John and Maynard’s Excellent Adventure
When I tell people that macroeconomic analysis has been triumphantly successful in recent years, I tend to get strange looks. After all, wasnt everyone predicting lots of inflation? Didnt policymakers get it all wrong? Havent the academic economists been squabbling nonstop?
Well, as a card-carrying economist I disavow any responsibility for Rick Santelli and Larry Kudlow; I similarly declare that Paul Ryan and Olli Rehn arent my fault. As for the economists disputes, well, let me get to that in a bit.
I stand by my claim, however. The basic macroeconomic framework that we all should have turned to, the framework that is still there in most textbooks, performed spectacularly well: it made strong predictions that people who didnt know that framework found completely implausible, and those predictions were vindicated. And the framework in question basically John Hickss interpretation of John Maynard Keynes was very much the natural way to think about the issues facing advanced countries after 2008.
So let me talk about where Hicksian analysis comes from.
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Here Krugman gives a technical explanation. Follow the link below, if you want to slog through it...
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All of this was predicted in advance by those of us who understood and appreciated Hicksian analysis. And so it turned out. I call this a huge success story one of the best examples in the history of economics of getting things right in an unprecedented environment.
The sad thing, of course, is that this incredibly successful analysis didnt have much favorable impact on actual policy. Mainly thats because the Very Serious People are too serious to play around with little models; they prefer to rely on their sense of what markets demand, which they continue to consider infallible despite having been wrong about everything. But it also didnt help that so many economists also rejected what should have been obvious.
Why? Many never learned simple macro models if it doesnt involve microfoundations and rational expectations, preferably with difficult math, it must be nonsense. (Curiously, economists in that camp have also proved extremely prone to basic errors of logic, probably because they have never learned to work through simple stories.) Others, for what looks like political reasons, seemed determined to come up with some reason, any reason, to be against expansionary monetary and fiscal policy.
But thats their problem. From where I sit, the past six years have been hugely reassuring from an intellectual point of view. The basic model works; we really do know what were talking about.
John and Maynards Excellent Adventure , Paul Krugman, New York Times
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"but Im terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.
were looking at a fiscal crisis that will drive interest rates sky-high.But whats really scary what makes a fixed-rate mortgage seem like such a good idea is the looming threat to the federal governments solvency.
How will the train wreck play itself out? .my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar."
Some Keynesian Economist, 2003.
I often see dismissive comments about "economics" and/or "economists"... generally from people who know next to nothing about the subject. Comments on the order of "nothing but 'opinions' from self-appointed experts".
The fact is that the economics world is fairly small, and highly interlinked across the Internet. It is easy to follow what is going on there -- even from a layman's point of view. The most influential people put their ideas online for all to see, and to critique. (The slugfests can be very popcorn-worthy!)
And as Krugman very much enjoys underscoring, they have done very well since the 2008 melt-down, in predicting how various governments' policies would work out.
If a "science" is a domain of knowledge which is able to make predictions with accuracy, then "the dismal science" is pretty close!
Please, Sean...
* * * sigh * * *
Give us a link, so we can get context. Frankly, the economic situation of 2003 is not present in my mind, and I doubt very much that you have it up front either...
Without context, this quote, even if accurate, is pretty much meaningless. If you understood anything at all about Keynesian economics, you would know that there is no "one size fits all" magic formula. Keynesian economics is highly contextual. So tossing out a quote without context is in fact a demonstration of ignorance.
Look, Sean... You posted that so fast that it obviously was not a spur of the moment search result. You have it pre-recorded somewhere as a "gotcha", to respond to anything Krugman may say on any subject.
The problem, Sean... is that something said in 2003 only makes sense in the context of 2003, and is pretty much nonsense in 2014.
In fact, the quote does not appear to be a prediction about economics, at all. It appears to be a prediction about political action, which is an entirely different kettle of fish.
Krugman wears two hats: he is an economist, and he is a commentator on political and social affairs. He does not mix the two. You appear to be mixing them... but once again, I would need the context to be affirmative.
Twelve Angry Men