Two Views of R&R
[UPDATE below. Make sure you read that if you are just now stumbling upon this post.]
Man, Reinhart and Rogoff are getting hammered by the Keynesians lately. First of all, you’ve got commentators (here’s but one example of many) who are making it sound like all the “austerity” the last 3 years was due to an Excel mistake. This is simply ridiculous, as the R&R headline number only changes “a few tenths of a percent” when you correct the spreadsheet formula.
Although (to his credit) Krugman didn’t lead his readers to believe all of R&R’s results hinged on that Excel mistake, he too has been just blasting them. In this post on “Knaves” and “Fools” Krugman says, “And so you have the spectacle of…powerful officials instantly canonizing research papers that turn out to be garbage in, garbage out”, a clear reference to R&R. And let’s not forget this post where Krugman summed up the lessons of the R&R fiasco:
Notice, however, that the problem with the original [R&R paper] wasn’t that it failed to convey the nuances. The problem was that it was just plain wrong — wrong about America after the war, wrong about what a debt-growth correlation means. (It turns out that there was other wrongness too, but that was enough).
So the moral of the story should not be, “Don’t take strong positions”. It should instead be “Don’t take a strong position that some people want to hear if the position isn’t supported by theory and evidence”. Or maybe, even more briefly, “Don’t pander”.
And the trouble with where I think [Tyler] Cowen, at least, is going is the apparent suggestion that everyone who develops a prominent public profile in economics has to do it by pandering. No, they don’t — and specifically, I don’t think that’s what I do. I’ve taken very strong positions over the years; I’ve been wrong on some occasions; but I can’t think of any cases where I took a stronger position than my actual beliefs warranted.
So you see, it’s not just that these researchers were wrong, but that they were consciously pandering to politicians, telling them what they wanted to hear in their quest to hurt the underprivileged and reward the fat cats, when R&R knew that they were taking a stronger position than their actual beliefs warranted. Man, what horrible people!
In the interest of evenhandedness, I guess we should try to find the views of someone else to counterbalance Krugman’s strong accusations. Now to be fair, we can’t just quote from some adjunct professor at Hillsdale College. Let’s get, say, a Nobel laureate, and one who has read the entire literature on financial crises and macroeconomic policies to get us out of a depression–this is the kind of guy (or gal) we need, to give a balanced view.
Oh, I’ve got an example of just such a person, who wrote in July 2010:
Regular readers will know that I’m a huge admirer of Ken’s work, both theoretical and empirical. Obstfeld and Rogoff is the definitive work on New Keynesian open-economy macro; Reinhart and Rogoff the definitive empirical history of financial crises and their aftermath. It was largely thanks to my study of Obstfeld-Rogoff that I realized, from the get-go, that many of the arguments we were hearing about how modern macro had proved Keynesianism wrong were just ignorant; it was largely thanks to my reading of Reinhart-Rogoff that I realized, early in the game, that this was going to be a prolonged slump rather than a V-shaped recovery.
I’m reminded of Truman’s request for a one-armed economist. (HT2 Scott Sumner and James Hamilton)
UPDATE: I had not clicked through the link of Krugman’s July 2010 quote. (You can choose whether to believe this or not, but yesterday the NYT wasn’t letting me read his stuff because it said I had exceeded my monthly limit, so I didn’t think it would let me. But, for some reason today–still April–it’s letting me.) I was just relying on the quotes from the other blog posts on this.
The quote is accurate, but later in the same post Krugman says:
Unfortunately, the Reinhart-Rogoff paper now being cited all over the place – the one that suggests that there’s a critical level of government debt, at around 90 percent of GDP — doesn’t follow that strategy. All it does is look at a correlation between debt levels and growth. And since debt levels are not sharp extreme events, there’s no good reason to believe that they’re identifying a causal relationship. In fact, the case they highlight – the United States – practically screams spurious correlation: the years of high debt were also the years immediately following WWII, when the big thing happening in the economy was postwar demobilization, which naturally implied slower growth: Rosie the Riveter was going back to being a housewife.
It’s just not up to the standard of the other work. And yet Ken is leaning hard on that paper to justify his pro-austerity position.
So, had I realized that upfront, I wouldn’t have made this post. I would take it down now, except that seems Orwellian.
In the very same July 2010 post, Krugman’s next line is “And yet I believe that Ken has been giving seriously bad policy advice lately.” So what’s the problem? Krugman values Reinhart and Rogoff’s book on financial crisis, but thinks they were wrong with their debt and growth paper. In fact he recently, I don’t have time to find it right now, wrote a blog post in which he said the terrible debt paper shouldn’t ruin the good reputation of the financial crisis book. So what is the problem with Krugman having good views of some of their work but not other? Especially when Krugman is so open about saying “I like these guys…but they have been giving bad advice lately”
Suppose in the same sentence he said, “I am a huge fan of Rogoff, and I greatly respect his book (with Reinhart) on financial crises, it was a great piece of scholarship. But when it comes to their latest paper, it is a piece of garbage and they are consciously pandering to politicians, giving them policy advice that they know to be baseless.”
