17 Aug 2011

Krugman’s Baseline for Economy Back in 2009, Without Stimulus Package

Economics, Krugman 13 Comments

We all know that Krugman has been saying “I told you so” ever since the Obama stimulus package didn’t usher in happy times. However, the naive outsider might get the sense that Krugman disagreed with the actual analysis conducted by Romer-Bernstein (with their infamous chart projected unemployment with and without the stimulus). Yet as I’m going to point out in tonight’s final lecture in the Mises Academy class, things are a lot more nuanced.

First of all, when the Romer-Bernstein projection came out, Krugman agreed that their multipliers were basically the same as his own. So they were basically in agreement about how much the Obama stimulus package would help.

The only disagreement, therefore, was in their projection of the baseline trajectory, i.e. what the economy would do in the absence of stimulus. Romer-Bernstein famously had unemployment without stimulus peaking at around 9 percent. Of this, Krugman said:

One more point: the estimate of what would happen to the economy in the absence of a stimulus plan seems kind of optimistic. The chart above has unemployment ex-stimulus peaking at 9 percent in the first quarter of 2010 and coming down through the year; the CBO estimates an average unemployment rate of 9 percent for 2010, so the Obama people are more optimistic than the CBO, and a lot more optimistic than I am.

OK, so maybe Krugman is a genius after all. If he thought, say, that the economy without stimulus would peak at 12 percent unemployment, then he correctly called everything. But in an op ed that same month, he had written:

Earlier this week, the Congressional Budget Office came out with its latest analysis of the budget and economic outlook. The budget office says that in the absence of a stimulus plan, the unemployment rate would rise above 9 percent by early 2010, and stay high for years to come.

Grim as this projection is, by the way, it’s actually optimistic compared with some independent forecasts. Mr. Obama himself has been saying that without a stimulus plan, the unemployment rate could go into double digits.

It’s true, he didn’t give a specific number, but I don’t think Krugman in January 2009 had any idea just how bad the economy would be, such that with the “help” of the (too weak) Obama stimulus, unemployment would exceed 10 percent at the peak.

In other words, when Krugman says, “I knew Romer was setting us up for failure, so don’t use her mistake as an argument against Keynesianism,” what Krugman means is, “Their own analysis told us this wasn’t going to be big enough.” Krugman explicitly agreed with the general estimate of the multipliers, and although he was more pessimistic than they were about the economy ex-stimulus, he didn’t give any evidence (that I have seen) that he knew just how bad the baseline would be.

Thus, Krugman’s own track record on this is entirely consistent with the Austrian view that the Obama stimulus made things worse, and that the Keynesians are just playing the non-falsifiable card of saying, “Well the baseline was worse than we realized.”

13 Responses to “Krugman’s Baseline for Economy Back in 2009, Without Stimulus Package”

  1. Daniel Kuehn says:

    I was with you until that last paragraph. How is he consistent with the view that the stimulus made things worse?

    • jjoxman says:

      You’re absolutely right. That last paragraph was a blindside.

      • Major_Freedom says:

        I see what you guys are saying, and I almost had that impression too, but I think you’re not getting what Murphy means.

        I don’t think he said that what Krugman, Romer et al argued shows in a positive sense that the stimulus made things worse and that the Austrians were right. I think Murphy is saying that the Austrian explanation is not refuted by anything they said, and what they did say is consistent (that’s the operative word here) with the Austrian explanation being correct.

        The key thing here is that Krugman hinted at the idea that without the stimulus, unemployment “could go into double digits.” In other words, Krugman was almost certainly thinking in January 2009 that WITHOUT the stimulus, he thought that unemployment would probably go into double digits, meaning 10% or above, but probably not much more than 10% (that’s what I get from “could go into double digits.”)

        Given all this, the government spending program was carried out, and yet….unemployment went into double digits!

        In other words, what Krugman was hinting at would take place without the stimulus, i.e. “could go into double digits”, that actually happened WITH the stimulus.

        Murphy is clearly inferring from all this, quite justifiably, that given what Krugman et al were arguing, and what the Austrians were arguing, that history transpired according to what the Austrians argued would happen and NOT what Krugman et al argued would happen.

