I take some comfort in learning that Brad DeLong and Paul Krugman appear to be as baffled as I by the traction that right-wing political and economic ideology seems to achieve, even with those who will be hurt most by it. I also find it reassuring that both men, who have sufficient standing within the discipline to critique it credibly, are willing to critique some of our brethren who have forgotten (or never learned) the economic lessons of the 1930s and 1940s. Admittedly, it's a cold comfort, but a comfort nonetheless.
I want to offer some thoughts about why extreme macroeconomic policy may trump moderate policy. They should be viewed as supplements to Krugman, rather than disagreements with him. Here's Krugman:
The brand of economics I use in my daily work – the brand that I still consider by far the most reasonable approach out there – was largely established by Paul Samuelson back in 1948, when he published the first edition of his classic textbook. It’s an approach that combines the grand tradition of microeconomics, with its emphasis on how the invisible hand leads to generally desirable outcomes, with Keynesian macroeconomics, which emphasizes the way the economy can develop magneto trouble, requiring policy intervention. In the Samuelsonian synthesis, one must count on the government to ensure more or less full employment; only once that can be taken as given do the usual virtues of free markets come to the fore.
It’s a deeply reasonable approach – but it’s also intellectually unstable. For it requires some strategic inconsistency in how you think about the economy. When you’re doing micro, you assume rational individuals and rapidly clearing markets; when you’re doing macro, frictions and ad hoc behavioral assumptions are essential.
In my opinion, the intellectual instability of the Samuelsonian synthesis runs deeper than "strategic inconsistency." I believe it derives from two aspects of the synthesis. One is Samuelson's propagation of the myth that "the invisible hand leads to generally desirable outcomes" has caused real economic and political harm, yet it continues to shape how many if not most economists and non-economists think about the economy. Gavin Kennedy does a much better and more scholarly job than I could of debunking the generalization of Smith's very specific uses of the term "invisible hand" to cover every possible manifestation of something we imagine are the natural benefits of "rational self-interest." (See also a recent post by Kennedy here.) That the economics profession, at least since Samuelson, has sanctified the myth and elevated it to high orthodoxy has in my opinion provided substantial political and ideological cover for those who benefit from laissez faire financial markets. It almost certainly accounts for pushing "the dividing line between micro and macro" in the direction it was "pushed."
The other aspect of the Samuelsonian synthesis that is problematical, at least to me, is its somewhat ad hoc synthesis of macroeconomics and microeconomics, which some have argued isn't a true synthesis. To me it has always looked like an uneasy attempt to reconcile a near-Utopian view of micro markets (ruled by an imaginary all-powerful, all-knowing invisible hand) with a more realistic Keynesian view of less than perfect macro markets. As noted above, it is perhaps no surprise that the tendency outside of the Fed "monasteries" has been to gravitate to micro principles and beliefs that appear to support laissez faire in macro policies, particularly those that affect finance. That the monasteries have a better anchor to reality is also not surprising, but as Krugman notes their "voice" in academic publications (and in promotion and tenure policies I would wager) has been systematically muted.
I also want to suggest another possible source of political instability for moderate macroeconomic policy that I think Krugman misses. It relates to the disconnect between economists' and non-economist voters' perceptions of the merits and effects of macroeconomic policy.
Let me give you an example from a protracted period of stagflation in the US during the 1970's. During the early stages of stagflation, a variety of government interventions aimed at countering a wicked combination of high inflation and high unemployment appeared to be ineffective. This weakened consumer and voter confidence in the government's ability to intervene effectively and produce beneficial macroeconomic outcomes.
I write that last sentence from the perspective of my business men and women relatives and the outrage they felt when wage and price controls were imposed by a Republican president (no less). The point here is that everyone, even non-economists, noticed the wage and price controls and how perfectly unpleasant and ineffective they were. And in the unlikely event that someone wasn't paying attention, the OPEC oil embargo in combination with gasoline price controls and very long lines at gas stations focused attention. Then, after nearly a decade of rapidly eroding purchasing power and high unemployment, interest rates soared as Paul Volcker effectively applied the brakes to inflation by raising interest rates in the early 1980s.
