A note on Casey Mulligan

Mulligan writes:

There is still no evidence to confirm the fundamental Keynesian proposition that supply doesn’t matter.

Oddly, for all of his apparent skepticism of Paul Krugman, Mulligan is completely suckered on this one.  This is Krugman’s current version of Keynesian economics (and even then only sometimes), not Keynesian economics more broadly construed.  There is nothing in the (very useful) data cited by Mulligan, in his posts on supply and employment, which runs against the Keynesian story.  Of course I am a fan of the blogosphere, but sometimes it frightens me when I see it having influence over research interpretations.  We’re just a small number of apes sitting at computers, relative to the overall literature.  When it comes to Keynesian economics, I don’t always see us apes as reflecting the broader literature very well, yet we are read by a relatively large number of apes.  We can expect this problem to get worse, as people learn the “blogosphere versions” of different points of view.  Karl Smith comments.  And, as you might expect, Scott Sumner makes perfect sense.


Very Delphic of you. I read a lot of Krugman, and I have no clue as to what you are saying.

Thats standard Tyler.

Having now read all the authors mentioned, this is just another case of Mulligan making stuff up and claiming Krugman said stuff that he didn't.

Keynes is probably the most distinguished alumnus of The Perse School for Girls. Not many people know that.

So Mulligan's argument is targeted and politically relevant, rather than focused on a literature that is ignored in policy debates? And that's a bad thing?

What IS falsifiable in Keynesianism? I await PK's answer.

Low interest rates and disinflation in the face of high deficits.

If government spending were simply "picking winners" rather than putting genuinely idle resources to work, we'd see evidence of crowding out, and that would suggest a supply-side story.

Interest rates didn't stay low in the PIIGS.

Crowding out. http://mjperry.blogspot.com/2010/06/harvard-study-federal-pork-kills.html

Picking winners. http://johnpaulus.com/blog/2011/08/15/solar-company-touted-by-obama-goes-bankrupt/

And crowding out and winner-picking are only the short-term growth problems.

More to the point, what are you saying is falsifiable? Interest rates and disinflation aren't claims.

What the PIIGS are going through is very different from the situation in the United States, which has its own currency and the theoretical capacity to eventually pay back what it owes with no more than modest inflation.

The falsifiable prediction would be that since we are in a liquidity trap, low interest rates and disinflation will persist in the face of large government deficits. Given that Krugman has been saying some variation of this every week for two years, I didn't think I would need to state it explicitly. Interest rates and inflation have stayed low, so this claim has not been falsified. If they rise significantly in the absence of a corresponding decrease in unemployment, we can then say that the claim has been falsified.

Heh, that's sort of an "I bet you can survive going over Niagara Falls in a barrel" sort of prediction. No one wants to risk a sovereign debt crisis.

Krugman's prediction was actually that we could spend $3-4T more and not have a debt crisis. Given than we've been downgraded in current circumstances even without his massive Keynesian spending plan, I'd say his hypothesis is looking extremely shaky.

Interest rates stayed low in the PIIGS too, until they didn't. Yes, since we control our currency we could have inflation instead, but that isn't very comforting, and it won't take much fluctuation in rates to make our massive short-term borrowing a huge problem very quickly, because an increase in rates creates a very very bad feedback on itself...

What is falsifiable in economics - and how often does it happen?

Krugman at least make predictions so that you, ex-post, can se whether he got things completely wrong.

We made the same prediction - that the stimulus wouldn't be enough. His was that a little more would be enough, mine was that no amount could be enough.

I guess we're all winners, then. Or, from a different point of view, losers.

As an aside, after repeatedly hearing of his predictive prowess (which I do not dispute, although he is often compared to people who are notoriously bad) I'd like a list of his actual predictions, and more importantly the methodology he uses. I'd like to figure out how much he is front-running, whether he is getting inside information, making his own future, etc. He partially benefits from some good calls followed by a lack of recognition of others making similar calls because they are not as famous as Krugman (and dismissed by him, which is taken as gospel by his throng). For example, his pessimism for the past decade was echoed by many people for some importantly different reasons, but they don't capture popular credit for it. For some reason, things like "we need a housing bubble" don't stick to him. I'd do this myself, but I'm too busy reading the people I think are marginally better who do not present an idiosyncratic methodology. Krugman gets paid to be Krugman, and being anti-Krugman would cost me money, and besides, if I agreed with his methodology and conclusions I wouldn't be anti-Krugman anyway.

