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Wednesday, February 10, 2010

'The Dark Age of Macroeconomics'

Paul Krugman visits MIT:

Krugman: ‘Dark age of macroeconomics’ is upon us, by Peter Dizikes, MIT News Office: Midway through his standing-room-only lecture at MIT on Friday,... Nobel Prize-winning economist Paul Krugman PhD ’77 took a brief detour into world history — specifically to the Dark Ages.

It was a period, Krugman suggested, that was especially dismal not merely due to, say, rampant barbarism, but because it constituted an intellectual reversal: “In the Dark Ages, people forgot what the Greeks and Romans had learned.”

It is an analogy Krugman favors these days when he thinks about his own profession. “We’re living in a dark age of macroeconomics,” Krugman said during his lecture... “Economists themselves are confused,” he added. “It’s been really amazing within the economics profession to see how much has been lost.”

What has been lost above all, Krugman argued, is an appreciation of ideas developed in the 1930s — most notably the economist John Maynard Keynes’s broad view that in certain circumstances government spending is the best tool to instigate an economic recovery. At a time when interest rates are minimal and can hardly be lowered to spur private investment, Krugman argued, Keynesian thought is especially vital, despite some loud arguments to the contrary.

Thus Krugman believes the United States has benefitted from the $787 billion federal stimulus package that was signed into law in February 2009... Krugman thinks the legislation helped alleviate the recession’s effects. “We would probably have 12 percent unemployment in the U.S. if we didn’t have the stimulus,” he said. Yet the seemingly long odds against additional government spending are leading Krugman to think we may well be headed for a double-dip recession — the contemporary counterpart to the slump that occurred in 1937, just as the U.S. economy was recovering from the worst of the Great Depression.

“We are caught in a situation more than a little reminiscent of the mid-1930s,” Krugman emphasized. “How can we be replaying the past so badly?” he added. “That is the question that has worried me a lot.”
Share the blame

If economics is failing to help the economy, however, Krugman is willing to spread the blame around, between both economists and politicians. ... As Krugman sees it, the economic ideas associated most heavily with the University of Chicago — such as the continuous efficiency of markets and the need to keep government out of the economic arena — have had a broad and baleful influence on economics education.

“In the 1970s, a lot of schools stopped teaching old-fashioned macro,” said Krugman on Friday. “MIT being one of the places you could still get it.” ... As a result, he added, “What’s striking is how many people there are in their 30s and 40s in the profession who haven’t encountered this idea, that fiscal stimulus helps.” ... “There are insights that have been hard-won, but they were hard-won 70 years ago, and were lost in the interim,” he told the MIT audience.

When these ideas are forgotten within the profession, Krugman asserted, such pieces of knowledge stand even less of a chance of getting a hearing on Capitol Hill. The problem, in his view, is that “political people tend to always look part-way. If you say you need to do this big [bill], they’ll say, ‘All right, let’s do part of it.’ … That’s very difficult to do in a situation where half a loaf may be not much better than nothing. And that is the situation we face with this crisis. If you do a half-hearted policy, even if economists think you should do more, the conclusion will be, ‘Well that policy failed.’”

As Krugman sees it, then, the government did too little to fight the recession, and now it’s too late to reverse course. In part, he said, that is also because an odd kind of self-congratulation has set in among policy-makers and the chattering classes, for having prevented an all-out 1930s-style Great Depression.

“By avoiding utter disaster,” Krugman said, “we’re avoiding looking at our own failings.” ...

No room for optimism

...As Krugman made clear, he does not expect that current policy stasis to change any time soon. Winding up his remarks, Krugman paused, looked down at the podium, then sized up the audience again. “I left a little [space] in my notes here that says, ‘Come up with something optimistic to say at the end,’” he remarked as the audience laughed, “but I don’t have anything.” Call it black humor for the new dark age.

    Posted by on Wednesday, February 10, 2010 at 01:54 AM in Economics, Macroeconomics | Permalink  Comments (59)


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