The new jobs report

All good news, 243k up but lots more information in the numbers, try @JustinWolfers or @BetseyStevenson for details and interpretation.  The “big loser” here?: Old Keynesianism.  You really can get a recovery when the real shocks are moderately positive.  You will note, as we have been told many many times by many many sources, fiscal and monetary policy have not been extremely pro-active in recent times; in fact the stimulus has been trickling to a close.  The big winners, apart from the American public?: real business cycle theory.  It is part of any cyclical explanation, whether one likes it or not.

Another big loser is those liquidity trap theories which tell us that positive real shocks are bad for the economy because the AD curve has a perverse slope, etc., and that negative shocks might help spur recovery.  That theory is looking very weak, again.  I consider it the weakest economic theory that has any currency in the serious economics blogosphere.


Looking forward to hearing Krugman explain how such a recovery was possible without a bigger stimulus.

He already started his mea culpa explanation: we would be much better much sooner with a huge stimulus.

Of course, that doesn't explain his whole debate with Summers where he basically said that we would be stuck until a huge stimulus came. But I think he will just forget about it and start to idolize Obama again.

When did Krugman idolize Obama? I think this is just more pea-brained partisan hackery "Oh He's anti-Republican therefore he must LOVE the Democrats - there's only a binary choice in the world"

Where you around during 2008? Obama was the great savior. Krugman only started to criticize him (from the left of course) after the health reform debacle.

Krugman has been criticizing Obama from the left, since the democratic primary. This is 2007:

"I recently castigated Mr. Obama for adopting right-wing talking points about a Social Security “crisis.” Now he’s echoing right-wing talking points on health care.

What seems to have happened is that Mr. Obama’s caution, his reluctance to stake out a clearly partisan position, led him to propose a relatively weak, incomplete health care plan. Although he declared, in his speech announcing the plan, that “my plan begins by covering every American,” it didn’t — and he shied away from doing what was necessary to make his claim true.

Now, in the effort to defend his plan’s weakness, he’s attacking his Democratic opponents from the right — and in so doing giving aid and comfort to the enemies of reform."

Huh? Krugman was a Hillary backer, and highly critical of Obama all along.

No no where were YOU Krugman starting criticizing Obama during the campaign - Krugman was a Hillary supporter and kept saying that Obama was not going to be particularly progressive on a number of issues.
You're clearly living in Partisan Hack Fantasy World.

Can you guys please take it outside?

" monetary policy have not been extremely pro-active in recent times"
Operation Twist is still ongoing, which he praised.

I was reading Krugman in 2008; he preferred Hillary Clinton to Obama because he thought that Obama would not fight for a big enough stimulous.

And what Krugman did say, is that there are still millions of Americans out of jobs that a big stimulous would have helped.

Krugman is Nostradamus compared to you anti-Keynesians. Please show intellectual honesty and acknowledge this reality.

@ Bob in SE PA Sadly the comparison should be with Cassandra rather than Nostradamus. In any case who are we to disturb the self regarding smugness inside the Republican echo chamber? Let them enjoy their illusions, it's all they have left.

@James. You really should check your literary allusions before you use them: Cassandra was right. It's just that nobody believed her.

Funny how that happens.

That's almost certainly true, though. We could have been at this point, or an even better point, had we put more money into the economy sooner. Let's remember that actual spending wasn't the entire stimulus and that the down turn was quite a bit more severe than people realized at the time.

And Krugman has never idolized Obama. To say that just demonstrates you aren't connected to reality.

You just cannot prove that. What would be the political implications if we had an even larger debt? The fact that we are recovering now, which is pretty much after all the effects of stimulus are gone, does not play well with your theory.

I can't prove what, exactly?

I have no idea what the political implications would be of a higher debt. If I had to bet, I'd say they wouldn't be so bad, as long as job creation was strong(er). This is more of my pet theory than anything else, as I am not sure what the political science literature says, but I wouldn't be surprised if most people focused on deficits like they have for the past few years in a misdirected anger-like way. In other words, they are angry about them because they there, they are told they are bad, and they assume they are somehow related to the other bad things they are experiencing.

As far as the recovery, I am not sure why it's so hard for people to acknowledge the possibility (and I say that for what I hope are obvious reasons) that without the stimulus, the problems would have been bigger and the recovery would have taken longer. Short of some incredible breakdown in society, we were bound to be done with these problems at some point. But things have to stop getting worse before they can get better, which the A.R.R.A made possible. Or, along the same lines, by taking additional stimulative steps (i.e. increased infrastructure spending and/or an expanded payroll tax cut), things would be even better than they are now.

The difficulty here is that there is no way to measure these things. All the initial unemployment projections from the Obama team was the the stimulus would prevent unemployment from going above 8%! I know the answer to that but we have people acting here on very shaky measurements from the start. So again, since you cannot be certain of what would have happened if we didn't have a stimulus (or if we had a smaller stimulus) we cannot discuss what would have happened if we had a larger stimulus. It is all a guessing exercise.

And this kind of thing is annoying because it will continue no matter what. We are basically recovering now without a stimulus in place (something that Krugman said it would not happen - he was pretty clear on that debate with Summers) and the explanation from you guys is that we can only have this going on because we had stimulus in the first place!

So I ask you: Why not believe that we could have had this kind of 'non-stimulus' recovery sooner if the stimulus had been smaller?

Krugman has never said that recovery was impossible without more stimulus; he has said that it would be unnecessarily slow and painful. He's right -- it would take 8 more years of months like January to return to full employment.

If I'm mistaken on that first point I'd appreciate a link to where he said that.


I guess PK or anyone else could come up with a counter factual that cannot be disproved. Like, if it were not for that deficit-financed stimulus, the recovery would have occurred earlier. Try to disprove that one.

The strong card for the stimulus crowd would be "what austerity"? We're running a $1 trillion plus deficit. Real government spending has increased, not decreased. How is that austerity? Of course, (fiscal) stimulus has gotten us out of the doldrums! Alas, that has not been the mantra. The mantra has been that the US pursued a course of "austerity" for the past two years or so and moreover it is the Republicans' fault. So, either austerity has brought the economy back, or they were just being rhetorical in the use of the term "austerity".

If this is the real business cycle theory at work, I want the money back we spent on that unnecessary and wasteful fiscal stimulus.

Look at state and local cutbacks as a big, big, if not overwhelming, piece of the puzzle.

State and local government spending per was FY 2008 $2.9 trillion; FY 2009 $2.9 trillion; FY 2010 $3.1 trillion; FY 2011 $3.0 trillion; FY 2012 $3.1 trillion. An "overwhelming piece"? Get real. During the same period, federal spending went from $5.3 trillion to $6.2 trillion.

Your problem is that you are looking a puzzle pieces rather than the entire puzzle. It does not surprise me that you would link to a PK chart that merely shows state and local spending as a percentage of GDP rather than a chart that would show spending in real terms. Increases of federal government spending by direct transfers and direct government purchases of goods and services would naturally tend to pump up the federal government's share of GDP and, to the extent of private transfer payments, temporarily boost private GDP.

Again, if you look at the entire picture---did total government spending increase or decrease? If it increased, which it certainly did in real terms, how is this "austerity" particularly in light of reduced government revenues?

In my prior post the total of *all* government spending (state, local and federal) increased from $5.3 trillion in FY 2008 to $6.2 trillion in FY 2012 (not merely federal spending). This, of course, shows tremendous increase in total spending.

I think you are being willfully obtuse at this point, Vivian Darkbloom, pretending as if absolute increases tell the whole story. Spending usually goes up because the populations go up.

From the most recent BEA news release on GDP:

The increase in real GDP in the fourth quarter reflected positive contributions from private
inventory investment, personal consumption expenditures (PCE), exports, residential fixed investment,
and nonresidential fixed investment that were partly offset by negative contributions from federal
government spending and state and local government spending. Imports, which are a subtraction in the
calculation of GDP, increased.

The acceleration in real GDP in the fourth quarter primarily reflected an upturn in private
inventory investment and accelerations in PCE and in residential fixed investment that were partly offset
by a deceleration in nonresidential fixed investment, a downturn in federal government spending, an
acceleration in imports, and a larger decrease in state and local government spending.


The increase in real GDP in 2011 primarily reflected positive contributions from personal
consumption expenditures (PCE), exports, and nonresidential fixed investment that were partly offset by
negative contributions from state and local government spending, private inventory investment, and
federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

Brian J, you clearly are thinking off the top of your head.

First, the discussion here is about fiscal stimulus. Let me put that in plain English: this means government (deficit) spending. You could also have mentioned "real per capita spending" which would have been a more meaningful measure. (I'm being kind here by suggesting that you might consider "real" spending to arrive at real per capita spending"). Here's an assignment: go back to the data and pull the number on real per capita government spending from, say FY 2007 to the present.

