Sep 03 2010

Pyramid Scheme

Paul Krugman, Nobel Prize Winner in Economics– “Contrary to what you may have heard, there’s very little that’s baffling about our problems – at least not if you knew basic, old-fashioned macroeconomics. In fact, someone who learned economics from the original 1948 edition of Samuelson’s textbook would feel pretty much at home in today’s world. If economists seem totally at sea, it’s because they have carefully unlearned the old wisdom. If policy has failed, it’s because policy makers chose not to believe their own models.”

You know, you can’t make a career in Academia by saying ‘problem solved’, it makes for very short papers, so there is a perverse incentive, especially in the Social “Sciences”, to disagree simply to be disagreeable and come up with insane theories about Pyramids being landing platforms for a race of parasite infested Galactic Overlords (I am of course talking about Stargate and not Scientology).

How has that Pyramid scheme worked out?

(L)et’s put politics aside and talk about what we’ve actually learned about economic policy over the past 20 months.

One group – the group that got almost all the attention – declared that the stimulus was much too large, and would lead to disaster. If you were, say, reading The Wall Street Journal’s opinion pages in early 2009, you would have been repeatedly informed that the Obama plan would lead to skyrocketing interest rates and soaring inflation.

So what actually happened? The administration’s optimistic forecast was wrong, but which group of pessimists was right about the reasons for that error?

When in doubt, bet on the markets. The 10-year bond rate was over 3.7 percent when The Journal published that editorial; it’s under 2.7 percent now.

What about inflation? … Sure enough, key measures of inflation have fallen from more than 2 percent before the economic crisis to 1 percent or less now, and Japanese-style deflation is looking like a real possibility.

The actual lessons of 2009-2010, then, are that scare stories about stimulus are wrong, and that stimulus works when it is applied. But it wasn’t applied on a sufficient scale. And we need another round.

But politics determines who has the power, not who has the truth. The economic theory behind the Obama stimulus has passed the test of recent events with flying colors…

So, as I said, here’s hoping that Mr. Obama goes big next week. If he does, he’ll have the facts on his side.

Unfortunately, as Atrios says any action at all at this point looks unlikely.  “Some big, new stimulus plan is not in the offing.”

So given the choice between going big and going home, the Obama Administration has decided to go home.

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