Friday, May 10, 2013

Rain of error and the rain-dancers

Paul Krugman has been indulging in a polite academic version of "kicking ass and taking names" over austerity policy, aka, "austerianism" and "austericide", in his blog.

Some of the names of people he's been naming who have established a record of consistently getting the economics seriously wrong during this depression include:

In this post, he points to the intellectual and practical bankruptcy of the austericide position, and discusses some major currents of economic theory that actually have something substantial to contribute to policy discussions right now:

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 [Krumgan 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 [Keynesianism] 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.

And the results aren’t looking good for the monetarists: despite the Fed's fairly dramatic changes in both policy and policy announcements, austerity seems to be taking its toll. I would add that the UK experience provides a similar lesson. Mervyn King advocated fiscal consolidation – I’d say that he shares equal responsibility with Cameron/Osborne for Britain’s wrong turn — but more or less promised (pdf) that he would and could offset any adverse effects on growth with monetary policy. He didn't and couldn't. [my emphasis]
See also Krugman's column The 1 Percent's Solution New York Times 04/25/2013.

Henry Blodget in The Economic Argument Is Over — Paul Krugman Has Won Business Insider 04/24/2013 explains how Krugman's Keynesian perspective has proven itself the empty austericide arguments:

This debate has not just been academic. It has affected the global economy, and, with it, the jobs and livelihoods of hundreds of millions of people.

Those in favor of economic stimulus won a brief victory in the depths of the financial crisis, with countries like the U.S. implementing stimulus packages. But the so-called "Austerians" fought back. And in the past several years, government policies in Europe and the U.S. have been shaped by the belief that governments had to cut spending or risk collapsing under the weight of staggering debts.

Over the course of this debate, evidence has gradually piled up that, however well-intentioned they might be, the "Austerians" were wrong. Japan, for example, has continued to increase its debt-to-GDP ratio well beyond the supposed collapse threshold, and its interest rates have remained stubbornly low. More notably, in Europe, countries that embraced (or were forced to adopt) austerity, like the U.K. and Greece, have endured multiple recessions (and, in the case of Greece, a depression). Moreover, because smaller economies produced less tax revenue, the countries' deficits also remained strikingly high.
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