Neo-Paleo-Keynesians Krugman and DeLong
I can’t resist commenting on the discussion between Paul Krugman and Brad DeLong on the young Stanley Fischer (part of the problem is I can’t get the equitablog comment system to work).
The one minute summary is that Brad discussed the history of thought and noted that way back when new Keynesian macro was new, it was largely based on the thought of Milton Friedman. Brad only discusses thought up until 1985 (which happens to be the year I became an economist). Krugman politely notes that since 1985 Keynesian economists have continued to study economies and they are less sure that Friedman was right and tend more to agree with uh Keynes. He calls this a neo-paleo_keynesian counter-counter-counter-revolution. Krugman’s post is excellent as usual (read it). It amounts to “no it’s not just the zero lower bound — we now disagree with Friedman about other things too.”
Krugman’s conclusion “we’re also seeing, within the Keynesian camp, a distinct if polite rise of neopaleo-Keynesianism.”
The discussion is ironic, since Brad is very neopaleo. My pointless comments.
Consider Brad’s five points:
1. Price stickiness causes business cycle fluctuations: You clearly need price stickiness to make sense of the data. However, there is now widespread acceptance of the point that making prices more flexible can actually worsen a slump, a favorite point of Tobin’s.
This is also a favorite point of Brad’s and the topic of his first published article (DeLong and Summers 1986) (published in 1986 so just out of his time interval). In general I think DeLong and Summers were both crypto-neo-paleo Keynesians back in the late 80s.
Krugman summarizing Brad summarizing new Keynesian thought pre 1985 again (my emphasis).
3. Business cycles are fluctuations around a trend, not declines below some level of potential output: This view comes out of the natural rate hypothesis, and the notion of a vertical long-run Phillips curve. At this point, however, there is wide acceptance of the idea that for a variety of reasons, but especially downward nominal wage rigidity, the Phillips curve is not vertical at low inflation. Again, a very Tobinesque notion, as Daly and Hobijn explain.
Here again it is key that Brad rounded to the nearest lustrum (normal people round to the nearest multiple of five but you know how Brad is with language). It was agreed in the 1986 NBER macro conference that the fluctuation around trend view was disproven by Summers and Blanchard (1986). Getting the link (warning pdf) I note that the editor of the volume was one Stanley Fischer. This did not prevent new Keynesians such as Blanchard from using the fluctuatons around trend assumption to identify demand shocks.
See also DeLong and Summers (1988) (warning pdf) arguing against fluctuations around trend. This quote should be enough.
In this paper we raise questions about the validity of the natural rate
hypothesis and argue that demand management policies can and do
affect not just the variance, but also the mean, of output and unemploy-
My point (if any) is that the neopaleo revival isn’t really new. When macroeconmics was totally dominated by the debate between new Keynesians and new Classicals (AKA fresh water macroeconomists) there were a few paleo Keynesians whose arguments might be accepted at the conference (Blanchard and Summers 1986) or generally dismissed (DeLong and Summers 1988) but which were ignored in most papers in the literature in either case.
“we’re also seeing, within the Keynesian camp, a distinct if polite rise of neopaleo-Keynesianism.”
Not always polite. Here is another post by Brad at equitablog.
But then Mike Woodford and company lost sight of the goal. Yes, New Keynesian models with more or less arbitrary micro foundations are useful for rebutting claims that all is for the best macro economically in this best of all possible macroeconomic worlds. But models with micro foundations are not of use in understanding the real economy unless you have the micro foundations right.
All in all Krugman chiding DeLong for being soft on new Keynesians is the height of irony.
<------------- another jump to the really pointless usual rant ----->
I don’t know where to put this, but on one key point DeLong and Krugman agree (as usual) and I don’t agree with them. This is one of the main bees in my bonnet.
In 1965-1975 a “Keynesian1” economist was somebody who believed that:
The Phillips Curve was a well-anchored relationship so that you could create and maintain a high-pressure low-unemployment economy with a slightly higher inflation if only the government would exercise minimal guidance to coordinate average wage and price changes at their desired level.
I believe that this is a myth and that DeLong is discussing a straw Keynesian1 invented by Milton Friedman. I refer you to James Forder at Oxford.