To Hold You Over….

Sorry to have been so silent this week; various deadlines have kept me away from this corner of the Internet. I’ll be back in force next week for sure. Meanwhile, if you’re looking for some good reading, this is the best thing I’ve seen all morning.

Edited to add: “Best all morning” was not intended as damning-by-faint-praise. It’s actually the best of many mornings.

Click here to comment or read others’ comments.


77 Responses to “To Hold You Over….”

  1. 1 1 Al V.

    I am no economist, so I may have this totally wrong. That said, if the Fed hadn’t implemented QE, where would we be? Presumably the U.S. government would still be borrowing huge amounts. I would expect that to (a) drive up interest rates, and (assuming that the money would have been sourced from overseas) (b) driven up the value of the dollar, increasing prices of imports, and thus increasing inflation somewhat.

    Instead, the Fed is printing money and lending it to the government. I would have expected this to increase prices, as there would be a larger money supply chasing products in the marketplace. We see some of that, but not as much as I would have expected. So, where is the money going? Is it driving the run up in the stock markets, and are we thus in bubble territory?

    What we definitely are seeing is a spectacular drop in the velocity of money, although not across the board. M2 velocity is down to 1985 level, MZM is at a level not seen since the 50s. Like I said, I’m not an economist, but this gives me pause. This seems to support the idea that the money is going into equities.

  2. 2 2 Dave

    AIV….wouldn’t driving up the value of the dollar decrease prices of imports in USD terms and thus reducing pricing levels?

  3. 3 3 Neil

    In 2010, Krugman points out that inflation is trending down sharply and would become deflation unless the Fed takes strong steps. The Fed takes the strong steps, and deflation is avoided. Now Murphy thinks this proves that Krugman made a mistake? Talk about desperate.

  4. 4 4 Daniel

    I think a big difference is Krugman has repeatedly admitted he got the deflation part wrong, but many on the right are still predicting hyper-inflation any day now. Plus it doesn’t negate the fact that we are indeed in a liquidity trap because real interest rates are negative, which should still lead to the same fiscal response regardless of whether we do or do not have deflation. Only the magnitude of the fiscal stimulus would change, and especially lately it seems like Krugman hasn’t been advocating for massive stimulus like he was in 2010. Instead he’s arguing for mild stimulus ($300 billion a year or a little over 2 percent of GDP) after returning to pre-sequester levels. It just seems like Krugman has modified his argument in the face of evidence while a lot of conservative economists have not.

  5. 5 5 Daniel

    Steve, and if this is the best you’ve read lately, I think you need to start reading a little more.

    His post essentially goes like this.

    1. Krugman and his friends have been more right about most predictions than we have
    2. Krugman keeps telling us, unless we’re willing to change our viewpoints in the face of evidence we should get out of the game.
    3. Krugman was wrong about one prediction which he has explicitly admitted and tried to come up with a reasonable explanation for.
    4. Krugman hasn’t completely changed his policy recommendations (even though he has modified them), so I shouldn’t have to modify or stop giving my policy recommendations at all.

    I probably missed something, but can someone point out where I did?

  6. 6 6 Al V.

    @Dave, you are correct. Sorry, I had it backwards.

  7. 7 7 Gordon / Brooks

    both of the “core” inflation measures roughly tripled more than doubled

    Ooph, I hate to see statistics used in that way. What’s worse, inflation quadrupling (OMG!) in one case or inflation doubling in another case? Could the former even be fairly inconsequential?

    Well, if, in the former (hypothetically), inflation quadrupled from 0.1% to 0.4%, that probably wouldn’t be all that consequential, and wouldn’t be as bad as, say, inflation doubling from 3% to 6%.

    And to illustrate further the problem, if inflation went from 0.01% to 0.4%, that would be a forty-fold increase in inflation! OMG!

  8. 8 8 Gordon / Brooks

    Please note: Murphy had crossed out “roughly tripled” and replaced with “more than doubled”. That doesn’t matter re: my point, but just pointing it out, because I forgot the formatting would be lost in my copy & paste from his piece.

  9. 9 9 Daniel

    It just seems like Krugman is crushing the popular conservative bloggers right now when it comes to macroeconomics, and they’re best defense has been to point to single instances in which he has been incorrect without attacking his meta-argument.

  10. 10 10 Daniel

    We’ve been pretty much wrong about everything, but look here’s this one argument Paul Krugman made 2.5 years ago and he was wrong about it, therefore we’re equally wrong!

  11. 11 11 Gordon / Brooks

    In 2003 Paul Krugman argued against and ridiculed the Bush tax cuts (which I opposed too, by the way, and still think were unwise). But the interesting part is that at that time, when the baby boomers were several years away from starting to retire, and when our debt/GDP ratio was much lower than today and the outlook for it less severe, Krugman (in NYT column expressed great worry and fear over the projected long-term fiscal imbalance (deficits and debt-to-GDP) once the Bush tax cuts were factored in, arguing that the Bush tax cuts made an already severe and extremely difficult-to-solve problem downright impossible to solve, thus putting us firmly, unavoidably on course for extremely adverse consequences. He told his readers that he was “terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits… we’re looking at a fiscal crisis that will drive interest rates sky-high”, describing this fiscal outlook as a “really scary…threat to the federal government’s solvency”, saying “the conclusion is inescapable. Without the Bush tax cuts, it would have been difficult to cope with the fiscal implications of an aging population. With those tax cuts, the task is simply impossible. The accident, the fiscal train wreck, is already under way.”