Would that be an odd sentence?
I don’t find that odd at all. Suppose I said “I am a huge fan of George R R Martin, and I greatly respect his book (a Storm of Swords). But when it comes to his latest book in the series, it is a piece of garbage and he is consciously drawing out the series, giving his audience material he knows is not as good”. Does that sound odd to you? I have heard similar things even about particular books in the Harry Potter series. Why is it odd to like someone’s earlier work, or a certain area of his work, and still say his more recent work, or work in another area, is pretty bad?
Krugman isn’t only praising and attacking R&R’s work. He is both attacking and praising their characters.
….”Would that be an odd sentence?”
But there is nothing necessarily “odd” about it at all. It is perfectly possible for someone to write a brilliant piece of work on some issue and write garbage on other issues.
Let me cite an expert authority:
“Sorry kids–Major Freedom in particular–but I think Keynes is brilliant in Chapter 13 of the General Theory ….
Obviously, I don’t endorse Keynes’ nutjob “socialization of investment” stuff in the final chapter, or any of his policy recommendations for that matter. But on his neutral, scientific assessment of what interest is, I actually agree with him more than Mises.”
http://consultingbyrpm.com/blog/2011/07/is-keynes-from-heaven-or-hell.html
In other words:
(1) you think Keynes is “brilliant in Chapter 13 of the General Theory” but
(2) a “nutjob” in his other chapters of the General Theory?
Come on, if Krugman has been taken down by this post, I am afraid so have you.
It’s normal to think that someone can be brilliantly right in one place and not so brilliant elsewhere. It’s another thing completely to accuse someone of pandering when they say something you disagree with, or when others misinterpret their work.
Bingo.
I don’t know about you, but I think I (and all of us with a normal brain) have the capacity to sense when we’re taking a position that puts us out on a limb, so to speak.
And we’ve all been in the position where we know our argument might be a little shaky – though it isn’t clear to us *why* it’s shaky. Sometimes we manage to firm up our sense of the argument by analyzing it some more. Sometimes we come to see that our *feeling* was *right* – that our position had a problem.
So when you feel your position might be a little shaky, but you’re out presenting it to other people – if your audience thinks this is a great idea and “is 100% definitely true!” even as you are feelin’ a little shaky about it still, but you decide to snuf out your concerns and just roll with the conclusions, even going to congress and telling them in a closed door meeting that not only is your position correct about correlation – but you also think you know the causality…. that’s where you are on serious “pandering” ground.
So you ask, how do I know R&R probably had a sense they were on shaky ground? Because I know they teach statistics at MIT. And what R&R did isn’t statistics. Anyone with half a brain and half a degree in any science should be able to just smell right off the bat that if you are publishing a paper in a major journal where you present globally-significant meaning from an average of other, asymmetrical averages – your data is crap, and it is impossible to derive any useful meaning from that kind of analysis.
And then if you don’t release your data/spreadsheet for others to critique? (Remember, while R&R’s data came from public sources, their particular choices about which years for which countries to exclude was never disclosed).
Sorry, but the more I think about it, the more I see it as an open and shut case. R&R shouldn’t just be ashamed – they should be facing consequences. I’m fairly supportive of academic freedom, but freedom comes with responsibilities.
There is such a thing as crap statistical analysis. What R&R did was statistical.
The joke on you is that all statistical studies are shaped by existing assumptions/convictions/prejudices about the world.
Anyone who has studied philosophy of science, would know that all econometric studies are nothing but historical, unique events that have ZERO causal relations to future economic activity.
And yet, on this shaky ground, nay, on this totally absent ground, Keynesians all over the place believe that history does reveal causal relations in economic activity, and even advise politicians to enact policies that affect millions of people’s lives, treating others as essentially lab rats coerced into proving to the policymakers whether or not they have finally found a causal relation.
The country, and the developed world, has had to endure and suffer under almost a century of this destructive activity. And for what? To keep morons calling themselves Keynesian economists in a welfare program financed almost entirely by coercion. This should be a strong signal that Keynesianism provides little to value to people who are able to manifest their preferences in a voluntary market society.
Keynesianism is a cancer, and Keynesian econometrics is a cancer and war on peaceful society.
