Monday, January 2, 2012

Is Alex Tabarrok Saying Unpleasant Monetarist Arithmetic is Identical to Complete Crowding Out?

I am puzzled by this.

Paul Krugman has already replied noting that Brian Riedl is arguing complete crowding-out even as the economy is far from full employment. Go figure. And I have to really wonder how Brian Riedl thinks the problem is too little savings as if consumption was allegedly soaring.

But let me just add what I said in Alex’s comment box:

Krugman’s 2003 writing strikes me as the same type of concern that was contained in Sargent and Wallace’s Unpleasant Monetarist Arithmetic. Which I thought was an excellent discussion. Simply put – the long-run government budget constraint has to be honored somehow. And if markets are ever convinced that our political masters have decided to spend and spend without raising taxes – inflation would soar, which I think Irving Fisher in 1907 claimed would drive up nominal interest rates. So what is so bizarre about this argument again?

As I read what Paul has written at various times, his arguments strike me as quite clear and hardly inconsistent.

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