Essays in Economics

"I took introductory economics with Jim Tobin. He was a great economist and I learned an enormous amount from him, though he isn’t very fashionable these days. This is a collection of his best papers, which I read, admittedly a long, long time ago. But when I go back to it, I realise how much I’ve internalised Tobin’s approach. Some way into this crisis I realised how much I was relying on his way of thinking about how financial markets work. It was an approach that was pragmatic and yet model-based. It went very much out of fashion as we shifted towards thinking of everything in terms of efficient markets, perfect use of information et cetera. And unjustly so, because that [newer approach] turns out to be no help at all in thinking about things like, “Well, what does Ben Bernanke ’s latest policy actually do to the economy?” “We probably could say that Keynes was what we could call a liberal in America now, or a moderate social democrat in Europe” The book is like The General Theory – Tobin is a much clearer writer than Keynes, though a little less stylish. Again, he’s pragmatic – we’ve got tools of economic modelling, but we need to apply them in a way that deals with the world as we find it. Politically Tobin was very much a free-market, welfare-state Keynesian, as I am. We appreciate markets, we understand them, we don’t hate rich people, but we want a social safety net and you do need government intervention to avoid what we are going through right now. He was. He resisted it, and he probably resisted it a bit too much. But the fact of the matter is that a lot of the things he thought were nonsense actually turn out to be nonsense. He didn’t handle it very well, and his hostility to the new trends in macroeconomics after about 1975 or so made him look like an old fuddy-duddy to many people. But he has actually been vindicated by events. In the light of recent events, I’d say he was mostly right. His instincts were not 100%, but he was 80% right. It’s funny he became famous for that. It was almost a suggestion in passing and it wasn’t the core of his work. On the Tobin tax, I always thought the administrative difficulties were very high. Since then people have been telling me it’s not as hard as you think. If it could be done, I would favour it, but it’s not the main thing I’m looking for, it’s not the core of what I’m in favour of . There is a theory that you can have balanced budget stimulus. I think it’s a little bit too cute. It’s something that maybe, in principle, could work, but in practice I wouldn’t count on it. I actually believe that, right now, deficits are our friend. Not long-term, but for now, we need deficit spending. I also think that if we didn’t have the deficits we have right now we would be in the middle of a second Great Depression. It had some effect. Mostly on the expectations side. That is a long story. There was a whole group of us at Princeton, about 10 years ago, who were worrying about, “What do you do if you find yourself in a situation like we are in now, where short-term interest rates are zero and that’s not low enough?” There was a division of views between one side, which is the side that I was on, which said that you have to work through expectations. On the other side was Ben Bernanke. He said that you could do it through expanding the Fed’s balance sheet. Now we’re very much playing out those arguments in real time. I guess I’d say that QE2 was helpful. I think we forget fairly quickly how much panic there was about the state of the economy last summer. I would be in favour of doing more, though I’m not highly confident that it will do everything we need. Michael Woodford is probably our leading technical Keynesian theorist. He does beautiful stuff. But there are a whole bunch of people whose work I read because they either do the empirical work or just have a good way of thinking about it. Then there are people who are effectively Keynesians, although that’s not where most of their work is. Joe Stiglitz is just a spectacular economist, who has done work that has been the basis of half a dozen fields. I’m unstinting in my admiration there."