We economists who are steeped in economic and financial history — and aware of the history of economic thought concerning financial crises and their effects — have reason to be proud of our analyses over the past five years. We understood where we were heading, because we knew where we had been.
In particular, we understood that the rapid run-up of housing prices, coupled with the extension of leverage, posed macroeconomic dangers. We recognized that large bubble-driven losses in assets held by leveraged financial institutions would cause a panicked flight to safety, and that preventing a deep depression required active official intervention as a lender of last resort.
Indeed, we understood that monetarist cures were likely to prove insufficient, that sovereigns need to guarantee each others’ solvency and that withdrawing support too soon implied enormous dangers. We knew that premature attempts to achieve long-term fiscal balance would worsen the short-term crisis — and thus be counterproductive in the long-run. And we understood that we faced the threat of a jobless recovery, owing to cyclical factors, rather than to structural changes.
On all of these issues, historically minded economists were right. Those who said that there would be no downturn, or that recovery would be rapid, or that the economy’s real problems were structural, or that supporting the economy would produce inflation (or high short-term interest rates) or that immediate fiscal austerity would be expansionary were wrong. Not just a little wrong. Completely wrong.
Of course, we historically minded economists are not surprised that they were wrong. However, we are surprised at how few of them have marked their beliefs to market in any sense. On the contrary, many of them, their reputations under water, have doubled down on those beliefs, apparently in the hope that events will, for once, break their way, and that people might thus be induced to forget their abysmal forecasting track record.
So the big lesson is simple: Trust those who work in the tradition of Walter Bagehot, Hyman Minsky and Charles Kindleberger. That means trusting economists like Paul Krugman, Paul Romer, Gary Gorton, Carmen Reinhart, Ken Rogoff, Raghuram Rajan, Larry Summers, Barry Eichengreen, Olivier Blanchard and their peers. Just as they got the recent past right, so they are the ones most likely to get the distribution of possible futures right.
However, we — or at least I — have gotten significant components of the past four years wrong. Three things surprised me (and still do). The first is the failure of central banks to adopt a rule like nominal GDP targeting or its equivalent. Second, I expected wage inflation in the North Atlantic to fall even farther than it has — toward, even if not to, zero. Finally, the yield curve did not steepen sharply for the US: Federal funds rates at zero I expected, but 30-Year US Treasury bonds at a nominal rate of 2.7 percent, I did not.
The failure of central banks to target nominal GDP growth remains incomprehensible to me, and I will not write about it until I think that I have understood the reasons. As for wages, even with one-third of the US labor force changing jobs every year, sociological factors and human-network ties appear to exercise an even stronger influence on the level and rate of change — at the expense of balancing supply and demand — than I would have expected.