In all your blustering over R&R, in all your fumbling over Austrian economics, i.e. your PANDERING TO YOURSELF, you fail to realize your own hypocrisy. While you imagine in your warped mind social destruction from less government borrowing(wow!), you don’t even seem to realize that it is precisely you and your ilk who are responsible for actual destructive activity that has plagued society for so long that dim witted followers like yourself believe is “natural”, and that the destruction you yourselves unleash, is some inherent flaw of a world without your destructive activity, i.e. the free market.
So while you act as parasites on the productive on a global scale, you still do what the typical thug does, blame the victims.
You hate Austrian theory not because it’s wrong (after all, you don’t even understand it), but because it stands in the way of your destrictive chaos by teaching your victims why they are made to suffer. That pisses you off the same way it pisses off a mafia goon being ratted on to the authorities.
Thugs like you don’t like being ratted on and exposed as parasites in society. That, and only that, is the sole and exclusive reason why you find it necessary in your mind to attack Austrian theory.
And that, also, is precisely how we know we’ve won the debate.
The debate has been over since the 1930s. Since then, coercion from your ilk has perpetuated the scam and overruled reason. And how was that possible? Keynesianism is an opportunistic dogma, an afterbirth, a derivative of a derivative of a derivative, of the already present philosophical environment of anti-rationalism. Philosophers, almost all of whom are in the same welfare program as the economists, attack rationalism (and thus Austrian economics) for self-serving reasons, or else the hand that feeds them will be erased.
You yourself are a product of this because you have chosen to make yourself a product of this.
Nowhere in any of your posts have you even come close to displaying any indication that you grasp economics (i.e. Austrian theory). After being challenged on this, you gave the churlish excuse that if you did, nobody would accept it anyway, so why bother. But that is just another way of saying you don’t understand it and you’re afraid to have your entire worldview demolished at your age. Your amygdala inspired fight or flight mode is on perfect display. You fight, and then you fly. It’s like watching Don Quixote yelling at windmills and then running off scared.
“econometric studies are nothing but historical, unique events that have ZERO causal relations to future economic activity. ”
This is wrong in an amusing way. Statistical studies in chemistry are unlikely to have a causal effect on chemical reactions, but econometric studies, by changing minds, CAN causally affect future economic activity. Imagine for instance a new study that — right or wrong — convinces all legislators we need hyper inflation.
“This is wrong in an amusing way.”
Oh do tell.
“Statistical studies in chemistry are unlikely to have a causal effect on chemical reactions, but econometric studies, by changing minds, CAN causally affect future economic activity.”
I said causal relations, as in, the same cause over and over again. I should have been clearer.
That’s different. That is pointing to one good thing in a book, and chastising a bad thing in the same book.
Krugman on the other hand went after R&R as people. He accused R&R, as people, of pandering, after praising R&R, as people.
Murphy, you have got to be the worst commentator I’ve ever had family suggest I read (so I can come to the light on how Austrians are so right – “Just read more mises.org! Soon you will see!”)
Would that be an odd sentence? Oh, I dunno – why not read the whole post, which is all about what you”re asking. Seriously! Read this, from just a few words further down the page (I know: you will be tempted to stop reading every 4 seconds: keep telling yourself you can do it! You can read on! You can learn! You can put quotes in context!!!”):
—–
“But Reinhart-Rogoff is relatively robust to these problems. Why? Because it focuses on extreme events. Financial crises are very big things, sharply concentrated in time. As a result, it’s reasonably certain that the economic developments in the aftermath of a financial crisis were driven by that crisis, not by other stuff that may have been going on.
“So the original RR book was able to tell us a great deal without any fancy statistical analysis, because it was a study of extreme events.
“Unfortunately, the Reinhart-Rogoff paper now being cited all over the place – the one that suggests that there’s a critical level of government debt, at around 90 percent of GDP — doesn’t follow that strategy. All it does is look at a correlation between debt levels and growth. And since debt levels are not sharp extreme events, there’s no good reason to believe that they’re identifying a causal relationship. In fact, the case they highlight – the United States – practically screams spurious correlation: the years of high debt were also the years immediately following WWII, when the big thing happening in the economy was postwar demobilization, which naturally implied slower growth: Rosie the Riveter was going back to being a housewife.
“It’s just not up to the standard of the other work. And yet Ken is leaning hard on that paper to justify his pro-austerity position.”
—–
Did you get that? You seem to have tried to argue that Krugman was actually praising the RR paper, but just denouncing the speeches. Now, I hope, you can see that you were completely wrong.
And all you had to do to check your facts was read a few paragraphs of the thing you were criticizing.
You know what’s really amazing? You can stop and remember how it felt when you thought you were making a great argument. Remember that? Remember how that felt? That was you, PANDERING TO YOURSELF.
Shucks. I wonder what other stuff you’ve dismissed without actually reading it? How many other bogus arguments have you made while believing they were valid?
