Tuesday, July 20, 2010

Cowen Digs Himself In Deeper...

I like Tyler Cowen. He must be one of the smartest, best informed conservatives around. Yet, in persisting in arguing against Paul Krugman that the German case in the early 90s, when Germany was nowhere near a liquidity trap, tells us anything about today, when we are in a liquidity trap, leaves me scratching my head.

Krugman wrote: "Fiscal stimulus is what you do only if two conditions are satisfied: high unemployment, so that the proximate risk is deflation, not inflation; and monetary policy constrained by the zero lower bound."

Simple enough and true.

Cowen writes: "the zero bound is not required to drive the main arguments that fiscal policy is effective with unemployed resources. So historical examples with a non-zero bound and ineffective fiscal policy do count against fiscal policy."

Except, they don't say anything about the effectiveness of fiscal policy in a liquidity trap, which is the only time fiscal policy should be used. So, they don't count against fiscal policy. They say fiscal policy shouldn't be used in normal times, which is what we all agree. Now we're constrained at the lower bound, so the usual logic is reversed.

For this, Cowen needs to be "noogied". Badly. Tyler, don't be a dead-ender...

1 comment:

  1. Reminds me of creationist arguments using the 2nd Law of Thermodynamics, and pretending that it isn't restricted to closed systems.