This famous quote of Keynes:
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.
Needs to be amended. In times of crises, even living economists can be quite ‘dangerous’.
R&R 90% ‘tipping-point’ is a clear example. Less noticed is the ‘battle for fiscal supremacy’. That ‘battle’ is spearheaded by Paul Krugman and he never misses a chance to ‘disparage’ the views of others. So when Mike Konczal argued the market monetarist experiment had failed, Krugman quickly backed it up and Mark Thoma was also quick to second it.
One year ago, related to his Nobel win, Chris Sims was interviewed by the Gary Tapp at the Atlanta Fed:
Tapp: So, if I asked you to describe the main contribution of your work to the field of economic modeling and maybe relating back to the traditional model, how would you describe that?
Sims: I think that what the Noble Prize people were singling out was that my work helped sort out the dispute between the monetarists and Keynesians. They, in part by introducing new approaches to statistical modeling in the ’60s and early ’70s, monetarists were claiming that the main source of business cycle fluctuations was bad monetary policy. The monetary authority was making mistakes, making the growth rate of money vary a lot, and all those variations resulted in recessions and booms, and if only we could force the monetary authority to stop messing with the economy and just keep money growth steady, the business cycle would be greatly reduced or even vanish.
And then the Keynesians were saying that can’t be true, but they didn’t have statistical models in which they could each put forward their position and ask, well, what did the data say? There were lots of attempts to do that, but with very awkward statistical modeling.
Over the course of about 10 years, things that I did and other people followed up on managed to sort out what the effects of monetary policy changes are and distinguish those from co-movements in money and prices and income that didn’t have anything to do with policy. There’s now pretty much a consensus on how monetary policy affects the economy, and on what the size of that effect is. The general conclusion is that it accounts for maybe somewhere between zero and 20 or 25 percent of the fluctuations we see, but if you try to trace out historically, you can’t blame any recession on monetary policy.
That´s a pretty strong statement, especially if you remember Friedman and Schwartz´s Monetary History and the research that followed up on it. By 1985, even the great Keynesian Paul Samuelson wrote in his famous textbook:
“Money is the most powerful and useful tool that macroeconomic policymakers have, and the Fed is the most important factor in making policy.”
But Thoma liked what Sims said so much that he helped spread the idea:
Now we need Chris Sims, or someone like him, to lead the charge against the idea that the problem with the economy is bad fiscal policy. Even better would be if they could overcome the objections to the use of fiscal policy in severe recessions — i.e. the type of recession that monetary policy alone cannot cure even if the interest rate is lowered to zero and non-traditional policies are put into place. In this case though, the empirical evidence is already mounting, what is needed are strong, respected voices to counter the objections to fiscal policy coming from the right (particularly, though not exclusively, objections to infrastructure investment). The politics of fiscal policy will always be a problem, but it would be less so if economists had the same unity on fiscal policy, particularly its ability to help the economy is severe recessions that they have on monetary policy.
I really don´t know what Thoma means by ‘unity’. There´s the long standing joke that if you gather 7 economists you´ll likely hear 8 different opinions!
While Chris Sims may be a pretty competent econometrician/statistician with that statement he indicated his knowledge of economic history is nonexistent. Worse, if that was really the conclusion the application of his tools to history provided, maybe the problem lies with the tools.
Is he implying that a 50% drop in nominal spending (NGDP), something the Federal Reserve, through monetary policy, is able to closely control had nothing to do with the “Great Depression”?
Or that the ‘reversal of fortune’ engineered by Roosevelt’s monetary actions in early 1933 had nothing to do with the recovery that followed?
Or that the decades-long Japanese slump had nothing to do with the monetary policy practiced by the BoJ, despite a ‘war-like’ increase in government spending and debt?