Tuesday, July 27, 2010

Economists Responses to Crisis of 2007

Here's a nice article by Philip Mirowski on Economist's responses to the crisis of 2007. Here's a bit:
As late as February 17, 2010, the PBS Newshour gave a platform to Chicago economist, Cato Institute member, and financial consultant John Cochrane to simply assert that government spending has no net effect on the economy. Insiders to the profession know this as “Ricardian Equivalence,” but that is tantamount to insisting, “You can’t fool Mother Market.” But fooling the Market was how the crisis developed in the first place. You should view the segment for yourself to gain an impression of the smug demeanor of someone who has drunk the Kool-Aid a little too avidly. I had to check my browser to make sure I wasn’t watching a clip from the Colbert Report. Perhaps Cochrane and I had been living in parallel universes over the previous two years. Just one representative quote: “The economy can recover very quickly from a credit crunch if left on its own.”19 Maybe in the Chicago Wormhole Universe. The real questions are: Why do the intrepid journalists of public television think that giving this guy a platform is “balance” in reporting? What set of social institutions has led us to accept that we have to keep getting exposed to this utterly predictable but uninformative stuff from economists? Where is Keynes when we really need him?
Only note is that even full Ricardian equivalence implies that government spending increases GDP in the short run, as fully rational, forward-looking actors reduce their consumption by a small amount each period offsetting the expected future tax hikes. The problem isn't even just in these guys' models, it's that when their models conflict with their ideology & emotional leanings, of course they side with their ideology and emotional leanings. That their models, such as Ricardian equivalence, are also simplistic and flawed (agents aren't perfectly rational or forward-looking, and don't know what's going to happen in the future in any event), is another issue entirely.

I give him props for acknowledging "Economist for Firing Larry Summers" as being one of the "better quasi-anonymous blogs".

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