A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Sunday, February 14, 2010

Paul Krugman: The Dark Age of Macroeconomics is upon us

The original thesis of Demand Side is that the discipline of economics has fallen back into a Ptolmeic mode under the inquisition of the free market fundamentalists. Not unlike the Wall Street barons, these academics prospered from their promotion of an economics that doesn't work, and that was, in fact, refuted during the time of John Maynard Keynes and the New Deal. Paul Krugman spoke on the subject at MIT, standing room only. Here is coverage of that speech.
Nobel laureate Krugman: ‘Dark age of macroeconomics’ is upon us
MIT News
February 9, 2010

Midway through his standing-room-only lecture at MIT on Friday, Feb. 5, 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, before an audience of several hundred students (and several of his former MIT colleagues) in the Stata Center. “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; it consisted of a combination of spending programs on things like infrastructure, education and research, along with some state aid and tax cuts. Although unemployment has risen from 8.2 percent when the stimulus was passed to 9.7 percent today, 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. At Friday’s lecture, sponsored by MIT’s Undergraduate Economics Association, Krugman amplified some of the critiques of his profession he has made over the last year, including a widely disseminated essay in The New York Times Magazine. 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.” (In addition to receiving his PhD at MIT, Krugman taught at the Institute in two stints, totaling more than 15 years, between 1980 and 2000, when he moved to Princeton.) 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.”

Additionally, Krugman thinks, efficient-markets ideology has allowed many misconceptions to flourish, including one he has frequently written about — the notion that government spending crowds out private investment, which Krugman believes to have been refuted long ago. “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.” Referring to Ben Bernanke, chairman of the Federal Reserve, Krugman offered, “I have a high regard for my former department chair [at Princeton], but I’m not sure the fact that the world didn’t end is enough reason to make Ben Bernanke [Time magazine’s] Man of the Year.”

No room for optimism

Krugman ended his talk with a wide-ranging question-and-answer session with students, covering subjects from international trade (a Krugman specialty) to his own investment advice (Krugman declined to offer any).

Audience members found a variety of subjects in Krugman’s ruminations to sort through after the talk. The lecture was “good, but rather depressing,” commented Charles Barr, a freshman majoring in economics. “It’s terrible to forget pieces of knowledge, so if he’s right that important ideas are not being taught, that’s disappointing. Even if some ideas are wrong, we should still understand what they are.”

Akil Middleton SB ’08, who is pursuing a master’s degree in aeronautics and astronautics, said he largely agreed with Krugman’s analysis of the disjuncture between economics and policy-making. “What’s frustrating is that we have so many people with expertise and solutions in this country, and it’s the political system that’s holding things up.”

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.

No comments:

Post a Comment