Paul Krugman did a twitter thread today about the difference between the 2009 stimulus and the 2021 rescue plan that I thought you might find interesting. This time they are just going with basic Keyenesian economics instead of the “innovative” austerity experiment (which many people knew wouldn’t work.)
There’s been a fair bit of Econotwittering about this J.W. Mason post on the American Rescue Plan and what it says about economic theory. I agree with a lot although not all of it, and in any case think some might be interested in my take.
The ARPA definitely marks a big break with the austerity/debt obsession that crippled recovery after the 2008 crisis. That’s a very big deal. And even the debate over the bill was very different from what went before .
One thing people should realize, however, is that policy orthodoxy in, say, 2011 did NOT reflect macroeconomic orthodoxy in the sense of what the standard models said. In crucial areas it was in flat defiance of what Macroeconomics 101 would have recommended.
It was actually quite weird: there was a lot of innovative, creative economic analysis — all of which turned out to be dead wrong — being deployed FOR austerity, which conventional macro rightly said was a really bad idea.
No, austerity isn’t expansionary; no, there isn’t a growth cliff at a debt ratio of 90 percent. Nothing in standard macro suggested either of these things should be true. All that supported them was bad statistical analysis and the political will to believe.
So part of what’s happening is simply that the Biden team is actually listening to the economic consensus, rather than grabbing dubious doctrines that fit right-wing preconceptions. But it’s also true that there have been some changes in theory.
Concerns about debt did loom larger in economic analysis than they should have — partly, I think, because people didn’t grasp the implications of r<g, partly out of partially unconscious deference to political fashion.
The truth is that if we’d taken our own models seriously we would have adopted an attitude much closer to Abba Lerner’s functional finance.
https://www.jstor.org/stable/40981939?seq=1#metadata_info_tab_contents
Someone will bring up MMT. After all this time, I still don’t know what it is beyond functional finance — every time you try, you’re told that you don’t get it, and at this point I think it’s mainly a marketing ploy. So never mind.
Anyway, the whole debate over ARPA was in effect conducted in terms of functional finance — not whether it cost too much, but whether it was inflationary. But that’s not so much new theory as taking our own models seriously.
The other big change — and this does mark a change in theory — is that the NAIRU has largely dropped out of discussion — basically because nothing that’s happened since 1985 supports an “accelerationist” view of inflation.
Low unemployment and a hot economy do seem to yield somewhat higher inflation; but there has been no sign that this quickly or easily translates into an ever-rising inflation rate. Maybe it’s anchored expectations, maybe it’s downward wage rigidity, but it’s just not there.
This doesn’t mean that inflation is never a concern. But it does mean that the stability of inflation over time does NOT mean that the economy was on average at full employment. Instead, there’s now a good case that we’ve been persistently underemployed.
That is a pretty big deal, and feeds directly into policy: Biden and co’s relaxed attitude toward debt is matched by a relaxed attitude toward inflation.
So there have been important changes in how economists talk about policy, some of which include rethinking of our models. But a lot of what has happened is simply that economists are following their existing models, instead of tweaking them to justify political prejudices.
Originally tweeted by Paul Krugman (@paulkrugman) on March 17, 2021.