02 Apr 2011

The Murphy-Krugman Debate Edges Closer

Federal Reserve, Krugman 21 Comments

I actually got a call on the emergency line on this one from Wenzel. (I imagine there are about 3 of you who live vicariously through us, and so I like to give you some tidbits now and then.) Krugman quotes our friend Daniel Kuehn who in an RAE paper quotes me on the 1920-1921 Depression.

I will have to think about this stuff for a bit. For what it’s worth, I was a referee on Kuehn’s paper and in the interests of intellectually honest, whenever I have discussed the 1920-1921 Depression since reading it, I give a disclaimer like, “Now just so you guys know, the Keynesians could say that the 1920-1921 Depression was caused by the Fed jacking up interest rates to record highs, and the government slashing its budget.”

Anyway, here is what Krugman has written on this in the last day or two: 1, 2, and 3.

As far as Kuehn’s paper: It’s been a while now since I read it, but I remember thinking that he was putting too much stress on what the man, John Maynard Keynes, thought should have been done during 1920-1921. That really has little to do with modern Keynesians.

Also, with your permission, can I complain about Kuehn’s reaction to my quote? He says, “[N]othing could be further from the truth.” Can we please drop this standard phrase–At the end of the day, bottom line is, it’s meaningless, and you can take that to the bank. Say what you will about my statement, it’s not further from the truth, than, say, “Black is white.”

In all seriousness, congrats Daniel on getting a link from the big man.

Last thing: If you’ve somehow managed to miss it thus far, check out the Murphy-Krugman Debate homepage.

21 Responses to “The Murphy-Krugman Debate Edges Closer”

  1. Tom Woods says:

    Jeff Herbener has written some good stuff, albeit only privately, on 1920-21. One hopes he may pursue this and thereby vindicate Schumpeter’s view that this episode reflect’s the market’s self-correcting nature, or the general consensus among Keynesian economic historians that the recovery was surprisingly quick given the “passive” role of the Fed, etc.

    • bobmurphy says:

      Yeah, for those who haven’t seen the video yet, check out Tom’s quotations from various Keynesian historians on this period. Funny stuff.

      I suppose Krugman could say, “I can’t help it if historians adopt vulgar Keynesianism. I’ve never said anything about big spending being the cure for all depressions.”

    • Daniel Kuehn says:

      Tom I was curious – why didn’t you cite Romer? Vernon? Temin?

      When I first heard your rendition of Keynesians who treated it, I expected to find no more when I went to write my paper. I was pretty surprised to see these major treatments of it that you never mentioned.

  2. Daniel Kuehn says:

    Bob – glad I made an impact on how you talk about it!

    And for others, one of the things that I try to make quite clear is that I really can’t say that 1920-21 isn’t consistent with ABCT. It simply wasn’t the disproof of Keynesianism that a lot of people claim it is. And Bob, in our reviewer-author exchange you challenged my assertion that modern Keynesians like Krugman would take the approach I did – that I was perhaps accurately channeling Keynes of the 1920s, but that that isn’t relevant.

    Isn’t Krugman making essentially my argument here? He cites 1981 – is that not exactly what I said modern Keynesians would compare this case to?

  3. Daniel Kuehn says:

    Thanks for the mention, btw – and again for the thoughtful comments and professional disclosure of your identity during the review. It was my first experience publishing in a peer-reviewed journal, and it was a good experience, particularly since I was submitting a critique. The people at RAE do a great job.

  4. Bob Roddis says:

    My thought on reading Daniel’s paper back in November was that he was simply defending the man Keynes. As in, “No, Keynes wasn’t a crazy unthinking Krugmanite. In fact, Keynes might have supported the actions that were taken in 1921 and thus those actions might therefore be called ‘Keynesian’.”

    In fact, his article is why I started using the term “Krugmanite”. So Daniel impacted how I talk.

    There is nothing in the paper about praxeology, acting man, subjective value, the pricing process or the distortion of the capital structure. It’s another of those “historical narratives establish economic principles” arguments.

    It seems that all the Krugmanites have left in their quiver is the use of hair-splitting to show that each Keynesian induced bust might have several different characteristics. Who knew?

    Nevertheless, since rate hikes plus tax and spending cuts worked so well in 1921, where was the established historical evidence that allegedly demonstrated those policies should be jettisoned in 1929?

    Further, this is a victory for us. The more they blab, the more they will be exposed. Just the admission that rate hikes plus tax and spending cuts do cure depressions is not generally known to the public. Get that in the brains of the masses and then let the double-talkers try to explain “liquidity crisis”.

    • bobmurphy says:

      Just the admission that rate hikes plus tax and spending cuts do cure depressions is not generally known to the public.

      But Krugman didn’t talk about the spending cuts.

