Peter Gourevitch wrote an article for the Washington Post about Federal Reserve policy, with the click bait title “This is why Paul Krugman is wrong about the Federal Reserve.” In it, he discusses how Krugman criticizes political decisions, both the substance and the verbiage.
Brad DeLong has written a “complete rejection” of this article. I think DeLong misunderstands the point of Gourevitch’s analysis.
What it really comes down to are Krugman’s assumptions and definitions. Gourevitch questions these assumptions:
Economists tend to assume that there is a single right answer (even if they disagree bitterly among each other about what the right answer is). They explore what is “correct” from a theoretical point of view and are puzzled when their “correct” ideas are not followed.
Political scientists don’t usually start from the basis that there is a single correct way to do things. Instead, they assume that there is more than one interpretation of what is correct, and try to come up with theories about which “correct” answer is chosen. There is no correct answer when there are competing rival views that are not easily testable in a complex world where one cannot readily carry out controlled experiments with obvious real world interpretations.
Instead, what is “correct” is about judgment and values. It is also about who benefits, who gains, who loses and how. The tolerable levels of unemployment and/or inflation are at some level matters of value, not efficiency.
This is not to say that political scientists don’t have their own hidden assumptions lurking behind their investigations of social reality. But these assumptions may be democratic rather than expert-driven.
A full account of the battles over the Fed policy would require us to step beyond asking bankers and economists what they think and even asking economists what they think. We might instead ask the media to broaden its coverage, by asking a wider range of people about what is “correct” than “just” the economic theorists.
As there is usually more than one interpretation of what is correct, theory is not likely to give us a good explanation of what actually gets chosen. And it is not likely to tell us actually what is best from a democratic point of view, taking into account all the benefits and losses to a wide range of the population.
Instead of relying on expertise, we should figure out what people actually want from policy (and map the forces that block or channel their efforts to express and act on their desires).
For more than a hundred years there has been a broad near-consensus among economists that there is such a thing as a “correct” monetary policy.
Paul Krugman’s point is that the consensus of the 1980 MIT macroeconomics posse is that right now a higher inflation target than 2%/year is appropriate and that raising interest rates is not appropriate. “Opinions of shape of earth differ” or even “There is no correct answer when there are competing rival views that are not easily testable in a complex world where one cannot readily carry out controlled experiments with obvious real world interpretations…” simply does not clear the bar as a criticism.
…every monetary economist worthy of the name has sought a government and a central bank that will pursue a monetary policy that makes Say’s Law true in practice even though it is false in theory. Everyone has sought for a policy that makes the demand for money in conditions of full employment equal to the supply, so that we have neither an excess demand for money and Keynes’s inexpedient Deflation, nor an excess supply of money and Keynes’s unjust Inflation.
There is a single right answer in monetary policy. It is the policy that hits this sweet spot.
Fed policy is intended to control the 2 part goal, inflation and employment. In order to do this, they typically take actions that we are taught in introductory econ classes will impact GDP (whether or not the Fed actions actually do have these effects in the way that we are taught). Krugman is assuming that this goal is correct (whether or not he agrees with the actions proposed or taken).
DeLong also starts with Krugman’s assumption that the two part goal of 2% inflation and 5% unemployment is correct, and concludes that there is certainly a right answer, and it is obviously the one that results in that perfect economy balanced eternally at those numbers. I think DeLong is adding in here an additional assumption, which is that Fed policy is capable of achieving the stated goal.
Gourevitch suggests that what the governed population wants from Fed policy may not be the attempted micromanagement of the global economy, or of the American business cycle. Especially with these goals being chased in ways that are likely to have second and third order effects that do not appear to be part of the Fed’s consideration. He is questioning both of these underlying assumptions. John Hussman has an outstanding post examining how the assumptions regarding Fed actions and their consequences are largely false anyway.
Update: Krugman has now addressed this himself, as well. He missed the point, too.