01 Feb 2013

More on Krugman’s Tale of Two Economies

Krugman 79 Comments

Sorry my teeming fans, I’m still bogged down with work. But I can’t resist drawing your attention to Krugman’s post today, entitled “Our Incredible Shrinking Government,” in which he said:

Still, the report does highlight the role that shrinking government purchases of goods and services are playing in holding the economy back. And yes, I mean shrinking, not just growing more slowly than I’d like. Transfer payments like Medicare and Social Security are rising (although unemployment benefits are falling), but government purchases of stuff — mostly at the state and local level, where the stuff in question includes hiring schoolteachers — has been in fairly rapid decline.

He then shows a chart of government purchases after the dot-com crash and now our Great Recession, and concludes: “By this measure, the era since the Great Recession began has been marked by unprecedented fiscal austerity.”

So let me try to express my point differently:

Suppose you came up to me (or to Peter Schiff, or George Will, or any other “austerian”) in January 2009, and you said, “I think this is going to be awful. They will call it the Great Recession. Bob, what do you recommend?”

I would say, “Unprecedented fiscal austerity! Massive cuts in government spending like no one has ever seen!”

Then you say, “Bob, if we followed your advice, would interest rates shoot through the roof?”

I would say, “Of course not you fool! Why would they do that if the government implemented unprecedented fiscal austerity.”

Is Krugman denying that the austerians would have said this? So doesn’t the historical record, since the Great Recession began, validate their model? If you want to argue against them, you’d have to point at the high unemployment. That would be the problem with their recommendation for austerity, which–according to Krugman–the government obeyed.

P.S. I know, I know. This is me willfully ignoring Krugman’s caveats, subtleties, and cul de sacs. For example, in the quote above, he said, “BY THIS MEASURE, the era since the Great Recession began has been marked by unprecedented fiscal austerity.”

Yet this is exactly the kind of thing I’m talking about. Krugman will use some Measure A by which we’ve had unprecedented monetary and fiscal stimulus, when he wants to ridicule the austerian warnings about price inflation and interest rates. Then, when Krugman wants to explain why the economy is still crappy, he will cite some Measure B by which we’ve had unprecedented fiscal austerity.

To repeat, Krugman can use whatever measure he wants. But he can’t switch measures between blog posts, depending on the point he wants to make. Either Krugman thinks we’ve had unprecedented fiscal austerity since the Great Recession began, or he doesn’t.

79 Responses to “More on Krugman’s Tale of Two Economies”

  1. Jonathan M.F. Catalán says:

    At first I thought you’re still susceptible to the critique that you aren’t reading between the lines and considering all the implicit nuance. But, the more I think about it the more I’m convinced that you’re completely right. To make your argument more obvious, consider when Krugman talks about how the Federal Reserve saved the banks and the limited stimulus we did experience helped stave off another Great Depression. How you argue that fiscal and monetary stimuli did such great things, and then turn around and write that relatively speaking we haven’t had stimulus at all: in fact, Krugman is implying that government spending has fallen (negative stimulus).

    Also, and correct me if my reading is wrong, but could Krugman’s argument (in this particular excerpt) be somewhat misleading? If I’m reading him correctly, he’s saying that direct government purchases have fallen. Okay… but subsidies and other forms of income redistribution is essentially the same thing. Based on my reading, it seems hee’s being disingenuous or incredibly sloppy. It could be that government purchases fall to 0, but indirect expenditure rises to $20 trillion — how dull would it sound to proclaim: technically, if we’re talking about government purchases, the fall in spending has been historic. Or, do you think Krugman would agree with the following statement: (Assume a period when the absolute level of government spending is falling, but where subsidies are nonetheless increasing) Technically, government spending on subsidies has been growing, and by this measure this is unprecedented fiscal stimulus.

    • Bob Murphy says:

      JMFC, right. Whatever method you use to salvage Krugman’s attack on the austerians (for their botched forecasts of inflation and interest rates due to massive stimulus), would then show that this post from today is incredibly misleading.

    • Lord Keynes says:

      How you argue that fiscal and monetary stimuli did such great things, and then turn around and write that relatively speaking we haven’t had stimulus at all:

      Krugman did not say “we haven’t had stimulus at all”. Direct government purchases only account for ONE aspect of stimulative fiscal policy.

      In any case, as I have said below: if anyone from Murphy to you had bothered to check Krugman’s graph, what it shows is rising government purchases for the first 8 quarters of the Great Recession; then a stable level for 4 quarters; and then falling levels after quarter 12.

      The “austerity” Krugman is talking about applies only to government purchases of goods and services, and only over the past 2 years.

