On the end of neutrality – Adam Tooze in LRB:
“The synthesis of brains, wisdom and power embodied in Bartlet didn’t stand up to 21st-century realities. Today, Krugman tells us, ‘everything is political.’ He has come to accept that ‘the technocratic dream – the idea of being a politically neutral analyst helping policymakers govern more effectively – is, for now at least, dead.’”
“In the 1970s Krugman belonged to a generation of young lions at MIT, then the pre-eminent economics department in the US. The prevailing model at MIT was the so-called neoclassical synthesis, shaped since the 1940s by Paul Samuelson above all. Working from a broad acceptance of Keynesian prescriptions for macroeconomic policy, the younger economists at MIT specialised in clever models that demonstrated the often dramatic implications of market imperfections such as the limited availability of information, or the dynamics that ensue from increasing returns when increasing production actually reduces unit cost. Their increasingly complex modifications to the neoclassical synthesis resulted in what became known in the 1980s as New Keynesian economics.
The young Paul Krugman’s breakthrough came when he used a model of increasing returns and product differentiation to explain the emergence of clusters of industrial specialisation which could in turn drive international trade, not as a result of natural comparative advantage, in growing bananas for example, but in manufacturing high-end products such as German-badged motor cars. It was theoretically elegant and it explained why, in the golden age of economic growth after the Second World War, it wasn’t the old colonial and postcolonial exchange of raw materials for manufactured goods that dominated economic growth, but trade in manufactured goods between rich countries. The hour and a half Krugman spent laying out his new trade theory at the National Bureau of Economic Research in July 1979 was, he later wrote, ‘the best ninety minutes of my life. There’s a corny scene in the movie Coal Miner’s Daughter in which the young Loretta Lynn performs for the first time in a noisy bar, and little by little everyone gets quiet and starts to listen to her singing. Well, that’s what it felt like: I had, all at once, made it.’”
“‘To generate their ‘Keynesian’ analysis of macroeconomic dysfunction their method was to introduce market imperfections into their models. But this opens the door to indeterminacy. The more imperfections there are in a model, the less easy it is confidently to characterise the equilibrium that supposedly approximates the running of the actual economy. The result is liberating in its overturning of a simplistic faith in the self-regulating perfection of free trade or flexible markets, but it also creates an opportunity for heterodox economists and disreputable policy entrepreneurs. Upholding the rigour and status of proper economics thus requires vigilant policing. Summers, for example, can take startlingly radical positions on such issues as secular stagnation and the need to increase the bargaining power of organised labour, while at the same time feuding with the left over wealth taxes and stimulus cheques. Similarly, William Nordhaus, the Nobel Prize-winning climate economist, has spent much of his career since the 1970s policing the boundary between climate alarmism and what his work suggests is reasonable policy: his models acknowledge the climate crisis, but characterise it in such anodyne terms as to cast doubt on whether it’s worth doing anything about it.”
“What sets Krugman apart within this cohort is the way he has, since the 1990s, stopped being a gatekeeper of the status quo and instead become its critic. In this respect his closest analogue is Joseph Stiglitz, also once of MIT, a member of the Clinton administration and chief economist to the World Bank. Both men have indisputable standing as members of the elite club of New Keynesians: Stiglitz was awarded the Nobel in 2001, Krugman in 2008. Where Stiglitz has been the driving force behind a variety of radical policy proposals from the UN – on financial regulation, the dollar system and carbon pricing, among other things – Krugman has focused on the American scene, progressively putting in question the terms of the New Keynesian technocratic model.
Krugman’s radicalisation took place over a fifteen-year period starting with the Asian financial crisis of the late 1990s. At the outset of the crisis, Krugman was still upholding the orthodoxy: the problem of the Asian states was their crony capitalism and excessive unproductive investment. But as the crisis intensified over the summer of 1998 he re-evaluated, becoming one of the most prominent critics of the IMF for its austere prescriptions, and even going so far as to endorse capital controls.”
