29 Aug 2014

I Call Krugman’s Bluff on European Austerity

Austerity, Krugman, Shameless Self-Promotion 173 Comments

I realize the novelty of this is wearing thin, but every once in a while I like to go look up the actual numbers when I know Krugman is full of it. This time, it concerns his offhand remarks concerning Germany, France, and the Netherlands.

173 Responses to “I Call Krugman’s Bluff on European Austerity”

  1. Major.Freedom says:

    Murphy, the fact that government austerity is correlated with output improvements is why the ideologues had to switch gears to “cyclically adjusted” government spending to GDP estimates, which course they can massage and manipulate to say anything they want, because the core (and erroneous) philosophical claim can be included in the model.

    • Tel says:

      Krugman was for a while using the second derivative of government debt as his measure of “Austerity”. That is to say, if the rate at which government gets into debt is decreasing, this is “Austerity”.

      Steve Keen calls it the “debt accelerator” and he thought of it years before Krugman…

  2. LK says:

    “If any country in Europe is to be associated with fiscal restraint, it is Germany, and yet it is doing much better economically than other countries that opened up the fiscal spigots more liberally after the crisis struck”

    Oh lord, the utter, embarrassing ignorance.

    For those who want the facts:

    “In late 2008, the German government implemented an emergency bailout package of €480 billion for German banks. In November 2008, the government then approved a stimulus package of €23 billion ($29 billion). On 27 January 2009, the German cabinet approved a €50 billion (£46.7 billion) stimulus package over two years (at 1.6% of gross domestic product).

    Germany had two stimulus packages that pumped about €80 billion ($104 billion dollars) into the economy. At about 1.6% of GDP, the German stimulus was larger than the G-20 average, and, along with Germany’s automatic stabilizers, government spending to stabilise the economy was 3.2% of GDP”
    —————————
    So much for German “fiscal restraint”. lol.

    The Germans implemented a strong Keynesian fiscal stimulus in 2008-2010, and then they have benefited from export-led growth since then. The fact that government spending as a percentage of GDP in your graph falls and then remains flat is largely the result of GDP growth, it would seem, not large cuts in government spending.

    The fact that you can wind down a stimulus in a period of expansion does not support the case for austerity in a recession or in periods of deficient exaggerate demand.

    • Richie says:

      “the German stimulus was larger than the G-20 average…”

      This means nothing without the standard deviations.

      • Ken B says:

        It means you cannot hold Germany up as a model of restraint.

        • Richie says:

          Thanks for confirming you know nothing about basic statistics, just like Lord Keynes.

          • LK says:

            So you have the plain fact that Germany’s stimulus was 1.6% of its GDP — and yet you are still trying to defend the idea that Germany was a model of fiscal restraint? Is that right? lol

            • Ken B says:

              The statistical point LK is that to be a “model” of restraint compared to the others you must be noticeably more restrained that the others. Some distance above the average. But if you are less than the average that is quite a trick. Regardless what the sd is …

          • Ken B says:

            Thanks for confirming you know nothing about my background.

            • Major.Freedom says:

              People often forget much of what they learned in school, but they convince themselves they can adequately debate it in the present.

            • razer says:

              Aren’t you the guy who argued that if someone has no opinion on a matter, then he is trying to have it both ways? Pure genius.

              • Bob Murphy says:

                Remember guys, trolls only have the power you decide to give them. Choose wisely.

              • Ken B says:

                I have no idea what you keep referring to. I admit I am curious to know if you do.

              • Ken B says:

                Crickets. Of course.

    • Bob Murphy says:

      LK I would never bother digging up numbers just to argue with you–my name isn’t Sisyphus–but in this case I already did the work. Go look at the charts in my post. Comparing Germany to the Netherlands you find:

      (A) Netherlands had a higher absolute level of gov’t spending throughout (measured as % of GDP).

      (B) Netherlands increased gov’t spending faster in 2009, both as absolute increase and percentage relative to 2008 level.

      (C) Germany cut gov’t spending after 2009 more sharply than Netherlands.

      So no matter how you slice it LK, if you’re saying Germany had a sufficiently aggressive Keynesian stimulus, then the Netherlands had an even better one.

      And yet, Germany is blowing Netherlands out of the water in economic performance.

      If you want to say, “Well jeez, there are a lot of moving parts in an economy, you can always find exceptions to the rule and that’s what happened here,” fair enough. But you are trying to argue that these data fit your Keynesian stimulus story, when no they clearly do not. It’s the opposite of what you need to happen.

      And to repeat, *I* didn’t cherry pick these countries to compare. Krugman did.

      • LK says:

        “So no matter how you slice it LK, if you’re saying Germany had a sufficiently aggressive Keynesian stimulus, then the Netherlands had an even better one.

        And yet, Germany is blowing Netherlands out of the water in economic performance.”

        First, I do not see any absolute numbers on your post.

        Secondly, the only other data you have is the “government spending as a percentage of GDP”, which as you already hint at is hardly going to show you the real story because it is also a function of GDP growth or contraction:

        “In conclusion, let me admit that the Keynesians have an obvious comeback: They can say that I’m loading the deck by using “government spending as a percentage of GDP,” because if a country is growing well (like Germany) then a given absolute amount of spending in euros will translate into a lower percentage of GDP.”

        The idea that Germany was a model of “fiscal restraint” is laughable.

        A nation whose stimulus was 1.6% of its GDP is not engaging in “fiscal restraint”. And as already pointed out, Germany has benefited from export led growth since 2009/2010, so the winding down of its stimulus and its continued growth is not contradicting Keynesian economic theory.

        • Major.Freedom says:

          LK,

          The point is concerning spending per GDP relative to the other countries in the chart.

      • Ken B says:

        This is non-responsive. LK criticized this claim: “f any country in Europe is to be associated with fiscal restraint, it is Germany,..” That makes an implicit comparison to all of Europe not just Nederland.

        • Major.Freedom says:

          Euro 17 area is in the chart.

          • Ken B says:

            Bob’s comment only talks about Holland. Non responsive.

          • Major.Freedom says:

            Bob’s claim about German austerity was in a context of not just Holland.

            Non-responsive.

      • Philippe says:

        Bob,

        you seem to keep conflating ‘government spending as a percentage of GDP’ and ‘government spending’.

        For example in your above comment you say:

        “Germany cut gov’t spending after 2009 more sharply than Netherlands”

        That is incorrect. Germany didn’t cut government spending after 2009, it increased it.

        • Bob Murphy says:

          Philippe wrote:

          Bob,
          you seem to keep conflating ‘government spending as a percentage of GDP’ and ‘government spending’.
          For example in your above comment you say:
          “Germany cut gov’t spending after 2009 more sharply than Netherlands”
          That is incorrect. Germany didn’t cut government spending after 2009, it increased it.

          Philippe, I am not going to keep writing “as % of GDP” in every sentence. I have repeatedly been telling people both in the original post and in these comments what my unit of measurement is. Also, FWIW, German gov’t spending actually did fall even in absolute euro terms in 2011 relative to 2010.

          And if you’re now going to switch to absolute euro level of spending, then the Netherlands in 2012 had 10% more spending compared to 2008. So that ‘s stimulus right? (It only goes up to 2012 on that website.)

          You guys are hilarious. When Veronique de Rugy points out governments haven’t been actually cutting absolute spending but at best have been removing some of the 2009 hike, you flip out and say they’re idiots, that the proper metric is relative to trend or whatever. Then we show cases where even that doesn’t work, and now it’s back to focusing on absolute euro spending. Do you even realize you’re doing that?

          • Philippe says:

            I’m not speaking on behalf of others.

            I’m pointing out that a reduction in govt spending as a percentage of GDP is not the same thing as reduction in government spending. Govt spending could fall whilst govt spending as a % of GDP increases, for example.

            Also, just to clarify, when I said that Germany “increased it” (i.e. govt spending), what I meant is that government spending increased over that period of time, not that they actively set out to increase overall spending by implementing new programs or an economic stimulus. (my comment was a bit unclear clear on that point).

