Noted for April 28, 2013
Paul Krugman: The Medium Term Is Not The Message: Ezra Klein tries to broker peace: 'The more modest differences between the various participants in the broader austerity debate are covering up a real area of consensus: We could, and should, do more now, and we could, and should, couple that with policies that reduce deficits in the medium and, more to the point, long term…. There’s no serious economic model in which $400 billion in stimulus spending — plus some principal reduction — over the next two years would destabilize the bond markets if it was coupled with $4 trillion in deficit reduction over the next 12 years. Reinhart and Rogoff could have been doing much more to call out the inanity of this position, which has blocked both more short-term support for the economy and more long-term deficit reduction. That, for them, should be a lesson of this debacle: They got in bed with politicians whose policy agenda had little to do with their actual research, and so now they’re being blamed for that policy agenda.'… Look, we are not going to have a deal that trades short-term stimulus for medium-term deficit reduction. Na ga ha pen…. [S]aying that you would oppose austerity if politicians simultaneously did something they aren’t going to do is, de facto, support for austerity. The reality is that as an economist, you’re either trying to calm deficit hysteria or you’re helping to ratchet it up. And R-R were clearly helping to ratchet up the fear…. This is, I’d say, part of a broader point: the responsibility of public intellectuals in general goes beyond talking about the ideal… you need to make it clear where you stand on the actual decisions being made, as opposed to merely stating what we should do but won’t."
Simon Wren Lewis (2012): Real and Fake Microfoundations: "Is intertemporal optimisation at the heart of modern macro, as I wrote here, or is it a gadget like the Dixit-Stiglitz model of monopolistic competition, as Paul Krugman suggests here? Well, I think I was right to characterise modern macro this way, but I also agree with what I believe Professor Krugman was saying in his post…. Professor Krugman did not get a Nobel for clever use of the Dixit-Stiglitz model of monopolistic competition, but for investigating the role of increasing returns and imperfect competition on trade and economic geography. So why characterise, as I did, modern macro by a tool it uses (i.e. intertemporal optimisation), rather than by what it is trying to achieve with that tool?… [T]rying to understand… did not start with the New Classical economists. What did begin in a major way around then was the microfoundation of macroeconomics…. But I think Professor Krugman is pointing to a danger that results from this. He writes 'a gadget is only a gadget, and you should not let it define your field'. If we define something by the tool or methods we use, we may start taking those tools too seriously…. Going back to macro, I’ve sometimes heard it said by someone that they are not sure how important price rigidity is, because they do not find any of the models of price rigidity convincing. This is letting theory define reality. If that is Professor Krugman’s point, then I agree with it. It is very similar to the argument I have been making about the need to be pragmatic about microfoundations…. [Y]ou should (a) look for a better microfounded model that does allow price rigidity, but also (b) discount the microfounded models you currently have because they are clearly incomplete/wrong…. [J]ust when microeconomics is getting rather more relaxed about its axioms as a result of behavioural economics in particular, the hegemony of microfoundations in macro is at its height."
Jérémie Cohen-Setton Blogs review: Bold ideas for the eurozone from economic history | Matthew Yglesias: Some further thoughts on the Bangladesh factory disaster |