"Wreckage"

From The History of the Phillips Curve: Consensus and Bifurcation by Robert J. Gordon (PDF, 41 pages, 2008):

Introduction

The history of the Phillips curve (PC) has evolved in two phases, before and after 1975, with a widespread consensus about the pre-1975 evolution, which is well understood...

The pre-1975 history is straightforward and is covered in Section I. The initial discovery of the negative inflation–unemployment relation by Phillips, popularized by Samuelson and Solow, was followed by a brief period in which policy-makers assumed that they could exploit the trade-off to reduce unemployment at a small cost of additional inflation. Then the natural rate revolution of Friedman, Phelps and Lucas overturned the policy-exploitable trade-off in favour of long-run monetary neutrality. Those who had implemented the econometric version of the trade-off PC in the 1960s reeled in disbelief when Sargent demonstrated the logical failure of their test of neutrality, and finally were condemned to the ‘wreckage’ of Keynesian economics by Lucas and Sargent following the twist of the inflation–unemployment correlation from negative in the 1960s to positive in the 1970s.

From After Keynesian Macroeconomics by Robert E. Lucas and Thomas J. Sargent (PDF, 34 pages, 1978):

1. Introduction

We dwell on these halcyon days of Keynesian economics because, without conscious effort, they are difficult to recall today...

That these predictions were wildly incorrect, and that the doctrine on which they were based is fundamentally flawed, are now simple matters of fact, involving no novelties in economic theory. The task which faces contemporary students of the business cycle is that of sorting through the wreckage, determining which features of that remarkable intellectual event called the Keynesian Revolution can be salvaged and put to good use, and which others must be discarded.

For the record...

The "negative" correlation of the Phillips Curve is the tradeoff: a little more inflation and a little less unemployment, or the reverse. The "positive" correlation is when both inflation and unemployment increase, or both decrease.

The negative correlation displays the tradeoff for given economic conditions. The positive correlation shows what happens when economic conditions improve or get worse. When people deny the existence of the tradeoff, it is because they are considering the long term, during which the condition of the economy varies. Even so, the tradeoff still applies to the short term.

But the proper fix for our economy is not to fiddle with the short-term tradeoff. The proper fix is to figure out how to improve conditions over the long term.

PK

Paul Krugman is very good with words. That probably accounts for the intensity of opinion about him, both for and against. But sometimes he's too good with words, and that allows him to change the subject and avoid answering important questions.

Here's Krugman from 24 May:

Did The Postwar System Fail?

I’ve been posting about the contrast between the popular perception on the right that America had slow growth until Reagan came along, and the reality that we did fine pre-Reagan, in fact better; see here, here, and here. And what I’m getting as a common response — including from liberals — is something along the lines of, “That’s all very well, but by 1980 the postwar system was clearly failing, so what would you have done instead of Reaganomics?”

Which all goes to show just how thoroughly almost everyone has been indoctrinated by the current orthodoxy.


Krugman takes the "common response," phrases it better than anyone else, and then proceeds to ignore the question.

You cannot ignore the question, Krugman. It is the most important question since Keynesianism fell into disarray. Here's PK's answer:

Here’s what I think: inflation did have to be brought down — and Paul Volcker, not Reagan, did what was necessary. But the rest — slashing taxes on the rich, breaking the unions, letting inflation erode the minimum wage — wasn’t necessary at all. We could have gone on with a more progressive tax system, a stronger labor movement, and so on.

... Radical change happened because a powerful political movement wanted it, not out of economic necessity.


Radical change happened because Reagan's people had ideas and Krugman's people didn't.

So Krugman says we needed tight money to break the upward spiral of prices. He offers nothing else. But by 1980 the postwar system was clearly failing, Paul. And you would have done nothing about it.

Disarray

Thanks for the update, Kevin.

Blinder:

"Unfortunately, macroeconomics has been in utter disarray since the Keynesian consensus broke down in the 1970s."

Heilbroner:

"Keynesianism was the economics of the world from around 1940 through the 1970s, but in the 1960s and 1970s came this extraordinary and quite unexpected inflation. And that took the bloom off the [Keynesian] rose. The Keynesian schema, which had tremendously wide acceptance, had no theory of inflation.... Since then, no new view that anyone can agree on has emerged, and there has been a vacuum in terms of a defining picture of what the hell economics is.... In the history of economic thought there has never been such a prolonged period of intellectual disagreement."

Not heard much on the topic lately. Until today. In a comment on Scott Sumner's Does macro need a paradigm shift?, Kevin Donoghue wrote:

So in my view you can only expect to see agreement on what tight money means when there is agreement on the appropriate model. That seems to be much farther away than it was in the 1970s when students could look at papers by Tobin and Friedman and say, what’s the argument about, the length and variability of lags, is that all? Fine tuning bad, coarse tuning good. There was a mainstream then, with only Austrians and Post-Keynesians and suchlike outside it. There is no mainstream now....

Not yet, Kevin. I'm workin' on it.