Paul Krugman had an item this morning noting too many in economics have turned their backs on what they “used to know,” while too many policymakers have abandoned “macroeconomics 101.”
Between Friday’s US job report and today’s economic news from the rest of the world, it’s hard to avoid the sense that things are going bust all over. Austerity is really biting, and the global economy is sputtering.
Plus, Europe! Spreads are widening out drastically, again — and where is the [European Central Bank]? Still unwilling to concede that its move toward monetary tightening was exactly the wrong thing. And Munchau is right: if all of Europe is going to be engaged in fiscal austerity, with the ECB adding to the downdraft instead of fighting it, there’s no way the peripheral countries can make it.
What gets me, always, is that there is nothing mysterious about this crisis; nothing is happening that someone who read Paul Samuelson’s original, 1948 edition of his textbook would find puzzling. And old-fashioned textbook analysis tells us quite clearly what we should be doing about it. Hint: not austerity.
That last point is of particular interest, because it often seems overlooked. We’re not dealing with a mysterious economic challenge for which there is no clear answer; we’re dealing with a straightforward challenge in which the answer is obvious.
In math and science, it’s a little easier draw hard, direct conclusions. If I said 5(a) + 2 = 22, and asked you to solve for a, the answer is obviously 4. It’s 4 regardless of party or ideology. Even if congressional Republicans don’t want it to be 4, we know it’s 4. There’s no room for argument.
When considering how best to deal with this struggling economy — I say “this” because different economic downturns have different causes, and the details help drive the solution — it’s not quite as straightforward as solving for a, but it’s not too far off, either. In our case, we see an economy that lacks demand. We can then have a debate as to whether to increase demand (stimulus) or decrease demand further (austerity). “Old-fashioned textbook analysis” tells us which approach makes more sense.
David Leonhardt recently touched on this general approach to policymaking.
One of the tricky things about the subject is that almost nothing is certain in the way that, say, two plus two equals four. Economics — which is at root a study of human behavior — tends to be messier. Because it’s messier, it can be tempting to think that all uncertainty is equal and that we don’t really know anything.
But we do. It’s just that the knowledge tends to come with caveats and nuances. Economic truths may not rise to the level of two plus two equals four, but they are not so different from the knowledge that the earth is round or that smoking causes cancer.
The earth is not perfectly round, of course. Some smokers will never get cancer, while most cancer is not caused by smoking. Yet in the ways that matter most, the earth is still round, and smoking does cause cancer.
Right, and austerity in the midst of high unemployment and weak growth makes economies worse. To use Krugman’s phrase, it’s something we “used to know.”