      • Bob Roddis says:

        Yes, but….

        There WERE spending cuts. And the gist of the Krugman/DeLong posts was that 1921 can’t teach us anything because there was no debt and/or no “liquidity crisis” back then. I say that this form of argument is an implicit admission that what happened happened, but let’s just forget about it because things are different now. (Oh, and of course, this is proof that Krugman isn’t ALWAYS a crazed spendthrift/inflationist.)

        • Daniel Kuehn says:

          Not “let’s just forget about”. Let’s just look at 1929 to compare to now, and when another 1981 rolls around we’ll talk a lot more about both 1921 and 1981.

    • Daniel Kuehn says:

      That you got that I think Keynes was not crazy and unthinking is good, but I certainly didn’t mean to imply that Krugman was crazy or unthinking.

      Why do you say “rate hikes plus tax and spending cuts”?

      Among other points I made in my paper, one of the things I highlighted was:

      1. It was the rate hikes that caused the recession (for the noble purpose of ending the post-war inflation, of coruse).

      2. It was the rate cuts that solved it.

      3. The bulk of the spending cuts happened before the recession even started and the budget was balanced before Harding came into office or the recovery started.

      4. The “tax cut” increased tax revenue as a share of income at first – it wasn’t until later years that it was actually a “cut”. Tom and Bob told people that Harding cut the tax rate. Fine – he did. What they neglect to tell you is that he widened the brackets so that those tax rates he cut were imposed on many more people than they were previously. It’s sound tax policy “lower the rates, broaden the base” – but it raised taxes on a lot of people in the middle of a recovery.

      Anyways, on that last tax cut point the idea that tax cuts induce recovery was never anything you guys had to convince us of in the first place.

      • Captain_Freedom says:

        The way you frame 1 and 2 makes it seem like unsustainable booms generated by low interest rates that will be followed by busts with or without rate cuts in the future is somehow normalcy, and that market corrections to that unsustainability (recessions) are a problem that require thwarting of yet lower interest rates.

        You’re lost on this one.

  5. Daniel Kuehn says:

    re: “Also, with your permission, can I complain about Kuehn’s reaction to my quote? He says, “[N]othing could be further from the truth.” Can we please drop this standard phrase–At the end of the day, bottom line is, it’s meaningless, and you can take that to the bank. Say what you will about my statement, it’s not further from the truth, than, say, “Black is white.””


    But is it not still legitimate as a local, rather than a global claim? With reference to the empirical content of the record on the 1920-21 depression specifically “nothing could be further from the truth” than the claim that it is a controlled experiment. Of course in a broader context there are things further from the truth.

    Indeed, if the default is to interpret this in a global rather than a local context, one wonders how the phrase ever emerged in the first place. I suppose it could be plain and simple hyperbole, but one would think that the sheer absurdity of using it as a global claim would have itself implied that it is being used locally.

  6. Bob Roddis says:

    I’m turning purple from holding my breath waiting for the very first Keynesian/Krugmanite/inflationist/spendthrift analyst who understands that the universal Austrian criticism of all their nefarious schemes is that they CRACK THE THERMOMETER of economic knowledge by disrupting and distorting the pricing process. Their hair-splitting about different types of depressions basically comes down to which depressions that are going to be more painful to cure. Our current one will be quite painful to cure and will get worse the longer we spend and have super low interest rates. The cure always remains the same: FIX THE THERMOMETER and allow it to work.

    BTW, Jonathan Finegold Catalan has an excellent new Mises.org article explaining how government spending cracks the thermometer and distorts the pricing process. This is important because the non-Austrians appear to have the same level of familiarity with basic Austrian concepts as Mark Levin does with presidential war powers.


    Also, we need a new name for the “liquidity crisis”. I propose “that short period when people are no longer so stupid that they will borrow more funny money due to impending deflation as prices seek reality”.

    • Daniel Kuehn says:

      Bob – it’s quite clear that you all don’t like Keynesianism because you think it “cracks the thermometer of economic knowledge by distorting the pricing process” (good turn of phrase, by the way).

      What seems to not be getting through to your side often is that we have essentially the same critique of you.

      Why do you think we advocate policies to lower the intereset rate first and foremost?

      Because that all-important thermometer has been cracked and interest rates are too high. Our cure is to fix the thermometer and allow it to work.

      Why this is lost on many (not all) Austrians, I have no clue.

      • Silas Barta says:

        Whoa, so you guys seriously thing that useful economic activity is stopped in its tracks by ~3% risk-free ten year interest rates, and if not for them being so obscenely usurious, then the right projects would be undertaken, and the wasteful ones would be quickly liquidated due to their inability to pay such, um, lower capital costs.

        Yes, you *could* make the same critique right back at Austrians — if you were willing to endorse such an insane belief.

