Afternoon Must-Read: Paul Krugman: Nerds, High Priests, and the State of Economics

Paul Krugman: Nerds, High Priests, and the State of Economics: “I’ll spend much of this weekend at the New York Review of Books conference on what’s wrong with the economy and economists…

…It’s important, in these things, to ask, ‘Compared to what?’… Leave out the unfortunately substantial number of economists who decided to throw basic macroeconomics out the window; that’s an important story, but a different one…. Talk instead about economists who stayed with more or less standard textbook macroeconomics. How did they do?… Very few saw the crisis coming… failed to understand… the growth of shadow banking… didn’t pay nearly enough attention to household debt…. But these were failures of observation, not fundamental conceptual problems…. We collectively went ‘Aha! Diamond-Dybvig-Irving Fisher yowza!’ and all was clear…. After the crisis struck… the liquidity trap came to the fore, and the sensible half… [said] massive expansion of central bank balance sheets would not be inflationary, large deficits would not drive up interest rates, austerity would depress economies by much more than it does in normal times. These were not obvious…. But they proved right. These past six years… a big win for basic Hicksian macroeconomics…. Consider the people Simon Wren-Lewis calls the ‘high priests’, people who are supposedly ‘close to the markets’ and whose vast experience and intuition grant them insights denied to nerdy economists…. They’ve spent these past six years declaring that we’re going to turn into Greece any day now (and it’s ‘regrettable’ that it hasn’t happened yet), that we can boost the economy by cutting deficits, because confidence. Great calls, guys. Remarkably, as Simon points out, politicians still hang on the words of these high priests…”