Austerians vs. reality

Paul Krugman for years has been approaching from various angles the problem of the Very Serious People disregarding solid, even conventional macroeconomics for the dubious lure of austerity economics, aka, Herbert Hoover/Heinrich Brüning policies.

We're in a position in the US and Europe at the moment where sound economic analysis has almost a Cassandra quality to it, doomed to be correct but having no one believe it, at least no one actually making economic policy.

Cassandra, patron prophetess of present-day US and European macroeconomics

From Encyclopædia Britannica, Cassandra:

According to Aeschylus’s tragedy Agamemnon, Cassandra was loved by the god Apollo, who promised her the power of prophecy if she would comply with his desires. Cassandra accepted the proposal, received the gift, and then refused the god her favours. Apollo revenged himself by ordaining that her prophecies should never be believed.

In Useless Expertise 07/30/2014, Krugman writes:

You might want to say that the professional consensus was rejected because it didn’t work. But actually it did. Mainstream macroeconomics made some predictions — deficits wouldn’t drive up interest rates in a depressed economy, "fiat money" wouldn't be inflationary, austerity would lead to economic contraction — that drew widespread scorn; Stephen Moore at the WSJ (which was predicting soaring rates and inflation) dismissed "fancy theories" that "defy common sense." The fancy theorists were, of course, right — but nobody who rejected the consensus has changed his mind. Oh, and Moore became the chief economist at Heritage.

So, two thoughts. One is a point I think I’ve made before. You fairly often hear people describe the very poor track record of policy since 2008 as an indictment of economists, who clearly didn’t have the right answers. But actually mainstream macro has a pretty decent track record since 2008 — the problem was that what it said about policy was disregarded by the policymakers, who went with what they wanted to believe.

The other is that you have to wonder what good we’re all doing. If policymakers ignore professional consensus, and if views about how the world works are completely insensitive to evidence and results, does knowledge matter. If a tree falls in the academic forest, but nobody in Brussels or Washington hears it, did it make a sound?

Stephen Moore is author of prescient economic classics like Bullish on Bush: How George Bush's Owenership Society Will Make America Stronger (2004) and How Barack Obama is Bankrupting the U.S. Economy (2009).

Tags: austerity economics