Is New Old Keynesianism dead? I encourage everyone to read Henry Farrell and John Quiggin's new article, "Consensus, Dissensus and Economic Ideas: The Rise and Fall of Keynesianism During the Economic Crisis." Basically, Keynesian policy briefly regained its old throne when everyone was panicking in 2009 - everyone became a Keynesian in a foxhole, as Bob Lucas would say - but this brief consensus fell apart under an assault from austerity-minded European central bank economists in 2010-11.
This makes me step back and think about the whole econ blogosphere over the past several years. The thing that inspired me to start blogging was the famous Paul Krugman article, "How Did Economists Get It So Wrong", published in September 2009 (that, and John Cochrane's dismissive response). Before that article, I had seen the econ blogosphere as mostly about micro, and mostly about "everyday economics" - pointing out cute little observations about how daily life reflects economic behavior and incentives. It was kind of interesting, but not really. Then, suddenly, it became something very different. A war was on. The blogosphere was Ground Zero for a very deep and fundamental argument about the purpose and practice of macroeconomics. And suddenly, the policy consequences couldn't be more important. After spending a year sitting on the sidelines of that argument, I decided to turn Noahpinion - which had just been a personal bullshit diary - into an economics blog.
Now it seems that the war is winding down. Arguments still flare up over the proper use of microfoundations, or over monetary policy. But - and this is just a feeling I get - the frequency of titanic clashes seems to have peaked.
Undoubtedly, this is just because of the economic situation. We're not in a boom by any means, but we're no longer in a crisis, or even obviously stagnating. Policymakers have emerged from their foxholes; they no longer feel a need to deviate from the comfortable pre-2008 consensus that monetary policy is the only necessary tool of demand management. I believe that this is the reason for the "fall of Keynesianism" described by Farrell and Quiggin.
So does that mean Krugman's insurgency failed? Seen narrowly as a push for countercyclical fiscal policy, I'd have to conclude "yes." Even Obama's "stimulus" bill was mostly just temporary tax breaks, not spending increases as Keynesian theory would recommend. All around the developed world, instinctive fear of debt made the policy recommendations of Krugman and other Old Keynesians a political non-starter regardless of their theoretical justification.
What about in academia? The crisis provoked a mini-boom in macro papers focusing either on Keynesian theory (e.g. Eggertsson & Krugman 2010) or empirics (e.g. Nakamura & Steinsson 2011). But I don't see this as a big deal. The theorizing is just DSGE with a couple frictions; the profession has not yet felt a collective need to overturn the basic methods and philosophy of macroeconomics, as Robert Lucas and others did in the 1970s. The analytical framework that emerged from that 1970s revolution, which remains absolutely dominant in macro to this day, has again and again proven itself flexible enough to build models to suit any passing fad or consensus opinion. This is not to say that DSGE can accurately describe any phenomenon - merely that it is capable of telling a mathematical story that delivers basically any desired policy conclusion. So after fiscal policy goes out of vogue, Old Keynesian models may go back to near where they were pre-crisis - subjects of study for smart people, but not accepted by the main body of the profession. The consensus may shuffle toward the ideas of Hall and Eggertsson and Krugman, but the change will be marginal.
Like the wars of Louis XIV, the push for a rehabilitation of Old Keynesianism has resulted in a lot of sound and fury, but only modest territorial gains.
Nor do I think Krugman's push against microfoundations will provoke a return to aggregate-only models. First of all, that assault was always a bit half-hearted - in principle, microfoundations are highly desirable for any macro model. The problem is more with the poor (but convenient) choice of microfoundations that macroeconomists have been willing to accept since DSGE came into vogue.
So a layperson might conclude that the insurgency that Krugman launched in September 2009 - and which has consumed and defined the econ blogosphere since then - was ultimately defeated. But I do not believe that this is the case. Although the battle for New Old Keynesianism is mostly over, the Krugman insurgency launched a much deeper, more profound, and more long-lasting war. It shook the philosophical foundation of macroeconomics, and that foundation is still shaking.
Since 2008, everyone had been asking: "Why did macroeconomists miss the crisis?" Even the Queen of England asked it! Shouldn't we expect macro theory to help us avoid macroeconomic disasters? Of course, the profession at first closed ranks against the criticism. Economists protested that Rational Expectations or the Efficient Markets Hypothesis made it impossible to predict a crisis. These protests mostly fell on deaf ears (and rightly so, because they are logically fallacious). Still, the reflexive wagon-circling made it hard to pin down exactly where economists had gone wrong - after all, if all the experts insist that experts have value, who are non-experts to disagree?
But when Krugman, a Nobel Prize winner, came out and said publicly that the macro profession had allowed itself to be satisfied with uselessness and irrelevance, it broke the facade of unity. Like Greg Smith departing Goldman Sachs, here was an insider who was willing to stand up and say that the whole system was rotten. And then Krugman went further. After revealing that top economists were dissatisfied with macro's ability to predict crises, Krugman revealed that they also couldn't agree on how to deal with crises. That's where the push for Old Keynesianism came in. It may not have resulted in a permanent sea change in macroeconomists' modeling consensus, but it told the public that there were deep divisions within the profession on the question of how to fight recessions.
And that, really, was all the public needed to know. If macroeconomists hadn't conclusively discovered how to avert crises and also hadn't conclusively discovered how to recover from crises, what good had they done for society? Why were we paying professors hundreds of thousands of dollars to study this subject if nothing usable had emerged?
Of course, it would be wrong to paint the challenge to macro as a one-man Krugman Show. It isn't. Even the stalwarts of the profession have been questioning how much macroeconomists really understand - see John Cochrane and Greg Mankiw, for a couple of examples. But it was Krugman who took this argument public, who took the case to the wider educated lay populace, and aired macro's dirty laundry to millions of engineers, scientists, financiers, businesspeople, politicians, lawyers, and journalists. What Krugman (and Brad DeLong) did to macro was similar, in some ways, to what Lee Smolin and Peter Woit did to string theory - except on a much bigger stage, since Krugman is such a huge name in his field, and macroeconomics has a lot more important policy ramifications than the theory of black holes.
So the battle over Keynesianism may be over, with the New Old Keynesians fought to a bloody standstill, but the wider Macro Wars have only begun. As for how this affects the blogosphere and the rest of econ's public face, one thing is for sure - we're not going back to talking about how abortion affects crime rates.
(Side note: Since my PhD will be done soon, I think I may turn this post into a book this summer, if I have the time...)
Update: Krugman comments, and notes that A) were it not for the New Old Keynesians, damaging austerity might have been implemented to a greater degree, further harming the world economy. That's a good point; policy is all about the balance of forces. Krugman also says - and I absolutely agree with this - that tere is a deep rumbling of dissatisfaction and disillusionment with the current paradigm among grad students and assistant profs, which will eventually build into a large wave of change. The Krugman insurgency was the beginning of the new Macro Wars, not the end.