      • Jonathan M.F. Catalán says:

        Right, he wrote “by this measure,” but that’s precisely why it’s misleading. And, re-reading what Bob wrote above,

        By this measure, the era since the Great Recession began has been marked by unprecedented fiscal austerity. (emphasis mine)

  2. Yogi says:

    Everybody knows that Krugman never says anything without also saying the opposite:

    http://econjwatch.org/articles/paul-krugman-denies-having-concurred-with-an-administration-forecast-a-note

  3. Lord Keynes says:

    From beginning to end you’ve so obviously distorted Krugman’s meaning and data.

    (1) Krugman did not say that overall government fiscal policy “since the Great Recession [i.e., since 2007] began has been marked by unprecedented fiscal austerity””. He said “By this measure, the era since the Great Recession began has been marked by unprecedented fiscal austerity.” Direct government purchases only account for ONE aspect of stimulative fiscal policy (which includes tax cuts, etc.).

    (2) If you had bothered to check Krugman’s graph, what it shows is rising government purchases for the first 8 quarters of the Great Recession; then a stable level for 4 quarters; and then falling levels after quarter 12.

    So the “austerity” Krugman is talking about here obviously must apply only to government purchases of goods and services, and only over the past 2 years.

    (3) “. Krugman will use some Measure A by which we’ve had unprecedented monetary and fiscal stimulus, when he wants to ridicule the austerian warnings about price inflation and interest rates.”

    No, Murphy. He can use OVERALL fiscal policy (obviously the most accurate) and look at components of it. This recent post of his just shows – contrary to ring wing myths – that over the past 2 years one component of fiscal stimulus has been falling.

    • Major_Freedom says:

      LK your reading comprehension is once again displayed as garbage.

      You said

      “He said “By this measure, the era since the Great Recession began has been marked by unprecedented fiscal austerity”

      as if Murphy overlooked that part.

      Yet that’s exactly what Murphy said Krugman said, starting with “P.S. I know, I know…” above, which motivated this whole post in the first place. If you had bothered to check the rest of Murphy’s post, then you will have read this part:

      “P.S. I know, I know. This is me willfully ignoring Krugman’s caveats, subtleties, and cul de sacs. For example, in the quote above, he said, “BY THIS MEASURE, the era since the Great Recession began has been marked by unprecedented fiscal austerity.”

      “Yet this is exactly the kind of thing I’m talking about. Krugman will use some Measure A by which we’ve had unprecedented monetary and fiscal stimulus, when he wants to ridicule the austerian warnings about price inflation and interest rates. Then, when Krugman wants to explain why the economy is still crappy, he will cite some Measure B by which we’ve had unprecedented fiscal austerity.”

      Then you said:

      “No, Murphy. He can use OVERALL fiscal policy (obviously the most accurate) and look at components of it. This recent post of his just shows – contrary to ring wing myths – that over the past 2 years one component of fiscal stimulus has been falling.”

      Using ONLY one component of fiscal policy to show unnamed, vague, personless “right wing myths” is exactly the kind of cherry picking PK typically engages in. He looks at overall, or components, of fiscal policy depending on whether he wants to mock austerians or defend non-austerians.

      Why didn’t he point to overall fiscal policy and state whether or not that is “rising”? Why did he only look at one component? Most “right wing” people don’t just look at only one component when saying “fiscal policy has been rising/falling”.

      It would be like Austrians ridiculing Keynesians by saying “What do you mean not enough stimulus? Just look at the car company bailouts. ACCORDING TO THIS MEASURE, and contrary to left wing myths, we’ve had skyrocketing/huge/massive/unpredecented/astronomical/etc/etc sized stimulus.”

      Well yeah, but that is incredibly misleading, and Keynesians including PK would almost certainly point that out and say Austrians are cherry picking data on that one.

      Murphy is just saying that PK should use the same data on both sides, for attack and offense. Not “only government spending for thee, but overall fiscal policy for me” type rhetoric.

      • Major_Freedom says:

        Sorry about the bold formatting insanity.

  4. Joseph Fetz says:

    How much do you wanna bet that Wenzel going to just on that whole “austerian” thing again? He already did it once just the other day. I guess that he misses the part where you put it in quotations. Oh well.

  5. Bob Roddis says:

    1. I’m always shocked that anyone would take an aggregate of government purchases or the prices which result from government interference and add those prices together with prices from voluntary transactions as if they were the same thing. Only voluntary exchanges produce prices that accurately reflect actual demand (and supply).

    2. After almost a half-decade of monstrous Keynesian interference in “treating” the bust, we still haven’t had the necessary re-pricing, have we?

  6. Brent says:

    Can someone just flat out ask him which is it? I’d love to see that question as he goes out peddling his book… “Dr. Krugman, have we had fiscal austerity or have we had fiscal stimulus?” Same thing for monetary policy. It might take an hour to pin him down on this one question, but it would sure be nice to have him agree to take a single position on “the facts” (even if it is just one).

