Krugman and Simon Wren Lewis point out that heterodox (that is unorthodox) economics get it wrong. And as you read this post, remember that Republicans, almost to a man or woman, believe the austerity policies. They consider economists who stick to what are actually conventional economics as being unorthodox. Per usual in todays Republican circles, they are usually wrong, and they refuse to consider that they might be wrong. They now control Congress and, if the past is prologue, they will attempt to implement policies based on bad economics. Many economists responded badly to the economic crisis. And there’s a lot wrong with mainstream economic analysis. But how closely are these two assertions related? Not as much as you might think. So I’m very much in accord with Simon Wren-Lewis on the remarkable unhelpfulness of recent heterodox assaults on the field. Not that there’s anything wrong with being heterodox in general; but a lot of what we’ve been seeing misidentifies the problem, and if anything gives aid and comfort to the wrong people. The point is that standard macroeconomics does NOT justify the attacks on fiscal stimulus and the embrace of austerity. On these issues, people like Simon and myself have been following well-established models and analyses, while the austerians have been making up new stuff and/or rediscovering old fallacies to justify the policies they want. Formal modeling and quantitative analysis doesn’t justify the austerian position; on the contrary, austerians had to throw out the models and abandon statistical principles to justify their claims. Let’s look at several examples. I often see people who should know better claiming that the debate over whether fiscal stimulus can work involved the question of whether Ricardian equivalence — an implication of representative-agent, rational-expectations models — holds in practice. But that’s all wrong. Claims that a temporary rise in government spending crowds out an equal amount of private spending were based either on crude confusions between accounting identities and causation, or on a complete misunderstanding of what Ricardian equivalence means. What about expansionary austerity? That’s really hard to get out of any formal model, and by and large the advocates of that position didn’t even try. They invoked the confidence fairy pretty much on faith, backed by casual econometrics that fell apart as soon as anyone looked hard at the data. Claims that the US and the UK were at risk of an attack by bond vigilantes were similarly hard to justify in terms of models — when you work through the analysis, it’s very hard to come up with a way such an attack can either happen or do much damage to a country that borrows in its own currency. As I’ve written many times, I reproach myself for having worried about such things back in 2003, when my own models refused to tell that story. And the persistence of “we are Greece” arguments now goes along with a rejection of clear modeling, not excessive formalism. Last but not least, all that 90 percent threshold of doom stuff was based on no model whatsoever, just an alleged statistical regularity. What mainstream economists should have said right away (as some of us did) was that any negative correlation between debt and growth, in the absence of any mechanism, probably reflected a lot of reverse causation. So if you go around claiming that model-oriented, quantitative economics gave rise to austerity mania, you’re getting the story all wrong. Worse, you are in effect covering up for the austerians’ intellectual sins. They were not orthodox economists following their models to their logical conclusion; instead, they revealed their true colors when they proved themselves either unable to understand their own models or willing to throw their analysis away the moment it conflicted with their political preferences. Uncritical embrace of austerity by economists has been a problem for the world. But don’t blame modeling or quantitative analysis; the fault lies not in models but in themselves.
Posted on: Sat, 10 Jan 2015 19:29:34 +0000
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