Krugman Potentially Owes Me an Apology
First, some background:
==> In August 2013 Brad DeLong wrote a blog post wondering why the Fed wasn’t proceeding full-steam ahead. He wrote:
There are no signs in the pace of technological progress, in the level of investment, in the pace at which the American labor force educates itself, in measures of capacity utilization, in signs of upward wage pressure due to labor quality bottlenecks, or in surging commodity prices due to supply bottlenecks to suggest that the path of growth of U.S. sustainable potential GDP is materially lower today than was believed back in 2007.
Yet real GDP in the U.S. today is and remains at least 5.5% below the path that past history tells us is consistent with stable inflation, and thus with rough balance in the labor market.
==> I found his statement odd, because the recession had obviously led to a fall in investment.
==> As is his wont, DeLong bit my head off. If I had done my homework (his phrase), I would’ve known that even taking into account the drop-off in investment, potential GDP as of August 2013 was only about 1% below its pre-recession trajectory.
==> Paul Krugman piled on, agreeing with everything DeLong had said, but adding that the CBO already took into account investment when it put out its potential GDP series. Krugman used the occasion of my smackdown to give this lesson to the world: “before you denounce a reputable economist for making some completely idiotic mistake, do your homework.”
==> Daniel Kuehn piled on as well. (It’s OK, Daniel, when I was younger, I too followed around some older boys who I later realized had a bad value system. I forgive you.) In the comments, DeLong elaborated on his position, once again claiming that the level of potential GDP was about 1% lower than it had been originally forecasted. DeLong suggested that I go do something else with my life. (And I’m not exaggerating, he literally wrote that.)
==> I pointed out here at Free Advice that I had been totally correct in everything I’d said during this dispute. Using the CBO’s potential (real) GDP series, we could see that as of August 2013, the rate of growth was 25% below the pre-crisis value. So what the heck were DeLong and Krugman talking about?
==> Daniel Kuehn had a follow-up post, acknowledging that I had given a response, but was puzzled as to why I kept writing on this topic? What the heck was my point? In the comments, DeLong says that if potential GDP had been down, say, 5%, then it would have been “materially lower” and I (Murphy) would have maybe had a point. But since anybody doing his homework knew it was only down 1%, it was clear that I was wasting everyone’s time.
==> I pointed out in the comments that there had been a misunderstanding: In his original post, DeLong had written about “the path of growth of U.S. sustainable potential GDP” and that was in fact 25% lower. But now it was clear that DeLong meant “the path of the level” and so we were much closer. But, I also noted, even on DeLong’s own terms, the actual drop reported by the CBO in potential GDP was 3.6%, not the 1% that he had repeatedly insisted was the right value. (Not sure if that’s because the CBO didn’t do their homework either.)
==> In response to these observations, which I kinda sorta thought weren’t half bad, DeLong called me a “clown” and said I should “step up my game.”
==> Stepping back from the particular (and personal) dispute, in general, DeLong and Krugman spent many blog posts and op eds in the post-crisis years, smacking down people who said that maybe the recession was “structural.” (Here’s but one of many, many examples.) As the block quotation from DeLong above indicates, their go-to argument was: If this were “structural” or had to do with “capacity constraints,” we would see wage/price pressure. Since we don’t see that, we know the problem is a general drop in Aggregate Demand. The economy’s capacity is just fine, thankyouverymuch, the reason actual GDP is down, is because the Fed’s hit the ZLB and Ron Paul won’t let the Treasury borrow more.
* * *
Nooooow, with that extensive background/refresher course, I invite you to read Krugman’s latest blog post. Someone make a compelling case for why I’m NOT taking crazy pills right now. Because it sure feels like it. In case you want some hints: Krugman shows that CBO now says 2013 potential GDP was about 8% (just eyeballing the chart) lower than what it had projected in 2008, and Krugman furthermore admits that using price inflation/deflation as a way to gauge capacity during the Great Recession was wrong, because that model of price dynamics was wrong. (Remember, unlike unemployment forecasts from Christina Romer, inflation forecasts really matter, according to Krugman/DeLong.)
Now I hope you’re all sitting down for this one: In light of the fact that it turns out maybe potential GDP had been dropping pretty fast from 2008 onward, Krugman now recommends: The exact same policies he recommended back in August 2013, when he was high-fiving DeLong for saying at best it was down 1%. In fact, now Krugman says this new information is all the more reason to implement his policy solutions.