  7. Daniel Kuehn says:

    re: “Krugman will use some Measure A by which we’ve had unprecedented monetary and fiscal stimulus, when he wants to ridicule the austerian warnings about price inflation and interest rates. Then, when Krugman wants to explain why the economy is still crappy, he will cite some Measure B by which we’ve had unprecedented fiscal austerity”

    Again – your bet and other claims like it were largely unconditional or if they were conditional, they were conditional on whatever we had already done. If you call that “austerity”, he’s going to tell you that won’t cause inflation. If you call that “stimulus” he’s going to tell you that won’t cause inflation.

    This post is about the “era since the Great Recession”, keep in mind.

    Since the Great Recession we’ve had a great deal more austerity than during the Great Recession – that was a time when Krugman said we’re doing something but not enough.

    • Daniel Kuehn says:

      I just noticed he said since it “began”.

      Anyway – I still think this dynamic is the source of some of the confusion. We did have modest stimulus during the Recession. We had more austerity afterwards.

      • Bob Murphy says:

        DK wrote: “I just noticed he said since it “began”.

        Anyway – I still think this dynamic is the source of some of the confusion.”

        Yep, that’s why I put that part in bold. In this post he didn’t even bother with the obligatory, “Of course, the stimulus was just big enough for me to write a post saying BIG GOVERNMENT AVERTED A DEPRESSION” (which he did, remember), “and big enough to mock austerians who warned of inflation and interest rate spikes, but it was too small to fix things.”

        Nope, in this post he just said that from the onset of this era, we’ve had unprecedented fiscal austerity (by “this measure”).

        I agree, Krugman’s dynamic blog posts are incredibly confusing.

        • Daniel Kuehn says:

          Is it all that confusing to talk about Dec. 08 – Dec. 12 as weak, Dec. 08 – Dec. 09 as decent, and Dec. 09 to Dec. 12 as way too weak?

          I’m saying the commentary is confused. I don’t think Krugman’s take has been all that confusing.

          • Bob Murphy says:

            DK wrote:

            Is it all that confusing to talk about Dec. 08 – Dec. 12 as weak, Dec. 08 – Dec. 09 as decent, and Dec. 09 to Dec. 12 as way too weak?

            Wait a second Daniel. In my second last post, I showed how Krugman displayed a chart of inflation and interest rates *from January 2011 to the present.* So by your own parsing of Krugman, this was a period where stimulus was “way too weak.” And by his recent proclamation, this was clearly in the period of “unprecedented fiscal austerity.” And yet, in this period of way too weak stimulus, aka unprecedented fiscal austerity, the low interest and inflation rates were proof in Krugman’s mind that the austerian model is wrong–because he used this chart from January 2011 to the present to make fun of Paul Ryan’s warnings.

            • Daniel Kuehn says:

              Krugman was referring to monetary policy which has a better case for being non-austere than fiscal policy.

              Still, I don’t get your point there. Ryan was concerned with the fiscal side of things two years ago (as Krugman cited), he was through the campaign, and he still is today. How is this not embarrassing for him?

              Do you think it helps Ryan’s case that what he mistakenly freaks out about is actually relatively austere?

              • Major_Freedom says:

                You’re missing the point, DK.

                If you agree that PK believes that we have had unprecedented fiscal austerity, then how can you say he is not wrong to say that the austerian’s model is wrong for predicting higher inflation rates and interest rates?

                If PK says we have had unprecedented austerity, then the low inflation rates and interest rates would be evidence that the austerian’s model is at least non-falsified, wouldn’t it?

                I don’t understand how the austerians can be wrong for predicting high inflation and interest rates, while PK is right about fiscal austerity, at the same time. They don’t gel.

    • Bob Roddis says:

      It’s one thing to claim that the government blowing prodigious amounts of money out its ass or engaging in prodigious levels of money dilution causes prosperity. But isn’t it a purposeful distortion of the language to call prodigious – but less than allegedly optimal – levels of such “stimulus” “austerity”?

      Just curious.

      • Daniel Kuehn says:

        I interpret austerity as below trend. Absolute cuts make no sense as a definition in a growing economy. I think that’s how most people think about it. Above trend but less than we need is what I think of as “modest stimulus”.

        • Gee says:

          Out of curiosity, please give an example of when stimulus was what “we need”.

            • Ben Southwood says:

              I know this is a tired, and hence probably to you boring, response, but you seem (from comments here, elsewhere, and your own blog) to be a pretty intelligent, well-read and open-minded sort of guy, not to mention extremely generous in interpretation (a virtue, of course).

              So it surprises me that you think “we” (i.e. the US) needed the stimulus of WWII. Of course, I could be misinterpreting what you said – I’m taking it to mean something like, “It was a good thing that the US federal government massively increased spending as it got involved in WWII as this boosted GDP and employment.”

              We like GDP and employment because under reasonably acceptable private markets, and the minority of well-considered government decisions they tell us about the health of the economy. But, as with any measure that correlates with, but is not exactly what you’re interested in and want to promote, if you target the measure, then you can boost it without boosting what you’re interested in (social welfare).

