Sunday, January 8, 2012

Quote of the Week

The first installment of the Quote of the Week comes from Time on the cross: can fiscal policy save Japan?, by Paul Krugman (9/21/99):

What continues to amaze me is this: Japan's current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do - even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy - the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance - are rejected as dangerously radical and unbecoming of a dignified economy.”

For the past few years Krugman has been vigorously promoting the Japanese strategy he had previously ridiculed. To be clear, I do not disparage Krugman for simply changing his mind on this issue. What I do question is whether or not his view of other economic models has changed.

Heterodox economics has been gaining recognition over the past couple years, including this recent piece in The Economist (Marginal revolutionaries). One of the noted economists in the article, Scott Sumner, drew my attention to this quote during a recent podcast with Russ Roberts (Sumner on Money and the Fed; listen to the whole thing for a better understanding of market monetarism and NGDP targeting). Sumner is a primary proponent of greater monetary stimulus, who is perplexed that the above quote is now playing out in the US. Meanwhile other branches of economics, namely post-Keynesianism, are working to encourage acceptance of models with multiple equilibrium (which had reasonable success in forecasting the previous crisis).  

During the next few weeks I will outline the strengths and weaknesses of several branches of heterodox economics. Hopefully by acknowledging different models, the benefits of each can be combined to better shape policy responses.

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