Some economists saw the Great Recession coming. Certainly Robert Reich did. But, as Paul Krugman writes in this morning's New York Times, an army of economists missed the boat. They did so for a number of reasons:
Clearly, economics as a discipline went badly astray in the years — actually decades — leading up to the crisis. But the failings of economics were greatly aggravated by the sins of economists, who far too often let partisanship or personal self-aggrandizement trump their professionalism. Last but not least, economic policy makers systematically chose to hear only what they wanted to hear. And it is this multilevel failure — not the inadequacy of economics alone — that accounts for the terrible performance of Western economies since 2008.
During those decades, economists focused on idealized models. And,
starting in the 1980s it became harder and harder to publish anything questioning these idealized models in major journals. Economists trying to take account of imperfect reality faced what Harvard’s Kenneth Rogoff, hardly a radical figure (and someone I’ve sparred with) once called “new neoclassical repression.” And it should go without saying that assuming away irrationality and market failure meant assuming away the very possibility of the kind of catastrophe that overtook the developed world six years ago.
Some economists -- like Joseph Stiglitiz -- got the post crisis right. However,
all too many influential economists did — refusing to acknowledge error, letting naked partisanship trump analysis, or both. “Hey, I claimed that another depression wasn’t possible, but I wasn’t wrong, it’s all because businesses are reacting to the future failure of Obamacare.”
There was a great deal of historical evidence to support the notion that counter-cyclical spending was necessary to reboot ravaged economies:
but European leaders and U.S. Republicans decided to believe the handful of economists asserting the opposite. Neither theory nor history justifies panic over current levels of government debt, but politicians decided to panic anyway, citing unvetted (and, it turned out, flawed) research as justification.
And, so, those who got it wrong led the way. It was not the first time this happened. It happens whenever hubris is given full sway.
This entry is cross posted at The Moderate Voice.