Greg Mankiw, an economics professor at Harvard U. and economic advisor to presidential candidate Mitt Romney, discussed the challenges facing monetary and fiscal policy at Princeton U. on Thursday afternoon.
Mankiw, who is best known for his work on New Keynesian economics, opened with memories from his freshman year philosophy class, likening the challenges nettling macroeconomists to the fate of Greek mythology’s king Sisyphus.
The character was cursed to an eternal cycle of pushing a massive boulder to the top of a hill, only to have it roll back down. Mankiw elaborated his analogy by reviewing the dialogue and shifting dominances between Keynesian and monetarist economic explanations and showing how these had nonetheless left economists unprepared for the current crisis.
“The 1990s were a period of really great economic tranquility. We had some recessions, but they were fairly mild,” Mankiw said. He explained that this tranquility had led to economists’ thinking that they were “smarter than before, that [they’d] figured stuff out.”
“Then all of a sudden, we have the current recession,” he said. “Macroeconomic analysis went back to the fundamentals.” He noted that America’s current situation was a “very strong case for humility” for economists.
Mankiw then segued into a discussion about the inadequacies of using monetary policy alone to sketch a plan for the economy. “If you take a pretty tailored rule and plug in where we are today … where should we set the interest rates … we’d roughly get negative four percent,” he explained to a chuckling audience.
“Let’s talk about why we can’t have negative four percent,” he added. “Well, nobody’s going to lend money at negative four percent,” he said and discussed the problems this interest-rate issue posed for the Federal Reserve, investment and the economy as a whole.
Mankiw also expressed his concerns that the United States was set to experience a situation similar to Japan’s. “A long slump, very low inflation, perhaps even deflation that exacerbates the slump.” He asked, “What can fiscal policy do to prevent us from being Japan … and Greece?”
He then discussed fiscal policy, “where there’s a lot of action going on in recent years,” he said, discussing both the necessity and dangers of controversial policies like Obama’s stimulus packages.
Referring to the discussions behind the government’s policies, “The report said that if we don’t do anything, employment is going to go up to 9 percent,” he said. “After the stimulus, unemployment went up to 10 percent.”
He likened this to the example of a patient who becomes sicker after treatment and explained that the dilemma lay in not knowing whether or not a larger “dose” would improve the situation.
At the end of the lecture, Mankiw fielded the audience’s questions about bond markets, corporate taxes and stimuli in the context of America’s economic challenges.
Students said they enjoyed having the opportunity to hear the famous economist.
“I really just wanted to see him,” Seung Heon Han said.
Lawrence Chang said he found Mankiw “really interesting and comprehensive” as well as “relevant” because of his role in Romney’s candidacy. “He was really good at explaining things, too,” added Han.
However, Chang said he felt that “it would have been nice to have more background” but that the lecture had increased his interest in taking economics classes at the University.