    To say the least, he has been expressing a very different view (essentially the opposite view) over the last few years, and screaming this view just as passionately, ridiculing and attacking the integrity of those who today are saying almost what he was saying back then, although with at least a bit less alarmism than he conveyed (generally they have not been stating emphatically that disaster is now inevitable, as he did).

    Hard not to suspect that Krugman is an ideologue who presents whatever economic arguments serve his policy preferences.

  12. 12 12 Daniel


    Oh, I didn’t know we were in a liquidity trap type recession with negative real interest rates making stimulus actually long-term deficit reducing in 2003? Krugman thinks that there are certain times for stimulus (when monetary policy is exhausted and unemployment rates are still high) and other time when austerity is necessary (when interest are not negative and thus monetary policy can be effective at fighting recessions). How is his current view in contradiction with his view in 2003?

  13. 13 13 Gordon / Brooks


    You missed my point entirely. I wasn’t faulting Krugman for opposing Policy X in one situation and advocating for Policy X in another situation. I was faulting him for predicting inevitable disaster due to projected deficits and debt in 2003, yet over the past few years calling those expressing even serious concern about such matters “hysterical” and other pejoratives, even though the fiscal outlook has been much worse over the past few years (projected debt/GDP over time, plus the proximity of baby boomers to retirement) than it was in 2003.

    Get it? It’s about his economic prognostication, not about his policy advocacy/opposition, and it’s about how he has flipped his extreme prognostications when it has suited his policy preferences, despite the basis for the 2003 prognostication actually growing stronger.

  14. 14 14 Daniel


    I think Krugman believes that sometimes the only way to force the pols to do the right thing is to be really forceful with your language. In 2003 he saw a war coming which he believed was unnecessary, and he saw tax cuts which largely benefited the rich. He lached onto the bond vigilante story, which he now admits he was wrong about, to try to force the hand of the pols. This was also at a time when real interest rates were positive and thus tax increases could be offset by lowering interest rates, and unemployment was just under 6 percent, not great but not bad either. The proper response in his Keynesian viewpoint would be to run surpluses or low budget deficits. Instead we were running medium size budget deficits.

    Now we’re at a point where we are in a liquidity trap and thus the proper response from his Keynesian viewpoint is to increase deficits. Krugman never said he was infallible, and has generated lists of the things he got wrong. But in this past recession he’s also been right a lot more than he’s been wrong. He does think it’s crazy to say that we need to cut “now, now, now” because doing this would cause lots of people to suffer now, and be self defeating because it would make our budget deficits worse in the long run.

    In other words the urgent problem in 2003 in Krugman’s eyes was the war and the long term deficit problem, and so he spoke passionately about it, but now he sees as a much more urgent problem, the massive unemployment and the depressed tax base and so he speaks passionately about that, knowing that we can’t go back in time to fix the bad deficits of the past, and that trying to fight the long term deficit now is counter-productive because pols can’t do more than one thing at once. And so he calls some people’s ideas crazy? Is the right so sensitive that instead of arguing with Krugman’s ideas they are going to complain about how he called them crazy which therefore makes his ideas moot! Cherry picking ideas that Krugman had in the past which he has admitted were incorrect instead of arguing with his current stances just seems counterproductive to me.

  15. 15 15 Gordon / Brooks

    Daniel (#14),

    You’re still not getting it. I can’t explain any more clearly than in #13. Again, it’s about the flip in his prognostication without basis (indeed when the basis for the original prognostication had become stronger, not weaker), not about his change in policy preferences in arguably different situations.

  16. 16 16 Daniel

    The flip had to do with the fact that the bond vigilantes never materialized and haven’t ever materialized for Japan. How is that without basis?

  17. 17 17 Daniel

    In other words he then believed bond vigilantes would come after fiscally irresponsible countries, and now he believes this only to be the case for countries without their own currency. How is this without basis?

  18. 18 18 Daniel

    I think your misunderstanding comes in when you somehow missed that the bond vigilantes were the key to the doom Krugman was talking about in 2003. If they don’t exist than the whole insolvency issue goes out the window, even though the deficits are now higher.

  19. 19 19 KS

    @ Gordon/Brooks–

    “Again, it’s about the flip in his prognostication without basis (indeed when the basis for the original prognostication had become stronger, not weaker), not about his change in policy preferences in arguably different situations.”

    The ‘basis’ is clear, you just don’t know what it is.

    The macroeconomic debate since 2008/2009 is over — Krugman has won. The IS/LM model made empirically-testable predictions which were distinctly different from those on the other side, specifically with regards to inflation and interest rates. The IS/LM model was right on both accounts across numerous countries. People are just clutching for straws.

  20. 20 20 Gordon / Brooks

    Daniel and KS,

    Did Krugman oppose the increase in the top tax rate, or (if he opposed it only on the basis that there are better forms of stimulus, which also happen to fit his politics), did he at least say he considered that tax increase obviously harmful with obviously little (if any) fiscal benefit, given his views about the harm from deficit-reducing policies not and the lack of benefit?

