A guest post by Benjamin Cole
I always liked Paul Krugman, the Nobel Prizer and New York Times blogger. I just wish he liked me, I mean in my Market Monetarist hat.
But at the macroeconomic ball, Krugman has been the swashbuckling swain on the center of the dance floor, and I but a wallflower.
Still, when Krugman dances well he does, and he shows his moves in this recent blog-missive:
[T]he question is why starting in the 1970s much of academic macroeconomics was taken over by a school of thought that began by denying any useful role for policies to raise demand in a slump, and eventually coalesced around denial that the demand side of the economy has any role in causing slumps.
Krugman nails it.
The Defeatists Set Up Camp
Modern macroeconomics has ossified into defeatism, perhaps under the influence of that doughty school of dour-hards, the tight-money ascetics and anti-inflationistas.
The latest fad in macro-posturing is that due to (unspecified) structural impediments and demographics, no modern economy can grow at more than, say, 2 percent a year, in real terms. And maybe less.
Economic historians might ponder this trope of current-day pundits and theoreticians.
For example, how did Americans, driving inflammable Pintos, wearing bellbottom pants and dufus hairdos, managed to expand their economy by 20 percent (real terms too!) from 1976 through 1979? When Jimmy Carter was President?
The 1970s? That was pre-Internet and the instant-information revolution that accompanied it. Before free trade swelled, and before smartphones. But still with the dying hulks of Big Labor, Big Steel, and Big Autos littering the politico-economic landscape. Before the Wal-Mart import-from-China riff. Computers? We were still using Fortran cards.
Somehow that economy of the 1970s was able to expand by 20 percent in four years, but we cannot now?
Sometimes when I raise this issue, I get the response, “Yes, but 1970s growth brought on high inflation.”
So we can do it—but we will have to tolerate a higher rate of inflation. Given that we are threatened by ZLB….
The other defeatist meme is that Western economies are running out of workers. The population is bulging in the wrong places, like in the senior category.
There is some truth in this, but only some.
Surely, from 2008 to 2012 a lack of workers to fill empty slots was not the problem in the U.S.
And is it a lack of workers that is holding back economic expansion in, say, Spain, where the unemployment rate is 25 percent?
Krugman is right as far as he went in the cited blog; I just wish he would come to the back of ballroom where us Market Monetarist frumps line the walls.
Maybe we are not so good-looking, but if they play the right song, we will show Krugman how to really dance.
I Love (Printing) Money