Nocturnal catch-up with blogs in my IPAD led me to this post by Greg Mankiw. As David Demery mentions, it was a non-committal statement by Greg Mankiw. I checked out the Council of Foreign Relations (CFR) post and the comments on the post. It is rather obvious that, on this occasion, the score is Krugman 1 – CFR and Mankiw 0.
Even a non-economist would know that one does not measure the success of a policy (non) intervention by the recovery from the trough but also the gap that still remains to catch up with the pre-recession peak. If a price dropped from 100 to 20 units and recovered to 40, it is a 100% gain from the trough but one is still off 60% from the peak.
In contrast, another widget drops from 100 to 60 units and recovers to 90 units, it is only a 50% recovery (compared to 100% in case A above) from the trough but it is now only 10% away from the previous peak.
It is hard to make the case that policies pursued in case A have worked better or superior to case B. Of course, it does not necessarily mean that the opposite is true either. More importantly, the measurement technique used to make the case is spurious and that is what makes one doubly suspect of the so-called conservatives’ claims.
Of course, this blog is no fan of Krugman’s prescription to keep raising the dosage of a medicine that does not seem to work. That is why TGS has stopped following Krugman, let alone comment on his blogs or articles.
What worked in Iceland might not have worked in Latvia. It may well be the wrong medicine for the U.S. too. Iceland could easily devalue the koruna because the Icelandic koruna is not the global reserve currency.
Latvia might have been worse off had it pursed Icelandic approach or Iceland might have fared worse had it followed Latvia or done better. We simply do not know. No one size fits all in economics. Yet, ideologues on both sides have only measurement and one shirt for all wardrobes.
More importantly, it is good to revisit the cases 10-years hence. Economic policies work with long and variable lags. There is no need to pass instant judgments and the urge to do so must be resisted. Of course, what we are witnessing is a battle of ideologues – a waste of time. This is not a debate between policy pragmatists who want to see what works in which context and over what time horizon.
If bankers and Wall Street have not learnt anything from the crisis, neither have economists.