            • Philippe says:

              Also I was looking at stats for different countries here, which are different to those on the OECD site:

              http://www.tradingeconomics.com/germany/government-spending

              The charts here show an upward trend for German govt spending, whilst Netherlands govt spending goes flat until 2014:

              http://www.tradingeconomics.com/netherlands/government-spending

              I’m not sure why there are differences in the data though.

              • Bob Murphy says:

                Philippe,

                I’m not saying the OECD data are gospel, but I don’t trust that Trading Econ stats site. I’m not saying that just on this topic; on other things I’ve thought they looked fishy.

            • Tel says:

              Just give us one simple definition of “Austerity” to stick with once and for all.

              What is “Austerity” ?

              • Tel says:

                Something measurable preferably.

              • Philippe says:

                if the economy is in a recession and the government responds by tightening fiscal policy, that would be an example of austerity by the usual meaning of the term.

                http://en.wikipedia.org/wiki/Austerity

              • Tel says:

                OK, so from the Wiki definition:

                n economics, austerity describes policies used by governments to reduce budget deficits during adverse economic conditions. These policies may include spending cuts, tax increases, or a mixture of the two.

                Looking at the Netherlands government budget, they did not have a deficit from 2007 to 2009 when the GFC hit, but they did have a big deficit by 2010. Does that sound like “reduce budget deficits during adverse economic conditions” because it would appear that their deficit increased.

                That’s from your own Trading Economics link above. Conclusion: there was no “Austerity” in the Netherlands, by your own definition and your own data.

              • Philippe says:

                govt budgets can go into deficit automatically as a result of an economic contraction, due to falling tax revenues and higher outlays on unemployment support etc.

                “Public spending cuts and higher taxes are likely to further weaken an already fragile recovery in the Netherlands as the government struggles to meet budget-deficit targets agreed to with the European Commission, according to the Netherlands Bureau for Economic Policy Analysis… Despite growing resistance at home, the Dutch government, one of the key advocates of fiscal discipline in the European Union, has continuously cut spending and raised taxes to curtail its own budget deficit as required by euro-zone rules, enforced by the European Commission.”

                http://online.wsj.com/news/articles/SB10001424127887323981304579078880582454124

              • Philippe says:

                the Netherlands did some sort of economic stimulus and financial bailout in 2009 which pushed the budget further into deficit:

                http://www.oxfam.org/sites/www.oxfam.org/files/cs-true-cost-austerity-inequality-netherlands-120913-en.pdf

                then it turned to tightening fiscal policy as the eurozone crisis continued to unfold and the euro countries agreed to deficit reduction plans.

              • Tel says:

                You can see the Dutch government budget here.

                http://www.tradingeconomics.com/netherlands/government-budget

                During 2006 – 2009 (4 years) it floated around pretty close to balanced, with a tiny surplus in some of those years). The deficit struck very strongly in 2010 but they did not attempt to reduce the deficit until 2011. Even then, they only reduced the deficit in small steps after that.

                So your definition of “Austerity” from above is this:

                if the economy is in a recession and the government responds by tightening fiscal policy, that would be an example of austerity by the usual meaning of the term.

                Well, was 2011 a recession year then? GDP Growth rate was officially positive for the Netherlands in 2011 and remained mostly positive ever since. How is that “Austerity” by your definition?

                You linked to multiple articles showing a Dutch “Stimulus” package in 2009, and that was when the recession hit, and that resulted in a big government deficit for 2010. That’s exactly the Keynesian recipe for success isn’t it? So your position is now that there was no Dutch “Austerity” at all, and Krugman is basically just clueless? As far as I can puzzle out, that’s what you seem to be saying.

              • LK says:

                No, Tel, the Netherlands had a recession from 2012-2013.

                http://www.tradingeconomics.com/netherlands/gdp-growth-annual

              • LK says:

                In fact, one wonders if Tel ever even reads anything anyone ever writes here.

                Philippe said, as I did, that the Netherlands

                (1) had a stimulus in 2009. It had a real impact and got them out of recession by 2010. However, analysis of that stimulus shows it was not as strong a that of Germany.

                (2) the government then turned to fiscal contraction from 2011 at a time when the domestic economy was still weak, mainly by tax increases in 2011, 2012 and 2013.

                (3) the Netherlands then fell into recession in 2012-2013.

              • Tel says:

                No, Tel, the Netherlands had a recession from 2012-2013.

                Well Philippe is claiming it happened in 2011 but anyway close enough I suppose. Your argument about stimulus in 2009 doesn’t match what Krugman says:

                … much better than the Netherlands, a creditor country nonetheless deeply committed to austerity.

                Actually, the Netherlands is only just now bringing its government budget back into balance after the large “Stimulus” deficit of 2010, so what does Krugman expect them to do?

                Run bigger deficits for ever? How ?!?

                Don’t you think it is a little bit unfair for Krugman to completely ignore the fact that a government has previously attempted a Keynesian policy and is now attempting to recover from that? Then to use the same government as an example of “deeply committed to austerity” ?

                Krugman (in 2014) also says:

                But you do have to wonder why the French elite is so easily intimidated into making a hard right turn while the elites of much worse cases like Finland and the Netherlands remain steadfast in their notion that the worse things get, the more committed they have to be to inflicting further pain.

                So not the slightest mention that the Netherlands actually did impose a “Stimulus” deficit of about five times larger than any of their “Austerity” budgets (let’s run with Krugman’s defintion of “Austerity” as simply change in government budget deficit, or second derivative of government debt).

                “the worse things get, the more committed they have to be to inflicting further pain” … really? So things have got worse now in 2014 than they were back in 2009 for the Netherlands, really? That’s kind of weird because in 2014 we see small but real GDP growth (despite the shrinking deficit) and there was a massive drop in GDP back in 2009 (like 4%).

                So LK and Philippe presumably believe (with the power of hindsight) that the Netherlands would have been much better off if the Dutch government ran a bigger deficit in 2011 and if they somehow could look ahead in time and see a double-dip recession coming, and then also be able to recover from this larger deficit during the years following that. Let’s compare with Germany then:

                * Dutch “Stimulus” in the form of large government deficit in 2010 (more than 5% of GDP) was bigger than German “Stimulus”.

                * The Germans, having not gone as badly into deficit in 2010 had a little bit more room for “Stimulus” deficit in 2011, but then started reining it in quite sharply after that.

                * The Dutch reined in their deficit more gently (presumably that’s less “Austerity” than the Germans), and overall have brought their deficit down only be incremental amounts each year.

                So the only thing that the Keynesians can say the Germans did that was so brilliant was to spread out their “Stimulus” package over one extra year (i.e. a little less in the first year, allowing something in the second year). That there is the huge sin that those “Very Serious People” who are “deeply committed to austerity” imposed on the Netherlands… failing to spread their stimulus package over two years and trying to pile it all into the one year.

    • Cosmo Kramer says:

      When strong economic performance follows stimulus, the stimulus was the right size.

      When lagging economic performance follows stimulus, it was not big enough.

      My goodness, the elementary logic employed is sad.

      “So much for German “fiscal restraint”. lol.”

      Does context matter at all to you, LK?

      Here, you’re done

      http://danieljmitchell.files.wordpress.com/2014/02/german-austerity-krugman1.jpg

    • Major.Freedom says:

      LK:

      Murphy is not denying the high INITIAL jump in government spending in Germany, during late 2008 and early 2009. The chart he linked to shows such a jump in spending as a percentage of GDP.

      When Murphy referred to German austerity, he meant relative to the other European countries (as well as Euro 17 area) in the chart. He picked those regions because that is what Krugman picked, and he came to a different conclusion.

      Murphy is correct. Government spending relative to GDP in Germany is as the chart titled “General Government Spending as % of GDP” shows lower than the other three regions, for the periods 2008-2013.

      These are the facts.

      Now, when Murphy sardonically said “If any country in Europe is to be associated with fiscal restraint, it is Germany”, he was NOT suggesting that he believes the German government retreated in a way that he would call “austerity”. What he meant was that IF a country in Europe is going to be labelled as having austerity, THEN as the data shows, German government spending (relative to GDP) was lowest.