Next, Brian, you are again looking at puzzle pieces. You have pulled a narrative from the BEA that suggests a *quarter-on-quarter* decrease in government spending. So, while the level of spending is still well, well above what it was prior to the recession, you are pointing to the fact that the federal government went from one level of very elevated level ofdeficit spending to a slightly lower level of elevated deficit spending to support you view that this is "austerity". PK would be proud! In fact, I think you've hit on a possible definition of "austerity": From henceforth, "austerity" shall be defined as any level of government deficit spending that is less than $1.1 trillion per year or, alternatively, "less than 10 percent of GDP" or, alternatively "less than the amount of federal spending that Paul Krugman, retrospectively, thought might be a good idea".
You can find the historical data here: (Table 1.2).

Vivian Darkbloom,

I am not thinking off the top of my head. You are simply throwing out pieces of information that are, at best, failing to capture trends and relative shifts or, at worst, completely beside the point.

If you want to discuss real per capita government spending, please put up the charts or tables you are looking at.

Also, you can try to be cute by creating your own definition of "austerity," but this won't distract from anything.

You will find some very informative charts on real per capita spending here:

The data at the above link goes to 2005. From 2005 the per capita spending has increased from $14,879 to $19,785 in FY 2012. The big jump occurred from FY 2008 to FY 2009 ($17,590 to $19,417). Latter data is from

As far as *real deficit spending per capita*, which is, of course, the better definition of "stimulus", the jump is even more dramatic. FY 2007 $534.4; FY 2008 1,511.5 ; FY 2009 4,615.9 FY 2100 $4,189.5 ; FY 2011 4169.9 ; FY 2012 $3,505.8

So, both real per capita spending has gone up considerably since the recession and, more importantly, deficit spending per capita has increased, on average, more than seven fold.

So a paper from 2006, before any of this started, and a site that looks like it was designed by teenagers in 1997 constitute your evidence?

Anyway, seriously now, let me ask you this: why do you insist on using absolute terms? You seem to be getting a different conclusion that pretty much everyone, including Ben Bernanke.

Vivian, according to the figures you have provided, total government spending increased in nominal terms by 4% per year over the past four years. By contrast, this same measure of total government spending increased in nominal terms by 6% per year between FY2002 and FY2008 (I deliberately picked this window to avoid the increase in spending after 9/11: a longer window would show a more dramatic annual rate of growth).

So we have 6% average nominal increase during a relatively stagnant economic period followed by a 4% average nominal increase during the worst downturn since the Great Depression.

Sorry, but the data simply do not demonstrate some enormous expansion of government over the past four years.

Did he say that it would begin to accelerate when stimulus was withdrawn?

Keynesians don't say that, but it seems to work that way from history,

Did you watch his debate with Summers? He was pretty clear then that we would remain 'stuck' until a large shock (i.e. stimulus) came along. He even mentioned the WW2 example in that discussion I believe.

krugman and keynes said that the economy would recover without keynesian polcies; just slowly, and it certainly has followed that scenario. it is a tragedy that so many people have remained unemployed for so long; remember Obama did have a stimulus; Krugman merely said that it was not strong enough to restore robust growth.

Now, if we want to deal with counterfactuals; would we be in the same position as Ireland is now if Obama had not gone after some kind of stimulus.

Wow. I have a lot of respect for Tyler Cowen, but this descends into hack territory. The Fed has had the spigot wide open and is periodically shaking the hose, while the federal government has been running trillion-dollar-plus deficits since 2009 on deep tax cuts and increased spending. Any "austerity" has so far been confined to modest reductions in the rate of future spending increases which haven't yet materialized. The fact is, Keynesians have been getting what they want, just not as much as they would prefer or targeted the way they would like. Compared to the effects of real austerity in the UK and Europe, I'd say whatever recovery we're enjoying provides some evidence to support their models, and that's true whether or not the federal government has labeled its policies as "stimulus" in the last couple years.

I agree.

It takes a strange world view to believe that policy at the federal level hasn't been sharply accommodative. The only people who think otherwise are those the who confuse policy instruments (funds rate settings, Fed balance sheet positions, taxes and transfers, and the like) with policy outcomes and/or intermediate targets like the level of nominal GDP.

Real austerity in the UK? Shouldn't you measure that the same way? What's their deficit as a percentage of GDP?

i do not think that the size of the deficit is what matters; it is the amount of increased spending by the government in comparison with the spending prior to contraction.

I wonder if anyone has any figures about this metric?

The UK? The UK has a larger percentage of GDP deficit than the USA, at 8.8%.

You can say that the US is still stimulating because of the large deficit (true), but then you have to say that the UK is as well.

Thomas and John, I agree. Not accurate to lump the UK in there. Thanks for the correction.

greg, i think that Thacker is wrong; please read my criticism. Stimulation is based on increases in government spending, not on the size of the deficit. If one is lucky, and government spending causes increased economic activity, it would bring the deficit down. So, deficit, is not what we should be thinking about.

John you are wrong, deficit as a % of GDP is often not a good metric to use in inferring whether short term fiscal policy is expansionary and contractionary (especially under current conditions), because GDP is not independent, it is also impacted by government spending (hence the numerator and denominator are impacted). This is the whole argument against austerity when interest rates aren't going to be able to fall further, it is self-defeating in a liquidity trap and/or when the private sector debt overhang is very large, and doesn't actually lower debt to GDP. This was the experience of Japan over the last two decades and the opposite of the experience in the US after the great depression (a large increase in spending did not raise debt to GDP). See Richard Koo's work.

People keep saying "Keynesians can say anything, more fiscal stimulus would have done more, there is no counterfactual", but there definitely is, besides these two relevant historical events (with similar conditions, large private debt interest rates near zero) we can simply look across countries. The nations with larger fiscal deficits were able to help the private sector deleverage and get back to a place where they could recover (Germany, Canada, US, China). The countries that bought into austerity have private sectors that have not been able to deleverage nearly as effectively, and hence their economies are not in a state of possible self sustaining recovery (albeit slow recovery in the US and elsewhere because of this debt fear mongering which has impeded better policy).

That somewhat oddly assume zero-baseline budgeting. Otherwise, merely maintaining spending levels in the face of decreased revenues is "Keynesian stimulus" and I've never heard anyone argue that.

Of course, the Rahn curve (a href="">and a recent NBER paper) argues that for some short-term pain that is basically an accounting identity, we could improve long-term growth, by cutting spending.

But scratch a Keynesian and you nearly always find a statist lurking beneath. That's why almost none of the "Keynesians" argue for nondefense spending cuts when times are good.

Yeah, old Keynesism never said monetary policy couldn't work, just that it would be less efficient than government directly hiring people. Given Bernanke standing before Congress while Republicans accuse him of allowing 1.8% hyper-inflation to support employment I think the answer to "where did the stimulus come from?" is pretty simple and obvious.

Quantitative easing.

Very simple: Economic developments over the past 70 years prove Keynes right and the Wall Street puppets like Cowen wrong. Everything thar Cowen predicted over the past three years were as correct as George W Bush's Weapons of Massdestructio story.

Other than Cowen Krugman understands economics.

Krugman: That was Keynes’s whole point in The Economic Consequences of Mr. Churchill — not that the return to gold at too high a parity would mean depression forever, but that it would subject Britain to years of unnecessary suffering.

Here you are then.

Makes sense to me.

Is there a quick way to distinguish between Old Keynesianism, New Keynesianism, and Keynes' actual thoughts?

The jobs report is good news, but are you really saying, based upon Dec and Jan jobs reports, that we are recovered from the Great Recession as a result of gridlock austerity?

On a long enough timeline, everyone dies. This isn't an argument that eating healthy is hogwash.

Wise words.

I don't think Tyler (or anyone) is totally sure why we are recovering. But it is clear that we are recovering and it is also clear that this is not being created by Keynesian stimulus.

Do you deny that stimulus stopped the bleeding?

It seems to me that the stimulus exacerbated the problem.

Weakest recovery on record.

How? In what way does money injected into the economy exacerbate the problem? Yes, over the long term, debt matters. But if I can pay my rent this month with credit cards instead of defaulting, it's still better for my landlord.

In what way does money injected into the economy exacerbate the problem?

Doc Merlin, TallDave:

There are plenty of papers that show the exact opposite. Here are a few: (although this once is nuanced)

Yes, but they tend to use inferior methodology. (Military sites? Really?)

At any rate, he asked how this could happen, and the links explain it.

Military spending? That's all that you pull out of it?

Here's a better link that sums up a bunch of papers quite nicely. Not that this will matter to you, but others might find it interesting.

Yes, I pulled out that it is a pretty poorly designed study. The Mercatus studies are much better on the general question of gov't injecting cash. There's also the famous Harvard study.

And again, he asked for an explanation. You may disagree with the explanation, but it's there.

Based on? Why don't you try comparing across countries. Some of the largest fiscal stimulus packages came from.... Germany, Canada, China. The countries with larger fiscal stimulus were better able to help the private sector deleverage and put it on the path to recovery. THAT IS THE WHOLE POINT, somwhat recovery now in the US (and the other countries I mentioned) and not in the austerity havens proves the virtue of Keynesianism, it isn't the short run impact, it is the longer run impact of allowing the private sector to get back on its feet.

FYI wins the thread.

Of course he does, as long as you consider "we are recovering at a pace that would take 20 years to return to full employment" definitive proof that Keynesian stimulus was not needed.