Your comment really makes me wonder -- what would PK be saying today if we'd done his $3-4T stimulus and after a brief increase in GDP, we headed back into recession while investors fled Treasuries amid a looming sovereign debt crisis as our massive short-term debt costs skyrocketed?

My guess is some variation on "it was a good idea but they did it wrong."

My guess is some variation on what he's saying exactly now. "It wasn't enough, just add more money and the chosen land will come."

This is a pattern of thought by no means limited to economic stimulus. There is essentially no subject on which some supporters think that the problem is you just didn't do ENOUGH of their policy. Neocons believe that the war in Iraq only went bad because we didn't put in enough troops or bomb enough cities or wait long enough. Border control activists think that if we just redouble our efforts to keep immigrants out, we'll suddenly be... prosperous and white, I guess? Moderators on message boards believe that if they just clamp down harder on what people say, nobody will ever be offended. Middle managers in companies believe that if they just have one more meeting about how everyone should work harder, productivity will skyrocket. Libertarians believe that if we just knock out a few more restrictions on economic choice, we will all be free and prosperous. Communists believe that if we just educate people a little more, we will all be free and prosperous. Abstinence-promoters believe that if they just clamp down hard enough on adults telling teens about sex, teenage pregnancy will disappear. Safe-sex-promoters believe that if they just give out enough condoms, teenage pregnancy will disappear.

What's similar about all of these positions (and I am sympathetic to some of them!) is that they are all utterly disconnected from the evidence. Here's a trend-line. It's increasing. Do what they want you to do, trend line is still increasing? Means you didn't do enough. Don't do what they want you to, trend line is still increasing? Wouldn't have increased if you did what they say.

Some of their positions are doubtless correct, but their belief in their positions is not predicated by evidence.

I don't expect a controlled experiment outline from him, but exactly how much did you want and what would be the result? Can we do regional Keynesianism? What do the results in different states (if not Texas, then who?) tell us? We occasionally have a real-live Keynesian drop some actual math on us around here that doesn't sound completely circular, the discussions on productivity were interesting though I still don't understand it. I'm just an ape trying to get a banana nut.

The problem with a robust theory that adapts to new evidence is you have to rely on the proponents to tell you where that theory is today.

Reminds of a comment from Dr. Rick Nebel on fusion progress in tokamaks:

It used to be the standing joke that the Tokamak community would come up with "the answer" to scaling and it always agreed with theory. But for some reason, both of them changed every year.

I think we already know, just look at the one who decided on the size and its potential impact, and therefore could not use the "it wasn't big enough" excuse (Romer).

Kruggy would be saying "we underestimated the severity of the downturn (which was due in its entirety to George W. Bush and trickle-down economics)".

Smith: "How is it possible that the US can have the same number of machines, the same number of workers and the same technological know-how yet nonetheless is producing less of the things that people want then it was a year before?

This is the core question."

The question I keep asking is why isn't the obvious answer to this question the answer? We don't want the things we over-built anymore.

Was there an epidemic of satiation that broke out? Recall again the classicals and the absurdity of a "general glut". There isn't really a new sector people are putting their money in once they've realized they don't want housing (and housing per person is now BELOW the trend line). Businesses aren't investing because they don't expect to make much money, and aren't hiring for the same reason. There's less spending because people have less money and want to save.

What about they thought housing was good spending and then found out quite abruptly that the had no clue what to buy?

There are plenty of new sectors, I just can't put money in them, as its illegal for me to due mostly to the results of Sarbanes-Oxley.

EXACTLY!! and everyone seems to miss that.
There is no Agregate demand for real goods in the macroeconomic sense. There /is/ a demand for money and there is a demand for specific goods and services and there are elasticities between them all.

When we aggregate demand we shouldn't get a price level as a function of Real Output. Thats just nonsense.
Demand isn't just a function of price and all the billions of goods that are made. When we aggregate then over all the goods we will get very different AD curves depending on what bundle of goods is being supplied and how different it is from the ideal bundle. AS has the exact same problem but in the other direction.

This means that AS and AD are highly endogenous which throws the entire AD-AS model into the trashheap.

What you said. It's actually harder to apply the right economics jargon and categorization than to see the actual problem.

Here here!

Thank you Prof. Cowen, a well appreciated dose of cool rational thinking in what has mostly become a blind crusage on Mulligan's part.

