Krugman has a bit of a go at what he calls “neo monetarists” – largely on the basis of a presumed lack of political realism. And he may be right: within Market Monetarism, the positive vibes towards what money can do is only matched by a strong dislike for going near fiscal policy. That plays overwhelmingly to a right wing constituency. And that constituency is also the one most likely to decry demand side solutions, to warn bleakly that there are no easy ways out (which is what a pure monetary answer is).
Republicans, in other words, are a difficult audience for this sermon.
What bothers me more is Krugman’s implicit criticism of the creed itself. I have a floating view here, not signed up to any particular view but strongly attracted to market monetarism. Above all, I tend to find the kneejerk criticisms weak: the “didn’t you know there was a zero lower bound, duh” style critique was unimpressive in 2009, at least unless dosed with some political economy. Now that people like Krugman (and Blanchflower and others) suggest that we change the inflation target, which would make **** all difference if monetary policy was literally powerless, that criticism ought to die.
Krugman should be taken seriously, because of who he is, and his role laying out “commitment to being irresponsible” (or “credibility traps” –1998). His brain is too large to ignore. There are several points he makes. One is that the ultimate effectiveness of monetary policy rests on some degree of fiscal risk. I think this is worth taking seriously. The reductio ad absurdum of monetary policy effectiveness is a Smaug-like permanent deluge of currency. That feels very fiscal. Or it is “buying everything in sight”. Again, that is quite fiscal.
Another criticism is that changing the target “isn’t exactly monetary policy”. Here I think the MM defence is stronger. If we were on a gold standard, or other external standard, changing the price target would definitely be monetary policy. So why not when the nominal anchor is the price level?
But the bigger problem for me is that Krugman’s attack shows the difficulty that monetarists have telling a story of why the economy behaves as it does, without circularity. Too often it feels like “you can tell if you have done something by whether it was effective”. Lacking both NGDP futures and strong faith in market efficiency, untangling the “something” from its effect is tricky.
And other nominal variables don’t help. For example, take the UK recovery. If it is driven by easier money, why is the pound so strong? Easier money in the States you might say – but there they have just had a growth setback.
Nor do I think Simon Ward’s atavistic money-variable watching works very well. It is bound to get people sucked into age old arguments about whether the variable is endogenous or not. And when he has made predictions, they have not been as clever as he sometimes implies (see e.g. here). Above all, using the technique of someone who seems to call for tighter money every month would be an odd approach for a market monetarist.
I hold that to make a political difference, macroeconomic schools need to tell great stories (it is is why I love the title of Marcus Nunes’s blog). Those taking a fiscal view can occasionally do this – see Krugman’s short point on Belgium. There is nothing in the normative or analytical side of market monetarism that I can fault. But I think it struggles with the bog-standard descriptive side – what is happening, and why. That is important, if it is to win over the converts. Politicians need solid results they can boast about.