Tyler Cowen has never met a Republican economic talking point he didnt love.

FYI's comment implies we don't really know what economic policies our political leaders should follow, or whether any of the likely* policy choices will really make a significant difference in the short term. The state of the economy will be a huge factor in who wins in the November election (president and congress), yet we can't even say with certainty who has the right policy, despite the overconfident punditry from both sides.

Not surprising really, since few agree on what really happened in the 1930s. Must be depressing to be an economist.

*obviously there are policies that could be quite disastrous in the short term that are fairly unlikely to be chosen by any possible administration


My point was that you focused on military spending rather than anything else, and that wasn't all those papers discussed.

Interesting link, but I give you this:

A single jobs report doesn't prove a whole lot. One swallow does not make a spring.

But if this really was significant, then looking forward to hearing the "deficits will kill us all" and "Obama is destroying the economy" brigades explain how such a recovery was possible.

Surely all they have to do is accept the claims of their opposing "the Republican austerity and gridlock is destroying the economy" brigades, and then compare this job report to previous ones under this recovery, no?

One side has been claiming policy they don't like is destroying the economy. The other side has been claiming policy they don't like is slowing recovery.

Even this job report is below the average for a recovery. It's about average for a report under the entire Clinton presidency.

Nice chart. Any reason to think that the Republicans won't use it to compare average job loss throughout the Obama Presidency with the job gains since they were elected?

I mean, sure, you're counting on people looking at the derivative. I don't recall that generally working as a political tactic; not under Republicans, not under Democrats.

Funny thing is that the Democrats have a better case by looking at the GDP numbers, but Democrats traditionally care about unemployment, not GDP.

Of course, Scott Sumner will make the case that it's all about QE and lack thereof, not irrelevant fiscal policy that is inevitably upstaged by the monetary authority's reaction.

One side has been claiming policy they don’t like is destroying the economy. The other side has been claiming policy they don’t like is slowing recovery.

Perhaps, but which side is which here? There are hysterics on both sides, accusing the other of intentionally destroying the economy. I certainly grant that you have the right-wing talk radio extremists on the Right, but you also have conspiracy theorists like Paul Krugman on the Left.

Oh, give me a break. You don't have to like his politics or agree with his policy prescriptions, but to pretend Krugman is a conspiracy theorist is just nutty.

to pretend Krugman is a conspiracy theorist is just nutty.

Certainly he and other Democratic partisans have claimed that the Republicans are intentionally sabotaging the economy in order to hurt Obama's reelection chances. That's a conspiracy theory.

You can believe that the conspiracy theory is true, but it's certainly a conspiracy theory.

John Thacker,

Do you have any sort of direct proof for that claim?

I've flirted with this notion myself. But then, what should we think when the Republicans have done nothing but hyped surges in regulation that have little to nothing to do with a shortfall in demand and tried to pimp high end tax cuts of dubious effectiveness as their main policy prescriptions? Once again, they are producing solutions in each of problems.

"Certainly he and other Democratic partisans have claimed that the Republicans are intentionally sabotaging the economy in order to hurt Obama’s reelection chances."

"Do you have any sort of direct proof for that claim? "

How about this Krugman editorial from the NYTimes:
" Axis of Depression

What do the government of China, the government of Germany and the Republican Party have in common? They’re all trying to bully the Federal Reserve into calling off its efforts to create jobs. And the motives of all three are highly suspect.

So what’s really motivating the G.O.P. attack on the Fed? In short, their real fear is not that Fed actions will be harmful, it is that they might succeed.

Republicans want the economy to stay weak as long as there’s a Democrat in the White House. "

I guess it really depends on how you want to define a conspiracy theorists. But since many Republican politicians have made it quite clear that if stimulus by the fed boosts the economy to help Obama's re-election chances they will be pissed, I'm not sure how you can deny that a significant portion of Republican politicians are hoping for short term economic failure to discredit Obama. Can we actually call something a conspiracy if it's not actually a secret? Maybe you can defend these guys by arguing that they really believe we need to take our medicine now for longer term benefit, but at that point you're just arguing the details. If you choose to believe that high profile Republican politicians aren't hoping for bad economic news for Obama's sake, then you're just choosing not to listen to what they say. I don't see how it's reasonable to call someone else a conspiracy theorist in this case.

But since many Republican politicians have made it quite clear that if stimulus by the fed boosts the economy to help Obama’s re-election chances they will be pissed

What they've claimed publicly is that they think that the risk of runaway inflation makes it not worth it. There's a hundred years of history of inflation fears among the Right in this country. Go back and read contemporary accounts of the Great Depression.

You certainly may think that that's balderdash (I think that since V has declined, that we do need more money and that they're wrong), but they have avoided publicly claiming that they want the economy to be worse. You may think that they policies that they're promoting will obviously make the economy worse, but they claim that they will make things better.

They can be deluded or mendacious, but they're not coming out and saying that they want the economy to be worse.

You're committing the same mistake as the right-wing radio conspiracy theorists if you confuse

1. They want this proposed policy.
2. [I think] this policy will be harmful to the economy.


1. They want to harm the economy.

No matter how obvious you think 2 is, it isn't to the other side. And even if politicians on the other side are being mendacious, they almost surely haven't said so in public, no matter what the partisans on your side claim. For even if the politicians don't think that their own policies will work, their voters themselves at the very least deluded themselves.

I'm not sure who is responding to me at this point, since the responses don't space out. However, I will say two things. One, of course they aren't going to be so stupid as to publicly want the economy to falter. A lack of a specific statement proves nothing one way or the other. Two, it's not, I suspect, so much that they want the economy to drop; it's that they don't care if it does, if the end result is their party regaining power. There's a difference.

Or I could just post this, from Scott Sumner, who goes a lot further than Krugman has, to the best of my memory, ever gone: There, he talks of treason.

John Thacker:
"You’re committing the same mistake as the right-wing radio conspiracy theorists if you confuse

1. They want this proposed policy.

2. [I think] this policy will be harmful to the economy. with

1. They want to harm the economy."


Well, that was funny. Brian J shifted seamlessly from claiming that calling Krugman a conspiracy theorist is nutty to supporting Krugman's conspiracy theory.

But since many Republican politicians have made it quite clear that if stimulus by the fed boosts the economy to help Obama’s re-election chances they will be pissed,

Beyond ridiculous. Please point to any statement from a GOP politicians that they oppose boosting the economy. They have opposed measures that they believe will hurt the economy.

And that's why Krugman is either a conspiracy loony or (more likely) just being dishonest to throw some red meat to his fanbase. He very clearly states he believes the Republicans want to hurt the country in order to hurt Obama. Not because they value long-term growth (because, as he's made so very, very clear, he believes any such statements are lies) but because they're awful people who hate Obama so much they would ruin the country to get rid of him.

BTW, Krugman's style there is pretty much exactly how Ann Coulter argues, too, except she's usually doing it with a bit of tongue-in-cheek humor whereas Krugman is generally morosely earnest with his bile.

Actually, TallDave, all I did was link to Scott Sumner, who quite clearly called what Republicans are doing treasonous, which is farther than Krugman has ever gone.

Heh, you must be talking about a different Paul Krugman, the one who writes in the NYT has not shied away from the "treason" card.


Not exactly the same charge, but I had forgotten about that nevertheless.

Exactly. The narrative has been "Obama is destroying the economy" vs. "the Republican austerity and gridlock is destroying the economy." If the economy doesn't actually get destroyed then maybe it will turn into "Obama saved the economy" vs. ""the Republican austerity and gridlock saved the economy."

See the above link to employment chart and consider that Obama got some of what he wanted early in his presidency and that Republican austerity and gridlock kicked into high gear somewhat later.

The chart you linked? Looks like the change in payroll jobs has been positive since the Republican House was elected, and was quite negative early in Obama's presidency, when he "got some of what he wanted" according to you.

Of course that's horribly unfair, but then again so is and was the assessment of George W. Bush's responsibility for the business cycle, including when he took office.

I'll settle for that, it seems a lot more useful politically than real data.

Shouldn't the unemployment rate be rising in a recovery?

Remember that this is one data point, data are noisy, there are lags in discouraged workers again trying to find jobs, etc.

good news is good news (this is not the first report to show some signs of life in the labor market) ... I just hope "real shocks are moderately positive" continues. A surge in oil prices and an earthquake in Japan rattled the hopes of solid recovery last year.

On what objective planet is this good news ?
4 years or so post crash, millions of jobs lost, and it is "good news" when we create just barely enough jobs to fill the natural increase ?
Please, before you say this is good or bad, or add other subjective adjectives, how about some data
given a data point (jobs/month) how many years to recover all lost jobs
job quality - are these min wage hamburger flippers ?
special factors, like Census hiring, etc (is there a jobs analog to core vs headline inflation ?)

PS: Tyler - I don't understand a word of your intro; Krugman gets more press because he writes more clearly for a larger audience; your intro paragraph is really intelligble only to professional economists

Or anyone with any access to a freshman level econ textbook, or an encyclopedia, or google.

what the heck is a google?