“One of Krugman’s defining characteristics as a thinker is that he likes simple, powerful models. In that spirit, The Conscience of a Liberal (2007) married his long-standing interest in inequality to a sweeping seventy-year political history of the United States. The Bush presidency’s open push for inequality, he showed, was not the exception. It was the period of the ‘great compression’ in income inequality – from the New Deal to Johnson’s Great Society – that was exceptional. The American norm was massive inequality. Since the Reagan era the wealthy elite had gone on the offensive, drumming up voters with dog-whistle racial appeals, following the model of Nixon’s Southern Strategy. If there was a single factor that explained why the US did not have a comprehensive welfare state, it was racism. Welfare in America was code for race, and for black dependency in particular.”
“Once the crisis was properly recognised it was clear what had to be done – and Obama appeared to have the people in place to do it. His economic policy team were as thoroughbred a group of New Keynesians as you could wish for. What was needed was a huge fiscal stimulus to ensure that the US didn’t slide from a crippling financial crisis into a Japan-style, low-growth liquidity trap. It was the very obviousness of that diagnosis that made what happened next all the more upsetting to Krugman. In 2009 Obama and the Democratic Congress passed a stimulus, but it was hopelessly undersized – half what was required. And 2010 began with the president announcing not that more was necessary, but that it was time for belt-tightening.
In so far as Obama was involved, Krugman wasn’t surprised – he had never been a fan. Obama’s insistence on bipartisanship ran squarely against Krugman’s darker vision of the roots of America’s political divisions in racialised class inequality. The dogged opposition of the GOP, for its part, was only to be expected. What shocked Krugman was the failure of his own kind, the economists, to rally in a time of national emergency. Predictably, the Chicago School joined the GOP opposition, but what horrified Krugman was the undeniable evidence that Obama’s own economic experts were self-sabotaging, and that Larry Summers – once the teenage star of MIT and Harvard – was in the thick of it. It was he who led the push to cap the stimulus at well below a trillion dollars. ‘The overall narrative,’ Krugman wrote, was ‘tragic. A policy initiative that was good but not good enough ended up being seen as a failure, and set the stage for an immensely destructive wrong turn.’ ‘We used to pity our grandfathers, who lacked both the knowledge and the compassion to fight the Great Depression effectively; now we see ourselves repeating all the old mistakes.’”
“ Though Friedman is commonly regarded as one of the fathers of the market revolution, he was at heart a creature of Samuelson’s neoclassical synthesis. He combined his passion for markets and the ‘freedom to choose’ at the microeconomic level with an insistence that the economy as a whole must be stabilised at the macro level by monetary policy. What Friedman promised was that non-discretionary, mechanical regulation of the money supply would in due course stabilise prices too. When that turned out to be hopelessly naive – defining the money supply and controlling it proved impossible and prices responded erratically – central bankers resorted instead to ad hoc decision-making, personified by Alan Greenspan, the guru of the Federal Reserve in the 1990s and early 2000s. If they were independent of elected politicians they were also free to ignore academic economics. The massive interventions used to stabilise the financial system were ad hoc decision-making taken to the limit; by the same token these interventions also lacked political and intellectual legitimacy. The central bankers faced a political backlash which spilled over from fiscal to monetary policy and hobbled their response.”
“Krugman reassured himself by adding that Kalecki was far more of a Keynesian than he was a Marxist, but quibbles aside, Krugman’s own transformation could hardly be denied. The members of the American left he had savaged in the 1990s were now his friends. He was talking about power in the starkest terms. But the question was unavoidable: once you lost your faith in the state as a tool of reformist intervention, once you truly reckoned with the omnipresence of class power, what choices remained but fatalism or a demand for a revolutionary politics? Between those alternatives, respectively unappetising and unrealistic, there was perhaps a third option. America had, after all, been here before. FDR’s New Deal too had been hemmed in. It had delivered far less than promised, until the floodgates were finally opened by the Second World War. The Great Depression, Krugman wrote, ‘ended largely thanks to a guy named Adolf Hitler. He created a human catastrophe, which also led to a lot of government spending.’ ‘Economics,’ he wrote in another essay, ‘is not a morality play. It’s not a happy story in which virtue is rewarded and vice punished.’”
