What?! In this article I actually claim that the Austrians have held their own against the Keynesians when it comes to steering through the choppy waters of the housing boom and now bust. I imagine Daniel Kuehn and some of the other frequent commenters here will not agree.
One thing that I didn’t realize until recently involves this:
Now, it is true that Krugman (and Mark Thoma) were warning by this point that such an amount wouldn’t be big enough. But go look at Krugman’s analysis at the time. His point was not so much that the Romer team’s numbers were wrong (though he did think their projections of what would happen without the stimulus were very optimistic). Rather, he was saying that on their own projections, they weren’t anywhere near to closing the “output gap.”
For the full details, go check out my article. But what I’m saying is that I’ve been conceding too much to Krugman for lo these many months. He actually wasn’t saying, “We need to spend more, because the economy is worse than Romer et al. realize.” Rather, he was saying, “Even on their own numbers, they aren’t getting the job done, so I don’t understand why Romer et al. aren’t proposing a bigger stimulus package.”
To be fair, Krugman does say that he thinks the economy is worse than they do. But it doesn’t look like he’s anywhere close to predicting what actually happened, after the stimulus kicked in. So I have no problem saying that Krugman was caught flat-footed by how bad things got, after the stimulus kicked in, just as Romer & Co. were. But hey I’m open to debate on this point…
UPDATE: Wow I see Daniel Kuehn has already thrown up his hands in frustration. This is a crucial point so let me quote him and explain my position:
[W]hat exactly is Bob under the impression the “output gap” is? That is a proclamation that the estimates are too rosy, is it not? And what’s this talk about Republicans? Nothing Bob links to seems to mention Republicans at all. Certainly Krugman and others were worried that Republicans would scuttle the stimulus, but from the beginning the complaint was that this wasn’t enough – that it would help but we would still have high unemployment. How Murphy gets this: “Therefore, when it comes to the effects of the “stimulus” package, the free-market economists (including the Austrians) were right, and the Keynesians were wrong” is beyond me…
OK here’s the deal: Romer’s team said, “If we spend $787 billion [or however they scored it, that’s one estimate that was prevalent at the time], then unemployment will peak somewhere around 8 percent and then come down gradually over the the next few years. If we do nothing, unemployment might get as high as 9 percent.”
Of course, in reality what happened is they passed they stimulus and we got unemployment higher than 10 percent–worse than Romer et al.’s “do-nothing” scary scenario. So as other Austrians and I were pointing out as this occurred, “What more could possibly happen to discredit Keynesianism?”
Now the standard response from the Keynesian camp is to say, “We were wrong in the baseline forecast of how bad things would get. The stimulus still helped, but it kept unemployment at 10 percent instead of hitting 12 or 13 percent. And anyway, Krugman was saying from the get-go that unemployment was going to be too high, even with the stimulus. So he nailed it, it’s just some other Keynesians like Romer were off on their baseline.”
This is the point I’m criticizing. Go look at Krugman’s analysis at the time. When he was urging them to spend more, his main argument was that Romer’s own numbers showed unemployment well above the “natural” rate for at least three years, i.e. actual GDP would be well below potential GDP for at least three years. So Krugman was asking, “Why are we settling for an incomplete package? Why not propose spending that will actually close the output gap in a reasonable amount of time, before the Republicans can discredit the stimulus?”
So yes, to answer Daniel’s question, I do know what he means by an “output gap.” And Krugman was telling everybody that Romer’s own projections showed there would still be a sizable gap 3 years out.
If you want to make the point that Krugman knew the economy itself was worse than Romer et al. did (as of January 2009), then all you’ve got are two sentences from the one blog post where he says he thinks Romer et al. are being very optimistic on their ex-stimulus projections. Yet even there, look at the numbers he throws around. It doesn’t look to me like he had any idea unemployment would break 10 percent even with the stimulus. But I’m open to debate on that.
What is clear, however, is that Krugman’s main argument for spending more, was that Romer’s own projections showed unacceptably high unemployment for years. He wasn’t saying their baseline was wrong, and gosh they’d better spend more because of that mistake.