New Keynesians vs. Old Keynesians
In a post aimed at economist Paul Krugman, Tyler Cowen writes that “it is a bit of an embarrassment for many commentators that the (admittedly weak) recovery is coming right after the end of the fiscal stimulus.” I don’t understand this, for at least three reasons:
- What makes this recovery different from previous recoveries? Cowen appears to believe we have turned the corner. I hope he’s right. But the economy has added an average of 178,000 jobs per month over the last four months. During the first four months of 2011, the economy added an average of 206,000 jobs per month. Perhaps the next four months will look like January (243,000 jobs) rather than October (112,000 jobs), but we have been through longer stretches of robust jobs growth than this one. It seems early for sweeping claims about what the recovery has proven.
- There is a detailed debate about New Keynesian models and Old Keynesian models that is well above my head. But it’s worth noting that the foundational argument for the stimulus package -- the infamous Bernstein-Romer paper -- anticipated a fairly rapid recovery even in the absence of significant fiscal stimulus. That paper was clearly too optimistic, but it also suggests that the pro-stimulus side was working from a model that assumed the economy could turn even in the absence of significant government support. It would just be an uglier, slower recession. Here’s the graph, with reality -- at least, reality through October 2011 -- added onto the top:
- I would like to hear more about how Tyler sees “old” and “new” Keynesians as differing in their current approach to the economy. Most of the people he’s criticizing seem to believe something like, “the economy has a bit of momentum to it, but the recovery would be more secure if we passed a larger payroll tax cut, sent some more aid to state and local governments, embarked on a program of infrastructure spending, got a stronger commitment to growth from the Federal Reserve, passed a long-term deficit reduction plan that includes tax increases, and hoped for the best in Europe.” Which of these recommendations do New Keynesians disagree with?
Here’s Krugman’s response, by the way,