On what planet is incremental improvement not good news? There's no way that we're going to wake up tomorrow and find out it was all a dream and we're at full employment. This is the way change happens: Gradually. And the fact that the gradual improvement seems to be coming at an accelerating pace is as good as it gets.

No, it could be made much better

I think that's an awful lot of weight to put on the data.

Keynesian economic theory doesn't say "the economy doesn't get better without stimulus", it says that recessions can be caused by an inadequacy of aggregate demand, that often it takes a long time to come out of such recessions because the market is slow to adjust prices and because of the paradox of thrift, and that fiscal deficits or expansions of the real money supply can close the "output gap" more quickly than market forces alone, and can prevent deflationary cascades.

In what way is that inconsistent with a relatively slow and weak recovery, persistently low employment/population ratios, and moderate inflation after massive amts of monetary easing?

I think that is what Tyler meant by "Old Keynesian" theory. In old Keynesian theory, there are no dynamics to speak of. Particularly at the zero lower bound, if there isn't some stimulus from somewhere there is no mechanism for full employment to be re-established. Unless you get lucky that is, with some favorable animal spirits. But the theory is loose enough that you can explain away anything if you try hard enough.

How old is old Keynesian? Keynes himself didn't deny that the market would move to a long-run equilibrium (though we might all be "dead" by that point). The simple IS-LM model, which is a favorite of people dubbed old Keynesians allows for deflation to increase the real money supply and reestablish equilibrium.
Yes, at the zero lower bound, that mechanism can break down. It hasn't in our case because the fed has reestablished mkt expectations of moderate inflation (so *real* interest rates can be below zero) and pushed down the outer end of the yield curve. Oh, and budget deficits have helped the IS curve not drift too far to the left when things got really ugly. We're not in a liquidity trap, but for a while there it did look like it, and I'm sure we would've ended up there if not for Bernanke and the 2008 stimulus.

It is convenient when one can pick one's strawmen. From now on I'm only going to argue against James Grant ;-)

Median household income started ticking up in September ( The explanation that sluggish growth was caused by a lack of aggregate demand caused by lack of access to medium of exchange on the part of many consumers would explain why things began to tick up when income began recovering.
Keynsians are less likely to be accurate going forward as the upturn appears to be cyclical unemployment turning structural (thus the rise in median income despite constant unemployment and the increase in spending on upscale goods: However, actual Keynesians started crowing about signs of stabilization before this employment report, and stabilization is still all we've seen at this point. ( and, so so far they seem to be doing okay just by being Captain Obvious.
At the very least, they are beating people who ignore aggregate demand, obsess over non-existent inflation or think that things are getting worse because they are obsessed with NGDP (

"All good news,"

8.3% is "all good news" to a tenured professor without fear of the being one of the planned layoff increase announced yesterday.

I'm not satisfied with this - what kind of jobs are these? Good ones or McDonalds jobs? Also this number is far too low it needs to be at least twice this number.

All jobs are good jobs.

No they aren't - that's ridiculous polyannaism. We need the rate of growth to be much much higher and they need to be quality jobs with good pay and prospects

Silly Tyler. Obviously this job growth was caused by the 2009 stimulus, and the New Deal, and the construction of the Great Pyramid by ancient Egypt. Have you never heard of policy lags?

Makes sense. The Great Wall of China had to kick in sooner or later.

I think you guys are way under estimating policy lag here. I blame the current recession on the original out migration from Africa. Stimulus effects from the Pyramids and The Great Wall is still millenia off. Obviously. [rollseyes]

Those were counterbalanced by the negative shock of leaving the oceans.

Think of all the stimulus we'll need to counteract the Yucatan asteroid impact!

Where, exactly, is the "serious economics blogosphere"?

Ummm...this is bunk. If you recall, we did have a stimulus. And, it did work initially. Then, in 2010 -- the GOP took over in the House and in many states. Which started a massive round of Gvt fiscal retrenchment at the state and local level -- and the inability of the federal government to continue fiscal stimulus. Although, Obama did win an extension of the payroll tax cut, unemployment benefits and middle class tax rates. So, in 2011 you saw the recovery that was evident at the end of 2010 get shocked by fiscal austerity at the state level and the withdrawl of fiscal stimulus at the federal level.

What is this "fiscal austerity" people are referring to?

In this case, "austerity" refers to the fact that state and local governments were cutting while the federal government was trying to do the opposite. Here's one good illustration of this:

It seems to me that the federal government not only "tried", they succeeded! Now, what would happen if you took the additional federal spending and subtracted the reduced state and local spending? What the result be positive, or negative?

I think you would see that the consolidated fiscal impetus was positive until approximately the middle of 2011 at which time it turned negative.

And it should be noted that we had a few even stronger readings in early 2011, even as real headwinds mounted.

Off the top of my head, I am not sure. My guess is, we'd still run a deficit at the federal level.

However, I am not really sure what you think this proves. We had a much larger output gap than people realized when the problems first appeared and in fact a weaker stimulus than we needed. We probably would have had this even if state and local governments hadn't been pulling in the opposite direction, but they were, and they made things worse.

"Off the top of my head, I am not sure. My guess is, we’d still run a deficit at the federal level."

You should stop thinking off the top of your head. It appears as though you are merely repeating Krugman sound bites (aka "puzzle pieces"). There is no need not to be sure. Why express such an opinion based on guess work? I thought this was the "serious blogosphere". I've given you the numbers above. Real government spending has experienced a tremendous increase over the past four fiscal years. However, if you want to define "stimulus" as a "deficit at the federal level" (rather than simply total real spending), fine. The amount of stimulus has been north of $1 trillion for the last four fiscal years. Again, is this "austerity"?

Vivian Darkbloom,

I'm not expressing an opinion based on guesswork. I am merely saying I haven't done an exact comparison of the numbers, how they've changed, how they might have changed, and so on. But then, I never claimed to have done so. Consider this an informal discussion rather than a conference presentation, with the obvious limits to the analogy noted.

As far as the numbers you have given me, as I said above, absolute numbers don't reveal all that much. It's also important to note the difference between running a deficit, which is valuable, and directly spending. They can be related, but not always.

"Why express such an opinion based on guess work? I thought this was the “serious blogosphere I’ve given you the numbers above.”

+1, For the use of Data to support an assertion.

Here's a link to a legitimate site that has data, the same one I posted above:

The link you posted doesn't seem to indicate that State spending dropped more than Federal spending increased. So that doesn't seem like it's proof of austerity.


Oy. Not all spending has the same effect. And of course we are spending more in absolute terms; that's usually what happens as populations go up and/or certain expenses come up.

Also, I'm not sure why so many people here are settling on a simpleminded definition of austerity. It's not an exact, measurable state; it's a relative concept.

Spending hasn't fallen. I don't know why so many people on the left are confused about this. And no, this is not something you would measure on a per-capita basis, unless you're talking about the effect on per-capita GDP, which we aren't.


I am not sure why so many on the right are speaking in absolute numbers.


Once again, austerity doesn't mean things have to be at one particular level. Why so many think austerity is more or less like a balanced budget is beyond me, but it's not.

"Once again, austerity doesn’t mean things have to be at one particular level. Why so many think austerity is more or less like a balanced budget is beyond me, but it’s not."

I don't know, maybe because some of us actually believe words have meaning independent of what is convenient to us at that particular time.

austerity: In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided.

None of that remotely resembles current governmental spending which is much higher than normal.

Brian -- Have you ever in your life heard a recession defined in per-capita terms? No, you have not, because it isn't done that way.

The only reason to do that is for some pretty blatant goalpost shifting.

"I don’t know, maybe because some of us actually believe words have meaning independent of what is convenient to us at that particular time...

None of that remotely resembles current governmental spending which is much higher than normal."

I agree, words should have meaning. Government spending might be higher, but it could be higher still, for any number of reasons. You can make slightly changes to government spending but still have a policy of austerity.

"Brian — Have you ever in your life heard a recession defined in per-capita terms? No, you have not, because it isn’t done that way.

The only reason to do that is for some pretty blatant goalpost shifting."

There are a lot of different ways to define things. I don't know why it's so terrible to define it as a percentage of GDP.

"I’m not expressing an opinion based on guesswork. I am merely saying I haven’t done an exact comparison of the numbers, how they’ve changed, how they might have changed, and so on"

Ummm, so, you are guessing.

Ummm, no. There's a difference between guessing in the form of hoping something might be right and having a discussion, however informal, based on information that hasn't been studied thoroughly, analyzed, defended, and so on. In other words, there's a difference between doing something like leading a class or blogging and writing and defending a paper.

"In other words, there’s a difference between doing something like leading a class or blogging and writing and defending a paper."

So, which of these things are you doing? Hopefully, not leading a class. From your description, It appears that guessing is ok for leading a class or blogging, but not for writing and defending a paper. And, I thought this was the "serious economics blogosphere". (I trust you are not in the classroom). Has it ever occurred to you that if you don't really have any grasp of the facts, you might just be a little more reticent about expressing those opinions?

Vivian Darkbloom,

I think I have a good grasp of the facts. May I suggest that you stop taking a mere phrase and turning it into something that it wasn't? You know perfectly well, or so I hope, what I meant. But on the off chance you didn't, let me say, there's a difference between sitting around the GMU lunch room and talking about things and presenting a paper at a conference.