I think you may have missed the bigger smackdown.

No worries, I haven't. There is a poster called Andrew out there who's being smacked down for somehow implying that a housing bust is akin to a supply shock.

I don't know if I did or not, but I'm not an economist. But that's not a bad thing these days.

Krugman says he knows how to fix it, but he has no methodology, so we have to install Krugman as king.

I'll just bang the Rahn curve drum here again, and note that while gov't spending may buy short-term growth it won't help us in the long run, and that short-term fiscal candy is how we got into today's ugly mess.

I'm really starting to think our fiscal policy approximates where monetary policy was around 1979, when Volcker heroically slammed on the economic brakes knowing a sharp recession would follow in the short run but knowing was necessary to knock down inflation in the long run. (That one worked out pretty well, I think we can all agree.)

In 1979 there was high inflation and low growth. Today there is not high inflation, there is just the opposite. I would not expect the same outcome from the same action in different circumstances.

They aren't the same actions. Monetary =/= fiscal.

So are you saying that immediate, sharp cuts to government spending will create a deep, but short, recession that will be followed by significant economic growth? If so, fine, I'm not criticizing that. I'm just trying to figure out what you are saying.

What do you mean by "gov't spending"?

Handing out tax cuts or tax incentives to drive prices of assets far above the cost of producing new assets?

Eg., driving up housing prices to twice the cost of building the marginal house, or driving up the price of pets.com to a billion more than the cost of IPOing dogs.com and cats.com and catsanddogs.com?

Paying for police and courts to maintain an honest market place?

Building public transportation open to rich and poor alike to promote interstate commerce for the general welfare? Eg., Jefferson's National Road opening up the West, Lincoln's transcontinental railroad, Eisenhower's American autobahn, rural electrification and telephone, commercial satellites.

Government neglect of transportation in the US has not resulted in private alternatives that address the rather obvious problems with the existing transportation system, which was all developed by substantial "gov't spending" and has increasingly failed to meet our needs by lack of "gov't spending."

Economists seem to have decided to make all spending equal with zero distinction between consumption and sacrificed consumption "spending" aka investment.

In fact, investment has become the process of driving up the price of something to twice or three times its replacement cost. How can an economist state the US lost $7 trillion or $2 trillion of market capital or value in a month, without a single war or natural disaster occurring. Japan really did suffer a trillion dollars in capital losses in a few days, but that took a cascade of natural disasters and failures of imagination, but with clear spending to restore the lost capital. No spending can restore the "lost capital" of 2008 or of the past month.

Government spending is when the gov't spends money. "Investment" is not gov't spending.

Again, Rahn curve. Everyone agrees we needs courts and police and roads.

I guess places like Sweden are proof that more than 20% government spending is disastrous.

You (U.S.) got into this mess through unfunded tax cuts & wars and a massive crisis caused by DEREGULATION. I will not have people trying to rewrite history infront of my eyes and tell me otherwise.

There really is no point in reading what Heritage write, they are quite clearly biased.

You do realize Sweden cut gov't spending by nearly 20% of GDP for exactly this reason?

Also, deregulation had little to do with mortgage securitization. That was driven by the GSEs.

Well, they made cuts, but from a starting point of like 70%. They are still at 56% and doing well, yet you insist the U.S. is 'to the left' of the Rahn curve (which is surely even more imaginary than the Laffer Curve) and spending cuts will somehow create prosperity, when it is closer to 20% of GDP.

'Also, deregulation had little to do with mortgage securitization. That was driven by the GSEs.'

I could refer you to authoritative books written on the crisis or come out with a bunch of stats, but a far easier response is this:

If the GSEs were responsible for subprime lending, securitization etc., then why did exactly the same thing happen in Iceland, Ireland, Britain and others? Why was the common theme between the countries that suffered most deregulation rather than GSEs, and why was the common theme between those that did best relatively tight regulation?

Also, whatever the GSEs were responsible for, it wasn't the massive fraud and predatory lending indulged in by the likes of Goldman Sachs and their cronies. Blaming government guarantees or 'encouraging homeownership' for this is like blaming people who opened a nursery for it being targeted by paedophiles.

Why did they cut from 70% to 52%? Why are they still cutting today?

Hint: the answer is not because they thought 70% was better than 50%.

What makes you think those countries had the most deregulation? Which regulation do you imagine would have prevented securitization and the obscuring of mortgage risk -- a policy being pushed by the gov't? What is "predatory lending" and winking at fraud if not the logical conclusion of a policy for increasing credit access to low-income households?

