25
Jun
2015
Krugman on 2013, Compared to 1937
This is a long post, but you need to get a cup of coffee and read it slowly. In particular, if we accept Krugman’s excuses for his botched 2013 calls, then he loses the Keynesian story about 1937.
Exactly what I was thinking. Although 1937 didn’t have an expansionary Fed…
Don’t you dare say it was monetary offset. That would be mendacious!
Did you know that “monetary offset” theory is really just a version of the quantity theory of money?
This version is based on the idea that anything that does not operate to increase the supply of money, such as Treasury borrowing and spending, will not affect total spending.
The Fed can affect the quantity of money whereas the Treasury can not.
The “monetary offset” theory is really “If the Treasury borrows and spends less, but the the Fed prints more money, then total spending will be higher. The Treasury borrowing and spending less has no effect on AD”, or, equivalently, “If the Treasury borrows and spends more, but the Fed does not print more money, then total spending will not be higher. The Treasury borrowing and spending more has no effect on AD.”
Of course, we are told ex post facto things like “Since total spending fell, despite the Treasury borrowing and spending more, this is evidence that the Fed “offset” the Treasury”, or “Since total spending rose, despite the Treasury borrowing and spending less, this is evidence that the Fed “offset” the Treasury.
———-
Monetary offset theory is not original enough to warrant its own phrase, focus, or attention, IMO.
“This version is based on the idea that anything that does not operate to increase the supply of money, such as Treasury borrowing and spending, will not affect total spending.”
-Didn’t Sumner tell you he agreed fiscal policy affected total spending in the Eurozone?
Euro zones without central banks, yes. Different thing.
Kind of like if I borrow and spend, I could raise the local spending in Wal-Mart, but I would be “offset” by the central bank at the level of the US economy.
“Monetary Offset” seems to me to be dysphemism for what we used to call “crowding out” or “the Treasury View”-which itself is something that’s done some laps around the euphemism-dysphemism treadmill.
Which, actually, would mean you’re right that it’s not really original enough to warrant it’s own phrase. Although Market Monetarists seem to have chosen the most unfortunate re-branding imaginable.
Crowding out’s the idea that Federal deficits will raise long-term interest rates. Different thing.
I’ve always thought of “crowding out” as a description of the result, not something involving a particular mechanism. The idea is not really all that special: if the banking system-centralized or not-is committed to a particular path for spending, implicitly or explicitly, an increase (decrease) in G will be offset by a decrease (increase) in C + I.
When Churchill referred to the “orthodox Treasury view” the way he describes it clearly indicates he is speaking of “crowding out” even though he makes no reference to interest rates. If you read Hawtrey’s 1925 paper, it’s clear his view would be described by Sumner as “monetary offset” (it’s clear because he’s literally done so).
If I’m confusing these ideas, I’m in rather illustrious company.
Yup…
https://research.stlouisfed.org/fred2/graph/?g=1l1y
Also, you totally forgot to mention that the Oracle of Keynes himself (Keynes) lost a lot of money in 1937 predicting no recession.
Excellent article Murphy.
The neat thing about the internet, which Krugman is painfully having to deal with, is that inconsistent and dishonest with themselves bloggers can be given rude awakenings which the world can see.
Keynesianism was never a good economics theory. It was always fundamentally flawed. Its only purpose is to serve as a weapon by haters of economic progress and freedom. Failed predictions, and failed economic logic.
Bob,
Excellent post!
Most of the criticism (at least that I have seen) of Krugman on the 2013 fiscal austerity stuff has come from the Market Monetarist camp who (as others have stated above) cite monetary offset as the reason that Krugman’s predictions turned out to be wrong. The implication being that if there had been no fed doing the offsetting Krugman would have probably have been right.
I assume you don’t ascribe to that view.
If this assumption is correct, can you clarify why you you think Krugman ended up being wrong ? Do you think that so-called “fiscal austerity” is always good and will lead to RGDP growth even in a recession and if if we have a CB that declines to offset ?
From what I make of Bob’s writing (after reading him for six years), I think he doesn’t believe fiscal policy has a significant impact on the economy (i.e., an increase in G leads to no little to no change in C or I, unless it’s a war, in which case the impact is negative). His views on monetary policy in his PIG to the Great Depression are incoherent, his views in 2009-2010 were wrong, and I’m not sure what they are now.
My guess is that Bob thinks that all expansionary fiscal policy is bad – just redistributes wealth and crowds out the private sector.
I also guess he thinks all expansionary monetary policy is bad – just redistributes wealth and stokes inflation (now or in the future).
Logically I would say he has to think that countries that did fiscal “austerity” benefited directly from it with no need for monetary offset to help out – I just wanted him to confirm that.
“Now look back at the 1930s. From 1937 to 1938–when FDR foolishly plunged the nation back into Depression, according to Krugman and Christina Romer–the budget deficit dropped by 2.4 percentage points. “
The budget deficit in 1938 was almost eliminated (it fell to just 0.1%) at a time when the economy was still weak and business expectations uncertain.
In 2013-2014 the private sector was much more robust and expectations better.
“So, at best, Krugman is now forced into saying that a two-year drop in the budget deficit of 5.4 percentage points back in the 1930s explains the return to Depression, whereas the two-year 4.4 percentage point drop more recently is perfectly consistent with a recovering economy.”
It is. You seem incapable of understanding that different states of the private sector at different times will cause different outcomes in changes in fiscal policy. A strong private economy with confident expectations can continue to grow even if government engages in some fiscal consolidation.
“It is. You seem incapable of understanding that different states of the private sector at different times will cause different outcomes in changes in fiscal policy. A strong private economy with confident expectations can continue to grow even if government engages in some fiscal consolidation.”
Be easy on us Austrians. Krugman knows all this already and he couldn’t have missed the mark on his prediction by much more than he did.
“The budget deficit in 1938 was almost eliminated (it fell to just 0.1%) at a time when the economy was still weak and business expectations uncertain.
In 2013-2014 the private sector was much more robust and expectations better.”
-I call B.S. This has less than zero predictive power. Keynes lost a lot of money in 1937. The recovery as of late 2012 was extremely weak and uncertain. In 1936, the stock market and the economy were much more closely related, and both were booming.
LK,
Re: “A strong private economy with confident expectations can continue to grow even if government engages in some fiscal consolidation.”
In this case we are talking (for the US) of an increase in growth and a large fiscal contraction. In the past I have seen you defend TARP (big fiscal stimulus->deepening recession) on the grounds that the economy was weaker than Keynesians had thought when they designed the stimulus.
Honest question: Can you describe a theoretical situation that you would accept as evidence against the Keynesian view ?