              GDP from building useless objects that destroy other objects and people does not add to social welfare. Make-work employment is probably a social bad (I’m open to the possibility that the personal consequences of unemployment are so bad, it’s actually a marginal good but no one’s made that argument to me.)

              Big caveat: it’s possible that fighting WWII boosted world wide social welfare so the costs of not fighting would have been even higher. I think it obvious that just looking at the immediate consequences of fighting the war, the US intervention detracted from world welfare. Obviously it’s entirely possible that the more long-term consequences go in the other direction.

              But if that were true then the US needed WWII spending to stop the USSR ravaging and taking over all of Europe, not just half, or whatever other bad effects not fighting the war would have. But WWII spending would not then be good because it boosted GDP and employment – because those things are only goods insofar as they actually help us understand what’s happening to social welfare. And difficult, unpleasant, probably unhealthy drudgery producing objects that at best produce very little extra welfare through existence value preferences – which bear in mind could have been at the very least engaging in leisure, and more likely producing goods that do enhance social welfare, isn’t a reason in itself to favour WWII stimulus spending.

          • Daniel Kuehn says:

            That actually overshot from a strictly macro perspective. Killing fascists ain’t cheap.

            • Major_Freedom says:

              You’re right. Those who wanted to kill FDR knew that pretty well.

          • Jonathan M.F. Catalán says:

            The classic answer, the one that has been associated with the name of John Maynard Keynes, is that if the private sector won’t spend enough to maintain full employment, the public sector must take up the slack. Let the government borrow money and use the funds to finance public investment projects — if possible to good purpose, but that is a secondary consideration — and thereby provide jobs, which will make people more willing to spend, which will generate still more jobs, and so on.

            — Paul Krugman, The Return of Depression Economics and the Crisis of 2008 (New York: Norton, 2009), p. 71.

            • Bob Roddis says:

              Yes, but….

              Where’s the evidence that economies have anything approaching “slack” that must be “taken up”?

        • Bob Roddis says:

          Austerity is derived from “austere”. Using the term to mean “below trend” is an abuse of the language.

          aus·tere
          /ôˈsti(ə)r/
          Adjective

          a. Severe or strict in manner, attitude, or appearance: “an austere man with a puritanical outlook”.

          b. (of living conditions or a way of life) Having no comforts or luxuries; harsh or ascetic.

          Synonyms : severe – stern – strict – rigorous – stringent – rigid

          Further, since cutting spending leads to prosperity and “stimulus” leads to poverty, the terms themselves are so loaded with false and deceptive meaning so as to be preposterous.

          • Daniel Kuehn says:

            I’m not sure what’s misleading.

            If a 40 lb. five year old grows into a 90 lb. adult I would call the diet going into that growth “austerity” even though the kid more than doubled in size.

            • Dean T. Sandin says:

              This analogy is atrocious. The easiest way to see that is to imagine your attitude about an adult who gains 50 lbs every 13 years throughout their life. Still austerity?

              • Daniel Kuehn says:

                My analogy made much more sense than yours. I’m comparing to natural growth rates for gov. and people.

              • Matt Tanous says:

                DK, there is no “natural growth rate” for government.

              • Major_Freedom says:

                WRONG!!

                The natural growth rate of government is whatever DK believes is natural.

          • Daniel Kuehn says:

            Potentially criminal, in fact.

        • Bob Roddis says:

          Also, as LK has shown, there cannot be anything such as an economic “trend”:

          “Keynes … rejected this view that past information from economic time-series realizations provides reliable, useful data which permit stochastic predictions of the economic future. In a world where observations are drawn from a non-ergodic stochastic environment, past data cannot provide any reliable information about future probability distributions. Agents in a non-ergodic environment ‘know’ they cannot reliably know future outcomes.

          http://socialdemocracy21stcentury.blogspot.com/search?q=ergodic

          • Lord Keynes says:

            “Also, as LK has shown, there cannot be anything such as an economic “trend”:”

            No, bob roddis, it is only your epic stupidity or dishonesty that leads you to say that.

            The existence of nonergodic, stochastic systems in markets does not prevent identification of output gaps in the present or past, or unemployment or GDP levels in the present or past, nor does it prevent identification of basic trends in market systems.

            The essence of the passage on uncertainty you quote is more or less also the Austrian view, e.g.:

            “Mises distinguished between the role of ‘quantitative predictions’ within the natural sciences and ‘qualitative predictions’ in sociology and economics. He argued that it is impossible to predict specific outcomes in social science with any degree of accuracy and that, instead, social science should concern itself only with the prediction of patterns”

            Mark J. Smith, Social Science in Question: Towards a Postdisciplinary Framework, p. 155.
            —-

            “The important point in relation to economic theory is that Misesian Man knows the body of economic laws that Misesians have built up; these laws, while absolute, are qualitative and ceteris paribus in their nature and cannot themselves forecast the future”

            Murray N. Rothbard, Economic Controversies, p. 174.

