Krugman Unwittingly Confirms Scott Sumner’s Whole Point
[UPDATE below.]
Free Advice readers know that if i’m Batman, then Paul Krugman is the Joker while Scott Sumner is the Riddler. (Now that I re-read that sentence, it turned out even cooler than I had imagined when I started typing it.) So this raises the question: What if Krugman ever directly attacks Sumner? Which side do I defend?
Well in this case, the answer is easy, since Krugman is so obviously making Scott’s own point for him. Before I quote Krugman, let’s review Scott’s position:
==> According to Sumner, the fiscal multiplier is basically zero, assuming that the Fed is doing its job. That’s because of monetary offset. Let’s say we have a demand shortfall, leading to unemployment above the natural rate. That would prima facie give scope for Congress/President to run a budget deficit and boost output without causing significant price inflation. Yet the only reason this is possible (according to Sumner), is if the Fed is engaging in too tight monetary policy. On the other hand, suppose the feds go ahead and enact a fiscal stimulus package. The Fed could simply tighten yet again, in order to achieve the same level of slack/low price inflation they had originally (and which the Fed desired for some inexplicable reason). Thus, once you take into account the Fed’s ability to offset fiscal action, and furthermore when you realize the only possible scope for corrective fiscal action is if the Fed is (a) asleep at the wheel and (b) refrains from sabotaging the fiscal action, which it always has the power to do, then you realize the Keynesians are really wrong.
==> Further, according to Sumner, a great illustration of this is the year 2013. We had the sequester and government shutdown, with Keynesians flipping out about this “unprecedented austerity” and how awful it was to cut spending at this critical juncture in our tepid recovery. Yet the Fed postponed the taper and made other expansionary moves, even explicitly mentioning the need to cushion the blow of sequester in some of its announcements. Since the Fed was able to offset the effects of the sequester in 2013, Sumner concludes triumphantly, clearly the Keynesians are wrong for focusing so much on fiscal policy and flipping out whenever Republicans want to trim the budget deficit.
OK, I think that is a fair summary of Sumner’s position. Now watch Krugman attack it on January 4, 2014:
One way to look at the US economy in 2013 is that it was, in effect, trying to begin a strong recovery, but was held back by terrible federal fiscal policy. Housing was making a comeback, state and local austerity was, if not going into reverse, at least not getting more intense, household spending was starting to revive as debt levels came down. But the feds were raising the payroll tax, slashing spending via the sequester, and more.
Incidentally, these other factors are why I don’t take seriously the claims of market monetarists that the failure of growth to collapse in 2013 somehow showed that fiscal policy doesn’t matter. US austerity, although a really bad thing, wasn’t nearly as intense as what happened in southern Europe; it was small enough that it could be, and I’d argue was, more or less offset by other stuff over the course of a single year. [Bold added.]
It would be hard for someone to confirm his opponent’s position more than what Krugman just did. I mean, that would be like arguing that Austrian business cycle theory is wrong, because the evidence suggests central banks can affect the timing of business cycles. Oh wait, Krugman did say that in his critique of me. (See the section “Answering Krugman” in my reply.)
UPDATE: At his blog, Scott makes the case even more strongly, by quoting what Krugman actually wrote in April 2013:
[A]s Mike Konczal points out, we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens.
And the results aren’t looking good for the monetarists: despite the Fed’s fairly dramatic changes in both policy and policy announcements, austerity seems to be taking its toll.
Sorry Krugman fans, he completely stepped in it this time. Back when he thought the data would go his way, he declared 2013 a good test of market monetarism’s claims about fiscal policy. Then when the data moved against him, he said 2013 wasn’t really a good test because other things could offset what happened to fiscal policy.
If you have a recession in the next five years, Krugman will blame it on the sequester.
Are we really sitting here in 2014, years after the beginning of the crisis, acting like Keynesians (and Krugman of all Keynesians) don’t believe in monetary policy at the zero lower bound?
I give up.
Sumner and Krugman have always been talking past each other to a certain extent. Krugman is saying of course monetary policy matters. That is not a demonstration that fiscal policy doesn’t matter.
Wait, so you’re saying Krugman does believe in monetary policy at the zero bound?
Of course. He has two famous papers on it.
Seriously, I give up.
Seriously, I give up.
If only.
AD, Krugman supports unconventional monetary policy at the zero bound, but he believes that conventional monetary policy (buying short-term Treasury securities) is useless at the zero lower bound. Sumner often caricatures that as Krugman believing that ALL monetary policy is useless at the zero lower bound, but I don’t think Krugman believes that.
