why you should quit listening to Paul Krugman about macroeconomic policy

From the editorialists of the WSJ, explaining the "explanations" for our continuing economic woes...

What happened?

The explanations from the White House and liberal economists boil down to three: The stimulus was too small, Republicans blocked better policies, and this recession is different because it began in a financial meltdown. Only the third point has some merit, and for a different reason than the White House claims.

On a too-small stimulus, this isn't what Democrats or most Keynesian economists told us at the time. Even Paul Krugman, who now denies intellectual paternity for this economy, wrote on November 14, 2008 that "My own back-of-the-envelope calculations say that the package should be huge, on the order of $600 billion." The White House raised him by 33% two months later, but now we're told that wasn't enough...

Given that the stimulus program was so poorly structured and so overtly politicized, how do we know that, say, $500 billion more would have made a difference even on Keynesian terms? The money for government spending has to come from somewhere, which means from the private economy. Our guess is that by ensuring even higher debt and implying higher taxes, a bigger spending stimulus would have done even more harm.

Stimulus godfather Mark Zandi and CBO have produced studies claiming that the stimulus saved millions of jobs and thus prevented an even deeper recession. But these are essentially plug-and-play economic models that multiply the amount of dollars spent by the assumed impact on jobs based on previous studies, and, voila, the jobless rate would have been higher without such spending. In the real world, the economy lost 2.51 million jobs.

Probably for space considerations, they left out another key part of the Krugman quote:

"So the question becomes, will the Obama people dare to propose something on that scale?" Let’s hope that the answer to that question is yes, that the new administration will indeed be that daring.

In any case, macroeconomic models are famous for the importance of their assumption-- from the graphs and policy implications in an E101 class to the fancy econometric models of the PhD's.

I remember visiting a branch of the Federal Reserve and playing around with one of the economic simulators. If you tried to cut taxes (even with a reduction in spending), the economy automatically got worse with no recovery (unless you raised taxes). What result were you supposed to get and what inferences were you supposed to draw? Not the correct ones!