Everything New Is Old Again

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Paul Krugman

Everything New Is Old Again

By PAUL KRUGMAN

January 23, 2014

Logistical note: I’ll be traveling the next couple of days — family, not work — so little if any blogging. Also, for those who like to plan their TV viewing far in advance, next week I’ll be doing SOTU commentary on CNN. I believe I’ve been assigned to discuss Michelle Obama’s wardrobe, or something.

But before we hit the very cold road, I thought I’d weigh in on an ongoing discussion about the state of Keynesian economics. Simon Wren-Lewis had a piecea few days ago that I never got around to discussing, and now John Quiggin has afurther piece that lays out an interesting typology. I don’t really disagree with either piece, but have a slightly different take.

So Wren-Lewis asks whether the financial crisis and aftermath will lead to a revolution in macroeconomics. He thinks mostly not, and he’s probably right — but the absence of a revolution will be mainly for the wrong reasons.

There have been two big revolutions in macro. First was the Keynesian revolution, closely tied to the Great Depression; then the new classical counterrevolution, more loosely tied to stagflation in the 1970s. In the first case the linkage was obvious: Keynes offered a way to understand what was happening, and a solution too.

In the second case things weren’t quite so obvious — new classical models didn’t actually have anything much to say about inflation. But stagflation was predicted by Friedman and Phelps, using models that attempted to derive wage and price-setting behavior from rational choice. So the effect of the emergence of stagflation was to give a big boost to “microfoundations” as a modeling strategy

There was a limited Keynesian pushback, what Quiggin calls the Old New Keynesian economics. Basically, this approach tried to get as much rationality into the models as possible without reaching the conclusion that demand-side recessions can’t happen. So intertemporal optimization by consumers, optimal price-setting by firms, with just the caveat that for reasons not specified firms and/or workers had to set prices well in advance, so that surprises in demand could translate into real fluctuations.

There was never a compelling empirical case for this approach. Yet it became dominant for, I think, a couple of reasons. First, it aped the style of the new classical types, creating the illusion of intellectual convergence. Second,it was mathematically hard enough to give you the feeling that you were doing real theoretical work, not just writing down something ad hoc — and maybe even more important, hard enough to convince referees that it was serious stuff. Finally, on a more positive note, New Keynesian-type models did and do under certain circumstances force you to think harder about issues in a way that enhances your understanding, even if you don’t really believe them; that’s certainly been my experience, which is why I usually try to model macro issues both ways (old and new Keynesian), just to be sure I’m not missing something.

So now comes the Lesser Depression — and it turns out that the New Keynesian models have been of hardly any use, while old Keynesian approaches (sometimes with a consistency check using NK modeling) have been tremendously useful. The result has been the rise of what Quiggin, borrowing a phrase from Tyler Cowen, calls New Old Keynesian economics. I liked my term Neo-Paleo-Keynesianism, but whatever.

Quiggin says that I’m the leader in this movement; hey, I’ll take it, although Larry Summers is giving me a definite run for the money lately.

But will this sweep the academic world? No. Partly because of politics: as Quiggin says, new classical economics is effectively part of the broader right-wing apparatus of denial, into which awkward facts rarely penetrate.But there’s also a professional dynamic going on.

You see, both the Keynesian revolution and the classical counterrevolution had one great virtue for ambitious academics: they involved both new ideas and more elaborate math than their predecessors. (It’s often forgotten, but Keynesian economics and the Samuelsonian modeling revolution went hand in hand.) New Old Keynesian economics, on the other hand, involves turning away from hard math back toward rough-and-ready assumptions based on empirical observation. Aspiring up-and-coming economists may be able to publish empirical papers in this vein, but theoretical analyses are likely to be met with giggles and whispers. Just because the stuff works doesn’t mean that it will be publishable.

So I think we’re in for a long siege in which the economics that works remains virtually absent from economic journals (except policy journals like Brookings Papers) and largely untaught in graduate programs.

I hope I’m wrong.

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