And Sumner’s got a nasty habit of selectively quoting Keynesians when they make precisely this distinction.
Daniel,
I want to make sure you understand what my point is, in this post. I hope I have some street cred with you, because I was biting Scott’s head off when he said that Abenomics refuted Krugman (when Krugman’s claim to fame on Japan was precisely a promise to inflate in the future!).
Strictly speaking, Krugman is mischaracterizing Sumner’s position when he says it’s “fiscal policy doesn’t matter.” That’s not what Sumner believes. Sumner actually thinks that fiscal policy can always be offset by monetary policy, and that monetary policy is “cheaper.”
So, Krugman doesn’t in any way “answer” or “respond to” the market monetarist claim, by pointing out that the fiscal retrenchment of 2013 was offset by other factors.
Sumner has both made a monetary offset claim and a zero fiscal multiplier claim.
Call the former “good Sumner” and the latter “bad Sumner” if you want.
When he wrote at EconLib TODAY that the fiscal multiplier is zero, I don’t think you can accuse Krugman of mischaracterizing him.
Krugman, I think, is guilty of not being as clear as, say, Brad DeLong in what he thinks about monetary policy at the zero lower bound. Part of that is strategic (he’s got a layman audience at NYT and he needs to get the main point across).
I don’t get it. Doesn’t the argument from “Good Sumner” imply the argument of “Bad Sumner”?
I don’t see how MF. Good Sumner only implies that monetary policy has an impact on the economy (duh), and that central bankers have a behavioral tendency to sometimes make bad policy and move in the opposite direction of other policymakers. That’s the offset. It doesn’t suggest that fiscal policy doesn’t do anything. It may suggest that we need tighter control of central bankers.
Sumner has both made a monetary offset claim and a zero fiscal multiplier claim.
Sumner claims that the fiscal multiplier is zero *because* of monetary offset.
BA gets it.
DK, Sumner doesn’t just believe that monetary policy has “an impact on the economy.”
He believes that monetary policy can completely offset any contractionary or expansionary fiscal policy.
Sumner isn’t claiming that fiscal policy doesn’t do anything. He only thinks it is completely dominated by monetary offset. That because the Fed can print any quantity of money and volume of spending it wants, or at least within the range of fiscal budgets, that any apparent fiscal policy impact only has an impact at the margin if the fed doesn’t choose to do what it can do according to Sumner.
I think you’re being unfair here Dan. Sumner, again and again, notes that in theory Krugman and Krugman’s work imply monetary policy is not impotent at the ZLB.
The point is that empirical Krugman is unbelievably obfuscatory about the implications thereof, such that he always always always appears to be saying that monetary policy is insufficient. Why does he constantly harp on about the ZLB when his work implies that only applies to “conventional” monpol, I.e. something CBs are not at all limited to either in theory or practice?
In my experience reading your blog comments around the web you are the most generous and charitable of readers (a big compliment)–give me the non-mendacious reading of his stance.
Well Daniel, it would be more like this:
DK: It will get cold on Monday and form icicles, thus proving ABCT isn’t true.
RPM: There are Keynesians out there, claiming that icicle formation invalidates ABCT. But no, what clearly happened on Monday was that it was really cold, and that’s what formed the icicles.
So yeah, Daniel, the above wouldn’t mean ABCT was right or wrong, it would just mean my response to the critics was dumb.
Maybe I should spell this out. So clearly the bolded is exactly what Sumner is looking for. In that sense he confirms what Sumner was looking for. I’m not sure I’d go as far as to say it “confirms his point” if his point is that fiscal policy doesn’t matter.
If I say that if it gets really really cold Monday night here it proves that ABCT isn’t true, and if on Tuesday you said “gosh I’ve got icicles because it was really really cold” would it make sense for me to come back and say “See! Bob confirmed my whole point!”.
Daniel, A simple question. Krugman said this would be the year that tested monetary offset. OK, what’s the outcome of the experiment? That’s all I want to know. Krugman is now saying there was no experiment, right? Or am I still misreading him.
Empiricism never makes conclusive propositions concerning the economy. All theories that are valid theories are hypotheses, which could be falsified in the future.
