M.I.T. economists got it right
As part of his effort to get smarter policy from the politicians, Paul Krugman in his New York Times column on 25 July 2015 listed some of the achievements of mainstream economists in recent years and underlined again their puzzling lack of influence on the politicians despite this.
He calls them the M.I.T. Gang. Apart from Krugman, they include:
-- Ben Bernanke, head of the Fed: whose expansionary policies "helped limit the damage" from the current financial crisis.
-- Olivier Blanchard, chief economist of the International Monetary Fund (I.M.F.): his research department has shown "beyond any reasonable doubt that slashing spending in a depressed economy is a terrible mistake".
-- Mario Draghi, president of the European Central Bank: "Mr. Draghi’s activism has been crucial to calming financial markets, probably saving the euro from collapse".
He points out that Blanchard is being replaced by another M.I.T. alumni, Maurice Obstfeld, and both were students of Stanley Fischer at M.I.T., now the Fed vice-chairman.
Academically these guys have great credentials (forget about Krugman's Nobel Prize): "Mr. Blanchard, for example, showed how small deviations from perfect rationality can have large economic consequences; Mr. Obstfeld showed that currency markets can sometimes experience self-fulfilling panic."
Krugman reminds us: "But M.I.T. types predicted, correctly, that inflation and interest rates would stay low in a depressed economy, and that attempts to slash deficits too soon would deepen the slump."
"The truth, although nobody will believe it, is that the economic analysis some of us learned at M.I.T. way back when has worked very, very well for the past seven years."
Despite this, Krugman can only record their failure to influence national policy, particularly in Europe. "But it is stll better to be right than to be wrong," he concludes.