At NYU my “field” was Game Theory, because I figured, if we’re going to formally model economic actions, then let’s get nuts. I have elsewhere criticized the big guns of game theory when they try to talk to the layperson.
So, when Tyler Cowen linked Ariel Rubinstein’s article titled, “How Game Theory will solve the problems of the Euro bloc and stop Iranian nukes,” I was getting ready to knock it out of the park. (Here’s an ungated copy of it.)
If you understand where I was coming from, then just click that link and be amazed. Read the whole thing, the end is the best part.
Man I am just really down lately, because the great experiment in European austerity has proven to be a disaster for “my side” of the debate. You had all these austerians predicting that the way to reassure bond markets and get yields down on fiscally suspect European nations was to make bold promises about reform. But it’s not like this “unprecedented experiment in austerity” produced something that could be described as “The Italian Miracle,” right? It’s not like Krugman would write a blog post like this:
Italy is a mess. Yes, it has a prime minster, finally; but the chances of serious economic reform are minimal, the willingness to persist in ever-harsher austerity — which the Rehns of this world tell us is essential — is evaporating. It’s all bad. But a funny thing is happening:
What’s going on here? I think that we’re seeing strong evidence for the De Grauwe view that soaring rates in the European periphery had relatively little to do with solvency concerns, and were instead a case of market panic made possible by the fact that countries that joined the euro no longer had a lender of last resort, and were subject to potential liquidity crises.
What’s happened now is that the ECB sounds increasingly willing to act as the necessary lender, and that in general the softening of austerity rhetoric makes it seem less likely that Italy will be forced into default by sheer shortage of cash. Hence, falling yields and much-reduced pressure.
So here’s how you deal with data if you’re Paul Krugman:
(A) Describe what Europe is doing as the dream plan of right-wingers, even though I can’t think of any Austrian or Chicago School guy saying that raising tax rates was a good idea for Europe.
(B) Find any example of bad economic news in Europe, and blame it on “unprecedented austerity.”
(C) Find any example of good economic news in Europe–even falling bond yields, which is exactly what the politicians claimed would happen if they implemented their “austerity”–and attribute it to the ECB doing just enough to offset the horrible fiscal policy.
(D) Then, just for kicks, claim that only a liar or a fool could possibly ignore the mountains of empirical evidence that the Keynesians have been totally vindicated by events in Europe.
I realized that I was being too fair to “Lord Keynes” in the last post, since total GDP statistics include government expenditures. To really test whether the Obama stimulus episode seems more consistent with the Keynesian versus the Austrian story, let’s look at what happened to gross private investment (I couldn’t find any FRED series for total private GDP) when the Obama stimulus kicked in, in early 2009. Here ya go:
Again, this doesn’t prove a darned thing. But remember what Lord Keynes had said to me: “If stimulus is counterproductive, then why didn’t real output plunge even further when the stimulus was implemented?”
So my point here is that if you are a Keynesian and think the data are overwhelmingly on your side, I think you need to take a second look. There is a reason a lot of us still cling to the notion that giving politicians control over resources is hardly the path to prosperity, when the economy is already reeling.
“Lord Keynes” provided the most beautiful confirmation possible in the comments of my recent post. Recall that I had teased a guy for simply assuming the Keynesian theory was correct, when interpreting the economic statistics. Lord Keynes upbraided me:
As opposed to your last post, where the data strongly confirms the Keynesian story, but not yours?
If stimulus is counterproductive, then why didn’t real output plunge even further when the stimulus was implemented?
Here’s the chart of total federal expenditures vs. real GDP:
So, the data did exactly what Lord Keynes denied had happened. Yet he literally can’t see this, because he is so sure that extra government spending, other things equal, will boost a depressed economy. He’ll look at that chart and “see” that real GDP was poised to collapse even further, but finally bottomed out (after a lag) because of the Obama stimulus in early 2009.
Also apropos, let’s consider the counterfactuals: The Keynesian economists with their names on the White House analysis of the stimulus package, infamously predicted that the economy without stimulus would have a lower unemployment rate, than what the economy actually ended up getting with stimulus. There could not be a better example of exactly what Lord Keynes had demanded. The economy looked like it was on trajectory A, they implemented the stimulus, and all of a sudden “oh shoot, the economy was worse than we realized.”
