Paul Krugman recently started off a post as follows:
I’ve been watching with sympathy as David Beckworth and Scott Sumner discover that their updated monetarism actually puts them on my side of the great ideological divide “” cast into the outer darkness along with John Maynard Keynes and Milton Friedman.
But what does the other side believe? Someone, I don’t know who at this point, sent me to this post by Robert Murphy, which is the best exposition I’ve seen yet of the Austrian view that’s sweeping the GOP
I certainly understand the point Krugman is making, and in a sense I agree. But I also think this slides over a much more important ideological divide; one I still don’t fully understand.
Suppose you asked the top 100 macroeconomists in America whether they were with the 5 economists in the first paragraph, or Bob Murphy. My guess is that at least 90 would be with us (and yes, that even includes new classicals like Robert Lucas.) So the “outer darkness” is not all that lonely a place.
But here’s what I don’t know. Why weren’t those 90 macroeconomists out picketing the Fed in October 2008, demanding easier money? Well 89 of the 90, the other is in the Fed. Back in late 2008 and early 2009 a few of us quasi-monetarists were just about the only people insisting on the urgent need for much more monetary stimulus. A tiny handful of others (including Krugman) half-heartedly agreed it was worth a shot, and almost everyone else completely ignored monetary policy. One argument was they assumed we were at the zero bound. Actually, we weren’t at the zero bound in October 2008, but let’s say we were close. The main problem with the zero bound argument is that there was no general understanding that monetary policy was ineffective at the zero bound among the macro elite. Indeed many of them (Bernanke included) argued forcefully that the BOJ needed to do much more in the late 1990s and early 2000s
I seem to recall Krugman once saying something to the effect that Bernanke discovered things were much harder than it looked from the outside, once rates hit zero. Yes, that’s right, but the thing Bernanke found out was not that the ideas he gave the Japanese don’t work, he found out that it was difficult to get his colleagues to agree to implement those ideas (or at least that’s what I assume.) But whatever you think of Bernanke, none of that explains the behavior of the 89 economists discussed above. Why weren’t they speaking out?
The reality is that the Fed almost always does roughly what the broad consensus of macroeconomists thinks they should do. In late 2008 and early 2009 those 89 macroeconomists didn’t think we needed more monetary stimulus, or if they thought so didn’t speak out (I’d guess Svensson would have agreed with me.) Naturally the Fed didn’t provide the needed monetary stimulus. If the consensus of the 89 had been that QE2 should have been adopted in November 2008, not November 2010, it probably would have been done then.
I still don’t think the views of Murphy have broad acceptance among elite macroeconomists (if they do God help us.) They certainly didn’t in 2007. The big mystery is not explaining wacky views of Austrian bloggers and GOP economists who hope to get a gig as Sarah Palin’s chief economic advisor, but the broad mainstream of Ivy League macroeconomists. I just did a post showing that Charles Calomiris opposed QE2 even though his rationale suggested it was needed. Earlier I did a post showing that Frederic Mishkin did not think Fed stimulus was inadequate in late 2008 and early 2009, even though the key insights of his textbook clearly and unambiguously suggest it was. Indeed the explanation of the crisis added to the 8th edition of his textbook is completely contradicted by his 4 key insights into monetary policy, which come just one page later! I recall a talk by Robert Lucas a couple years ago, where he mentioned how in this situation the Fed needed to boost the money supply to offset a fall in velocity, but then for some strange reason suggested he though Bernanke was doing a good job. I could go on and on.
The big mystery Krugman should investigate is not why people like Bob Murphy hold wacky opinions, but why his fellow elite macroeconomists seemed to suffer from mass amnesia in late 2008 and early 2009.
Krugman makes this observation later on:
Why is there such a strong correlation between nominal and real GDP? Why is there overwhelming evidence that when central banks decide to slow the economy, the economy does indeed slow? And on and on.
I’d love to know why our elite macroeconomists were not loudly demanding that the Fed do something to prevent (in 2009) the biggest fall in NGDP since 1938.
BTW, I appreciate the support from Paul Krugman; despite our previous disagreements I consider him the most brilliant macroeconomist in the blogosphere. But I was slightly bemused by his comment that I had just “discovered” I was on Krugman’s side regarding demand shocks. I feel like I’ve been here all along. I can’t help remembering when I tried to remind Paul Krugman that we were (should have been?) on the same side in March 2009. As Matt Yglesias pointed out, on the issue of monetary stimulus it is others that need to do some soul-searching:
The Great Recession has revealed a lack of capacity for dealing with monetary issues to be a major institutional weakness of the progressive movement.
Matt himself doesn’t lack an understanding. I’d like to think that’s partly because he reads quasi-monetarist bloggers. You know, the ones who said that rumors of QE2 would depreciate the dollar, raise equity prices, and raise inflation expectations—months before rumors of QE2 actually did depreciate the dollar, raise equity prices, and raise inflation expectations.
I suppose this sounds like I’m being a poor sport. Two positive mentions in a row from Paul Krugman! Let’s celebrate that fact and not look back on unpleasant memories that are best forgotten.