The War of Ideas
Paul Krugman, yesterday:
I still don’t know why the Obama administration was so quick to accept defeat in the war of ideas, but the fact is that it surrendered very early in the game. In early 2009, John Boehner, now the speaker of the House, was widely and rightly mocked for declaring that since families were suffering, the government should tighten its own belt. That’s Herbert Hoover economics, and it’s as wrong now as it was in the 1930s. But, in the 2010 State of the Union address, President Obama adopted exactly the same metaphor and began using it incessantly.
This is, I think, overly focused on the person of the president. It’s worth delving into Krugman’s wonkish post on “Credibility and Monetary Policy in a Liquidity Trap (Wonkish)” to get a better understanding of what the relevant ideas are here:
Via Mark Thoma, Mankiw and Weinzierl have a paper (pdf) arguing that fiscal expansion shouldn’t be the tool of choice even at the zero lower bound; that monetary policy can still work if you can credibly make commitments about future monetary policy. As they acknowledge, the potential role of expected future money isn’t a new insight; it was at the heart of my original analysis, and it’s a central theme in Eggertsson and Woodford (pdf). [...]
Now bear in mind that in order to make a commitment to inflation work, central bankers not only have to stand up to the pressure of inflation hawks — which is much harder when you’re having to testify to Congress than it is if you’re a Harvard professor — but, even harder, they need to convince investors that they’ll stand up to that pressure, not just for a year or two, but for an extended period. [...]
I supported fiscal expansion in 2008-2009 precisely because I didn’t believe that the kind of commitment-based unorthodox monetary policy that works in the models could, in fact, be implemented in practice. Nothing I’ve seen since has changed my views on that subject.
Think of a room containing Barack Obama, David Axelrod, Jon Favreau, and Christina Romer where they’re trying to work out how to explain the Obama administration’s economic policies to the public and Romer offers that analysis above. Is it so hard to understand why we didn’t hear this in a State of the Union address? Instead we had a war of naive metaphors (“jumpstart” the economy vs “everyone needs to tighten their belt”) and since unemployment got way higher than the administration forecast, their naive metaphor was discredited. The lesson here is that discretionary fiscal policy on the scale recommended doesn’t seem any more implementable than monetary expansion on the scale recommended. We need to think through the implications of that, which I think includes reforming state/local budgeting (“automatic stabilizers”) and setting an inflation target higher than 2 percent so it becomes much less likely that the zero bound issue will arise.