What seems to have irked Krugman most is Taylor's take on short-term stimulus:
...it seems to me that we are in a situation where monetary and fiscal stimulus that has been extremely high by historical standards since about 2008 has had a much smaller effect on output and inflation than would have been expected before the Great Recession.Krugman's first problem with this is that fiscal stimulus has not in fact been "extremely high" by historical standards. That's certainly correct, if we use government spending on final goods and services as our measure of fiscal stimulus. Here's government spending since the end of the recession:
Krugman's next point is this:
...there is overwhelming evidence that fiscal policy has strong effects — that the multiplier is well above one. I’ve seen nothing suggesting that fiscal policy has lost traction...Finally, he states:
...if you have a persistent problem of inadequate demand — which is the secular stagnation argument — then find things that will boost demand.
So, Krugman is making the case that we have a problem of "inadequate demand" that has persisted since the beginning of the Great Recession, and that fiscal multipliers are large - "well above one." First, suppose we look at the behavior of real GDP and of real GDP minus government expenditures - the latter reflecting what Krugman would consider private demand, I think.
Another way to look at this is by way of a counterfactual, though I'll warn you that this won't be anything fancy. Suppose that the government spending multiplier is 2, which seems in the "well above one" ballpark. As well, suppose that we assume that government spending had grown at 3% since the end of the recession. Basically, think of Keynesian Cross with investment and net exports exogenous and held constant (I warned you this would be crude, but I'm trying to do some kind of Krugman calculation), and we're going to change the path for government spending from what it actually was and look at the effect, which gives:
But how would we have produced all of that extra output? Suppose that output per worker is the same on the counterfactual path as the actual one, which should put a lower bound on the number of workers required to produce the extra GDP, given that output per worker should fall with higher government spending. Then employment would have to be 13.3% higher now than it actually is. In the CPS, total employment is about 150 million, so it would require 20 million workers to produce the extra output needed to support the higher level of GDP. Where would those workers come from? Well, with the unemployment rate currently at 5%, 1.5 million workers transiting from unemployment to employment would give an unemployment rate of about 4%, which matches the lowest unemployment rate we have seen in the last 40 years, without putting much of dent in the worker shortfall. So, the extra workers would have to come from those who are currently not in the labor force. The employment/population ratio (epop) would have to go to 67.2%. Here's the actual time series:
So, it seems hard to make Krugman's argument stick - quantitatively. Further, there are plenty of other reasons to find fault with what he is saying:
1. When Keynesians say "inadequate demand" they really mean than prices and wages are screwed up. How does wage and price stickiness persist for more than seven years after the beginning of the Great Recession? How does a Summers secular stagnation sticky-wage-and-price phenomenon persist indefinitely? How do we square these ideas with what we know about the frequency and size of price and wage changes?
2. As I pointed out in this post and this one, the labor market in the U.S. is actually quite tight. There's no "slack" there, in Krugman's sense.
3. Summers's secular stagnation argument is that real interest rates are low because of a dearth of investment opportunities. But, according to this piece by Gomme, Ravikumar, and Rupert, the measured real rate of return on capital has not declined. Here's their Figure 2:
What to conclude? Taylor should not take Krugman's jabs too seriously. We should be thinking about long-run issues.