Krugman continues to blog on the inadequacy of the US fiscal stimulus. Alan Greenspan appears to see unemployment going to 10%, but does not "support another stimulus package". So what are we to make of this debate.
Greenspan's policies now stand discredited and the popular view is that his refusal to take the punch bowl away at an appropriate time was largely responsible for the mess the US and the world finds itself in. But what are we to make of Krugman's insistence that a higher fiscal deficit is the answer to the US problem. All that we learned of economics - especially in the context of India, seems now to have been turned on its head. It was always argued that small government is important - so are the rules different for the US and for other economies? Intuitively, if the answer to a problem caused by excess liquidity is to infuse more liquidity, I'm afraid I find this completely unsatisfying. But Krugman is a nobel prize winner, so must know his stuff.
In my defense, I offer three arguments
(1) If the economists really had the world modeled correctly, why are we in the mess we are in?
(2) I quote Fischer Black (1986)
In the end, a theory is accepted not because it is confirmed by conventional empirical tests, but because researchers persuade one another that the theory is correct and relevant.
(3)Emanuel Derman, in a presentation on quant finance in 2002 - had this to say on financial modeling
There is no fundamental theory in finance. There are no laws.
That s why many of the textbooks are so mathematically rigorous.
I recommend that we stick to the tried and tested - if the model does not seem to be sensible, stick to the sense and chuck the model.
1 comment:
There are many interesting trends beginning to emerge from the start of this recession which will settle many important debates of the new century. Questions like Dollar dominance, US as a super power, global economic dependence on Energy Markets etc. have been more or less answered. One interesting debate which is still continuing is the use of monetary versus fiscal policy during the time of recession. Depression Era and Keynesian Economists like Bernanke, Krugman have come to the lime light and continue to place emphasis on fiscal deficits. To be fair to the monetarists, Greenspan has faded away and Freidman is no more there to argue on their behalf.
Since, most of the economists agree on using less fiscal measures during good times, the problem is profound during recessionary period. Compelling evidence for both the sides can be found only in recessionary periods in US like fiscal measures worked very well in Great Depression while it failed during the stagflationary period of 70s and early 80s in US.
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