Crazy ideas have a habit of re-entering the public policy debate even if they have been comprehensively rejected in theoretical and/or empirical terms. In fact, the whole edifice of neo-liberal thinking, which dominates the public debate now, was discredited by Keynes and others during the Great Depression and fell into irrelevance for most of the Post World War 2 growth period which delivered full employment. There are sub-sets of crazy ideas within the neo-liberal narrative that are in a similar position. In the early 1980s, we started to be barraged with what is known as supply-side economics, which amounted to a categorical rejection of demand-side measures (active fiscal policy intervention). One of the major claims of the supply-side approach was that deregulation and large tax cuts for the high income earners and companies would generate massive increases in real GDP growth (and national income) which would trickle down to the low-income earners. To fit this into the neo-liberal rejection of budget deficits they also had to come up with the claim that the tax cuts would actually generate offsets in tax revenue and improve the budget balance. This was the comedy that became known as the Laffer Curve. The economist who was pushing that line in the 1980s has also maintained an intense opposition to any use of fiscal policy to stimulate real GDP growth. He claims that the recent history shows that fiscal policy expansion damages growth. But when you dig into his argument you realise that the comedian is still trying to make us laugh. The only problem is that he isn’t very funny.

I was reading several older papers from the 1990s today as part of a project I am working on where I track predictions that leading mainstream economists were making at the time about the evolution of national and global economies. It is a very interesting exercise to build the narratives that were popular at an earlier time and then consider how far the economists got things right. I have noted that there has been some debate out in blog-land about who predicted the failure of the Euro. I am less interested in documenting which person was the first or the second – there were many who saw the design flaws from the inception and could extrapolate what they would mean if a negative shock occurred. Modern Monetary Theory (MMT) economists were among them. I am more interested in groupthink (at the paradigm level) and how the failed predictions can be used to demonstrate the inapplicability of a certain body of theory. That is, what can we learn from the failure of mainstream economists in general to see the crisis coming (and being in denial now of what the solution is). In this blog I consider a part of the thinking that explains why my profession proved to be unreliable in this regard. I renamed this blog – appending it with the term redux because on March 23rd, 2009 – I wrote a blog – Budget surpluses are not national saving.

Everyday the major financial newspapers and magazines provide Op Ed space to so-called leading economists. For the majority of the public, it is these Op Ed articles that provide their interaction with my profession. It is a pity. The majority of the reasoning presented by these characters, most who occupied senior positions in US academic departments, is spurious to say the least. The public is thus being poorly educated (to put it mildly) on a daily basis and this represents a major problem for our democracies. Voting in elections is one thing. But when citizens are voting based on faulty understandings that they have derived from these economists, then what is the value of a free vote? Today I consider the views of leading Princeton economist Alan Blinder – who is another macroeconomist who is blind to the way the economy works.

I was asked today what the Modern Monetary Theory (MMT) position was on the new report about to be published by the – which reports trillions of dollars (and other currencies) being secreted in tax havens by the wealthiest citizens and the role that the top 10 banks have played in arranging these fund transfers. Progressives are clearly up in arms about the research findings and for good reason, especially if one holds equity to be a valid policy and national goal (as I do). But the way MMT analyses these trends is somewhat different. Once we get a good understanding of what the off-shoring of wealth and tax evasion actually means for domestic economies, it is clear that the progressive attacks often miss the point.

Two things led to this blog today. First, the IMF has once again been lecturing the world on economic policy. In the Global Financial Stability Report and the World Economic Outlook Update – both released yesterday (July 16, 2012) the IMF has downgraded their growth forecasts again yet is hanging on to the myth that austerity is the path to resolution and that the deficit reductions underway are appropriately growth supporting. Doesn’t anyone in the IMF understand logic? One cannot on the one hand admit that growth is falling below previous forecasts yet on the other hand claim that policy which caused growth to slump is growth supporting. Second, Anna Schwartz died in New York on June 21, 2012. The two events can be linked.