Tuesday, May 06, 2003

Wow. Apparently my series of pieces on Donald Luskin's attacks on Paul Krugman has prompted the man himself to link to my own humble site in his latest piece. It is (appropriately enough) entitled "elephant shit" and deals with the concept and history of liquidity traps.

I'm honored.

Here's Krugman detailing the modern history of liquidity traps:

By the 1990s, however, the liquidity trap had largely (though not entirely) vanished from economic discussion. The Fed had demonstrated its power in ending recession after recession; there seemed no reason to doubt that it could always do so at need.

Then came Japan, which by 1996 looked an awful lot like a country in a classic liquidity trap. And that was scary: it meant that our grandfathers weren't as stupid as we thought, that 1930s-style slumps may not be that easy to cure, after all. Or as I put it a couple of years later, it was as if a disease we had thought controlled had reappeared in a form resistant to all the usual antibiotics.

At first I didn't believe it; in early 1998 I set out to write down a fully worked-out, no loose ends model to show that liquidity traps can't really happen. (The purpose of such a model is to help you think clearly about an issue - realism is not the point.) To my surprise it showed that liquidity traps can indeed happen; Japan's trap was real. And Japan remains stuck in that trap.

That in itself makes the liquidity trap a very important subject: Japan is the world's second-largest economy, and not that long ago seemed to be the economy of the future. But there was obviously more. If it could happen to Japan, why not to us? As the US bubble of the 90s grew to rival that of Japan in the 80s, one couldn't help wondering whether we might see a similar aftermath.

Sure enough, here we are, Fed funds at 1.25, with an economy still losing jobs. We hope that things will pick up, that a year from now this will all seem like a bad dream. But at the very least we're having a serious scare.

And do I need to point out that the case for fiscal policy to create jobs rests mainly on the fact that the economy is near a liquidity trap? If the interest rate were currently 5 percent, we'd all say that the Fed needs to cut more, while the Treasury and the Congress should focus on long-term fiscal responsibility. It's the Fed's possible ineffectuality that makes us reach for another tool.
I've said before that I'm not an economist, but I can recognize and respect the work that they do- and in turn recognize what's truly in contention and what isn't. That was and is the best part about Krugman's popular work. He lays out the economic terrain well enough and simply enough that it's easy to tell when you're looking at a serious debate within the field, or crank science on the order of magnetic healing and phlogiston-based combustion.

It remains important, however, to avoid mixing up forests and trees. This individual salvo at Prof. Krugman, and even the attacks on Prof. Krugman himself, are merely a part of the larger whole. If this attack were aimed at a supporter of the Bush administration, it would have been quickly rebutted by a whole bevy of sources, and there are countless outlets by which the rebuttal can be spread and repeated, to the point that the rebuttal becomes better known than the original charge. That this has a lot to do with the power of the Presidency is important, but as "Issuesguy" has been pointing out, it is vitally important to look beyond the words, and start looking at the broader patterns of behavior, because politics nowadays is as much about how, where, and how often words are used as it is about the words used themselves. When employing the Big Lie, after all, it's almost unimportant as to what the substance of it really is, as long as its consistent and serves some political aim.

Robert Cox once said that "all theory is made for somebody and for some purpose". I don't necessarily buy that in its totality. The willingness to sacrifice (or ignore, or deny) empirical reality for political expediency is one of the major reasons why American politics is in the mess it is and the neo-conservatives have been so wildly successful. When trying to parse the arguments of transparent operatives like the Krugman attackers and cranks like Luskin, however, looking at whether it's "for somebody and for some purpose" is a useful tool at figuring out what's really going on.

In this case, of course, it's all about trying to blunt one of the most unapologetic and successful critics of the Bush administration anywhere. That's the Alpha and Omega of all of this, and it doesn't matter whether Krugman's right or wrong, or whether he's an economist, a journalist, or just a random guy on the street. If they're critics, they need to be checked, and because many of his critics honestly believe that their political opposition are at least misguided and at worst evil, they'll do or say anything that serves their purpose. These ends justify any means.

Edit: slight wording change on previous paragraph

Thanks again for linking, Prof. Krugman.

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