Thus, even if you want to test the MM theory, and even if you think the last year is a valid test of MM theory, Krugman can always use empiricism to doubt the outcome of the experiment. He can say that other factors, heretofore unaccounted for, explain why the economy rebounded. Even if you directed his attention to “monetary offset” as the unaccounted for variable, then that would not conclusively confirm MM theory either. For even if NGDP didn’t fall, then other unaccounted for variables could have influenced the experiment such that what you thought was caused by NGDP rising, wasn’t actually caused by that at all. That is what your worldview of “testing” and “empiricism” calls for. That is the structure of empiricism.
You however seem to want a conclusive proposition to come out of the last year’s “experiment”. So does Krugman to be fair. But you are not permitted to do so in empiricism. You must grant that there is a possibility that there was a rebound during 2013 because of other variables that you have not accounted for besides MM prediction variables. If you don’t grant that as a possibility, then you are not engaging in empirical testing, but something else.
Couldn’t you make the same argument about predictions in physics?
Yes. That is exactly right.
But don’t worry, you don’t have to think that empiricism in physics is actually being practised by physicists, nor do you have to think that physics research has not made any real progression over the years due to the entirety of it being nothing but a series of hypotheses capable of being completely overturned at some point in the future.
Progression in physics (and chemistry, etc) is actually being made on the basis of rationalism.
I’ve said many times before that the Krugman/Konczal test point is dumb, Scott. And I’ve made a related point in this post above:
“Krugman, I think, is guilty of not being as clear as, say, Brad DeLong in what he thinks about monetary policy at the zero lower bound. Part of that is strategic (he’s got a layman audience at NYT and he needs to get the main point across).”
He’s not always the best ambassador although on certain margins he’s very effective. It’s not as if all Keynesian types need to apologize for Krugman and Konczal.
“Part of that is strategic…”
Yes, and the strategy is to support his faction of the Democratic party against all Republicans.
No it’s to promote fiscal policy. Keep the story simple. Keep the New Keynesian expectation channels out of it.
Its pretty clear that Krugman meant by “other stuff” things other than monetary offset.
I believe that Sumner is correct that monetary policy can offset fiscal tightening. 2013 supports Sumner’s case but it is far from a smoking gun.
I just read:
http://mainlymacro.blogspot.com/2014/01/economic-standards.html
And I think this puts it in perspective.
“Its pretty clear that Krugman meant by “other stuff” things other than monetary offset.”
Even if he meant monetary offset, then someone else who uses Krugman’s empiricist methodology could always point to yet other stuff still, to explain why we saw what we saw.
I’m too stupid to involve myself in the substantive argument, so I’ll just chime in here and say that clearly Brad DeLong is the Penguin, the guys from Blimey Cow are collectively Robin, Bob Wenzel is Commissioner Gordon, and I have no idea who gets to be Catwoman but if anybody finds out please let me know.
Excluded from Bob’s update is this from Krugman:
“I’m not claiming that there is nothing the central bank can do; but as I’ve tried to explain before, monetary policy can, for the most part, gain traction under current circumstances only by changing expectations about future actions (and changing them a lot). Meanwhile, fiscal policy has a direct, current effect on the economy, which easily trumps attempts to move the economy by changing the Fed’s messaging.
Sorry, guys, but as a practical matter the Fed – while it should be doing more – can’t make up for contractionary fiscal policy in the face of a depressed economy.”
And this is not news to anyone that follows this. These people know that Krugman thinks monetary policy can work at the zero lower bound.
Given how far off we still are from full employment, no green shoots in 2013 are going to demonstrate that fiscal policy is not having a damaging effect or that monetary policy is up to the full task of closing the gap. Unconventional monetary policy works, but it’s hard. A lot of future analysis on the Great Recession and further multiplier studies are going to get a sense of this.
“These people know that Krugman thinks monetary policy can work at the zero lower bound.”
Let’s be clear here DK. By “can work”, Krugman is talking practically, not theoretically. Sumner on the other hand thinks it is practically possible. So his disagreement is still there.
Sorry, switch “practically” with “theoretically.”
As far as I can tell Krugman is talking about practicality too. He’s more skeptical than Sumner, but he thinks it’s possible.
Daniel, I can understand why my initial post here, didn’t convince you. But are you telling me that in light of the quotes that Alex Tabarrok gives in his post, you’re still going to the barricades for Krugman on this one? Just admit he changed his position when the data changed.
“Sorry, guys, but as a practical matter the Fed – while it should be doing more – can’t make up for contractionary fiscal policy in the face of a depressed economy.”