I’m being serious. Daniel? Harold? Transformer? Help me out here. Am I just sulking because the older boys teased me on the playground? The above seems rather contradictory and hypocritical to my eyes.
There are so many moving parts in that 2013 discussion and its relation to the recent Krugman post that its hard to get a foothold.
First off: The main theme in that discussion appears to be the extent to which potential GDP had fallen between 2008 and 2013. DeLong said less than 1% and anyway it would need to be >5% to be materially lower. You used CBO’s numbers to show it was actually 3.6% which (in my opinion) is sufficiently close to his arbitrary 5% threshold to make the amount of abuse he showered on you look overdone – I actually think he should have apologized.
I don’t however think you have much of a case against Krugman’s post from 2013. He correctly noted that (as you say) ‘the CBO already took into account investment when it put out its potential GDP series’. I think this was actually a body blow to your position as it meant that your claim ‘Oh really? Here’s the official government statistics showing gross private domestic investment as a percentage of potential GDP. To keep potential GDP chugging along at its previous pace, you’d think GPDI should stay about the same percentage as it was from 2005-2007′ is significantly weaker once you factor in what Krugman is pointing out about the potential GDP numbers alreday factoring in the investment numbers you quote.
Which brings me to Krugman’s recent post.
As far as I can tell he is reporting that the CBO has significantly reduced what its estimates for potential GDP should have been for the years since 2008. While this is consistent with your skepticism on the claims made by DeLong in 2013 on potential GDP, I am sure that both Krugman and DeLong would be of the view that this has nothing to do with your Austrian view that GDP in those years was structurally determined ( and therefor never going to keep up with its artificial boom-years trend) and everything to do with the lack of appropriate stimulus in the relevant years. If their advice (they would claim) had been followed both before and after 2013 then potential GDP would have stayed much closer to its 2008 trend line.
Transformer,
Thanks for chiming in. It’s enervating when I spend an hour writing up a post and then nobody cares. 🙂
Of course you are right when you say, ” I am sure that both Krugman and DeLong would be of the view that this has nothing to do with…”
But the issue is, are they justified in saying that?
Please answer these two questions:
1) Do you agree that DeLong/Krugman in 2013 were saying, “Actual GDP is down 5.5%, while potential GDP is down only about 1%. Since this isn’t about capacity, it shows the people talking about restructuring are crazy. It’s about Aggregate Demand, which is why we need fiscal policy.”
2) Now they are saying, “Turns out, potential GDP was perhaps down 8% in 2013. That just shows how much we were right, that the problem was Aggregate Demand, and we needed fiscal policy, even more than we realized at the time.”
Do you agree with 1) and 2)?
Delong was definitely saying 1). Krugman didn’t really say it but I guess never corrected Delong.
I think they would both claim 2) or minor variants on it.
But even if you redrew the potential GDP line from DeLong’s original post 8% lower in 2013 it would (I think) still be above actual GDP and his call on the fed not to tighten would’ve been the same.
Krugman’s post on the possible reasons for fall in potential GDP is quite interesting.
.
And the 8% fall is comparing the 2008 estimate to the 2018 estimate. I bet if you compared the 2013 estimate (when the year original spat took place) to the 2018 one the difference would be much less than 8%.
Transformer wrote: “And the 8% fall is comparing the 2008 estimate to the 2018 estimate. I bet if you compared the 2013 estimate (when the year original spat took place) to the 2018 one the difference would be much less than 8%.”
That has no relevance. If you had written, “I bet if you compared the 2013 estimate with the 2008 estimate, the difference would be much less than 8%,” then yes that’s right: it was about 3.6%. (That assumes CBO in 2007 took the most recent year/year growth rate and extrapolated forward. I’m guessing in practice they did something more sophisticated.)
I think I may be confused here.
You say (of the 2008-2013 difference between actual and potential) ‘then yes that’s right: it was about 3.6%’.
But I thought Krugman’s recent post was telling us this had been revised so that using the latest CBO numbers it would now be greater then 3.6%?
Am I mis-understanding this , and is Krugman actually using the same data that showed a 3.6% difference for 2008-2013, to tell us the difference is now 11% for the 2008-2018 period ?