  21. 21 21 Daniel


    Now you really are grasping for straws. Many studies have been done showing that raising taxes on the rich have the lowest multiplier of a host of deficit reducing options. But that’s besides the point, he saw it as the best option given the republicans demand for deficit reduction now, now, now. I think Krugman would have been fine to leave tax rates as they are until the economy recovered but when your placed in a terrible situation, as republicans put us in, why would he oppose the form of deficit reduction that does the least harm?

  22. 22 22 KS

    @ Gordon/Brooks–

    Please overlook your bias for a second. Krugman argues that the current economy suffers from inadequate aggregate demand (or low spending). He argues in favor of government policies that INCREASE spending. This means, he would favor direct government spending and tax cuts to populations that are likely to SPEND. Ie, NOT THE FREAKING SUPER RICH.

    It’s okay to argue with his thesis, but please, at least try to understand it.

    - KS

    PS It’s less okay given all the empirical evidence over the past 3 years. As I said, the macroeconomic debate is over — Krugman won.

  23. 23 23 Gordon / Brooks


    I’m not asking you to speculate that Krugman “would be fine” with not raising those tax rates. I specifically said I was not asking about an objection on the grounds that other measures would be more stimulative. I’m asking if he ever asserted or implied that raising those taxes would, in itself, be net harmful. I would think that even if he advocated for it because it was the least bad among all the political possibilities he would at least frame it as such, acknowledging that he thinks that even that measure is a bad idea. Did he ever do so?

  24. 24 24 Daniel

    Here Krugman talks about how raising taxes on the rich provides some stimulus but not a lot. It really is an unfair question though since Krugman knows we live in a world where we have options between which forms of stimulus we choose. Why would we choose the form of stimulus which gives us the lowest bang for our buck?

  25. 25 25 Daniel

    The above post was supposed to read lowering taxes.

  26. 26 26 Daniel

    And another reason I think your question is silly is because if Krugman believes Tax cuts for the rich have much lower stimulative affects than other forms of stimulus it’s possible that tax cuts for the rich do not meet the cost-benefit threshold that other forms of stimulus do. So it’s entirely logical given Krugman’s assumptions to support some forms of stimulus and not others.

  27. 27 27 Bearce

    Really? A half-baked petty attempt at a ‘gotcha’ post by that fat little troll Bob Murphy is the best thing you’ve read all morning?

  28. 28 28 Ken B

    @27: Well it’s better than the first comment I saw this morning.

  29. 29 29 Daniel


    Why are we turning to insults?

  30. 30 30 Gordon / Brooks


    Your argument (valid or not) that that my question is “silly” would possibly make sense only if my question were rhetorical. That seems to be your baseless, incorrect presumption, albeit one that is forgivable given how often commenters on blogs snarkily ask rhetorical questions (as do I sometimes, although when I do I think it’s clear that it’s rhetorical). I simply asked a question to elicit an answer to perhaps further the discussion, not because the answer necessarily proves my point, which you apparently think I was implying. And you’ve given an answer, which I’ll address.

    But first, re:
    It really is an unfair question though since Krugman knows we live in a world where we have options between which forms of stimulus we choose. Why would we choose the form of stimulus which gives us the lowest bang for our buck?

    I don’t know why you continue to miss the simple distinction I’ve made repeatedly between (1) someone saying he considers a particular policy (e.g., allowing top tax rates to go up rather than extend current rates at that time) bad in itself (i.e., net harmful), yet the least bad among what he sees as the set of possibilities vs. (2) that person saying he does not consider it bad policy or even saying it would be good policy. So if — IF — Krugman advocated the increase in tax rates simply because it was the least bad among the politically feasible policies, I would think he’d say so (#1 above). So your point about better alternatives is a straw man.

    That said, you followed up with the point (and link to related Krugman piece) that Krugman did NOT consider it bad policy to increase those tax rates, and you imply that Krugman didn’t oppose ANY deficit-reduction that would have ANY adverse short-term impact (i.e., opposite effect of stimulus), but rather that, per his argument in that piece, it was a matter of degree (stimulus bang for the buck of a given deficit-increasing policy), and if the economic impact were low enough relative to the deficit impact, he’d favor deficit-reduction on that basis, as opposed to making an exception on an ideological and/or party-partisanship basis, and in the case of raising taxes on top earners, you’re saying that bang-for-buck was indeed his basis as he claims, not ideology or party-partisanship (which is the question I’m exploring re: his position on those tax rates, and which, in turn, may or may not be informative re: my broader initial assertion that his prognostications have been motivated or biased by ideology).

    Well, there certainly wouldn’t be anything irrational about Krugman opposing deficit-reduction policies with a high ratio of economic impact-to-deficit-reduction and advocating policies with a high ration. The question is whether or not such a ratio was truly the basis for his departure from his crusade against deficit-reduction, favoring deficit-reduction in the case of those tax rates. Is it just a coincidence that (A) he made this exception from his crusade for higher deficits and his insistence that one would have to be “hysterical” (etc.) to favor deficit-reduction at that time, and (B) advocating higher top rates just happened to be a core part of his ideology and that of his fans? Could be, but that’s a judgment call, and that judgment should factor in one’s assessment of his tendency toward ideological and/or party partisanship / hyperpartisanship.

