Further thoughts on Delong and Krugman blogs

PS

Brad Delong is unpersuaded by my response on Fed thought regarding monetary policy strategy. He is broadly right in my view that models function both as discovery tools and as ways of organising and codifying thought. The danger comes when too primitive a model is regarded as too powerful a discovery. Thus Paul Krugman was right to recognise that first-generation models of currency crises were an inadequate basis for making policy in response to many actual currency crises.

On the issue at hand, my judgment is that excessive spending and fear of a sudden stop can push the IS (investment-savings) curve back, leading to contractionary capital outflows. I cite the work of Olivier Blanchard and his colleagues in support of this proposition. With a bit of political economy, the argument can be extended. Suppose countries in danger of high inflation are more likely to turn populist. It was Keynes after all who introduced animal spirits and warned Roosevelt about business confidence.

Again, I don’t think any of this is of concern for the US right now and I think my track record in favour of fiscal expansion notably in my work with Delong is clear enough.

The point though is that responsible policy makers such as the Fed’s Janet Yellen and Stanley Fischer may sometimes come to judgments different from mine. I find it unhelpful and likely wrong to attribute this to a failure to understand and appreciate basic macroeconomics.

PPS

Paul Krugman now offers some observations. He is right that we are not all very far apart. I agree with him that one needs more than attitude; one needs a logically consistent view of how the world works. As my response to Mike Spence and Kevin Warsh illustrates I, too, am impatient with fear mongering as an approach to analysis.

We have, I think, two remaining disagreements. First, I am more willing than Krugman to credit the possibility that people with substantial experience and even a track record of making money by predicting markets, have important insights even if they cannot speak the language of “models” in the way I teach in economics. Hyman Minsky is an example of a scholar whose warnings were ignored in part because they were not formalised, not because they were incoherent or illogical.

Second, on the issue of confidence crises I think Krugman is way too serene for reasons Blanchard’s work makes clear. If loss of confidence in their government or economy makes people less wealthy, they will spend less and that is contractionary. This objection may for some reason be wrong but I do not see why it should be dismissed apriori. This is a case where I think reliance on formalism may lead people astray.