A postscript to Delong and Krugman





Brad is unpersuaded by my response.  He is broadly right in my view that models function both as discovery tools and as ways of organizing and codifying thought. The danger comes when too primitive a model is regarded as too powerful a discovery. Thus Krugman was right to recognize that first generation models of currency crises were an inadequate basis for making policy in response to many actual currency crises.

On the issue at hand my judgement is that excessive spending and fear of a sudden stop can push the IS curve back leading to contractionary capital outflows. I cite the work of Blanchard et al in support of this proposition. With a bit of political economy, the argument can be extended. Suppose countries in danger of high inflation are more likely to turn populist.  It was Keynes after all who introduced animal spirits and warned Roosevelt about business confidence.

Again, I don’t think any of this is of concern for the US right now and I think my track record in favor of fiscal expansion notably in my work with Brad is clear enough.

The point though is that responsible policy makers like Janet Yellen and Stan Fischer may sometimes come to judgements different from mine. I find it unhelpful and likely wrong to attribute this to a failure to understand and appreciate basic macroeconomics.


Paul now offers some observations. He is right that we are not all very far apart. I agree with him that one needs more than attitude, one needs a logically consistent view of how the world works. As my response to Mike Spence and Kevin Warsh illustrates I too am impatient with fear mongering attitude as an approach to analysis.

We have I think two remaining disagreements. First, I am more willing than Paul to credit the possibility that people with substantial experience and even a track record of making money by predicting markets, have important insights even if they cannot speak the language of “models” in the way I teach in economics. Hyman Minsky is an example of a scholar whose warnings were ignored in part because they were not formalized not because they were incoherent or illogical.

Second, on the issue of confidence crises I think Paul is way too serene for reasons Blanchard’s work makes clear. If loss of confidence in their government or economy makes people less wealthy, they will spend less and that is contractionary. This objection may for some reason be wrong but I do not see why it should be dismissed apriori. This is a case where I think reliance on formalism may lead people astray.

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