A note on model risk, policy design, and political alliances
My previous post advocating a collaborative detente between post-Keynesians, market monetarists, and mainstream saltwater economists, has drawn smart and often skeptical comments. Some critics suggest I understate the dissimilarities between the three schools, and argue that any sort of fusion would amount to a muddled middle, centrism only for its own sake. (I like this: “The centrist position on building a bridge would end up with a bridge halfway across the river.”)
If I were advocating some kind of Grand Unified Theory, I might concede the point. But I’m not advocating a theoretical fusion at all. I’m advocating a policy compromise. Quarreling schools may not find very much common ground in arguments over theory. Theory and its inseparable twin, ideology, are too pervasive to admit much compromise. They are indistinguishable from reality. Our eyes form the world before the world forms our vision. When truth itself is at stake, we will not easily give ground.
But it is not the truth that we are after here. We should strive for something far less grand: to do actual good in the world. It just so happens that the theoretical disputes which divide the disciples and apostates of Keynes do not prevent overlap in the solution space. We can work together even when the stories that we tell ourselves are worlds apart.
And since it is at least possible that my side might be wrong, the existence of others who are almost certainly mistaken is actually helpful. We can build insurance policies out of their errors and make resilient analogues of Pascal’s wager. The point is not to take the best a priori position. The point is to avoid going to hell.
I am not neutral between the economic schools I’ve identified for a love-fest. Although I dislike binding myself with labels, I lean post-Keynesian. I agree with many critics that monetary policy alone is unlikely to be effective, and my gut inclination is not at all favorable to monetary policy as an instrument. I think overreliance on monetary policy, especially during the so-called Great Moderation, played a key role in the development of socially destructive inequality and economically catastrophic patterns of aggregate investment.
But, as the finance types like to say, that’s a sunk cost. We are in a global depression. Despite periods of respite, I think we are likely to remain in a depression until we sort out the immense social conflict embedded in the financial and political claims we’ve accumulated against against one another. This is a bad situation. Last time, it took a catastrophic global war before we put our squabbles into perspective and found ways to engineer a reset. That kind of thing is still not off the table.
The incremental cost of trying a bit more monetary policy seems small to me by comparison. I don’t think it’s likely to work, but I am heartened at least that the variant proposed by the market monetarists is much less toxic than the mainstream dogma that, de jure or de facto, prizes price stability above all things. I’m still skeptical, but NGDP path targeting represents a huge improvement over inflation targeting as a monetary policy rule. I’d be willing to give it a try. In exchange, I’d like to try to persuade monetarists of good will to agree to limits on what constitutes legitimate monetary policy, and to assent to a coherent and non-corrupt fiscal lever as a backstop.
This sets up a wager that both sides should smugly accept. The market monetarists should be glad to accept the fiscal backstop, despite theoretical objections, because they should be sure that it will not need to be used. I can put up with one last big monetary push. I expect it won’t work, but it will automatically open the door to policy that I’m pretty sure will work. In either case, whichever side is wrong will be glad to have taken the bet. There are devils in the details, obviously. There are some forms of monetary policy that I’d consider too destructive to try, that might “work” in terms of restoring growth in macro aggregates but that would threaten social values I hold dear. The “fiscal lever” is unlikely to be a decentralized job guarantee engineered by Pavlina Tcherneva and Randy Wray, which in a more perfect world I’d like to see given a try. But the world is as it is, and time is of the essence.
One of the worst unintended consequences of the Obama administration is that it has discredited compromise. We can argue about whether Obama was hapless and naive, or whether he was cynical and canny, using compromise as a fig leaf to promote the center-right outcomes that he actually favors. But to the progressive left, “compromise” has come to mean sacrificing core ideals and values as the starting position in negotiations that only gets worse.
But compromise is not always a bad idea. Sometimes there are people with whom one can find common ground despite important, even fundamental, differences. That doesn’t mean we smudge away the disagreements, that we cease to argue the merits and demerits of conflicting models and worldviews. But we shouldn’t let our debates in the seminar room prevent or delay finding a practical consensus. If we are not, all of us, just a constellation of egos engaged in a masturbatory pissing match to establish our place in academic or journalistic hierarchies, then we need to find ways to leaven our disputes with provisional compromises and coordinated efforts to improve the real world. In real time.