Krugman’s blog, 6/6/15

There were four posts yesterday.  The first was “Views Differ on Shape of Macroeconomics:”

The doctrine of expansionary austerity — the claim that slashing spending would actually boost demand and employment, because it would have such positive effects on confidence that this would outweigh the direct drag — was immensely popular among policymakers in 2010, as the great turn toward austerity began. But the statistical underpinnings of the doctrine fell apart under scrutiny: the methods Alberto Alesina used to identify changes in fiscal policy did not, it turned out, do a very good job, and more careful work found that historically austerity has in fact been contractionary after all. Moreover, the experience of austerity programs seemed to confirm what Keynesians new and old had warned from the beginning — that the negative effects of austerity are much larger under conditions where they cannot be offset by conventional monetary policy.

So at this point research economists overwhelmingly believe that austerity is contractionary (and that stimulus is expansionary). Surveys show overwhelming support among US economists for the proposition that the ARRA was a job creator, a huge majority of British academics denying that the Cameron austerity program was positive for growth. The Federal Reserve, the IMF, the OECD, the OBR, and more believe that austerity is contractionary. Nothing in economics is every settled for good, but for now at least expansionary austerity has virtually collapsed as a doctrine taken seriously by researchers.

Nonetheless, Simon Wren-Lewis points us to Robert Peston of the BBC declaring

I am simply pointing out that there is a debate here (though Krugman, Wren-Lewis and Portes are utterly persuaded they’ve won this match – and take the somewhat patronising view that voters who think differently are ignorant sheep led astray by a malign or blinkered media).

Wow. Yes, I suppose that “there is a debate” — there are debates about lots of things, from climate change to evolution to alien spaceships hidden in Area 51. But to suggest that this debate is at all symmetric is just wrong — and deeply misleading to one’s audience.

As for the claim that it’s somehow patronizing to suggest that voters are ill-informed when (a) macroeconomics is a technical subject, and (b) the media have indeed misreported the state of the professional debate — well, this is sort of an economic version of the line that one must not suggest that the Iraq war was launched on false pretenses, because this would be disrespectful to the troops. If you’re being accused of misleading reporting, it’s hardly a defense to say that the public believed your misinformation — more like a self-indictment.

Again, we’re not talking about the truth of how fiscal policy works so much as the state of professional opinion on that question, which is very one-sided. And it’s actually disturbing to see reporters unwilling to admit that simple reality.

The second post yesterday was “The Truth About AI (Silly):”

Izabella Kaminska, at a meeting about the future of artificial intelligence, muses/jokes that the AI might already be here, but choosing not to show itself. She’s not watching the right TV shows! That’s the premise of the terrific Person of Interest. Here’s Root (Amy Acker), a hacker temporarily confined to a mental health facility but still in contact with the Machine:

Yesterday’s third post was “Mr. Market Speaks:”

Way back, when it wasn’t entirely silly to say that there was a real debate about the impact of fiscal and monetary policy in a liquidity trap, there were really two big issues on which academics like me and those who claimed to be wise about such matters but didn’t do models differed. One was inflation; the other was interest rates, where there were many dire warnings about the impact of budget deficits, but basic macroeconomics said otherwise.

You might think that six years of low rates would have settled that dispute, but we live in an age of derp. Indeed, what’s really remarkable is the enduring conviction of the other side that it knows what the market — “Mr. Market”, in Robert Peston’s phrase — wants, even though actual market results have been very much what liquidity-trap theory predicted.

Yet to the extent that the peddlers of interest rate derp acknowledge this at all, they berate markets for not behaving as they should. Remember when Alan Greenspan declared the failure of interest rates to spike and inflation to take off “regrettable“? (When I ran into another well-known figure a few months ago, he did concede that “The market seem to agree with you,” but his tone was quite bitter.)

Now Jonathan Portes points out that the recent UK election offers a natural experiment: the surprising result, which gave the Tories an outright majority, also means much more austerity looking forward than one would have expected otherwise. So did Mr. Market respond by driving down long-term interest rates? No — there was no bond-market response at all.

This ought to move the discussion. But after all these years, I’ve long since stopped expecting any such thing.

The last post yesterday was “Why Am I a Keynesian?”

Noah Smith sort-of approvingly quotes Russ Roberts, who views all macroeconomic positions as stalking horses for political goals, and declares in particular that

Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government.

OK, I’m not going to clutch my pearls and ask for the smelling salts. Politics can shape our views, in ways we may not recognize. But I’m aware of that risk, and make a regular practice of asking myself whether I’m letting that kind of bias slip in. In fact, I lean against studies that seem too much in tune with my political preferences. For example, I’ve been aggressively skeptical of studies that seem to show a negative relationship between inequality and growth, precisely because that result is so convenient for my political tribe (which doesn’t mean that it’s wrong.)

So, am I a Keynesian because I want bigger government? If I were, shouldn’t I be advocating permanent expansion rather than temporary measures? Shouldn’t I be for stimulus all the time, not only when we’re at the zero lower bound? When I do call for bigger government — universal health care, higher Social Security benefits — shouldn’t I be pushing these things as job-creation measures? (I don’t think I ever have). I think if you look at the record, I’ve always argued for temporary fiscal expansion, and only when monetary policy is constrained. Meanwhile, my advocacy of an expanded welfare state has always been made on its own grounds, not in terms of alleged business cycle benefits.

In other words, I’ve been making policy arguments the way one would if one sincerely believed that fiscal policy helps fight unemployment under certain conditions, and not at all in the way one would if trying to use the slump as an excuse for permanently bigger government.

But in that case, why am I a Keynesian? Maybe because of convincing evidence?

First of all, the case for viewing most recessions — and the Great Recession in particular — as failures of aggregate demand is overwhelming.

Now, this could be a case for using monetary rather than fiscal policy — and that actually is the policy I advocate in response to garden-variety slumps. But when the slump pushes rates down to zero, and that’s still not enough, any simple model I can think of says that fiscal expansion can be a useful supplement, while fiscal austerity makes a bad situation worse.

And while it’s true that there was limited direct evidence on the effects of fiscal policy 6 or 7 years ago, there’s now a lot, and it’s very supportive of a Keynesian view.

The point is that while it’s definitely OK to scrutinize economists’ motives — to ask whether they’re responding to logic and evidence, or just talking their political book — assertions that it’s all politics deserve the same scrutiny. Is my behavior consistent with claims that my views are purely a reflection of my political preference? And if it isn’t — which I don’t think it is — what’s driving such claims? Might it be … politics, deployed on behalf of economic doctrines that have lost the substantive debate?




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