Krugman Expands the Ranks of the Cultish
A typical objection to Austrian economics is that it is a cult. We worship Mises, we excommunicate heretics, etc. (The second point is true but c’mon, just look at this stuff.)
Anyway, I’m glad to note that Paul Krugman has now expanded the ranks to anyone who is a non-New Keynesian:
What this reveals, I think, is just how insular part of the macroeconomics profession has become. They just don’t read anything that doesn’t come from their
cultcircle; they just weren’t aware of major bodies of work that didn’t happen to be in their preferred style.This insularity is asymmetric. Ask a PhD student at Princeton what a real business cycle theorist would say about something, and he or she can do that; ask a student at one of the freshwater schools what a new Keynesian would say, and I doubt that he or she could answer. They’ve been taught that there is one true faith, and have been carefully protected from heresy.
It’s a sad story.
Incidentally, if some of you regulars can help me remember, I want to come back to this Ricardian equivalence stuff. Krugman links to this post which allegedly proves that Wikipedia is wrong to assert that Ricardian equivalence implies that deficit spending can’t boost aggregate demand. (In other words, Krugman and Econospeak say that even with Ricardian equivalence, the government can boost aggregate demand.) Econospeak thinks his numerical demonstration is a counterexample, but it’s not; it just begs the question. Here’s what he says:
Suppose we decide to have an additional $100 billion in public investment in 2009. In Ricardo’s example, permanent taxes will increase by $5 billion per year which would have a very modest offsetting reduction in consumption. So if government purchases rise by $100 billion and consumption falls by $5 billion, then isn’t the direct impact on aggregate demand closer to $95 billion for the year rather than zero?
So to repeat, Econospeak is simply begging the question here. A proponent of Ricardian equivalence could use the same numerical example to make his point. He’d say, “On the surface this might look like you’d get a boost in aggregate demand, but no you wouldn’t. The households would realize they now had a perpetually higher annual tax payment of $5 billion. So to budget for that, they’d have to put aside an extra $100 billion today, such that at 5% interest they would be able to pay those future taxes without cutting back consumption. Thus, no change in aggregate demand.”
Now I admit that sounds weird; why take the hit to consumption all in year one? But if the government is spending that $100 billion on present consumption, then it makes perfect sense. Or rather, it makes just as much sense as the standard Ricardian equivalence example, where the government gives a deficit-financed tax cut and households just save it all.
At this point, Krugman is right–you need to use formal models to keep all of your assumptions straight, and to think through the full general equilibrium implications. Sometime in February, after the book is turned in and I’ve caught up with my “real job,” I will dig up some of the stripped-down New Keynesian models and see if Krugman really is surrounded by friggin’ idiots. (Note that I agreed with DeLong about Fama, so it’s possible that Krugman is right vis-a-vis the right-wing critics who rely on purely mainstream economics.)
