Krugman blogs on demand-deniers, those who don’t believe that recessions are caused by a fall in Aggregate Demand.
Third, monetarists — old-style Friedman-type monetarists who focus on monetary aggregates, or the new style which says that the Fed can and should target nominal GDP — are, whether they realize it or not, part of the axis of monetary evil as far as the demand-deniers are concerned. They may believe that they can limit the scope of demand-side reasoning, making it a case for technocratic policy at the central bank but no more than that. But from the point of view of those who can’t see how demand can possibly matter, they’re essentially in the same camp as Keynesians. And you know, they are; once you’ve accepted the idea that inadequate demand is the problem, the role of fiscal as opposed to monetary policy is just a technical detail (albeit one of enormous practical importance).
At first I thought he meant those who focus on monetary policy were inadvertently pumping up the demand-deniers. A re-reading revealed that he meant that the monetarist were on the same side as Krugman – and thus evil in the minds of the demand-deniers.
In a recent email to a fellow economist, I pointed out that as soon as you accept that the Federal Reserve has control over the overnight interest rate almost all of the Aggregate Demand conclusions fall out as a matter of basic intertemporal optimization.
Said more explicitly:
If the Fed tries to increase interest rates by shrinking the money supply then folks will try to buy less and save more.
If the market functions smoothly and perfectly then buying less will drive prices down. Saving more will drive the interest rate back down and almost everything will go back to the way it was before the Fed did anything. The only difference will be lower prices.
Thus the Feds effort to raise interest rates would fail.
For the Fed to even be able to alter interest rates there has to be some frictions in the market.
Now you might think that the distortions involved in monkeying with the money supply are so bad is not worth it, but you are in the technocratic world now. You are debating the merits of various demand side policies – not whether or not they are logically possible.
More or less the same thing is true with deficit spending as well. You could believe that deficit spending today causes people to save more in anticipation of higher taxes tomorrow but it takes some pretty heroic assumptions to get all the way to the idea that deficits can’t possibly spur demand.
At the root, I agree, is the common tendency to deny that something is possible when what you mean is that it is undesirable. You might have a laundry list of reasons to think that deficit financed Aggregate Demand expansions are undesirable but that is different than saying that they are impossible.
Denialism, to be clear, does not market one as a crank or fool. Almost everyone does it. I have heard many people claim that violent crime, prostitution, drug abuse, etc could not be eliminated even if we removed all restraints on the state.
I’ve also heard people say that poverty could not be eliminated with a likewise abandonment of our basic principles of government.
All of these denials are almost certainly wrong.
I am tempted to describe the policies that I am confident would virtually eliminate crime and poverty but their draconian nature is so extreme that the description would cause people to recoil from my general case. Moreover, I adamantly profess that doing these things would make the world a much, much worse place.
And, that’s the point. If you don’t like deficits then you can and shouldmake the case that the ultimate price is too high. You should feel free even to make the moral case that these things shouldn’t be done even if they would improve the economy.
However, what we shouldn’t do is look away from the truth because the weighing of right and wrong is too painful.