And when a famous economist like John Cochrane lets his “beliefs” (as in “religious beliefs”) intervene in his economic analysis, a philosopher is able to criticize and do a much better piece of, you know, economic analysis.
John Cochrane makes some good points about Europe, but this is laughably unpersuasive:
“Defenders think that devaluing would fool workers into a bout of “competitiveness,” as if people wouldn’t realize they were being paid in Monopoly money. If devaluing the currency made countries competitive, Zimbabwe would be the richest country on Earth.”
Try this mode of argument on for size. If water made agriculture possible, then the Pacific Ocean would be the breadbasket of the earth. Or: If flooding is a problem, then the Sahara Desert would be the best place to live. Right?
Krugman wholeheartedly agrees with Yglesias on this, but in a companion post clearly indicates that he´s often “guided” by a “belief system”, in his case the “belief” that the economy is in a liquidity trap:
Via Brad DeLong, there’s a paper by David Romer (pdf) summarizing recent research on fiscal policy, inspired by the crisis and aftermath. And his conclusion is not at all what you hear on the talk shows; it is that there is now overwhelming evidence that fiscal policy does in fact work when it’s not offset by monetary policy. And since we’re now in a liquidity trap in which conventional monetary policy has no traction, that’s the world we’re in.
But as Scott Sumner has pointed out in a recent post:
Yes, and the financial markets tell us that the economy is not in a liquidity trap, every time they respond strongly to hints of Fed stimulus (QE2, etc.) But the press thinks we are.
And the “clash of beliefs” that´s going on has been greatly responsible for keeping the economy down!