Our economic woes are not complex or mysterious

[Kurt_and_Hunter]

September 11, 2010, 10:18 am
One Model To Rule Them All
Paul Krugman


. . .

I was, in a way, ready for this particular mess: a decade earlier, trying to make sense of Japan’s woes, I had thought through the economics of a liquidity trap. Moving back and forth between that basic model and its translation into more traditional IS-LM analysis (pdf), I had a framework ready-made for the mess we’re in.

And that framework has held up very well. That basic framework led me to conclude that the Obama stimulus was much too small; that the huge increase in the monetary base wouldn’t be inflationary; that interest rates would stay low as long as the economy remained depressed, despite huge government borrowing. All this has turned out to be true.

Now, there’s no virtue in sticking with a model if it fails the reality test; but in this case the model — unlike the economy — has performed well. By contrast, many policy makers and, sad to say, economists, have been frantically inventing new models and doctrines to justify whatever the currently fashionable policy recommendations are. And looking back at that 1999 paper, I see that I anticipated this, too:

In the case of the liquidity trap, however, conventional textbook models imply unconventional policy conclusions … To defend the conventional policy wisdom one must therefore appeal to various unorthodox models – supply curves that slope down, demand curves that slope up, multiple equilibria, etc.. So unworldly economists become defenders of analytical orthodoxy, while the dignified men in suits become devotees of exotic theories.

The tragedy of our current economic mess is that the solution to our problems is not, in fact, mysterious — basic macroeconomics, macroeconomics that has worked quite well in the last two years, shows the way. But the men in suits have decided that they know better — and the slump goes on, and on, and on.

. . .

The original post is full of hyperlinks, so best to read it there:

http://krugman.blogs.nytimes.com/2010/09/11/one-model-to-rule-them-all/

[Kurt_and_Hunter]

1. ...

[msongs]

2. who put the people who CAUSED the problem in charge of the solution & can that be changed?

replace the problem causers with people who have solutions, that is.