Paul Krugman recently argued that Keynesian economics is alive and well, and linked to this paper by Greg Mankiw, which summarizes the principles of new Keynesian economics. Unfortunately it was typed back in the Stone Age, so I can’t cut and paste. And I’m too lazy to re-type, so I’ll summarize the gist of Mankiw’s explanation of new Keynesianism:
1. It probably shouldn’t even be called Keynesian; don’t waste time with the General Theory.
2. It uses lots of classical principles.
3. Paradox of thrift? Fugetaboutit.
4. Similar to the economics of Hume and Friedman.
5. Don’t do discretionary policies, follow a rule–preferably NGDP targeting.
6. Don’t bother with fiscal stabilization policy, use monetary policy.
I will include one exact quotation from the 1991 paper:
For the purpose of analyzing economic policy, a student would be better equipped with the quantity theory of money (together with the expectations-augmented Phillips curve) than the Keynesian Cross. In the United States today fiscal policymakers have completely abdicated responsibility for economic stabilization. Their inability to cope with persistently large government deficits has left them unable to even imagine trying to reach consensus on countercyclical fiscal policy in a timely fashion. All attempts at stabilization are left to monetary policy. When a recession ensues, as it did recently in the United States, fiscal policymakers merely begin discussions of what the Federal Reserve did wrong.
Reading this brought tears to my eyes. A mere 20 years ago we were in a golden age of macroeconomics. Now a new dark age has set in, as the forces of old Keynesianism have made Mankiw’s vision seem like a distant dream.
PS. Try to imagine Obama, Pelosi, and Reid in early 2009 sitting around discussing what the Fed did wrong in 2008.
PPS. Krugman’s post contains this comment:
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.
I think some Chicago economists are guilty as charged. But I wonder whether Krugman himself read Mankiw’s paper. If so, is this his vision of Keynesianism?