“You might argue that in Covid we have found an enemy of precisely the kind Krugman was imagining. As far as Europe is concerned, an alien space invasion isn’t an implausible model for Covid. This novel threat broke down inhibitions in Berlin, and the Eurozone’s response was far more ambitious than it was after 2008. But America isn’t the Eurozone. For all Krugman’s gloom, it didn’t take a new world war to flip the economic policy switch. All it took was an election. Almost immediately after Trump’s victory in November 2016, the fiscal taps were opened. As under Reagan in the 1980s and Bush in the 2000s, all fear of deficits disappeared.”
“In 2020 these doctrinal debates were overtaken by the reality of the Covid shock. In March 2020, as more than twenty million Americans lost their jobs in a matter of weeks, Congress united around a gigantic fiscal stimulus. At the Fed, the centrist Republican Jerome Powell embarked on a programme of intervention that dwarfed anything contemplated by Bernanke. And with a Democratic majority in Congress the impetus has carried through to 2021. The mantra on everyone’s lips is a blunt statement of Krugman’s position. Do not repeat the mistakes of the early Obama administration. Go large. If the Republicans have now decided to be fiscal conservatives, ignore them. There has been no opposition from big business. What the Chamber of Commerce did not like was the $15 minimum wage. Once that was dropped, it did not oppose the $1.9 trillion plan; it seems that business fears legislative intervention more than it does Kalecki-style pressure in the labour market.”
“ In 2020 America came through something close to an existential social and political crisis. That crisis is now understood by large parts of the Democratic Party not as an unforeseeable shock, but as enabled by the forty years of ‘responsibility’ that Summers invokes as the gold standard: successive Democratic administrations failing to address inequality and handing the game to the utterly unscrupulous Republicans. With the pandemic still running through American society, and the midterms looming in 2022, the most irresponsible thing to do would be to risk electoral disaster of the sort the Democrats experienced in 2010. No one has made this case more consistently than Krugman. ‘Debt isn’t and never was an existential threat to our nation’s future,’ Krugman wrote in February. ‘The real existential threat is an illiberal GOP that looks more like Europe’s far-right extremists than a normal political party. Weakening policy in ways that might help that party’s prospects is a terrible idea – and I think Democrats realise that.’”
“As Biden himself has put it, China wants to be number one, and it isn’t going to happen on his watch. Why not? Because America is going to grow. The infrastructure programme Biden announced on 31 March is designed, like the ‘great projects of the past’, to ‘unify and mobilise the country to meet the great challenges of our time: the climate crisis and the ambitions of an autocratic China’. Perhaps Krugman’s Martians have arrived after all.”
Read the article here.
Covid as a blessing in disguise. Not only did it help us to get rid of Trump, something Tooze didn’t mention, but also did it help to silence fiscal hawks.
A war, an invasion of Martians or a pandemic will help increase government spending immensely.
And economy is not a morality play indeed.
And Toose rightly points to China. The action Biden is taken, much unlike Obama, is pressured by China. If the US wants to be more than a world power in decline – that was Trumps program, ironically called MAGA – action is need, a bit like the New Deal indeed.
By the way, the controlled irresponsibility in Europe took place earlier when Draghi (also MIT), now prime minister in Italy, declared that he would do whatever was needed to save the euro.
Whether all this makes Biden a true progressive or Krugman a revolutionary is besides the point. In other words: of course not.
Everything must change so that everything can remain the same. But maybe a bit better.
Biden appears to have learned from Obama’s mistakes. I’m not sure how influential Krugman really his. His writings are a bot predictable and monotonous, at least in the Times, but maybe you need these two qualities in order to be influential.