Has Greg Mankiw Jumped the Shark?

You be the judge. From his "Economic View" column in the New York Times yesterday, "It May Be Time for the Fed to Go Negative":

Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.

Of course, some people might decide that at those rates, they would rather spend the money — for example, by buying a new car. But because expanding aggregate demand is precisely the goal of the interest rate cut, such an incentive isn’t a flaw — it’s a benefit.

Would your first response to this scenario be to buy a new car? I bet a lot of people would decide instead to buy gold, or to exchange their U.S. dollars for the currency of a country less likely to pick a number out of a hat and invalidate a tenth of its currency.

Later in his column, Mankiw offers a more reasonable way that the Fed could create negative real interest rates, by committing to a certain level of inflation (presumably one higher than the Fed's current 2% target). Is this the best way to spur aggregate demand though? If this is a balance sheet driven recession, as some observers have termed it, and the problem is that many consumers can't service their debts, why not deal with that more directly?

For those whose mortgages are underwater, restructuring them using John Hussman's idea of property appreciation rights might make make sense. That would lower monthly borrowing costs for those mortgagers and enable them to increase their discretionary spending. For mortgagers who aren't currently underwater, the idea of Glenn Hubbard and Christopher Mayer, to use the GSEs to lower mortgage rates down to their historic spread of about 1.6% above 10-year Treasuries might make sense. According to Yahoo! Finance, the average rate on 30-year fixed rate, conforming mortgages today is 4.88%; since 10-year Treasuries currently yield 2.75%, under the Mayer and Hubbard plan mortgage rates might average 4.35%. Refinancing higher-rate mortgages at 4.35% would also lower borrowing costs and enable tens of millions of Americans to increase their discretionary spending.

The image above, of the Happy Days character Fonzie (played by Henry Winkler) jumping the shark¹ comes from Media Bistro.

¹For those unfamiliar with the phrase, see the Urban Dictionary's definition of "jumping the shark".

Economics as Politics by Other Means

Although Greg Mankiw didn't mention it specifically in the post I linked to previously ("News Flash: Economists Agree"), I wonder if part of what prompted him to write it was the row set off by Clive Crook's Financial Times column last week, ("Politics is damaging the credibility of economics"). In that column Crook wrote,

Economics outside the academy has become the continuation of politics by other means. If you wish to know what Mr [Paul] Krugman thinks on any policy question, do not read his scholarly writings; see which policies are advocated by the progressive wing of the Democratic party. Mr Krugman agrees with liberal Democrats about most things, and for the rest gives as much cover as the discipline of economics can provide - which, given its scientific limitations, is plenty. He does this even on matters where, if his scholarly work is any guide, the economics is firmly against his allies. Liberal Democrats are protectionists. Mr Krugman is not, but politics comes first.

The syndrome affects economists on the right as much as on the left. Just as there is a consensus among economists that protectionism should be opposed, most economists believe that a powerful fiscal stimulus is both possible and desirable in present circumstances, and that the best stimulus would include big increases in public spending. Yet recently, Robert Barro, a scholar with conservative sympathies, wrote in the Wall Street Journal that this view was an appeal to "magic".

The problem is not that Mr Krugman questions the consensus on trade (if indeed he does), or that Mr Barro questions the consensus on fiscal policy (as he certainly does). It is that both set the consensus aside so carelessly. In doing so, these stars of the profession destroy the credibility of their own discipline. Mr Krugman gives liberals the economics they want. Mr Barro gives conservatives the same service. They narrow or deny the common ground. Why does this matter? Because the views of readers inclined to one side or the other are further polarised; and in the middle, those of no decided allegiance conclude that economics is bunk.

Crook threw in a (mostly accurate) criticism of the blogosphere as well:

The web, for all its blessings, is an aggravating factor. Many of the most successful economics blogs promote communication within political groupings, not across them. On the web you best build an audience by organising a claque and stroking its prejudices. Extend elaborate courtesy to people you agree with and boorish contempt to those who do not get it. Celebrate exasperation and incivility as marks of intellectual authenticity - an attitude easier to tolerate in teenagers under hormonal stress than in professors at world-class universities.

For Krugman's and Barro's respective responses to that column, see Crook's Atlantic blog post, "The Dismal Science, Revisited".

"News Flash: Economists Agree"

Hat tip to Atlantic blogger Andrew Sullivan for linking to this post by Greg Mankiw, the Harvard economist and former Bush Administration Chairman of the Council of Economic Advisers: "News Flash: Economists Agree". From Mankiw's post,

The recent debate over the stimulus bill has lead some observers to think that economists are hopelessly divided on issues of public policy¹. That is true regarding business cycle theory and, specifically, the virtues or defects of Keynesian economics. But it is not true more broadly.

Mankiw goes on to list fourteen propositions on which a majority of economists agree, according to various polls of the profession. The fourth one is the most relevant to the recent stimulus debate:

Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)

Mankiw adds,

Note that the proposition about fiscal policy (#4) does not distinguish between taxes and spending as the best tool for purposes of macro stabilization. Maybe that question should be added in a future poll. I doubt, however, that the answer would make it onto this list of widely agreed upon propositions.