From his usual NY Times post:
On Wednesday, I wrapped up the class Iíve been teaching all semester: ďThe Great Recession: Causes and Consequences.Ē And while teaching the course was fun, I found myself turning at the end to an agonizing question: Why, at the moment it was most needed and could have done the most good, did economics fail?
I donít mean that economics was useless to policy makers. On the contrary, the discipline has had a lot to offer. ... But policy makers and politicians have ignored both the textbooks and the lessons of history. And the result has been a vast economic and human catastrophe, with trillions of dollars of productive potential squandered and millions of families placed in dire straits for no good reason.
In what sense did economics work well? Economists who took their own textbooks seriously quickly diagnosed the nature of our economic malaise: We were suffering from inadequate demand. The financial crisis and the housing bust created an environment in which everyone was trying to spend less, but my spending is your income and your spending is my income, so when everyone tries to cut spending at the same time the result is an overall decline in incomes and a depressed economy. And we know (or should know) that depressed economies behave quite differently from economies that are at or near full employment.
(So - here, he finally acknowledges that what we really need is JOBS - not welfare enticements to stay unemployed and not new regulations stifling business owners).
For example, many seemingly knowledgeable people ó bankers, business leaders, public officials ó warned that budget deficits would lead to soaring interest rates and inflation. But economists knew that such warnings, which might have made sense under normal conditions, were way off base under the conditions we actually faced. Sure enough, interest and inflation rates stayed low.
And the diagnosis of our troubles as stemming from inadequate demand had clear policy implications: as long as lack of demand was the problem, we would be living in a world in which the usual rules didnít apply. In particular, this was no time to worry about budget deficits and cut spending, which would only deepen the depression. When John Boehner, then the House minority leader, declared in early 2009 that since American families were having to tighten their belts, the government should tighten its belt, too, people like me cringed; his remarks betrayed his economic ignorance. We needed more government spending, not less, to fill the hole left by inadequate private demand.
(Well, Paul, in cased you missed it, we have had record budget deficits each of the six years since Obama took office - so it seems a little disingenuous to say they didn't know or try to make that work)
But a few months later President Obama started saying exactly the same thing. In fact, it became a standard line in his speeches. Nor was it just rhetoric. Since 2010, weíve seen a sharp decline in discretionary spending and an unprecedented decline in budget deficits, and the result has been anemic growth and long-term unemployment on a scale not seen since the 1930s.
So why didnít we use the economic knowledge we had?
(gee - Paul, I don't know, but least you realize the we still have a problem)