    I define “hyperpartisanship” not as a different from “partisanship” in degree, but rather in nature, hyperpartisanship going beyond partisanship by adding great bias and/or deliberate misleading of the audience by omission (knowingly omitting worthy information that a fair-minded presentation would contain) and/or by commission — and, IMHO, Krugman is very often guilty of hyperpartisanship. I should note that I’m not a partisan of the “other side” so my assessment is not motivated or biased in that way or at least not to that degree, and I think not at all since I call out hyperpartisanship of left, right, and center whenever I see it as an analytical matter, regardless of whether I share or oppose the writer’s/commentator’s position.
    So do I think Krugman should be given the benefit of the doubt when he claims that he made this exception on the basis he claims? Should I assume he is neither biased nor serving an ideological and/or party agenda? I’m inclined against it, though it’s not implausible. Do I think I should accept as sincere and not greatly biased Krugman’s claim that in 2003 this Nobel prize winner, who so emphatically predicted with certainty doom due to the long-term fiscal outlook , believed that then (when it suited his politics and ideology, and pleased his target market), but now (when higher deficits even amid a much worse long-term fiscal outlook suits his politics and ideology and pleases his target market) believes that he was just way wrong back then but now has it right and anyone who favors deficit-reduction now is “hysterical” or worse (well, unless they want to do it by increasing taxes on the rich, which he favors as an exception, and also happens to fit his politics, ideology, and target market)? No, I’m inclined to think he has deliberately bent his prognostications to serve an ideological/political agenda and to market to his fans (in 2003 and/or now), and probably bias has been a factor as well.

    By the way, in that September, 2010 piece, he argues:

    consider first what would happen if we extend the tax cuts for the next 10 years. This would add $700 billion to the debt (pdf). If the rich spread their windfall evenly across the decade, that’s $70 billion a year in additional consumer spending — or $140 billion during the period when we need it. So, $700 billion in deficits for $140 billion in stimulus; not a good bargain!

    Well, first of all, he had already noted that the economy could need stimulus badly for more than 2 years, and as it turns out, he’s still on his crusade today and probably will be for a while longer, but limiting it to two years (which he acknowledges “involves a bit of cheating”, along with his assumption in his other scenario) helps his argument. But moreover, why does he do that math – the cost-benefit analysis – as if there is no economic benefit at all from $70 billion in incremental spending in years after the first 2 ? Even if the period of “need” for stimulus ended after 2 years and such a need didn’t occur again in the 10-year period (another convenient unstated assumption of his), even in a more normal economy there would be some benefit to that incremental spending. There would also be some degree of revenue feedback effect, somewhat reducing his statically-calculated increase in deficits. But ignoring all that makes his cost-benefit analysis look much stronger, so he ignores those things.

  31. 31 31 Daniel


    I’m less willing to accept that Krugman is a hyperpartisan when he goes against what many in his party assume to be correct. Like that inequality is the cause of the recession, he repeatedly makes it a point to say why this is probably not true although it may have contributed. I think there have been other incidences where he goes against his party if he believes them to be incorrect. Tell me if a citation is needed for this. If he tends to agree with one party more than another this could be because he’s partisan, but it could also be because he believes they’re correct in these instances.

    In responding to this
    “Well, first of all, he had already noted that the economy could need stimulus badly for more than 2 years, and as it turns out, he’s still on his crusade today and probably will be for a while longer, but limiting it to two years (which he acknowledges “involves a bit of cheating”, along with his assumption in his other scenario) helps his argument. But moreover, why does he do that math – the cost-benefit analysis – as if there is no economic benefit at all from $70 billion in incremental spending in years after the first 2 ? Even if the period of “need” for stimulus ended after 2 years and such a need didn’t occur again in the 10-year period (another convenient unstated assumption of his), even in a more normal economy there would be some benefit to that incremental spending. There would also be some degree of revenue feedback effect, somewhat reducing his statically-calculated increase in deficits. But ignoring all that makes his cost-benefit analysis look much stronger, so he ignores those things.”

    I think this is because he assumes that once we are no longer up against the ZLB, there is greatly diminished benefit to these policies. At full employment there is little benefit in a macro-economic sense to increasing the deficit because of “crowding-out”. It’s also difficult to include in your calculation possible recessions that haven’t happened yet and because ZLB recessions are extremely rare. As to why the time horizon of only 2 years, probably because he assumed no government would be stupid enough to make the same mistake we had in 1937 and pull back spending before we’ve escaped the ZLB, and he willingly admits that this is one of his assumptions at the beginning of the post. This is something I think he’d be happy to admit he was wrong about :).

  32. 32 32 Daniel


    And even if Krugman is hyper-partisan, I still think that he shouldn’t be automatically distrusted. I think we should evaluate his arguments on their merit. I trust Steve to be an honest evaluator even though I think he too is a hyper-partisan. That’s why I continue to read and enjoy Steve’s work. I think the world would be an extremely dull place if no one ever challenged “moderates” assumptions. It could be that moderates are right, but it’s also possible that they’re really, really wrong. I don’t like intentionally dishonest people and I don’t think Steve or Krugman or Bob Murphy are intentionally dishonest people, although I do think their partisan viewpoints may unintentionally bias all three of their arguments. Unless we can somehow transport to Vulcan, I don’t think we’ll ever meet any economist who’s view is not in some way skewed by their outlook on the world.

