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.
Potpourri
==> Richard Ebeling is not a fan of stimulus spending.
==> A funny comic on physics envy.
==> Remember everyone, I only troll Steve Landsburg because I care.
==> I am the prosecutor putting the Fed on (mock) trial at FreedomFest this year.
==> Rob Bradley on Ken Green’s road to conversion on the carbon tax issue.
==> Zach Slayback has been writing on “The Remnant” as an alternative to “the movement” philosophy.
Upcoming UN Paris Climate Meetings Open Up Gravy Train
My latest at IER. An excerpt:
In this post I’ll focus specifically on the enormous wealth transfers from rich to poor countries that are being proposed in the draft—as high as annual transfers in excess of $100 billion from the United States alone, according to some of the language. To be sure, at this stage these ludicrous suggestions are merely a “wish list,” but average Americans should realize just how much of their money will be on the buffet line when the UN delegates meet in December. In November President Obama already pledged $3 billion for such efforts, and the new UN proposal shows how much more the most zealous advocates have in mind.
How the Bankers Arranged for a Stream of Billions in Subsidies
I have not seen too many people comment on this; here’s one guy mentioning it last August. The punchline is that amongst other favors, private bankers have managed to use the financial crisis such that they now receive a stream of billions of dollars in income from the Federal Reserve. Moreover, this amount could rise substantially over the coming years.
The banks now receive “interest on reserves” from the Fed, a policy that was instituted back in October 2008. This means that when a bank keeps its reserves parked with the Fed, then it will be paid interest on them; this didn’t happen before October 2008. There are various ways to describe this policy, but one accurate way is to say at this point the Fed began paying banks to not make loans to their customers. The rate is currently a measly 25 basis points (0.25%), but it is expected to increase in the near future.
Specifically, the Fed has said that if and when it begins raising interest rates (probably later this year), it will not follow the textbook approach of selling off assets from its balance sheet, and thereby draining reserves from the system. On the contrary, the Fed will raise interest rates by increasing the amount the Fed itself pays to bankers, to keep their money parked at the Fed. For example, if the Fed wants the short-term rate (what’s called the “federal funds rate”) to rise to 1 percent, then the Fed will increase the amount it pays to banks for their reserves (perhaps to a bit less than 1 percent). If the banks can earn a guaranteed 1 percent from the Fed, then they would never lend their reserves to anybody else–even each other–for less than that.
One implication of this plan is that the Fed will be on the hook for funneling huge amounts directly to the banks. These wouldn’t be loans, these would be interest payments–direct income for the banks. Right now excess reserves are about $2.4 trillion. Assuming this is the ballpark for the next year or two, and that the Fed eventually raises its target rate to 3 percent, that would involve annual interest payments of $2.4 trillion x 3% = $72 billion.
Notice that this is effectively coming right from the taxpayers, in the sense that the Fed has been remitting its excess earnings to the Treasury, making the federal budget deficit lower than it otherwise would be. So, other things equal, if the Fed pays bankers $72 billion annually to not make loans to their customers, then that is effectively coming from the taxpayers.
I daresay before the crisis, if any banker had proposed such a scheme, that it would not have met with the public’s approval.
Potpourri
==> This Niall Ferguson hit piece on Krugman has some good zingers, but word for word I have something better coming out soon, I daresay.
==> My latest Mises CA piece on the silly outrage over Walmart selling water bottles for 88 cents. You’re thinking little water bottles, right? Nope, I mean gallons.
==> It’s not available yet, but check out what they’re saying about my new book from the Independent Institute!
Physicists vs. Economists
I suggested that Noah Smith must be trolling when he argues that the public takes economists more seriously than physicists. Noah retorted in the comments: “I ain’t trollin’! People think physicists are smart, but could a physicist write a book about where to get lunch and get taken seriously?”
Now I appreciate a jab at Tyler Cowen as much as the next guy, but this is really too much. Let me speak on behalf of the physicists:
PHYSICISTS: Yes Noah, you guys write your books on finding lunch, or how to make a marriage last, and some people will buy them. But we tell the public there is no God and it’s big news. Oh, by the way. When we physicists destroy countries…it’s on purpose.
Potpourri
==> The bearish von Pepe sends this Zero Hedge article on the new “cash.”
==> Josie Wales reports on the flaws and foibles of the FBI crime lab.
==> I liked this Noah Smith post talking about whether everything is created by human labor. But I have to think Noah is trolling when he says that people take economists as seriously as physicists.
==> Chris Leroux thinks he blew up Gene Callahan and me, in our critique of Hoppe’s argumentation ethics. I report, you decide.
==> Mark my words: Dan Sanchez is a rising star in Austro-libertarianism. And you can’t go wrong with articles covered in Marvel art.
==> My latest at Mises CA talks about Carly Fiorina’s record at HP:
I have not investigated Carly Fiorina’s campaign, and I am quite sure that if I did, I would very much oppose her becoming the next U.S. president. My modest point in this blog post is that the United States federal government is currently spending far more money, and employing far more people, than any reasonable person could defend–let alone people (like me) who have ideological and moral objections to the State per se. In this respect, if I hear that a particular candidate has experience in laying people off when she thought it was in the long-term interest of the organization, then that’s a plus, not a minus.
Recent Comments