Paul Krugman: I Am Not Your Mirror Image


 

I Am Not Your Mirror Image, by Paul Krugman, in NY Times: Russ Roberts tries to debunk my explanation of the reasons to believe in a broadly Keynesian view of the world — and reveals more than he intended.

First, a few points. Roberts treats my statement that we have a lot of evidence on the effects of monetary policy, not so much on fiscal policy, as being somehow slippery. But if you are at all familiar with the reality of macroeconomic policy, you know that there’s an obvious reason: monetary policy, which is set by a small committee without the need to pass legislation, is routinely used as a tool for managing the economy; discretionary fiscal policy isn’t. The classic Romer and Romer study showing that monetary policy matters was based precisely on the frequent use of monetary policy as a deliberate tool:

The central part of the paper is a study of postwar U.S. monetary history. We identify six episodes in which the Federal Reserve in effect decided to attempt to create a recession to reduce inflation.

Six such episodes between 1945 and 1990; there is no comparable profusion of fiscal examples.

Roberts also says, well, I choose some studies of austerity, but others reach different conclusions. Yes — but not all studies are created equal. In fact, the last two years of research on fiscal policy have clarified a lot.

Initially, a lot of credence was given to work like that of Alesina and Ardagna, which tried to identity changes in fiscal policy using mildly fancy time-series analysis — and seemed to find evidence of expansionary contraction. But everyone who looked at that work closely quickly noticed that their supposed episodes of both stimulus and austerity didn’t seem to correspond at all to known changes in policy. When economists started doing studies using the Milton Friedman/ Romer and Romer mthod –that is, using historical information to identify actual changes in policy — the results turned clearly Keynesian.

But the main thing wrong with Roberts’s piece is the assumption that people like me are just mirror images of people like him:

Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government. Both of us can find evidence for our worldviews.

This is wrong on multiple levels. First of all, while conservatives see smaller government as an end in itself, liberals don’t see bigger government the same way. Think about it: while you often see conservatives crow about, say, reducing discretionary spending as a good thing just because the number is down, do you ever see liberals crowing about a rise in spending, never mind what on? Liberals want government to do certain things, like provide essential health care; the size of government per se isn’t the objective.

Second, Keynesianism is not and never has been about promoting bigger government. Outside the US, this is obvious: there have been Tory Keynesians in Britain, the Germans favor both a big welfare state with heavy regulation and balanced budgets. Even in the US, when the political heat isn’t so intense, you find conservative economists promoting quite Keynesian views of stabilization policy — Greg Mankiw is the editor of two volumes on New Keynesian Economics, and the Bushies were quite happy to argue for tax cuts as a way to boost spending.

What is true is that some conservatives in America have always opposed Keynesian thought because they believe it legitimizes an active role for government — but that’s not what Keynesianism is about, and not the reason I or others support it.

Which brings me to the final point. Russ Roberts may choose his economic views because they support his political prejudices. I try not to. Maybe I sometimes fall short — but I try to analyze the economy as best I can, never mind what’s politically convenient, and indeed to bend over backward to avoid believing things that make me comfortable, to avoid turning everything into a morality play that confirms my political values.

Here’s an example: is economic inequality the source of our macroeconomic malaise? Many people think so — and I’ve written a lot about the evils of soaring inequality. But I have not gone that route. I’m not ruling out a connection between inequality and the mess we’re in, but for now I don’t see a clear mechanism, and I often annoy liberal audiences by saying that it’s probably possible to have a full-employment economy largely producing luxury goods for the richest 1 percent. More equality would be good, but not, as far as I can tell, because it would restore full employment.

So I’m trying to figure this thing out, as best I can. If you’re not, we’re not in the same business.

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