Wednesday, March 27, 2013

Krugman Finally Jumps the Shark

I have for some time offered a defense of P-kroog. 

A tepid defense, to be sure.  But the defense has been that he had not sacrificed his intellect to his ideology in the area of international trade.  Sure, he sold out and lied about domestic macro policy, but okay:  he was still sensible on his open economy macro claims.  In fact, really impressive.  (For an example, read this.   That's great stuff.  P-kroog vintage 1993).  P-kroog, on trade, still had some sense of being required to use actual logic and evidence.  P-kroog has decided that the reason that investors are trying to get their money out of Greece, Cyprus, and etc. is that (wait for it) the INVESTORS are bad people, and need to be controlled.  Here it is.

There is a reason why capital mobility is one of the Mundell-Fleming "unholy trinity," along with a currency peg and an independent monetary policy.  That reason is simple:  if a country wants to impose capital controls, it can only be because they want to do something appallingly stupid to their exchange rate or their monetary policy.  Some commentary from FEE.

(I should note that the "Krugman thinks he is Pharaoh" comparison makes sense.  He won't let the capital go, he thinks he is a living god, and he lives in a city near denial, or the Nile, or something like that)

1 comment:

Kindred Winecoff said...

I'm as critical of Krugman as the next guy -- okay, way *more* critical of him -- but if he was dictator of Cyprus for a day I'm pretty sure he'd float the exchange rate and amp up monetary policy. So I think he's taking the "do something appallingly stupid to their exchange rate or their monetary policy" -- ie being in the euro -- as a given.

We need a new name for this. Mundell-Fleming is that you get to choose two of three desired policies. But what do we call it when you choose NONE of them? Right now Cyprus has no capital mobility, AND no independent monetary policy, AND their exchange rate is irrelevant because they're not being allowed to exchange anything at any rate.

I nominate The Devil's Trifecta, but I'm sure you can do better.