Paul Krugman

So, hi -- I'm here and on.

Let's start with the inflation issue. What we want is "appropriately" low rates -- which in this case means negative in real terms. Excessively low rates can cause problems, but we're nowhere near there right now. And for what it's worth, I don't buy that story about the bubble at all; what went wrong in 2000-2007 was runaway unregulated banks, not too-low rates.

About the deficit: the thing you need to realize is that a weaker economy means lower tax receipts. Slashing spending now hurts the economy in the short run, offsetting a large part of the initial saving. It also hurts the economy in the long run. So when you do the full arithmetic, you probably make the debt problem worse, not better.

About partisanship: I don't think I'm being partisan, I think I'm being honest. The way many people try to seem nonpartisan is by pretending that bad ideas aren't really bad, which I won't do. It's not partisan to say, for example, that Paul Ryan's budget is a fraud. It's just the uncomfortable truth.

If dollar "debasement" doesn't mean a fall against other currencies, then it's just a loaded term for inflation. And the fact is that inflation in recent years hasn't been high -- it's fluctuated but on average been around 2 percent, which is low by historical standards, and in particular a lot lower than the inflation rate during Ronald Reagan's "Morning in America". So where does this heated rhetoric come from?

I actually don't defend the Fed in all cases -- see my magazine article from last Sunday! But the right critique of the Fed is that it's failing to deliver on its mandate to pursue full employment, not that it's doing something that Ron Paul may consider dangerously inflationary but actually isn't. As for auditing -- audit what? The Fed isn't a business; its job is to manage the economy, and the audit there is what's happening to unemployment and inflation.

Last, I don't actually call for deficits forever -- I was a deficit hawk during the Bush years, back when a lot of the people now ranting about deficits were just fine with unfunded tax cuts and wars. But now is not the time. And where exactly are those consequences? US borrowing costs are at historic lows; people with actual money to invest don't seem worried at all.

In End This Depression I explain how recessions happen in terms of the true story of a baby-sitting coop; I'm not sure this can explain the issue to a 5-year old, but hey, it's about 5 (and 4, and 3 ...) year olds. And it's pretty simple. If you don't want to buy the book, I've written about it before; just Google "krugman baby sitting".

Well, if you look at the Congressional Budget Office report from last fall, it shows that about half the rise in income inequality is accounted for by the divergence of the 1 percent from everyone else. That part is NOT about education and returns to skills -- the next 19 have about as much education as the top 1, or if you prefer, hedge fund managers and high school teachers have roughly comparable education levels. So something else is driving at least half the rise in inequality, and probably more.

That doesn't mean that market forces play no role, but it says that it's nowhere close to the whole story, or even most of it -- a point that people like Mankiw refuse to acknowledge.

By all means let's expand access to higher education -- but I'd say that the biggest reason to do that it is not so much to reverse inequality as to stop the ongoing decline in social mobility. Horatio Alger has left the building; it's getting ever harder for Americans born into the lower half of the income distribution to move up. And more aid for college would help make climbing the ladder easier.

Hmm. I'm not sure about efficiency. But how about the graciousness of life? As someone who spends too much time in airports and train stations, and has been doing that for a long time, let me say that the advent of self-flushing toilets in men's rooms has made life significantly less disgusting.

And on the more serious front: bar codes!!!

Let me just take on part II of this question. We normally consider it perfectly OK for the Fed to cut interest rates to fight a recession, even though this reduces yields for people who bought Federal debt. After all, the purpose of Fed policy is to stabilize the economy, not guarantee returns for consenting adults who chose to buy particular assets.

Quantitative easing -- Fed purchases of longer-term debt -- are no different in principle from the open-market operations that usually take place in short-term debt, and allow the Fed to move short-term rates. So why is this somehow an outrage?

Put it this way: if the economy is still depressed at current interest rates, this means that those rates are too high! Refusing to act to bring them down would be a de facto subsidy to bond holders, and makes no sense as a public policy.

We've already done it, by adopting a calendar under which his reign is in the 200s C.E., not the zeroes. I think Bennus Bernankimus, chairman of the SPQR Fed, can do whatever is necessary.

I was clearly too worried about bond vigilantes back in 2003 -- and I've written on my blog conceding that mistake.

I wasn't wrong, however, to condemn the Bush deficits. Deficits serve a useful function when the economy is deeply depressed, and in particular when monetary policy is up against the zero lower bound. You should not gratuitously increase debt in normal times, when any fiscal stimulus can and will be offset by Fed policy.

And don't you wish now that we hadn't run those unfunded wars and tax cuts? The ratio of debt to GDP would be 20 or 25 percentage points lower, and we'd be feeling a lot more relaxed about current deficits.

Actually, one more point: the Bush deficits were, I though, especially likely to send a bad signal to markets for two reasons. First, they were gratuitous -- they weren't about stimulus, they were just about irresponsibility. Second, they were driven by long-term, quasi-permanent tax cuts -- which is very different from temporary stimulus spending.

I don't see how this can work. The adjustment plan, such as it is, calls for Spain to endure years of crushing unemployment and deflation, with no end in sight.

The trouble, as far as I can tell, is that the Germans are so wedded to a view of the way things MUST be that they can't even take on board facts that conflict with this position. Economic crises must be the result of fiscal irresponsibility; tell them that Spain had low debt and a surplus on the eve of crisis and it just goes in one ear and out the other. Ask them how austerity is supposed to work and they give you a sermon on the evils of debt.

