Rajan's Reply

Ragu Rajan replies to Krugman and Wells attack on his book Fault Lines. The book is excellent, no time to discuss it now. The reply is devastating and valuable.

Here is a small taste (but important point):

Krugman starts with a diatribe on why so many economists are “asking how we got into this mess rather than telling us how to get out of it.” Krugman apparently believes that his standard response of more stimulus applies regardless of the reasons why we are in the economic downturn. Yet it is precisely because I think the policy response to the last crisis contributed to getting us into this one that it is worthwhile examining how we got into this mess, and to resist the unreflective policies that Krugman advocates.

Read the whole thing.

Historians versus Economists?

Gideon Rachman had a really abominable article in the FT. It is not his call for economists to become less vain that I have trouble with:

The vanity of economists needs to be challenged. Above all, their claim to scientific rigour – buttressed by models and equations – must be treated much more sceptically.

I am not really sure who is so vain. But the use of models and equations is of course misunderstood here. Models and equations are used to make arguments understandable, not to pretend. But this is not the worst. Rachman quotes Stiglitz calling for new paradigms in economics, and then argues:

For somebody educated as a historian, there is an obvious alternative conclusion to draw from Prof Stiglitz’s opening observation. And that is to conclude that the entire attempt to treat economics as a “science ... defined by its ability to forecast the future” is misconceived.

Economics is not about predicting the future. That is a straw man. It shows how little Rachman understands about economics. Fortunately, his FT colleague, Tim Harford has a good column that deals with this. Here is the money shot:

Historians deal in hindsight. It is a wonderful thing. But it is not the only thing. I wonder whether Gideon, intoxicated with a heady brew of Niall Ferguson and Herodotus, has forgotten that.

Tom Sargent Interview

Tom Sargent is interviewed by Art Rolnick on the state of modern macro. Very nice read. But the best part is this exchange:

Rolnick: I’ll come back to that in a second, but you haven’t said anything yet about what is to be gained in terms of understanding financial crises from importing insights of behavioral economics into macroeconomics.

Sargent: No, I haven’t.

Read the whole thing.