      Your ridiculously off base response can, ironically enough, be shown as such by merely observing the very response you gave, specifically the bolded part. Murphy is comparing the countries and regions in Krugman’s chart, and you reply with comparing German government spending to the G-20, which of course is not the comparison Murphy made.

      • LK says:

        Withdrawing a stimulus when the economy is booming is not called austerity.

        • Bob Murphy says:

          LK wrote:

          Withdrawing a stimulus when the economy is booming is not called austerity.

          What year did Germany withdraw its stimulus, LK?

        • Major.Freedom says:

          Your initial response only mentioned late 2008 and early 2009 stimulus packages.

          And nobody said withdrawing spending during a boom is austerity. Murphy said relative to the other regions in the sample originally cited by Krugman, German spending per GDP was lowest.

  3. Robert says:

    You’re missing the crucial point that Germany has very low unemployment whereas the countries most experiencing austerity (Ireland etc) have very high unemployment. The Keynesian argument is that austerity in recession is crazy, whereas during times of expansion and low unemployment is far less damaging. When the government reduces spending and there is nothing to replace it (due to weak domestic demand) then it makes the economy worse.

    Viewing government spending isolated from consumer spending and investment only gives you a part of the picture.

    • Bob Murphy says:

      Robert wrote:

      You’re missing the crucial point that Germany has very low unemployment

      No, *you’re* missing the point. Isn’t it funny that the country that slashes its government spending very aggressively after 2009 has low unemployment. Just like the US unemployment rate shot up after the Obama stimulus. These “counterfactuals” always seem to go against Krugman don’t they?

      • Philippe says:

        Germany didn’t slash its government spending after 2009, it increased it.

      • LK says:

        ” Isn’t it funny that the country that slashes its government spending very aggressively after 2009 has low unemployment.”

        hahaha:

        Year | Total Government Spending*
        *millions of Euros
        2007 | 1,056,760.0
        2008 | 1,090,460.0
        2009 | 1,146,270.0
        2010 | 1,194,130.0

        2011 | 1,178,650
        2012 | 1,191,490.0
        ———-
        Is that a government slashing its “spending very aggressively after 2009”??

        In 2008, government spending increased by 3.18%.

        In 2009, government spending increased by 5.11%, then in 2010 by 4.17%

        From 2007 to 2010, it increased by 12.99%.

        Total government spending did indeed fall in 2011, but only by -1.29%, but then increased again by 1.08% in 2012, leaving government spending in 2012 well above its level in 2007, 2008, or 2009.

      • Robert says:

        “Isn’t it funny that the country that slashes its government spending very aggressively after 2009 has low unemployment. ”

        Well as LK pointed out, they didn’t slash spending, in fact they increased it. Ireland and Greece have been aggressively slashing spending for years with only stagnation to show for it. I suppose you will claim its because they haven’t had enough austerity.

        “Just like the US unemployment rate shot up after the Obama stimulus.”

        Are we still arguing over this? Do you genuinely believe that the unemployment rate would have frozen at its January 2009 rate had McCain or anyone else been President? Whatever about the other commenters here, I would have thought at least you wouldn’t confuse correlation with causation.

  4. Philippe says:

    Bob,

    Government spending as a percentage of GDP is not a measure of austerity.

    Austerity refers to attempts to actively reduce budget deficits, balance budgets or run budget surpluses in the midst of a recession or weak economy.

    • Bob Murphy says:

      OK Philippe tell me the exact metric by which the Netherlands has been “deeply committed” to austerity (as Krugman claims), for whatever time period you want to use, and then show me that Germany by that same metric was less austere from 2009-2011. Or, if you want to punt and say, “Yeah our story doesn’t work if you just look at the Netherlands and Germany, there’s other stuff going on” that’s OK too. But I don’t like this constant refinement of the criteria every time I show that Krugman’s story doesn’t fit the data.

      • Philippe says:

        “tell me the exact metric by which the Netherlands has been “deeply committed” to austerity (as Krugman claims)”

        You might have to ask Krugman about that.

    • Major.Freedom says:

      By how much?

  5. Transformer says:

    Bob,

    I can understand Krugman’s framework:

    Recession caused by inadequate AD->Less Austerity will boost AD -> higher RGDP

    I think yours may be:

    Recession cause by supply-side issues->Less Austerity will distort things more ->lower RGDP in the long run

    However your post seems to indicate that even in the short run you think less austerity will lead to lower RGDP. is that correct ? if so why ? If the govt increases spending on things like bridges and tax cuts then why wouldn’t that boost GDP at least for a while ?

    • Enopoletus Harding says:

      If the govt increases spending on things like bridges and tax cuts then why wouldn’t that boost GDP at least for a while ?

      -The positive effect on NGDP would certainly be larger than the positive effect on RGDP, if there is any positive effect on RGDP. Government spending crowds out private investment.

  6. Bob Murphy says:

    I realize people who already agree with me don’t need further convincing, and I also realize people who like LK will have the following factoid bounce off them, but here goes:

    ==> Above LK is arguing that the reason Germany has done so well relative to the Euro area (and click the link to look at the first chart, reposted from Krugman, which shows how much better Germany is doing now) is that Germany had an aggressive stimulus early on. That’s why, LK claims, the Germans were able to let government spending as % of GDP fall later on in the recovery; they acted quickly upfront, as opposed to their sluggish peers who didn’t see the wisdom of immediate and strong stimulus after the crisis hit.

    ==> Well, the Eurostat numbers I grabbed show that from 2008 – 2009, Germany increased its government spending by 4.2 percentage points of GDP (using GDP of each year, not the 2008 year of GDP). The Euro area (using 17 countries, they also had an option for 18 countries which was very similar) increased by 4.1 percentage points.

    ==> If we instead look at 2008-2010, then Germany’s gov’t spending as % of GDP was 3.8 percentage points higher in 2010, compared to 3.9 percentage points for the Euro area.

    Thus LK’s story doesn’t work at all if we use a two-year period–and note in his remarks he was saying Germany was a big stimulator through 2010–and if we look just at 2009, then Germany’s increase in government spending was a whopping 0.1 percentage points higher.

    Now it’s true, Germany was starting from a lower level of government spending as % of economy, so that’s why my index (middle chart in my Mises CA post) shows Germany’s blue line shooting up higher in 2009 compared to green Euro line. But, Netherlands is still the highest even on that dimension.

    So in conclusion, yes you can start taking derivatives, refining the years of analysis, looking at whether it should be gov’t spending versus deficits, etc. etc., but notice the Keynesians have to keep refining the story every time. To repeat, above LK was claiming Germany versus Euro area was more stimulative through 2010. No, it wasn’t, not at least by criterion of increase in government spending as % of GDP.

    • Ken B says:

      ” yes you can start taking derivatives”
      I believe Philippe’s point above was that “austerity” is all about derivatives. To suggest then that that the Keynesians are moving the goalposts by talking about derivatives is disingenuous.

    • Dan says:

      “I realize people who already agree with me don’t need further convincing, and I also realize people who like LK will have the following factoid bounce off them, but here goes:”

      I don’t know if I find it reassuring or not that even the brightest among us bang their head against a brick wall from time to time 😉

    • Ken B says:

      “No, it wasn’t, not at least by criterion of increase in government spending as % of GDP.”
      Which LK and then Philippe both explicitly reject as a meaningful measure.
      And right they are. Imagine a large Keynesian stimulus caused the economy to suddenly grow by a billion %. Then the stimulus would be small by this criterion. Philippe made this point explicitly.

      • Major.Freedom says:

        So if someone were to check the entirety of LK’s posts, nowhere will we see him mention spending/GDP as a means to make an argument he believes is true, right?

    • LK says:

      “Thus LK’s story doesn’t work at all if we use a two-year period–and note in his remarks he was saying Germany was a big stimulator through 2010–and if we look just at 2009, then Germany’s increase in government spending was a whopping 0.1 percentage points higher.”

      Funny how the absolute numbers tell a different story:

      Year | Total German Government Spending*
      *millions of Euros
      2007 | 1,056,760.0
      2008 | 1,090,460.0
      2009 | 1,146,270.0
      2010 | 1,194,130.0

      2011 | 1,178,650
      2012 | 1,191,490.0
      —–
      In 2008, government spending increased by 3.18% over 2007.

