13 May 2013

Noah Smith Shows the Power of Framing

Economics, Federal Reserve, Noah Smith 23 Comments

Noah puts “austerians” on the couch:

[M]aybe people like the idea of austerity because they think an economic stagnation is our best chance to address what they perceive to be our long-term challenges. Allowing a crisis might be less terrible than wasting it.

Now, when stated that way, the idea sounds kind of silly – why don’t we just periodically bomb our own cities, in the hope that governance will improve during the rebuilding? But I find it very difficult to state with any confidence that the idea is wrong. When economists discuss the costs of stabilization policy, they limit their discussion to distortionary taxation, unexpected inflation, and things like that. They almost never bring politics or institutions into the picture. The fact is, we just don’t know how institutions really work. So I can’t dismiss the idea that anti-recessionary macro policy might, in fact, rob us of our best chances to make needed reforms.

But what I think we should do is to discuss this idea explicitly. If people really do think that the danger of stimulus is not that it might fail, but that it might succeed, they need to say so. Only then, I believe, can we have an optimal public discussion about costs and benefits.

Yeeees, I actually think I agree with Noah’s assessment of my own view, but give me a chance to put it in my own words. You’ll see I paint quite a different picture:

There was an absurd run-up in the Nasdaq in the late 1990s, which was but one indicator of the structural imbalances in the economy. There needed to be a reallocation of resources, and Americans needed to realize they were poorer than they had thought.

But Alan Greenspan slashed interest rates and replaced the Nasdaq bubble with the housing bubble, just like a few prominent Keynesians wanted. Yes, Noah, that policy “worked,” in the sense that it pushed back the crisis by 7 years and made it ten times worse.

By the same token, Bernanke’s actions from 2008 – today “worked” in that they pushed back the crisis. But it will be much worse when it finally hits. Back in 2008, people were warning about major investment banks and MMMFs going down. Now people are worried about European governments and currencies failing. If the Fed keeps bailing everyone out, eventually it will be the dollar and the US Treasury that collapse.

Notice also that if I oppose Noah’s preferred fiscal and monetary policies because I don’t desire the above chain of events, it’s rather inapt for Noah to say that I (and people like me) oppose “stabilization policies.” No, I view Noah’s recommendations as promoting instability.

23 Responses to “Noah Smith Shows the Power of Framing”

  1. Joseph Fetz says:

    Once you become fixated on particular data points, you tend to ignore everything else.

  2. Ken P says:

    “There needed to be a reallocation of resources, and Americans needed to realize they were poorer than they had thought.”

    I think this is a very important part of the picture and the same is true today. That’s why it bothers me so much when economic stories in the media talk about “the wealth effect” of increasing home prices (as a result of Fed policy). Making people think they are richer than they are is not the answer.

    My other pet peeve that is closely related is mainstream media reports about how terrible it is that consumers are de-leveraging. By paying down debt, people are actually increasing their future disposable income. That contributes to stability in the future.

  3. Adrian Gabriel says:

    Interesting that David Stockman stated on CNBC that he thinks nobody in the 1990s would have thought interest rates at near zero would have been nothing but lunatic. Ok, well now I can say Stockman is a nut. Although saying some good things, including the fact that he thinks Ron Paul was right all along, I see some of his tactics as basic GOP revival banter. He is a Republican, and wants to revive the party. I heard him say one time on Bill Maher that a social safety net was important, what a weirdo.

    I guess he can get away with that one if Hayek supported a universally beneficial income, but the other comment about the 90s was pretty far off. Government never knew, and seems to me will never know, that a central bank in general is bad, regardless of where they try to keep interest rates. Centralizing money is the problem, with Government being the orchestrator of such a problem. In these regards, it is no surprise people mentally molded through academia make the naive mistakes that Noah did there. Look at David Stockman….they’ll never get it until they decide to study Austrian Economics and stop worshiping that mainstream fallacious dogma.

  4. Ash says:

    There’s also the fact that there is no theory that says “a government rebuilt from the ruins of a bomb-ravaged city will be necessarily better than its predecessor.” Whereas Austrian theory says its logically necessary for there to be a recession to properly reallocate resources that were malinvested during the boom. In other words, the Austrian story has nothing to do with “reforming institutions”–it is virtually exclusively concerned with the allocation of capital.

