Paul Krugman gave an interesting and (IMHO) exceptionally candid lecture at his alma mater, MIT, this past Friday. Here's the link to yesterday's MIT News Office story on it: "
Krugman: `Dark age of macroeconomics' is upon us."
The report from the MIT News Office observed, Krugman "...warns that America is replaying its past economic policy mistakes."
Krugman: `Dark age of macroeconomics' is upon us
Peter Dizikes, MIT News Office
February 9, 2010
..."We're living in a dark age of macroeconomics..."
--SNIP--
"Economists themselves are confused," he added. "It's been really amazing within the economics profession to see how much has been lost."
What has been lost above all, Krugman argued, is an appreciation of ideas developed in the 1930s -- most notably the economist John Maynard Keynes's broad view that in certain circumstances government spending is the best tool to instigate an economic recovery.
--SNIP--
Thus Krugman believes the United States has benefitted from the $787 billion federal stimulus package that was signed into law in February 2009; it consisted of a combination of spending programs on things like infrastructure, education and research, along with some state aid and tax cuts. Although unemployment has risen from 8.2 percent when the stimulus was passed to 9.7 percent today, Krugman thinks the legislation helped alleviate the recession's effects. "We would probably have 12 percent unemployment in the U.S. if we didn't have the stimulus," he said. Yet the seemingly long odds against additional government spending are leading Krugman to think we may well be headed for a double-dip recession -- the contemporary counterpart to the slump that occurred in 1937, just as the U.S. economy was recovering from the worst of the Great Depression.
"We are caught in a situation more than a little reminiscent of the mid-1930s," Krugman emphasized. "How can we be replaying the past so badly?" he added. "That is the question that has worried me a lot."
The story continues on to tell us that Krugman blames politicians as much as he does the economy, itself. He was also highly critical of the "Chicago School" (the University of Chicago) of economic thought so prevalent throughout the U.S. socio-economic landscape during the past three decades (i.e.: the concept of the "efficiency of markets," and laissez-faire economic policies, keeping government out of the marketplace, the "freshwater school," Milton Friedman, supply-siders, trickle-down economics, Reaganomics, etc., etc.). And, as a result of this reality, Krugman lamented, "What's striking is how many people there are in their 30s and 40s in the profession who haven't encountered this idea, that fiscal stimulus helps."
What struck me most was Krugman's reiteration of how politicians (inferred: seeking compromise and bipartisanship) tend to do things "halfway." Krugman's frustration, as noted by the report, with all things political was based upon the reality that President Obama's stimulus really needed to be much larger than it was. And, as a result of political compromise, rather than coming out "big," we end up with a situation where "...half a loaf may be not much better than nothing. And that is the situation we face with this crisis. If you do a half-hearted policy, even if economists think you should do more, the conclusion will be, 'Well that policy failed.'"
As Krugman sees it, then, the government did too little to fight the recession, and now it's too late to reverse course. In part, he said, that is also because an odd kind of self-congratulation has set in among policy-makers and the chattering classes, for having prevented an all-out 1930s-style Great Depression.
"By avoiding utter disaster," Krugman said, "we're avoiding looking at our own failings..."
Lastly, the report mentioned that Krugman praised Fed Chair Ben Bernanke, but he didn't think he was deserving of Time Magazine's "Man of the Year" award. Krugman said, "I'm not sure the fact that the world didn't end is enough reason to make Ben Bernanke (Time magazine's) Man of the Year."