18 Nov 2013

Outsourcing My Krugman Kritiques

Debt, Federal Reserve, Krugman 17 Comments

Believe it or not, I actually do not relay most of the Krugman critiques that people send my way. Very often they are of the form, “Krugman interprets X according to his Keynesian model, but that’s dumb, because really we should interpret it this other way…” I usually agree with such posts, but they won’t really affect even the openminded reader who initially is sympathetic to Keynesianism.

However, Jeremy Hammond and Ryan Murphy have some gems that I want to pass along:

==> Jeremy Hammond in this piece shows how Krugman’s commentary on the federal debt flip-flopped, depending on whether it was Tea Party Republicans versus Democrats who could be blamed for it. This is something I noted at the time, and Hammond has several of the same Krugman pieces that I linked. But he grabbed one that I had missed, when Krugman wrote in October, 2013, in reference to the possibility of defaulting on Treasury debt:

“[T]this could create an immediate financial crisis, because U.S. debt — heretofore considered the ultimate safe asset — would be reclassified as an asset in default, possibly forcing financial institutions to sell off their U.S. bonds and seek other forms of collateral. That’s a scary prospect.“

Remember, this is the same Krugman who said that who couldn’t even imagine a model whereby the bond vigilantes could hurt the United States economy–let alone did he think it was a realistic worry.
==> Then in this piece, Hammond digs up Krugman writing the following:

Dollar purchases by China and other foreign governments have … kept U.S. interest rates low despite the enormous government borrowing required to cover the budget deficit…. Here’s what I think will happen if and when China changes its currency policy, and those cheap loans are no longer available. U.S. interest rates will rise… [and] we’ll suddenly wonder why anyone thought financing the budget deficit was easy. In other words, we’ve developed an addiction to Chinese dollar purchases, and will suffer painful withdrawal symptoms when they come to an end.

But that was in 2005, so it doesn’t count. Nowadays anybody who writes the exact same sentences as above, would be dismissed as a libertarian, liar, or lunatic by Krugman.
==> Ryan Murphy tackles Krugman’s recent claim that there’s no evidence, only politics, to explain why people who claim to be worried about European debt levels, could simultaneously complain that France is raising taxes. I had linked to an ECB bulletin documenting some evidence, but Ryan provides links to the original papers. These are from heavy hitter economists, some of whom are Keynesian, and the journals include AER. This isn’t a memo put out by the Heritage Foundation, in other words (“not that there’s anything wrong with that”). Some of the best examples, with bolding from me:

We examine the evidence on episodes of large stances in fiscal policy, both in cases of fiscal stimuli and in that of fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments, those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions. We confirm these results with simple regression analysis.

–From Alberto Alesina and Silvia Ardagna. 2009. “Large Changes in Fiscal Policy: Taxes Versus Spending.” NBER Working Paper No. 15438.

This paper investigates the impact of tax changes on economic activity. We use the narrative record, such as presidential speeches and Congressional reports, to identify the size, timing, and principal motivation for all major postwar tax policy actions. This analysis allows us to separate legislated changes into those taken for reasons related to prospective economic conditions and those taken for more exogenous reasons. The behavior of output following these more exogenous changes indicates that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes.

–From Christina D. Romer and David H. Romer. 2010. “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks.” American Economic Review 100 (3): 763-801.

For U.S. annual data that include World War II, the estimated multiplier for temporary defense spending is 0.4–0.5 contemporaneously and 0.6–0.7 over 2 years. If the change in defense spending is “permanent” (gauged by Ramey’s defense news variable), the multipliers are higher by 0.1–0.2. Since all estimated multipliers are significantly less than 1, greater spending crowds out other components of GDP, particularly investment. The lack of good instruments prevents estimation of reliable multipliers for nondefense purchases; multipliers in the literature of two or more likely reflect reverse causation from GDP to nondefense purchases. Increases in average marginal income tax rates (measured by a newly constructed time series) have significantly negative effects on GDP. When interpreted as a tax multiplier, the magnitude is around 1.1. The combination of the estimated spending and tax multipliers implies that the balanced-budget multiplier for defense spending is negative. We have some evidence that tax changes affect GDP mainly through substitution effects, rather than wealth effects.