    Now maybe the Austrian explanation isn’t true. But if an intellectual wants to refute it, they must do so on logical grounds. The absolute wrong thing would be to strawman it as some whimsical, emotional “morality play” built on cotton balls and fairy dust (and heartless, sociopathic sadism). Austrians aren’t advocates of “not wasting a crisis”. Austrians say that if you want efficient (and stable) allocations of capital, then avoid increasing fiduciary media in the economy, as it will only lead to a crisis–which must be allowed to play out naturally in order to restore the system.

    • joe says:

      Can you explain how resources are going to be “reallocated?”

      You have excess real estate construction in Vegas. Are those homes and malls going to be put on trailers and moved to somewhere that needs homes and shopping malls?

      • Tel says:

        It is not the job of Austrian economists to be better central planners than the existing failed attempts at central planning. The whole Austrian theory is that central planning can’t work precisely because the knowledge of what works best and what is needed most only exists within the local area. I don’t live in Vegas, it is a matter for the people who do live there to think about their housing situation, and most importantly, it is not a matter for anyone else to step in and solve that. All you need to do is leave those poor people alone, and refrain from messing up their lives. Is that too much to ask?

      • valueprax says:


        You are mistaking the allocations of capital and production processes of the past with allocations of capital and production processes of the future.

        What will adjust, if it’s allowed to, is the general network of prices for goods, services and capital economy-wide in order to better reflect actual scarcity vs. real individual demand preferences.

        In some cases, this might literally mean physically calling away existing resources from one location to another (for example, people employed in Las Vegas may seek jobs elsewhere and move themselves, or an old casino might go bankrupt and sell its furniture, fixtures, equipment, etc., to other casinos in town or other buyers outside of town). Mostly, it’ll mean changes in the profitability and returns to debt and equity available in one location (such as Vegas) versus another (say, Chicago), such that Chicago will offer higher returns on capital than Vegas so that FUTURE allocations of economic resources are made in Chicago over Vegas.

        The malls in Vegas will exist, but they might be stocked differently, maintained differently, frequented by shoppers differently, etc. Less people might be willing to buy the homes, and different people. Some properties might become extremely hard to sell at even “low” prices.

  5. Tel says:

    Maybe people like the idea of austerity because … [whatever]

    I never liked the idea of “austerity” and I never supported the idea of “austerity” and I’m yet to hear anyone give me a consistent and recognizable explanation of what it is anyhow.

    I do like the idea of small government and restrictions on government powers and people being able to get on with their lives.

    There are two long term challenges that we face (I mean two that stand above the others): debt (both private and public) and the strange belief that government does a good job of managing an economy. The debt represents promises that have been made in the past, I don’t believe those promises can be fulfilled, so someone will miss out. There’s no answer to that, we just need to figure out who gets shafted.

    The belief that government does a good job of managing an economy can probably be solved, but only after such an appallingly bad job has been demonstrated that the earth is scorched and Keynesian theory is thrown away forever. The only way to achieve this is to hand the reigns to the Keynesians, let them do their stimulus crap, let them run massive deficits and watch what happens. That is exactly what the USA did.

    The Republicans never managed to impose a debt ceiling, never.

    The debt has never stopped growing.

    The government has never reduced spending.

    Social security is as unfunded as ever.

    The one thing I cannot abide is people like Noah coming along and saying, “Oh the Austrians did this, with their austerity,” after things went pear shaped. Sorry Noah, but you guys own this disaster. You own all of it. The Austrian school has taken jeers about how irrelevant it was. Maybe in future they might start bringing their debt under control (and I’m in support of keeping both public debt and private debt under control) but that hasn’t even started to happen yet.

  6. Major_Freedom says:

    “Now, when stated that way, the idea sounds kind of silly – why don’t we just periodically bomb our own cities, in the hope that governance will improve during the rebuilding?”

    Did anyone else notice the irony in this statement, given the fact that it was said by someone partial to Keynesianism?


    “Notice also that if I oppose Noah’s preferred fiscal and monetary policies because I don’t desire the above chain of events, it’s rather inapt for Noah to say that I (and people like me) oppose “stabilization policies.” No, I view Noah’s recommendations as promotinginstability.”

    This is a point around which the concept of framing doubly applies. Both Smith and Murphy want to promote stability, and avoid instability, however if you notice, Smith wants to promote short run stability at the cost of long run instability, while Murphy wants to promote long term stability at the expense of short run instability.

    Murphy’s instability however is less worse than Smith’s instability, because short run instability is a reflection of short lived investment errors. Long run instability is a reflection of long lived investment errors. It’s better to have short lived investment errors than long lived investment errors, because of the trivial fact that making fewer errors is better than making more errors.