Correction:
‘the 2008-2013 difference between actual and potential’
=
the 2008-2013 drop in potential
You say: ‘Krugman shows that CBO now says 2013 potential GDP was about 8% (just eyeballing the chart) lower than what it had projected in 2008’.
I assume this means that the CBO has revised the number that led to you 3.6% calculation. Is that correct ?
(My comment above starting ‘And the 8% fall is comparing the 2008 estimate to the 2018 estimate’ is indeed confused and wrong – I would delete it if you had that feature on the blog)
Transformer wrote: “You say: ‘Krugman shows that CBO now says 2013 potential GDP was about 8% (just eyeballing the chart) lower than what it had projected in 2008’.
I assume this means that the CBO has revised the number that led to you 3.6% calculation. Is that correct ?”
Great question! The source of the 3.6% figure was coming from me, taking the pre-crisis growth rate of potential GDP and then extrapolating forward to 2013, and then comparing that figure to what CBO in 2013 was saying at that time what potential GDP was.
If you want to get the official number, you should check out Krugman’s recent post (the one I link to in the OP), and look at his link to CBO’s 10-year forecast issued in 2008.
So, I’m virtually certain that that number is going to be bigger than DeLong’s 1% and lower than CBO’s current estimate of an 8% gap, but it might be smaller than 3.6% since I’m sure CBO in 2008 did something more nuanced than just assuming the latest yr/yr growth rate would hold perpetually into the future.
Does that make sense? I can chime in on this stuff later in the week, but I’m slammed with “day job” stuff for a bit.
So you think they would have responded exactly the same to Murphy had the numbers originally shown 8%? Or are you saying they’d abandon argument 1, but still support 2?
Bob’s point was that Delong seemed to be denying the existence of falls in potential GDP – I suspect if he had had a chart that showed an 8% fall Bob wouldn’t have bothered posting.
Transformer wrote: “But even if you redrew the potential GDP line from DeLong’s original post 8% lower in 2013 it would (I think) still be above actual GDP and his call on the fed not to tighten would’ve been the same.”
Well, at the time he was saying actual GDP was 5.5% below where it should’ve been, so no, you’re wrong.
And also, he said at the time that if potential GDP were 5% or more below trend, that that would have been a “material” drop and his original post wouldn’t go through anymore.
On the first point: yes, you are right – the actual and potential GDP lines are less than 8% apart in the chart in DeLongs original post (probably about the 5.5% you quote). I need to think through the implication of that, coz I can’t believe that output was above potential at that time which would be the case if you reduced potential by 8%
On the second point: I think i already said in a separate comment that with the new numbers you had scored a KO on that part of the dispute (albeit I’m now doubting my original interpretation of Krugman’s new post that led me to think the CBO had changed their minds about the change in potential GDP between 20013 and now).
I don’t think you have Krugman on anything (unique) here, functionally Krugman is claiming that the lack of AD during the crisis is what is causing the structural gap to be as large as it is now.
The problem would be they were claiming the 1% gap showed it wasn’t a structural problem. Now the gap is being reported at 8%. That throws out the window their reasoning for why Dr. Murphy needed to go find a different profession. Of course they’re going to blame everything on a lack of AD, that’s what they do, but it doesn’t touch their reasoning for attacking Murphy.
Note: I haven’t had a chance to read back through those old posts yet, so I’m just giving my perception of the argument being made. Murphy can always correct me if I’m framing it incorrectly.
If you follow Krugman’s post that Bob linked he is basically setting up the claim that had the Fed and the federal government been stimulative enough then the structural gap would have been smaller. He can say that in 2013 potential gdp was X and now looking back its is X-y without contradiction according to what he wrote in that piece.
DeLong was upset with Bob for daring to suggest that potential GDP had fallen by 2013. I think Bob sort of won on points (or at least tied) that argument by using CBO numbers to show that potential GDP had fallen by 3.6% (which deLong considered be “not material”). He would probably get a KO now that (it appears) potential GDP has been reduced even further and probably above that 5% threshold that DeLong invented.
I’m just not really seeing this has much bearing on the Austrian Structural v Keynsian lack of AD argument as both sides will claim that falling potential GDP is consistent with their story (as indeed Krugman does in his recent post).
