Over at Econlog I have a new post pointing out that back in 2006 New Keynesians like Brad DeLong believed in monetary offset. I should clarify one point, however. I am basically talking about the New Keynesian elite, the people who follow the latest developments in macroeconomics.
A paper by Daniel Klein and Charlotta Stern (2006) points to a 2003 survey done by the AEA that showed that most economists favored using fiscal stimulus for purposes of fine-tuning the economy. Read that again, I didn’t say “most Keynesians,” I said most economists. Fiscal skeptics like Krugman and DeLong were right-of-center economists back in those days.
The problem here is that most economists get their ideas on macroeconomics from studying the Keynesian cross model in EC101, and also using common sense (obviously if G goes up, then C+I+G must go up.) But by 2006 the Keynesian cross model was horribly outdated, and common sense is almost useless in economics. Indeed you could argue that it is a lack of common sense that separates the elite economists like Krugman from their mediocre colleagues.
In a 1997 article Paul Krugman called those holding this consensus view “Vulgar Keynesians.” Here Krugman makes the same mistake I made (when discussing the paradox of thrift and the widow’s cruse.):
Such paradoxes are still fun to contemplate; they still appear in some freshman textbooks. Nonetheless, few economists take them seriously these days. There are a number of reasons, but the most important can be stated in two words: Alan Greenspan.
After all, the simple Keynesian story is one in which interest rates are independent of the level of employment and output. But in reality the Federal Reserve Board actively manages interest rates, pushing them down when it thinks employment is too low and raising them when it thinks the economy is overheating. You may quarrel with the Fed chairman’s judgment–you may think that he should keep the economy on a looser rein–but you can hardly dispute his power. Indeed, if you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God.
Krugman and I both believed that there were “few economists” who stilled believed that nonsense back in the late 1990s, when in fact most economists believed that nonsense as late as 2003. Krugman had the Pauline Kael problem, he didn’t know most economists; he knew Bernanke, Svensson, Woodford and other Princeton economists. My problem was that I didn’t know most economists, I read Bernanke, Svensson, Woodford and Krugman, and assumed they were representative.
Of course Krugman has now joined the vulgar Keynesians, citing the new circumstances of near-zero interest rates. I suppose he finds strength in numbers, such as the 350 economists who warned that fiscal austerity in 2013 would produce a recession. Indeed I’ve seen Krugman cite a poll of 50 economists, almost all of which thought fiscal stimulus had a positive effect.
Unfortunately, most economists are far behind the times in macro theory. By joining up with most economists, Krugman has allied himself with the least informed segment of the profession. It would be like suddenly becoming a protectionist, and citing the fact that 90% of Americans think Chinese imports cause unemployment. Come to think of it, isn’t Krugman also making that argument?
Economics is the queen of the counterintuitive sciences. And no parts of economics are more counterintuitive than stabilization policy and trade. Krugman was wrong in thinking the majority agreed with him in 1997. But Krugman’s right that he’s now in with the overwhelming majority of economists. I’m in the tiny, tiny minority of economists who think the economy has needed demand stimulus but that fiscal stimulus is ineffective. But this is one case where there is weakness in numbers. I’m perfectly happy being in a tiny minority, if it’s the same minority that Krugman and DeLong and the other elite NKs belonged to a decade ago.
PS. To be fair, the 350 warned about fiscal austerity slightly worse than the $500 billion reduction in the deficit in calendar 2013 that actually occurred, but still . . .