Paul Krugman, June 25, 2012:
Economics, Good and Bad: Jonathan Portes quotes a three-year-old piece from Niall Ferguson I mercifully missed, ridiculing me as the “man from Econ 101” who believed, foolishly, that huge government deficits could fail to raise interest rates in a depressed economy. Indeed, that is what Econ 101 said – and it has been completely right. Basic IS-LM macro also said that under these conditions printing lots of money would not be inflationary, and that cutting government spending sharply would cause the economy to shrink. All of this has come true.
So Econ 101 has done just fine – and perhaps more to the point, it has made successful predictions “out of sample”….
So why the sense that macroeconomics is a mess? I’d say that it’s essentially political. The type of macroeconomics Portes and I do offends conservative notions of how things are supposed to work in a capitalist society, so they reject the theory no matter how well it performs, and throw their support behind other views and other people no matter how badly they get it wrong. As a result, all the public hears are arguments between dueling economists (some of them not knowing much about economics). That’s a big problem – but it’s not a problem with the economics, which has, once again, been spectacularly successful.
The other thing I’d like to say is that the notion that microeconomics is in much better shape is questionable, to say the least. I mean, it’s not as if the assumptions underlying standard micro theory are, you know, true – utility maximization? Really? Micro is consistent in a way macro is not, but for the most part it’s best viewed as a metaphor that’s helpful as long as you don’t take it too seriously.
But isn’t there a lot of solid empirical work in micro? Yes – and in macro too. The difference is that for the most part there isn’t as much of a politically-based determination to deny the empirical results in micro. Yet even there, when it comes to areas where there are strong political stakes, like health care economics, you see the persistence of politically convenient views no matter how strong the contrary evidence…
Niall Ferguson, June 14, 2009:
How Economists can Misunderstand the Crisis: Borrowing is forecast to be $1,840bn - equivalent to around half of all federal outlays and 13 per cent of GDP. A deficit this size has not been seen in the US since the second world war…. It is hardly surprising, then, that the bond market is quailing. For only on Planet Econ-101 (the standard macroeconomics course drummed into every US undergraduate) could such a tidal wave of debt issuance exert "no upward pressure on interest rates".
Of course, Mr Krugman knew what I meant. "The only thing that might drive up interest rates," he acknowledged during our debate, "is that people may grow dubious about the financial solvency of governments." Might? May? The fact is that people - not least the Chinese government - are already distinctly dubious. They understand that US fiscal policy implies big purchases of government bonds by the Fed this year, since neither foreign nor private domestic purchases will suffice to fund the deficit. This policy is known as printing money and it is what many governments tried in the 1970s, with inflationary consequences you do not need to be a historian to recall.
No doubt there are powerful deflationary headwinds blowing in the other direction today. There is surplus capacity in world manufacturing. But the price of key commodities has surged since February. Monetary expansion in the US, where M2 is growing at an annual rate of 9 per cent, well above its post-1960 average, seems likely to lead to inflation if not this year, then next. In the words of the Chinese central bank's latest quarterly report: "A policy mistake… may bring inflation risks to the whole world."
The policy mistake has already been made - to adopt the fiscal policy of a world war to fight a recession. In the absence of credible commitments to end the chronic US structural deficit, there will be further upward pressure on interest rates, despite the glut of global savings. It was Keynes who noted that "even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist". Today the long-dead economist is Keynes, and it is professors of economics, not practical men, who are in thrall to his ideas.
About that "bond market… quailing"? In June 2009 10-Year Treasury interest rates had recovered from their panic lows, but were still far below their average levels for the 2000s. Ferguson simply did not know what he was talking about:
About that "the price of key commodities has surged since February"? Yes. Oil prices had recovered from their panicked lows. But if the sunup in oil prices in 2007-8 had not generated inflation when the global economy was at full employment, why would anybody who knew what they were talking about expect a recovery a third as large to generate inflation in 2010?
About that "[m]onetary expansion in the US, where M2 is growing at an annual rate of 9 per cent, well above its post-1960 average, seems likely to lead to inflation if not this year, then next"? How well do you think that worked out for Ferguson?
One would think--after such a catastrophic intellectual failure--that Ferguson would be a little bit quieter in stridently putting forward opinions on issues where he has not done his homework. One would imagine that he would be busily marking his beliefs to market, figuring out where he went so completely and catastrophically wrong and how he needs to change his views of how the world economy works.
One would think that there would be some apologies from him to all the people whom he misinformed…
But playing for Team Republican means never having to say that you are sorry.