Krugman's Inflation Incoherence


Why is anybody still listening to Paul Krugman? Why is anybody still listening to any macroeconomist?

Every macroeconomist believes in higher prices until he's served an overpriced Belgian craft brew in a tiny glass.

The New York Times columnist makes his umpteenth case for inflation at his blog. According to Nobel Laureate Krugman, Federal Reserve Chairman Ben Bernanke's bold experiment with effectively negative interest rates has not been bold enough to cause the radical devaluation of the dollar recommended by studies Krugman or one of his assistants has read:

I would add, however, that there's another case for a higher inflation rate — an argument made most forcefully by Akerlof, Dickens, and Perry (pdf). It goes like this: even in the long run, it's really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis.

D'jever notice how sometimes when columnists dumb down their language ("…even in the long run, it's really, really hard to cut…") it doesn't make anything simpler, but just makes it more dumb? When Krugman wants to complain about stagnant wages and income inequality, he relies on real wage measures, because they show that the Working Poor Families of Our Vanishing Middle Class are Working Harder For Less. Yet now, just when nominal wage figures are at their least relevant, he has a plan to save and create jobs by inflating consumer prices, based on a theory about nominal wages. Yes, it's true that nominal wages are downward-sticky. It's also true that we have 10 or 20 percent unemployment right now. America (everywhere except in the public sector) has reined in what it is paying on wages. Even now that we seem to have completed the first stage of the real estate devaluation, consumer prices are not falling rapidly enough to keep pace with the drying up of disposable income. If they were, the shopping malls and the Sunday afternoon looky-loos would not be empty. The idea that Krugman and a bunch of other geniuses are going to help out the poor by doubling the cost of a gallon of milk, well, tell that to the tourists.

But I don't want to argue against Krugman with macroeconomics, a pseudoscience in which he is just one of a million witch doctors. Krugman doesn't need to be wrong in theory because he's wrong in reality. Nobody's lending because nobody's worth lending to. We are all worse credit risks than we were believed to be just a few years ago. That epiphany is going to take a long time to sort out. Runaway inflation will definitely make banks desperate to find places to put their money, but it will not suddenly make Americans into better credit risks. That can only be done through reducing borrowing, upping savings and employing policy that encourages frugality—or actually, just policy that fails to punish frugality. The good news is that a big chunk of that work has already been done, despite the best efforts of the Keynesians in charge of U.S. economic policy. The bad news is that, just as he famously did in 2002, Krugman is arguing for the creation of another asset bubble, and too many people still take him seriously.