Merry Christmas. As usual, I’ll be sparing you the prose stylings of Ross “Don’t” Douthat, or as I call him, the Pasty Little Putz. You’re welcome. Prof. Krugman had one post yesterday, “Don’t Blame Macroeconomics (Wonkish and Petty):”
Arguing about the state of economics seems like a distinctly secondary concern right now, especially arguing with people I agree with on most things. But Robert Skidelsky’s latest gets one big thing very wrong, and I think it matters for how we approach the general mess we’re in.
Skidelsky argues, quite correctly in my view, that economists have become far too inward-looking; they study models, and forget (or never knew) that these are only sketch maps of the territory, and that you always have to consider the possibility that the map is all wrong — which means that you need to supplement technical training with history, psychology, and just plain looking out there at the real world.
But his prime examples of economics malfeasance are, well, terrible:
Policymakers don’t know what to do. They press the usual (and unusual) levers and nothing happens. Quantitative easing was supposed to bring inflation “back to target.” It didn’t. Fiscal contraction was supposed to restore confidence. It didn’t.
“Supposed to” according to whom? Not basic macroeconomics!
Look, we had a more or less standard model of macroeconomics when interest rates are near zero — IS-LM in some form. This model said and says that (a) monetary policy is ineffective under these conditions (b) fiscal multipliers are positive and large — in particular, fiscal contraction is strongly contractionary. And these predictions have been borne out! Huge monetary expansion didn’t raise inflation; extreme austerity was strongly correlated with severe economic downturns.
In other words, policy had exactly the effects it was “supposed to.”
Now, policymakers chose not to believe this. They chose to believe that monetary policy could do the job absent fiscal support, because for several reasons they refused to use fiscal policy to promote jobs; they chose to believe in the confidence fairy to justify attacks on the welfare state, because that’s what they wanted to do. And yes, some economists gave them cover.
But that’s a very different story from the claim that economics failed to offer useful guidance. On the contrary, it offered extremely useful guidance, which policymakers, for political reasons, chose to ignore.