  33. 33 33 Daniel

    @ Gordon/Brooks,

    But back to the point about why the 2 year time horizon. In Krugman’s view, if we had a sufficient amount of stimulus (the kind Krugman was advocating for) that pulled us out of the ZLB, than we would have been out of the recession and so the stimulus from the top end tax breaks would have been unnecessary. I think it’s unfair to point to the fact that we’re not out of the recession in the 2 year time horizon Krugman had picked given that we haven’t had the kind of stimulus Krugman believed we needed to be pulled from the ZLB at the time. I’d also note that the kind of stimulus the right prefers (leaving the tax rates at their Bush II levels) did occur over that 2-year time period.

  34. 34 34 Bearce

    @28: You must have been too busy then, writing all those blog posts that for all your…um…readers?

    @29: Insults? I was just stating a fact.

  35. 35 35 Bearce

    Grrr…scratch ‘that’ after ‘posts’.

  36. 36 36 Daniel


    I actually thought that was kinda funny even though I don’t agree with him. Still I don’t think he should be automatically discredited because he made a funny YouTube video. Maybe that’s what I’m missing in all of this? Is Bob Murphy actually a self-deprecating comedian and not an economist?

  37. 37 37 Bearce

    Is Bob Murphy actually a self-deprecating comedian and not an economist?


    Yes…yes he his.

  38. 38 38 Gordon / Brooks


    There are a number of points in your responses that I’d take issue with, but I don’t want to devote more time to blog discussion for the next couple of days due to other priorities. So I’ll just add a point of conceptual agreement: yes, insofar as someone rejects some of the major arguments of his “side” (and I don’t mean a liberal doing so from the left of others, or a conservative doing so from the right of others, etc.), that reduces the likelihood that he is a hyperpartisan (as I’ve defined it), other things equal. That said, you and I differ in our assessment of Krugman re: hyperpartisanship, and at least for now, I’ll have to leave it at that.

    If you see me on another thread in the future and you want to go back to this thread and continue, let me know.

  39. 39 39 Scott H.

    Yes, Krugman was wrong, but about what? It seems to me his issue is underestimating the capabilities of the Fed at the zero bound. A bittersweet victory really as this is not the kind of wrong most of his critics can rejoice in.

    Never-the-less, the latest news has been a route for Keynesianism as the only (or any?) solution in the face of liquidity traps. Europe is in recession, the Sequester is cutting into take home pay, and the Obama tax hikes are kicking in, and yet here we are with employment increasing and the stock market going up. This shouldn’t be happening in the Krugman universe.

  40. 40 40 Scott H.

    On a related note…

    Please choose the 2013 Man of the Year:

    1.) Ben Bernanke
    2.) Shinzo Abe
    3.) Scott Sumner

  41. 41 41 Bob Murphy

    You guys are amazing. If I’m wrong about price inflation going way up, it means I’m a shill and need to shut up with my dumb policy recommendations. If Krugman is wrong about price inflation continuing to fall, it has no impact on his credibility and his policy recommendations are still fine.

    And are you guys arguing that as of early 2010, the Fed hadn’t taken any countermeasures yet? Do you see Krugman saying, “Japan here we come, assuming Bernanke suddenly changes strategy and stops doing QE?”

  42. 42 42 Daniel

    @Scott H.,

    Yes, here we are after more than 4 years of persistently high unemployment, growing the labor force at roughly exactly population growth and millions of newly long-term unemployed. What a route for monetarism, right?

    I’d also note, that Keynes didn’t say that we wouldn’t ever come out of a liquidity trap type recession but that it was needless to wait for the extremely slow wage adjustment and private debt overhang to solve itself. 4 years of this seems pretty unnecessary to me if the alternative would have gotten us back to full employment faster.

    Also the flip side of this is that Austerity has proven to be extremely damaging almost everywhere it’s been tried, including Britain which has its own currency and can run it’s printing press along with an independent fed.

    So my question is, where have alternatives been successful in pulling us out of our liquidity trap?

  43. 43 43 Ken B

    @41: “Because He’s Krugman.”

  44. 44 44 Henri Hein


    In #14, you tell us we should give Krugman a pass because he needs to be forceful with his language in order to influence pols, but in #32, you ask us to evaluate his arguments on their merits. That seems in contradiction. I’m in favor of the latter, and doing so, I think Gordon/Brooks has a point. Krugman’s stance in 2003 on the (non) danger of a large public debt is completely unrecognizable from what it is now. He is taking fiscal conservatives to task for even raising the issue. If he was saying, “yeah, they have a point, but spending is the least bad option right now,” I would have more respect. Instead, according to him, they are irresponsible for wanting the debt to get any attention.

  45. 45 45 Henri Hein


    If we grant Krugman victory on the monetary policy issues, will you join us in convincing him to get on his knees and apologize to the nation for the failed stimulus?

  46. 46 46 Scott H.

    @ Bob Murphy

    I think Krugman’s credibility is taking a small hit. It’s just not taking the hit on IS/LM as you’d like. Btw… to which Japan are you referring to? Japan 1999 or Japan 2013?

    @ Daniel

    Just as not all federal government actions amount to proper fiscal stimulus, not all Fed actions amount to market monetarism. To imply that we’ve had 4 years of the Fed pursuing NGDP targets — or any sustained monetary aggression — is just wrong.

    Also my point about now — 2013 — is that we are essentially practicing federal austerity, and yet we are having different results. Employment numbers are getting expanded upwards and the stock market and many other asset classes are appreciating. The big delta between us and the other countries that have suffered under austerity is the actions of the Fed. Maybe you have another explanation you’d like to give? (Note: I’m not saying that austerity is economically expansive. I’m just saying with our monetary policy we are weathering it.)

