Amity Shlaes

Amity Shlaes: The Forgotten Man

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Benn Unedited

by Amity Shlaes
February 18, 2009

Clive Crook of the FT and the Atlantic has sounded a welcome note of civility to the blogosphere. (If it’s all cacaphony, it won’t be useful.)

My colleague Benn Steil replied to Clive, and attacks on his own solid new book with Manuel Hinds, on FT.com. The unedited version of Benn’s reply is pasted below:

Blogs Gone Wild
by Benn Steil

“Many of the most successful economics blogs promote communication within political groupings, not across them. On the web you best build an audience by organising a claque and stroking its prejudices. Extend elaborate courtesy to people you agree with and boorish contempt to those who do not get it. Celebrate exasperation and incivility as marks of intellectual authenticity – an attitude easier to tolerate in teenagers under hormonal stress than in professors at world-class universities” (Clive Crook, FT: 8 February).

Two days before Clive’s column appeared, I experienced firsthand the econoblog treatment he describes. On 6 February, I published an op-ed in the FT (“Keynes and the triumph of hope over economics”) criticizing the tendency of economists to invoke Keynes, rather than logic and evidence, in support of any and all forms of new deficit spending, which are now massed together under the cozy umbrella of “stimulus” – a term that closes discussion by simply assuming the merits it claims. This provoked a call for my dismissal from blogger Brad DeLong (a California state employee with lifetime employment). Fellow blogger Paul Krugman, who is apparently too busy to read what he criticizes, then parroted DeLong’s description of me as a “wingnut”, and reprinted DeLong’s curious misstatement of what I’d written, together with a link to DeLong’s blog entry (rather than to my article, of course).

According to DeLong and Krugman, my article says that Jacques Rueff (1896-1978), whom DeLong dismisses as a “French crank,” demolished the foundations of Keynesian economics. Despite my admiration for Rueff, a renowned economist, statesman, and judge at the European Court of Justice, I never gave him such credit. What I wrote was that Rueff had demolished the Keynesian foundations of Krugman’s claim that a trillion dollars of new deficit spending would “employ . . . money that would otherwise be sitting idle.” For those interested in what Rueff actually wrote, it can be found here: “The Fallacies of Lord Keynes General Theory,” The Quarterly Journal of Economics, Vol. 61, No. 3, May 1947, pp. 343-367.

Krugman’s claim, I argued, is manifestly false. Institutions are not hoarding dollar bills, awaiting the issuance of stimulus bonds. Any funds they choose to make available to the government, beyond their current holdings of Treasurys, will have to be withdrawn from the banking system or the market for corporate securities. DeLong retorted that the evidence that Krugman is right is apparent in the fall in monetary velocity. But this is a non-sequitur, since if Krugman had actually been using the word “idle” to mean circulating at low velocity, he would then have been assuming the very thing he needs to establish – that by outbidding the banks and corporate securities markets for funds, and then spending such funds, the government necessarily increases velocity and stimulates private consumption or investment more than it reduces it by withdrawing the funds from the market. This could, of course, be true. The burden, however, is on Krugman and DeLong to make an argument that it is true. They cannot just assert it. This is, after all, what the entire debate is about.

Harvard’s Robert Barro, writing in the 22 January Wall Street Journal, provides logic and offers evidence supporting the case that it is not true. Krugman, naturally, waves off Barro’s views as “boneheaded”.

I cannot help but think what Keynes and Hayek, friends who engaged in profound and respectful private and public debate about economic policy for decades, would make of the ugly and childish econoblog culture which Krugman and DeLong have helped create.

Benn Steil is director of international economics at the Council on Foreign Relations, and co-author of Money, Markets, and Sovereignty (Yale University Press).

3 Comments

  • Posted by Randall Platt

    The hostility and contempt for rational and dispassionate discourse has crippled our society. We Americans have become an intolerant lot, we have sunk to a winner takes all mentality that views compromise as weakness. Krugman is a talented fellow who deserves respect, but I wonder if he, like others with a similar platform could fill our nations leadership gap by encouraging dialog and tolerance rather than fanning the flames of hate and contempt for anyone who does not agree with them. I can only hope.

  • Posted by JD

    Sir,

    I took the opportunity to read your FT article and was surprised by the following quote:

    “And indeed, we as a profession are making our voices heard in a way we never get the chance to do when the credit is flowing, businesses are investing and consumers buying what business wants to sell.”

    From this quote, I take it you believe credit is not flowing normally, business have cut back on investment and consumers have curtailed spending. Based on this information, I think you are making Krugman and DeLong’s case that the velocity of money is slowing.

    Moreover, you quote Rueff: the government’s “investment programme diverts means of production from the areas where they are more desired to less useful employments, it will reduce the standard of living”. This is your basis suggesting that Rueff “demolished” the Keynesian foundation that justifies the stimulus.

    I suggest to you that there is an unprecedented capital flight to quality and risk aversion bordering on paralysis. Although the credit crisis has eased since November, another leg down will send ripples throughout the banking community that could collapse the free world. Bank failures across Europe, depression in Japan, civil unrest in China, Socialist coups throughout South America, mass starvation in Africa. The probability of these events has never been higher. Financial collapse looms near.

    Perhaps now is the time for a government programme to divert means of production to the areas where they are more desired from less useful employments, in order to increase the standard of living.

  • Posted by MrBill, Eurasia

    That’s okay, Mr. Steil’s, I also questioned Dr. Krugman’s support for capital controls, and the underlying causes of the Asian currency crisis in one of his recent ‘semi-moderated blogs’, and surprise, surprise, my comments on asset & liability mismatches based on the research of Micheal Pettis in “The Volatility Machine, Emerging Economies and the Threat of Financial Collapse” were not printed.

    Apparently Dr. Krugman can use his Nobel prize to comment on any subject he wants, including very publicly criticizing Angela Merckel and Germany’s measured response to the global financial crisis, but no one is allowed to question his insights?

    For the record it is more important for countries like Germany to maintain and expand their social safety nets, even as tax revenue from the recession fall, while asset prices fall to their true economic value, rather than spit on a hot stone, which is what fiscal stimuli are when private wealth has contracted by $50 or $60 trillion in the past 18-months.

    Let asset prices fall to their true economic value, while protecting the weak and the vulnerable in society. That is the role of government. Not Keynesian policies on steroids that wreak havoc with debts and deficits, and leave behind such a debt overhang that they can only be erased through government sponsored inflation and currency devaluation or passed on to future generations of unborne taxpayers.