As Posner and others have indicated, there appears to have been a huge conversion of economists toward Keynesian deficit spenders, but the evidence that produced such a “conversion” is not apparent (although maybe most economists were closet Keynesians all along). This is a serious recession, but Romer and Bernstein project a peak unemployment rate without the stimulus of about 9%. The 1981-82 recession had a peak unemployment rate of about 10.5%, but there was no apparent major “conversion” of economists at that time. What is so different about the present recession compared to that one, and to other recessions since then, that would greatly raise the estimated stimulating effects of government spending on various types of goods and services?
It is relevant in answering this question that the origins of this recession were in the financial sector, and especially in the excessive mortgage credit to sub prime and other borrowers. The widespread collapse of the financial sector, and the wholesale retreat from risky assets, clearly has called for a highly pro-active Fed. But it is not obvious why this should lead to greater confidence in the power of government spending stimulus packages. Of course, perhaps the prior emphasis on crowding out, and skepticism toward the stimulating effects of government spending, were wrong, or that recessions were too short and mild after the 1981-82 recession to call for Keynesian-type stimulus packages.
This is an excerpt from a longer essay, but, I think that relevant context is not removed. I don’t think that anyone can read the whole post and doubt that Becker claims that it is mysterious that fiscal policy, as opposed to monetary policy, is back in fashion now compared to 1982.
Evidently, he either doesn’t know that the target federal funds rate is “0 – 0.25” or doesn’t think that this fact is relevant to the discussion.
Is it really possible that a Nobel laureate in economics isn’t familiar with the argument that the effectiveness of monetary policy changes when a nominal interest rate reaches zero ? Is there any other explanation for why he wrote what he wrote ? Even if he were completely dishonest he can’t really hope to keep the current target federal funds rate a secret can he ?
The rest of his post is based on the argument that the market economy can’t get workers into vacant jobs in response to a shock. I don’t mean that this happens slowly or is costly, he assumes that it doesn’t happen at all (the post contains no discussion of labor market dynamics at all and doesn’t acknowledge in any way that there is any such thing).
I honestly don’t know what’s going on. I think over at U Chicago they have decided that Keynes was wrong, that what he wrote was obvious nonsense and concluded that any argument that comes to their mind must be a valid refutation of Keynes.
update: Minds think alike.
update II: My further thoughts on Krugman’s further thoughts after the jump
Update III: Minds think alike II. Now I understand. Becker was irritated that Fama was getting all the attention and decided to see how many links he could get. Looks like Fama is toast.
I think there is another contributing factor to the silliness in Chicago. The arguments for the stimulus are basically straight from Keynes. You and other supporters basically state that macroeconomics has made no progress in 70 years on how to address the current situation. Now aside from questions of left vs right, that is deeply offensive to economists in Chicago who are proud of that universities role in the rational expectations revolution.
I think that aside from hostility to public spending and to the idea that the government can improve on market outcomes there is also a deep deep hostility to Keynes, Hicks, Samuelson (the macro-economist) etc. I mean if you had a disease, and your trusted physician didn’t know what do do with it and someone argued that your 4 humors were out of balance and the solution was something that seems to have worked once in the past, how would you react ?
I think that a little voice screams “that’s nonsense” whenever they hear about “multipliers” and “fiscal stimulus.” The strangest contributions are those of Fama and Becker who aren’t macroeconomists and who are just sure that Keynes was totally wrong, don’t remember exactly why, but are sure it is something obvious.
A test case of my alternative explanation is Thomas Sargent. He is not ideologically right wing. He is definitely anti-Keynesian. IIRC his only contribution to the debate was to note that the back of the envelope calculations to be found, for example, here are based on a 71 year old model as if macroeconomists had learned nothing in the past 60 years (I don’t know where those 11 years went either). This claim is, of course, true. I don’t even know if he went on to argue against the stimulus. Your view is that Macroeconomists haven’t learned anything which is currently useful in the past 71 years, but you can see how many economists find that conclusion intolerable.