I really liked Jeff Madrick’s book, Seven Bad Ideas. Its subtitle was, “How Mainstream Economists Have Damaged America and the World.” It was written at the perfect level for me. And overall, it was widely praised. But some economists had a problem with the book because, they claimed, no actual economists believed these ridiculous ideas. The most vocal critic was Brad DeLong. And I’m sympathetic to this argument. The truth is that most economists don’t believe in things like Say’s Law, which says that supply creates its own demand. But there is a more important level where DeLong was totally wrong: which ideas of economists have poisoned policy decisions over the last few years?
When it comes to the nexus between economics and policy, the question is not what the consensus of economists is. The question is whether politicians can find mainstream economists who are willing to tell them what they want to hear. And they are. It isn’t necessary, as it is with climate change, to set up special think tanks designed only to muddy the water. As I’ve noted in the past, no less respectable an economists than Greg Mankiw is always willing to finesse his arguments for the greater good of his conservative policy preferences.
Monday morning, Brad DeLong himself wrote, Time for a Rant!: Why Oh Why Cannot We Have Better Economists? It is regarding an article by just such an economist, David K Levine. He is the John H Biggs Distinguished Professor of Economics at Washington University in St Louis. Pretty impressive. Yet what he has to say on the subject of monetary stimulus is a fallacy known to economists two centuries ago. As best as I can tell, Levine is doing what I see a lot with libertarians: creating simplistic models of the economy that have never been right and then drawing broad conclusions from them.
In his paper, Levine creates a model economy with four people who barter with each other. Then he disrupts the economy. Then he says that adding money into the economy would not fix the disruption. To me it’s just bizarre. How do you create a model based upon barter to prove that monetary policy doesn’t work? Regardless, DeLong changes the model slightly and shows that — What a surprise! — monetary policy actually does work. It is amazing to me that economists do this all the time: decide that something that seems obvious really isn’t, and claim to prove it with some trick. One doesn’t see climate scientists saying, “There can’t be global warming because the earth has to give off as much energy as it receives!”
DeLong ended his rant by asking a question:
I think we all know why this is. Economics is poisoned by political ideology. And it’s kind of funny, because in my experience, economists are the most pretentious of the soft scientists. But I think these things are related. Economists tend to live in their ideological bubbles even while thinking that they are just looking at the facts. And that’s why economics is so dangerous. Sure, Brad DeLong beat up Levine very badly. But I doubt it will matter to Levine. And it certainly won’t matter to Rand Paul, who will find Levine’s fallacy very useful in pushing his hard money policies.