        There is no way that Krugman could have possibly held that the stimulus package passing would have been followed by double digit unemployment, not when he was busy in 2009 saying (and thus thinking) that double digit unemployment would probably occur without government spending.

        Murphy is absolutely right when he writes:

        “the Keynesians are just playing the non-falsifiable card of saying, “Well the baseline was worse than we realized.”

        Now to be fair, and I hope Murphy admits this, Austrians would also be compelled to make non-falsifiable arguments the same way Krugman et al are making non-falsifiable arguments, if they try to interpret economic historical data as well. As Mises proved, yes proved, interpreting economic historical data requires an a priori theory. Economic theories cannot be induced out of economic historical data, the way scientific laws can be induced out of controlled experiments.

        I get the sneaky suspicion that Murphy is somewhat embarrassed about the Austrian position that economic principles and theories arise out of rationalism, specifically praxeological reasoning, and not economic historical data. I think that’s why he appears to me to be a little jealous of Krugman making non-falsifiable arguments all the time. It’s almost as if Murphy is saying “Krugman! Stop doing that!” because it’s a personal embarrassment of Murphy’s.

        I think we should encourage Krugman making non-falsifiable arguments, because then we can get him out in the open as a holder of the Austrian position that economic theories a priori to economic historical data. Once we get him to admit that he is practicing the Austrian methodology, then we can nail his ass to the grass and use the superior logic of praxeology to refute his flawed logic.

        You will NEVER refute Krugman by pointing to historical data and finding inconsistencies between what he argues and what the data show. He is much too sneaky to get caught that way. No, we have to expose the logical contradictions inherent in the Keynesian worldview. That is how Keynesianism will finally die the death it oh so truly deserves.

        Why don’t we expose the inherent logical contradictions in Keynesianism? I’ll go first.

        The multiplier effect doctrine, and the marginal efficiency of capital doctrine, both of which are workhorses in the Keynesian worldview, contradict each other.

        When they espouse the declining marginal efficiency of capital theory, the Keynesians claim that more net investment will be followed by a reduction in the rate of profit.

        Yet when they espouse the multiplier effect, the Keynesians claim that more net investment will be followed by a multiplied increase in aggregate demand, which of course will increase the rate of profit.

        Of course they don’t see this contradiction, because they are too busy using the multiplier effect when justifying government spending, and they are too busy using the declining marginal efficiency of capital when attacking saving and net investment.

        Not only that, but both the multiplier effect and the marginal efficiency of capital theories are themselves internally illogical on their own.

        • jjoxman says:

          Huh. Well that makes a lot of sense. Muchas gracias.

  2. Blackadder says:

    Let’s say Krugman was wrong about how bad the baseline would be. How is that evidence against his Keynsian model?

    Suppose that we want to get to Albuquerque and think that we are five miles east of the city. According to my map, to get to the city from that point we would need to drive five miles west along a certain road. So we do that, but it turns out we were fifteen miles east instead of five, so that even after driving the five miles we are still ten miles away. Does that prove my map is wrong?

  3. Yancey Ward says:

    What if the stimulus had been 3 times as big, but was now rstill running out? What do the Keynesians think would be the state of the economy going forward, and why? I keep coming back to this- they say the economy is starting to stall and fall back because the stimulus has run it’s course, but the stimulus has to end sometime, doesn’t it, so even if you make it bigger initially, it still runs out some time, and that GDP is going to fall back, right?

    • jjoxman says:

      That’s right Yancey. I believe the argument for stimulus is that it kick starts business investment so that when the stimulus runs out the effects won’t be too bad. I don’t buy that argument, though.

  4. bobmurphy says:

    DK and Blackadder, I am trying to clarify what Krugman means when he says (paraphrasing), “Don’t take the Romer PR disaster as a strike against Keynesianism. I, for example, told us this is exactly what would happen, back in 2009.”

    So I’m saying no, he didn’t. If Krugman had made his own chart, it would have shown (say) unemployment without the stimulus peaking at 10.5 percent, and with the stimulus peaking at 8.5 percent. So the basic Austrian critique of, “You guys don’t know what the heck you are talking about!” would be almost as valid for him as it was for Romer.