Note: pandering doesn’t require that you know what you are saying is bogus. It’s just what you do with your minions here that yuck-it-up with you all day long in the comments about how brilliant you are, how Hayek now sits on the right-hand of von Mises, and Krugman is going to econometrics hell.
J Hansen wrote:
Would that be an odd sentence? Oh, I dunno – why not read the whole post, which is all about what you”re asking. Seriously!
You’re right, I hadn’t clicked through, because yesterday the NYT said I was out of my freebies for the month and wasn’t letting me read any more Krugman posts. But I just now tried it, and it worked.
I updated the post.
I have a subscription – anytime you need something from the NY Times or the Krugman blog, send me an email. I’ll be happy to get you the copy.
Speaking of pandering to oneself, new resident hypocrite J. Hansen just gave us all an excellent example.
I’m a huge fan of Beethoven, and I greatly admire his piano sonatas, quartets, and symphonies. But his Wellington’s Victory overture is a piece of garbage consciously pandering to his British patron; dull and bombastic.
Is that an odd sentence?
Everything you write is odd, Ken B.
That’s because I don’t repeat myself.
I greatly admire Paul Krugman for his pandering to politicians.
Honestly, a lot of Krugman’s commentary on R&R comes off as “you’re either with me or against me.” He probably has a case when he points out that R&R did little to correct misreadings of their research (although, I think Krugman has a selective memory). But, R&R’s main intention was to make the academic discussion on debt more sophisticated, not patrol pandering on the blogosphere. The “with me or against me” mentality overlooks the positive contribution of R&R’s work on debt.
I wonder what Bartleby thinks …
Everything Krugman does is designed to push his ideology. He has already decided what he wants the answer to be, so all that’s left is to mold the facts to fit the story he is trying to tell.
Maybe he used to be more honest, as an academic, but Krugman the pundit makes a living by helping Democrats & other left-leaning statists justify the actions they’ve already decided to take.
Lord Keynes and Yosef are correct. Nothing odd about that post by Krugman.
Actually Murphy is right. Krugman is addressing their characters. Sometimes attacking their character, sometimes praising it.
Both LK and Yosef are using analogies of praising and attacking two separate pieces of work by the same author. They’re not addressing the point Murphy is raising.
In 2010, Krugman was gushing about R&R in general but for his disagreement with the paper on excessive debt. Now he’s claiming that the technical ERROR in the paper was essentially intentional and was inserted so that R&R, who are obviously of extremely low character, could successfully and fraudulently pander* to the most vile and hateful elements of society.
Bob Murphy announcing that he agrees with Keynes on one definition is allegedly the equivalent. Heck, I once found myself agreeing in part with something Mike Norman said.
http://mikenormaneconomics.blogspot.com/2012/11/i-will-be-on-theblaze-today-at-430pm-et.html?showComment=1353088171542#c1964434325251905397
However, I’m sure that Mike Norman had/has no clue that Austrians are constantly explaining that there are no invariables/constants in economics equations.
*”In pandering, the views one is verbally expressing are merely for the purpose of drawing support up to and including votes and do not necessarily reflect one’s personal values.” (That is why Krugman never actually “panders” – – his constant misrepresentations are not at odds with his actual beliefs and are done to spread his personal values and beliefs).
Everybody, I updated the post. Had I read all of Krugman’s July 2010 post, I wouldn’t have bothered making this one. It’s true he is still being remarkably harsh in his assessment of R&R’s character, but it’s not as white-and-black as I originally thought from just reading his quote in Hamilton and Sumner’s posts.
Weird, because I think that additional quote proves your case even more.
While we’re digging up old blog references to the R&R paper, here’s one that might interest some readers of this blog (and one writer) – it would seem that, yet again, Krugman was right from the beginning, and Murphy was wrong – and giving credibility to other people that were ALSO wrong. See a pattern?
And here’s another opportunity for you to remember back to 2010 when you thought your argument was oh-so-devastating. That was you, pandering to yourself (and your readers).
Again, Murphy, you’re in the wrong profession. I need a lawn-man. Stop over.
—-
http://consultingbyrpm.com/blog/2010/08/krugman-krushed.html
03-Aug-2010
“Von Pepe sends this great article explaining how Krugman was getting owned
(I refuse to use the hip term) by his commenters. It got so bad that Krugman took
action.
“Incidentally, the guy writing the article (Fred Douglass) apparently reads Krugman
even more than I do. But he singled out a particular comment that had caught my
eye too; it’s been sitting on my Firefox browser since July 28. It is in reference to
Krugman’s continued bashing of the Rogoff-Reinhart piece (on the connection
between debt and GDP stagnation), and it is hilarious:
” “No it is not ‘all, repeat all, the postwar demobilization’ [as Krugman had claimed–
RPM]. The lie has now been told twice; one more time, and it will enter the
Krugman canon of anti-science.
