Posted: 29 Jul 2015 12:24 AM PDT
Paul Krugman wonders if he has been advocating for the right type of policies:
Second-best Macroeconomics: The ... economic problems facing both the United States and Europe have been quite straightforward and comprehensible. ... So no worries: just hit the big macroeconomic That Was Easy button, and soon the troubles will be over.
Except that all the natural answers to our problems have been ruled out politically. Austerians not only block the use of fiscal policy, they drive it in the wrong direction; a rise in the inflation target is impossible given both central-banker prejudices and the power of the goldbug right. Exchange rate adjustment is blocked by the disappearance of European national currencies, plus extreme fear over technical difficulties in reintroducing them.
As a result, we're stuck with highly problematic second-best policies like quantitative easing and internal devaluation. ... In case you don't know, "second best" ... comes from a classic 1956 paper by Lipsey and Lancaster, which showed that policies which might seem to distort markets may nonetheless help the economy if markets are already distorted by other factors. ...
The problems with second best as a policy rationale are familiar. For one thing, it's always better to address existing distortions directly, if you can — second best policies generally have undesirable side effects... There's also a political economy concern,... in a complicated world you can come up with a second best rationale for practically anything. ...
But here we are, with anything resembling first-best macroeconomic policy ruled out by political prejudice, and the distortions we're trying to correct are huge — one global depression can ruin your whole day. So we have quantitative easing, which is of uncertain effectiveness, probably distorts financial markets at least a bit, and gets trashed all the time by people stressing its real or presumed faults; someone like me is then put in the position of having to defend a policy I would never have chosen if there seemed to be a viable alternative. ...
Which makes me ask myself the question: Do people like me spend too much time being limited by what is presumed to be politically practical? Should we devote more time to trying to widen the range of options, to pointing out that we really would be much better off if we threw off the fetters of conventional deficit fears, the 2 percent inflation target, and the extremely ill-advised euro project?
Posted: 29 Jul 2015 12:06 AM PDT
Posted: 28 Jul 2015 09:15 AM PDT
The Politics of Economics and 'Very Serious People': The latest debate in the economics blogosphere is about the true meaning of the term "Very Serious People," a term of derision initially used to describe some supporters of the Iraq war. It was later broadened to describe people who advocate for the tough position on any issue – budget cuts and entitlement reform to ease debt worries, increases in interest rates to prevent inflation, and so on – despite evidence contrary to their policy proposals.
Very Serious People often embrace unpopular policies; they adopt the tough and serious route they believe is needed to ensure the US remains on solid footing, and they ridicule the opposition as softies unwilling to accept that there is no easy way to overcome our economic problems. Gain requires pain, but we should note that the tough policies Very Serious People embrace usually impose the pain on other people -- often the poor and disadvantaged. When they are asked to step up and pay more taxes to reduce the deficit, for example, their tune generally changes.
Henry Farrell, an Associate Professor of Political Science at George Washington University says, "Being a Very Serious Person is about occupying a structural position that tends to reinforce, rather than counter, one's innate biases and prejudices." I'm not sure that fully captures the desire to appear tough and disciplined, to be seen as the one willing to say what needs to be done no matter how hard it is, but it did lead me to think about the degree to which I, and other economists, are influenced by our political leanings. To what extent do our politics determine our economics? ...
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