In an article published on Slate earlier this month titled “Argentina Did the Right Thing in 2002, the Wrong Thing Last Year,” the commentator Matthew Yglesias said what needed to be said about Argentina’s economic troubles: there’s no contradiction at all between arguing that Argentina was right to follow heterodox policies in 2002, but that it is wrong to reject advice to curb deficits and control inflation now.
I know some people find this hard to grasp, but the effects of economic policies, and the appropriate policies to follow, depend on circumstances. I would add that we know what those circumstances are! Policies like running deficits and printing a lot of money are inflationary and bad in economies that are constrained by limited supply; they are useful and good when the problem is persistently inadequate demand. Similarly, unemployment benefits probably lead to lower employment in a supply-constrained economy; they increase employment in a demand-constrained economy; and so on.
And just to repeat a point I’ve made many times, those of us who understood the IS-LM model (explained in depth here) predicted in advance that the actions of the Federal Reserve under Ben Bernanke wouldn’t be inflationary, while the other side of the debate was screaming “debasement.”
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There’s something else to be said about Argentina and, it seems, Turkey – namely, that we’re seeing a mini-revival of what the economists Rudi Dornbusch and Sebastian Edwards long ago called “macroeconomic populism.”
This involves, you might say, the symmetrical error to that made by people who think that running deficits and printing money always turns a country into Zimbabwe; it’s the belief that the orthodox rules never apply. And it’s an equally severe mistake. It’s not a common error these days; a few years ago one would have said that only Venezuela was making this mistake, and even now it’s just a handful of countries.
But it is a mistake, and we need to say so.
Winners and Losers
In a recent blog post, the economist John Quiggin wrote about a new book that purports to explain the big ideas in macroeconomics, but doesn’t contain any, well, macroeconomics.
His meditation involves a useful take on what happened to the profession in the decades that preceded the 2008 crisis, and a very interesting analysis of the current state of affairs. (DSGE is “dynamic stochastic general equilibrium” – basically, the particular form of modeling that is more or less the only thing one can publish in journals these days.)
“Broadly speaking, as far as academic macroeconomics is concerned, DSGE has won the day,” Mr. Quiggin wrote, “not so much by force of argument as by maintaining control of the criteria for publication of journal articles in the field: it’s O.K. to assume full employment, and ignore inflation, but not to omit rigorous microfoundations for your model. On the other hand, with the collapse of the intellectual case for austerity (though not its political dominance), the terms of public debate are set almost entirely by New Old Keynesians like Krugman and DeLong (that’s true, even if you don’t believe, as I do, that the outcome of that debate has been a knockout win for the Keynesian side).”
It’s a pretty strange situation, and it implies, I think, that somebody is going to end up in the dustbin of history. I wonder who?