” “Here is some unsolicited advice to PK’s bloggers: Read Rogoff’s paper. Do not
rely on an ideologue whose sociopolitical agenda is destroyed by Rogoff’s analysis
to represent to you what Carmen and Ken have said…..
” “…Read the paper to decide for yourself whether this alleged “highlighting” exists,
let alone whether its “highlighting” undermines the conclusion from six different
countries on three continents spanning five decades in a fine example of economic
science.
” “The accusation that Carmen and Ken “falled to notice” what they clearly noticed
and failed “to think about what that means” what they clearly thought about it will
not survive your spending five minutes with this paper. What is clear is that PK has
“thought about” what the Reinhart-Rogoff economic science “means”. It means that
his proscription [sic] for perpetual deficits is a prescription for disaster.”
”
(end all quotes)
So this is the point where Murphy is trying to resist the urge to go delete this old post. It’s so much easier to have credibility if you can erase your errors…. Reminds me of this old book some guy named Orwell wrote.
J. Hansen wrote:
So this is the point where Murphy is trying to resist the urge to go delete this old post. It’s so much easier to have credibility if you can erase your errors…. Reminds me of this old book some guy named Orwell wrote.
What in the world are you talking about? I wanted to take down the present post, because it is arguably unfair to Krugman. But I am leaving it up because other people may have linked to it etc., and that just feels weird to delete a post.
So yes, if I say, “I disagree with Krugman but I won’t put his head into a cage with a rat, because that would be immoral,” then I guess you could accuse me of being Orwellian since that’s what the bad guys did in 1984.
The post I (joked) that you might be tempted to delete is the one from 2010. See link to your blog, above. When I wrote that, you had not yet issued any updates, or mentioned Orwell, yourself.
Kudos to you for issuing the update(s) and not deleting the post or comments. I would have gotten mad if you’d done that. You wouldn’t like me when I’m mad.
=)
The post I (joked) that you might be tempted to delete is the one from 2010. See link to your blog, above. When I wrote that, you had not yet issued any updates, or mentioned Orwell, yourself.
Oh OK, then your comment is (slightly) less obnoxious.
According to Herndon, Ash and Pollin (HAP), average GDP growth in the +90% public debt/GDP category is positive 2.2 percent, not negative 0.1 percent (James Hamilton disputes these conclusions). . However, according to HAP, average GDP growth in the less than 30% public debt/GDP category is 4.2%.
I fail to see how the HAP conclusion benefits the Keynesians. Higher debt correlates with lower growth. And, of course, there is no reason to think that government debt CAUSES prosperity just as there is no reason to think that any Keynesian policy CAUSES prosperity. All Keynesian policy is aimed at interfering with the essential re-pricing of almost everything ASAP.
Further, in response to Hamilton, HAP stress the importance of the Fed’s continuing super low interest rates on the alleged harmlessness of massive government debt:
Deficit hawks have been predicting sharp rises in interest rates since the U.S. fiscal deficit rose sharply in 2009 as a result of the financial crisis and onset of the Great Recession. That means they have been badly wrong for four years running. Of course, the interest rate on U.S. Treasuries has been, and now remains, at historic lows, not highs. The deficit hawks may eventually be right. But the fact that they were wrong over these four years also matters a lot. It means that the U.S. has had a great deal of fiscal space to pursue countercyclical measures. Crucially, it also means that the U.S. has been carrying for these past four years—and will continue to carry for at least a few more years—historically low interest payment burdens as a share of total government expenditures. At present, government interest payments as a share of government expenditures are less than half of what they averaged under Presidents Reagan and Bush-1. We consider this an absolutely critical factor to incorporate into the types of discussion Prof. Hamilton has raised. We are not sure why this point is almost universally neglected in current fiscal policy debates.
http://www.econbrowser.com/archives/2013/04/reply_to_prof_h.html
I suppose that these awful super low interest rates can continue for quite a while yet. Continuing super low non-market interest rates are a disaster for the private economy and portend very low, if any, growth in the future, a situation which was, in fact, predicted by most Austrians back in 2009. (Why can’t we call super low interest rates “austerity and black plague interest rates” since they lead to so much poverty and misery?)
And these HAP guys have refuted the case for “austerity” (aka “the 57% Keynesian solution”)?
