There were four posts yesterday. The first was “Playing Whack-a-Mole With Expansionary Austerity:”
The rise and fall of Alesina-Ardagna didn’t make as much of a public splash as the Reinhart-Rogoff saga, but in a fundamental sense it was the same thing. An academic paper purported to show something austerians very much wanted to hear – in this case that slashing spending in a depressed economy would actually create jobs; the authors were immediately feted and the paper promoted to sacred status; but then the result fell apart under both intellectual scrutiny and the weight of real-world experience.
Unlike R-R, however, A-A didn’t crash and burn, it just sort of quietly slunk offstage. And as a result, pieces of their story are still embedded in what all the Serious People know. In correspondence, Kevin O’Rourke points me to Mario Draghi admitting that fiscal consolidation is contractionary, after all, but claiming that it will be less contractionary if it takes the form of spending cuts rather than tax increases. Where is that coming from? Why, Alesina-Ardagna, of course.
And as it happens, the IMF study (pdf) that debunked A-A also had something to say about this result. It found that when you measured austerity right, it was contractionary, not expansionary; it did, however, find that spending cuts were less contractionary. But why? Careful further analysis suggested that much of the explanation lay in the behavior of central bankers, who for whatever reason were more likely to cut interest rates to offset spending cuts than to offset tax increases.
So one way to read Draghi’s remarks is that he is saying that it’s better to cut spending, because he personally will reward spending cuts while punishing tax increases. I know, that’s a bit harsh – but remember, we’re talking serious business here, and Draghi is inserting himself into domestic policy in a way that he really shouldn’t.
But there’s a further consideration: whatever the historical pattern, at this point the ECB can’t cut rates (much) in any case, because they’re already near zero. So to the extent that spending cuts may have been offset by lower rates in the past, that’s irrelevant now.
In short, Draghi is stating as a fact the superiority of spending cuts, when there is no good reason to believe that it’s true under current conditions.
Next up was “Varieties of Academic Temptation:”
These aren’t good times for austerian economics; and, to be honest, they aren’t too good for economics in general. Even if some economists have come out of the Reinhart/Rogoff/Alesina/Ardagna business looking pretty good, the reputation of the intellectual enterprise as a whole has clearly suffered.
But what did go wrong? I’ve been seeing a lot of comments along the lines of “They’re all just tools of Pete Peterson”; so I guess I should say that this is, in these cases, way too crude an interpretation.
Notice that I say “in these cases”. There are indeed plenty of economists who are essentially hired guns for interest groups, and they don’t all work at right-wing think tanks. But the temptations that led to the current affair are, I’d argue, nowhere near that crude.
Start with R-R. The fact is that Carmen and Ken are fine economists. Carmen has been doing terrific empirical work on banking crises for a long time. Ken is arguably the world’s leading international macroeconomic theorist. In fact, the main reason I knew that the case for fiscal policy remained strong even in the context of New Keynesian models was that I carefully read the canonical text by Obstfeld and Rogoff.
So what happened here? My interpretation is that after writing a very good book, R-R dashed off a careless paper on debt and growth that was so much what the VSPs wanted to hear that it made them instant celebrities in a way they hadn’t been before — and they didn’t know how to say stop the merry-go-round, we want to think about this a bit harder. The temptation involved was one of fame and becoming a part of the alleged real world, not some crude mercenary consideration.
I don’t know Alesina as well, and the expansionary austerity thing has deeper roots than the 90 percent thing, but again I doubt that a crude self-interest story is appropriate.
Let me also say that even some things that are in part Peterson-funded are not part of the octopus. The Peterson Institute for International Economics sometimes pops up in conversation, and people assume that it’s part of the Committee for a Responsible Federal Budget/Concord Coalition//Fix the Debt nexus. But it isn’t — it used to be the good old Institute for International Economics, a boutique think tank doing very good work on international trade and finance issues, and the grant it got from Peterson hasn’t changed its character at all.
Again, I’m not saying that crude flacks are absent from the scene. But the temptations that led people astray in these cases were subtler and sadder than that.
The third post of the day was “Humorists At The European Commission:”
The EC is many things, but I didn’t think of it as going in for self-mocking sarcasm. But the latest forecast is out; it predicts declining GDP and rising unemployment this year, stabilization next year (but we’ve heard that before), and displays a track record like this:
And the title of the report — wait for it — is “The EU economy: adjustment continues”.
Stop, you’re killing me (not to mention the European economy).
He ended the work week as usual, with “Friday Night Music: The Suburbs:”
Apparently it was too much to ask (listen to the lyrics); Win (lead singer) and Regine (drums in this video) just had a baby boy. But congrats — and there’s a new album reportedly coming!
Oh, and the strings in this song, especially after about the 4 1/2 minute mark, are really something …