Raghu Rajan polarizes with his essay

Greg Mankiw calls it wise, John Cochrane likes it, David Brooks likes it, and I liked it, but other people are upset or less impressed.  Karl Smith flips out.  Adam Ozimek points out one misunderstanding of the piece, not the only one I might add.  The essay itself is here.

Ezra Klein argues that Rajan should not have presented long-term vs. short-term thinking as either/or (for more on the “false choices” view, read here).  To be sure, some policies such as immigration reform help both the short and long-term problems.  Still, any given dollar must be spent somehow and “the stimulus model” and “the long-term investment model” are indeed competing visions for the allocation of resources.  Think of it as having to choose a rate of discount for evaluating expenditures.  I say choose the low discount rate, which of course still may justify those forms of stimulus with long-term payoffs.  Ezra also notes that long-term investments may require short-term sweeteners to pass, but I see that as an illustration of Rajan’s point, namely that we are not very interested in the long run for its own sake.

Once the problem is presented in sufficiently precise microeconomic language, we can see where the real choice has to be made, namely at the level of the discount rate.

Rajan wants to spend money as an investment model would suggest.  There is an “investment drought,” including from our government, and the growth-inducing parts of discretionary spending are coming under increasing pressure.  AD stimulus is/would be less effective with each passing day.  Raghu’s case on this point is strong, maybe you don’t agree but I don’t see that the critics have grasped it with sufficient depth.

In the past, in other contexts, Karl Smith and Matt Yglesias have defended “muddle through” and short-term thinking in policy.  I see the public choice literature — both theoretically and empirically — as suggesting political discount rates to be far too high.  Climate change is Exhibit A, but other examples are numerous.

Krugman is upset at Rajan, but where to begin?  He misunderstands Rajan on structural unemployment, for a start see Adam’s post of correction listed above.  (In general Krugman has written and rewritten more or less the same post against structural unemployment at least a dozen times without responding to, or even presenting, a strong version of the argument.  It’s an intellectual Turing test fail, and maybe I’ll cover this some other time.)

From Krugman, there is more:

Most important, as Karl Smith says, is the fact that Rajan’s injunction that we focus on long-run growth isn’t responsible — it’s deeply feckless. The truth is that we don’t know much about promoting long-run growth, whereas we know a lot about promoting short-run recovery — which is a very different problem. In practice, stroking your chin and talking about the long run is mainly an excuse for doing nothing.

I would find it more useful if Krugman simply stated his preferred discount rate, and whether he wishes to count highly uncertain results for nothing (I don’t think so).

In any case, Krugman gets it backwards.  Any Martian visiting the economics blogosphere, or for that matter Krugman’s blog, could tell you that most of micro is a more or less manageable topic, whereas macro induces economists to start thinking of each other as idiots and fools.

More substantively, we know a fair amount about promoting growth, for instance read Alex’s The Innovation Renaissance, much of which has been endorsed by left-wing thinkers too.  Read the new Acemoglu and Robinson book.  Even Robin Wells thinks we know how to promote long-run growth.

One might try to draw a distinction between “once and for all” changes in output and permanent boosts to the rate of economic growth, a’la Solow.  In this context, that won’t wash, even if it is otherwise a defensible distinction (debatable).  If we could get many “one time” gains today, for five or ten years running, that would be excellent and would boost growth and create jobs, whether or not we would be boosting the rate of innovation twenty years out.  Krugman in other contexts argues for such gains all the time and with great vehemence and certainty, not with the faux temporary agnosticism exhibited above.

Finally, Rajan is a case for testing Krugman’s oft-stated view that we should listen most seriously to those who have made good predictions in the past.  Rajan was probably the best, more accurate, most serious, most detailed, and most non-Chicken Little predictor of the financial crisis.  You might think that means he gets listened to today, or given the benefit of the doubt on interpretation, but apparently not.


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