Paul Krugman has a lot in common with quasi-monetarists like me. [Update: I'm going to re-emphasise this. On reading Paul's post, it is now much clearer to me than it was in the past that there is a helluva lot in common between Paul Krugman and quasi-monetarism. So many economists just don't get the central importance of monetary exchange and excess demand for money in understanding recessions. Paul does. Take as read a general rant about such economists.] To oversimplify just a little, we agree on the diagnosis, but disagree on the proposed cure. Which is a bit strange, though not impossible.
Unlike many macroeconomists, Paul Krugman sees that the fact we live in a monetary exchange economy, and not a barter economy, is absolutely central in understanding recessions. A recession is not just a fall in output and employment. A bad harvest or earthquake could do that, even in a barter economy. It is a fall in output and employment accompanied by a generalised excess supply of goods in terms of money. A recession is an excess demand for money. If barter were costless (it obviously isn't) it would be very easy to escape a recession. Unemployed workers would simply barter the labour they cannot sell for the extra goods they could produce but which their potential employers cannot sell. And then the newly-employed bakers could barter their bread-wages for the beer-wages of newly-employed brewers.
Ultimately, I think, Paul Krugman believes that the Paradox of Thrift is really a Paradox of Hoarding. (I reckon I might have misinterpreted him in that old post).
His babysitting model is a Paradox of Hoarding model. That model wouldn't work if they could barter babysitting services, and "money" were just a savings vehicle.
And if you do think of recessions as an essentially monetary phenomena, it's also a bit strange not to propose a monetary cure. Strange, but not impossible.
But what precisely is the underlying difference between the cure Paul Krguman would propose and a monetary policy cure?
Paul Krugman would, I think, want US Nominal GDP to be (say) 5% higher than it is right now, and then grow at (say) 5% per year thereafter. I don't think there would be much disagreement between Paul Krugman and (say) Scott Sumner over the precise numbers. Or even over the target variable itself. In any case, both would agree that something even vaguely like that would be much better than what the US has right now.
And if that's what you want monetary and/or fiscal policymakers to do, why not have them announce it, make it a commitment, that they will do as much as is necessary for as long as is necessary to hit that target? Paul Krugman would agree that expectations of higher NGDP would help the US escape recession. His model says so.
OK. The difference is on the means used to hit that target and fulfill that commitment. Paul would I think want a policy like:
1. The Fed prints money and Treasury uses that money to build a new bridge.
OK. Let's start there.
2. Any objection if they charge a toll on the bridge (subject to demand and collection costs)? The revenue from tolls could always be spent on other worthwhile government things, if you think that's a good use of the funds, from either micro or macro grounds.
3. Any objection if Treasury sells that bridge at a later date, and returns the money to the Fed, once the NGDP target has been hit, and there's a danger of overshooting the target? It would be good to make this policy reversible.
4. Any objection if the management of the bridge and collecting the tolls were turned over to the private sector? Or rather, any objection on purely macroeconomic grounds?
5. Any objection if the bridge is built, owned, and operated by the private sector, and the government just buys all the shares and collects the dividends?
6. Any objection if the government instead buys 50% of the shares in two new bridges, rather than 100% of the shares in one new bridge?
7. Any objection if the government buys commercial bonds in new bridges, rather than shares? Make the private owners the residual claimant, so they have the incentive to do their job right?
8. Any objection if we extend this to all new investment projects, not just bridges?
9. Any objection if we allow the Fed/Treasury to buy some old investment projects instead of just new ones? There's presumably high substitutibility between old and new investment projects, so the previous owners of the old investment projects will go looking for new ones with their new cash?
If there's no objection so far, then the cure for the recession is for the Fed and Treasury to announce a joint commitment to a level-path for NGDP, and to implement that policy by buying commercial paper with freshly-printed money.
Want to go the final step and have the Fed alone buy government bonds, on the grounds that government bonds are close substitutes for commercial bonds?
Or, maybe back up a little, and get Treasury to allow the Fed to buy the S&P 500 index? That's definitely OK by me.
Where exactly does fiscal policy end and monetary policy begin? (Not sure I know the answer to that one).
What is the real underlying difference between Paul Krugman and quasi-monetarists?
(It can't be just pessimism/optimism on the ability of monetary authorities to make credible commitments, can it?.)