Monday, December 1, 2014

Was Robert Samuelson Referring to Keynes or the New Classicals?

Robert (no relationship to Paul) Samuelson draws another well deserved rebuke from Dean Baker. Samuelson seems to be impressed with more musings from James Grant where Grant alleges that all we need to avoid prolonged recessions is faith in the free market system. Samuelson summarizes:
Grant argues, for example, that the downward rigidity of wages in the 1930s prolonged and deepened the Great Depression, contrasting unfavorably with the 1920-1921 depression. He concedes that his laissez-faire approach might result in harsher recessions but also suggests that it would produce stronger recoveries. Grant disputes the conventional wisdom that falling wages and prices would doom the economy to a prolonged collapse by reducing incomes and making debts harder to repay. To the contrary: Lower prices might encourage spending and lower wages might encourage hiring.
I guess Samuelson has never heard of the debt deflation theory – in particular Tobin’s 1975 AER paper. But it is his closing paragraph that has irked Dean:
The recent financial crisis and the (unpredicted) weak recovery have exposed economists’ fragile grasp of reality. There has been a massive destruction of intellectual capital: Old ideas of how the economy functions and can be improved have been found wanting. Since the Great Depression, governments are expected to react to economic slumps with countercyclical policies that reverse the downturn and relieve personal suffering. These understandable impulses may compromise the economy’s recuperative rhythms. That’s a troubling possibility that echoes from the 1920s.
Dean notes:
Robert Samuelson apparently didn't know that all sorts of good Keynesian types, starting with Paul Krugman, predicted that the recovery would be weak due to inadequate stimulus … Apparently Samuelson is unaware of this history. He pushes his idea of leaving everything to the free market telling readers, harkening back to the recovery to the downturn following World War I
But can we return to this line from Samuelson?
There has been a massive destruction of intellectual capital
There was a massive destruction of intellectual capital but Samuelson has this all backwards. The New Classical revolution in macroeconomics that dominated the profession for the 30 years preceding the Great Recession tossed out Keynesian economics replacing it with the kind of faith in free markets that Grant and Samuelson seem to want to hold onto. Robert Samuelson indeed is so unaware of the history of macroeconomics that he missed the New Classical revolution as well. And he still gets to write a column for the Washington Post? Update: James Grant and Robert Samuelson really needed to read Daniel Kuehn:
A series of recent reviews of the depression of 1920–1921 by Austrian School and libertarian economists have argued that the downturn demonstrates the poverty of Keynesian policy recommendations. However, these writers misrepresent important characteristics of the 1920–1921 downturn, understating the actions of the Federal Reserve and overestimating the relevance of the Harding administration’s fiscal policy. They also engage a caricatured version of Keynesian theory and policy, which ignores Keynes’s views on the efficacy of nominal wage reductions and the preconditions for monetary and fiscal intervention. This paper argues that the government’s response to the 1920–1921 depression was consistent with Keynesian recommendations. It offers suggestions for when Austrian School and Keynesian economics share common ground and argues that the two schools come into conflict primarily in downturns where nominal interest rates are low and demand is depressed. Neither of these conditions held true in the 1920–1921 depression.
I learned about this from Paul Krugman who was writing about the 1921 recession back in April 1921.

3 comments: said...

Looks like we are all going nuts over the absurd reaction to this new James Grant book. What I find particularly silly is how suddenly Grant is this great oracle. People have been pushing these half-baked arguments about 1921 for some time, but now, well, Grant has it. We just needed major deflation.

Grant is a gold bug who has been a joke for a long time, even if he does get on money talk shows. But now we have WaPo taking him seriously, at least the completely incompetent RJ Samuelson. I fear this is the influence of Jeff Bezos more and more. Grant's book has gotten push from libertarian Cato, and so, well let us please new owner, libertarian Bezos.

reason said...

Paul Krugman must be older than I thought!

ProGrowthLiberal said...

Reason - that's funny. But I think Paul was born on February 28, 1953. He just knows how to do research. He also linked to Barkley's awesome account of the 1921 recession in his blog post on this issue just today. I'm glad Barkley and I were able to stir this pot as it has gotten Paul's attention, which has been a good thing.