…though we have no proof that he puts on women’s clothing.
Some of you may recall that in May 2011, Chicago economist Casey Mulligan wrote a critique of New Keynesian economics. He wrote:
Our labor market has long-term problems that are not addressed by Keynesian economic theory. New Keynesian economics is built on the assumption that employers charge too much for the products that their employees make and are too slow to cut their prices when demand falls. With prices too high, customers are discouraged from buying, especially during recessions, and there is not enough demand to maintain employment.
When the financial crisis hit in 2008, the New Keynesian “sticky price” story had some plausibility because economic conditions were, in fact, deflationary (although I have my doubts about other aspects of their theory). That is, the demand for safe assets surged in 2008, which means that those assets had to become expensive or, equivalently, goods had to get cheaper in order to clear the market.
Mulligan then went through an argument seeking to demonstrate that “[t]he low employment rates we have today are too persistent to be blamed on price adjustment lags,” and hence that New Keynesianism offers little guidance.
Enter Paul Krugman. For the ultimate point he wanted to make, Krugman could have said something like, “I understand why a hard-core market-clearing guy like Mulligan would think New Keynesianism is all about sticky prices, and how that gives rise to the necessity for activist fiscal policy. But, in this particular crisis at least, sticky prices aren’t really the issue, because blah blah blah.”
But no, Krugman didn’t say that. Instead, in a post entitled, “Why Casey Can’t Read,” Krugman claimed that Mulligan
should try reading a bit of Keynesian economics — old or new, it doesn’t matter — before “explaining” what’s wrong with it. For the doctrine he’s attacking bears no resemblance to anything Keynesians are saying.
This is fairly typical of freshwater economists. They know that what the other side is saying is obviously stupid, so there’s no need to read it; they picked up enough about it talking to some guy in a bar, or whatever, to criticize it.
At the time, I was flabbergasted that Krugman would take such a hard line. I explained (can’t find the link right now) that I literally was taught at NYU that a defining feature of New Keynesian economics was its insistence on the empirical reality of sticky prices (and wages), and the relevance of that fact to policy prescriptions. And I was taught this…by New Keynesian economists. I also pointed out that when self-described New Keynesian Greg Mankiw scoffed at my laissez-faire position, he cited sticky wages and prices as the problem.
Then Noah Smith jumped in, politely pointing out to Dr. Krugman that an entire class of New Keynesian models was based on exactly the mechanism Mulligan had in mind. But nope, Krugman rejected poor Noah’s appeal to human decency and sanity, and repeated his line about Mulligan learning about New Keynesianism from a guy at a bar. At that point, I checked Wikipedia for its entry on New Keynesianism, saw that it said sticky wages/prices were a defining element, and wrote a post titled “A Bunch of Drunks Must Have Edited Wikipedia.”
Now at the time, I knew Krugman was full of it, because I could vividly remember Krugman himself writing a post talking about the importance of sticky prices/wages, and how it was hilarious that Chicago types could deny the reality staring them in the face. But I couldn’t dig up that exact post. It was also true that Krugman had been a careful blogger for a while, and had been stressing that even falling wages wouldn’t solve our current mess, since we were in a liquidity trap and had massive debt overhang in the private sector. (It was rhetorically important for him to do this, because if the interventionist position rested on sticky wages, it gave right-wingers a great card to play in smashing unions, cutting the minimum wage, etc.)
But just like the killer in an episode of Columbo, Krugman thought the danger was over, let his guard down, and said something that seemed innocuous at the time, but would ultimately spell his demise. Today in discussing the passing of Mike Mussa, who had studied the movement of exchange rates during and after Bretton Woods, Krugman wrote:
All this amounts to the single most compelling demonstration that prices are indeed sticky, with all that follows from that observation — in particular, the case for activist monetary and fiscal policies to fight slumps.
I guess we can forgive Dr. Krugman for hanging around in bars. After all, within the past month Nick Rowe and now Scott Sumner* have totally blown up his positions with irrefutable numerical illustrations, in two different arguments where Krugman had been treating his opponents as second graders. That would drive anybody to the bottle.
* I hadn’t followed the Savings=Investment argument too closely, and at first I didn’t understand what Sumner was saying. But this post made it clear to me that his limited point was right, and that Krugman et al. had made an invalid argument in responding to John Cochrane’s (own) invalid argument against fiscal stimulus.