      • Captain_Freedom says:

        Why do you think we advocate policies to lower the intereset rate first and foremost?

        Who cares. Advocating for the central bank to set artificially lower interest rates IS the very distortion Bob was alluding to.

        Because that all-important thermometer has been cracked and interest rates are too high. Our cure is to fix the thermometer and allow it to work.

        The natural interest rate is whatever interest rate the free market sets. If it is 50%, or if it is 1%, that is what the interest rate is according to the voluntary market process of exchange of private property.

        A “high” interest rate does NOT “prevent the economy from working.” It enables the market to work because it reflects true voluntary savings and time preference. A “high” interest rate of say 50% (from say a lower rate of 10%) means that the people have very high time preferences and voluntarily want more goods and services in the near future relative to goods and services in the more distant future. With a “high” interest rate of 50%, that makes investors invest in such a way that is consistent with that high time preference, since higher borrowing costs means more investments with payoffs in the nearer future will be made relative to investments with payoffs in the more distant future.

        If true time preference of the people is such that interest rate is 50%, but the Fed inflates into the loan market and depresses interest rates down to say 10% or whatever, then that will DISTORT the economic structure of production away from what the true consumer and saver preferences happen to be (much higher than 10% justifies).

        You are lost because you fallaciously believe that the interest rate that is set by voluntary trade is “wrong” whenever it is higher than what you believe is necessary to cure whatever level of unemployment you believe is “too high.” You have no clue as to WHY widespread unemployment even arises in the first place (you blame the free market). You have no clue that artificially low interest rates set by the Fed DISTORT the economic structure and generates inevitable unemployment down the road.

        Your “cure” to “fix” the thermometer is actually the POISON that Austrians identify and understand GENERATES a broken thermometer.

        Why this is so lost on you people is beyond me.

    • Daniel Kuehn says:

      Just take five seconds to think about it.

      What do you hear Krugman et al. saying? Do they/we say “the price mechanism isn’t essential we just have to push this through”, or do they say “the interest rate is too high which is causing massive disruptions in market activity”.

      You are preaching to the choir when you talk about the centrality of the pricing process and the problems with distorting prices.

      • Silas Barta says:

        I would never dare to childishly insult Krugman by claiming that interest rates are *both* “at the zero bound” *and* too high. I don’t want to lie about someone’s beliefs by claiming them to be so asinine.

        For my part, of *course* I believe your claim to understanding the price mechanism while also claiming that the interest rate “should” be near zero to communicate relevant information. How could someone thinking that money should be free _not_ understand the price mechanism?

  7. Blackadder says:

    Re: Nothing could be further from the truth. This has long struck me as being a more modest claim than it sounds. If statements are either true or false, then it will be correct to say of any false statement that “nothing could be further from the truth.” You can’t get any further from the truth than being false.

    • Contemplationist says:

      That is of course, logically true. But the “nothing” in the statement is a rhetorical device of exaggeration. And since this construct has been so overused, I find it very tedious

  8. John Papola says:


    I look forward to reading your paper. Here’s my question in the meantime:

    Why do you think it is the case that allegedly tight-money recessions are treated rhetorically by Paul Krugman and other Keynesians as if there was another choice? He has routinely talked about the 1980s recession, which I believe falls into the inflation-fighting variety, as if there was some other option but Paul Volker chose the “pain” way. This rhetoric comes across as if Krugman believes that inflation is some exogenous force unrelated to actions of the central bank, rather than something which is explicitly created by the central bank. The Fed doesn’t “fight” inflation. They cease creating it. A fight has an opponent other than one’s self.

    Put another way, Krugman has written repeatedly that the pain of recession is avoidable. Is that untrue? Is it merely he that believes DEEP recessions are avoidable? Here he is from 1999:

    “Recessions, we claim, can and should be fought with short-run palliatives; by all means let us work on our structural problems, but meanwhile let us also keep the work force employed by printing enough money to keep consumers and investors spending.” – http://www.slate.com/id/13630/

    In the end, Krugman himself states that his reliance on fiscal policy tools is entirely contingent on being in the alleged “liquidity trap”. But the liquidity trap isn’t some unavoidable fact of economic reality. It is an institutional quirk of central banks targeting short term nominal interest rates. If the LT was really the problem, why don’t Keynesians devote all of their energy to redirecting monetary policy away from short term rate targeting? I guess this falls into the same realm as the concern for sticky wages. If sticky wages are such a problem, why not focus on undoing the interventions that make them even MORE sticky? Instead, many keynesians seem to support policies which fly under the broader “progressive” banner that make wages MORE sticky (minimum wage laws, extended unemployment benefits, unionization,etc).

    It’s a strange thing to see institutional problems and rarely seek to address them directly, but rather advocate shims and hacks that ultimately end up making them worse.