Krugman vs Krugman

31 May, 2019 at 10:30 | Posted in Economics | 3 Comments

Paul Krugman wonders why no one listens to academic economists …

Listening_TitleOne answer is that economists don’t listen to themselves. More precisely, liberal economists like Krugman who want the state to take a more active role in managing the economy, continue to teach an economic theory that has no place for activist policy.

Let me give a concrete example.

One of Krugman’s bugaboos is the persistence of claims that expansionary monetary policy must lead to higher inflation … But where could someone have gotten this idea that an increase in the money supply must always lead to higher inflation? Perhaps from an undergraduate economics class? Very possibly — if that class used Krugman’s textbook. Here’s what Krugman’s International Economics says about money and inflation:

“A permanent increase in the money supply causes a proportional increase in the price level’s long-run value. … we should expect the data to show a clear-cut positive association between money supplies and price levels. If real-world data did not provide strong evidence that money supplies and price levels move together in the long run, the usefulness of the theory of money demand we have developed would be in severe doubt …

A permanent increase in the level of a country’s money supply ultimately results in a proportional rise in its price level but has no effect on the long-run values of the interest rate or real output.”

This last sentence is simply the claim that money is neutral in the long run, which Krugman continues to affirm on his blog … The more thoroughly a student understands the discussion in Krugman’s textbook, the stronger should be their belief that sustained expansionary monetary policy must be inflationary. Because if it is not, Krugman gives you no tools whatsoever to think about policy …

Liberal Keynesian economists made a deal with the devil decades ago, when they conceded the theoretical high ground. Paul Krugman the textbook author says authoritatively that money is neutral in the long run and that a permanent increase in the money supply can only lead to inflation. Why shouldn’t people listen to him, and ignore Paul Krugman the blogger?

J. W. Mason/The Slack Wire


  1. .
    (Screenshot of a FRED graph showing M2 money supply, CPI, GDP, and Velocity since 1959)
    Where is the proportionate increase in prices? M2 grew 4800%; CPI grew 800%.

  2. M2 loosely correlates with the value of housing stock that is on mortgage, in other words with the velocity (not the stock) of a very specific asset class that’s both durable and supply limited.

    Consumer prices are determined by there being enough cyclic flow in the economy to support demand without raising the price – a lowest stable wage level. Supply, for most industrial goods, is elastic.

    The point is asset-like and consumption-like subgraphs of the economy have completely different flows and old intuitions that conflate the two don’t work. We need new ones.

  3. Mason makes an important point here about the ZLB “exception”. Mainstream economists believe that once interest rates return to ‘normal’ we can simply return to mainstream theory and business as normal with conventional monetary policy that targets the interest rate guided by gimmick such as Taylor Rules. Of course this ignores the deeper problems in capitalism that have been building up for a very long time – even when they think things were normal. Window dressing that had gone on during the ‘New Labour’ (Blair) and Clinton years when New Keynesians were all powerful and associated failure to deal with deep seated socio-economic problems such as inequality, deindustrialisation and overly powerful financial sectors. “Liberal kitsch” as the song points out.

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