Here’s Paul Krugman in 1998 making the case for an effort to create inflationary expectations:

Let us now bring this discussion back to earth, and to Japan in particular. Of course the Bank of Japan does not announce whether its changes in the monetary base are permanent or temporary. But we may argue that private actors view its actions as temporary, because they believe that the central bank is committed to price stability as a long-run goal. And that is why monetary policy is ineffective! Japan has been unable to get its economy moving precisely because the market regards the central bank as being responsible, and expects it to rein in the money supply if the price level starts to rise.

The way to make monetary policy effective, then, is for the central bank to credibly promise to be irresponsible – to make a persuasive case that it will permit inflation to occur, thereby producing the negative real interest rates the economy needs.

This sounds funny as well as perverse. Bear in mind, however, that the basic premise – that even a zero nominal interest rate is not enough to produce sufficient aggregate demand – is not hypothetical: it is a simple fact about Japan right now. Unless one can make a convincing case that structural reform or fiscal expansion will provide the necessary demand, the only way to expand the economy is to reduce the real interest rate; and the only way to do that is to create expectations of inflation.

It seems to me that central banks, as institutions, value their reputations as credible inflation fighters. The fact that such a reputation has benefits for central banks—or is perceived as having benefits—could lead to poor policy in situations of severe recession. Certainly the European Central Bank, which is right now probably the most important central bank in the world, has made it very clear that it regards maintaining a low level of inflation as its top priority. And the Bank of Japan was put to the test over this issue and clearly chose not to take this path. The Fed in the United States has never been as clear, but certainly shows no sign of taking this advice and trying to create inflationary expectations.

I saw most of Pirate Radio on an SAS flight back when I was in Europe, but it just opened in the U.S. (or here in DC at any rate) this weekend so I went to see the whole thing. Very fun movie, with a lot of great music.

It also comes, in virtue of the subject matter, with a strong libertarian, anti-statist message. And of course it’s quite true that a public agency getting involved in the arts is likely to tend toward propagation of the status quo rather than toward innovation. The German government does a lot of subsidizing of opera, and by most accounts (I’m not in a position to judge) they do a very good job of mounting good performances of the classic works. But boosting innovation, the way an illegal offshore radio broadcaster like the one depicted in the movie could, is not the forte of a state broadcaster.

That said, the film’s portrayal of the creative promise of commercial radio doesn’t seem to hold up all that well to the rather tawdry reality of today’s commercial FM radio stations. They’re not run by fussy bureaucrats who insist on classical music only, but you’d hardly say that they’re havens of good taste and pioneering aesthetic. In a sense, you might think of the fact that pirate radio stations operate in a legal gray area as integral to their success. The enterprise is commercial enough to cater to consumer demand for rock ‘n roll, but it’s enough of a dubious prospect to mostly attract real enthusiasts as proprietors and staff. Full-blown commercialization, combined with the limited supply of viable broadcast frequencies, pushes stations toward homogenization and a least common denominator mindset. That’s why in the U.S. innovative music programming came to be associated with college radio stations that, like the pirate stations from the movie, are driven by the interests of enthusiasts rather than an ethic of profit-maximization. At this point, of course, it’s all moot since terrestrial radio is basically yesterday’s news.

Like most progressives, I find it extremely annoying that Beltway conventional wisdom exempts military-related expenditures from the normal rules of budgeting.

At the same time, in these days of recession it does occur to me that to some extent this is a two-way street. I’ve been inclined to complain that most of these more ambitious visions for Afghanistan, for example, don’t seem to meet any kind of reasonable cost-benefit test. After all, they could use better security, a Provincial Reconstruction Team, and a “civilian surge” in Newark, New Jersey. But if you take the hypocrisy of the political system as a given, this looks a bit different. At the end of the day, war expenditures don’t trade off with domestic expenditures, they trade off with increased levels of public debt. Under normal circumstances, that still means that military operations should be (though they generally aren’t) subject to real cost-benefit scrutiny, since higher debt levels has real social costs. But the basic progressive analysis of the current economic situation is that higher short-term debt levels are socially beneficial, right? The story is that World War II—at least from the perspective of the American economy—wasn’t a huge economically wasteful use of resources. Sure it was more wasteful (in economic terms, obviously the “beating Hitler” benefits were quite real) than some other possible projects, but it still on balance was helpful in ending the Depression.