Geithner himself blames the GSEs.

What that chart shows is a 2% deficit even at the peak of the business cycle (when revenues should peak and spending should be relatively low). The current decline in revenues and spike in spending are both triggered by the recession, and what follows is indeed runaway spending, but it primarily driven by health care costs. It says very little about the cause of the financial crisis, and indeed our current situation has nothing to do with government debt. In fact, it is currently cheaper for the government to borrow money than to print it, presuming that inflation meets (currently quite modest) expectations.

Volcker's actions were intended to control inflation, which is currently quite low. Unless you are contending that inflation was merely a coincidental part of stagflation, then there's really no reason to expect that the same kind of monetary tightening is called for.

Again, monetary =/= fiscal. The problem in the 1970s was inflation (monetary), the problem today is too much gov't spending (fiscal). The similarity is just that the solutions are both painful in short term but beneficial in the long term.

Tyler, since you like to hint that you have a clear position on many issues related to employment and economic policies, I'd appreciate if you can write down your position clearly with references to relevant and reliable evidence. Please don't relate your position to what other (dead or alive) economists have said --the sources of your ideas are irrelevant, only your logic and your evidence matter. You may start with your position about the relative importance of aggregate demand and aggregate supply on the prospect of high unemployment (indeed, I expect you to make clear why you choose the U.S. economy rather than the world economy in your analysis of the three main concepts).

Your comments went from high quality and worthy of their own blog to demanding and annoying in the span of only a few months.

E.'s comments have not changed at all since I've been reading MR. He is high quality, the highest, and demanding because of this, though noone can meet his expectations.

(Someone feel free to say obvious things so I don't have to).

Let Tyler respond to my suggestion (yes, suggestion, not demand). Many times I have suggested him that it's better to present his own ideas clearly and in detail rather than to refer ambiguously to specific points raised by other people. My interest is to learn from people that claim to know and are willing to share their ideas with others. I'm retired and work at home somewhere in Chile, and I can continue doing research thanks to the web and the access I have to researchers and to research documents far away.

Student's comments went demanding even faster, hardy har

No-one owes you a response EB. Say something interesting and people will respond back. Snarky comments can only take you so far.

You're right: none owes me a response. I still expect one, however, because I assume that Alex and Tyler are always looking to improve their blog and may consider my suggestion a good one. I may be wrong assuming that their objective is to have a "good scholar" blog rather than a "good celebrity" blog (or a "good chef" blog or, God forbid!, a "good mercenary" blog).

E's response doesn't sound so bad. I don't think it's unreasonable to suggest more posts about what Tyler or Alex themselves think, recommend, or predict.

I don't think it is Krugman's view that "supply doesn't matter." As I read his position, it is rather "supply could matter, but the data don't indicate that it matters in our current situation." I find the observation that unemployment is high in ALL regions, and high in ALL sectors persuasive in leading to the conclusion that our problem isn't mostly structural. Add to that the recurring surveys of business leaders who indicate that their biggest problem is "lack of customers" or "slow sales," and I think you have to admit that there is a demand shortfall.

"I think you have to admit that there is a demand shortfall."

This is why I have so much trouble with this stuff. Why do we have to admit that in the same sense that, say, Krugman does? If you ask a home builder, he is obviously going to say there is a lack of demand and a lack of customers. What does that prove? For one thing, his answer exists because you can't ask the guy that doesn't exist because homes got all of the last bubble. That's not just about the malinvestment, it's about the recovery. What kind of aggregate demand are you going to boost to take up the slack in employment? If it really doesn't matter then why not construction? Construction seemed like a good idea at the time, why not now? That is also not to say that we haven't overshot on the down-side, but just that you can't replace all of the peak demand by pressing the easy button.

AD is the answer to the wrong question.

We should not be asking "How can we generate more demand?" Demand crashed with the housing bubble. That demand was illusory and isn't coming back. And the legacy of the bubble was a financial crisis and a crushing debt hangover. We do not want to do that again, especially not with sovereign debt.

What we should be asking is "How can we generate sustainable growth?" And the answer there is also not massive deficit spending by the gov't.

It's easy to sell that to a good portion of the political class now, but what happens after the 2012 election. Everyone in power suddenly becomes a hardcore Keynesian. Anyway, the "problems" in the US are most likely the result of globalization, the American people taking a very long time to realize the free ride is over, and demographics. There is no policy magic bullet.

