Increasingly, I find Paul Krugman’s [PK] forays into macroeconomics (or rather, the history and sociology of macroeonomic thought) bizarre, highly selective (selected in order to back his own view that unlimited stimulus obtained anyhow is great) and ridiculous. This post responds to this article by PK, but there are many more in the last few years that I could pick.
Steve Williamson wrote at length rebutting previous claims by PK that debate at the forefront of macroeconomics was ideological, and not scientific. This claim is repeated implicitly in the post I am responding to, but Steve’s rebuttal can’t be bettered or added to greatly. I think it would be fair to point out that most economists, being human, find themselves prey to the weakness of trying once in a while to focus on the plus points of a piece of research, (if you don’t join the others in this, they will beat you), or to defend a previously held position for too long. But I don’t think that ideology has played a part in any seminar I have attended. (Unless you want to call a basic acceptance of the capitalist system with quantitative analysis of government intervention ‘ideological’.)
On to two specific points in PK’s column.
1 ‘The original idea that money had real effects because people were surprised by monetary shocks fell apart in the face of evidence of business cycle persistence’.
Where does this come from? Here is what I would recognise: when researchers took simple real business cycle models and made prices sticky, they found that monetary shocks had real effects. However, because these effects were not persistent enough on their own to generate long-lasting effects that were computed for (what was hoped were) comparable effects (of identified monetary shocks) in the data, it was recognised that something else had to be added to the model to account for it. The profession converged on adding various other frictions, like slowly moving consumption, investment, price and wage ‘indexation’. These additions don’t mean the original observation that it is monetary shocks causing business cycles (at least in part) ‘falls apart’; it is intact, it’s just that one needs a model with richer propagation.
2 ‘the real business cycle view that nominal shocks didn’t actually matter after all was refuted by decisive evidence (pdf) that, in fact, it did. Yet there was no backing off on this approach. On the contrary, it actually increased its hold on the profession.’
It’s selective to view this notion as ‘decisively rejected’. The sharp way to test it is to try to find monetary shocks in the data and compute their effects. There is a huge volume of papers trying various methods to do this. On the assumption that these shocks exist and on the assumption that the methods accurately recover what we are trying to find, then it’s fair to say that the weight of evidence favours the view that monetary (policy) shocks have real effects. However, both assumptions are questionable. Policymakers don’t accept that they are injecting significant monetary shocks (after all, why would they). And all methods for recovering these shocks (even if they are there to be found) have their problems. Rejecting the notion of monetary policy neutrality on the basis of these two problematic assumptions hardly qualifies as ‘decisive’ in my view.
I also don’t get the comment that ‘there was no backing off on this approach’. Actually, I think the view that monetary policy shocks have real effects was ‘decisively’ accepted by central bank economists, [eg, it’s embodied in the Fed’s model, and models at the BoC, ECB, BoE, BoJ, RBA, RBNZ, and many more], and accepted by at least half of the macroeconomists working with real business cycle models or those descended from them.
The point of successful economics scholars migrating to journalism ought to be to bridge the divide between research and non economists who want to decide what to think about what their governments are doing or not doing. But PK’s columns don’t do that any more. They don’t even reinforce the divide, which would be less harmful. They are filling non economists’ heads with stories of a cult of crazed mathematician-politicians that have lost their way, but could solve all problems if they simply thought through the old AS/AD/IS/LM diagrams in his macro textbooks.