DeLong Unloads with Both Barrels

Brad DeLong reviews Justin Fox's posting on Paul Krugman's recent essay. The Fox posting attacks Krugman's view that the "freshwater" schools of economics and finance completely failed in the face of the 2008 economic collapse.

Here's the lead from Justin Fox's posting:

Paul Krugman has an epic, and really great, dissection of the state of economics in Sunday's New York Times Magazine—headlined "How Did Economists Get It So Wrong"... For those who only know Krugman from his NYT columns, it's a wonderful glimpse of the expansive, unpredictable essayist whom my former boss Rob Norton (who disagreed with Krugman at least 60% of the time) called the best economics writer since Keynes. For me it's a little frustrating, since large swaths of the article parallel the story told in my book [The Myth of the Rational Market], which Krugman said was a "must-read" in the NYT Book Review a few weeks back...

... the one big issue I have with the [Krugman] piece is that, while economists certainly got lots of things wrong before the crisis (as did almost all of us), many members of the profession have acquitted themselves pretty well since things turned really ugly last year. Krugman goes on and on about the "freshwater" economists (at the Universities of Chicago, Rochester and Minnesota) and their crazy ideas about perfect markets. But what's telling is that the hardcore freshwaterites have had almost no impact on economic policy for the past year—neither in the Bush months or the Obama ones.

That is the point of departure for DeLong who then goes in for the kill on the pathetic jaundiced right wing views of the leaders of the "freshwater" school of economics in order to correct the mistakes in Justin Fox's views.

For me, the key bit of DeLong's criticism is in its two final paragraphs:

Had John McCain won the presidential election of 2008, at the start of 2009 he would have in all likelihood proposed a trillion dollar fiscal stimulus bill--3/4 tax cuts and 1/4 aid to states--and he might have picked Tim Geithner for his Treasury Secretary. Democrats would have called for fewer tax cuts, more state aid, and some government infrastructure spending initiatives in the fiscal policy mix, but the need for the government to cushion the recession would have brought them into line. When Obama took office he bid $800 billion for his fiscal stimulus bill--about 1/3 spending, about 1/3 aid to states, about 1/3 tax cuts--thinking that would be a plan that would win broad bipartisan assent. And he was wrong. The Republicans decided to follow the Gingrich strategy: try as hard as they could to make the Democratic president appear a failure by blocking all his initiatives. But you can't block an initiative without a story for why it is bad for the country. And that, all of a sudden, makes the madmen in the attic the favored economic advisors of the Republican Party.

This is, I think, very dangerous. The Republicans will win elections in the future. And when they do will we want Ed Prescott to be running economic policy?

Go read both DeLong and Krugman's essay in the NY Times.

As for the state of the real economy, the remains after the right wing ideologues from the freshwater schools spread their crazed ideas among Wall Street types and the bureaucrats. Here's a DeLong posting:

By the employment-to-population ratio metric, the recession is now twice as deep as any post-1960 recession. At 59.2%, the employment-to-population ratio stands 4.1 percentage points below its December 2006 cyclical high--and 5.5 percentage points below its April 2000 alltime high.

We are at 1/3 of a Great Depression right now, and are going to go higher.

Go read the whole posting to get the details and look at the graphs (use right-click 'open image in new tab' or window to see the full graph, DeLong's blog setup cuts off the right side of his graphics).