Yeah, the HAP paper is not a very good source if you want to actually learn something useful about the relationship between debt and growth. The HAP paper is about how RR went wrong. However, you get a taste for what the REAL problem is: if you know anything about statistics, you know that you shouldn’t average numbers that are, themselves, other averages of unequal weights. But if you are ready to learn, go read Dr. Dube’s econometric analysis of the same data. It is excellently done, and shows which tends to be the cause and which tends to be the effect (hint, slowing growth triggers rising debts – which is kind of obvious if you think about it). However, Dr. Dube does not go a step further and try to weight the relevance of enormously different economies – 20+ years of high debt and modest growth in a mature UK economy is not a good comparison with a post-WWII German recovery economy. But this is what real economics looks like:
http://www.nextnewdeal.net/rortybomb/guest-post-reinhartrogoff-and-growth-time-debt
However, if you actually plot the data points, it is extraordinarily noisy data, anyway. And that is the REAL, real problem: there just isn’t enough good data at >90% (“90%” was also picked out of thin air – it isn’t a real boundary – but that’s what the graphs show you).
So ask yourself, why is the data so noisy? That should make you wonder. The answer is simply that the samples are not good matches. The economy of the US in 1955 is a very poor comparison to the US in 1995 or 2005. And Belgium vs the US or UK? Or comparing Germany in 2005 to Germany in 1960?
That is why even though this analysis shows that the relationship runs in the other direction (low growth triggers debt increases), even that is not a very good conclusion to take here. The simple fact is that it just isn’t that simple – debt/gdp is not a good way to think about a nation’s growth prospects, nor vice versa. A better way is to get your hands dirty and look at the unique characteristics of a nation, not try to cram every nation into a one-size-fits-all system of assessment.
1. Wow. I guess the historical anecdotes method of determining economic principles doesn’t work as well as advertised. Who knew?
2. hint, slowing growth triggers rising debts – which is kind of obvious if you think about it
All that is kind of obvious from this is that when growth slows, Keynesians prescribe rising debt. But we just learned that there is no clear evidence from the historical anecdotes school of economics that debt CAUSES prosperity.
Uh… if you have what seems like a really great business idea but not enough money to kick start it, doesn’t getting a loan CAUSE the prosperity that follows? (Assuming you don’t blow the money on consumables that don’t leave you with any long-term improvement in wealth…)?
If you read the Keynesians with a little less prejudice, you will see that when they favor fiscal stimulus, they also encourage that spending to go to long-lasting goods, like “infrastructure”. Granted, not all infrstructure is equally valuable or even especially wise as a target of govt purchasing, AND, likewise, yes, I am aware Keynes even suggested that burrying cash in bottles and letting people dig it up again would suffice – but only in the sense that, sometimes, THAT is better than *nothing*.
But intelligent fiscal spending is always preferable. His point was mainly, “Sometimes this is so easy that it would be hard for govt to screw it up!”
(I know. Many of my readers believe that govt will always find a way to screw something up. But the inevitability of error is not the same as continuous error.)
Okay, and just to help make interpreting my “loan” analogy crystal clear for everyone… if your really great business idea (and subsequent loan) comes to you at a point where your income just got slashed, you might be laid off, and as of right now your expenses exceed your income, that’s a time when the risks of failure in your new business tend to be outweighed by the likely outcome. (Note: obviously, if you have wasteful expenses, you can still cut those AND start the new business…).
Compare that to the case when times are “good” – your boss just gave you a great raise and bonus, your job looks like it will be fun and engaging for years to come. Is this a good time to set out on a new business venture, debt financed? No.
And especially not if the interest rate on the loan will be high. But back in the “bad” times, how much less are the risks if you can get the loan at an interest rate of 0% – or even negative?
That’s right. It really is a no-brainer. And that’s what Keynes was saying. It’s not the evil, irresponsible, corrupt concept you guys tend to portray it as. In a way, it is precisely what you would do in the applicable circumstances.
“Uh… if you have what seems like a really great business idea but not enough money to kick start it, doesn’t getting a loan CAUSE the prosperity that follows?”
Only if your business idea requires direct resources and complimentary resources that consumer spending and saving patterns make available. If you have a business idea that can only make competitive profits with central bank “accommodation”, i.e. inflation, then your business plan might be a malinvestment, in the sense that it will require direct resources and complimentary resources that consumer spending and saving patterns do not make available.
In a context of central bank inflation, there is no way you can discern from the single set of relative prices that exist, what portion of those relative prices is due to actual consumer marginal preferences, and what is due to inflation.
So what you perceive as a good business plan, due to the nominal signals, may be a wasteful plan in real terms, and you won’t know it until later on, when physical constraints present themselves if the central bank continually accelerates its inflation indefinitely, to keep your business afloat, which has the trivally understood outcome, or if the central bank avoids that and reduces the extent of its inflation, which you will perceive as a “lack of nominal demand” for your output.
But Keynesians like you just don’t understand this process, because you’re brains are mentally defective due to garbage theory. You have a fetish for “demand”, totally ignoring the intricate capital structure of sustainable division of labor economies.