And that's why the recovery grew stronger as 2011 came to a close...


Don't you think you're doing an awful lot of extrapolating from a single data point? I mean it's nice to have a modest upside surprise for a change, but let's not kid ourselves here, relative to the overall unemployment situation, this is a fairly average increase in employment that only looks "good" relative to recent months.

But let's say this is the turning point, and from here on out we have 240/300/400,000+ net jobs created per month, don't you think it's possible we could have gotten to this point years earlier with more aggressive fiscal or monetary policy, and that, a la Scott Sumner, negative nominal shocks exacerbated a negative real shock?

"Doing An Awful Lot Of Extrapolating From A Single Data Point" is Tyler's middle name. See his Ireland posts.

We still have 5.5 million jobs to go before we're even back at the pre-recession employment level, and that with a growing population. A little early to declare victory on the employment front just yet.

Kinda pathetic name calling. Grow up and admit your crystal ball is not working.

Did i hear that 1.2 million workers left the workforce?

Recovery? Not here in the real world.

Where is the productivity shock? Where is the end of the great vacation? What does this have to do with real business cycles? The natural rate of interest is up (people are borrowing and spending more), and the Fed has recently rotated in a much more dovish group than was previously the case. This looks like standard NK to me, which is of course built on an RBC foundation but I don't see how this development is RBC at all.

Standard NK models have effects from changes in the composition of the Fed without any policy change?

If the change in Fed members pushes up inflation expectations, then yes. And you can see in the 5 and 10 year breakevens that inflation expectations were indeed rising in anticipation of the new, more dovish FOMC. But also if the natural rate goes up and the Fed policy rate is fixed, that's gonna kick up AD as well. And I see lots of evidence for that in, for example, renewed purchases of consumer durables, progress on deleveraging, etc.

Where is the productivity shock?

We have the similar GDP with way less workers.

And that's a "shock" how? Hasn't that been the case for a little while now? Isn't that an odd explanation for a suddenly sunny jobs report?

Productivity increasing isn't a productivity shock?

Not that odd, unless you believe Obama's claim that ATMs are stealing our jobs.

Not even close to what he said, but whatever.

Compare Obama's recovery to Reagan and it looks anemic.

Of course, the regime will claim that what they faced was unprecedented, but the situation in the early 80's was very much like to the current one, with similar claims that we had better get used to diminished expectations..

The Obama recovery is to the Reagan recovery as a Chevy Volt is to Ferrari.

Wow even I know this one. The Reagan recovery started from a period of very high interest rates, which had been raised very high on purpose to choke off inflation. Lower interest rates and boom! recovery.

To compare this to the situation Obama inherited is gross negligence.

What you know is absolutely wrong. The high interest rates were a consequence of high inflation. First inflation was decreased, then rates came down. 30 year treasury yields hit 13% in 1981 and did not decline to below 10% until 1986. They remained in the 8% range until the early 1990's.

Look at the fed funds rate: 19% in 81, 9% in 83. The point is the Fed had much more wiggle room and wasn't up against the zero lower bound.

Inflation fell faster than Fed funds rates, also.

Wrong again Rich. Volcker controlled the Fed Funds rate, not 'inflation'. He is quite rightly lionized for purposefully raising it to choke off inflation.

Rich -

The 1980's recessions were quite different from the current one. Both are characterized by continuing oil shocks, albeit the current one is primarily demand-driven, the 1980s were supply-driven.

The recent recession, however, was characterized by a financial crisis as well. That's not a problem we had in 1980.

Ah, let' compare this to Britain before we say this was not from stimulus rather than the alternative of austerity.

We're we running deficits in the last two years and extending UI and doing SS tax seduction to workers.

You tell me if this is Keynesian or not. Evidently Tyler claims it isnt

Deduction, not seduction, but it is interesting to think of it that way,

I think the point was that Keynesians said we would need a much, much larger stimulus with shovel-ready projects rather than tax cuts in order for the economy to recover. Please correct me if I'm incorrectly describing their position

My impression is that Keynesians consider both tax-cuts and shovel-ready projects to be stimulative responses to recessions. I.e., both are considered by keynesians to be fiscal policy. At the very least, that is what I remember from intro to macro-economics textbook description of Keynesians.

Britain is running a larger deficit than we are.

TallDave, huh?

Note that British GDP is declining. Would you expect, cet par, that its deficit would increase or decrease from that.

Down is up from your point of view. Better tell the British that Cameron is a closet Keynesian, not an austerian.

Shrug. Our deficits have been driven largely by GDP decline as well.

"Austerity" is the wrong word, what they are attempting to achieve is solvency.

And I think if you argue that deficit spending is appropriate stimulative counter-cyclical policy, then you'd have to say that policy isn't working very well in the UK. If you think the UK should be spending even more you have to explain how that's possible given their debt situation.

There's a difference between merely running a deficit and new, active spending that causes a deficit or causes it to get bigger.

This is a really disingenuous post. Tyler has refused to make predictions of his own and now he's claiming that the jobs report is vindication of his favored positions!? This is Monday morning quarterbacking at its worst.

Get in the game, Tyler! Make some predictions yourself based on your own favored models. If you're not even in the game then you're conceding to Krugman et. al. by default.

Isn't the point of this post that the health of the economy is largely beyond the control of any entity, even the government? That the economy will get better, or worse, or stay the same, based on factors way beyond anyone's control, and we are for the most part just along for the ride?

So he's not saying "my policy was right" he's saying "things happen irrespective of anyone's policy."

Although that's a policy too.

If no one knows what policy works then why not shitcan all the economists and economics departments?

Reality is that some policies work lot better and yo can look at the predictive records to compare.

Krugman's predictions over the last 5 years have been lightyears ahead of the others.

The only truly correct prediction is that no matter what happens, many people will claim Krugman correctly predicted events.

Here is a sampler- all from around early 2009
1. Stimulus too small
2. Interest rates and inflation will stay low in the face of all the Fed actions - bond vigilantes will be MIA
3. Austerity in UK and most of Europe will backfire (early 2010 perhaps?)

and then from early Bush years
1. There is no case made for WMD
2. Warnings about the housing bubble (2005-6?)

I could go on - let's hear about the great prediction record from the right:
1. Bond vigilantes?
2. Hyperinflation due to flooding by the Fed? - Niall Ferguson, Schiff, .....
3. No housing bubblle - Greenspan et al
4. Bush tax-cuts will so goose the economy that the debt will be wiped out by 2010 - Heritage Foundation in 2001
If you have any interest in how things will unfold in the future then Krugman's calls on interest rates have proven right and even big investors like Bill Gross (PIMCO),Paulson Hedge Fund have been wrong.

I'm no fan of Keynesianism, but I'm at a loss as to what positive real shocks are being referred to.

This recovery is due to George Bush's May 2008 stimulus payments.

Is it possible to defend that statement by using all of the same arguments used by Krugman apologists?

If you're going to make Krugman really mad, you should claim it's due to the 2003 invasion of Iraq.

How on earth did you reach the conclusion that this is a victory for RBC theory ?

i) The theory had no explanation for why the crisis began in the first place - after the fact some half-assed explanations have emerged.

ii) There solution did not involve any kind of fiscal stimulus.

iii) In a follow up post, please could you explain how the mechanisms that led to this recovery align with those consistent with RBC theories.

The RBC thing is a complete non-sequitur. Talk about throwing everything anti-Keynesian out there and seeing what sticks!

i) Of course it does, the RBC theory would say the crisis began with a commodity price shock, then prior gov't intervention in the housing market amplified the negative shock into a crisis as all the weak hands were shook out of housing.

ii) The recovery doesn't seem to, either.

Any theory that says this crisis began with an external shock is clearly wrong, regardless of the debate about Keynesianism.

You didn't look at the graph, did you?

The commodity price spike had very little to do with the housing bubble. The only connection is possibly that the excess liquidity moved from housing to commodities. Caballero and others have published a paper supporting that argument - and connecting it to the global savings glut. But I can't think of one intelligent piece that shows that the recession was caused by that commodity spike.

TC is out of his depth in this post and flailing.

No one said the price spike had anything to do with the housing bubble. Commodity price spike (price shock) leads to recession leads to mortgages that can't be paid leads to housing bubble finally bursting.

You don't think price shocks can cause recessions? Really? And you think Tyler is out of his depth? I see.

Some facts :

i)The housing market took a downward turn (summer 2007) before the commodity spike bubble really erupted (spring-summer 2008). By the summer of 2007, it was already clear (to those who are paid to understand these things) that something strange was happening in the credit market.

ii) You claim : "Of course it does, the RBC theory would say the crisis began with a commodity price shock".

I could go on. But read your post, and try and understand if these statements are consistent. You are certainly out of your depth.

i) Seriously? Do you not remember when the financial crisis happened?

ii) I don't think you read the link.

Glass houses, my friend.

Actually, the price shock argument was already being made in May 2008.

It's really textbook RBC, I don't know why this is confusing for people.

