Move America’s economic debate out of its time warp: In Krugman’s simplified Keynesian worldview, there are no structural challenges, only shortfalls in aggregate demand. There is no public debt problem. There is no global competitiveness challenge, since “competitiveness” is a myth when applied to national economies. Fiscal multipliers are predictable, timeless, persistent, and large. All growth reversals can be solved through larger deficits. Politicians can be trusted to design short-term stimulus spending programmes of hundreds of billions of dollars. Tax cuts are about as good as increases in government spending, and short-term boosts in spending are about as good as long-term public investments. Not one of these conclusions stands scrutiny.
Why have we come to this vacuous debate between a free-market extremism and a Keynesian superficiality that addresses none of the subtleties, trade-offs, and uncertainties of the real situation?… [T]he world is facing novel problems at the global level, and novelty is hard to factor into economics, which is a rigid, ideological, theoretically based, and largely backward-looking field…
I find very little here that I can agree with.
Krugman's line--Krugman's consistent line--has never been that we do not have structural problems. Krugman's consistent line has been:
- We have an urgent and dire aggregate demand shortfall problem.
- We know how to cure our urgent and dire aggregate demand shortfall problem.
- Our structural problems are a lot more manageable and a lot less daunting at full employment than in a deep depression.
It makes absolutely no sense to say that we should not solve a dire and urgent problem we can easily solve because solving that problem does not solve all of our problems.
When I started Jeff's column, I thought it was going to be an exercise in hippie-punching, along the lines of: "Simplistic Keynesian remedies will not solve our problems. See, I am a Very Serious Person. What will solve our problems is X." And X would turn out to be simplistic Keynesian remedies plus some magic ingredient Y. That might have been useful. It would have been a call for simplistic Keynesian policies plus magic ingredient Y.
But that is not what we have. What we have is a rejection of simple Keynesian remedies--Jeff calls for us to do magic ingredient Y minus simplistic Keynesian remedies.
But what is magic ingredient Y. What remedies does Jeff propose in his column?
education, skills and active labour market policies… we are in the age of the Anthropocene, where global growth is limited by natural resources, climate change and hazards… a long-term financial outlook and new approaches to pensions and healthcare delivery…. Well-designed public investments (eg in infrastructure) can unlock significant private investments as well…. [W]e need new economic strategies to overhaul broken systems of finance, labour markets, taxation, ecological management, budget management and investment incentives…. The new approaches must be long-term, structural, sensitive to inequalities of skills and education, aligned with the need for more sustainable technologies and “smarter” infrastructure (empowered by information technology) and congruent with long-term demographic trends…
Would any policies to deal with any of these structural challenges be hindered by policies to boost aggregate demand up to potential output? No. Would every policy I can think of to deal with any of these structural challenges be helped by policies to boost aggregate demand up to potential output? Yes.
And are there any action items on Jeff's list? We aggregate demand types tend to call for things like:
Give every homeowner the opportunity to refi at the conforming loan rate, with an equity kicker if their mortgage does not meet conforming-loan standards.
Spend an extra $100 billion a month on roads, bridges, teachers, police officers, public health workers, and tax cuts targeted at the cash-strapped until (a) the economy recovers or (b) long-term interest rates feel upward pressure pushing them above normal-time levels.
Declare that it is the policy of the Federal Reserve to push nominal GDP up to its pre-2008 trend growth line.
Buy $100 billion a month of long-term risky bonds until market expectations of nominal GDP have it quickly returning to its pre-2008 trend growth line.
Then we can start dealing with our other structural problems.
What does Jeff call for?
He calls for policies that are "long-term, structural, sensitive to inequalities of skills and education, aligned with the need for more sustainable technologies and 'smarter' infrastructure (empowered by information technology) and congruent with long-term demographic trends".
I am reminded of the late Michael Mussa's response to declarations like this…