20
May
2015
The Failure of Krugman’s Empirical Model
My latest at FEE. Here’s the opening:
One of the running themes throughout Paul Krugman’s public commentary since 2009 is that his Keynesian model — specifically, the old IS-LM framework — has done “spectacularly well” in predicting the major trends in the economy. Krugman actually claimed at one point that he and his allies had been “right about everything.” In contrast, Krugman claims, his opponents have been “wrong about everything.”
As I’ll show, Krugman’s macro predictions have been wrong in three key areas. So, by his own criterion of academic truth, Krugman’s framework has been a failure, and he should consider it a shame that people still seek out his opinion.
…entrails and pieces of brain scattered the field. The carcass of Krugman lay in pieces over the dry corn fields. Not an animal was in sight. All were in hiding, whether the crow, rat, or mouse, from fear after the beginning salvo of the fight. The only movement was of a figure so giant he drowned his own face in shade from the beating of the midday sun. As he came closer, one could see he was the only man capable of inflicting such massive damage…the man who went only by the name Murphy…
A fair summary.
Heh.
http://blogs.spectator.co.uk/coffeehouse/2013/10/niall-ferguson-paul-krugman-gets-it-wrong-again-and-again-and-again-why-does-anyone-still-listen-to-him/
is much more comprehensive about Krugman’s Kontradictions and outright contradictions.
Murphy, I might be off base on this, but I can’t help but surmise that you seem to have accepted MM into your subconscious, at least during central bank induced “boom” times, as the best counter to Keynesianism. Had a hunch about this a month or so ago. This post could have been written by Sumner and nobody would have been the wiser.
It is almost as if you are gloating that rates went negative and that prices did not fall very much. Yes, you are technically right about Krugman’s botched predictions. But it is also important which facts you choose to look at and say aha, that person made these wrong predictions.
I would understand this, because it is difficult to be a so-called “worry wart” during these boom times, especially with the falsified prediction of the CPI making it a safe bet to critique Krugman’s Keynesianism from a fact counter fact, ex post facto positivist basis.
Too bad, because ABCT is a model of booms, not busts, and it is boom times like now that we all should be refuting both Keynesianism and Monetarism, not using Monetarism against Keynesianism.
Both have been empirically falsified. Monetarism claims stable inflation does not prevent sustainable growth and employment, which has been empirically falsified. Monetarism also claims monetary activity post 2007 is the fundamental cause of the Great Recession, not monetary policy prior during the 1990s and 2000s, which also has been empirically falsified.
Of course the theory behind both claims has been refuted as well.
What is going on right now as we speak is empirical falsification of what the MMs predicted. They predicted stable inflation since 2007 would not adversely affect sustainability, even though it has. We don’t need to actually experience the correction before we can know their claim regarding sustainability is wrong.
We don’t have to wait until this boom ends before bringing out ABCT again.
Boom times like now?
You don’t listen to the Peter Schiff Show very often, obviously.
“I can’t help but surmise that you seem to have accepted MM into your subconscious”
Them’s fightin’ words
Is it?
http://www.themoneyillusion.com/?p=29447
Sumner just linked to it today, calling it “excellent”.
“Krugman, armed with his Keynesian model, came into the Great Recession thinking that (a) nominal interest rates can’t go below 0 percent, (b) total government spending reductions in the United States amid a weak recovery would lead to a double dip, and (c) persistently high unemployment would go hand in hand with accelerating price deflation. Because of these macroeconomic views, Krugman recommended aggressive federal deficit spending.”
(a) and (c) probably don’t matter that much to his model as neither negate the need for increased govt deficits at the ZLB (or sub-ZLB as we should probably now call it).
(b) is more serious. It means you don’t need fiscal policy, just a monetary regime that adjusts money supply to money demand.
I think he may have acknowledged mistakes (a) and (c). I’m pretty sure he has been silent on (b).
Transformer wrote:
I think he may have acknowledged mistakes (a) and (c). I’m pretty sure he has been silent on (b).
Right, he has admitted he has been wrong on (a) and (c), but he’s also continued to claim that his model came through the crisis with flying colors, and calls his opponents members of the “Always Wrong Club.”
It’s also arguably true that the case for aggressive fiscal stimulus doesn’t directly depend on (a) and (c), but if you go that route, you have to realize neither did my opposition to QE rest on predictions of absolute increases in CPI. Yet Krugman was quick to say I’m a hack because I kept my policy views in place, even after being wrong about official CPI over a 3-year stretch (or whatever).
Finally, on (b), he hasn’t been silent. In certain places (which I link in the article) he has acknowledged that his predictions were off, but he’s explained that away by saying there are always other things going on in an economy, and he was just talking about one force. I.e. exactly what I said about my CPI bet with Henderson.
Well, he has acknowledged that (a) and (c) were mistakes that meant he had to tweak his theory a little, but (as far as I can see) he just thinks that other things went against him on (c) to make his theory look bad while fundamentally it was sound (in his view).
I would never fail to note every time I wrote about Krugman that he does not have the slightest familiarity with basic Austrian concepts which explain how the world actually works. Since the NAP based market does not fail, Keynesian “stimulus” is both pointless and disruptive. Keynesian analysis is also fundamentally dishonest because it purposefully fails to differentiate between what might be a market failure and price distortions caused by political and/or central bank policy. Further, in the broad scope of things, guessing about where the new funny money is going to flow (based upon future political whim) and bid up prices is just that, a guess. And since that market does not have, require or lack “momentum”, any “stimulus” is going to be temporary, disruptive and unsustainable.
But Bob Murphy’s instant analysis is excellent. I do understand why it is important that Krugman be refuted on his own terms.
Looking at the list of “Recent Comments,” apparently someone named George felt the need to respond to a post about Christopher Hitchens from 2012, calling you a “coward.” Your move, Murphy. You have three years to respond.