Krugman on Summers

I disagree with Paul Krugman over something!!!! I thought the day would never come! In Krugman’s most recent post on the battle for the Fed Chair, Krugman reiterates his argument that one way in which the Fed can gain traction at the zero-lower bound is by ‘credibly promising to be irresponsible.’ In other words, if the markets believe the Fed will maintain accommodation even after recovery is under way and perhaps overshoot a bit on the inflation target, market participants might be more willing to mobilize cash in the real economy in the near-term (stimulating demand and leading to growth).

Christy Romer at Berkeley has argued that it takes a “regime shift” in order to get the market to believe the Fed can credibly promise to be irresponsible. Krugman is upset at the impending appointment of Summers because:

A Yellen appointment would clearly have represented something new at the Fed — not just because she is, as Garrison Keillor used to say, a person of gender, but also because she has been a strong and consistent monetary dove, and took that position before it was fashionable.

Summers, on the other hand, while he often expresses unconventional views when not in office, has a strong tendency to revert to conventionality when in office. And leaving Summers the person on one side, just think of the historical connections: can you imagine a stronger signal that the same old regime is staying in place than choosing a Robert Rubin protege at this late date?

So the apparent decision to appoint Summers is a strong anti-regime-shift signal on Obama’s part.

I have to say, I think that Krugman is making a stretch here, at best. While I agree with the point that Summer’s most likely doesn’t represent a regime-shift because of his familiarity within the Obama administration’s economic team, it is a HUGE exaggeration to say that the CURRENT vice-Chair of the Fed (and, some would argue, a major player in the formulation of current policy) represents MORE of a regime-shift. I understand Krugman’s opposition to the appointment of Summers, but the argument that Summers is not a regime-shifting candidate (and that Yellen is) has to be one of the weakest arguments I’ve heard in favor of Yellen.


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