The Cup Half Full

I am frequently baffled by the onesidedness of Paul Krugman’s New York Times columns and today’s column is no exception. In this column Dr. Krugman takes the Europeans to task for rejecting Keynesian approaches to the economic turndown in the last recession:

Why has Europe done so badly? In the past few weeks, I’ve seen a number of speeches and articles suggesting that the problem lies in the inadequacy of our economic models — that we need to rethink macroeconomic theory, which has failed to offer useful policy guidance in the crisis. But is this really the story?

No, it isn’t. It’s true that few economists predicted the crisis. The clean little secret of economics since then, however, is that basic textbook models, reflecting an approach to recessions and recoveries that would have seemed familiar to students half a century ago, have performed very well. The trouble is that policy makers in Europe decided to reject those basic models in favor of alternative approaches that were innovative, exciting and completely wrong.

I’m one of those students of a half century ago and, yes, Keynesian pump-priming if familiar to me. As I’ve said before, back in the olden days when I took economics Keynes was king. There was no competing view.

My problem isn’t with the passage quoted above. I think it’s correct as far as it goes. I question the opening of his column:

BRUSSELS — America has yet to achieve a full recovery from the effects of the 2008 financial crisis. Still, it seems fair to say that we’ve made up much, though by no means all, of the lost ground.

The problem I have with that passage is that it only tells part of the story. Keynesian stimulus is a short term strategy not a long term one and after eight years it’s undoubtedly fair to think that the short term is behind us. If I remember those models of 50 years ago correctly, by this point whatever stimulus was provided from 2007 to 2011 would have been absorbed into a return to trend.

It’s not as though Keynesian stimulus hasn’t been tried over the last generation. It has been deployed first in Japan, then here, and then in China and I think we’ve learned something from the experiment. First, we’ve learned that the empirical evidence for the effectiveness of Keynesian stimulus remains weak. Second, we can be pretty confident that Western politicians don’t have the courage to follow through with what the models predict in dealing with a severe recession. Third, and in this we can be even more confident, their economic advisors will unfailingly abet the politicians in their cowardice.

The question I would ask Dr. Krugman is how could anything else have happened in Europe? The Germans are the dog not the tail there and they are absolutely convinced that German prosperity is based on German industry and thrift while Portuguese, Greek, etc. woe is a result of their being lazy spendthrifts. And dishonest. Those shifty, layabout, dishonest Southern Europeans.

We are not the only ones who have a history of economic theory. The German have a full century of truly horrific theories that have resulted in depressions, revolutions, and wars beyond anything we’ve experienced. They can be expected to hold onto them until it is politically impossible for them to continue which means for the foreseeable future.