            Davidson, in the passage you quote, is thinking of specific economic data or quantities in market systems – not general trends – e.g., stock market prices of an specific stock 10 years from now, the returns on an investment 4 years from now, etc, etc.

            • Jonathan M.F. Catalán says:

              If you have to start out with this,

              No, bob roddis, it is only your epic stupidity or dishonesty that leads you to say that.

              Why respond at all?

            • Bob Roddis says:

              Thanks, LK, for your always helpful clarification. I guess it all depends upon a flexible Keynesian policy of language interpretation especially concerning the transparently ambiguous assertion that:

              In a nonergodic system, ONE CAN NEVER EXPECT WHATEVER DATA SET EXISTS TODAY TO PROVIDE A RELIABLE GUIDE TO FUTURE OUTCOMES.

              You Keynesians know what you mean, and mean what you say.

            • Major_Freedom says:

              “The existence of nonergodic, stochastic systems in markets does not prevent identification of output gaps in the present or past, or unemployment or GDP levels in the present or past, nor does it prevent identification of basic trends in market systems.”

              Explain how you can do that, GIVEN that “past information from economic time-series realizations provides reliable, useful data which permit stochastic predictions of the economic future” is assumed as valid.

              • Major_Freedom says:

                typo:

                “is assumed as invalid.”

                As per Keynes.

              • Lord Keynes says:

                Because that sentence is referring to specific economic variables in market systems.

                Its meaning is that you cannot construct an objective probability score for the likelihood of specific outcomes in the future, e.g, the price of certain stock x in 10 years time, the returns on an specific investment 4 years from now, etc, etc.

                That does not exclude identification of general trends or underlying regularities in economic life.

              • Major_Freedom says:

                LK:

                Explain what you just said about it only referring to specific outcomes like stock returns, given that you said in your blogpost:

                “The concept of radical uncertainty applies to such systems, like medium term weather events, financial markets, and economies, and other natural systems studied in physics.”

                and then

                “In these systems, past data is not a useful tool for predicting the future state of the system and the problem of induction is particularly acute.”

                In these passages you’re talking about the whole economy, not “particular outcomes” of particular stocks.

                Yet you said to me that the “non-ergodic” argument only applies to particular objects, like stocks.

                ???

              • Major_Freedom says:

                LK:

                In other words, I would like to know how you are claiming to be able to “construct trends” of whole economies, using observations, which are necessarily historical, not future, given that you said in your blog post that “past data is not a useful tool for predicting the future state of the system and the problem of induction is particularly acute.”

              • Lord Keynes says:

                Because I am thinking there in that post of highly laissez faire or pure market systems, in the absence of stabilising government interventions in the quotes you cite.

                That ought to be quite clear to anyone who didn’t selectively quote the post without looking at the whole context and this comment at the end:

                “And even today a powerful entity like the government can intervene to reduce uncertainty in the non-ergodic stochastic system we call the economy.”

                Obviously, in a real world economy, as, e.g, France or Germany in 2013, you have many government interventions that mean that the overall economy is not a pure nonergodic, stochastic system.

                E.g., in a pure market system it is indeed not possible to give an objective probability score for the likelihood that the standard interest rate at bank x on a mortgage will be such-and-such in one years time pr two years time.

                However, in a modern economy when the central bank controls the base rate, and credibly announces that it will keep the base rate at a certain level for a year, you have ceased to have a nonergodic, stochastic system in the way the base rate is set. The base rate is clearly being controlled and the central bank has indeed provided certainty in that particular variable – certainty that would not exist in a pure market system.

              • Major_Freedom says:

                LK:

                So when you’re talking about constructing “trends”, you are not saying it is possible for pure market economies, but rather for hampered market economies.

                When you said:

                “That does not exclude identification of general trends or underlying regularities in economic life.”

                You were referring to hampered market economies, not pure free market economies.

                Given that is the case, then for the “trends” that you say need to be constructed in order for a government to plan, you seem to be talking about a government that “intervenes” in the market in order to bring about a calculated “trend” that is itself based on its own intervention, not any trend in what would otherwise be a primarily laissez faire or pure free market, as they do not exist.

                Given that this is the case, how can the very first government plan be calculated, if we start with a primarily laissez faire or pure free market that has no trend?

                In other words, on what basis is the first Keynesian government plan executed, given that Keynesian policymakers start with historical non-Keynesian, primarily laissez-faire data?

              • Lord Keyens says:

                No, even in a highly laissez faire economy (e.g., late 19th century) one can identify general trends, even if one cannot predict precise specific events objectively.

                The original quote in question is talking about the ability to give an objective probability score for a specific variable outcomes, when subject to decentralised market phenomena.