Whereas market monetarists think it can, and so a situation like 2013 where the US shifted to a contractionary fiscal policy during a depressed economy constituted a test (not conclusive, of course) between Krugman’s Keynesianism and market monetarism.
Of course, this isn’t just true of market monetarism vs. Keynesianism, but also for any other theory that predicts that Fed policy at the ZLB can be indefinitely expansionary. While Misesians would be reluctant to take such credit, Hayekian ABCT allows for pattern predictions, and theories that say “Fed policy can be expansionary at the ZLB in the face of fiscal contractions and a depressed economy” have been confirmed in 2013.
“Sorry Krugman fans, he completely stepped in it this time. Back when he thought the data would go his way, he declared 2013 a good test of market monetarism’s claims about fiscal policy. Then when the data moved against him, he said 2013 wasn’t really a good test because other things could offset what happened to fiscal policy.”
I agree that Krugman is wrong on this, but I want to make it clear to everyone here that he’s saying what he’s saying because he adheres to empiricism (when it suits him of course!), and that’s what empiricist principles allow people to do. Empiricism allows one to excuse ANY falsified (and confirmed) test as not conclusively showing the theory to be correct or incorrect, precisely because the structure of empiricism doesn’t claim to make conclusive propositions concerning the world. Skepticism is allowed for ANY test outcome, no matter how strong the correlation.
Of course, this doesn’t mean that empiricists practise what they preach. Krugman, when the test outcome goes his way, will communicate and interpret those outcomes as conclusively showing the theory to be correct (or incorrect). When it suits him. But, when it doesn’t suit him, then he suddenly becomes more scientific, more skeptical, more consistent with empiricism.
This is exactly the problem with empiricism. It breeds skepticism, which contradicts rationalism, which is itself a convincing foundation. So we see wavering between them. Empiricism when an outcome goes against one’s existing convictions, and rationalism when the outcome is consistent with one’s existing convictions.
[…] the one you have to convince. BTW, Alex Tabarrok, David Beckworth, Bill Woolsey, and Bob Murphy all have excellent posts on this […]
Paul Krugman:
“…Incidentally, these other factors are why I don’t take seriously the claims of market monetarists that the failure of growth to collapse in 2013 somehow showed that fiscal policy doesn’t matter. US austerity, although a really bad thing, wasn’t nearly as intense as what happened in southern Europe; it was small enough that it could be, and I’d argue was, more or less offset by other stuff over the course of a single year…”
This is a testable claim. I will assume by “southern Europe” he means the GIPS. By “intense” I will assume he means the amount of fiscal austerity in any given year.
Using one of Krugman’s favorite measures of fiscal austerity, the change in the cyclically adjusted primary balance (CAPB) from the IMF Fiscal Monitor, the CAPB increased by the following amounts in the US, the Euro Area, the GIPS as a whole (weighted by potential GDP using IMF estimates of potential GDP), Greece, Italy, Portugal and Spain in 2010 through 2013:
Entity—-2010–2011–2012–2013
US——-(-0.2)–1.0—1.1–2.3
Euro-Area(-0.2)–1.5—1.1–1.1
GIPS——-1.1—1.6—2.3–0.9
Greece—–6.4—4.9—3.3–2.2
Italy——0.1—0.9—2.1–0.5
Portugal-(-0.2)–7.1-(-0.9)-1.4
Spain——1.7—1.0—3.0–1.2
Note that Greece, Italy and Spain started fiscal austerity in calendar year 2010 and the US, the Euro Area as a whole and Portugal started a year later. Note also that US fiscal policy was only less austere than the Euro Area as a whole in 2011. And finally note that 2013 was the first year that US fiscal policy was more austere than the GIPS, but that the intensity of its austerity in 2013 was as great as the fiscal austerity in the GIPS in 2012 which was the peak year for fiscal austerity for those nations as a group.
Looking at the individual GIPS nations we see that the level of fiscal austerity in the US in 2013 was less than that in Greece in three out of four years, was greater than the worst year of fiscal austerity in Italy which was 2012, was greatly exceeded by Portugal only once in its one truly horrendous year of fiscal austerity which was 2010, and was slightly exceeded by Spain’s worst year of fiscal austerity which was 2012.
I am gratified that Krugman seemingly acknowledges that the US fiscal austerity of 2013 was greater than anything that the Euro Area has ever experienced as a whole. However, I think by objective measures, measures Krugman himself uses, the intensity of fiscal austerity that the US experienced in 2013 is also as intense as the worst year of fiscal austerity experienced in southern Europe as a whole.