The financial crisis began in the summer of 2007 (possibly before). Almost anyone who works (or worked) for an investment bank will tell you that that is when the credit markets began behaving strangely. From that summer there was a downward spiral till the end of summer 2008 when things went completely awry.

Lots of people who are much smarter and better informed than the idiots you linked to have examined this issue. See, for example, Raghuram Rajan's book, , or Gillian Tett's or Viral Acharya and the others at NYU Stern - no one believes that the commodity price spike precipitated the financial crisis. It is a waste of my time to interact with someone who is obviously as misinformed as you are. No more replies from me. Keep blabbering on.

The correct answer is mid to late 2008. Credit markets "behaving strangely" isn't a crisis.

Again, you don't seem able to read the link or even what I wrote. No one is arguing that rising commodity prices caused the financial crisis directly, just that it was a negative shock, which helped precipitate the conditions that led to the economic crisis by exposing the fragile nature of the housing bubble.

Thanks for stopping by, it was a pleasure to talk to someone so intelligent and civil!

Since no one wants to read the link:

The decade of the 2000s saw a global explosion in prices, focused especially in commodities and housing, marking an end to the commodities recession of 1980–2000. In 2008, the prices of many commodities, notably oil and food, rose so high as to cause genuine economic damage, threatening stagflation and a reversal of globalization.[23] In January 2008, oil prices surpassed $100 a barrel for the first time, the first of many price milestones to be passed in the course of the year.[24] In July 2008, oil peaked at $147.30[25] a barrel and a gallon of gasoline was more than $4 across most of the U.S.A. The economic contraction in the fourth quarter of 2008 caused a dramatic drop in demand and prices fell below $35 a barrel at the end of the year.[25] The high of 2008 may have been part of broader pattern of spiking instability in the price of oil over the preceding decade [26]

RBC would say "Hey! A price shock! That could cause recessionary pressures!" And then the housing bubble created largely by gov't intervention was popped, leading to further problems. You can disagree, but it's obviously untrue that RBC has "no explanation" of the crisis.

Labor force participation has dropped sharply. Since 2008 this number has been well below historical averages. Is the BLS playing politics to keep the unemployment number low? CBO believes the actual unemployment is much higher.

so economics is completed.
what will you do in your retirement ?

It may be that Bernanke et. al. managed to finesse this about as well as possible (contra both the austerians and Krugmans) and neither Obama or the liberal commentariat deserves much credit for that, but the ideological approach of most Republicans to macro policy are the real losers no matter what bluster Tyler puts forth. Stay bitter about the $50bn+ in stimulus pork and maybe also the $1trillion in Iraq if you wish, but imagine a smaller or no stimulus to prop up AD, stave off public sector unemployment, and facilitate household deleveraging, no quantatative easing, and more fretting by Fed officials over nonexistent inflation and we could have had a holy mess on your hands.

We almost had a double-dip with the stimulus money dried up and States started laying off thousands of workers, but the private sector recovery with its juiced up demand stumbled through and now it looks like the public sector will have to go through some deleveraging / restructuring and have a lag before tax revenues grow sufficiently to make it possible to add back teachers and other social services. Both the private and public sectors will have their retrenchment, but not simultaneously as the GOP would have insisted on had they held power in 2009.

The real enemies in the policy debate are the ideologues. If the economy were to roar back to life this year without additional stimulus, Krugman will look eager and hasty, and austerity Republicans will look foolish and corrupt.

"If the economy were to roar back to life this year without additional stimulus,... austerity Republicans will look foolish and corrupt."

"The real enemies in the policy debate are the ideologues."

I think by labeling the semi-austerity Republicans as 'foolish and corrupt' you are more of an ideologue than you probably think you are. But I do concur with your statement.

Total gov't spending hasn't fallen. If we had cut to even, say, 2005 levels, you might have a point.

Tyler Cowan believes Keynesianism means that prices are not only sticky but do not move at all? How else would it be possible to believe that this is a defeat of Keynesianism? Prices and wages might've finally adjusted after a period of many years so that economic activity can be coordinated again barring any new negative real shocks. I find the Tyler's cheer-leading for his beliefs "Unemployment's down. I'm right. They're wrong." without any real explanation a bit distasteful on an economics website.

How would you explain the result of austerity in Europe? The decrease in government spending is pushing and pulling them back into a recession. Had we done the same in the U.S. we wouldn't be enjoying this very modest recovery after the longest recession since the great depression. Without the stimulus and bailouts we would be looking at double the unemployment in NYC and detroit. How is that a positive counterfactual for the real business cycle, hands-off policy prescriptions?

There's no doubt that the real business cycle plays a role, but to claim that the economy is fine to ride out financial and debt crises without fiscal or monetary policy adjustments is not something I'd be cheer-leading looking back on the last 4 years and across the Atlantic.

How exactly did "old Keynesianism" lose and "Real Business Cycle theory" become vindicated? This seems more like mean reversion. Everyone has their own explanation. I like Matthew Yglesias's "recovery winter".

My guess is that real business cycle theory seems right because it describes how business cycles worked before the advent of macroeconomic stabilization, so when macroeconomic stabilization isn't tried (Keynesianism, monetary policy) you get boom and bust cycles.

I would like to make this claim: whenever real business cycle theory applies, there has been a massive failure of macroeconomic stabilization.

Wait a minute. I had never understood Old Keynesianism to hold that there was no such thing as the business cycle, nor that economic recovery was not possible in the absence of stimulus. Even in macoeconomics, I had understood that time could heel all wounds.

So I'm not sure how anemic recovery after four years disproves the efficacy of fiscal (or monetary) stimulus.

Sounds like most here are taking the BLS at their word and debating the implications of that employment number... as if it were real.


Your opinion is usually balanced, but you often lose objectivity and make hasten remarks at the slightest chance to make an anti-Keynesian post. Look at this graph and tell me where the huge victory for RBC and huge loss for Keynesians are: (Also, recall that Krugman has been saying for a long time that recessions eventually end, even without stimulus; he has never even suggested this thing would go on forever)

Noah Smith is my favorite blog policer, Tyler takedown in 3, 2, 1...
(The cougar picture is genious, and the last two paragraphs exactly reflect my sentiment.)

Yes Noah Smith is great - Tyler loses again

Money Quote: "And did Cowen seize on every month of terrible employment growth over the past three years to say "Wow, Real Business Cycle is the big loser from this data, and the big winner is Old Keynesianism!"? No, he did not."

Oops meant that as a reply to Ricardo

Well Krugman has moved more and more lately to accept Richard Koo's arguments on the crisis. And if you have read Koo these developments should become more clear.

If the crisis is a balance sheet recession, than the extend deficits are needed in order to remove the debt burden from the private sector to the government. Now, if you remember your undergrad macro, Mankiw's book makes it very clear why a deflation recession is very dangerous. Not only does it increase the real value of the debt, but the people who are most likely saddled with it are the real job-creators and investors in the economy, not the creditors. So deleveraging in this case means creating an environment for the real job creators to start investing again. Eventually people will deleverage, as the McKinsey report shows, either by saving enough or simply declaring bankruptcy. In the US what made this easier is the fact that banks can come after your house but not your other assets. So people might eventually bite the bullet and give in. But in other countries it's harder due to the liberty banks have to come after your non-house assets as well. So yes, Keynes was right, in the long-run we are all dead; i.e eventually something happens to return us to previous levels of growth, but why make it harder on ourselves?

There is another claim here that I'd like to refute, that of the UK not practicing austerity. Well, first of all the Bank of England has been extremely accomodating regardless of the policies by the Tory government. Second, the reason why Britain has these massive deficits is due to the higher GDP drop they went through mostly due to the fact that their economy is based on the financial services. So an increase in the public debt, as PK always likes to point out, is not neccessarily due to increased spending (of which the UK has done very little if none) but mostly due to decreased revenues.

Last but not least, I have no idea where RBC is confirmed in any of this!!!! Are you telling me workers suddenly returned from their three year vacation in Mexico and are now willing to work? And where is the positive shock? Tall Dave says we are producing the same amount with less workers, but that's growth simply in trend with previous eras. In order to have a positive shock you need a jump, not increase along the previous upward slope path.

Wow, how pathetic is Tyler? He just continues to surpass himself in irrelevance and cynicism in intellectual contribution to the debate.

One good number and an entire theory is out the door.

My God, why do people read this idiot?

His food and travel posts are good, and he's recommended some great books in the past

Oh my, I really hope this is not one of those posts where Tyler Cowen explains exactly nothing, makes very strong assertions regardless, and then complains how the blogosphere didn't understand him, really, and that comments are weak, not his post, no no no. And it's all but his fault, since everybody is snarky and therefore they don't get a job and all, so they can't possibly have a point, because real noblemen are dismissive, which more or less is their point, see?

I really hope Delong doesn't come up with snarky remarks, you know, about mood affiliation.... Turing test fail.... and all that stuff dismissing any argument without even pretending to rebut anything.

This is NOT Tyler Cowen - I was just curious (in light of the inane 'wins the thread' remark above) if you can impersonate him in the comments.

It appears that you can.