      In 2009, government spending increased by 5.11%, then in 2010 by 4.17%

      From 2007 to 2010, it increased by 12.99%.

      This is why your chosen metric — government spending as % of GDP — is not adequate to prove your case.

      • Bob Murphy says:

        LK show us the same data for the Euro area. We’ll see that measured in percentage increase of euros, it was a much smaller stimulus in the first two years, right?

      • Bob Murphy says:

        Here’s how LK shows us that government spending in Germany was very stimulative, enough to get them through the hump and into a strong recovery, such that removing spending after the fact was A-OK:

        In 2008, [German] government spending increased by 3.18% over 2007.
        In 2009, [German] government spending increased by 5.11%, then in 2010 by 4.17%
        From 2007 to 2010, it [German gov’t spending] increased by 12.99%.

        OK I’ll do the same metrics for Netherlands (the website I’m using won’t give me the numbers for the Euro area as a whole, but here too I’m guessing it won’t be good for LK), and to be clear these figures refer to total government spending in the country (which is what Krugman et al. have always said is the relevant metric when judging the US):

        * In 2008, Netherlands gov’t increased spending 6.2% relative to 2007.

        * In 2009 Netherlands gov’t increased spending an additional 7.3%, then in 2010 by an additional 2.2%.

        * From 2007 to 2010, total Netherlands gov’t spending increased 16.4%.

        So when trying to understand why German real GDP had finally reached pre-crisis levels by the end of 2010, while the Netherlands were still in a slump and have been stuck there since, LK wants to argue that it’s because of the much more aggressive German stimulus early on, measured in absolute increase in euro expenditures?

        No LK, just admit that your story doesn’t work for Germany versus Netherlands (and I would guess for Euro area as a whole too, though there it won’t be as slam-dunk).

        • Dan says:

          Ha, I started to pull up Netherlands spending numbers, but then stopped myself knowing that this would be too easy of a comeback for you to pass up, and that you’d surely take care of it yourself.

        • LK says:

          (1) First, Bob Murphy my data above is there to refute your assertion that government spending as % of GDP is a proper gauge of actual absolute government spending.

          (2) Secondly, if we move to the question of how large one stimulus was in one country compared to another, we must, actually as I have explained to you in the past, look not just at absolute government spending, but at its **fiscal impact.**

          And lo and behold:

          http://www.bruegel.org/publications/publication-detail/publication/266-estimating-the-size-of-the-european-stimulus-packages/

          The combined effect of German fiscal measures for 2009 was 4.3% of GDP, but for the Netherlands was only 1.1%.

          So, yes, Bob Murphy, the German fiscal measures in 2009 were much larger than in the Netherlands.

          Also, the Netherlands came out of recession by 2010 and had positive GDP growth in 2010 and 2011, so the claim that its stimulus “failed” does not accord with the facts.

          As to why its recovery has not been sustained, the reasons are most likely to be that the Netherlands did not experience the type of export boom after 2009 that Germany did — thus it could not maintain a boom by that route and its domestic demand remained weak and fell after the government turned to fiscal contraction, mainly by tax increases in 2011, 2012 and 2013:

          “In 2011, the government began to introduce austerity measures based around several rounds of budget cuts and tax increases. These are scheduled to be implemented between 2011 and 2017, and could represent, on average, €7bn a year, or more than one per cent of GDP, totaling €48bn overall (equivalent to seven per cent of GDP). 2013 is set to be an especially harsh year with austerity measures amounting to €15bn. Seventy-five per cent of this, €12bn, will come through tax increases, which are likely to weigh most heavily on low-income groups (the average in previous years has been nearer 40 per cent or €3bn of out €7bn of savings)”
          http://www.oxfam.org/sites/www.oxfam.org/files/cs-true-cost-austerity-inequality-netherlands-120913-en.pdf

          If government spending rises because of increased tax revenues, you are not dealing with expansionary fiscal policy, but contractionary fiscal policy.

          • Bob Murphy says:

            Is anybody else cross-eyed at this point? I think LK now has the ability to show the Netherlands did better or worse economically than Germany, because its stimulus was higher/lower and its recovery was underway/or not depending on what needs to be true in a particular comment.

            • LK says:

              ” From 2007 to 2010, total Netherlands gov’t spending increased 16.4%”

              Another point: one of the reasons why Dutch government spending increased by 16.4% was its large bank bailouts:

              “As the financial crisis began to escalate in late 2008, several Dutch
              banks and insurance companies needed financial help from the Dutch
              government. The total amount of capital, guarantees and debt relief
              provided to them reached almost 30 per cent of Dutch GDP.
              By the end of 2012, €80bn remained at risk of not being fully paid back, equivalent to almost 15 per cent of GDP.

              http://www.oxfam.org/sites/www.oxfam.org/files/cs-true-cost-austerity-inequality-netherlands-120913-en.pdf
              ————————
              Bailouts of banks like this no doubt stabilised the financial system and stopped collapse of banks, but they did not add much to aggregate demand

              This is very much like Ireland: in 2008 Ireland announced a €5.5bn bank recapitalisation program. The bank bailouts did not add to aggregate demand because the banks just hoarded the money (probably at the ECB) – just as QE in the US did not really add to aggregate demand – and private credit collapsed anyway.

            • LK says:

              Bob Murphy, you claim to be able to prove that one government was more stimulative than another, yet you still don’t understand how to properly calculate actual fiscal effects, and whether they were expansionary or contractionary, say, as in the method used in a classic article like E. Cary Brown, “Fiscal Policy in the ‘Thirties: A Reappraisal,” American Economic Review 46.5 (1956): 857-879.

              No, it is not necessarily absolute spending or even deficits that tell you how stimulative a government budget is — the fine details like tax policy and how money is spent (e.g., bailouts do not cause much stimulus!) matter a lot.

              • skylien says:

                “No, it is not necessarily absolute spending or even deficits that tell you how stimulative a government budget is — the fine details like tax policy and how money is spent (e.g., bailouts do not cause much stimulus!) matter a lot.”

                See Bob, you will never disprove him. The wiggle waggle room is near infinite for LK. But at least for him this very same wiggle waggle room that avoids being ever disproven, on the other hand proves unquestionable how right he is… But at least he argues empirical “hard” facts.

              • Major.Freedom says:

                Ah yes, the “proper fiscal effects”. Fudge factor when the facts don’t gel with the fudge.

          • Cosmo Kramer says:

            Can you say….

            Automatic Stabilizers

            “the reasons are most likely to be that the Netherlands did not experience the type of export boom after 2009 that Germany did ”

            Most likely?

            Gee, who would dare fact check the almighty LK?

            Me.

            http://images.investorshub.advfn.com/images/uploads/2014/8/29/xzktjlk_see_this.png

            • Transformer says:

              I love “we must, actually as I have explained to you in the past, look not just at absolute government spending, but at its **fiscal impact.**”

              This sounds like “heads I win, tails I lose” as far as govt spending goes !

              • Transformer says:

                heads I win, tails YOU lose

              • Tel says:

                Moving to ever more esoteric and unmeasurable definitions of “Austerity”.

                With enough hand waving, you can fly. Not a lot of people know that.

              • Ken B says:

                Tel, LK’s link is to an article from 2009. Based on notions defined even earlier. Are you suggesting it is now post hoc rationalization for 2011?
                It is Murphy who tried to define austerity in a simple measure. Not the Keynesians, who rejected that measure from the get go. They advocate stimulus that meets other measures. Explaining why Murphy’s measure in inadequate is not hand waving or post hoccing. Assessing results in 2014 based on theories antedating 2009 is not changing horses in midstream. Their arguments may be wrong but they are not vacuous.

              • Tel says:

                LK (above) says that government spending should still be regarded as “Austerity” when it gets spent on the things that he decides don’t count as “Stimulus”.

                Philippe (elsewhere on this page) declares that “Austerity” is only applicable during a recession, and not at other times. Wikipedia seems to broadly agree on this, but presents it in somewhat different terms.

