The NYT’s Book Review today includes a review of Paul K’s new book and while the reviewer nicely summarizes the macroeconomics of the book and our historical moment–the terribly damaging dominance of austerity both here and in Europe–his critiques struck me as wrongheaded.
Complaining about Paul’s exclusive focus on demand, the reviewer conflates the structural with the cyclical:
The rise in unemployment may be largely the result of inadequate demand, but that does not mean there has been no contribution from structural changes like the substitution of cheap foreign workers and innovative technology for some jobs in rich countries.
This is just plain wrong. Technology and trade are ongoing, structural forces that have been influencing jobs and wages and much else for decades. Unless the reviewer is asserting that tech and trade somehow accelerated sharply in the recession, they don’t explain the change in unemployment. And even in expansions, this type of hand-waving falls short. In the Clinton boom, trade and tech were huge factors, yet the job market achieved full employment for the first time in decades. Unemployment fell below 4% for a few months in 2000. Clearly, there was a bubble in the mix—when hasn’t there been in recent years?—but the point is that strong demand offset the trade and tech impacts. And as Paul relentlessly stresses, it’s weak demand that’s to blame today.
The austerians may be excessively fearful of so-called “bond vigilantes,” but that does not mean there is no need to worry about what investors think about the health of a government’s finances.
Krugman has been consistently empirical on this point. His argument is not that investors’ sentiments don’t matter. It’s that they’re embedded in prices and can be followed on an hourly basis. Those numbers—the bond yields on sovereign debt—show that markets judge US debt to be safe and Spanish and Greek debt to be risky. If you want to criticize Krugman on this count, you need to explain what’s wrong with the markets themselves—why they’re giving the wrong signals. Otherwise, you’re into phantom-menace land, just across the way from where the confidence fairy hangs out.
He next takes a swipe at Krugman for not embacing a Bowles-Simpson style budget plan, suggesting Paul would be taken more seriously if he had a plan not just for hitting the accelerator now by for applying the brakes later.
Meh. First, that “accelerator now, brake later” frame doesn’t work–it doesn’t make the politics any easier. Believe me, we’ve tried it, and no one buys it, even though it’s correct–it just comes out muddled (sorry, Peter).
Second, summarizing a more detailed part of his book, Paul’s argument here is perfectly and fiscally sound: get out of the damn recession, apply more progressive tax rates like those in the Clinton years, and there’s no reason we can’t stabilize the near term debt (in the longer term, it’s all about getting health care costs under control, something Paul’s also consistently stressed).
If you want to criticize Paul’s book–and Joe Stiglitz’s excellent new book on inequality as well–it’s that they make the solutions sound easier than they are. And I think I understand this. These Nobelists see the solutions so very clearly that it looks easy to them. Their logic is, in fact, air-tight and our natural experiments with austerity are turning out exactly the way they (and I, and others) predicted. Remember, in economics, go with the guys and gals whose models best explain what’s really happening, not what you wish was happening, not what you think should be happening, but what’s actually in the numbers.
So I really wouldn’t waste time trying to prove that Paul and Joe et al are wrong about austerity, bond vigilantes, Bowles-Simpson, confidence fairies, and “very serious people.” Instead, I’d urge them–P&J–to think more about real politics and how to get out of this mess given the stark realities of political dysfunction.