Tuesday, May 10, 2011

Honest economists and other unicorns

So Dean Baker just nailed Greg Mankiw.  Bush's Council of Economic Advisors's chairman (yep he was part of that economic team) asks three questions in his NYTimes column.  Namely:
1) How long will inflation expectations remain anchored?
2) How long will the bond market trust the United States? 
3) How long will it take for the economy’s wounds to heal? 
The reply to the first (I changed the order) is pretty good, in part because it dismisses the whole exaggeration about the role of expectations (what people think you think they might think will actually happen).  Also, and more importantly Dean emphasizes that wages have been subdued (to say the least; and one might add with unemployment at this level and years of weakened unions no chance of recovery anytime soon), and the only source of inflationary pressures are higher commodity prices.  He elegantly puts aside Mankiw's nonsense about the credibility of the Fed.

The second question is also dealt with the same clear understanding of economic principles that mainstream economists (that missed the coming crisis, and where cheerleaders of the policies that got us here seem to be oblivious to).  It is worth quoting Dean on this one.  He points out that:

"The idea being pushed by many in policy circles that at some point the bond markets will lose faith in the ability of the U.S. government to pay its debts is absurd on its face. This would be like saying that if I issued iou's, that were payable in my iou's, that the markets would be worried about my ability to meet my commitments."
It is, in fact, a very common idea, even in progressive circles, as I noted in my previous post.  Mankiw's notion that a day of reckoning for US debt is inevitable is disingenuous, which seems to be a pattern in certain mainstream circles.

On this I should say that all so-called New Keynesian economists, that is, those that think that involuntary unemployment might exist, and did not fall for Real Business Cycles and other crazy theories (please somebody explain to me how the last crisis was a real one!), that have advised Republican governments (John Taylor, in his recent rants against Krugman, is another example) are in a similar pickle.  They have to defend ideas (e.g. cutting taxes for the rich) that are clearly wrong for political reasons.  This means that Republicans are left with cranks that actually believe in supply-side economics and Santa Claus, and reasonably informed neoclassical economists that say things that they know are not quite correct.

But on question two, as Dean notes, if insolvency is not a problem, and inflation is not going to get out of hand, interest rates will remain low and there is no reason why the government cannot go on borrowing to finance its deficits.  If anything deficits should be larger.

Which gets him to the last question.  And yes, he asks how could "honest economists debate" whether the recession was actually worse than expected.  Dean is to nice to say that they might be clueless, in which case they should not be teaching in the "best" universities or writing for the Times, let alone advising government, or they are just not honest.  And yes, we do need more stimulus.

PS: Democrats have the reasonably well informed neoclassical (mostly New Keynesian) economists, but also some very good heterodox economists (which do not get the amount of influence they should, but that's another story).  In the Democratic camp the reasons for crazy things, like the belief that deregulation would increase financial stability, followed the monetary incentives (let's call it that).  But at least most of their economists do believe that unemployment is a problem.

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