                Krugman defines “Austerity” as any positive second derivative of government debt (presumably regardless of what it is spend on, and when).

                Tel, LK’s link is to an article from 2009.

                LK’s link to Oxfam “THE TRUE COST OF AUSTERITY AND INEQUALITY The Netherlands Case Study” is an article from 2003 and it claims the following:

                In 2011, the [Dutch] government began to introduce austerity measures based around several rounds of budget cuts and tax increases

                In terms of spending-to-GDP ratio, there was indeed a government budget cut of about 1% in 2011, so we have to presume the definition of “Austerity” here is the first derivative of government spending to GDP… but wait! Just two years earlier there was a rise of about 5% in government spending to GDP ratio, so overall no “Austerity” by that definition either (which does not seem to be any logical problem for Oxfam).

                Presumably, by Philippe’s metric since 2011 was not a recession year, this rather insignificant cut does not count as “Austerity” either.

                LK also links to a 2009 article, “Estimating the size of the European stimulus packages” and this article introduces the concept of subsidized credit (presumably they mean artificially low interest rates, driven by a central bank) and that is yet another category, unrelated to government budgets (but the article also discusses government budgets and goes to some length to explain why these things should be considered separately). It does not strictly define “Austerity” but perhaps by implication if we regard “Stimulus” as the opposite.

                Yeah, I think I see more than one definition of “Austerity” here, how many can you find?

              • Philippe says:

                I don’t know what you’re trying to achieve here Tel.

                “Presumably, by Philippe’s metric since 2011 was not a recession year, this rather insignificant cut does not count as “Austerity” either.”

                Netherlands did go into recession in 2011.

                The wikipedia article I linked to says: “austerity describes policies used by governments to reduce budget deficits during adverse economic conditions”.

                If the economy is booming and the government starts actively tightening fiscal policy that wouldn’t be what people refer to as ‘austerity’. The term austerity implies ‘belt-tightening’ all round (by both the private and public sector).

              • Tel says:

                There were two quarters of negative growth at the end of 2011 so technically a recession, but overall the Dutch GDP grew in 2011 by 1.2%. Not exactly a booming economy, but still growth never the less.

                So they had already blown out their deficit one year earlier with a big “Stimulus” package, do you at least accept that a large deficit cannot be maintained? If you choose a policy of a large stimulus in one year, you are also, by necessity, choosing that in some future year the deficit must be reined in again. If government attempts to keep running bigger and bigger deficits it gets pulled up forcibly and sharply when it defaults (like Greece or Argentina).

                Since 2011 started out with pretty good growth (better than most of Europe) and since government policy always happens (by law of causality) after the statistics, it was impossible for the Dutch government to predict ahead that there would be a downturn at the end of 2011. That would be a matter for 2012 government policy.

                Thus the real “Austerity” happened in 2012 when Dutch government deficit reduced by 0.8% of GDP. This is the terrible mistake that doomed the Dutch economy and brought the ire of Krugman.

                The term austerity implies ‘belt-tightening’ all round (by both the private and public sector).

                Wait a moment, now you are bringing in yet another definition of “Austerity”. If households choose to pay down their mortgages, presumably they therefore consume less which might be “belt tightening” or it might be just what you normally expect when people keep promises to one another.

                Now we are outside the realm of government policy and blaming the Dutch people themselves for choosing to do the wrong thing. So I guess I have to ask you again how we can measure this new type of “Austerity” and maybe you should explain what a government is supposed to do about it?

                Have we reached ten different definitions of “Austerity” on one page yet? If not, try harder.

            • Z says:

              You’re not understanding that graph properly. What is most important is not exports as a whole, but the export subset of turbo encabulators. Germany exported far more turbo encabulators than the Netherlands, which gives Germany’s exports more encabulation weight and thus makes your graph irrelevant.

              You’re welcome people.

              • Ken B says:

                Ah, it seems you can explain the graph, else you wouldn’t be sneering. Only an idiot would do that. So please explain, what do the lines represent?

            • Ken B says:

              That graph shows two lines. What are they? The legend does not identify them as Dutch or German exports, but seems to refer to data sources. So just what is being graphed?

              • Cosmo Kramer says:

                Take a guess……kind of obvious

              • Ken B says:

                Ahh guess work. Good enough for Austrians perhaps, but some of us are just bad guessers. So, since this graph allegedly makes LK’s argument risible, and I enjoy a good laugh, help me out. What do the lines represent? Exactly.

              • Tel says:

                The black line is German exports, and the black vertical axis (LHS) is millions of Euros (on a monthly basis).

                The blue line is Dutch exports, with a blue vertical axis (RHS) also in millions of Euros (on a monthly basis).

              • Cosmo Kramer says:

                1. It said at the top “Germany Exports” “Netherlands Exports”

                2. Both “lines” do the same thing.

                3. The bottom left says “GRTBEXE”

                I wonder if that is Germany or Netherlands

                4. The bottom left also says “NETBEE”

                I wonder what that one refers to.

                5. It is a graph called “LK Laugh Graph” because I expose a hilarious LK blunder. Which means he has to find another imaginary data point to prove Keynesian stimuli work.

                6. Context that was left out…… it is monthly Euros.

              • Ken B says:

                So you can’t actually say. The image you cite is one you created, and gave no source for. This you call fact checking and assert it renders your adversary an object of mockery.

              • Reece says:

                Ken B – It seems to have come from here: http://www.tradingeconomics.com/netherlands/exports

                Just lower the starting date and graph it against German exports and you’ll get the same thing.

              • Ken B says:

                Reece, thanks. Yes that seems to work.

            • LK says:

              And what is it showing? Volume of exports or value?

              Furthermore, the right blue numbers show that Dutch exports only went up to about 37000, but German exports (the black numbers on the right) went up to nearly 100000.

              So, um, given that exports probably do not make up such a big part of the Dutch economy anyway (whereas they do for Germany), it appears your graph DOESN’T necessarily refute me, but could be confirmation of my point.

              • K.P. says:

                It’s late so I might be reading poorly but from what I can gather (Worldbank, UN) exports constitute a larger percentage of the Dutch economy than Germany.

              • LK says:

                OK, I see that it is showing value of exports in millions of Euros and further research shows that exports do make up a big part of the Dutch economy.

                Therefore I am happy to retract the export part of this argument:

                “As to why its recovery has not been sustained, the reasons are most likely to be that the Netherlands did not experience the type of export boom after 2009 that Germany did — thus it could not maintain a boom by that route and its domestic demand remained weak and fell after the government turned to fiscal contraction, mainly by tax increases in 2011, 2012 and 2013”

                However, the domestic demand part is still valid, and my point about the need for analysis of the fiscal effects of government spending is also still valid.

              • K.P. says:

                Your particular argument makes it look like the weak domestic demand was a consequence of (“thus”) an export boom (or lack thereof). If you just remove the cause (happily or not) it looks kind of lacking.

                “Domestic demand remained weak because domestic demand remained weak… then taxes made it worse.”

              • skylien says:

                Wow, first time I see LK say, right I am wrong on this. Nice LK!

                And of course congrats Kramer. However of course Kramer, you are still a bad guy for not holding up to Ken B’s high standards of scientific discourse in an internet blog so LK is still the moral winner here..

              • razer says:

                Translation: nothing will falsify or shake my belief in my favorite theory.

          • Major.Freedom says:

            “we must, actually as I have explained to you in the past, look not just at absolute government spending, but at its **fiscal impact.**”

            And so the BS begins. The “fiscal impact” enables the Keynesian philosophical point to slip in whereby the conclusion is assumed true because it is contained in the premise.

            • LK says:

              lol.. So according to you raising taxes is NOT a contractionary fiscal measure?

              And as for begging the question: that is your strong suit.

              • Major.Freedom says:

                Within the theory of Keynesianism, raising taxes is not “contractionary.” Raising taxes does not destroy money or spending.

                Taxes collected by government are spent by government.

                Taxes redirect spending away from market ends and towards political ends.

                Taxes hamper economic growth for reasons Keynesian theory and its focus on AD cannot explain.

