A powerful comment on Krugman's blog in response to "Reinventing 1934 macro." Who is Dan Hunt?
This is a misreading of Schumpeter entirely. The problem with inflation is not that it doesn’t work to east the pain, it’s that it has side effects that make the cure worse than the disease. I’d like to understand why that point of view is as callous as you’ve tried to paint it Mr. Krugman, both here and in your magazine article. I presume as well you disagree with any medical procedure that involves pain, irrespective of its result on final outcomes?
In any case, if memory serves Mr. Krugman, you are one of the economists who has pointed out how much more severe each successive financial crisis has become. And yet you see no linkage with these teachings you so deride. To deepen the irony, as I understand it, you are currently looking to build a model of Minsky moments. Who was it again, that Hyman Minsky studied under at Harvard? Yea…. Joseph Schumpeter. And what was one of Hyman Minsky’s most renowned teachings? That new-Keynesians such as yourself have dangerously misunderstood Keynes, leading to mistaken policy proposals such as that de jour. May I suggest a book?
Your grasp of recent events is no better. This wasn’t a housing boom and bust, just the latest chapter in the ongoing, nearly three-decade-long credit bubble, painstakingly cultivated by self-styled slayers of business cycles like yourself. One could also trace the 80’s real estate bubble and S&L crisis, the late 90s stock bubble and all manner of other speculative manias from then to now (commodity futures anyone?) to the same underlying credit fueled phenomenon. It’s as Keynes called it- casino capitalism, only in this version, the only safe bet is the one against the house.
The legacy of all that bad policy are deep, painful maladjustments to modes of consumption and production that have been postponed for decades now. Does US goods producing productivity justify the massive chasm between its wage and per-capita consumption levels and those of its emerging market trading partners? Does it make sense that all we do here is produce ’services’, drive big cars and live in 5 bedroom homes with two car garages? As a cockney might say, yeur arvin’ a laugh.
That mess cannot be fixed painlessly. Resources and investment have been terribly misallocated- people have developed the wrong expertise, whole countries have developed (or underdeveloped) the wrong infrastructure, people have grown accustomed to the wrong lifestyles, companies have researched the wrong developments, for the wrong markets, etc. etc. That’s not going to have serious costs manifesting themselves in poor outcomes in people’s lives? More laughs. It simply cannot, and if the last 30 years have taught us anything, it is the absolute necessity of such adjustments. The necessity of periodic retrenchment, pain and unemployment when commerce and intermediation is organized as it is in a capitalist economy.
That does not mean we need ignore the lessons of Keynes with regard to what happens when there are bad loans, then bad banks and all manner of misappropriated savings, then collapsing asset prices and effects on intermediation, animal spirits etc. What it does mean, is that we cannot let expedients have worse consequences than that which we hope to expedite. And we have. In spades. This stimulus and all the inflationist monetary nonsense you have advocated that have gone along with it, are just more of the same.