For quite a while, I’ve been arguing that the simultaneous occurrence of sustained depression in most developed countries provides fairly conclusive evidence that both new classical macroeconomics and standard versions of real business cycle theory cannot explain actual macroeconomic outcomes. That argument is directed both against US-based economists like Casey Mulligan and Narayana Kocherlakota, who are trying to explain the US experience in terms of problems specific to the US labor market[1] and to European advocates of austerity who blame the crisis in peripheral European countries on (mostly falsely) alleged government profligacy in those countries.

An immediate implication, drawn out here by Paul Krugman, is that the success or otherwise of the limited stimulus undertaken by the Obama Administration should be assessed by comparison to the performance of other countries, most of which undertook less stimulus, returned to austerity faster, and have experienced correspondingly weaker growth (as some Oz tweeps are pointing out, he might have mentioned Australia, which undertook a big stimulus and avoided recession altogether).

But, as Megan McArdle snarks here, there’s an implication more appealing to Republicans. If Obama can’t be blamed for a global recession, neither can Bush. Although McArdle’s argument isn’t watertight (the US is big enough that US actions have a big effect on the world as a whole), the conclusion is broadly correct. There’s plenty of blame to go around for the Global Financial Crisis and the subsequent depression, and the Bush Administration deserves only a small share. Bush’s main contribution was to introduce unfunded tax cuts at a time when the budget should have been in surplus, thereby reducing the fiscal space available for stimulus when the crisis came. But, given the weakness of the stimulus and the ferocity of the political response, it’s not clear that was a binding constraint in any case.

The primary culprit is market liberal economics, which may be considered both as a set of ideas with its own internal logic and as an expression of the class interests of those who benefit from the finance-dominated form of capitalism that produced the crisis and has prevented any recovery. My book Zombie Economics is a critique of market liberalism considered as an economic theory, showing how market liberalism produced the crisis. Colin Crouch’s Strange Non-Death of NeoLiberalism gives more of the class interpretation, explainign why these discredited ideas remain dominant.

Chicago is about as close to the American heartland as you can get and still be in a major city (the infamous Heartland Institute is located there, for example), but even so, I’d expect a professor at the University of Chicago to be aware that the USA is not the only country in the world. That’s not true, apparently, of Casey Mulligan, who claims that the continued weakness of employment in the US is due to policies introduced in 2008 and 2009, which ” greatly enhanced the help given to the poor and unemployed — from expansion of food-stamp eligibility to enlargement of food-stamp benefits to payment of unemployment bonuses — sharply eroding (and, in some cases, fully eliminating) the incentives for workers to seek and retain jobs, and for employers to create jobs or avoid layoffs.”

Mulligan’s claims about US policy are dubious at best (see over fold), but there’s a much more critical problem with his argument. If US unemployment is caused, not by a demand shock but by the mistaken policies of the Obama Administration, why did unemployment move in the same way, and at the same time, in many different countries? Did Iceland expand its food stamp program? Does Estonia pay unemployment bonuses? Sadly, no. And while many countries adopted Keynesian policies in the immediate aftermath of the Wall Street meltdown, others did not, and most have now switched to the disastrous policy of austerity. An even clearer demonstration is given by the Great Depression, where nearly all governments pursued austerity policies after 1929 (Mark Blyth’s soon-to-appear Austerity: The History of a Dangerous Idea tells the story)>

This isn’t just a problem for Mulligan. The simultaneous occurrence of a sustained increase in unemployment in many countries, with different institutions and policies undermines any explanation of unemployment that works at the national level. That includes all forms of New Classical Economics, in which unemployment arises from labor market “distortions”, as well as Real Business Cycle theories (except if you stretch the idea of a technology shock to the point where “technology” effectively means “aggregate demand”).

Read More »

In the light of the latest news of large-scale fraud in the for-profit vocational education sector, I thought I would repost this from CT (in turn a repost of an article in Campus Review, that’s no longer on the website).

I also found a response by Andrew Norton

Read More »