Hoisted from Paul Krugman’s Archives from 2008: Ken Rogoff’s Mid-2008 Desire for Tighter Money

Paul Krugman (2008): The Rogoff Doctrine: “Ken Rogoff is one of the world’s best macroeconomists, so I take whatever he says seriously…

…But — you know that’s the kind of statement that is followed by a ‘but’ — I’m having a hard time understanding his demands for a world slowdown. Ken tells us that: “The huge spike in global commodity price inflation is prima facie evidence that the global economy is still growing too fast.” And then he calls for: “a couple of years of sub-trend growth to rebalance commodity supply and demand at trend price levels…”
Um, why? Basically, the world is employing rapidly growing amounts of labor and capital, but faces limited supplies of oil and other resources. Naturally enough, the relative prices of those resources have risen — which is the way markets are supposed to work. Since when does economic analysis say that the way to deal with limited supplies of one resource is to reduce employment of other resources, so that the relative price of the limited resource returns to ‘trend’? Presumably there’s some implicit argument in the background about why a sharp rise in the relative price of oil is more damaging than leaving labor and capital underemployed. But that argument isn’t there in Ken’s recent pieces. Model, please? I agree that: “Dollar bloc countries have slavishly mimicked expansionary US monetary policy…” And that’s a real issue: the Fed is pursuing very loose policy to deal with a US financial crisis, and that’s inflationary in countries that are pegged to the dollar without facing our problems. But that’s an argument for breaking up Bretton Woods II; it’s not an argument for tighter Fed policy. Since this is coming from Ken Rogoff, I assume that there’s some deeper analysis here. But I can’t infer it from the articles I’ve read. Please, sir, can I have some more?

Originally published at www.bradford-delong.com.