I see full-employment as constrained by effective demand, which can be determined by quite simple equations. My view comes from Keynes and chapter 3 of his General Theory book.
“An alternative, though equivalent, criterion is that at which we have now arrived, namely a situation, in which aggregate employment is inelastic in response to an increase in the effective demand for its output. Thus Say’s law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment. If, however, this is not the true law relating the aggregate demand and supply functions, there is a vitally important chapter of economic theory which remains to be written and without which all discussions concerning the volume of aggregate employment are futile.”
If you assume full-employment as Krugman does, it seems that you are assuming Say’s law. The key is to understand the “vitally important (unwritten) chapter” on effective demand. How is it determined? How does it affect long-run growth? How does it affect employment? How does it affect monetary policy? How does it affect output? How does it affect the aggregate profit rate?
Now, Krugman did concede that employment may be closer to full-employment than one might think. He said that if the Fed did not taper, and the economy was closer to full-employment than thought, that inflation would rise modestly. But look at this graph using the AS-ED model (Aggregate Supply-Effective Demand).
Inflation is running low. Effective demand is steadily coming downward. Inflation is staying low because effective demand is weighing down upon business (sales and production). Under this circumstance, there is little transference of output growth into inflation. The financial sector will not support inflation. Spare capacity consumes financial injections. If you want to see inflation, you will have to wait until the LRAS zone, where inflation results from effective demand constraining output in terms of labor and capital utilization. (I have showed this before in the post titled, Will there be inflation in the next recession?)
Krugman finishes his post with…
“So my message is, don’t do it. Don’t taper, don’t tighten, until you can see the whites of inflation’s eyes.”
So as I see it, he would start tapering as real GDP enters the LRAS zone, because that is where inflation will begin showing the white’s of its eyes. But you know, the economy normally goes into a recession within the LRAS zone. How likely is it that the Fed would taper as a recession is forming?
Related post… Krugman & Kalecki, “injecting” to escape from a sub-optimal reality. Edward Lambert, August 9th, 2013