But you can't really because when he posts his comments have a blue background so we all know it's not him

that wins the thread

Isn't the obvious counter-argument that more stimulus would have resulted in a much faster recovery? And thus more jobs to those who really needed - like 3 years ago?

Of course - but you know most people around here don't give a shit about the actual humans who lost their jobs. Also most of the people who were unemployed before are not getting jobs back and if they do they'll be significantly crappier ones.

And, obviously, even MORE stimulus would be even BETTER.

It seems pretty obvious the best results would come from a stimulus so powerful the gov't would spend 99% of GDP. Has anyone ever tried running an economy that way? I predict it would result in an economic paradise, a "worker's utopia" if you will.

Or how about we address actual arguments instead of strawmen? The very short answer as to why your attempted ad absurdum is wrong is that most stimulus opponents were predicting a spike in borrowing costs for the government which would crowd out private investment and negate any increase in GDP coming from the stimulus (e.g. John Cochrane and Niall Ferguson are both on record as making this argument in 2009). These predictions were completely wrong. Clearly, borrowing 99% or whatever of GDP in a single year would cause severe strains in the debt market but borrowing 10% doesn't appear to have made a dent at all. The conclusion is that most people vastly underestimated how deep the demand is for U.S. government securities (or U.K. securities or Japanese securities, etc., especially during a financial crisis and recession) and that stimulus spending of the magnitude discussed by real people in the real world (as opposed to what gets discussed on blogs by people attempting to construct strawmen) does not pose serious crowding out problems.

Not a strawman, a reductio ad absurdum to demonstrate the fallacy of the unfalsifiable counterfactual. It's very hard to imagine a scenario in which the U.S. gov't spends as much as (say) Krugman thinks would enough, such that his argument could be falsified, yet clearly there ARE limits or we'd all be Communists by now, because that would be the rational choice instead of free markets. And the problem with Communism is not the debt markets, it's misallocation of resources.

And misallocation of resources (not crowding out) is the main problem with gov't spending as stimulus. Also, running up debt just because it's cheap put the Euro countries where they are today -- we are drawing closer to the point where the bond markets start panicking, and the Plank graph is very steep (just ask Corzine),

If your problem is "misallocation of resources", why didn't World War II create massive economic dislocations in the U.S. after 1945? What kind of evidence could be brought to potentially falsify your theory?

On the other hand, Christina Romer summarizes the empirical evidence for fiscal policy here. You can insist this evidence does not convince you but if this evidence did not exist, it would pose a pretty clear challenge to pro-fiscal policy people. Indeed, it wouldn't be a problem for me -- and I don't think it would be for a monetary economist like C. Romer either -- if the evidence worked out differently to say, "Oh well, it's back to monetary policy I guess." So then what evidence would you need to see to be convinced your own theories are false?

That's why there was rationing in WW II, even as GDP boomed. Post-1945 demobilization (i.e., reallocation of resources by markets in place of gov't) did not restart TGD as many feared it would at the time (that would have falsified the theory, btw) but instead kicked off the postwar boom.

Romer's view is interesting, but I find the Mercatus data more broad and compelling.

Re the present period, if we saw employment worsening as the effects of stimulus waned, even as productivity waxed, that would tend to argue RBC was less applicable.

I'm not sure Romer could change her mind without resigning, and the evidence she cites isn't that good, nor is it very empirical -- as others have pointed out, if 2.4 to 3.2 million jobs cost $800B, that is a cost of $250,000 to $350,000 per job, and the prediction (remember, empiricism is prediction and result!) was an unemployment rate of less than 8% well before now, and presumably without the greatest fall in labor force participation ever seen. Given the Rahn curve, I think it's much easier to argue we were spending so much already that the additional stimulus was bound to be largely ineffective, except in the very narrow sense of an accounting identity (i.e. the spending/jobs themselves are counted in GDP regardless of how useful they actually are). Note the NBER study above finds that private employment isn't affected much.

Ideally, we could go back and run things again with a doubled simulus, and then again with no stimulus at all, but failing that it's hard to falsify much, which is why there's so much debate, and grasping at data points like the one Tyler points to that tend to delineate.

Nice straw man.

Hmmm. Let's take the scientific view: economists stink at operationalisation. Let's, following Solow, operationalize the liquidity trap as a situation in which especially households postpone their interest sensitive expenditure decisions, either because of a zero bound interest rate event or bacause house prices continue to fall or because banks suddenly discover (EU situation, right now) that lending money comes with risks attached and actually start to investigate if borrowers are 'risky', considering their indiivdual situation and the macro economy. Yes, this means that the liquidity trap is about houses and cars and about people either willing or being able to borrow.

A. This is what happened to houses, in the USA (and Spain, Ireland, the Baltics, not in Greece and Italy by the way as the Greek and the Italians don't like to borrow, look at the facts):

In the last quarter (don't be fooled by the red line) there was a slight uptick in the USA, but historically low interest rates were not able to either prevent of reverse the historical decline in housing starts. That's what a liquidity trap looks like.

B. Cars. This it what happened to cars:

Indeed, cars are out of the doldrums. I don't know what happened in the USA, but in Europe car manufacturers are providing genuine consumer credit, 0%, 5 years, in true eighteenth century fashion (that was what Say was writing about, by the way, producers selling their stuff by providing free credit in a case of acute scarcity of money...).

To make things more complete: orders for durable goods: not yet back to the old level (though improving):

C. But the USA is not back on track yet: see this graph:

After WWII, the backward bending supply curve (a market phenomenon!) prevented sky high unemployment in the USA. Production plummeted (to be more precise: aggregate production, production of consumer products increased) when war spending was suddenly wound down, but the labor force participation rate when back with abut 10%-points while the number of hours worked per person declined even more. That was clearly a voluntary event. Is the same thing true this time?

By the way: finally some good news from Europe. spain capped income of banksters to 300.000,-- (government companies) and 600.000,-- ('private' banks on welfare). The 600.000,-- is of course still way to high to attrackt the people who are needed - but that's another question. It is a first step towards low cost banking, with low salaries, low to no dividends, few people and no bonuses.

How is Real Business Cycles and talk of "positive real shocks" an explanation of anything? It is a bit like an astronomer looking through a telescope, noticing some movement in the orbit of one of the planets that he did not predict and then saying perhaps there is something to theory of epicycles and equants after all.

This is not a very illuminating way of talking about the world. Much better just to say, "I don't know exactly what is driving the recovery right now although it looks like there has been a lot of deleveraging going on in the U.S. over the past three years. I'll wait for more data before deciding what to make of this."

Because, as Tyler said, liquidity trap views can say the opposite about positive real shocks. So it's useful to understand which view is more correct, and RBC seems to be winning.

So there are implications. If you believe we are recovering employment because of the producitivty gains of the recession, you would have a completely different policy direction than if you believe we are recovering because of the gov't stimulus despite those productivity gains.

That they can say this doesn't mean they must say it so your argument appears to be a false dilemma. For instance, Eggertsson's DGSE model of the liquidity trap -- I found just through a few seconds of googling -- shows inflation expectations and real shocks move output in the same direction (there is a positive relationship). Even Krugman's paper on Japan argued that a likely cause of Japan's liquidity trap was a productivity slowdown in turn caused by an aging population.

In fact, Krugman's highly influential paper says nothing to rule out a scenario where an economy in a liquidity trap eventually recovers on its own and agrees that an increase in productivity that boosts aggregate demand will also boost GDP.

Above should read "DSGE"; I somteimes mix lteters up.

No, your argument is a pretty clear logical fallacy. Your statement "Because, as Tyler said, liquidity trap views can say the opposite about positive real shocks. So it’s useful to understand which view is more correct, and RBC seems to be winning" is only true if the only two alternatives are a theory of liquidity traps that predict positive shocks lead to negative outcomes or RBC. I pointed out above that these are not the only two alternatives -- I also have yet to see a clear argument that the jobs report does refute some specific liquidity trap theory and use equations and data to do so.

So what, exactly, is the argument that this vindicates RBC?

What? There's no reason Tyler can't make a statement that criticizes certain liquidity trap theories, that doesn't make it a "logical fallacy" or "false dilemma," just a specific criticism rather than general. As he said, he is criticizing a specific liquidity trap theory that has currency in the econosphere.

If you couldn't glean from Tyler's post, he is saying fiscal and monetary policy effects have been dwindling, so a recovery now looks more RBCish.

Yes, but again you're not paying attention, Tyler specifically references those that DO say that:

Another big loser is those liquidity trap theories which tell us that positive real shocks are bad for the economy because the AD curve has a perverse slope

This is a pretty clear reference to Krugman's "topsy-turvy" comments:

This puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing.

Tyler has been wrong about everything through this crisis.

Why does anyone listen to this moron?

Be honest here, Cowen, are you trying to troll us? How about you put some of that «writing rich multi-voiced dialogues which extend both his points and those of his intellectual opponents» ideia at work here.

Great - now we can look forward to big drops in unemployment in Spain and Greece too! In fact, because they are retrenching, the fall in unemployment will presumably be even bigger. It's really great to be alive.

Tyler, i like a lot of your writing, but that post was ... lacking.

