Tuesday, August 13, 2013

Did Paul Krugman lose?

Typically good comments thread over at Monetary Realism. Personally I did not see what was remarkable about the Noah Smith piece, or Noah Smith himself, but they certainly seemed very excited.

That lead me to this comment by Krugman (NYTimes) when discussing the state of macro:
On the academic side: look, to a first approximation nobody ever admits being wrong about anything. But my sense is that a lot of younger economists are aware, even if they don’t dare say so, that freshwater macro has been a great embarrassment these past four years, and that liquidity-trap Keynesianism has done very well. This will affect future research; it will, over time, break the stranglehold of decadent Lucasian doctrine on the journals.
And the giggles and whispers thing — in which anything resembling non-microfounded Keynesian analysis was the subject of automatic ridicule — is already, I think, over.
Look at Delong/Summers on fiscal policy: the analytical core is, yes, the IS-LM model.
In a better world, Brad and I and our fellow-travelers would have achieved an immediate transformation of both policy and doctrine. We don’t live in that world. But I think we are winning the argument, in ways that will make a difference.
First of all, Krugman just comes out and says a number of points I've been making about the social and political economy inside of the economics profession, and how those individuals then become "thought leaders" and drive public opinion through the NYTimes Op Ed column.

He says "nobody ever admits being wrong about anything" which is quite true. And even if younger economists believe this stuff is nonsense, they daren't say so out loud because it's career suicide to do so. More important, note what Krugman is saying -- he's saying that economics as a discipline is about fashion, not facts, and that it prioritizes the research process over research itself. He isn't saying this too loudly because it calls his own identity into disrepute, but there isn't another way to interpret what he's saying. His criticism of Lucas isn't that it's wrong, it's that it's decadent. Kind of like wide shoulders in the 80s. And when it cycles out of favor we'll giggle and call it gauche. Also like wide shoulders in the 80s.

Also, look at the tricks Krugman plays -- he brings up the IS-LM model as the supporter of his brand of Keynesianism. But IS-LM is also the micro-foundations of DGSE. And DGSE is at the heart of all macro. And IS-LM/DGSE do not get the accounting right. Which is why they are not only wrong, but actively block the path to right-ness.

You can see similar groupthink between Krugman and DeLong who are ideologically sympatico, with Krugman being much higher up the ladder (which sets the dynamic between them). Noah is broadly in line as well, and it is the Krugman engagement that I think has been the catalyst. Anyway, DeLong writes:
..My view is that macroeconomists know a great deal about how to avert and cure the macroeconomic consequences of financial crises, and have known how to do it since John Stuart Mill drafted his "Essays on Some Unsettled Questions in Political Economy" back in 1829. A general glut--a desire on the part of agents in the economy as a whole to spend less than their total incomes--is the consequence of a general belief on the part of agents that they are holding too few or the wrong kind of financial assets. It can and should be cured by having some lender-of-last-resort-like agency--the tallest midget in the room--create the financial assets needed for people to be happy with the amount and type of their holdings, and so push economy-wide spending up to income.
And yet, in spite of everything, this was not done. There were lots of technocratic details and questions about how to do it. But back in late 2008 I had no doubt that all of us economists agreed that that was what needed to be done, and it would be done.
I still don't understand why it was not done. I thought that those of us who understood John Stuart Mill (1829) exercised intellectual hegemony over economic policy discourse. And it turns out we did not…
DeLong is wrong. In the case of a general glut you don't need a lender-of-last-resort, you need a printer-of-last-resort, or at least you need to tell the unprinter-of-last-resort to take a chill pill for a while. JKH will hate me, but the core issue here is that DeLong is out-of-paradigm, and his New Keynesian approach is interpreted as a just-so story for Democrats. This is because, so long as it remains out of paradigm, it is a just-so story for Democrats. Also, I will note that Mosler is technically wrong when he talks about taxes being taken to the shredder -- they are not -- conceptually this can help someone get their head around how balance sheet expansion and contraction across sector can work. So even though he was wrong, this moved the ball forward for me.

Noah responds and lays his cards on the table:
Well, although I agree with Mill/you, and although I think we are *right* to think these things, I also think that's very different from *knowing* these things. The way I use the term, if we *knew* these things, then we could get the whole public to laugh at the Chicago School as much as we laugh at the Chicago School. Just like even people who will never understand the research of Copernicus or Kepler or Galileo or Newton now laugh at geocentrism.
The point is that, as things stand, we cannot easily *prove* that we know how to clean up after financial crises. And it's just because we don't have sufficient data or data-gathering methods, not because our ideas are BS.
Right -- so there's the enemy, the Chicago School. Never mind that it's in all the textbooks published for the past 50 years, Krugman believes it, Smith believes it, and DeLong believes it. And the folks who are right -- the MMT/PK guys -- they are the actual folks being laughed at.


Blogger Ralph Musgrave said...

I quite agree that what’s needed is a “printer of last resort”. Unfortunately, printing was attacked just recently by an Oxford economics prof here:


I did my best to defend printing in the comments.

5:47 AM  
Blogger winterspeak said...

Hi Ralph

Thanks for your note. I must admit, I didn't understand what point you were driving in the comments there.

The hypothetical Pigou effect is interesting, and I guess it makes sense in a model where you don't have debt and by extension debt deflation, but we don't live in that world at all so it's a bad model. By eliminating the right hand side of the balance sheet academic macro has made it impossible to understand money, and by extension unemployment (longer post on that soon).

10:45 AM  
Blogger Tyler said...

"If you choose to pay [federal] taxes in cash, the [federal] government will give you a receipt--and shred the bills. Since it is the source of money, [the federal] government can't run out." - James Galbraith

1:15 PM  
Blogger Ralph Musgrave said...

Hi Winter,

I’m sure you have the ABILITY to understand my points on Wren-Lewis’s blog. The reason you didn’t understand was probably lack of time to read through all the comments: both mine and the comments I responded to.

My basic position is the same as yours, namely that a printer of last resort is needed. Indeed, that’s one of the basic MMT claims.

Unfortunately, there are numerous academics and others who like producing complicated but flawed arguments against the printer of last resort idea. That means that people like me have go through the complicated alleged flaws and produce complicated rebuttals of the alleged flaws.

1:38 AM  

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