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Friday, April 17, 2015

Paul Krugman: That Old-Time Economics

Not all macroeconomic models failed during the Great Recession. "Old-time macroeconomics" ... "provided excellent guidance":

That Old-Time Economics, by Paul Krugman, Commentary, NY Times: America has yet to achieve a full recovery from the ... financial crisis. Still, it seems fair to say that we’ve made up much, though by no means all, of the lost ground.
But you can’t say the same about the eurozone... Why has Europe done so badly? In the past few weeks, I’ve seen a number of speeches and articles suggesting that the problem lies in the inadequacy of our economic models — that ... macroeconomic theory ... failed to offer useful policy guidance... But is this really the story?
No, it isn’t..., basic textbook models ... have performed very well. The trouble is that policy makers in Europe decided to reject those basic models in favor of alternative approaches that were innovative, exciting and completely wrong. ...
In America, the White House and the Federal Reserve mainly stayed faithful to standard Keynesian economics. ... Meanwhile, the Fed ignored ominous warnings that it was “debasing the dollar”...
In Europe, by contrast, policy makers were ready and eager to throw textbook economics out the window in favor of new approaches. The European Commission ... eagerly seized upon supposed evidence for “expansionary austerity... Meanwhile, the European Central Bank took inflation warnings to heart and raised interest rates in 2011 even though unemployment was still very high. ...
European policy makers ... sought justifications for the harsh policies they were determined, for political and ideological reasons, to impose on debtor nations; they lionized economists, like Harvard’s Alberto Alesina, Carmen Reinhart, and Kenneth Rogoff, who seemed to offer that justification. As it turned out, however, all that exciting new research was deeply flawed, one way or another.
And while new ideas were crashing and burning, that old-time economics was going from strength to strength. ...
The point is that it’s wrong to claim ... that policy failed because economic theory didn’t provide the guidance policy makers needed. In reality, theory provided excellent guidance, if only policy makers had been willing to listen. Unfortunately, they weren’t. And they still aren’t. ...
But back to the question of new ideas and their role in policy. It’s hard to argue against new ideas in general. In recent years, however, innovative economic ideas, far from helping to provide a solution, have been part of the problem. We would have been far better off if we had stuck to that old-time macroeconomics, which is looking better than ever.

    Posted by on Friday, April 17, 2015 at 04:50 AM Permalink  Comments (129)


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