My macro times are a bit in the past, but even I see that your ... argument ... is lacking somewhat in ... arguments.

Get it together.

I am not familiar with Tyler Cowen (who is he?), but after reading this post I doubt that I will ever read what this guy writes again. The post is absolutely nonsense. This is not economics, it is just populism. First of all, I have no idea why Keynesianism would be the big looser here. To make a statement like this, you would need to observe what would have happened without fiscal stimulus and no monetary expansion. These are of course counterfactual scenarios that cannot be observed in the data. Second, how can Real Business Cycle theory be the winner here, if productivity has actually been countercyclical during the recession? Ideology kills science. Please keep this in mind when reading the posts of this guy.

Mr. Cowen, you are stretching things here... How can you claim victory for an entire theory just from a single data point? You haven't even proven the causation between a supposed inactivity of fiscal and monetary policies and the job growth for January. It really shows you are getting desperate. Other evidences also indicate that what you have been saying all along is indeed wrong, and that Krugman has been on the money all along.

First, no Keynesian ever said that a recovery is impossible without stimulus, just that it will take much longer than it would have without it. A refutation of the Keynesian idea would be if, say, Ireland and Latvia recovered faster than Sweden, or if interest rates after the 09 stimulus shot up, or core inflation shot up.

Second, RBC in the form stated by Kydland-Prescott can't be right or wrong, because it's a tautology.

Finally and most importantly, given that guys like you and Scott Sumner are among the few non-Keynesian economist that Keynesian types bother reading, it would be very nice if when you make an "i told you so" post, you point out to the earlier post in your blog where you did actually tell us so. If you could use some kind of RBC model to predict, say, that unemployment will drop bellow 7% in a year, why not make a post about it, so when your predictions come true you have something to point us to?

At least, that's what Krugman does in his "I told you so" posts.

"we have been told many many times by many many sources, fiscal and monetary policy have not been extremely pro-active in recent times"

"While fiscal policy has turned contractionary, monetary policy has been and is expansionary. Even Krugman has argued that expansionary monetary policy will have a positive effect, and critics on the right have criticised monetary policy as being too stimulative. So monetary policy deserves much of the credit for the improvement and if the Fed had moved more agressively with expansionary monetary policy, the improvement would be even greater.

"You really can get a recovery when the real shocks are moderately positive."

Keynesian economics, as it has developed, incorporates supply shocks into the analysis. The fact that supply shocks affect the economy is in no way a vindication of real business cycle theory.

"that negative shocks might help spur recovery"

There is nothing in Keynesian economics that supports that. In Keynesian economics as it has been currently developed, adverse supply shocks shift the short-run aggregate supply curve up and to the left and are contractionary. Beneficial supply shocks shift the short-run aggregate supply curve down and to the right and are expansionary.

Real business cycle theorists are grasping at straws to keep from being drowned by reality.

Tyler's getting more pathetic by the week, isn't he?

Indeed - its a pretty desperate assertion based on a data point that is consistent with multiple theories. Credibility completely blown.

I agree, Tyler is teh awful, and we three-letter trolls have proven this point decisively with our well-thought-out and logical arguments.

As an Econ Prof., I searched about to find high quality conservative economic commentary blog sites to recommend to the students. I thought that this site might be one, but after reading it frequently, I have concluded that sadly, there are none. Cowen is just a dilettante, as there seems never to be any analysis -- just a stream of oversized and under-considered tweets. How am I not surprised -- libertarians are just ideologues, and ideologues of every stripe just substitute cant for thought.

Keynesian economics includes the proposition that output will return to potential output without any stimulus in the long run. But the long run is a misleading guide to economic policy. In the long run, we are all dead.

Therefore a slow improvement in the economy without stimulus is not a refutation of Keynesian economics. But a fast return to to potential output without stimulus is. We are not seeing a fast return to potential output and monetary policy has been stimulative, just not enough.

Keynesian economics is about not waiting for the painfully slow return to potential output if the economy is left on its own, but giving it a forward shove. This is also true about quasi-monetarism. The disagreement there is about the best way to give the economy the shove.

This is kind of great. A group of RBC theorists and anti-Keynesians arguing to the death that Obama did NOT in fact spend a whole bunch of money. I am wondering if Romney is going to pick up on this trend.

I agree, Tyler is teh awful, and we three-letter trolls have proven it with our well-thought-out and logical arguments.

Yet another example of the "Dark Age" of macro. Tyler, your post is consistent with the following theory: you have no idea what Keynesian theories actually predict. I have no idea whether or not that's true; maybe you do understand it, but are for whatever reason not doing the theory justice. Nonetheless, it's hard for people to take you seriously when you make basic, basic errors.

Did you notice that the Fed recently announced that interest rates were going to stay near-zero until 2014. Put that together with the QEs and we have the most expansionary monetary policy for the most prolonged period in my lifetime. Somehow you call that austerity. It's unbelievable.

I would make one further point: what we are seeing now is fallout from the debt ceiling crisis over the summer. If you look at the data, things were improving in the spring of 2011, until the debt ceiling brinkmanship. As I predicted then, the tremendous uncertainty introduced into the economy by those talks caused the economy to fall back, and that's what happened. Now that nonsense is behind us, and the economy is continuing on its previous trend.

Wow, talk about your basic, basic errors. There was never any economic effect from the debt ceiling talks, because there was never any danger of default. The worst-case scenario was spending only as much as took in (the horror!). That's why the bond markets yawned.

That's just nonsense. There wasn't anything horrendous from the debt ceiling debacle, but it did have a negative effect.

Just read PK's rather distasteful blog post - linking to this post. I wish you would write another post clearly explaining the statements made in this one.

i) Why did you reach this conclusion ?

ii) What mechanisms are involved with this recovery and how are these consistent with the RBC model you allude to ?

iii) What is the RBC explanation for the cause of the crisis ?

I remain a fan and read you much more often that I read PK. Yes, I have concerns with your funding sources, but you are definitely less blindly ideological than him. Cheers.

Wow, RBC theory is apparently really, really hard for some people to grasp. Seemed pretty obvious.

Very silly arguments that you appear to deserve. Firstly, the recovery could have begun 36 months ago with appropriately strengthful policies in place. Secondly, yes, there _has_ been a _real_ shock, but not one your model could accommodate. The Republicans' conspiracy to fire all their workers began in 2008, out of spite, and kept on till recently. Now alas, they have lost the upcoming election, and really cannot keep fortunes buried for yet another four years. They have lost, and must cough up.

This is a mood affiliation post.

Not being an ideologue I would like to understand the following:
1) Since unemployment went down, there must have been an increase in demand that led to an increase in hiring. Where did that increase in demand come from primarily?
2) Have 3+ yrs of deleveraging finally led to the point where some individual borrowers have finally become able to take advantage of low interest rates? This would be one possible explanation for an uptick in growth and employment.

In the end inflation and interest rates have both remained low as Keynesians predicted while the anti-Keynesians (particularly the Ron Paul types) predicted Zimbabwe style hyperinflation and a collapse of the dollar. So it is hard not to see that Krugman's framework has been intellectually more sound than the anti-Keynesians.

My dream: a macroeconomic theory or evidence, which can convince everyone without appealing to authority or majority or etc. I wish you guys are tired of the existing state of macroideology or macrelgion, be it left or right. Unfortunately, the dream seems to me as far as Fermat's last ...

Two basic questions: 1. What is the moderate positive shock we experienced? 2. In your Austin talk you mentioned that only half of the output gap is truly an output gap. Could you explain to what you attribute the rest? I think this might help me understand your point better.

Pathetic. Tyler, you can do way better than THIS! The only silver lining here is that we have yet another illustrative example of even smart people going through incredibly robust mental acrobatics instead of admitting that they were wrong, both to the public and themselves.

Lotsa fun in this comment section! 2 thoughts: I wonder when Cowen will thank Krugman for the exposure, and how does it feel to be so exposed? Such a public spanking with such dim supporters must be embarrassing.

Here is Krugman's 2009 post explaining how the economy will eventually spontaneously recover, even in the absence of sensible policy, because of "use, delay and obsolescence":
So who exactly was the Keynesian who argued that the economy will never ever recover without fiscal stimulus??

Tyler, you are corrupt moron.
Wrong and lying about it, as always.

The debate here is over the efficacy of federal stimulus. Don't you have to include federal reserve spending as part of the stimulus? Don't you even have to consider the vast amounts spent by China and other countries as part of the massive 'stimulus?' If you include fed spending, transfers to banks, interest free loans, QE1-?, and all of the unofficial money transfers that have occurred between the federal government and the private sector, didn't the stimulus totally dwarf the relatively paltry amount demanded by Krugman as necessary due to his privy relationship with 'truth?' True government stimulus over the past four years has been immense. Unfortunately, Keynesian 'stimulus' stimulates far less than private investment. The looming threat of Russian style punitive measures for private companies that actually make a profit(profit should be illegal), and the know fact that taxes will be jacked up as soon as possible, by as much as possible on any productive members of society more than compensated for the paltry boost of crony capitalistic demand nudging.

P.S. Vivian Darkbloom strikes me as sharp, and I liked her posts.

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