    Smith, and the rest of the population of flag carrying court intellectuals for the state enforced central banking oligarchy, want to convince themselves, and everyone else, that our focus should be on “employment” and “output”, rather than minimization of investment errors and economic sustainability. They don’t want to fundamentally criticize the the existence of the oligarchy itself. At best, they only joke and quibble about the particular extent of the oligarchy’s activity during any given time. No serious consideration of capital.

    Their worldview prevents them from understanding how “employment” and “output” in the long term (yet still within the average human’s lifetime) can be reduced through eating of the seed corn and false perceptions of prosperity that can occur in a division of labor marred by non-market money management. These false perceptions can occur because the individual cannot observe whether capital is devoted to actual consumer preferences or to nominally profitable projects. In an economy where the monetary system itself is controlled by political force, rather than sovereign consumer preferences, these two can diverge from each other. This is a major source of investment errors piling up over time.

  7. RPLong says:

    Can’t believe I’m the first person to say it, but the 2nd quoted paragraph is a clear broken window fallacy. So the quote above (I didn’t read the full post) seems kind of like this:

    Honesty is the best policy.

    Now, when stated that way, the idea seems kind of silly – Epimenides himself said that all Cretans are liars.

  8. Rob Rawlings says:

    I think we need to better distinguish between monetary and fiscal policy. I agree that Keynesian-style fiscal policy will just paper over the cracks but I think monetary policy needs to be looked at differently

    Bob (correctly in my opinion) criticizes the monetary authorities for too loose policy in the decade before 2008. However in 2007/8 the fed followed a policy that reduced the rate of money supply growth just as the financial crisis was brewing with the result that nominal spending and economic activity fell far more than they otherwise would have done.

    My concern is this: Bob is very happy to criticize the fed for too loose policy but apparently never for too tight policy even when as at that time the evidence is strong that there is a case to answer.

    As a supporter of free-banking I believe that a CB-free regime would have avoided both the excessive looseness and the excessive tightening of money supply policy that contributed to the crisis and slowed down the recovery. However in the absence of free-banking I think it an appropriate role for economists to recommend the appropriate monetary policy that the CB should be following.

    “Austrians” like Bob apparently only see the looseness and not the inappropriate tightening. Indeed Some (not Bob as far as I am aware) have in effect become cheer leaders for the ECB and its tight money policies – almost as if they see merit in tight money (rather than optimal money) as an end in itself.

    I think this one-sided view that the monetary authorities can only ever practice loose-monetary policy is a big gap in the Austerian story.

    • valueprax says:

      Rob Rawlings,

      Try reading any of the basic Austrian literature on monetary theory before opening your mouth next time. I can’t speak for all “Austrians” (as you use the term.. what does it mean to call Bob Murphy an “quote Austrian unquote”?) but Bob Murphy has consistently advocated NO MONETARY POLICY as his preferred solution, ie, money should be a market phenomenon, not a state policy tool.

      The entire rest of your commentary melts away into sweet, pointless nothingness when you acknowledge that. You’re attacking a position neither Bob Murphy nor a simple reading of Austrian monetary theory holds.

      • Rob Rawlings says:

        My point is that advocating “NO MONETARY POLICY” can be dangerous if the fed is pursuing a policy that is counter to what would happen if money was a market phenomenon, not a state policy tool.

        (BTW: “Austrian” was a typo. I was meaning to use the term “Austerian” ironically- hence the quotes – but I think my spell checker overruled me. Bob wouldn’t need quotes for “Austrian”)

        • valueprax says:

          Rob Rawlings,

          You’re trying to pin the blame tail on the Austrian donkey but it’s not quite sticking.

          Here are four possible opinions I could have of monetary policy:

          1.) Monetary policy is “too tight,” it should be “looser”.
          2.) Monetary policy is “too loose,” it should be “tighter”.
          3.) Monetary policy is “just right,” don’t change it.
          4.) There shouldn’t be “monetary policy” as such, money should be a market phenomenon like everything else, there is no need or role for a central bank or other governmental institution to “manage” it and the problem is not that money is “too loose” or “too tight”, it’s that a 3rd party is able to arbitrarily dictate the conditions for all without voluntary consent.

          I won’t ask you to try explaining how #4 is “dangerous” regardless of what the Fed is doing. If the Fed is doing something counter to what would happen in its absence, the fault lies with the Fed and the confused people who argue the Fed should do X or Y, not the Austrian who says “I don’t see the benefit of monetary policy and the Fed for the economy as a whole.”