“I’m just not really seeing this has much bearing on the Austrian Structural v Keynsian lack of AD argument as both sides will claim that falling potential GDP is consistent with their story (as indeed Krugman does in his recent post).”
Granted both sides will still claim they are right. That will always be the case, although Dr. Murphy has at least spelled out events that would cause him to think the Austrian school must be wrong.
The problem is they used a specific reason for calling Murphy names and telling him to go find another profession. Turns out, as you say, Murphy won on points over those specific reasons back in 2013 and now by KO today. So the reasons for mocking him are clearly wrong, as I think you’d agree considering you called it a KO at this point, so they should apologize, even though we both agree they’ll still say their prescription is still right.
Let me try to save us all some time. I am claiming that our Keynesian friends made the following two arguments:
(A) In August 2013: The fact that potential GDP hasn’t dropped much, proves how wrong the non-Keynesians are.
(B) Last week: The fact that potential GDP dropped drastically, proves how right the Keynesians are.
Now, I’m happy to entertain objections to my position. But if you *do* want to say I’m getting this wrong, please clarify which of the following two objections you are raising:
(1) “Your summary into (A) and (B) above is wrong, Bob. That actually isn’t what Krugman was saying in at least one of those propositions.”
(2) “Yes, ha ha, Krugman is indeed saying both (A) and (B) above, but it’s not really a contradiction even though you’re marching around the room in victory by writing out those sentences in that way.”
I’m saying B- Krugman is basically saying potential GDP barely fell due to the great recession, but that it fell further due to a different causal agent which is the federal government’s unwillingness to be accomadative.
I’m not convinced they are saying A.
I just reread the DeLong and Krugman posts and they both seem to attack you for your numerous failings as an economist and a human being (that they claim to detect from) and not really for any ideological reasons to do with lack of potential GDP drops supporting the Keynsian story.
OK Transformer, what was the point of DeLong’s original post? Remember, I was responding to him.
The point of deLong’s original post is captured in its title ‘AND I DO NOT UNDERSTAND THE FEDERAL RESERVE’S CURRENT THINKING AT ALL…’ : He did not understand why the fed would consider tightening when there was an output gap.
He does not really address the issue of if and why potential GDP was falling. And when you brought it up he said if it was happening at all it was only about 1% and anyway would be not material if was below 5%.
BTW: My ‘numerous failings as an economist and a human being’ comment was a joke based on DeLong and Krugman’s (over-the-top) reactions to your 2013 post and not meant as an an insult !
Transformer wrote: “BTW: My ‘numerous failings as an economist and a human being’ comment was a joke based on DeLong and Krugman’s (over-the-top) reactions to your 2013 post and not meant as an an insult !”
Oh, don’t worry, I got that.
Transformer wrote: “He did not understand why the fed would consider tightening when there was an output gap.”
Right, so do you see why this is relevant to the Austrian vs. Keynesian policy prescriptions? I muddied the waters in my “history” above by making it sound like Krugman and DeLong were both focusing on fiscal stimulus, when (at least in this post) DeLong was talking about monetary stimulus.
But putting that subtlety aside, do you see how DeLong was saying, “Don’t listen to the people saying we need to remove stimulus, there are no signs that the structuralist people are right, this is a lack of Demand plain and simple”?
He clearly is saying ‘Don’t listen to the people saying we need to remove stimulus’.
I suppose his very first sentence could be interpreted as saying ‘there are no signs that the structuralist people are right’.
What would be really useful at this stage is a chart of CBO data on actual v potential GDP for the years since 2007 and based on 2018 estimates of potential. This would allow us to see what kind of output gap there really was (according to the CBO) in 2013.
I’m guessing that potential GDP is now showing as haven fallen by more than deLong’s 5% threshold between 2008 and 2013, in which case he clearly owes you an apology.
But as long as GDP is still showing as below potential for 2013 I think he would stand by his original post pretty much (perhaps he would reword that first sentence a bit!)
‘I’m guessing that potential GDP is now showing as having fallen by more than deLong’s 5% threshold between 2008 and 2013’
Actually no need to guess as Krugman’s chart shows that it clearly has !
Transformer, have you seen my latest post?
Ha ha. I like you Murphy.
Thanks Andrew if I can make just one person chortle, it’s all worth it…