    So, reforming your question a little: has market monetarism pulled us out of the liquidity trap? I would say not yet or not completely, but this is the best start I’ve seen, under some of the worst post-2008 circumstances we’ve seen.

  47. 47 47 Daniel

    @ Scott H,

    Thanks for the clarification. I guess a pretty good experiment will be to see how the US does with austerity + NGDP targets and how Japan does with stimulus + NGDP targets to compare. I know there won’t be a one to one comparison, but I’m sure some analyst will be able to pull some useful policy information from this. What do you think about that measure?

    @Henri Hein,

    I’m saying that him having a piece in the NYT that uses forceful language because he’s also a prominent figure and wants to influence policy does not necessarily mean that his arguments on their merits are incorrect. I prefer Krugman’s blog posts to his opinion pieces because he goes more in depth and explains his reasoning. I think Krugman might have gone overboard in latching onto the bond vigilante story in 2003, and he admits he was wrong about that. At the same time, I’m not going to automatically distrust every thing he says because he was wrong about a single thing in 2003 or 2010 for that matter. From my vantage point it seems like he’s been right about most things since 2008, but not every analyst is perfect and we shouldn’t punish them for every prediction they make.

    That said, if someone is persistently wrong in their predictions but refuses to re-evaluate their model I have little respect for that.

  48. 48 48 Daniel

    @Bob Murphy,

    Price deflation isn’t central to Krugman’s argument for more stimulus, negative real interest rates are. Has he been wrong about that? What other factors than high price inflation (in a macroeconomic sense) should make us want to have more austere policies, monetary or fiscal?

  49. 49 49 Ken B

    You are slow. But I knew that when you spilt all that ink and bile angrily denying there were Jim Crow laws segregating southern buses.

  50. 50 50 Bearce

    I have other business. I didn’t deny there were Jim Crow laws segregating southern buses, I thought it was only public institutions and not public places, thus omitting private companies. I admitted to my error when Ken demonstrated otherwise.

    But since we’re keeping childish score of each others mistakes, why not mention when you though price affected demand instead of quantity demanded? You know, basic microeconomics.

    You’re awfully sour lately, did KS beat you up and take your lunch money at school this week?

  51. 51 51 Bearce


    I would also like to point out the irony in you calling me slow when you didn’t reference the correct post number, and instead referenced yourself.

    So I guess it’s technically correct, you are a bit slow.

  52. 52 52 Daniel

    @Henri Hein #45,

    What failed stimulus? You mean the stimulus that any intermediate macro student could have computed as woefully inadequate and that Krugman himself said from the beginning was far too small? Yep you sure called it.

  53. 53 53 Henri Hein

    Daniel @47:

    That still sounds like a white-wash to me. I re-read his 2003 piece on the debt. I did not see a single thing about any bond vigilantes. That whole thing sounds like a bogey man invented later to rationalize his turnabout.

  54. 54 54 Henri Hein

    Daniel @52:

    I find this reasoning problematic. For the Keynesians, the stimulus is always too small, or too slow, or not implemented the right way, or not financed the right way, or whatever. Those sound suspiciously like excuses, not arguments.

    If a small stimulus doesn’t work, why should we believe a larger one would have fared any better? We are not talking pocket change, here.

    Prior discussion:

  55. 55 55 Daniel

    @Henri Hein 53,

    Just because there weren’t direct references to bond vigilantes doesn’t mean that it wasn’t what he was talking about. What else about deficits would cause interest rates to rise. Over-spending at full-employment can certainly lead to crowding-out, but that’s not what Krugman was talking about in the piece.

    @ Henri Hein,

    If I spend $1 why would that have the same effect that spending a $1 trillion dollars? In this case size definitely does matter. We can’t re-run the experiment because we only have one instance of this world, but any macroeconomist that did calculations told us that the stimulus was far to small. I was in intermediate macroeconomics in 2009 at the time and found that the correct size of the stimulus should have been $700 billion a year based on standard calculations, whereas it was spread over 3 years. Romer’s initial presentation to Obama was for $1.2 trillion, but that would probably have been too small as well given the actual size of the recession (before the stimulus was implemented). Here’s Krugman talking well before the stimulus was implemented about why the arithmetic wasn’t going to work out. How is it an excuse when most keynesian macroeconomists were screaming at the top of their lungs that the stimulus was too small?
    And don’t use the, oh they were predicting unemployment rates of 9% percent and it went to over 10% gag, it was over 10% before pretty much all the stimulus was implemented. Let me know if you need a citation for this.

  56. 56 56 Henri Hein


    I see we are back to evaluating Krugman using his own words only when it makes him look good.

    We are not talking about the difference between $1 and $1 trillion. Using your own numbers, we are talking about the difference between $800 billion and $1.2 trillion. I have to admit I’m a little confused about the Keynesian position here, but it sounds like you are saying the difference between these two numbers is one of “woefully inadequate” — ie, no effect — to substantially reducing unemployment. This strikes me as a fantastical claim, so I’m sure I misunderstood.

    According to the piece you linked to, even this woefully inadequate stimulus should have reduced unemployment by 1.7%. Yet, that is not what we saw.