          • Rob Rawlings says:

            If economic theory strongly indicates that monetary policy is too tight (for example: demand for money is increasing while money supply is shrinking) I would prefer that influential economists who happen to support free banking also push for more appropriate monetary policy (as a second best alternative) and not just recite the free market mantra..

            My observation is that “austerians” are quite happy to make policy recommendations to the fed when they perceive monetary policy as being too loose but never when they see it as being too tight.

            I think this a dangerous strategy.

            • valueprax says:

              Rob Rawlings,

              Your ignorance is as impressive as your stubbornness on this point. You don’t understand what “Austerians” (read: Austrians) actually are saying because you have apparently made zero attempt to familiarize yourself with the essentials of what you’re trying to criticize.

              I will admit that the Peter Schiffs of the world can add confusion to this message because people associate them with some spokesman for the Austrian movement (which doesn’t exist and has no spokespeople) but when Peter Schiff says “the Fed should be tightening” or whatever, he’s making the same error you are, which is to believe there is an “appropriate” way to centrally plan money supply and interest rates.

              There is not. This is the “official position” of the vast corpus of Austrian monetary theory which I beg you to familiarize yourself with before you put your size 14 boot into your pixiestick-size hole of a mouth once again.

              You are trying to smuggle some contested premise (your “economic theory” you mention) and treat it like an objective, commonly accepted fact of reality. It is not. IT IS THE ENTIRE POINT BEING DEBATED RIGHT HERE AND NOW.

              What’s dangerous is going about, giving opinions on this and that, when you make no attempt to familiarize yourself with even the basics of what you’re trying to criticize. You bask in your own ignorance and think it is the triumphant sunshine of reason. But it is a storm cloud and it blows no good fortune on your or anyone else.

              Start here: http://mises.org/document/6772/Mises-on-Money

              When you’ve read that or something equivalent to it, you’ll have license to criticize Austrian thinking from a position of knowledge. Until then you’re just standing up your false impressions and knocking them down and feeling really good about yourself in the process, I’d imagine.

    • RPLong says:

      Is there a clear definition of what constitutes tight monetary policy? Every time I read about it, its definition always seems subjective to me.

  9. Dan says:

    This is a fine hypothesis bob…however you’re relying on an assumption of highly irrational markets that massively overreact to small changes in the interest rate.

    • Major_Freedom says:

      It’s impossible to correctly react to non-market distorted interest rates.

      It’s not that markets are irrational, it’s that investors cannot disintangle how much of a change in interest rates is due to a change in real savings, and how much is due to the central bank’s activity.

      And even if an investor could perform miracles and could disintangle them, they still have an incentive to get into the game because other investors can make nominal profits (for a time) by going ahead and acting as if the change in interest rates is entirely market driven. It’s not irrational to get into the game of musical chairs and get out before the game stops. The question is when the game stops.

      There is no assumption of “irrationality” nor “overreaction.” It’s basic incentives and price signal distortions lowering the quality of market information.

  10. Andrew Keen says:

    But we DO periodically bomb cities in the hope that governance will improve during the rebuilding…

    Austerians: Stop feeding the zombies!

    Stimulators: But they’re so hungry!

  11. John Papola says:


    Where’s the evidence that massive government spending and deficits is a path out of stagnation? None. Oh wait… WWII. Forgot. Jeez. Just don’t pay attention to power WWII America… or post WWI America… or Britain in the 1930s, or countless other anti-Keynesian examples. All those pail in comparison to the fact-free, computer-generated “things would have been worse” counterfactual. What charlatanism.

    The fact that some “economists” think that it’s reasonable to call tiny cuts to enormously wasteful bureaucracies in a world where over a billion people still live in abject poverty and malnourishment represents the most spoiled brat globally tone-deaf insanity imaginable.

    Having government employees kick in more than 10% toward the cost of their health benefits is “austerity”? Pushing retirement from 60 to 62 is “austerity”? Give me a break.

    Oh… and I believe many so-called “Keynesians” were boosters for increased taxes AND policies which increase wage “stickiness”. Why do they want stagnation and unemployment so much, given that their own models suggest that tax hikes hurt growth and wage stickiness is the core reason why reduced aggregate spending leads to unemployment? Ah… never mind. I’m sure the answer is “we’re in a liquidity trap”.

    When you’re doing “economists” without people, production or prices… anything goes! Welcome to the dark ages of macroeconomics.

  12. John Papola says:

    power WWII = post WWII.

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