What the average non-economist noticed during the remedial period was the very high credit card and mortgage interest payments they were making. Had they been economists, they might have rationalized this by noting that housing and other prices were stabilizing. Not being economists, they imagined that if only interest rates were lower and they could still pay the same, now stabilized price for their house, they would be better off. Instead, the "government," by raising interest rates, seemed to be making the banks and mortgage companies better off at the home purchaser's expense. They certainly did not notice, at least not right away, that the economy was slowly being restored to something that in the long run would have been better for them and for their grandchildren had we only been able to sustain it.
Let me emphasize. I'm not telling this story as an economist, I'm telling it from the eyes of members of my family and friends who bought homes or waited in gas lines. Many came out of it convinced, convinced, that the guvmint is always and everywhere the problem. (Most of the businessmen in my family had already concluded this based on the 2 years post-WW II when continuing wage and price controls by the Office of Price Administration forced their suppliers to stop or slow production, while my family members were forced to scour the countryside looking for manufacturers who would supply goods for cash under the counter so my family could stay in business.)
I'm going to suggest that even though many who espouse anti-government ideas may not have directly experienced the 1970s, that period provided the political right with a "teachable moment." Everyone was paying attention, most were noticing that the government seemed to be creating more problems than it was solving, and many became open to the idea that guvmint is the problem. It established an intellectual beachhead from which foot soldiers could advance and reinforce the idea that a democratically elected government constituted in such a way as to protect the people from its own predations and power was in fact the enemy and incompetent to boot.
Now combine carefully fostered distrust of the government, the only thing that might reasonably be expected to stand between us and the private interests of concentrated, unfettered wealth and power, with the myth of an all-wise, all-knowing, beneficent invisible hand embedded in a Utopian free market. Then propagate the myth by a discipline that trains its young: to assume rather uncritically fully-informed, unchanging over time, prudent, industrious, self-interested preferences and behavior; to downplay the "friction" of transaction costs and information asymmetries; to assume that many externalities are or soon will be internalized; that labor and goods markets clear rapidly; that capital is more putty than clay; and until recently that financial markets were both rational and efficient. That many of these same so-trained youth sought employment in the highly lucrative financial sector can only have contributed to the intellectual and political disconnect between Wall Street and Main Street and the dark age of macroeconomics to which Krugman alludes.
It most likely also explains the young assistant professor in economics at a top ten US university who opined at lunch a few weeks ago that "the thing I like most about economics is that there is no truth."
Unfortunately, there are some truths. One is that whatever equilibrium we move to next, we can't go back in time to the fairer income distribution and employment rates and economic growth we had in the 1950's and 60's. We can only go forward with the human, physical and financial capital that we have now. If any of these need to change in order for us to go forward, then we need to tinker with or replace the defective "magneto" now. That's why how we go forward is so important to get right. Our choices will determine whether eventually we restore a fairer distribution of higher output or create a highly unequal and unproductive society that rewards only a few.
We have broken the economy at least twice in the last 100 years and in pretty much the same way both times. And with pretty much the same rhetoric both as we were breaking it and as we were and are attempting to repair it. Yet, as DeLong puts it
Still, here we are. The working classes can vote, economists understand and publicly discuss nominal income determination, and no influential group stands to benefit from a deeper and more prolonged depression. But the monetarist-Keynesian post-WWII near-consensus, which played such a huge part in making the 60 years from 1945-2005 the most successful period for the global economy ever, may unravel nonetheless.
I share DeLong's bewilderment. I would suggest several steps that might remedy this. First, at a minimum economists had better learn to speak and write in parables so that the working classes can understand macroeconomic policy as readily as they understand gas station lines and and as well as they misunderstand payroll taxes, marginal tax rates, and estate taxes. Second, it would help if we could agree on what the message (in 25 (OK, maybe 50) word soundbites) should be.
Finally, it might help if we all acknowledged that moderate and extreme macro polices will almost certainly lead to different macro equilibria and that while both may be efficient, it doesn't necessarily make them both good. Unfortunately, deciding which one is "good" would depend on a normative judgement, which we as a profession have tended to eschew.
Update: Brad DeLong's longer talk here is a must read. The disturbing conversations with the tea partiers fit with my own anecdotal experience regarding working and business class attitudes towards both macroeconomic policies and the "morality play" that underlies how many non-economists that I know think about the economy.