(Yes yes, some Keynesians said it wouldn’t be enough. Just like some Austrians and fellow travelers [like Vijay Boyapati and Mish] said deleveraging would lead to tame CPI increases, if not outright price deflation. Yet I don’t see Lord Keynes or Krugman pleading for nuance when discussing the predictions of “the austerian camp” regarding the economy in the last four years.)
I was going to read my son another chapter from the second Harry Potter book, but he requested a story from “the Bible…your Bible.” (By which he meant, not the children’s animated book of Bible stories in his room.) So I flipped through and read him this, from Matthew 13: 24-30:
24 Another parable He put forth to them, saying: “The kingdom of heaven is like a man who sowed good seed in his field; 25 but while men slept, his enemy came and sowed tares among the wheat and went his way. 26 But when the grain had sprouted and produced a crop, then the tares also appeared. 27 So the servants of the owner came and said to him, ‘Sir, did you not sow good seed in your field? How then does it have tares?’ 28 He said to them, ‘An enemy has done this.’ The servants said to him, ‘Do you want us then to go and gather them up?’ 29 But he said, ‘No, lest while you gather up the tares you also uproot the wheat with them. 30 Let both grow together until the harvest, and at the time of harvest I will say to the reapers, “First gather together the tares and bind them in bundles to burn them, but gather the wheat into my barn.”’”
Look, the problem of the existence of evil is a problem. But atheists drop that like it’s a conversation ender, when in fact theologians have grappled with it all along. Indeed, Jesus Himself tries to explain it to the layperson with the above story.
My son wasn’t satisfied with the above, so I tried explaining that there couldn’t be superheroes if there were no bad guys. For example, there could be a guy “Superman” who could fly and was really strong, etc., but without any villains we wouldn’t think he was great.
In the comments last week, I pointed out that great literature always has villains or at least antagonists who present conflict for the protagonist. For some reason, people expect God–the author of history itself–to not obey an obvious rule of human creativity.
Presumed “wonk” Neil Irwin writes:
The [latest GDP] report details this stuck-in-neutral economy. It’s not without bright spots, but there aren’t enough of them, and they aren’t bright enough to make up for the forces dragging the recovery, most significantly a drop in government spending.
Indeed, the biggest culprit in the weak report was the government sector, which fell at a 4.1 percent rate, after a 7 percent pace of decline in the fourth quarter. The fall was universal — at the federal, state and local levels. The U.S. government is in pullback mode, and whatever one thinks about reducing the size government in the long run, for now it is unequivocally the villain in slowing growth. If there’d been no change in government spending over the last six months, GDP growth would have averaged a respectable 2.55 percent, not the current soft 1.45 percent. [Bold added.]
Why yes, Mr. Irwin, I agree: If you simply assume without even realizing it that the Keynesians are right, and that their opponents are wrong, then the Keynesians will be vindicated “unequivocally” by the data.
I am going to accelerate my transition into stand-up comedy, because the public is going to turn on economists very, very soon. Look at this:
1) Krugman argues that severe US fiscal austerity explains our dismal economic growth.
2) I say no, there hasn’t been fiscal austerity. In fact, we have record-high spending, and that explains our dismal economic growth.
3) Mike Konczal says the authorities have done exactly what the market monetarists wanted: The federal government has engaged in severe fiscal austerity, while the Fed has aggressively upped its purchases. The latest GDP numbers show what an abysmal failure this has been. The Keynesians were right, after all: We need budget deficits to get out of this mess.
4) Scott Sumner says no, we haven’t gotten level targeting of NGDP, which is what the market monetarists want. But anyway, Scott continues, the government’s severe fiscal austerity and easing of monetary policy has led to the recent GDP numbers, which are better than last year’s. So the market monetarists were right, after all: We don’t need budget deficits to get out of this mess.
I don’t care whether you’re Austrian, Keynesian, or Sumnerian: The above is messed up. If Joe Schmoe tried to follow the economic debate on the blogosphere, he would be very upset, as you can understand, and rightly so.
On April 20 I gave the opening talk at the “Anarchy in the NYC” event. In case you don’t know, this event featured a bunch of young anarchists of various persuasions, as well as bands. So I had to unveil Tough Guy Murphy for this one.
One last caveat: There is about 45 seconds of lost footage in the video below, and it occurs at a crucial part near the end after I give the NBA and writers analogies. The talk is still comprehensible, but the “a ha” punchline loses some of its force. In any event, my opening joke about testicles survives, and I think that’s all that really counts.