Krugman reviews 3 on NYRB

[ashling]

http://www.nybooks.com/articles/archives/2013/jun/06/how-case-austerity-has-crumbled/

The Alchemists: Three Central Bankers and a World on Fire
by Neil Irwin
Penguin, 430 pp., $29.95

Austerity: The History of a Dangerous Idea
by Mark Blyth
Oxford University Press, 288 pp., $24.95

The Great Deformation: The Corruption of Capitalism in America
by David A. Stockman
PublicAffairs, 742 pp., $35.00

Four years ago, the mystery was how such a terrible financial crisis could have taken place, with so little forewarning. The harsh lessons we had to learn involved the fragility of modern finance, the folly of trusting banks to regulate themselves, and the dangers of assuming that fancy financial arrangements have eliminated or even reduced the age-old problems of risk.

I would argue, however—self-serving as it may sound (I warned about the housing bubble, but had no inkling of how widespread a collapse would follow when it burst)—that the failure to anticipate the crisis was a relatively minor sin. Economies are complicated, ever-changing entities; it was understandable that few economists realized the extent to which short-term lending and securitization of assets such as subprime mortgages had recreated the old risks that deposit insurance and bank regulation were created to control.

I’d argue that what happened next—the way policymakers turned their back on practically everything economists had learned about how to deal with depressions, the way elite opinion seized on anything that could be used to justify austerity—was a much greater sin. The financial crisis of 2008 was a surprise, and happened very fast; but we’ve been stuck in a regime of slow growth and desperately high unemployment for years now. And during all that time policymakers have been ignoring the lessons of theory and history.

It’s a terrible story, mainly because of the immense suffering that has resulted from these policy errors. It’s also deeply worrying for those who like to believe that knowledge can make a positive difference in the world. To the extent that policymakers and elite opinion in general have made use of economic analysis at all, they have, as the saying goes, done so the way a drunkard uses a lamppost: for support, not illumination. Papers and economists who told the elite what it wanted to hear were celebrated, despite plenty of evidence that they were wrong; critics were ignored, no matter how often they got it right.

The Reinhart-Rogoff debacle has raised some hopes among the critics that logic and evidence are finally beginning to matter. But the truth is that it’s too soon to tell whether the grip of austerity economics on policy will relax significantly in the face of these revelations. For now, the broader message of the past few years remains just how little good comes from understanding.

[hedda_foil]

1. knr and thanks for a great link.

[muriel_volestrangler]

2. K&R - a Krugman piece worth reading

that people might not otherwise see.