This Changes Nothing
“When the facts change, I change my mind.” The crash of 2008 has brought Keynes’ famous line back into popular use. But should it have done so? Here’s my claim:
Nothing that happened in the last two years should have significantly revised the general macroeconomic views of anyone who is (a) familiar with the last two centuries of global economic history, and (b) reasonable.
The most someone could reasonably claim to have learned since last year
is that the “Great Moderation” has been oversold. After all, a
generalization about the last two decades is a lot easier to
unseat with one big event than a generalization about the last two
This may seem like libertarian dogmatism, but I insist that it’s just good Bayesianism. Financial crises happen all the time. Disastrous global crises are rarer, but the Great Depression was vastly worse than anything we’ve seen or are likely to see, and there have been plenty of scary shocks before and since. And before we follow Arnold and deny the powerful effect of monetary policy on nominal variables, we’ve got to remember that monetary policy has always been subject to Friedman’s “long and variable lags.”
Admittedly, you could look at this history and say, “2008 is just another in an endless series of macro disasters caused by capitalism.” If that’s your position, then at least you’re updating correctly. But if you claim that 2008 overthrew everything you thought you knew about economics, I’ve got to wonder what you knew in the first place.