“Have Events Vindicated Keynesian Models?”
This is a follow-up article to the one last week that concerned Jim Manzi’s debate with Karl Smith. In this new article, I walk through Paul Krugman’s citation of Mark Zandi’s forecasts. Krugman thought Zandi’s projections of the impact of the Obama stimulus–coupled with the ex-post record of actual GDP performance–was a great confirmation of Keynesian models. Yet I argue that Krugman is conveniently looking at rates, and not levels.
This leads me to revise the popular swimming pool analogy:
When the stimulus was a hot topic, conservative and libertarian opponents often invoked a swimming-pool analogy. They would point out that every dollar the government spent, it had to first get from the private sector through taxing or borrowing (we’ll ignore inflation). With this insight, the critics said that trying to boost the economy with stimulus spending was like trying to raise the water level in a swimming pool by taking buckets of water from the deep end and dumping them in the shallow end.
Now it’s true, things are a bit more complicated than this. An extra dollar spent by the government doesn’t necessarily translate into a dollar less spent by the private sector, because of issues of expectations and how a private household or firm adjusts its present spending in light of permanently higher future taxes. (That’s why Brad DeLong expressed disagreement — in his usual way — with what he viewed as an improper oversimplification by Steve Horwitz.)
Even so, let’s take the swimming-pool analogy as a good proxy for the free-market view, but with a tweak: because the people carrying the buckets will inevitably let some of the water spill out onto the patio, in practice the plan of redistributing water from the deep to the shallow end will actually lower the level of the pool.
In this context, what would be the analog of Paul Krugman’s defense of Keynesian stimulus policies, when he relied on the two charts above? It would look something like this: Krugman would look at the level of the pool right before someone dumped in a bucket. He would exclaim, “Aha! When someone empties a bucket into the pool, the level goes up, just as I predicted. And what’s more, when they empty a big bucket, the water level rises more than when they empty a little bucket.”
The critics of course come back with this retort: “Hold on a second, Dr. Krugman. After implementing your bucket plan all afternoon, the water level is lower than when we started — just like we predicted!”
To this, Krugman could only reply, “Nonsense! You Neanderthals need to study your fluid dynamics; I can write some differential equations if you want. Obviously what is happening is that there is a leak somewhere in the pool. If it hadn’t been for my bucket plan, the water would be three feet lower right now than it is. If only we had had the willpower to go find bigger buckets this morning, like I suggested …”
Merry Christmas!
One of the neat things about becoming a born-again Christian–besides the whole salvation thing–is that the lyrics of Christmas hymns mean a lot more to me now. For example, how about this one from “Oh Holy Night”:
O Holy Night! The stars are brightly shining,
It is the night of the dear Saviour’s birth.
Long lay the world in sin and error pining.
Till He appeared and the Spirit felt its worth.
I think that third line is really neat, since it ties in with my fascination with Job 28: 28. More generally, Jesus is the Light of the World–He had to come show us how to live, because we were quite simply lost without Him.
The Real Controversy of the Obama/Stewart “Dude” Exchange
I was in a cocoon when this originally happened, but apparently there was a big brouhaha when the Daily Show’s Jon Stewart called President Obama “dude” during their interview. I heard the clip on NPR, as one of the memorable events of 2010.
The thing is, it’s the earlier part of their exchange that caught my attention. (Sorry I can’t find it on YouTube.) Stewart was busting Obama for hiring Larry Summers when Obama the Candidate had promised to bring in new blood etc.
In his defense, Obama said something like this: “If you had told me two years ago, that we would be able to stabilize the stock market, stabilize the economy, while spending less than 1 percent of GDP…when the S&L crisis cost about 2.5 percent of the economy–and it was a much smaller crisis–then I would say I’ll take that deal.”
Then the crowd swooned and started cheering. Obama went on to say, “And Larry Summers did a heckuva job,” to which Stewart said, “You don’t want to use that phrase, dude.”
Sooo, let’s put aside the shocking notion that someone referred to the president as “dude.” Let’s focus on Obama’s claim that they stabilized the economy by spending less than 1% of GDP. What the heck is he talking about? Even if we put aside TARP and the Fed stuff, the Obama stimulus package was at least $700 billion. So even if we break if up per year, that’s $350 billion per year. Divided by a GDP figure of $14 trillion, that works out to exactly 2.5 percent.
So what the heck is Obama talking about?!
Inapt Analogy
Here’s Tom Woods relaying a nullification anecdote:
The Intercollegiate Studies Institute recently held a very interesting debate at the University of Virginia on state nullification, between Allen Guelzo of Eastern University and Donald Livingston of Emory University. You can watch it or listen to it. Unfortunately, you won’t be able to see the question period, when things got very interesting. A person in attendance wrote to tell me what happened:
Eventually a female student raised a question: the American colonists said they were defending the rights of Englishmen against usurpations of Parliament. She asked couldn’t it happen that the central government could become oppressive in the same way and that the States could step forth as the colonial governments had done to check the tyranny? Guelzo paused for a long time and asked whether she thought the central government was a tyranny. She rephrased the question. He persisted twice, and demanded that she answer. She did, and said she thought it was a tyranny. The audience clapped! After which a long silence. Guelzo said, after some other words, that she was a “traitor.” [Another person whose recollection was sent to me recalls that he said, before calling her a traitor, “There was a man not too long ago with a similar response and his name was Benedict Arnold.”] One of her teachers, the Dean of Honors Students, jumped up to protest, and was physically restrained. A gentleman in the audience said, “Professor, that was a cheap shot.” Others protested. The moderator, a professor of international law, had to call for order.
This was a confirming instance of my darkest thoughts about nationalist ideologues. Guelzo was a Lincolnian Jacobin who would have had no problem leading war against civilians, including the honors student at UVA.
My observation: It would have been more historically accurate if Guelzo had said, “There was a man not too long ago with a similar response and his name was Patrick Henry.”
If anybody is Benedict Arnold in this story–siding with the distant tyrant instead of the local rebels–it is Guelzo.
More Potshots at Pelosi
Justin Longo sends this short clip. It’s not bad, especially if you have something you absolutely have to get done at work before the holiday break, and so can quite comfortably watch a YouTube “that’s only 1:22 after all.”
“I’m in Love With Friedrich Hayek”
Don’t give up on this. It gets hilarious at the end. (HT2 a bunch of simultaneous posters.)
How Much Faith Should We Put in Keynesian Models?
This is the first of a two-part series in which I join Jim Manzi’s search for justification for Keynesian models. For what it’s worth, one of the copy editors at Mises told me, “This one made me laugh a lot.”
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