                But this is all besides the point.

              • LK says:

                “Within the theory of Keynesianism, raising taxes is not “contractionary.””

                Yes, thank you for confirming you know very little about Keynesian theory.

                But I suspect you don’t know an awful lot about actual published Austrian theories either, so no surprises there.

              • Philippe says:

                Raising taxes without increasing expenditure by the same amount would represent a contraction of fiscal policy.

                So moving from a budget deficit to balanced budget would be a contraction of fiscal policy.

                However a balanced budget is not ‘contractionary fiscal policy’ in itself. It could be neutral or expansionary depending on the circumstances.

              • Philippe says:

                so if you started at say zero govt spending and taxation, and increased both by 100, that could be expansionary.

                If you only increased taxes by 100, that would be contractionary.

              • Major.Freedom says:

                LK:

                “Yes, thank you for confirming you know very little about Keynesian theory.”

                I seem to know more than you.

                Keynesian “stimulus” concerns “stimulus” to AGGREGATE DEMAND.

                If it can be shown that higher taxes does not reduce aggregate demand, then higher taxes cannot be claimed as “contractionary” within Keynesian theory.

                And that is what I did. Taxes collected by government are indeed spent by government. That is the reason they collect taxes. It is to spend that money.

                Government spending money adds to AD, dollar for dollar.

                Prove me wrong, LK. But we both know you can’t.

                “Raising taxes without increasing expenditure by the same amount would represent a contraction of fiscal policy.”

                But that is not the same thing as “raising taxes = contractionary”. That is the government financing more of its spending through taxation, and less through borrowing.

                But that also cannot be claimed as reducing AD either. If the government taxes more, but does not spend more, then that just means the government is borrowing less.

                Investors lending less to the government may or may not reduce AD, depending on whether investors who reduce their investment in government debt turn around and invest more in the market. If the government does borrow more, we cannot know for sure if that actually raises AD, because they never gave the marmet process a chance. It can only ever be guessed.

                “So moving from a budget deficit to balanced budget would be a contraction of fiscal policy.”

                Yes, THAT would.

                “However a balanced budget is not ‘contractionary fiscal policy’ in itself. It could be neutral or expansionary depending on the circumstances.”

                Circumstances which Keynesians often fallaciously treat as separate and distinct from the effects of their own government action advocacies. We see statements like “The government should print more money for itself when the economy goes into recession”, as if past money printing had nothing to do with the recession.

                —————

                Philippe:

                “So if you started at say zero govt spending and taxation, and increased both by 100, that could be expansionary.”

                We’ll never know for sure, because once government taxes and spends 100, they make it impossible for us to observe what would have happened in the market.

                “If you only increased taxes by 100, that would be contractionary.”

                That means a reduction in borrowing.

                Separate from, but related to, higher taxes.

  7. Mule Rider says:

    Unfortunately, I don’t think we’ll ever see progress in this debate until the Keynesian Cargo Cult is properly called out/chastised/punished for *literally* (http://www.salon.com/2013/08/22/according_to_the_dictionary_literally_now_also_means_figuratively_newscred/) changing the definition of the word “austerity.”

  8. LK says:

    Yet another point here is that if you gauge success by low unemployment, then part of the story why German unemployment has remained relatively low is government intervention:

    “one important part of Germany’s state intervention to stabilise the economy was the “Kurzarbeit” (“short work”) program. This was a program of government subsidies to German industries to keep people employed by working shorter hours. The measure has significantly supported aggregate demand, which in turn prevented a large fall in consumption and production. The measure also stopped unemployment from rising significantly.”
    http://socialdemocracy21stcentury.blogspot.com/2010/09/germany-success-of-keynesianism-and.html

    • Bob Murphy says:

      LK wrote:

      Yet another point here is that if you gauge success by low unemployment…

      If you want to do that you can, but Krugman used real GDP relative to pre-crisis levels, so I was following suit.

    • Major.Freedom says:

      Not all employment creates wealth on net. Some employment, especially employment brought about by government intervention, destroys wealth.

      Merely producing does not imply there is net production.

      You are assuming any and all employment is net wealth producing employment.

      That paragraph you quoted is not empirical facts, it is just a restatement of internally flawed Keynesian theory/

  9. skylien says:

    Sry Bob, for making your life harder by responding to this from Ken B before. It is not always easy to asses what you leave, and what not..

  10. Bob Roddis says:

    I question the wisdom of ever debating Keynesians on their own terms, at least without repeated caveats.

    1. The world simply does not work the way they claim it does and the source material (The General Theory) is a hoax that ignored both the real source of the problem, government money manipulations that dated back to WWI and the essence of Austrian analysis, which is economic calculation/miscalculation.

    2. The market does not fail and there is no reason to think that economies have, lack, require or can be provided with “momentum”.

    3. Previous Keynesian policies have always caused false and distorted prices but Keynesians have clue that this issue even exists.

    4. Since Keynesianism has no “internal logic”, it seems a waste of time to demonstrate internal inconsistencies.

    5. The use of the term “austerity” in conjunction with deficit-riddled spendthrift Euro social democracies is preposterous.

    All that “stimulus” can possibly accomplish is to facilitate yet another grab of someone else’s wealth in the form of government spending and/or funny money emissions that are deemed necessary when the prior [unsustainable] wealth transfers and distortions become obviously unsustainable to the general public.

    You realize, don’t you, that you are debating someone who popularizes the clueless Phillip Pilkington’s analysis of Austrian capital theory?

    http://socialdemocracy21stcentury.blogspot.com/2014/08/philip-pilkington-on-austrian-capital.html

    • Philippe says:

      you should write a book, Bobby.

    • Bob Murphy says:

      Seriously? LK is silent on this?

      Most likely.

    • Major.Freedom says:

      Lol,

      LK Laugh Graph

      • Ken B says:

        Who needs sourcing?

      • Ken B says:

        No Richie, I have rushed to the defence of simple common sense. Presenting a sourceless, modified, incomplete picture of a graph is not the way grown ups, even snarky ones, debate. Maybe Kramer has nailed LK on this point maybe not. Find a single place where I expressed an opinion on that either way. But Kramer is not on my list of people whose unsupported word I would take.

        • Cosmo Kramer says:

          You. Can. Verify. The. Claims. I. Made.

          A simple google search, my god….

          • Ken B says:

            Such standards you Austrians have.
            You would fail any academic course, you realize that, right? “You can check all my quotes yourself, google, duh!”

            • Cosmo Kramer says:

              You do understand that LK’s statement was left completely unchallenged by you, right?

              Yet I post a simple picture and I’m some kind of moron?

              The picture spoke for itself.

              Now be a good academic and admit LK was hilariously wrong.

              • Ken B says:

                Well if you check the comments you’ll see I already have.

              • Cosmo Kramer says:

                I see it now, I appreciate that. Thanks for keeping me on me in line.

                Until the next time,
                CK

            • Major.Freedom says:

              Ken B, if lack of sources means failure, then most of your activity here is a failure.

            • Enopoletus Harding says:

              Now I see why Ken B was banned.

        • Cosmo Kramer says:

          And further, the picture was entirely complete. I only removed advertising from the screenshot….

          But don’t let the “facts” get in the way of your assault…

          Austrians won this round.

          • Ken B says:

            Missing the units, the source, anything to indicate what a datum meant. Other than that I guess, yep.

            • Cosmo Kramer says:

              It was a screenshot, sweetheart.

              • Ken B says:

                So, you had time and space to take a shot at LK, wrote a comment, responded, or didn’t really, to me several times, but still could never supply … Anything. OK.

              • Cosmo Kramer says:

                Ken, everything you demanded was supplied to you above hours ago…….

                Is there anything I can help you with? I have abundant free time now that I am home from work and school.

    • Richie says:

      Don’t worry, Ken B. has rushed to Lord Keynes’s defense above.

    • LK says:

      I see your graph is showing value of exports in millions of Euros and furthermore that there is evidence that exports did drive recovery in 2010 and recovery from the recession of 2012-2013.

