Its
sometime in the 1970s. Inflation is rising, and the monetary authorities are
failing to raise interest rates by enough, so real rates are failing. A large
number of academic economists are urging governments or central banks to raise
rates by more. But other economists argue otherwise, and partly as a result, policy
appears unresponsive.
In that context, an eminent
economist writes an article looking at what they see as the key structural problems
that have been developing in the economy over the last few decades. But they
start the piece by saying that excess demand is not the most important problem
right now. Instead inflation reflects deep structural imbalances in the economy
that have been building up for years. They write that governments cannot use unemployment
as a way of regulating inflation: the relationship is all over the place, and raising
productivity would be a more effective way of reducing inflation.
Articles like that did get written at the time and look
a little foolish today. But as some of you will have guessed, I’m trying to
make a point about what I see as a similar thing happening today,
except its fiscal policy at the zero bound and unemployment, rather than
monetary policy and inflation. If it was really true, as Rajan writes,
that “this narrative—the standard Keynesian line,
modified for a debt crisis—is the one to which most
Western officials, central bankers, and Wall Street economists subscribe today”,
and if policymakers were acting accordingly, then I doubt anyone would get too
upset by what could be discounted as a rhetorical device to catch attention. But
instead governments are implementing
austerity around the globe. This article is not an isolated case: see this($)
recent FT piece by Sachs .
I really do think we should try and keep discussions
of long term trends and short term problems distinct as far as possible. If
economists are good for anything, it is in abstraction of this kind. To the
extent the issues are linked then they are more likely to be complements than
substitutes. In the UK, according
to the OBR, public sector investment fell by 13% in 2011, as the initial thrust
of the government’s austerity programme. This included abandoning
plans to rebuild dilapidated schools.
Tyler Cowen suggests
they are competing stories because “any given dollar must be
spent somehow and “the stimulus model” and “the long-term investment model” are
indeed competing visions for the allocation of resources.” The above example
suggests they need not be competing. In addition my fictional writer from the
1970s could have made the same point. Higher interest rates are raising the
cost of government borrowing, they might say, which is squeezing resources for
tackling our longer term structural problems. That would be a very bad argument
for not raising interest rates in the 1970s, just as I think ‘where is the
money coming from’ is a bad argument against stimulus today.
However I agree with Tyler when he
writes: “Any Martian visiting the economics blogosphere, or for that matter
Krugman’s blog, could tell you that most of micro is a more or less manageable
topic, whereas macro induces economists to start thinking of each other as
idiots and fools.” I have written about why this might be elsewhere, but as long as
a large section of the profession, and the majority of policymakers, appear to
ignore what mainstream macro tells us, then any writing that encourages this
amnesia will get some of us annoyed.