–From Robert J. Barro and Charles J. Redlick. 2011. “Macroeconomic Effects from Government Purchases and Taxes.” Quarterly Journal of Economics 126: 51-102.

This paper provides new estimates of the macroeconomic effects of tax changes using a new narrative dataset for the United Kingdom. Identification is achieved by isolating “exogenous” tax policy changes using the Romer and Romer narrative strategy. I find that a 1 percent cut in taxes increases GDP by 0.6 percent on impact and 2.5 percent over three years. The findings are remarkably similar to Romer and Romer narrative estimates for the United States, reinforcing the view that tax changes have powerful and persistent effects. “Exogenous” tax changes are also shown to have contributed to important episodes in the UK business cycle.

–From James Cloyne. 2013. “Discretionary Tax Changes and the Macroeconomy: New Narrative Evidence from the United Kingdom.” American Economic Review, 103(4): 1507-28.

17 Responses to “Outsourcing My Krugman Kritiques”

  1. Major_Freedom says:

    I wonder if at some point all of Krugman’s malinvestment building up in his intellectual repertiore will finally make him and everyone else realize how much he needs a painful intellectual correction. It’s just getting downright pathetic. He should just cut his losses and have himself a self-recession.

  2. Lord Keynes says:

    “>In other words, we’ve developed an addiction to Chinese dollar purchases, and will suffer painful withdrawal >symptoms when they come to an end.

    But that was in 2005, so it doesn’t count. Nowadays anybody who writes the exact same sentences as above, would be dismissed as a libertarian, liar, or lunatic by Krugman.”

    Or simply wrong, because today there is QE, whereas there was no QE back in 2005.

    • skylien says:

      Well, and what happens if the economy is finally out of the liquidity trap? Then you have the same situation as in 2005 except double, triple or whatever-ple the debt. So how what it be idiotic to already warn of this situation now?

      • skylien says:


        Why can’t you answer such a simple and obvious question? How am I, or anyone, supposed to take Krugman seriously if they are not able to think even two steps ahead? Consecutively engaging in the short run principle which is willingly accepting long term negative consequences to buy short term relieve must run into the wall at some point. And having at T+1 x-times the debt than at T is one such consequence that you cannot honestly try do deny; T being the point in time at which even Krugman was worried!

        Please tell me if this is such a DUMB question to ask that it doesn’t even warrant a short reply, while you never endingly discuss about the actual method of how businesses set prices (which I know since I am actually “setting” prices)?

    • Major_Freedom says:

      Of course there was QE back in 2005. QE has been taking place for many, many decades.

      “QE” is just another word for the Fed buying (monetizing) government bonds.

      The Fed certainly did not start buying bonds in 2008.

      The reason why they started calling their inflation programs “QE”, is because they couldn’t just dramatically increase the rate of bond purchases without acknowledging it to other central banks and the media. They had to give it a name so as to make it appear that they are “doing something”. But all they did was the same thing they have always been doing, just at various levels.

      The Fed was capable of doing “QE” back in 2005, because it was capable of buying (monetizing) unlimited quantities of government bonds.

      Your response doesn’t work.

    • RIchard Moss says:


      In the article Bob linked to Krugman reasoned as follows when he dismissed concerns over foreigners buying our debt;

      But if you’re America or Britain, the central bank sets interest rates, and under current conditions that means holding them at zero. So what happens instead is that your currency depreciates, making exporters and import-competing industries more competitive. The effect on the economy as a whole is therefore expansionary, not contractionary.

      Things might be different if the private sector had large debts in foreign currency, as was true in Asia in the 90s. But it doesn’t.