    You’re right, I didn’t just prove that Keynesianism is wrong. But I think Krugman is leading people to believe he wouldn’t have fallen into the same trap as Romer did back in 2009, and that his projections were more realistic. I don’t think they were (by much).

    • Daniel Kuehn says:

      OK – if you’re saying forecasting is really hard, I’d agree. But it’s not just Krugman and Romer – nobody knows what they’re talking about in that sense.

      Ideally we’d get forecasts close enough to be somewhat useful for making our way in the world. Krugman seems to be marginally better on that front. But this isn’t a Romer/Krugman thing – isn’t this an everyone thing?

      I just get concerned because some people have actually been saying we should measure the success of the stimulus against forecasts.

      • Daniel Kuehn says:

        **Marginally better not because Krugman is a professional forecaster, but really almost solely because he knew what bad news a financial crisis and a liquidity trap were early on.

  5. Anonymous says:

    The idea that there is a “trend line” which forms the outline of an “output gap” is preposterous. The idea that government spending is generic is preposterous.

    We’ve won. Average people have no idea that the Keynesians have ever believed this crap and all the evidence points to them being appalled when they realize that’s what is and has been proposed and enacted. Ask a non-political person if they are aware that all of this massive government debt and deficit is allegedly the CURE for our problems and not the cause. They will not know that and they probably won’t even believe you. They also do not understand that the Fed can create money out of thin air and probably won’t believe you if you tell them. But once they understand, they are appalled.

  6. bobmurphy says:

    Major Freedom, what the heck are you talking about? The only things I’m embarrassed about are my waistline and some bootleg karaoke YouTubes.

    Krugman is running around saying, “I warned everyone this was going to happen!” for two years now. I’m pointing out that his analysis was virtually identical to Romer’s. He thought that her own analysis showed “this” would happen.

    Let me put it to you this way, MF. For a while, I thought fairness demanded that I not simply point to that infamous graph from Romer et al., showing unemployment peaking at 9% without the stimulus. The reason I thought it would be unfair to do so, is that I thought Krugman was saying that his own analysis at the time showed that things would be much worse.

    However, in retrospect I think if Krugman had drawn up his own chart, he too may very well have predicted that without stimulus, the economy would do better than what actually happened with stimulus. (That, after all, is what is such a PR disaster for Romer and Obama.)

    Maybe this is such a little nitpicky thing you guys are reading more into it. The point is, for two years now I have been bending over backwards to be fair to Krugman, and lately I realized that was unnecessary. I have no problem now saying, without qualification, that “the Keynesians don’t realize that their stimulus made things worse. They think for some exogenous reason the economy got worse after their package kicked in.”

    Before, I had been hedging and saying, “Krugman disagreed with the Romer forecast.”

    • Major_Freedom says:

      Bob, my point is that Austrians are saying the exact same thing, but in reverse. For two straight years, Austrians (myself included) have been saying “I warned everyone this was going to happen!”

      You see, we Austrians are looking at the historical data, and we’re concluding that because the government did what they did, the economy would get worse. Keynesians like Krugman are concluding that because the government did what they did, the economy would get worse.

      Other than that, I whole heartedly agree with you that Krugman probably didn’t expect that the economy would get as bad as it did GIVEN the Obama spending spree was passed.

      I think it is terribly wrong to think that looking at past data will ever prove or disprove either the Austrian story or the Keynesian story.

      I mean come on, we all have the same data. Krugman is looking at the data, and he is using his a priori theory of Keynesianism to conclude that the data is what it is because Keynesian policies weren’t prevalent enough. Austrians are using their a priori theory of Austrianism to conclude that the data is what it is because Austrian policies weren’t prevalent enough.

      I am trying to help our cause by emphasizing that we won’t win this battle by any way other than to refute Keynesianism using rationalist principles. Empiricism, historical data, just can’t cut it. We can’t observe counter-factual realities of alternative courses of action to see what would have happened had the government did things differently. We just have one set of practically infinitely complex data.

      Why aren’t you refuting Krugman using a priori logic?