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Now, the O.E.C.D. is calling for fiscal and monetary stimulus in Europe. It’s not the same people: The O.E.C.D. has a new chief economist, Catherine L. Mann, whose excellent research has always been pragmatic in orientation (and who wrote her dissertation, way back when, under Rudi Dornbusch at M.I.T. and yours truly). But the O.E.C.D. did make a statement in selecting Ms. Mann this year, and my sense is that the ground is shifting all around the world.
It has taken a while. In early 2013, with the infamous growth cliff at 90 percent debt and the case for expansionary austerity collapsing, many of us thought we had the austerians on the run. But we underestimated the extent to which officials and, to some extent, the news media had a professional stake in the positions they had staked out over the previous three years, and their willingness to seize on anything - a slight recovery in Southern Europe, say, or a pickup in Britain when the government stopped tightening for a while - as supposed vindication of views that were, in reality, overwhelmingly at odds with the evidence. This still goes on.
But the hawks seem to be in retreat at the Federal Reserve, and European Central Bank President Mario Draghi (another M.I.T. Ph.D.) is sounding an awful lot like Fed Chairwoman Janet Yellen. Plus the whole way we’re discussing Japan is very much on Keynesian turf. Three and a half years ago Businessweek was declaring that expansionary austerian Alberto Alesina was the new Keynes. Now it’s telling us that Keynes is the new Keynes. And we have people like the billionaire hedge fund manager Paul Singer complaining about the “Krugmanization” of the debate.
Why does the tide finally seem to be turning? Partly, I think, it’s just a matter of time; after six years it’s becoming hard not to notice that the anti-Keynesians have been wrong about everything. Europe’s slide toward deflation makes it even harder to deny the realities of liquidity-trap economics. And the refusal of almost everyone on the anti-Keynesian side to admit any kind of error has gradually made them look ridiculous.
All of this may be coming too little and too late to avoid a policy disaster, especially in Europe. But it’s something to cheer, faintly.
Oil Prices and Deflationary Bias
I know all you young whippersnappers don’t remember ancient history, but a long time ago, in a galaxy far, far away - well, actually, in 2011, and right here on planet Earth - oil and other commodity prices were rising, not falling. As a result, headline inflation was running fairly high. Some of us argued that core inflation was a much better guide to monetary policy, and the Fed agreed; but inflationistas were going wild, and in Europe the E.C.B. decided, disastrously, to raise interest rates.
So now that oil is plunging, the same people who saw rising oil as a reason to raise rates should see falling oil as a reason for expansionary policy, right?
Wrong. They’re telling us not to pay attention to low headline inflation, which they say is just oil (although it isn’t), and anyway, falling oil prices are a stimulus.
So when oil is going up, it’s a reason to tighten policy, and when it’s going down, it’s a reason not to loosen policy. And people wonder why I talk about sadomonetarism.