Paul Krugman – The New York Times
I’m still thinking about Kevin Hassett’s appearance at the Tax Policy Center, where he repaid his hosts’ graciousness by gratuitously impugning their integrity. But insults aside, he offered a new analysis of corporate tax incidence – an approach that is novel, innovative, and completely boneheaded. Oh, and it just happens to say what his political masters want to hear.
As I see it, this is part of a broader pattern.
When the financial crisis struck, there were many calls for new economic ideas – even an Institute for New Economic Thinking. The implicit story, pretty much taken for granted as true, was that the crisis proved the inadequacy of economic orthodoxy and the need for fundamental new concepts. Pretty obviously, too, supporters of calls for new thinking had a sort of Hollywood script version of how it would play out: daring innovators would propose radical ideas, would face resistance from old fuddy-duddies, but would eventually win out through their superior ability to predict events.
What actually happened was very different. True, nobody saw the crisis coming. But that wasn’t because orthodoxy had no room for such a thing – on the contrary, panics and bank runs are an old topic, discussed in every principles book. The reason nobody saw this coming was an empirical failure – few realized that the rise of shadow banking had done an end run around Depression-era bank safeguards.
The point was that only the dimmest of free-market ideologues reacted with utter bewilderment. The rest of us slapped our foreheads and said, “Diamond-Dybvig! How stupid of me! Diamond-Dybvig!”
And post-crisis, pretty standard macro worked pretty well. Both fiscal policy and monetary policy did what they were supposed to (or, in the case of money, didn’t do what they weren’t supposed to) at the zero lower bound. Plenty of room for refinement, lots of opportunities to use the mother of all natural experiments for empirical work, but no huge requirement for radical new thinking.
Nonetheless, there was a proliferation of radical new concepts: contractionary fiscal policy is actually expansionary, expansionary monetary policy is actually deflationary, terrible things happen to growth when debt crosses 90 percent of GDP. These ideas instantly got huge amounts of political traction – never mind the fuddy-duddies in the economics establishment, the policy establishment leaped at the chance to apply new ideas.
What did the ideas they leaped at have in common? All of them had, implicitly or explicitly, conservative ideological implications, whether the authors intended that or not. (I’m quite sure that Reinhart-Rogoff weren’t operating out of any political agenda. Not equally sure about others.) And all of them proved, quite quickly, to be dead wrong.
So new economic thinking since the crisis has proved, for the most part, to consist of bad ideas that serve a conservative political agenda. Not exactly the script we were promised, is it?
Once you think about it, it’s not too hard to see how that happened. First of all, conventional macro has worked pretty well, so you’d need really, really brilliant innovations to make a persuasive major break with that conventionality. And really, really brilliant innovations don’t come easy. Instead, the breaks with conventional wisdom came mainly from people who, far from transcending that wisdom, simply failed to understand it in the first place.
And while there are such people on both left and right, there’s a huge asymmetry in wealth and influence between the two sides. Confused views on the left get some followers, provoke a back-and-forth on a few blogs, and generate some nasty tweets. Confused views on the right get mainlined straight into policy pronouncements by the European Commission and the leadership of the Republican Party.
Which brings me back to Hassett. Tax incidence, like macroeconomics, is a technical subject with a mainstream consensus that faces challenges from left and right. But a lot of hard work went into creating that consensus; this doesn’t mean that it’s right, but you have to come up with a really good idea to challenge it effectively.
On the other hand, you can get a lot of political traction with a really bad idea challenging the consensus, as long as it serves the interests of big money and the political right. And that’s what just happened at TPC. October 8, 2017