              • Major_Freedom says:

                LK:

                “As to the problem of induction and epistemological justification for government intervention, I have already dealt with that:”

                “http://socialdemocracy21stcentury.blogspot.com/2011/10/how-can-government-overcome-uncertainty.html”

                In that post, you write:

                “When you introduce an intervention to influence the state of a nonergodic stochastic system, that process and outcome is not in the same ontological category or status as the future of that system, without intervention.”

                Explain why an individual market actor’s “interventions”, e.g. purchasing $10,000 worth of goods, does not turn a “non-ergodic stochastic system” that is the free market into an ontologically different process and outcome, but an individual Keynesian policymaker’s “interventions”, e.g. purchasing $1000 worth of goods, does turn a “non-ergodic stochastic system” that is the free market into an ontologically different process and outcome.

                You then wrote:

                “The past data from which one draws inferences about what the intervention will do consist of examples of past such interventions, ideally of the same type.”

                I was asking about the an initial Keynesian intervention, not the second, third, fourth, interventions, the past of which does contain Keynesian interventions of which does (allegedly at this point) turn the past into something other than a non-ergodic stochastic system from which to construct trends.

                Your link does not address that question of how an initial intervention is to be planned, on the basis of constructions of trends, given that you have stated elsewhere that there are no trends that can be induced from observing past “no Keynesian interventionism” data.

                You also wrote:

                “If one thinks that induction can be defended rationally, then inductive arguments using past empirical evidence can be used to provide justification for policy interventions. Induction can be reliable when used outside of nonergodic stochastic systems or events.”

                According to your opinion however, that “if” collapses to a decided no, as you have stated that induction cannot be rationally defended with “non-ergodic stochastic systems”. So what is the defense for the content and form of the plan that constitutes an initial Keynesian intervention?

                Given that it’s not past data (since Keynesian interventionist outcome data cannot exist prior to Keynesian intervention), what is it?

                “http://socialdemocracy21stcentury.blogspot.com/2010/12/risk-and-uncertainty-in-post-keynesian.html”

                In that post you write:

                “Thus the investment decisions of a firm are based on expectations of future earnings, which are not necessarily rational at all. When investment decisions are made, they are done under conditions of subjective expectations by business, and the expectations depend on what Keynes called “animal spirits” (for the original concept, see Gerrard 1994).”

                Explain why those investment decisions do not constitute an “intervention”, the process and outcome of which are of a different ontological category than “non-ergodic stochastic systems”, but Keynesian policy decisions do constitute an “intervention”, the process of and outcome of which are of a different ontological category than “non-ergodic stochastic systems”.

                In other words, explain why an individual market actor who engages in an action, and then observes the outcomes of his past actions, and inductively construct trends over time from which to design future actions, does not turn the world into something other than a non-ergodic, stochastic system, but an individual Keynesian policy maker who acts, and then observes the outcomes of his past actions, and inductively constructs trends over time from which to design future actions, does turn the world into something other than a non-ergodic, stochastic system.

                In other words still, why can’t a market actor use induction based on data consisting of past market actions, but a Keynesian actor can use induction based on data consisting of past Keynesian actions?

              • Major_Freedom says:

                LK:

                “No, even in a highly laissez faire economy (e.g., late 19th century) one can identify general trends, even if one cannot predict precise specific events objectively.”

                General trends don’t need to be predicted by individual market actors. The protection of property rights is sufficient to ensuring that if there are going to be inter-industry influences, they don’t all need to be researched, let alone possible to research them all.

                Only particular market trends that concern each individual market actor need be of concern, or can be of concern.

                A baker of bread for example doesn’t need to know, and can’t know, the expected prices of everything else. Neither can policymakers, BTW. He just needs estimate demand for bread and perhaps a few other important variables.

                While all industries are in some sense inter-connected, this does not imply that every market actor should know, or can know, everything else before he can make relatively informed decisions and forecasts about his own market segment.

                Not even hampering the market with non-market activity can accomplish this. Uncertainty is ubiquitous for humans.

                “The original quote in question is talking about the ability to give an objective probability score for a specific variable outcomes, when subject to decentralised market phenomena.”

                If general trends cannot be reliably constructed on the basis of past laissez faire data, then what is the justification for form and content of the initial Keynesian intervention? How can the first plan be designed if using past data is out of the question?

                Could it be pure greed from powerful criminals who call themselves, and are called by some others, “government”? Is that why Keynesianism arose in the 1930s? Because it had to wait for enough chaotic government intervention before it could enter the scene?

    • Ken P says:

      What do you mean by “since the great recession”? I thought Krugman calls it a depression and claims we are still in it.

      • Joseph Fetz says:

        “End This Depression Now”?

        For a minute I thought you were Ken B, but no, you’re Ken P. What a pleasant surprise!

