Wednesday, April 24, 2013

The Mistakes Economists Make

With the exposure of the errors and other flaws in Reinhart-Rogoff and other papers, the theoretical basis of austeriean economics is in ruins. Meanwhile, the devastating consequences of austerian policies continue to wreck havoc on much of the world. Once again, Keynes prophecy about the powers economists for evil as well as good is confirmed. Astronomers errors probably mostly affect only their own community, but the mistakes of economists spread national, continental, or global catastrophe.

Paul Krugman points out that the reaction of the architects of disaster to the collapse of their predictions and theories has been to get hurt feelings, protest that nobody understands economics, and that the people who got it right - Krugman, Wolf, and bunch of others, includes Keynes - are a bunch of meanies.

When it comes to inflicting pain on the citizens of debtor nations, austerians are all steely determination – hey, it’s a tough world, and hard choices have to be made. But when they or their friends come under criticism, suddenly it’s all empathy and hurt feelings.

We saw that in the case of Olli Rehn, whose friends at the European Commission were outraged, outraged when I pointed out, using slightly colorful language, that he was repeating an often-debunked claim about economic history. And today we see it in Anders Aslund’s defense of Reinhart and Rogoff against what he calls a “vicious” critique by Herndon et al.

Aslund praises R-R for providing

an important corrective to the view that fiscal stimulus is always right – a position that is common across the Anglo-American economic commentariat, led by Paul Krugman in the New York Times.

This is a curious thing for him to say, because it’s an outright lie; as anyone who has been reading me, Martin Wolf, Brad DeLong, Simon Wren-Lewis, etc. knows, our case has always been that fiscal stimulus is justified only when you’re up against the zero lower bound on interest rates. I can’t believe that Aslund doesn’t know this; why, then, would he discredit himself by repeating an easily refuted falsehood?

Aslund is another one whose work has been discredited by analysis and history, of course. He and those he defends should be glad they live in such an unjust world. In a more just world Rehn would be stoned to death in a Madrid square.