Krugman kicking some austerian ass this morning!
3 new posts:
Building A Mystery
Jared Bernstein shakes his head at what he calls “weirdness” at the Washington Post, citing an editorial and a commentary by Robert Samuelson. I second his views, but I’d like to point out something else about Samuelson’s piece.
What Samuelson does is to throw up his hands and declare that we just don’t understand what’s going on in the macroeconomy. How does he know this? He talks to several people who declare themselves deeply puzzled by events — notably, Lorenzo Bini Smaghi and Allan Meltzer.
But it’s no mystery why Bini Smaghi and Meltzer would find it all very puzzling — they personally got everything wrong. Bini Smaghi spent years sneering at anyone suggesting that Greece might need to write off some of its debts. Meltzer has been predicting runaway inflation for four years.
Some of us don’t find the macro developments puzzling at all; we applied basic IS-LM macro, understood from the beginning that monetary policy would have little traction, warned that austerity policies would have major negative effects. Basic textbook macro has in fact worked fine. And so you might think that Samuelson would ask the people who got it wrong why they got it wrong, and whether it might not be because they had the wrong framework while the Keynesians were closer to the truth.
But no; he acts as if these people are the authorities, and their personal predictive failures demonstrate that nobody can get it right.
Oh, and it goes without saying that these “experts” have not reconsidered their views at all.
http://krugman.blogs.nytimes.com/2013/04/22/building-a-mystery/
Trap Denial
OK, probably going on too much about this, but I want to return briefly to the issue of puzzled economists, specifically Allan Meltzer.
Four years ago Meltzer and I effectively had a debate about the effects of the rapidly expanding Fed balance sheet. He (and others) warned of inflation ahead; I (and others) said that we were in a liquidity trap, so that the Fed’s bond purchases would basically just sit there.
So here we are four years later, the huge expansion of the Fed’s balance sheet has not, in fact, led to inflation. And Meltzer is puzzled by the fact that all those bond purchases just sat there:
Since late 2007, the Fed has pumped more than $2 trillion into the U.S. economy by buying bonds. Economist Allan Meltzer asked:
“Why is there such a weak response to such an enormous amount of stimulus, especially monetary stimulus?” The answer, he said, is that the obstacles to faster economic growth are not mainly monetary. Instead, they lie mostly with business decisions to invest and hire; these, he argued, are discouraged by the Obama administration’s policies to raise taxes or, through Obamacare’s mandate to buy health insurance for workers, to increase the cost of hiring.
He made a monetary prediction; I made a monetary prediction; his prediction was wrong. Therefore, it must be because of Obamacare!
http://krugman.blogs.nytimes.com/2013/04/23/trap-denial/
A Heartbreaking Work of Staggering Folly
As I have been writing a lot lately, the clean little secret of the global economic crisis is that standard economic theory actually performed pretty well.
It’s true that few anticipated the severity of the 2008 crisis — but that wasn’t a deep failure of theory, it was a failure of observation. We actually had a pretty good understanding of bank runs; we just failed to notice that traditional banks were a much smaller share of the system than before, and that unregulated, unguaranteed shadow banks had become so important. Once that realization hit, as Gary Gorton (pdf) has documented, standard bank-run theory made perfectly good sense of the story.
And the aftermath of the crisis — persistent low interest rates despite high deficits, impotence of monetary policy, major negative impacts of fiscal austerity — may not have been what most economists or government agencies predicted, but it’s what they should have predicted; Econ 101 macroeconomics, as I often point out, has worked pretty well.
Even the euro area crisis made and makes a lot of sense in terms of standard optimum currency area theory.
The point is that radical new theories haven’t been needed at all; off-the-shelf economics, tools we already had, provided plenty of guidance.
more
http://krugman.blogs.nytimes.com/2013/04/23/a-heartbreaking-work-of-staggering-folly/
= new reply since forum marked as read
I was thinking of the French when I wrote #16 
*"first against the wall when the revolution comes"
