The Economic Costs of the Fact That Obama Believes He Is Lucky
Martin Wolf on the Eurozone

Why Does the New York Times Still Publish Casey Mulligan?

Why oh why can't we have a better press corps? There are lots and lots of smart, right-wing economists who write well and inform the public.

Admittedly, this one is better than most of his others. Nearly three paragraphs of it are actually good.

Gone are the claims that there is no reason to think that the U.S. economy will fall into recession.

Gone are the claims that it was the election of Barack Obama that gave business investment a bad case of the vapors.

Gone are the claim that our high unemployment is due to recent increases in the minimum wage.

Gone are the claims that increased government spending "made a bad situation worse."

There has indeed been progress: twenty years after becoming an economist Casey Mulligan is finally giving the standard analysis of a financial crisis-driven downturn that John Stuart Mill and Jean-Baptiste Say knew back in 1829--and that he ought to have learned as a college junior, if not as a freshman:

Casey B. Mulligan: the demand for safe assets surged in 2008, which means that those assets had to become expensive or, equivalently, goods had to get cheaper in order to clear the market. Normally the Federal Reserve could expand the money supply to satisfy the extra demand for safe assets, so consumer prices wouldn’t have to fall to maintain employment. But the financial crisis was severe enough that the Fed’s best efforts would not be enough. At the time, New Keynesian fears seem to have been realized: consumer prices had to fall to maintain employment, but too few employers were willing or able to make the price cuts quickly enough. The result was going to be a severe recession that could be partly cured, in the short term, by fiscal stimulus or, in the longer term, as more companies had the time needed to cut their prices...

But in that last clause Casey Mulligan goes off the rails again. Four years of being wrong about--well, about nearly everything--has not led to any caution. For that last clause is simply wrong.

For firms and workers to cut their prices in a downturn has, New Keynesians (and Old Keynesians, and monetarists, and Fisherians, and Wicksellians, and a host of others) think, two effects:

  1. With lower prices the same flow of nominal demand purchases more commodities and employs more people.
  2. With lower prices the collateral and cash flow cover of nominal debt erodes, and so nominal debt becomes even riskier. If the problem is indeed an excess demand at full employment for safe assets, allowing deflation to reduce the supply of safe assets really does not help.

Back in 1933, I think, Irving Fisher argued most strenuously that deflation was destabilizing: that downward moves in nominal wages and prices were not the cure but the cause of Great Depressions.

It is much better to use other policies--open-market operations, quantitative easing, commitments to further expansion in the future, loan guarantees, government spending, tax cuts--to boost nominal demand in both the short and long run than to sit back and wait for deflation to someday, somehow restore the proper functioning of the market system and return the economy to full employment.

Note that the three paragraphs I picked out are the only accurate things about the column. Paul Krugman lost it before he had finished reading the first paragraph:

Our labor market has long-term problems that are not addressed by Keynesian economic theory. New Keynesian economics is built on the assumption that employers charge too much for the products that their employees make and are too slow to cut their prices when demand falls. With prices too high, customers are discouraged from buying, especially during recessions, and there is not enough demand to maintain employment...


Why Casey Can't Read: [He] should try reading a bit of Keynesian economics — old or new, it doesn’t matter — before “explaining” what’s wrong with it. For the doctrine he’s attacking bears no resemblance to anything Keynesians are saying. This is fairly typical of freshwater economists. They know that what the other side is saying is obviously stupid, so there’s need to read it; they picked up enough about it talking to some guy in a bar, or whatever, to criticize it.

So Mulligan shows us a graph indicating how much prices would have to fall, according to New Keynesians, to restore full employment. No reference to anyone actually saying this, or any model that can be used to derive that line... [no] explanation of how Mulligan got that line.... It looks as if he’s assuming that nominal demand is constant, so that a fall in prices would lead one for one to a rise in real output. But where’s that coming from? If he had read anything — anything at all — that Keynesians have written about policy at the zero lower bound, he would have learned that there is no reason to expect falling wages and prices to raise employment — in fact, quite the contrary in the face of a debt overhang.

If Mulligan wants to argue that point, fine — but he presents as “the New Keynesian position” something that is just what he imagines, on casual reflection (or, again, maybe after talking to some guy in a bar) to be the New Keynesian position.

OK, so from now on I’ll assert that the Chicago position on unemployment is that we can cure it by sacrificing goats. Hey, I heard that somewhere — no need to actually read anything they say, right?