ADDITION! Just after I finished writing this post, but right before I put it up, I saw Christopher Drew’s NYT story “High Costs Weigh on Troop Debate for Afghan War”:

While President Obama’s decision about sending more troops to Afghanistan is primarily a military one, it also has substantial budget implications that are adding pressure to limit the commitment, senior administration officials say. [...] Senior members of the House Appropriations Committee have already expressed reservations about the potential long-term costs of expanding the war in Afghanistan. And Mr. Obama could find it difficult to win approval for the additional spending in Congress, where he would have to depend on Republicans to counter defections from liberal Democrats.

I think that to an extent invalidates my musings above. I assume the reference to “senior members of the House Appropriations Committee” refers primarily to David Obey who’s expressed concerns about this.

Paul Krugman has spent a lot of time writing about the desirability of more expansionary fiscal policy, but yesterday he seemed to say that this is a second-best alternative to his real preference of something like a Scott Sumner approach to monetary policy:

The first-best answer — that is, the answer that economic models, like my old Japan’s trap analysis, suggest would be optimal — would be to credibly commit to higher inflation, so as to reduce real interest rates.

But the key thing to recognize about this answer is that it’s all about expectations — the central bank only has traction over expected inflation to the extent that it can convince people that it will deliver that inflation after the liquidity trap is over. So to make this policy work you have to (i) convince current policymakers that it’s the right answer (ii) Make that argument persuasive enough that it will guide the actions of future policymakers (iii) Convince investors, consumers, and firms that you have in fact achieved (i) and (ii).

In reality, we haven’t even gotten anywhere near (i): the conventional wisdom is still that any rise in expected inflation above 2 percent is a bad thing, when it’s actually good.

But Krugman thinks this isn’t going to happen. He doesn’t focus on this solution because “I don’t think I’ll get anywhere, at least not until or unless the slump goes on for a long time.” Hence, the focus first on expansionary fiscal policy and now increasingly on direct support for employment.

But if this political analysis is correct, then aren’t the monetary authorities going to end up undermining anything that can be done on the fiscal side? You can see how fiscal policy could be effective as an adjunct to monetary efforts, but if fiscal and monetary policymakers try to work at cross-purposes, then my understanding is that monetary policy wins.

Kevin Drum says:

I sure wish that overall subsidy levels in the current healthcare bills produced the same kind of uproar as abortion and the public option. In terms of real-world effect on real-world people, subsidies are the biggest issue by a mile. But not a very sexy issue, apparently. That’s too bad.

Three points on this. One is just that the White House undercut efforts to organize around really generous subsidies by setting a $900 billion overall price tag during his big congressional speech. Another is that moderate Democrats by-and-large seem to have accepted this number, and not seriously pushed for a $600 billion bill or whatever. So there’s a certain amount of fatalism.

Last, I think most people see subsidies as the kind of thing that’s relatively likely to be tinkered with and revisited in the future. If a public option isn’t enacted in 2009, it’s not going to arrive in 2015. The subsidies, by contrast, are bound to be tweaked.

As I’ve said before, I have a sneaking suspicion that the Wizards aren’t cursed with injuries they’re cursed by a bad medical staff. And that’s what former Wizards center Etan Thomas seems to think as well:

While on the subject of team trainers and doctors, is it possible to impose a fine or forced firing when a team trainer or doctor consistently misdiagnoses numerous players? Not to call out any names but certain teams (not here with the Oklahoma City Thunder) employ trainers and doctors who regularly make medical mishaps (if that’s a politically correct way of saying it).

That’s gotta be the Wizards, right? Meanwhile, the Wizards signed Earl Boykins away from the Italian league because:

The situation also works out for the Wizards (2-6), who have already seen Javaris Crittenton (left ankle), Mike James (left hand) and Randy Foye (right ankle) go down to injury, leaving Saunders with only Arenas — who missed all but 15 games the previous two seasons with a knee injury — to run his point-guard-centric offense.

And that’s to say nothing of injuries to players (Caron Butler, Antawn Jamison, Mike Miller) who play different positions.