In a piece entitled “The Instability of Moderation“, Krugman tries to determine why the economic-political consensus, which has ruled the policy world for the last 75 years, has failed. (I’m counting roughly since 1935.)
In the same way that our modern “managed markets” were not supposed to fail, and hadn’t since the New Deal era, modern market management policy, enacted by political and economic elites working together, was not supposed to fail.
Yet both did fail. In 2008 the market itself came close to completely apart. Krugman notes that the cause was that the policy consensus, the tool by which markets were corrected, had already come apart. He wonders why that occurred.
But watching the failure of policy over the past three years, I find myself believing, more and more, that this failure has deep roots – that we were in some sense doomed to go through this. Specifically, I now suspect that the kind of moderate economic policy regime Brad and I both support – a regime that by and large lets markets work, but in which the government is ready both to rein in excesses and fight slumps – is inherently unstable. It’s something that can last for a generation or so, but not much longer.
By “unstable” I don’t just mean Minsky-type financial instability, although that’s part of it. Equally crucial are the regime’s intellectual and political instability.
The Professor then goes on to detail the reasons for the intellectual instability and the political instability. The “intellectual instability” he refers to is the inability of the economics profession (by which he means, without saying it, actual humans, the “professionals”) to hold the differing assumptions of macroeconomics and microeconomics in their heads at the same time over a period of two generations. The result:
The result was what I’ve called the Dark Age of macroeconomics, in which large numbers of economists literally knew nothing of the hard-won insights of the 30s and 40s – and, of course, went into spasms of rage when their ignorance was pointed out.
I think he’s too kind (see below). About the political instability, he discusses the moderating effect, through this intellectual Dark Age, of the independent central bank:
If we’re living in a Dark Age of macroeconomics, central banks have been its monasteries, hoarding and studying the ancient texts [i.e., macroeconomic wisdom] lost to the rest of the world. Even as the real business cycle people took over the professional journals, to the point where it became very hard to publish models in which monetary policy, let alone fiscal policy, matters, the research departments of the Fed system continued to study counter-cyclical policy in a relatively realistic way. [But] sooner or later the barbarians were going to go after the monasteries too; and as the current furor over quantitative easing shows, the invading hordes have arrived.
The whole thing came apart when a “too big to fail” crisis, a Minsky Moment, required that policy ignorance cooperate with central-bank wisdom. Oops; policy ignorance prevailed:
In the end, then, the era of the Samuelsonian synthesis was, I fear, doomed to come to a nasty end. And the result is the wreckage we see all around us.
Why am I presenting this? First, because it really represents an attempt at a clear-eyed, intellectually honest looking back, something others are starting to do as well. That discussion is worth following.
And second, because Krugman is wrong, I think, in one important respect. He fails to see that his revered colleagues — the “actual humans” he obliquely calls his “profession” — can’t be presumed to be intellectually honest. If your money, for example, comes from the AEI — a known political operation from its founding — you dance to the tune you have to, or your paycheck (and upward career path) simply goes away.
In short, many of Krugman’s colleagues are not intellectually honest; many have fallen into the role of Movement soldier-for-pay in citizen’s clothing. And Krugman sees only the disguise. Until he looks past that, looks beyond his self-imposed mask of collegiality, his analysis will (alas) remain flawed.
One more piece and you’re there, sir; just one more piece.