Friday, January 7, 2011

"Wink" Economics

In his "balanced budget stimulus" article -- reviewed over at MacroMania and also on the Billy Blog -- Robert Shiller writes:

Paul Samuelson, an economist at M.I.T., first drew national attention to the balanced-budget multiplier in 1943, seven years after Keynes introduced his theory. The multiplier was an immediate consequence of the Keynes theory, but Keynes didn’t articulate it himself.

See that? The multiplier was an immediate consequence of the Keynes theory, but Keynes didn't say it himself. Know what that is? That's what a Keynesian would do, put his own words in Maynard's mouth. Sorry to interrupt. Resume Shiller:

Economists embraced this multiplier because it seemed to offer a solution to a looming problem: a possible repeat of the Great Depression after wartime stimulus was withdrawn, and when new rounds of deficit spending might be impossible because of the federal government’s huge, war-induced debt.

In other words, economists of the time did not believe what Keynes had been telling them -- that the deficit spending would cure the Depression. Resume Shiller:

It turns out that this worry was unfounded. The Depression did not return after the war. But in the early 1940s, economists justifiably saw the possibility as their biggest concern. Their discussions have been mostly forgotten because they didn’t have much relevance for public policy — until now, that is, when we again have a huge federal debt and a vulnerable economy.

Shiller says it turns out that the worry was unfounded. Still, he finds the concern justifiable then, and the discussions relevant today.

In other words, Robert Shiller -- an economist I've heard of, so he's probably pretty good -- is judging the possibilities of economic performance not by his understanding of things, but by as-things-turn-out results. This is the level of economic thought that fails to foresee financial crisis.

What is Shiller saying, really? He offers us WYNK economics: Well, Ya Never Know.

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