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  • the instability of moderation

    interesting article from krugman, finally speaking on something he's qualified to speak about.

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    The Instability of Moderation - NYTimes.com

    The Instability of Moderation

    Brad DeLong writes of how our perception of history has changed in the wake of the Great Recession. We used to pity our grandfathers, who lacked both the knowledge and the compassion to fight the Great Depression effectively; now we see ourselves repeating all the old mistakes. I share his sentiments.

    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.


    Intellectual instability

    The brand of economics I use in my daily work – the brand that I still consider by far the most reasonable approach out there – was largely established by Paul Samuelson back in 1948, when he published the first edition of his classic textbook. It’s an approach that combines the grand tradition of microeconomics, with its emphasis on how the invisible hand leads to generally desirable outcomes, with Keynesian macroeconomics, which emphasizes the way the economy can develop magneto trouble, requiring policy intervention. In the Samuelsonian synthesis, one must count on the government to ensure more or less full employment; only once that can be taken as given do the usual virtues of free markets come to the fore.

    It’s a deeply reasonable approach – but it’s also intellectually unstable. For it requires some strategic inconsistency in how you think about the economy. When you’re doing micro, you assume rational individuals and rapidly clearing markets; when you’re doing macro, frictions and ad hoc behavioral assumptions are essential.

    So what? Inconsistency in the pursuit of useful guidance is no vice. The map is not the territory, and it’s OK to use different kinds of maps depending on what you’re trying to accomplish: if you’re driving, a road map suffices, if you’re going hiking, you really need a topo.

    But economists were bound to push at the dividing line between micro and macro – which in practice has meant trying to make macro more like micro, basing more and more of it on optimization and market-clearing. And if the attempts to provide “microfoundations” fell short? Well, given human propensities, plus the law of diminishing disciples, it was probably inevitable that a substantial part of the economics profession would simply assume away the realities of the business cycle, because they didn’t fit the models.

    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.

    Political instability

    It’s possible to be both a conservative and a Keynesian; after all, Keynes himself described his work as “moderately conservative in its implications.” But in practice, conservatives have always tended to view the assertion that government has any useful role in the economy as the thin edge of a socialist wedge. When William Buckley wrote God and Man at Yale, one of his key complaints was that the Yale faculty taught – horrors! – Keynesian economics.

    I’ve always considered monetarism to be, in effect, an attempt to assuage conservative political prejudices without denying macroeconomic realities. What Friedman was saying was, in effect, yes, we need policy to stabilize the economy – but we can make that policy technical and largely mechanical, we can cordon it off from everything else. Just tell the central bank to stabilize M2, and aside from that, let freedom ring!

    When monetarism failed – fighting words, but you know, it really did — it was replaced by the cult of the independent central bank. Put a bunch of bankerly men in charge of the monetary base, insulate them from political pressure, and let them deal with the business cycle; meanwhile, everything else can be conducted on free-market principles.

    And this worked for a while – roughly speaking from 1985 to 2007, the era of the Great Moderation. It worked in part because the political insulation of central banks also gave them more than a bit of intellectual insulation, too. If we’re living in a Dark Age of macroeconomics, central banks have been its monasteries, hoarding and studying the ancient texts 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 this, too, was unstable. For one thing, there was bound to be a shock, sooner or later, too big for the central bankers to handle without help from broader fiscal policy. Also, 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.

    Financial instability

    Last but not least, the very success of central-bank-led stabilization, combined with financial deregulation – itself a by-product of the revival of free-market fundamentalism – set the stage for a crisis too big for the central bankers to handle. This is Minskyism: the long period of relative stability led to greater risk-taking, greater leverage, and, finally, a huge deleveraging shock. And Milton Friedman was wrong: in the face of a really big shock, which pushes the economy into a liquidity trap, the central bank can’t prevent a depression.

    And by the time that big shock arrived, the descent into an intellectual Dark Age combined with the rejection of policy activism on political grounds had left us unable to agree on a wider response.

    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.
    There is a cult of ignorance in the United States, and there has always been. The strain of anti-intellectualism has been a constant thread winding its way through our political and cultural life, nurtured by the false notion that democracy means that "My ignorance is just as good as your knowledge."- Isaac Asimov

  • #2
    Originally posted by astralis View Post
    the instability of moderation
    Hmmm....that from a "moderator..."



    :exit:
    "Only Nixon can go to China." -- Old Vulcan proverb.

    Comment


    • #3
      Originally posted by gunnut View Post
      Hmmm....that from a "moderator..."



      :exit:
      So what? Inconsistency in the pursuit of useful guidance is no vice. The map is not the territory, and it’s OK to use different kinds of maps depending on what you’re trying to accomplish.

      So are we in the era of Great Moderation or are we doomed to come to a nasty end?

      Comment


      • #4
        Everything in moderation, even moderation.:)
        "Only Nixon can go to China." -- Old Vulcan proverb.

        Comment


        • #5
          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.
          This reads like a lament from a statist, yes, there are times when even govt cannot offer solutions. The economy just gets into a tizzy and we have to live with it. The trick has always been to come up with a regime that provides more stability than the last.

          Which system will that be ?
          - one with more intervention, govt or otherwise or
          - one with less

          We've been through both periods and the former seems to have provided the answer at least stability wise. So is the answer yet more government ?

          Krugman is silent on this.
          Last edited by Double Edge; 30 Nov 10,, 05:46.

          Comment


          • #6
            Originally posted by Double Edge View Post
            This reads like a lament from a statist, yes, there are times when even govt cannot offer solutions. The economy just gets into a tizzy and we have to live with it. The trick has always been to come up with a regime that provides more stability than the last.

            Which system will that be ?
            - one with more intervention, govt or otherwise or
            - one with less

            We've been through both periods and the former seems to have provided the answer at least stability wise. So is the answer yet more government ?

            Krugman is silent on this.
            No he wasn't. I took it to mean more of either proves faulty. Meaning, moderation in all areas for stability.

            Comment


            • #7
              So moderation is the least evil then, inspite of being unstable ?

              The reason i suggested more govt was better is because this time around the regulators looked the other way. The wisdom was self-preservation is in itself self-regulating, or at least thats what Greenspan thought.
              Last edited by Double Edge; 30 Nov 10,, 09:57.

              Comment


              • #8
                julie,

                Meaning, moderation in all areas for stability.
                no. the central idea of his post is that moderation, while usually good, will sooner or later result in unavoidable instability. when that time comes, policymakers need to realize this and be decisive/extreme before going back to the moderate route.

                i actually sympathize and agree with his statement. most things we perceive as "stable" are actually in dynamic equilibrium: true for the body, the universe, and for economics. i also agree that at times of need, government MUST be pro-active.

                however, what i disagree with him on is exactly -when- and -where- the government needs to be proactive. he has a considerably greater range for both.
                There is a cult of ignorance in the United States, and there has always been. The strain of anti-intellectualism has been a constant thread winding its way through our political and cultural life, nurtured by the false notion that democracy means that "My ignorance is just as good as your knowledge."- Isaac Asimov

                Comment


                • #9
                  I like Krugman! I need a dose of him and Ben Stein everyday! Throw in some Art laffer, Thomas Sowell and Rush Limbaugh and I've had a great day.

                  Comment


                  • #10
                    well, damn, color me surprised! you know his blog title is called "The Conscience of a Liberal", and he dislikes obama because he thinks obama is too conservative?
                    There is a cult of ignorance in the United States, and there has always been. The strain of anti-intellectualism has been a constant thread winding its way through our political and cultural life, nurtured by the false notion that democracy means that "My ignorance is just as good as your knowledge."- Isaac Asimov

                    Comment

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