If the euro is to be saved, it will probably have to go the brink of collapse first, because until that happens, the Germans and other defenders of orthodoxy just won't listen.

I think there's a lot of very good work in behavioral econ. But I don't expect a unified theory for many, many years. There are just two many ways the assumption of perfect rationality can fail, and I don't think we have enough broader understanding to put it all in one package.

That said, we can use behavioral econ even as it is, as long as we're modest about modeling. As long as we are prepared to say "this is how people actually seem to behave" without demanding general theorems -- for example the obvious reluctance to accept nominal wage cuts -- we can go a long way toward analyzing real-world issue in a way that can guide both prediction and policy.

They really shouldn't have created the euro in the first place -- it was obvious even when Maastricht was signed that Europe didn't have the right preconditions. (I used to joke that they should have signed the treaty not in Maastricht but in Arnhem; it was a bridge too far).

But now that it exists, it would be a political disaster to let it fail. Ideally we would move quickly to true fiscal union. Since that isn't likely, the next best is to raise the inflation target, which would make the process of adjustment to imbalances much easier (Spain wouldn't need deflation, it would just need to lag inflation in the core nations).

It's not an impossible task, but everything depends on whether the European elite will be willing to drop its illusions and stop making everything into a morality play -- and my views on that keep fluctuating.

I think it is to point out that if nobody is buying, nobody can sell. Austerity in a depressed economy makes the depression deeper, and that is, I believe, a point people can grasp. Of course, it's a point made easier to grasp now that the Irish and others have given us such clear examples of how bad the results of austerity can be.

Hi Brad

My best theory here is that it's political and sociological: conservative-leaning economists who should know better are driven by peer pressure to suppress their better instincts.

Think about Greg Mankiw and inflation. Early on in the Lesser Depression Greg came out for inflation -- fairly high inflation! -- as the solution, to give us negative real interest rates. But he encountered a firestorm of criticism from his political allies -- and went silent.

The point is that even among academics with tenure and established reputations, there is apparently enough leverage in the hands of the enforcers of right-wing orthodoxy that they end up bowing to the reign of error.

As for Rachman: I think this is a subtler form of peer pressure. And for what it's worth, Ryan Avent has already written the devastating reply to Rachman I haven't had time for because I'm on Reddit!

All around Europe's periphery they're doing it as we speak, er, type. The euro has served as the functional equivalent of the gold standard.

The difference for, say, Spain is that since they don't have their own currency, it's much harder to change course than it would have been for Britain under gold. But if you look at, say, Latvia, they're doing the full Churchill -- and being hailed as a role model even as they enforce a devastating slump on themselves.

I don't share the view that there's some fundamental reason why NGDP is better than other ways to make the Fed take its dual mandate seriously; price level targeting, or just a symmetric treatment of unemployment and inflation, could be better in principle.

But I do see the point that nominal GDP targeting (for those who have no idea what this is about) could be a way to de facto raise the inflation target without saying so. So I'm OK with it as an idea.

About QE3: God knows. Logically, the Fed should do it. But logically the Fed should be doing lots of stuff it isn't.

Shave around it every day, and get your wife to clip it fairly often.

To coin a phrase, End This Depression Now! Further instructions in the book.

Accurate I don't know. But a rule of thumb would run something like this: multiplier of around 1.5, based on a growing body of empirical work. So $100 billion in spending cuts would reduce GDP by $150 billion or one percent. Christy Romer says that's about a million jobs. So, one million jobs for each $100 billion of spending cuts.

But wait, that's not the whole story: because spending cuts shrink the economy, they reduce revenue, so $100 billion of spending cuts probably reduces the deficit only something like $65 billion.

Now, the deficit is more like $1.2 trillion (I think -- won't check now) than $1.5 trillion. But even so, by my calculation this says that trying to eliminate the deficit with spending cuts would lead to the loss of around 18 million jobs.

Unless, that is, the confidence fairy makes it all better.

Well, not being able to do experiments is a problem, but not as bad as all that. We do have statistical techniques for trying to sort out what's going on, although I'm skeptical about their power. But mainly we can look for "natural experiments", which often tell you a lot. In End This Depression I talk about how wars provide a natural experiment on fiscal policy; right now forced austerity in Europe is providing another set of natural experiments.

You may ask whether both sides in every debate won't nonetheless find ways to support their positions. My answer here is that this is not, in fact, happening. On the question of whether austerity is expansionary or contractionary, we had some alleged evidence for expansionary effects, but it was quickly shot down by the normal process of scholarly discussion. In any normal scientific debate, this would now be a settled issue.

I guess that what I'm saying here is that while the non-experimental nature of economics is an issue, the apparent inability to resolve differences that you see right now is about politics, not the inherent problems of the discipline.

My sense is that young people feel, rightly, that the establishment -- or if you like, the Very Serious People -- have let them down, and betrayed a trust. Given that, they're looking for alternatives, and the goldbug types have a well-established sales pitch backed by a lot of stuff that looks scholarly if you aren't already sophisticated in such matters.

I would add that Ron Paul's anti-war stance has given him some credibility among people who might otherwise have passed him by; you have to look hard to realize that his reasons for opposing Iraq were very different from, say, mine.

Resources have always been finite -- they're just a bit more finite now. The basic rules haven't changed; Keynesianism has, if you asked me, worked spectacularly well as a tool of analysis these past three years.

Thanks for all the questions, all. It was fun.