Tuesday, September 27, 2011

Threading the Needle

Paul Krugman knows immeasurably more about economics than I do. So, although I'm aware that similarly credentialed macro-economists disagree with him, for all I know he’s exactly right when he says that the failure of the Obama stimulus in early 2009 doesn’t refute the Keynesian thesis that we should be spending however many borrowed dollars it takes to jump-start the economy. Indeed, I’m in no position to disagree with Krugman when he says that what has happened to the economy over the last couple of years corroborates his macro-economic perspective and undermines that of his opponents within the economic profession (my emphasis):
“The story of Keynesian economists and the Obama stimulus, as anyone who’s been reading me knows, runs as follows: When information about the planned stimulus began emerging, those of us who took our macro seriously warned, often and strenuously, that it was far short of what was needed — that given what we already knew about the likely depth of the slump, the plan would fill only a fraction of the hole. Worse yet, I in particular argued, the plan would probably be seen as a failure, making another round impossible. . . .

[W]hat the facts say is that Keynesian policy didn’t fail, because it wasn’t tried. The only real tests we’ve had of Keynesian economics were the prediction that large budget deficits in a depressed economy wouldn’t drive up interest rates, and the prediction that austerity in depressed economies would deepen their depression. How do you think that turned out?”
Let’s stipulate that Krugman’s Keynesianism not only furnishes the best available explanation of our present economic predicament, but puts him in a better position than anyone else to design the optimal policy response. Conceding those points makes it easier to sympathize with his frustration that policy-makers here and in Europe aren’t listening to him. But does our stipulation imply that they should be?

I may be an economic illiterate, but I think I know enough elementary logic to figure out that, strictly speaking, it doesn’t follow, and it might not follow, practically speaking, either. Take a look at the phrase I’ve italicized: when Krugman says “Keynesian policy . . . wasn’t tried” he can’t mean that there weren’t a lot of people in the administration and Congress trying their level best to implement sound Keynesian prescriptions. He’s just saying that the stimulus bill that emerged from the political process didn’t get those prescriptions quite right, either because the people who designed them aren’t as smart or intellectually scrupulous as he is or because too many cooks in the administration and Congress spoiled the fiscal broth.

Yet it isn’t exactly shocking that things turned out that way. Krugman will be the first to tell you that there aren’t a lot of people around who are as smart and intellectually scrupulous as he is, and even if they all had their hands on the levers of political power, in our Madisonian system they’d still have to compromise with people who are less acute economically and less single-minded about getting fiscal policy right. If you think the Obama stimulus wasn’t up to snuff, you have to ask yourself whether it’s ever reasonable to expect that economic policy will live up to Krugman's exacting standards.

The Obama stimulus, after all, was originally conceived by committed and highly accomplished Keynesians within the administration (like Larry Summers and Christina Romer) and enacted by a Democratic Congress that didn’t need to shop around for more than a few Republican votes. I'm having a hard time imagining better administrative and political conditions for getting fiscal policy right by Krugman’s lights.  Yet it still came out disastrously wrong.  Indeed, Krugman sometimes makes it sound like the Obama administration’s trying to follow his advice only half-heartedly and doing it ham-handedly left us in the worst possible place—still in a near-recession when the only policy approach that will make things better is so discredited in the popular imagination as to be politically unsustainable.

So even if you agree with Krugman about what the optimal policy is, you have to ask yourself whether trying to enact it is reasonable when you know to a practical certainty that you’re bound to miss your mark, and probably by more than a little. I've never heard Krugman's answer to that question.

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