Comment on Noah Smith on Neo-Fisherism and an old Silverfish

I'm not sure why I can't resist commenting on this post. I certainly love the illustration of an extremely old silverfish frozen in amber. I deeply regret my inability to think of a joke connecting unorthodox monetary policy and silver (with perhaps a reference to paleobiology). Oh and the Wizard of Oz. Oddly I have a complaint that Noah's introduction and conclusion don't have much to do with his main point. He mentiones neo Fisherism in the first paragraph, provides some links and discusses it in the last paragraph, but the post is really about Friedman's compromise.

Noah argues that monetary policy is not working (I told them it wouldn't hah but later admitted I was wrong ho so the jokes on me). He asks why economists are so devoted to it, and argues that it is a compromise between Keynesians who support fiscal stimulus and neo-liquidationists who say that the correct response to a recession (or an expansion) is deregulation.

politics. Macroeconomics has a political spectrum all its own, which is at most loosely connected to the familiar left-right axis. On one side of macroeconomic politics are the true Keynesians, who believe that government spending is the answer to downturns, and possibly can even boost growth in normal times. On the other side are the liquidationists, who believe that recessions are the healthy functioning of a normal economy, and should be left alone, or used to make a political push for structural reforms.

These two sides have battled it out since the Great Depression. The evidence in macro isn't very strong it’s been very hard for either side to defeat the other with facts. Instead, what tends to happen is that they fight each other to a standstill. In the end, they agree on the compromise position, which is that monetary policy, rather than fiscal policy or structural reform, should be the main tool of recession-fighting.

... it represents a compromise between the Keynesian interventionists and the opposing coalition of anti-interventionists. It posits that technocratic central bankers, manipulating a single price in the economy (the interest rate), are all we need. This is a minimal intervention that liquidationists can stomach and that Keynesians can grudgingly accept.

Others have mentioned this compromise and ascribed the compromise of free markets plus active monetery policy to Milton Friedman.

I have some objections also to this non neo Fisherian discussion.

First at the anti-Keynesian pole there are two very different camps. There are economists (real business cycle theorists) who argue that recessions and expansions are the healthy functioning of a normal economy and all would be for the best in the best of all market systems if only the state were drowned in a bathtub. But the word liquidationist referred to another view in which recessions are needed to restore the economy to health. To the original liquidationists (Von Mises, Von Hayek and Schumpeter) the booms which preceded recessions were unhealthy binges caused by irrational exuberance and loose monetary policy. They didn't trust the market or market participants. Now it is odd that the two Vons thought that the market could and would handle any challenge other than loose monetery policy perfectly, but the fact is that during the depression they noticed that something had gone wrong. They just thought the policy errors were back before the crash and the depression was necessary penance.

Second, I think the evidence in macroeconomics is plenty strong enough to refute the liquidationists. I think the debate will never end, because they have declared that evidence is irrelevant. It just isn't true that there is too little evidence in macro to reject either of two competing hypotheses. It is definitely a fact that macroecnomists don't test hypotheses and say "all models are false" when the implications of their models are rejected by the data. In other posts, Noah has mentioned this fact (and also that if New Keynesian models were treated as hypotheses they too would be rejected).

Third the real business cycle theorists and liquidationists do not accept any compromise at all. They do not concede that monetary stimulus can ever be useful. Actually, I can't name a New Keynesian who hasn't argued for fiscal stimulus recently either. I see no hint of academic compromise.

The problem is that fiscal authorities have no time for old Keynesians, new Keynesians, real business cycle theorists or liquidationists. They listen to supply siders and ordoliberals. I think we are stuck with ineffective monetary policy because of ordinary politics not academic politics.