    Also, if Keynesians know that an adequate stimulus is politically impossible, why call for stimulus at all? I mean, if they knew at the time that $800 billion would be inadequate, but would be all they could get, then asking to pour these tax-payer resources down the drain seem unconscionable to me.

  57. 57 57 Bearce

    Really didn’t want to actually get in the middle of it but…

    @ Henri

    Daniels’ right, Krugman did claim from the get-go that the stimulus was inadequate. Furthermore, any (good) student in intermediate macro could have given you the same prediction. To know why, you have to understand the concept of marginal propensity to consume and how it affects the multiplier as well as the multiplier’s effects on tax cuts versus infrastructure spending. The stimulus was basically a bail-out to the states and one giant tax cut, both of which are known to be very inadequate in stimulating the economy.

  58. 58 58 Daniel

    @ Henri Hein,

    Still not understanding how you “know” that the stimulus did nothing? Do you have information about an alternative universe where the stimulus was never run?

  59. 59 59 Daniel

    @ Henri Hein,
    Also, 1.2 trillion wasn’t even the proper amount, as they thought unemployment would only rise to 9%. Since it rose to 10% instead the correct amount would have been closer to 2 trillion. My calculation at the time was based on the change in GDP and using okun’s law to predict the unemployment rate which actually got me closer to the truth than Romer at the time, but obviously I didn’t know enough at the time to be making policy, it’s just a happy coincidence that using Intermediate Macroeconomics got us closer to the truth than PhD economics.

  60. 60 60 Daniel

    @Henri Hein,

    “I see we are back to evaluating Krugman using his own words only when it makes him look good.”

    As to that snarky comment, I think I’ve already addressed this, but I think analysts should be evaluated on their body of work and not single instances we’ve picked out in which they’ve been incorrect. As I look at the body of the predictions and statements Krugman’s made throughout his career I find a lot more right than wrong. When I look at the things Bob Murphy has written about macroeconomics, I’ve found mostly wrong. You might have a different interpretation of their body of work but you haven’t clearly laid out an outline of where Krugman has made rights and wrongs and why he should be less trusted than Bob Murphy based on the things he has gotten right and wrong.

  61. 61 61 Daniel

    Further evidence that Krugman is not just an ideologue and has independent thoughts even when it goes against his parties interests.

  62. 62 62 Gordon / Brooks


    Re: #61, if that Krugman post re: Sanford is the kind of evidence on which you base your belief that Krugman isn’t a party-hyperpartisan, well, let’s say it’s not surprising that you’d reach that conclusion (one I don’t think a fairly objective person would reach). Very weak, at best, as an indicator contrary to hyperpartisanship. (I’d also note that there is also ideological hyperpartisanship, but that’s another matter).

    Going back to your earlier responses to me, I’ll just address one of your points with which I’d take issue. In #32 you suggest that, rather than distrusting Krugman’s assertions, I should just assess his arguments on their merits. First of all, that seems to be a non sequitur. If I were just assessing the arguments on their merits, trust would have no role, so there would be no place for distrust. But moreover, it is precisely because I lack the expertise, time and information to critically evaluate all of major assertions and supporting arguments of experts like Krugman (as with experts in most other fields and issues) that trust does play a key role, and thus one’s apparently demonstrated tendency to place his hyperpartisan advocacy horse before his analysis cart is highly relevant, whether the hyperpartisan does this due to extreme bias, deliberate misleading of his audience, or both.

  63. 63 63 Gordon / Brooks

    Ooph and lol, I screwed up the metaphor in my #62. Obviously I meant to say “place is hyperpartisan advocacy cart before his analysis horse”.

  64. 64 64 Daniel

    @Gordon/Brooks 62,

    Where did I say it was substantial evidence to suggest that he wasn’t a hyper partisan, I just said further evidence. A fairly objective person would have seen this as just pointing out a single piece of evidence and not taken it as more than that (see how easy it is to question someone’s objectivity without any basis).

    I have an unrelated question for you. Which economists do you trust to make predictions for us?

  65. 65 65 Daniel

    @Gordon Brooks,

    For example, do you trust Ben Bernanke, do you think he’s a hyper-partisan?

  66. 66 66 Gordon / Brooks


    My basis was that you said you were “less willing to accept that Krugman is a hyperpartisan when he goes against what many in his party assume to be correct.” I took that to mean (because it would seem a more meaningful, relevant point) that you were unwilling to accept that Krugman is a (party-)hyperpartisan because it’s not uncommon for him to go against what what many in his party assume to be correct. And in your subsequent comment you say “And even if Krugman is hyper-partisan…” which I took to mean “And even if Krugman were hyper-partisan” (many people don’t use the subjunctive) or “And even, arguendo, if Krugman is a hyper-partisan” (i.e., as just a hypothetical).

    But if I’m wrong (if you’re not arguing that he isn’t a hyperpartisan), I stand corrected.

    Re: your question, I don’t have much trust in economists to make macroeconomic predictions generally because my sense is that they aren’t very good at it even when making a good-faith effort. As for very general “predictions” of the sort we’re talking about re: Krugman (i.e., will debt/GDP ratio present major problem or risk over within the next decade), I can’t say there are any particular economists I trust because, still, of limited ability of the science, but if you’re asking if there are any whose expressed views on this issue I think are at least sincere and who make a good-faith effort to guard against any ideological bias, I’d say Donald Marron. I’d probably also say it about Nariman Behravesh (with whom I became familiar by reading his book, Spin-Free Economics

    What is your answer to your question?