True. OTOH, unlike the Greeks, we have the example of the Greeks to learn from.

How do you generate sustainable growth if not through sustained demand (domestic or elsewhere)? Growth needs demand.

Do you think there is a demand shortfall in the world market economy? If yes, are there significant differences across countries and within large countries? If not, may there be shortfalls in some (small?) countries and in some areas of (large?) countries?

I don't think there is a demand shortfall in the world market economy. The ongoing adjustment to the largest shock to the world market economy --that is, the integration of over 3 billion people into it since the mid 1980s-- has triggered a reallocation of resource across countries and within countries that is still going on. The events of the past 3 years in advanced economies have made more difficult the adjustment in these countries but not in the rest of the world.

Hmm, interesting notion: unemployment is structural but globally rather than within the U.S..

I like it. The Great Factor Equalization continues.

This is so much more serious than proving Keynesianism.

The mismatch to some extent is a constraint of geography. A large demand, say, for hairdressers in China will be hard for the US to satisfy (assuming the US has a glut of barbers). The challenge arises because the 3 billion people were born in the wrong (!) parts of the world.

Really wish this piece would have been on Carey Mulligan instead.

"We can expect this problem to get worse, as people learn the “blogosphere versions” of different points of view."

Which is about 200x better than the Fox News versions of different points of view, which is viewed by many, many more apes than the economics blogosphere. We are doomed.

What is it that makes anyone think Mulligan is worth mentioning? Maybe we could make up something. Bachmann selects Mulligan as her economic advisor. Now that would be worth a laugh.

It seems to me that you can get a weak aggregate demand from a lack of 'enabling commodities'.

For example, suppose a farming community in California were suddenly denied its quota of water for irrigation. Although water might constitute only a fraction of the cost of production, the economy as a whole would collapse for want of it. In this situation, water plays the role of an enabling commodity. All other activity depends upon it, and economical substitutes in large quantities are not readily available.

Could such a problem be solved with a fiscal stimulus? Would it help if people were paid unemployment benefits to stay on the farm? Would it help to build roads and bridges? Would it help to re-train people? Would it help to pay re-location costs?

Clearly, unemployment benefits would be the worst, since they merely postpone adjustment, even if they alleviate suffering. Infrastructure and training might help, if it were oriented towards non-water intensive industries that had a comparative advantage in the respective location. Such interventions would be useful to the extent that the provider of funds was seeking an explicit social return on them. If not, they would likely be misdirected. Interestingly, paying re-location expenses would seem to be a good use of funds, as it would help people start new lives elsewhere.

But clearly, replacing the lost water would be the most direct approach to reviving the economy. Replace the enabling commodity, and the economy can bounce back.

So then, what might comprise the list of enabling commodities. Water. Air. And oil?

Its an interesting idea but I cannot think of any credible candidates for "enabling commodities" critical and scare enough to have caused the recent recession.

that's fking interesting, we are apes sitting before the computers, we are apes sitting on the chair wanting bananas.
SEEMS that apes are cleverer than people.


'Krugman is on the extreme left'

Dear god. Krugman would have been a Republican in the 1960s.

'Have you ever considered the answer is somewhere in the middle?'

Of course! Why didn't I think of that? We need a third way that combines the power of markets *and* government for the optimum results! Revolutionary.

Professor Mulligan seems to have earned the rare distinction of being called out as not simply wrong, but as a fool, by both Brad Delong and Tyler Cowen, now.

"There is still no evidence to confirm the fundamental Keynesian proposition that supply doesn’t matter."

If a student wrote these words on an exam, I would give him a (very) low grade.

My favorite argument by Mulligan was his explanation of the increase in unemployment in late 2008. It was an exogenous shock to the time preference rates of many workers, who suddenly got lazy and quit their jobs, even though many of them seemed to be seeking new ones (and were, in fact, laid off, rather than "voluntarily separated"). This was supposedly due to their foreseeing that Obama would increase taxes, although he has cut them. Funny thing is that the optimal response to expecting a tax increase is to keep your job to earn money now, although maybe they all foresaw that he would cut taxes, so quit their jobs early in anticipation of being able (maybe) to go back to work later.

This remains probably the least plausible explanation of what has happened to our labor markets, although it is neatly consistent with a lot of RBC theories, which I guess is why some people still take Mulligan seriously.

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