The Incoherence of Neo-Keynesian Doomsaying

by Will Wilkinson on February 6, 2009

In response to my post below, friend and former colleague Ryan Avent writes:

This is just too cute. The paradox of countercyclical macroeconomic politics is only a paradox if you believe that the current recession is the result of equal parts Democratic fear-mongering and facts on the ground. But can any sane person actually believe this? Does anyone really think that Barack Obama’s acknowledgement of economic reality and the op-ed warnings of lefty economists are the things producing this downturn, or perpetuating it, or deepening it?

I don’t think Ryan understands the cute argument. The cause of the recession is irrelevant. I never even intimated that Democratic fear-mongering caused it. (I think normal periodic breakdown of efficient-ish economic coordination + American houselust + democracy + fancypants finance + executive myopia + regulatory failure caused it.) So does anyone think that pants-wetting op-eds by Presidents and Nobel Prize-winning economists can perpetuate or deepen a downturn? Yes! For example, people like the President or Nobel Prize-winning economist Paul Krugman who believe that countercyclical macroeconomic policy works largely by manipulating consumer and investor psychology. If you don’t think Obama and Krugman’s confidence-destroying disaster forecasts hurt, then you probably shouldn’t accept confidence-restoration theories of stimulus, either. Or maybe Ryan knows of some research that shows that badly-targeted tax cuts and infrastructure spending effectively boost confidence and buoy markets while doomsaying from the most powerful man on Earth means squat. That would be interesting to see.

  • BTW, are you arguing for the full on "austerity" path? As we would perhaps propose to a 3rd world nation with a debt crisis?

    Or are you merely positioning a milder, continued, deficit and debt as "non-stimulus"?
  • I've dropped the observation other places that we came out of the Bush years with a long history of Keynesian stimulus. We've had a solid 5 years, perhaps more, of deficit spending and tax cuts. We've had a war (or 2) fought not on cash accounting, but borrowed from the future.

    That "irrelevant" line is both galling and strongly misleading.

    The recent meme is that payroll taxes should be counter-cyclical. Solid. The only problem is it's too late. We were already doing tax cuts and deficits during the past, weak, misshapen, recovery.

    So sure, make the rational case that the best path out of this mess is with reduced stimulus, if that is your belief, but don't forget your actual baseline.
  • Cool Cal
    I'd rather beat a dead horse than thrash a straw man.
  • Paul Zrimsek
    "Last but perhaps not least among causes of the consumer funk is the administration's own determined pessimism. Mr. Bush has a bully pulpit, and he is using it to preach economic alarm. This adds powerfully to the chorus of doomsaying. And when it comes to short-term economics, believing can sometimes make it so."

    --Paul Krugman, 2/21/01
  • Ooh. Thanks, Paul. This one's getting it's own post.
  • "the President or Nobel Prize-winning economist Paul Krugman...believe that countercyclical macroeconomic policy works largely by manipulating consumer and investor psychology"

    This makes it sound as if they seek to manipulate c&i psychology directly. It seems to me, rather that the c&i psychology is an unknown factor encompassed by the relevant economic theory. To put it another way, they don't claim to have a psychological model; they claim to have an economic theory, and they claim that that theory implicates (in some impressionistic way) c&i psychology.

    That issue is easy to conflate (and I think you may be conflating it) with the degree to which voter psychology has to be managed and leveraged to effect political goals. The political posturing doesn't do much as far affecting the economy, but it does a lot as far affecting the kind of policy that can get implemented and how swiftly it can be implemented.
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