  67. 67 67 Gordon / Brooks


    I should add that I was also basing my sense that you were arguing that Krugman isn’t a hyperpartisan on your description of that blog post to which you linked as “Further evidence that Krugman is not just an ideologue and has independent thoughts even when it goes against his parties interests.” So no, I don’t think you are correct that “A fairly objective person would have seen this as just pointing out a single piece of evidence and not taken it as more than that.” You seemed to be making a case, implying that such examples are not uncommon and that therefore you don’t think Krugman is a hyperpartisan. Were you not?

    Re: Bernanke in particular, my only concern about him is that it’s possible he may care more about what happens on his watch than about consequences today’s Fed policies down the road (possible inflation or perhaps other adverse consequences), and perhaps this would lead him to favor too much of this quantitative easing stuff, etc. that is good for the economy in the short term, but perhaps with risks down the road. (I”m not an economist, and I don’t know much about monetary policy, so these are general thoughts/concerns, admittedly not very well-informed.)

  68. 68 68 Gordon / Brooks


    Oh, and in my #66, I was referring to this Donald Marron I should also add (just for clarity) that in addition to trusting his objectivity and sincerity, I also believe he has an abundance of relevant expertise and intellect.

  69. 69 69 Daniel


    I don’t think Krugman is a hyperpartisan, but I also don’t think the example I just gave there was very substantive, and I believe there are other cases where his arguments against his own party have been more substantive. I don’t currently have time to look for them, but if you express enough interest in these examples I could do some searching for you.

    Re Bernanke: Bernanke’s current views and his views prior to becoming Fed chairman have actually been extremely consistent (which I think invalidates your assumption that he may be making policies to make the economy better in the short run at the cost of the long-run in his own self-interest but tell me if I’m wrong), if anything he’s been a bit more conservative on how the Fed should fight against a liquidity trap than he was at Princeton, although recently he’s been more drifting back towards his views at Princeton. I’d also point out that his views are extraordinarily consistent with Paul Krugman’s views about what should be done with current fiscal policy as his testimony to congress recently indicated.

  70. 70 70 Daniel

    @ Gordon/Brooks

    Btw, I agree with a lot of what both the economists you mentioned have written about, so good to know.

  71. 71 71 Daniel

    @ Gordon/Brooks,

    Oh I forgot you asked me the same question. In addition to trusting Krugman on Macro, I trust Bernanke, Joseph Stiglitz, the Romers, and I think Hale Stewart gives pretty good financial advice in a macro sense.

  72. 72 72 Henri Hein

    Daniel @58:

    How do I know pain killers work? Any time I have a headache, and I take tylenol, the headache goes away. That could be pure random chance. If I don’t take a pain killer, the headache goes away on its own about 1/3 of the time. After about a dozen times of taking tylenol, in which the headache went away each time, I calculate the chances of it being random to about 1/531441. Not a proof, but I find it pretty unlikely.

    So it is with fiscal stimuli. Everytime a government tries it, the economy suffers anemic growth and rising unemployment. This is what we saw in 2009-10. It is what we saw in the 30s. It is what Japan saw in the 90s. You can see my thoughts on Japan here:

    I mapped out GDP and unemployment for all OECD countries, plus China and India, from 2008-2011. The countries that used stimulus during 2009 fared slightly worse than the countries that didn’t. That could be chance. It could be the different circumstances in the different countries makes for a difficult comparison. Nevertheless, there is an unmistakable pattern, and the pattern is that stimuli either make no difference or make things worse.

  73. 73 73 Henri Hein

    Daniel @60:

    I am not a Krugman student and I don’t care that much what his record is. Conversely, the only rationale you have given for his flip-flop is the bond vigilante point. I told you what I think about that. Since I don’t follow the debate that closely, you should feel free to ignore my take, but my honest impression is that your reverence for Krugman is leading you to an undeservedly charitable interpretation of him.

  74. 74 74 Daniel

    @Henri Hein 72,

    I’ll just say that your methods are vastly simplified to the point of being non-relevant. Just consider that you have no controls and don’t lag your Independent variables as a starter to why it is too simplified. I’d also like to actually see your OECD comparison. Btw, taking Tylenol etc., can be proven affective by carefully planning a control and experimental group in a way that fiscal changes in GDP can not. You miss my point about alternative universes entirely if you think these two are comparable.

  75. 75 75 Henri Hein


    I admit my methods are simple. I’m not trying to do scholarly work. It is just that, within the economics debate, when I go and check Keynsesian claims about historical precedents, I quite often find they don’t hold water.

    A controlled experiment doesn’t prove that a drug is effective, it only increases its probability.

  76. 76 76 Daniel

    @Henri Hein,

    I agree with your last statement. What I meant by that was that it’s reasonable to infer causation from double blind controlled studies of drugs in a way that you can not on the national level (since countries are so heterogeneous across space and overtime and don’t have easy ways of agreeing to double blind studies). Careful and more complex analysis can tease out causation in a way that your analysis can not. For example, the IMF recently estimated a multiplier of over 1 in the short term even after removing the extreme cases (Spain and Greece) but their analysis was more complex.

  77. 77 77 Harold

    #72 and following. Using this method very many people know that homeopathy works. And astrology etc, ad infinitum.

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