Comments in the FT's Austerity vs Stimulus Debate

First, I want to thank the FT for allowing this online "debate" to happen.

I believe though that this can no longer be a "debate" - it is the abject failure of a discipline, and a fundamental crisis for the subject area, with little "credibility" now being given to those in the elite economist "mafioso", as they really don't seem to be providing any intellectual guidance. The Queen's reasonable question of economists ('it's awful - why did nobody see it coming?') points the finger at the "closed shop" that academic macroeconomics has become, and suggests to me that external pressure needs to be applied so that the subject should no longer continue to be highjacked by a narrow group of academics, given their clear failure to predict or provide guidance in the face of a downturn. We hear the same tired voices from the Ivy League schools in the same dialectic debates with no new philosophical approaches. They hire the types of Ph.D.s who follow their thinking and we get stuck in an intellectual quagmire. So in this light the comments of Niall Ferguson are rather interesting - why should Behavioural Finance be the biggest winner so far from this intellectual meltdown in macroeconomics? I don't disagree with him, but shouldn't some new ideas in macro emerge and then save the day? After all that's how Keynesianism first came about, and most schools of thought in economics since that time ( - with the obvious exception of the Austrian school and the Post-Keynesians). My fear is that the way the economics discipline is now so institutionally structured, that is unlikely to occur this time around.

One new direction might be to think about the business cycle more seriously. The business cycle was basically downplayed and dismissed in some quarters during the 80s and 90s ( - the "great moderation"), and now looking back, this was clearly a mistake. Business cycles appear to be "hard-wired" into macroeconomic behaviour, and yet they don't appear explicitly in any of our models, let alone in our academic thinking - they are just treated as a "stylized fact". To date this phenomenon has been explained as the result of "shocks", and although "shocks" can cause recessions (think of the 70s oil price shocks), if we don't have exogenous shocks we now know (after our current downturn) that we can still get recessions. If you take this approach then obviously studying these cycles ( - as I am using frequency domain techniques) might give us a different perspective on these downturns. OK, this is only one approach, but at least it might offer some new direction to the subject, and I'm sure there are others with new and interesting ideas.

The main point here is that academic macroeconomics needs to be more open to ideas that come from both inside and outside the discipline. Most outsiders would be shocked to see how parochial the discipline has become. Hopefully if outside pressure is brought to bear on the discipline this will change, and academics long held back by the "mafioso" will get a chance to present their ideas and make an impact!

Time to Plan for a Post-Keynesian Era

Jeffrey Sachs from the Earth Institute at Columbia University recently had a comment published in the FT at http://www.ft.com/cms/s/0/e7909286-726b-11df-9f82-00144feabdc0.html entitled "Time to Plan for a Post-Keynesian Era".

Here is my response in the form of a letter to the editor.

Dear Sir,

Jeffrey Sachs’s erudite dismissal of Keynesianism, although intellectually stimulating, flies in the face of much of what Keynes might have thought about the role of governments when confronted by the stylized fact of the business cycle.
Keynes would not have advocated a short-run fiscal boost to counter a major downturn, and nor would he likely have been comfortable about high levels of public debt. I doubt very much that Keynes would have advocated temporary tax cuts or car scrappage schemes, given what we know about the advice he metered out to governments during the Great Depression. On the other hand Keynes would have likely been in complete agreement with Sachs’s analysis of the broken politics which surrounds the US economic situation. US taxes are too low, given what is expected of the public sector, and spending programs are too entrenched to allow the flexibility to be enterprising in terms of public investment. Keynesianism is not dead, and many economists believe it still to be the best solution in the face of an unprecedented downturn in the global economy. And after all, Keynes’s original advocacy of public investment in the 1930s is also one of the hallmarks of the current administration’s emphasis on both stimulus and investment.

The myth that does need to be broken, however, is that there exists “the threat of bubbles if we pursue economic illusions”. This misguided thinking implies that the bubbles which likely cause business cycles can be avoided and are not “hard-wired” into human behavior. Certainly given the regularity of the business cycle, the empirical evidence provides extremely strong evidence to the contrary.