Should-Read: Noah Smith: Keynesian Economics Is Hot Again

Should-Read: What Noah misses is that international macroeconomists—those who had never taken Prescott or Lucas seriously—were very well-prepared for the collapse of 2007-2010. It’s not that theories needed to be rethought: it’s that doctrines that were always bs needed to be thrown to the side:

Noah Smith: Keynesian Economics Is Hot Again https://www.bloomberg.com/view/articles/2017-04-10/keynesian-economics-is-hot-again: “Lawrence Christiano… after the Great Recession…

…the pendulum should swing decisively in the Keynesian direction:

The Great Recession was the response of the economy to a negative shock to the demand for goods all across the board. This is very much in the spirit of the traditional macroeconomic paradigm captured by the [simple Keynesian] model… The Great Recession seems impossible to understand without invoking…shocks in aggregate demand. As a consequence, the modern equivalent of the IS-LM model—the New Keynesian model—has returned to center stage.

Another way of putting this is that Paul Krugman was right…. As Christiano mentioned, the New Keynesian revolution isn’t so new. Even in the 1990s, economists like Greg Mankiw and Olivier Blanchard were arguing that monetary policy had real effects on demand. And at the same time, international macroeconomists were realizing that Japan’s post-bubble experience of slow growth, low interest rates and low inflation implied that demand shortages could last for a very long time…. Krugman, Adam Posen, Lars Svensson, and others were already referring to a Japan-type stagnation as a liquidity trap in the late 1990s, and warning that standard monetary policy of cutting interest rates wouldn’t work in that sort of situation. But the profession didn’t listen, and only the smallest deviations from the New Classical orthodoxy were accepted into the mainstream.

The idea of fiscal stimulus was still largely taboo. Nobel prizes were awarded to the economists who made theories in which demand shortages can’t exist, while no Nobels were given to New Keynesians for suggesting otherwise. When the Great Recession hit, some prominent macroeconomists pooh-poohed the idea that stimulus could help. Christiano’s essay should serve as a needed rebuke to the profession…

But it also raises an uncomfortable question: Why didn’t macroeconomists catch on until years after disaster struck? One explanation is sociological…. Robert Lucas, Thomas Sargent and Edward Prescott… anti-Keynesians who now have big gold medals from Sweden… scare[d] younger economists away…. Political considerations might have played a role as well….

But… in most scientific fields — biology or astronomy, for example — the weight of evidence is enough to overcome social fads and political bias. Even in most areas of economics, empirical results gradually push the profession in one direction or another. For example, relatively few economists now believe a $15 minimum wage is likely to reduce employment very much…. The right way forward for macro is… to adopt more public humility and caution about… theories…. Someday… macroeconomic models won’t have to be rethought every time a big recession happens.