      Krugman never mentions QE as the deciding factor vs. 2005.

  3. valueprax says:

    Serious question, Bob: how many “openminded” converts have you made from your Krugman Kritiques so far?

    I am not trying to “gotcha” if you say zero, I am sincerely interested if you’d had people say something to the effect of, “Thanks, Bob, you’ve helped me to totally reconsider my slavish devotion to all things Krugman” just because I see a lot of people who have come by here to try to spin an even thicker web for Ol’ Kruggie. I’d like to think there is this Unseen cohort somewhere whose existence I am not enjoying though I could if only I knew of it.

    • Major_Freedom says:

      I am guessing that if there are converts, most wouldn’t go around announcing it.

    • Ken B says:

      I think Dan Kuehn is Bob’s most notable convert.


    • valueprax says:

      Well, when I found Austrian econ I started sending thank you emails to the people I had read that showed me the way and were still alive. But maybe I am just a nice guy. Or creepy.

      • Ken B says:

        I sent notes, not thank yous, just appreciation, to some authors whose books i liked, including math texts. They seemed very pleased to get the notes. And surprised!

        • valueprax says:

          Are we equivocating between “thank yous” and “appreciation” now? Has it really come to this, Ken B?

          Oh, the humanity!

          • Ken B says:

            Well all I meant was I said I liked the book, not thanking them for taking my money when I bought it! But apparently we’re a rare breed valueprax, who write to authors of older books with kind words.

  4. Keshav Srinivasan says:

    Bob, Krugman has written a lot about why he thinks that the evidence behind the Alesina analysis has collapsed. Have you seen this post, for instance?

    “Ah, remember the good old days of expansionary austerity? On both sides of the Atlantic, austerians seized on academic work by Alberto Alesina and Silvia Ardagna claiming that fiscal consolidation, if focused on spending cuts, would if anything lead to economic expansion. It wasn’t because the paper was especially compelling — even a quick look suggested that the methodology for identifying austerity was seriously flawed. But A-A told people what they wanted to hear, and they went with it.

    Since then we’ve had what has to be one of the most decisive combinations of scholarly critique and real-world tests of an economic doctrine ever — and expansionary austerity has failed with flying colors. The IMF went about identifying austerity through an examination of actual policy, and A-A’s results were reversed. Critics showed that all of the alleged examples of expansion through austerity involved factors like currency depreciation or sharp falls in interest rates that don’t apply now. Osbornian policies in the UK led to stagnation; and in the euro area, well … [He shows a graph of GDP growth vs austeirty in various eurozone countries]”

    • Bob Roddis says:

      The world does not operate the way the Keynesians describe it. Voluntary exchange produces objective evidence of the terms of transactions which is the essential dispersed information for economic calculation. Keynesian policies of funny money loans, emissions and spending distort that process.

      Examinations of countries which continue to emit funny money and may have slowed down the rate of growth of their spending and perpetual deficits is not evidence that the world works the way the Keynesians say it does.

      The market does not fail and the Keynesian “cure” is the cause of our problems. Nothing in MMT, New Keynesian or Post Keynesian analysis even addresses those issues, much less refutes them. It is a continuing outrage that Keynesians (and statists of all stripes) are so cowardly, conformist and dishonorable that they refuse to engage our analysis.

      Finally, has anyone EVER found a convert to Austrian analysis by a Keynesian? I haven’t.

      • Lucy in the sky w Dimon says:

        I converted a friend & colleague from MMT to Moldbug/Mises. It took over a year of almost daily discussions and his sharp Qs also helped me understand Mises better.

        Give me another couple billion years and the world will be rid of business cycles!

        I used to be a Keynesian btw, but corrected my major epistemic errors in mid-2000s. Thanks to LvMI and LessWrong. But the full picture only snapped into place upon reading Moldbug last year.

      • Keshav Srinivasan says:

        So you don’t believe in market failures or externalities?

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