      Therefore I am happy to retract the export part of this argument and admit that it was wrong:

      “As to why its recovery has not been sustained, the reasons are most likely to be that the Netherlands did not experience the type of export boom after 2009 that Germany did — thus it could not maintain a boom by that route and its domestic demand remained weak and fell after the government turned to fiscal contraction, mainly by tax increases in 2011, 2012 and 2013”

      However, the domestic demand part is still valid, and my point about the need for analysis of the fiscal effects of government spending is also still valid.

      Some evidence that deficient domestic Dutch demand as the government turned to fiscal contraction (at a time when the domestic economy) was what plunged the economy back into recession in 2012:

      http://www.marketwatch.com/story/netherlands-emerges-from-year-long-recession-2013-11-14

      Germany’s domestic demand remained strong at the time when the Merkel government turned to fiscal contraction, whereas Dutch domestic demand was weak: this is the key point.

      Also, as noted above the actual fiscal effect of the Dutch stimulus was weaker than that of Germany.

      • Ken B says:

        So in regards to my challenge above, LK has admitted he was wrong.
        I expected no less.
        But I mentioned two fellows …

        • Major.Freedom says:

          It is OK for him to admit he was wrong on a tangential point that does not require him to admit his fundamental theory of markets is wrong.

          Don’t worry, AD is still the ultimate driver.

          • Bob Roddis says:

            But isn’t “demand” the “ultimate driver’? No one is going to go to the trouble to produce something for exchange unless someone else wants it and is willing to trade you for it.

            The Keynesians take that obvious truth (while actually denying it) and turn “demand” into “aggregate demand”, an undifferentiated blob that can and must be “regulated” and “stimulated” by wise, neutral, scientific and boring “experts”.

            • Major.Freedom says:

              Roddis,

              Demand is the ultimate effect.

              Production is the ultimate cause.

              The ultimate driver is saving and investment. We cannot demand has not been produced.

              What Keynesians do is they take the fact that demand is needed to earn profits on investments at the individual firm level, and then commit the fallacy of composition and believe that this is also true at the level of the economy as a whole.

              In fact, at the aggregate level, all expenditures are in competition with one another. Consumption expenditures on the one hand, and capital and labor expenditures on the other, are off-setting. A dollar of spending in general cannot go to both labor and consumer goods. If you use that dollar to buy a consumer good, it is money you did not spend on labor.

              This is easily understood by imagining people choosing to increase their consumption spending by 10%. Then imagining them increasing their consumption spending more. And more, and more again.

              What would happen to investment? According to Keynesian theory, as consumption spending is maximized, so too should investment and employment, and standards of living be maximized.

              What would actually happen though? Is Keynesian theory accurate?

              Consider a large firm. Consider their owners earning gross revenues and deciding what to do with the money. If we consider continually increasing consumption spending, then this firm’s owners will devote more and more of their gross revenues towards their own consumption. That means they will spend less and less on replacing used up materials, which are capital goods and require investment spending, and less and less on worn out capital machinery.

              This will increase profits for consumer goods companies, and reduce profits for capital goods companies. It will also reduce employment in capital goods industries and stimulate employment in consumer goods industries.

              Now the assumption is that consumption spending rises everywhere. So all other firm owners would be increasing their consumption spending as well. That means even the owners of consumer goods selling companies would increase their consumption and reduce investment.

              Consumer goods companies would earn huge profits from the increase in consumption spending, but they too would spend more on consumption.

              At the extreme, there would be maximum spending on consumer goods and zero spending on capital and labor.

              With all spending going towards consumer goods and zero spending to capital and labor, we can now clearly understand that more consumer spending cannot in fact be assumed as automatically providing for more investment and labor. The money going towards consumption is actually money that could have gone to investment in capital and labor.

              Now if consumer demand really was the ultimate driver, then maximizing consumption should bring about maximum investment. But it doesn’t. Maximum consumer spending in fact eliminates all investment.

              By “demand” did we really mean both capital goods demand and consumer goods demand? That we don’t have to assume consumer demand is the only demand? That Keynesian theory does not assume maximum investment with maximum consumption? Keynes offered two alternatives. Either money invested must be at least matched by money consumed, or more money investment. Here, “demand” is money spending on both consumer and capital goods. So it would at first blush seem that more demand need not only mean more consumption. But upon deeper inspection, the way Keynes argued the case, we can see that he described the market in such a way so that more investment spending were an impossibility. More consumption without more production ended up being the only solution after all, to get economies out of depressions.

              This idea then became the general overall view of most years of capitalism. We are constantly under threat of insufficient consumption spending. Consumption falls, and we’re supposed to panic. This has evolved into “consumer demand is the ultimate driver”.

              • Bob Roddis says:

                I guess my point is that people’s requirements to live and their subjective values come first. Then you need production, of course. And, of course, each side of a voluntary transaction has both “demand” and “supply” for both finished goods and every microscopic widget component of capital goods.

                As Hayek said, Keynes was a genius. He took simple truths and turned them into a conceptual tar pit. Our “debates” in these comments are the proof of that.

              • Philippe says:

                “A dollar of spending in general cannot go to both labor and consumer goods.”

                So if I pay a worker $1 you are saying that he can’t spend that $1 on consumer goods? Why do you believe that?

                “Maximum consumer spending in fact eliminates all investment.”

                How do people produce the consumption goods then?

                “More consumption without more production ended up being the only solution after all, to get economies out of depressions”

                So when Keynes advocated policies for increasing employment and production, you read that for some reason as advocating less employment and production? Or more likely you never read anything and are just spouting?

          • Ken B says:

            CK only provided evidence on that point, which you concede was tangential, not on the others. What makes you think a disproof of a tangential point is relevant to a completely different point?

        • razer says:

          Quit patting yourself on your back for that pathetic mea culpa. Funny how you seldom admit when you are wrong. The “having no opinion in a matter = having it both ways” debacle comes to mind.

          I think another ban would do you good, Ken.

          • Ken B says:

            An intelligent reader would notice that when CK presented his graph I asked about the source of the data, not whether, if it were what CK alleged, it would refute LK’s claim. An intelligent reader would then notice that shortly after I was given the source by Reece I announced I had checked it, verfied the data was good, and that LK was wrong. An intelligent reader would conclude I wanted to check the facts before stating an opinion.
            You on the other hand persist in seeing a concern for accuracy as culpable. And I expect in your circles it is.

      • Cosmo Kramer says:

        Without comparison, the graphs did show what the numbers on the axis were referring to. When you compared to another country, that disappeared. So it seems you came to understand that the magnitude of each country’s exports rose and fell at the same rate %-wise.

        I won’t beat this horse to death.

        and I’m not going to argue against your newly elaborated points in light of the new facts. There are simply too many factors that drive an economy for any one to pick a couple and call that proof of their school.

        Thanks

  11. John says:

    You know what I like about these debates? For the life of me, I can’t tell who’s right….

    • Z says:

      The good thing is it doesn’t matter. We’re all going to die anyways.

  12. LK says:

    A review of how this thread developed in its major points, not the minor point about Dutch exports (which I admit I was wrong about):

    (1) Bob claims that Germany has been a model or clear example of European “fiscal restraint”. It is untrue. By its fiscal effects as a % of GDP, Germany had a large stimulus indeed as well as other bailouts of industry and a highly interventionist policy of government subsides to keep unemployment low by the “Kurzarbeit”/”short-work” program.

    (2) Bob next tries to prove his point by using government spending as a % of GDP. I point out how potentially misleading this is and how it is not a proper way to gauge fiscal policy.

    (3) Bob then says that Germany slashed “its government spending very aggressively after 2009.” Unfortunately, that is not true.

    (4) Bob then uses the absolute numbers from the Netherlands to try and show that the Netherlands’ fiscal policy must have been much greater than Germany’s.

    I point out that even absolute numbers do not necessarily give you an accurate measure of fiscal policy. In the Netherland’s case — like Ireland — they increased government spending partly because of big bank bailouts that did not add much to aggregate demand.