        I must say, that is a good observation that you make, and it strikes to the core of this flippity floppity Keynesian position (or at least that of PK and DK). Obviously, we aren’t dealing with unintelligent men, but they always seem to want to have their cake and eat it too. And that isn’t just concerning their published opinions, in fact their entire theory is based upon that premise (new-Keynesians especially).

        (don’t worry Ken B., I have a big heart, so their’s still room for you)
        :)

        • Daniel Kuehn says:

          I take the NBER dates of the recession – falling output, etc. – as given. Output remains depressed in this jobless recovery, ergo we are still in a depression.

          There was a recession in the early 1930s, and then growth afterwards (ergo, not a recession – a recovery), but the whole decade was still depressed – a depression.

          I’m not aware of how I’ve flip-flopped.

  8. George Ford Smith says:

    MISH had an appropriate column recently – to debate Paul Krugman, ask questions like a child. http://tinyurl.com/bksjpkg

    • Bob Roddis says:

      1. Ignore minutiae and try to get the other side to debate basics? What kind of a nut would advocate that?

      2. I love how our “fair minded” opponents accuse us of “anarchy” and “austerity” when our proposals would instead produce A) a meticulous adherence to protecting the physical safety of even the most powerless; and B) a universal increase in luxurious levels of wealth and prosperity even among today’s poor and powerless.

      • guest says:

        B) a universal increase in luxurious levels of wealth and prosperity even among today’s poor and powerless.

        Rockwell’s Thirty-Day Plan
        http://www.lewrockwell.com/rockwell/30-day-plan.html

        DAY SEVENTEEN: Centrally planned agriculture, as imposed by Hoover and Roosevelt, is repealed: there are no more subsidies, payments-in-kind, marketing orders, low-interest loans, etc. Farm prices drop. Entrepreneurial farmers get rich. Welfare farmers go into another line of work. The poor eat like kings.

  9. Yosef says:

    Oh I get it. It was the best of government spending, it was the worst of government spending. With posts like these, you’ll have Krugman running like the Dickens

  10. Kpm says:

    The only thing we can all be sure of is that no matter what happens – depression, inflation, asset bubble, slow growth, high growth, lower unemployment, higher unemployment, higher deficits, lower deficits – whatever numbers are produced, future or mined from historical data – every school of thought will claim that it validates their point of view. Monetarists, Keynesians, Austrians, Post-Keynesians, Neo-Keynesians. Any learning consists of small caveats or changes in fringe, smaller ideas that perfect the main thesis. It’s all just like astrology – all results are explainable -all failed predictions explainable with small caveats “I didn’t consider Saturn’s third moon!” Of course you didn’t!

    Really no different than arguing about religion.

    “It is claimed that what happened is a refutation of our point of view, but actually it is a resounding affirmation of our thesis!! Mostly because no one REALLY understands what we are saying” – every economic school of thought. All others’ back-fitting and theorizing are akin to Ptolemaic circles, but not us.

    Don’t worry – you’re right. You feel it in you bones. How COULD you be wrong?

    What result/data could cause a change of mind?

    20 years from now – same arguments. That is a lot of time spent reading, arguing on blogs (or whatever technological form these forums become) to be in the same place.

    Yet – I have resigned myself that I will probably be one of those. Sorry for the rant. This is a great blog. Bob and crew, keep up the good work (and keep an open mind – whatever that means).

  11. Peter says:

    Also note that Krugman specifically mentions state and local governments, i.e. institutions operating under balanced budget limitations, with limited or no access to the money printers.
    It seems to me that the states that were most successful at paring their expenditures to match their “revenues”, and have the most business and labor friendly regulatory environments have the lowest unemployment. And by “labor friendly” I don’t mean “union friendly”, as I believe these are opposites.
    So that would seemingly go against the statement that “shrinking government purchases of goods and services are holding the economy back”.
    Paying people not to work, setting minimum prices for labor are the things that are holding the economy back, at least in terms of unemployment. The fact that we have no capital markets and accurate price signals as a result of endless QE have of course nothing to do with holding the economy back…
    Creating “make work” jobs by government can’t generate the wealth needed to move the economy. Stimulating wealth generation by by lowering regulatory thresholds for people to start and expand businesses is the way to go. The states that figured this out are the most prosperous, despite the oppressive and expanding interference from fed.gov.

    • joe says:

      Interesting observation but I don’t hear Schiff, Will or any austerian saying that interest rates are low now because govt cut spending. That’s the problem with your argument. You are taking Krugman’s statements out of context. Deficit scolds continue to say govt spending has gone through the roof and a fiscal crisis is on the horizon but then Krugman merely reads from table 1.1.2 on the BEA website which says cuts in public investment and consumption have slowed growth for 10 of the past 12 quarters. They claim interest rates are low because the Fed is buying all the debt then he simply points out that the Fed reduced their holdings of treasuries in FY 2012 by 12 billion.

