Public Debt: Krugman vs. Sumner

     Hopefully at least the reader Greg is happy, as this is my second Sumner post today. Here's the first.

     http://diaryofarepublicanhater.blogspot.com/2013/04/krugman-calls-out-sumner-hornets-nest.html

     Krugman not only criticized Market Monetarism but actually named Sumner-though the two things are more or less synonymous. This lead Sumner to lash out at Krugman not just with a direct answer that begun with Krugman wrote a post that failed on every level but a second post that tried to draw a parallel between Krugman and Reinhart-Rogoff.

     So I'm certainly happy myself to write about a Sumner-Krugman smackdown. I'm actually glad Krugman went here because for the most part he seems to avoid tussles with Sumner-maybe he sees them as more trouble than they're worth?

      Yet we need Krugman to go here now and again, particularly all this Sumner talk about the zero fiscal multiplier. Krugman's obviously a major player in the econ establishment and no doubt that's why Sumner is so fired up: look I agree that it's ultimately about what you say but at times like these it really helps to have someone like Krugman say it; it sometimes does matter who says it too, let's face it.

     What I've often wondered is why Krugman doesn't call him on this? I mean why not write a post now and again that push back a little? What would be welcome would be for Krugman to get into theory a little here-go "wonkish" on this one by all means. I know he wants to write for the lay person. However, many of us lay people are now hungering for a little theory to push back on some of the false theory we get elsewhere.

   In his rejoinder to Krugman, Sumner used his usual tricks: why do fiscal stimulus when monetary stimulus is so much cheaper-no government debt?

   "But it’s even worse.  Fiscal stimulus is costly, as it increases the burden of future taxes, whereas monetary stimulus is free.  Indeed monetary stimulus actually reduces the burden of future taxes.  So it makes some sense to talk about the “effort” that fiscal policymakers put into stimulus, but no sense to talk about monetary policymakers “making an effort.”  The analogy for monetary stimulus is steering a ship.  It’s not “how hard should they try,” it’s “which direction do they want to go?” The Fed believes their policies will lead to roughly 5% NGDP growth; hence they don’t want to do more.  I think they overestimate the effect, and want them to do more.  But that difference of opinion has nothing to do with the validity of market monetarism."

      http://www.themoneyillusion.com/?p=20876#comments

     The usual canard of debt leading to higher taxes. While he tries to make this weak analogy between R-R and Krugman, Sumner misses the point of where R-R went wrong: for starters they confuse causality and correlation. What is clear is that debt is cyclical-it tends to increase during recessions and drop during booms. With such low interest rates now would be the time to use fiscal stimulus. 

     Actually, however, Krugman made another comment about debt today that's interesting. It was regarding the causes of Italy's high interest rates. He notes-and provides a chart-that Italy's interest rates have fallen to under 5% from over 7 early last year. As he suggests this is due to the ECB finally getting on the ball a little-Draghii's promise to do whatever is necessary-and we will succeed. 

     "What’s happened now is that the ECB sounds increasingly willing to act as the necessary lender, and that in general the softening of austerity rhetoric makes it seem less likely that Italy will be forced into default by sheer shortage of cash. Hence, falling yields and much-reduced pressure."

     "It also, to be a bit self-justifying, shows that back when I used to cite Italy in the 1990s as an example of how advanced countries can carry high debt loads, I wasn’t being naive. Back then Italy had its own currency, and debt denominated in that currency; yes, it was pegged to the Deutsche Mark, but there was always the option of unpegging. By joining the euro, Italy in effect turned itself, macroeconomically, into a third-world country with debts in someone else’s currency, and exposed itself to debt crisis; now, thanks to the Draghi put, it has stepped half way back into the first world."

     http://krugman.blogs.nytimes.com/2013/04/29/the-italian-miracle/

     I wonder if Sumner-or Bob Murphy, or Tyler Cowen-go off about that one-debt loads are manageable if the country has it's own currency. Looking forward to what comes next.