Send in the (economic) clowns

The social sciences are just opinion dressed up as evidence-based theory. From something just sent to me, although published in the middle of December: Reform the economic system now or the populists will do it: The interests of the financial sector and the economy at large are different.

Direct inflation targeting is common today, but was unknown before the 1990s. Medium-term fiscal policy targets are also a modern invention, as are independent fiscal councils. Behind these institutions and policies lie a theoretical foundation — new Keynesian macroeconomics. John Maynard Keynes himself would probably characterise its average proponent as “a defunct economist”.

The theory asserts three key points. One, that a low rate of inflation is consistent with full employment, so it is sufficient for a central bank to target a low rate of inflation. Two, that fiscal policy should not be used for economic fine-tuning but should follow medium-term stability targets. And three, that neither monetary nor fiscal policy make a difference in the long run.

But as he says, there is a problem:

While the case for a challenge of the macroeconomic policy doctrine is overwhelming, I doubt the western policy establishment will do it. As happened during the financial crisis, vested interests will intervene. The macroeconomists who designed the models are the gatekeepers and the beneficiaries of the system. They are the independent central bankers. They are running the independent fiscal councils. Some are finance ministers.

If economists cannot tell that Obama along with the rest of these mad spenders have left our economies a wreck, it must only be because they are so cossetted from any actual economic problems that they are impervious to just about anything. Real living standards for a large part of the population are falling – tried to buy a house lately on an average income? – but they not only cannot explain it, they cannot even see it.

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