Inflation & Japan: Why the U.S. Is in the Clear

Paul Krugman Conscience of a Liberal May 26, 2010

Some loosely connected thoughts inspired by today’s reading:

First, here’s a prime example of the fire-in-Noah’s-flood syndrome: Irwin Kellner manages to get all scared about inflation in the face of a deflationary environment. To do this, he has to come up with a novel theory: that the prices that matter are those of things we buy frequently, as opposed to big-ticket items bought less frequently. And the reason for this is …??? (Remember, there’s a very clear reason for excluding food and energy prices; I have no idea why big-ticket items should receive the same treatment.)

Why care about Kellner? Because he represents a significant body of opinion, which is basically worried because of the expansion of the monetary base. Yet both logic and experience show that when you’re in a liquidity trap, big rises in the monetary base aren’t inflationary — in fact, they can be virtually irrelevant.

Which brings me to a very insightful talk (pdf) by Adam Posen, my favorite Japan expert (and now on the policy board of the BOE). There’s a lot in this talk, but let me just focus on one issue: the effects of Japan’s “quantitative easing” policy, which involved pushing up the monetary base in the hope of getting some traction. (Unlike what we now call quantitative easing, this didn’t involve large purchases of nontraditional assets.)

First, here’s the record of increases in narrow money, aka the monetary base (ignore the UK data):

So base money was expanded at very high rates for about 3 years.

And here are the inflationary consequences:

Hmm. Deflation just kept on going.

Actually, this has a moral beyond not to worry about inflation. It’s also a reminder that it’s hard to make monetary policy effective in a liquidity trap. There are some writers who suggest that all we need is more determination on the part of Bernanke et al; while I dearly wish the Fed would try harder, it’s not all that easy, because just pushing out money doesn’t do anything. You either have to buy lots of long-term assets — we’re talking multiple trillions here — or credibly commit not just the current FOMC, but future FOMCs, to pursuing higher inflation targets.

Part of the argument for fiscal policy as a response to this crisis is precisely that it doesn’t pose the same kind of commitment problems — a point that Gauti Eggertssson has made at length, e.g. here (pdf). On the contrary, a surge in government purchases of goods and services is more, not less, effective if the public believes that it’s only temporary.

Anyway, studying Japan remains very useful for understanding where all of us are these days.

Paul Krugman is an Op-Ed columnist for The New York Times.

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Going away for a bit.

May 26

Reasons To Despair

I worry that policy makers will just sit there, for years and years, all the while congratulating themselves on the soundness of their policies.

May 25 //

Interest Rates: A Self-Serving Observation

Where's the crowding out?

May 25 //

Inflation, Deflation, Japan

Studying Japan remains very useful for understanding where all of us are these days.

May 24 //

Did The Postwar System Fail?

We could have gone on with a more progressive tax system and a stronger labor movement.

From the Opinion Blogs Schott's Vocab Vocabulinks

An occasional assemblage of notable vocabulary and linguistic debate from around the Web.

Freakonomics Does Living Close to Your Destination Make You Late? A Very Small Experiment

A Freakonomics reader experiments.

I worry that policy makers will just sit there, for years and years, all the while congratulating themselves on the soundness of their policies.

May 25

Interest Rates: A Self-Serving Observation

Where's the crowding out?

May 25 //

Inflation, Deflation, Japan

Studying Japan remains very useful for understanding where all of us are these days.

May 24 //

Did The Postwar System Fail?

We could have gone on with a more progressive tax system and a stronger labor movement.

From the Opinion Blogs Schott's Vocab Vocabulinks

An occasional assemblage of notable vocabulary and linguistic debate from around the Web.

Freakonomics Does Living Close to Your Destination Make You Late? A Very Small Experiment

A Freakonomics reader experiments.

Where's the crowding out?

May 25

Inflation, Deflation, Japan

Studying Japan remains very useful for understanding where all of us are these days.

May 24 //

Did The Postwar System Fail?

We could have gone on with a more progressive tax system and a stronger labor movement.

From the Opinion Blogs Schott's Vocab Vocabulinks

An occasional assemblage of notable vocabulary and linguistic debate from around the Web.

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A Freakonomics reader experiments.

Studying Japan remains very useful for understanding where all of us are these days.

May 24

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We could have gone on with a more progressive tax system and a stronger labor movement.

From the Opinion Blogs Schott's Vocab Vocabulinks

An occasional assemblage of notable vocabulary and linguistic debate from around the Web.

Freakonomics Does Living Close to Your Destination Make You Late? A Very Small Experiment

A Freakonomics reader experiments.

We could have gone on with a more progressive tax system and a stronger labor movement.

An occasional assemblage of notable vocabulary and linguistic debate from around the Web.

A Freakonomics reader experiments.

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Inflation & Japan: Why the U.S. Is in the Clear

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