      • Peter says:

        I didn’t mention anything about interest rates, or Shiff. I took issue with the statement that “shrinking government purchases are holding the economy back”. I would argue that the less the government spends, the better it is for taxpayers. I think we can all agree that individuals are much better at figuring out what to spend their money on than the government. Unless you think that bullets and tanks are more productive than tractors and combines.

  12. devo says:

    krugmans intelligence (imo) comes in the form of being able to cover his own ass, make up things that sway attention in his favor, and completely rejecting anything that might possibly be a tad controversial. his intellect is surely not in economics. he may be a smart cookie (i guess, from what i hear sometimes….) , but he is only smart in playing a role. his life is a mask of intelligence over a body of inconsistency and failure. again, all imo, but this guy seems like his brain power is used to make sure no one thinks he’s wrong, instead of actually being right.

  13. William B says:

    Take note of that little dip after the first eight quarters of the 2001 recession, then note how it continues climbing. What do you think happened exactly eight quarters after the start of the recession? The invasion of Iraq! So, is Krugman recommending that we get ourselves involved in another war? If so, why doesn’t he just come out and say it? Its clear that without the invasion, the charts would look much more similar.

    Regardless, its not like we fixed the problems in 2001. We kicked the can down the road until 2007, when the chickens came home to roost again.

  14. William B says:

    If anything, charts like this prove that Krugman’s approach doesn’t work. Austrians (and austerians) can simply point at graphs like these and show how they are correct, that inflation can temporarily paper over an issue (no pun intended), but there’s only so many times you can kick the can before the final day of reckoning.

  15. William Anderson says:

    Notice that Krugman recently claimed that most of the one-trillion-plus federal deficits are due to a slow economy, and now he claims that the slow economy is due to what essentially he would say is a not-large-enough deficit. (More spending in a depressed economy means government has to run a large deficit.)

    Furthermore, it would stand to reason that if the deficit is the result of a slow economy, then wouldn’t less spending at the state and local levels also be due to a depressed economy? But now Krugman is trying to say that had states and local governments spent more, the economy would be stronger. So, he wants it both ways.

    • Joseph Fetz says:

      He almost always wants it both ways, Bill. But then, you already know this. I’m glad that I have you and Bob to follow his inconsistencies, because I just don’t have the stamina for reading his articles.

  16. Mickey says:

    Best as I can tell from his measure, it peaks 11 quarters ago at 107 and is currently at 100. So, over a period of 2 3/4 years it declined by like 6.53%. It seems awfully strong to me to call that a “fairly rapid decline”.

  17. AJM says:

    How’d that David Henderson bet turn out?

    • Bob Murphy says:

      I lost. I wasn’t banking on the unprecedented fiscal austerity since the era of the Great Recession began. Fortunately my model was right–after all, my model predicts that fiscal austerity won’t usher in massive price inflation or spiking interest rates. But it was a costly confirmation of my views, to be sure.

      • AJM says:

        I hope you write up a blog post explaining in detail how getting such a basic bet on the future wrong and still have that failure be a “confirmation of your views”

        I look forward to it.

        AJM

        • Joseph Fetz says:

          Somebody completely missed the joke.

        • Matt Tanous says:

          I thought Bernanke and the Obama administration were going to print and spend like crazy. This would lead to spiking interest rates and massive price inflation.

          However, as Krugman has dutifully pointed out, Bernanke and the Obama administration didn’t do that. Thus, my model still works – because if I had thought that we would have unprecedented fiscal austerity, I would not have predicted inflation. If we had “unprecedented austerity” AND inflation, then the Austrian model might have to be reevaluated. Fortunately, we didn’t have that – Krugman said so!

  18. CC says:

    “So doesn’t the historical record, since the Great Recession began, validate their model?”

    No because Japan

    • Major_Freedom says:

      Not too many people seem to notice, or care, that since 1987, Japan has grown in real terms virtually identically with Switzerland, if by real growth we mean real gdp per capita (corrected for PPP).

      Source.

      Not too many inflation loving economists are complaining about any Swiss lost decades.

      • Lord Keynes says:

        That’s because Japan’s population growth has slowed. The real per capita GDP growth data is a factor of that population trend
        too.

        As for the lost decade that ended about 2003.

        • Major_Freedom says:

          Slowing population growth reduces the growth in the increase in the labor supply, which reduces productivity, ceteris paribus.

          Per capita is a correction for population changes.

          I think many would disagree with 2003 as the end date.

      • CC says:

        so is that your argument for why japan can still borrow cheaply despite a large and rising debt to GDP ratio?

  19. Lord Keyens says:

    “Per capita is a correction for population changes.”

    False. Per capita real GDP does not tell you anything about underlying population trends.

    You’ve no idea what your talking about.

    • Major_Freedom says:

      I didn’t say it tells us about underlying population trends.

      I said it is a correction for population changes, so as to isolate real GDP per person so that comparisons can be made between countries and within the same country over time as the country’s population changes.

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