Inflation Lessons

One of the themes I’ve hit on many times is the fact that the crisis and slump have been a testing ground for economic doctrines. People came into this mess with very different views about how the economy works, and the crisis in effect provided natural experiments that tested those views.

Most notably, what we got was a test of demand-side versus supply-side stories about the nature of depressions.

Demand-siders like me saw this as very much a slump caused by inadequate spending: thanks largely to the overhang of debt from the bubble years, aggregate demand fell, pushing us into a classic liquidity trap.

But many people — some of them credentialed economists — insisted that it was actually some kind of supply shock instead. […]

How could you tell which story was right? One answer was to look at the behavior of interest rates; the other was to look at inflation.

For if you believed a demand-side story, you would also believe that even a large monetary expansion would have little inflationary effect; if you believed a supply-side story, you would expect lots of inflation from too much money chasing a reduced supply of goods. And indeed, people on the right have been forecasting runaway inflation for years now.

Yet the predicted inflation keeps not coming.


So what we’ve had is as good a test of rival views as one ever gets in macroeconomics — which makes it remarkable that the GOP is now firmly committed to the view that failed.

(Paul Krugman in der NYT; Links oben von mir.)

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