Hermetic Economic Cults (Wonkish), by Paul Krugman, in NY Times: Brad DeLong points to repeated quotes from Chicago economists asserting that any economist proposing fiscal stimulus – Christy, Larry, me – must be corrupt. And then they get all huffy about the way I insult them!
What drives this stuff, at least in the first instance, is the belief of the Chicago guys that “nobody” has argued that fiscal policy can be expansionary since the rational expectations revolution of the 70s – which is quite untrue. What actually happened in the 70s was that the Chicago guys stopped reading anyone who wasn’t a true believer, which meant that they missed the revival of Keynesian economics (pdf) (yes, that’s a paper by Greg Mankiw), and all that went with it.
In my case, when the possible role of fiscal policy started coming up, my thoughts turned immediately to Obstfeld and Rogoff. This stuff – which was very influential in international macro – relied on a model with full Ricardian equivalence. Nonetheless, temporary increases in government purchases caused temporary increases in aggregate demand.
I don’t mean to argue that this is the only good way to think about these issues; old-fashioned IS-LM is actually a surprisingly powerful tool of analysis, and it’s by no means clear that fancier models are an improvement. But O-R was a model with all the eyes crossed and teas dotted, and it showed that even so fiscal policy could affect demand. No economist who had read Obstfeld-Rogoff, or was even vaguely aware of what they and many others working in the New Keynesian domain had been doing, could have said what Fama, Cochrane, and Lucas did.
So what this whole controversy shows is the insularity of the Chicago guys; their brand of economics has turned into a hermetic cult, closed to any information from heathen sources.
And of course, having tried to pull rank on people who were actually well ahead of them even in terms of fancy modeling, they’re now in a position where they have to become even more hermetic to keep their self-respect.