Patrick Smith: European Austerity Does a 180 as Lagarde Weighs In: "The IMF and the World Bank, notably by way of IMF Managing Director Christine Lagarde, have put in sharp focus the core components of a recovery strategy. It focuses on two questions: 1) What is the optimal degree of austerity, meaning contraction as opposed to stimulus? Up to what point is it necessary, and at what point does it become counter-productive—that is, when does it start inhibiting growth instead of fostering it? How does demand management fit in? 2) How much public debt—debt as a proportion of GDP—can a nation carry when it is in or near recession? What is the relationship, if any, between debt and growth? Is cutting debt so simple as cutting spending? Lagarde and Olivier Blanchard, the IMF’s chief economist, seem satisfied that the fund and the bank and their member nations understand the centrality of these two questions. Now, do we have consensus on them? Not by a very long way. But this is just the point.Lagarde’s work for much of the past year—trace her steps—has been to destroy what has amounted to an artificial consensus on a set of policies that have yielded paltry results, not only for Europeans but for Europeans more than anyone else."
Paul Krugman: Basic macroeconomics — IS-LM type macro"the stuff that’s in Econ 101 textbooks — has performed spectacularly well in the crisis. The true test of an analytical framework is how it performs in unusual or extreme circumstances, how well it predicts 'out of sample'. What we have experienced since 2007 is a series of huge policy shocks — and basic macroeconomics made some very counterintuitive predictions about the effects of those shocks. Unprecedented budget deficits, the model said, would not drive up interest rates. A tripling of the monetary base would not cause runaway inflation. Sharp government spending cuts wouldn’t free up resources for the private sector, they would depress the economy more than one-for-one, so that private spending as well as public would fall. Quite a few people considered these predictions not just wrong but absurd; they braced for soaring rates and inflation, they waited for the good news from austerity. But the model passed the test with flying colors…. So how is it that economists look so bad? The answer is that too many prominent economists chose, for one reason or another, to reject the existing model. Maybe they were just trying to score points by being different; maybe they were sucked in by the approbation of the VSPs, the rewards that came from telling important people what they wanted to hear… Alesina/Ardagna saying that austerity is actually expansionary thanks to confidence effects; Reinhart/Rogoff saying that debt has terrible effects on growth via unexplained channels. This stuff was creative, different, deeply appealing to powerful people — and dead wrong. If you stayed with Econ 101, you got it right, if you went with the trendy stuff you made a fool of yourself. The lesson we should have taken from this crisis was that plain ordinary macro is actually a very powerful, very useful tool, one that you ignore at your peril."
Paul Krugman: The Jobless Trap: "[W]hen future historians look back at our monstrously failed response to economic depression, they probably won’t blame fear, per se. Instead, they’ll castigate our leaders for fearing the wrong things. For the overriding fear driving economic policy has been debt hysteria, fear that unless we slash spending we’ll turn into Greece any day now. After all, haven’t economists proved that economic growth collapses once public debt exceeds 90 percent of G.D.P.?… America isn’t and can’t be Greece, because countries that borrow in their own currencies operate under very different rules from those that rely on someone else’s money. After years of repeated warnings that fiscal crisis is just around the corner, the U.S. government can still borrow at incredibly low interest rates. But while debt fears were and are misguided, there’s a real danger we’ve ignored: the corrosive effect, social and economic, of persistent high unemployment. And even as the case for debt hysteria is collapsing, our worst fears about the damage from long-term unemployment are being confirmed…. The key question is whether workers who have been unemployed for a long time eventually come to be seen as unemployable, tainted goods that nobody will buy. This could happen because their work skills atrophy, but a more likely reason is that potential employers assume that something must be wrong with people who can’t find a job, even if the real reason is simply the terrible economy. And there is, unfortunately, growing evidence that the tainting of the long-term unemployed is happening as we speak…. [W]e are indeed creating a permanent class of jobless Americans. And let’s be clear: this is a policy decision. The main reason our economic recovery has been so weak is that, spooked by fear-mongering over debt, we’ve been doing exactly what basic macroeconomics says you shouldn’t do — cutting government spending in the face of a depressed economy It’s hard to overstate how self-destructive this policy is. Indeed, the shadow of long-term unemployment means that austerity policies are counterproductive even in purely fiscal terms. Workers, after all, are taxpayers too; if our debt obsession exiles millions of Americans from productive employment, it will cut into future revenues and raise future deficits. Our exaggerated fear of debt is, in short, creating a slow-motion catastrophe."
Tim Duy: Economist's View: Fed Watch: Monetary Policy and Financial Stability | Tim Duy: Three Parts to Macro Policy | Matthew Dalton (2010): Is Europe Right to Push Austerity? | Jose Marti. Versos Sencillos. Yo soy un hombre sincero | Benjamin R. Mandel and Geoffrey Barnes: Japanese Inflation Expectations, Revisited | Mark Thoma: Why Politics and Economics Are a Toxic Cocktail | Steve Randy Waldman: The generalized resource curse | Miles Kimball: An Economist's Mea Culpa: I Relied on Reinhart and Rogoff | Tertullian: De praescriptione haereticorum | Dylan Matthews: Lead abatement, alcohol taxes and 10 other ways to reduce the crime rate without annoying the NRA | Japan Inc. Hesitates to Invest as Yen Spurs Nikkei Rally | Henry Farrell: Dragons and Credible Commitments [Warning: Dubious Economic Theory and Game of Thrones Quasi-Spoilers] | Giancarlo Corsetti at IDEAS |
Claire Jones: Private lives of the monetary superheroes: Review: A study of the central bankers entrusted with saving the global economy praises their boldness but skates over their weak spots: The Alchemists: Three Central Bankers And A World On Fire, by Neil Irwin, Penguin (RRP£25, RRP$29.95)"
David Wessel: Seven Lessons for Fixing an Economy: "A generation ago, unemployment of 7.6% would have been considered a bad recession in the U.S. Now it's a sign of improvement… many of the international finance ministers… envy it. In the 17 countries that share the euro, unemployment is at 12% and rising; it's double that in Spain. The British economy has contracted in 10 of the last 19 quarters…. [A] few early lessons seem clear: Lesson one: Get the diagnosis right…. Lesson two: When in doubt, do more, not less…. Lesson three: A financial crisis is about economics, not morality…. Lesson four: Mind the banks…. Lesson five: Mind the borrowers, too…. Lesson six: Go for long-acting, time-release fiscal policy…. Lesson seven: Have an exit strategy and explain it."