A Dark Age of macroeconomics?

“Brad DeLong is upset about the stuff coming out of Chicago these days — and understandably so. First Eugene Fama, now John Cochrane, have made the claim that debt-financed government spending necessarily crowds out an equal amount of private spending, even if the economy is depressed — and they claim this not as an empirical result, not as the prediction of some model, but as the ineluctable implication of an accounting identity. ....

[B]oth Fama and Cochrane are asserting that desired savings are automatically converted into investment spending, and that any government borrowing must come at the expense of investment — period.

What's so mind-boggling about this is that it commits one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship. Yes, savings have to equal investment, but that's not something that mystically takes place, it's because any discrepancy between desired savings and desired investment causes something to happen that brings the two in line. ....

That's actually the point of one of the ways multiplier analysis is often presented to freshmen. ....

So how is it possible that distinguished professors believe otherwise?

The answer, I think, is that we're living in a Dark Age of Macroeconomics. Remember, what defined the Dark Ages wasn't the fact that they were primitive — the Bronze Age was primitive, too. What made the Dark Ages dark was the fact that so much knowledge had been lost, that so much known to the Greeks and Romans had been forgotten by the barbarian kingdoms that followed.

And that's what seems to have happened to macroeconomics in much of the economics profession. The knowledge that S[avings]=I[nvestment] doesn't imply the Treasury view — the general understanding that macroeconomics is more than supply and demand plus the quantity equation — somehow got lost in much of the profession.”

Paul Krugman, "A Dark Age of macroeconomics (wonkish)", The Conscience of a Liberal (New York Times blog) (27 January 2009).

http://krugman.blogs.nytimes.com/2009/01/27/a-dark-age-of-macroeconomics-wonkish


Paul Krugman (1953-) is a professor of economics and international affairs at Princeton University, and a columnist for The New York Times. Earlier this year he won the Nobel Memorial Prize in Economic Sciences "for his analysis of trade patterns and location of economic activity".

Paul Krugman is at once one of the best and one of the most controversial economists commenting on economic affairs today. There is no doubt that his academic accomplishments in the areas of trade theory, economic geography, and international finance are worthy of a Nobel Prize. And there is no doubt that he is more than outspoken in his opposition to ideas he does not like, often in a "shrill" rhetorical style, a tactic that wins him few friends among the many he attacks. A Democrat, he was among the harshest critics of the Bush Administration and now is an Obama cheerleader. J. Bradford DeLong, mentioned by Krugman in his excerpt, is a professor of economics at Berkeley, and a Democrat and strong Obama supporter.

The past week or so Krugman turned his rhetorical guns on John Cochrane and Eugene Fama of Chicago and Robert Barro and Greg Mankiw of Harvard, among others, eminent economists all who happen to disagree with his view of the central policy question under public discussion: Obama’s Stimulus Package. Barro responded in The Wall Street Journal the other day (“Government Spending Is No Free Lunch: Now the Democrats are peddling voodoo economics”), Mankiw posted a response on his blog (“Krugman on Equilibrium Macro”), and Cochrane wrote up his views on the issue (“Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies?”).

Suffice it to say that the four gentlemen (and others) accused by Krugman of living in a Dark Age of Macroeconomics are among the nation’s top macroeconomists. Their major failing is not that they do not understand macroeconomics, as alleged by Krugman, but that they oppose the Stimulus Package now being considered by Congress. Worse, at least to Krugman, is many of them suffer from the sin of being Republicans and therefore, in his view, could not have understood economics in the first place.

When faced with sharp criticisms of any policy position he advocates, it is typical of Krugman to change the subject from the merits of the policies he advocates to an oblique attack on the people who oppose him.