Matt Yglesias is frustrated

Actually, I (and many other economists) are too – at the state of debate in academic economics. Here’s the quick summary of this particular debate (from the recent AEA conference in San Diego), related to whether there should have been fiscal stimulus in response to the most recent recession:

  • Paul Krugman supported the fiscal stimulus. In a nutshell, he argues that as a result of this particular recession, one in which interest rates were already extremely low, monetary policy would be ultimately ineffective at stimulating the economy. 
  • Valerie Ramey, on the other side, presents as evidence against fiscal stimulus, empirical research based on data from different periods in U.S. history – such as during World War II – which suggest fiscal stimulus is not particularly effective at stimulating a depressed economy.

These two viewpoints need not be mutually exclusive! It is possible for fiscal stimulus to be effective in the present context (as Krugman suggests) while being simultaneously less effective in other circumstances just as Ramey suggests! So why is this even called a “debate” when the viewpoints are not inherently at odds with one another? In other words, as Matt neatly says,

To me this and other versions of the academic debate actually suggests that there’s actually a fair degree of consensus on the issue. If you listen carefully to Krugman, he’s saying that fiscal stimulus will almost never be a good idea. And if you listen carefully to Ramey, she’s saying that when economic slack exists fiscal policy can reduce it.

But, instead of an emphasis on the degree of agreement between the two, we end up with what is portrayed as deep ideological disagreement within the community of academic economists. You’d think a bunch of Ph.D.’s could see the forest for the trees. Matt’s common sense suggestion?

My sense is that we could get a lot clearly about where people really stand by actually posing the policy questions squarely. Would a large temporary income tax cut offset by a small permanent cut in Social Security benefits be a good idea? Or how about reducing America’s debt:GDP ratio by taxing dividend income at the ordinary income tax rate?

I think if we tried to jog researchers out of basic left-right political alignments we might get a little bit more clarity on what everyone thinks the real issues are.

Hard to disagree.

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