Sunday, April 28, 2013

The Great Depression and today's

Paul Krugman at his blog - which you can access via his Twitter page (@NYTimeskrugman) and not get blocked from reading the posts if you go to each one via a link on Twitter or elsewhere - has been talking a lot lately about how well Keynesian predictions have held up during the current depression.

In Monetarism Falls Short (Somewhat Wonkish), he provides this helpful guide to economists:

There have, however, been a couple of side shows, with what I guess now constitutes mainstream Keynesianism – carried forth in public debate by Martin Wolf, Simon Wren-Lewis, Brad DeLong, Jonathan Portes, Paul DeGrauwe, and whatshisface [Krugman himself], among others – subjected to non-austerian criticism on both flanks. On the left are the Modern Monetary Theory types, who assert exactly what the austerians like to claim, falsely, is the Keynesian position – that budget deficits never matter (except for their direct effect on aggregate demand). On the right are the market monetarists like Scott Sumner and David Beckworth, who insist that the Fed could solve the slump if it wanted to, and that fiscal policy is irrelevant.

Now, there won’t and can’t be any current-events test of MMT until we get out of the slump, because standard IS-LM and MMT are indistinguishable when you’re in a liquidity trap. But as Mike Konczal points out, we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens.
You can get a regular dose of MMT views on the New Economics Perspecvtives blog.

One of those Keynesians mentioned by Krugman, Brad DeLong, has written a new preface to an important book on the Great Depression. DeLong's co-author on the preface is Barry Eichengreen, who wrote the book on the gold standard in the Great Depression, Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 (1992).

Their New preface to Charles Kindleberger, The World in Depression 1929-1939 is available online. They write:

It might be hoped that something would have been learned from this considerable body of scholarship. Yet today, to our surprise, alarm and dismay, we find ourselves watching a rerun of Europe in 1931. Once more, panic and financial distress are widespread. And, once more, Europe lacks a hegemon – a dominant economic power capable of taking the interests of smaller powers and the operation of the larger international system into account by stabilising flows of finance and spending through the European economy. The ECB does not believe it has the authority: its mandate, the argument goes, requires it to mechanically pursue an inflation target – which it defines in practice as an inflation ceiling. It is not empowered, it argues, to act as a lender of the last resort to distressed financial markets, the indispensability of a lender of last resort in times of crisis being another powerful message of The World in Depression. The EU, a diverse collection of more than two dozen states, has found it difficult to reach a consensus on how to react. And even on those rare occasions where it does achieve something approaching a consensus, the wheels turn slowly, too slowly compared to the crisis, which turns very fast.

The German federal government, the political incarnation of the single most consequential economic power in Europe, is one potential hegemon. It has room for countercyclical fiscal policy. It could encourage the European Central Bank to make more active use of monetary policy. It could fund a Marshall Plan for Greece and signal a willingness to assume joint responsibility, along with its EU partners, for some fraction of their collective debt. But Germany still thinks of itself as the steward is a small open economy. It repeats at every turn that it is beyond its capacity to stabilise the European system: "German taxpayers can only bear so much after all". Unilaterally taking action to stabilise the European economy is not, in any case, its responsibility, as the matter is perceived. The EU is not a union where big countries lead and smaller countries follow docilely but, at least ostensibly, a collection of equals. Germany’s own difficult history in any case makes it difficult for the country to assert its influence and authority and equally difficult for its EU partners, even those who most desperately require it, to accept such an assertion.6 Europe, everyone agrees, needs to strengthen its collective will and ability to take collective action. But in the absence of a hegemon at the European level, this is easier said than done.
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