    By a proper measure of fiscal impact, their stimulus was about 1% of GDP while Germany’s was over 3%. Finally, the situation in Germany and the Netherlands in 2011, 2012 and 2013 was different: in the Netherlands the domestic economy remained weak, whereas in Germany it was strong, and so German fiscal contraction from 2011 (actually milder than the announced targets) did not impact the economy in the way fiscal contraction did in the Netherlands.
    —————–
    All in all, I have adduced evidence that vindicates my major points. I am not seeing evidence that refutes it.

    • Cosmo Kramer says:

      can you please address it in the context of automatic stabilizers?

    • Major.Freedom says:

      You couldn’t see evidence that refutes it, because the way you see is a priori to the evidence. Your theory makes it impossible for you to understand the historical data in any other way.

      You can see the same percentages and the same statistics, but come to a totally different understanding.

      You keep falsely believing that your interpretation of the data is just an unbiased scientific assessment of it. You say that the data “suggests” this, and “suggests” that, not knowing that this “suggesting” is just your theory being used as the tool to understand the data.

      To your points:

      (1) You have already been corrected on this. Bob was comparing the countries of France, Germany, Netherlands, and the Euro17 average. According to these, Germany was most austere. You are saying Germany is not austere because you are using a different standard, namely, some undefined, murky absolute whereby 1.6% of GDP government spending somehow must compel us to label Germany as not austere. OK, fine, whatever, you call it potato, others will call it potahto. The data is not being disputed. You are disputing the name calling. Bob’s point stands. In the data he presented, Germany was closest to austerity. If you asked him whether Germany was austere relative to ancapism, he would say of course not. Austerity is a political, unscientific concept. Don’t get mad when a political concept is used politically.

      (2) It is only misleading to those you want to lead into believing more government is beneficial. If you want more government, but spending per GDP encourages the belief that there is more than enough, then you claim spending per GDP is “misleading”, because it is leading people to a different conclusion than yours. There is also the problem of your conclusion being implicit in your premises. If spending per GDP falls, you use your theory and conclude that this might have been caused by the very theory you claim the data proves, namely, that GDP rose because of earlier government spending, and the ratio has since declined.

      (3) Pretty sure he meant relative to GDP.

      All in all, your position is nowhere near as strong as you believe it is.

      • LK says:

        (1) “austere” by what measure?

        (2) no, the issue is how to measure fiscal expansion and contraction properly. You are clueless.

        (3) Saying that Germany slashed its government spending relative to GDP “very aggressively” is still false. It reduced government spending in only one year: 2011, and even then by only -1.29%.

        • Philippe says:

          (2) govt spending can decrease whilst govt spending as a percentage of GDP increases. Or vice versa.

          • LK says:

            Precisely, government spending as a % of GDP is a function of both spending and GDP changes.

        • Bob Murphy says:

          LK wrote:

          (3) Saying that Germany slashed its government spending relative to GDP “very aggressively” is still false. It reduced government spending in only one year: 2011, and even then by only -1.29%.

          MF and everyone else, I realize I am guilty of it too in this thread, but at this point we can safely walk away. Relative to GDP, the German gov’t did indeed reduce its spending in 2010, 2011, and 2012. What LK is doing above is saying “relative to GDP” should not alter the nature of the claim; he is still falling back on the fact that the absolute level of euro spending by the German government only fell in 2011. So if I say, “The train slowed down” and “the train slowed down relative to the automobile next to it,” for LK those are identical statements that must have the same truth value.

          Naturally, this standard of precision will only apply to us, in this comment thread. If we ever bring up Krugman talking about, say, the Paul Ryan budget “slashing” aid to the poor, I do not think LK will be shocked, shocked at the blatant dishonesty if really what Krugman means is that the rate of dollar growth slows.

          • LK says:

            “Relative to GDP, the German gov’t did indeed reduce its spending in 2010, 2011, and 2012.”

            Bob Murphy, so all you are saying is: government spending as a % of GDP fell largely because German GDP rose.

            But that does *not* prove that Germany was engaging in “very aggressive” austerity or was Europe’s shining example of “fiscal restraint,” so you have not vindicated any of your main points

            “So if I say, “The train slowed down” and “the train slowed down relative to the automobile next to it,” for LK those are identical statements that must have the same truth value.”

            No, they are not. I fully understand the difference, thanks.

            But your assertion that “Relative to GDP, the German gov’t did indeed reduce its spending in 2010, 2011, and 2012” just reduces to “government spending as a % of GDP fell largely because German GDP rose.”

          • Philippe says:

            GreeK govt spending as a percentage of GDP has increased 11% since 2007.

          • Ken B says:

            The debate here is over the word slashed.
            If Bob’s claim were simply that it fell or dropped then his comment above would refute LK. But Bob said slashed which implies a deliberate action by the government to achieve that fall or drop. So LK’s rebuttal about actual cuts is relevant: Does the action taken by the government rise to the level of slashing?

            Bob’s car train example is helpful here.
            Saying the train slowed relative to the car is not the same as saying the engineer slowed the train relative to the car. Saying the government slashed is like saying the engineer slowed the train.

            • Tel says:

              So now we have yet another definition of “Austerity” which requires measurable intent.

              How the heck to you intend to quantify that? What units do you use to measure intent?

              • Ken B says:

                No, you have missed my point entirely. I am not discussing whether it was austerity or not. I am pointing out that Murphy’s point against LK would be correct here if Bob had not discussed it in terms of intent. But once you say X happened because Y did something you are no longer just debating if X happened. LK is addressing the Y part.

              • Tel says:

                I’m willing to go out on a limb and say that Bob regards the actual government budget as having a much larger influence on the economy than the supposed intentions behind said budget.

                Possibly I just don’t get it, or something, but that seems to be his position.

      • LK says:

        In fact, on point (1), Germany had the **largest fiscal stimulus** in Europe:

        “Clearly, the contributions to the European stimulus vary substantially by country. According to our estimates, the classic fiscal stimulus is greatest as a percentage of GDP in Germany, which is due to the sizeable second stimulus package that the German government tabled in January 2009

        David Saha and Jakob von Weizsäcker, EU Stimulus packages, p. 3.
        http://www.bruegel.org/publications/publication-detail/publication/266-estimating-the-size-of-the-european-stimulus-packages/

  13. Bob Roddis says:

    Since the populace is allegedly too dumb to maintain sufficient “aggregate demand” via voluntary transactions, from where are they to obtain the wisdom to elect that appropriate gang of expert Keynesian overseers who themselves have the wisdon to hit LK’s fiscal and monetary “sweet spot”? By his own admission, this “sweet spot” was only obtained during the “golden age of capitalism”, 1945 to 1970. Apparently, this sweet spot is missed more than it is hit.

    • LK says:

      (1) nobody ever said that people are “too dumb to maintain sufficient “aggregate demand”.” It is a macroeconomic outcome from micro-decisions that may well be smart (e.g., increasing saving to pay down debt or to protect yourself against the possibility of unemployment).

      (2) hmmm.. Germany elected a government that was smart enough to implement a large Keynesian stimulus when they needed it in 2008-2010. So was the UK, Canada, France, Sweden, Australia, New Zealand, etc. etc.

      (3) 1945-1970 was indeed the golden age of high employment Keynesianism, yes. But even though many nations have not used Keynesianism to keep unemployment low since the 1970s, it doesn’t mean it has disappeared, or that a new era of more effective Keynesian policies couldn’t happen again.

      • Bob Roddis says:

        And we know this from the evidence of the 1930s when the interventions into the monetary system of the various governments beginning in WWI came to fruition?

        • LK says:

          And that is called a non sequitur. You should look it up sometime. Might learn something.

        • Bob Roddis says:

          It’s called sarcasm. It’s been 37 years since Hayek said this on TV. Stockman’s book and web page are based upon it. When are the Keynesians going to provide the evidence that it was the market, not the messed up government monetary system?

          http://bobroddis.blogspot.com/2014/02/being-polite-to-keynesians.html

      • Bob Roddis says:

        I’m perfectly happy to have that be the Keynesian narrative. If one believes it, no amount of debate is going to change their mind.

    • Philippe says:

      deficient demand doesn’t have anything to do with people being stupid, unless it is directly caused by government policy.

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