In your quest of defending the queen bee Krugman, your rather crude and superificial understanding of Keynesian theory, and your total ignorance of capital theory, has lead you into making absurd conclusions regarding “fiscal policy”, which in effect is the dogma that consumption benefits society, and that holding cash is evil because spending is holy.
“If you have a business idea that can only make competitive profits with central bank “accommodation”, i.e. inflation, then your business plan might be a malinvestment”
Yes, it “might.” But fiscal stimulus paid for by unprecedentedly low borrowing rates does not meet this criteria, anyway. The central bank is not determining the interest rate the market “wants”, and “malinvestment” is a poor idea at all times – and the private sector is perfectly capable of “malinvestment” too, from individuals, to SMEs, to multinationals – malinvestment is always and everywhere a problem that is only evolved through vigilant auditing, never cured.
It is always amazing to me to see the Selection Bias on display among Austrians that speak as if govt couldn’t get a price “right” if it was tattooed on it’s head, but in the private market everything is always optimized or getting optimized – and if you talk about the questionability of “profiteering” an Austrian will say, “Well, there’s really no such thing as a ‘right’ price.” Fantastic: if there’s no “right” price then there’s no malinvestment!
In actuality, the world is more complicated than all that – and I have seen amazingly foolish malinvestment at every level in the private sector – and a deleveraging wave simply enables private sector malinvestment every bit as much as it enables govt. If you want to blog about what govt could spend on that IS and IS NOT malinvestment, that would be great. But simply saying that govt ought not spend simply because it might choose poorly? Maybe you should live in a bubble because if you step out, you might get hurt.
Just for the record, I actually feel bad for beating up on Mr. Murphy. I admit it. I was pretty harsh. It isn’t cool pickin’ on the slow kid in the yard. Crap. There I go again.
But then I just think about what you stand for, and the damage the Austrian “debate” has done to both our nation and other nations, and the politicians that are reading this stuff – maybe even this blog, thinking this is a credible source of info….
That makes me mad.
I don’t want to suppress dissent. But it is high time people who are wrong and have been wrong over and over again man-up and move-on and start using their brains for useful debate, not endless pandering and sniping.
(And Murphy studied Game Theory? Really??? Every time I learn more Game Theory, I learn more about how Austrian theory is wrong….)
Where’s the evidence that you have even the slighest familiarity with basic Austrian concepts and analysis, smart guy?
If I provided you said evidence, you would accuse me of doctoring my own statistics to fit that conclusion.
…of course, that reply by itself should tell you I know what I’m talking about, shouldn’t it?
Quit changing the subject and get on with being the first Keynesian in the history of the galaxy to demonstrate some familiarity with basic Austrian concepts and analysis.
J. Hansen wrote:
Just for the record, I actually feel bad for beating up on Mr. Murphy. I admit it. I was pretty harsh. It isn’t cool pickin’ on the slow kid in the yard. Crap. There I go again.
…
(And Murphy studied Game Theory? Really???
I updated the post in light of you pointing out Krugman contrasting R&R’s book with the debt paper. You could’ve ended it right there, with a mild moral victory.
But then you decided to go the Billy Madison route. Fair enough.
I got a good laugh out of that.
J. Hansen,
From skimming your original post (on a family member recommending Austrian econ), I’m not quite sure how familiar you are with Austrian ideas. If you are interested in approaching them with an open mind, I’d recommend these videos to get started (I think it’s a more structured intro than perusing mises.org):
Roger Garrison on the boom: http://www.youtube.com/watch?v=zhoFOyy7rbo
Steve Horwitz on the bust (and why recommending no monetary stabilization after a bust actually goes *against* Austrian theory): http://www.youtube.com/watch?v=n64yEg-x5Ko
Larry White on why we should consider ending govt control of money (a more sophisticated argument of “End the Fed”; even if you don’t agree, it’s a fascinating history on banking and money): http://www.youtube.com/watch?v=Dd-UHqibj5c
There’s a lot of nastiness in Austrian/Keynesian/Monetarist debates, but I think a lot of it is talking past each other, i.e. not understanding the other POV. This leads to less debating of ideas and more squabbling over interpreting the latest stats; a lower quality dialogue, imo.
Best wishes,
John
I am so familiar with Austrian econ its silly. There are easy responses to all of your sources – and I bet you could even come up with them yourself.
As I’ve said before, Austrian econ falls apart because it stops the analysis too soon. As a result, everything you post, I’ll be able to rebut, but sometimes doing so requires a lot of words because sometimes the problems only come to light when you consider feedback, after feedback, after feedback – and do so realistically.
