Must-Read: Paul Krugman: Notes on Farrell and Quiggin

Must-Read: Paul Krugman is, of course, right. Keynesian economists today are much less sympathetic to monetarist positions—either with respect to the Great Depression or the Great Recession—than they were in 2007, much more confident in their own point of view, and also much more appreciative of Minskyite perspectives. Anti-Keynesian economists do not appear to have changed their minds at all: learning nothing, and forgetting much: Paul Krugman Notes on Farrell and Quiggin: “I’m not sure how many readers will realize the extent to which anti-Keynesian economic arguments, as opposed to those that Keynesians made, were invented on the fly…

…[Farrell and Quiggin] suggest that there was a broad consensus before the crisis that fiscal policy did not work, so that the Keynesian turn of many macroeconomists in 2008 represented some kind of departure from previous views. In fact… [it] had long argued that conventional monetary policy loses traction when interest rates get close to zero (Krugman 1998, Eggertsson and Woodford 2003), and correspondingly that fiscal policy becomes more effective than in normal conditions… responding to events rather than changing doctrine….

Something quite different happened on the other side of the debate. A large part of academic macroeconomics was and is implacably opposed to Keynesian views, insisting that business cycles reflect real shocks and aren’t amenable to policy; but this “equilibrium macro” view played little role in post-2008 debates. Instead, we had novel doctrines like Alesina-Ardagna expansionary austerity and the Reinhart-Rogoff debt threshold that went straight from working papers to official orthodoxy… [that] became hugely influential before there was any extensive discussion or critique…. When that critique came, it was… harsh… A-A… identify fiscal shocks… very poor[ly]… R-R’s results… eccentric choices about data analysis…. But by that time, these papers had already played a major role….

What is remarkable is how small a role evidence has played… [in] fiscal policy… the strong association between austerity and economic contraction has made little dent in anti-Keynesian views… monetary policy… a famous 2010 open letter to Ben Bernanke, in which a number of well-known conservative economists and other public figures warned that quantitative easing would risk a “debased dollar” and inflation. Bloomberg asked signatories about what they had learned from the failure of inflation to materialize; not one was willing to admit they were wrong….

A… dispiriting portrait…. The actual relationship between [right-wing] experts and [right-wing] policymakers has borne little resemblance to the idealized picture, with both sides of the transaction violating supposed norms. And it’s hard to see signs of improvement…


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