And I love hearing how Austrians think we’re talking past each other. We’re really not. You are simply not taking your theories to the next level, and you will only believe a Keynesians elaborate response if it #1 manages to rebut every single thing you thought was true, or #2, you get a concession on some point from someone you accept as an “authority” – because when an authority concedes it also implies that there are seemingly no more valid rebuttals. Until then, no matter what issue I obliterate temporarily, you will consider to believe Austrian-ism is da bomb, even if there’s a slight problem in that one argument you decided was totally irrefutable – until it was.
You might say I’m asking something of you that I don’t do myself. But the truth is, I’m only a “Keynesian” when I’m debating an anti-Keynesian. Keynes wasn’t right about everything. He added to our understanding. And many others have added more, since – even Austrian ideas have been useful additions to the overall modern macroeconomic theories. I move on. I do not consider any source sacrosanct, whether Keynesian or Austrian or other. The simple fact is that I keep seeing deeper wisdom in those that do not argue against the basic Keynesian position, and I find that every time an Austrian opens his mouth about how he sees things, it’s either something I already know, or it’s a flawed argument in that it uses fallacious logic or stops short of the contravening next level of analysis.
I actually learned something new, today, reading Krugman. That was fun.
May I ask how you define the “basic Keynesian position”?
Keynesian theory has been refuted umpteen times, and it is precisely Keynesian/Monetarist (same fundamental view of markets) policies foisted on the hapless public that is the cause for the Great Depression and the Great Recession, as well as decimating the industrial dominance of the US economy through decades of capital consumption deficit spending.
You Keynesians have been nothing but social parasites, the same way bloodletters and thieves make themselves appear as the cause for why people produce, i.e. fix the problems you have created.
Austrian theory doesn’t make predictions. To claim that Austrian theory has been shown to be wrong over and over again, would obviously imply that you either understand that the only way to refute Austrian theory would be through economic logic, which is obviously laughable, or you believe that history somehow proves Austrian theory wrong, in which case you’d only continue to display total ignorance of Austrian theory.
You’re mad? That anger is precisely why you are having trouble understanding Austrian theory (and economics in general). See, for people like you, your amygdala, which is basically the “fight or flight” center of the brain, is overpowering your pre-frontal cortex which is responsible for rational thinking. In all your self-aggrandizing and self-serving reaction formation activity insulting “Austrians” left right and center, you fail to do the one thing that can enable you to refute what you are engaging, and to understand economics in general.
Sad, really.
“Every time I learn more Game Theory, I learn more about how Austrian theory is wrong”
Really? As modern Game Theory was actually started by an Austrian economist (Oskar Morgenstern).
I’m still scratching my head on what sort of mental gymnastics one has to go through in order to conclude what this clown Hansen is trying to convince others (himself?) about, namely, that game theory, which utilizes the categories of purposeful activity, and the corollary categories of means, gains, costs, etc, which are the same categories that form the entire praxeological framework, can somehow show that Austrian theory, which is deductively grounded on said praxeology, to be “wrong.”
I guess anything proves it wrong, because, you know, it should be wrong, because he doesn’t like it.
Maybe it’s just the sight of mathematics that makes one think that it’s non or anti-Austrian.
I can see where one could get that impression, at least, but it doesn’t make much sense to me. So I’ll give them the benefit of the doubt that they have better, more sensible reasons.
We needn’t turn this comment section into a debate about Game Theory, but here are some reasons why Game Theory undermines Austrian econ – specifically, that the “free market” comprised of self-interested Econs is always the best way to optimum: Equilibriums (eg “Nash Equilibrium”) are cases where optimums cannot be reached via individual self-interest – a “collectivist” interest – and a collective-planning capacity – accelerates the rate of getting to the next natural optimum. At bottom, this is precisely what Keynes addressed – that govt spending can break the pattern of mass private deleveraging. I know we can debate this til the cows come home, so let’s move on. But there you go. That’s one example.
And the Greeks founded celestial mechanics. Let’s go to Greece for all our astronomers. Newton founded optics. Let’s have our spectacles produced by alchemists.
Notice that you’re comfortable using a logical fallacy?
Are you sure you know what you’re talking about?
You seem to be jumping to off-base conclusions or simply misreading.
What is hilarious is that J. Hansen’s criticisms of me, by name, were the apparent trigger to have my Google Ad show me Lessons for the Young Economist from Amazon.
Perhaps you should pick up a copy. I hear it’s good.
And if Bob buys a copy from himself that boosts GDP.
Nope, he would be hoarding.
Not if he SPENDS the money, putting it from his left hand to his right hand. That’s sufficient for “stimulating aggregate demand.”
Krugman: “the big thing happening in the economy was postwar demobilization, which naturally implied slower growth”
And since the GDP growth in 1946 was highest in the history of America, that only means that if the war had continued the growth would have been 30% annually or so. 🙂
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