Why Old Keynesianism is looking worse these days, and other thoughts

I am happy to report that I heard another Paul Krugman talk a few nights ago.  Krugman had just flown in from Moscow, switching in Houston to a flight to Austin, with little time to spare.  Presumably he was very tired, he had a bad cold, he had to speak in a loud barbecue joint and bar, and yet he was entirely lucid and he charmed and instructed the crowd.  He even had praise for MarginalRevolution.  It was better and better received than if he had given a more traditional lecture.

The same Krugman has a recent blog post, or two, in which he is unhappy with me.  I will put some thoughts on that under the fold…

Krugman attacks me for being an anti-Keynesian when in fact I very much prefer New Keynesianism over Old, so the entirety of his critique is boxing at shadows.  As an aside, my first published article was in the Journal of Post Keynesian Economics, and as long ago as 1989 I wrote an essay arguing that Keynesian economics explained the Great Depression better than did alternative views; some of my libertarian and Austrian acquaintances still hold that piece against me.  Some MR readers also will recall the 12-part symposium I did on Keynes’s General Theory, full of praise for the book, though of course with some criticisms too.  I don’t expect Krugman to be an expert in the history of thought of me, but a) he has linked to previous posts of mine making clear my affinity for sticky price reasoning and other new Keynesian ideas, b) it is a rather simple proof that he has rather drastically misread me, as has DeLong, and c) if Krugman doesn’t know my views perhaps he should not attack them in such strident language.  By the way, to the extent I like Old Keynesianism, it is for the Shackle-Lachmann-Minsky strand, not IS-LM and the liquidity trap.

Moving on to substance, let’s start with a few reasons why I think the course of the recovery discriminates against Old Keynesianism, though not against new Keynesianism (definitions and contrast here).

1. New Keynesianism has a more optimistic attitude toward mean reversion than does Old Keynesianism.  Things are looking a bit better than expected half a year ago, so New Keynesianism gains in status over the Old.  Q.E.D.  That’s actually enough to establish the entire point.

2. Brad DeLong suggested not long ago that the short-run model, rather than the long-run model, will apply for a minimum of five years, and possibly up to fifteen years.  That claim is looking weaker these days and I am happy to admit that I am revising my own previous views on speed of adjustment.  It’s one thing to predict we won’t get to four percent unemployment for a long time, but I am now much more skeptical that the short-run model will apply for so many years.  (Since the labor force is not a homogeneous aggregate, the long-run model still can be more relevant than the short-run model even when there is residual unemployment.)  That is the view I am arguing against and Brad is not made of straw.

3. Krugman’s own writings show he is less worried about the particular perverse consequences of one version of the liquidity trap argument than say a year or six months ago.  Remember all the talk of the upward-sloping aggregate demand curve?  That would imply more output and the expectation of further output gains can make the liquidity trap worse.  Yet how does Krugman respond to the good job market report?  He claims, correctly, that it is good news.  Full stop.  There is no response like “it’s great those people have jobs but I’m worried that the extra output will worsen the liquidity trap.”  Common sense rules, as it should, though now it’s time to admit we have moved onto a different and better model.

3. Frankly, it is a bit of an embarrassment for many commentators that the (admittedly weak) recovery is coming right after the end of the fiscal stimulus.  Of course this does not refute the standard account of fiscal policy, namely that it can work but is hard to pull off politically in a manner which contributes to sustainable growth.  The correct answer for the timing of recovery, relative to the end of stimulus, is “confounding factors,” but that is exactly the point.  The confounding factors are more important than we had thought, and the fiscal stimulus not quite as important as we had been led to believe.   That is another point against the Old Keynesian view.

4. The Old Keynesian focus on the paradox of savings may have been relevant during the most dire points of the crisis, but it does not seem to be panning out in the recent data.

5. Liquidity trap models of unemployment stand in tension with Mortensen-Pissarides search models, as Krugman himself has noted in the past.  The notion that employer (and worker) expected profit influences search behavior and thus employment, seems to be showing up in the data.  That’s a real business cycle mechanism.

6. Corporate profits are strong.  Quite possibly the prevalence of labor-saving innovations helps explain why labor market recovery has been slower.  That too is a real business cycle mechanism.  The persistence of long-term unemployment, even in light of an improving labor market, suggests those particular workers face structural unemployment.  That too is a real business cycle mechanism.

7. A lot of people get upset when one praises “real business cycle” models, perhaps having in mind some overly simplified one-person contraption from the early 1980s.  The reality is that most economic phenomena and mechanisms fall under this heading, and that the objectionable simple models have been left behind a long time ago in favor of synthetic treatments.  I’m the one in the mainstream here (which doesn’t mean I am right), but it does make it odder to be pilloried and insulted for holding those views, as if it were some inexplicable tomfoolery not worthy of professional economists.

8. The old Keynesian view really does have trouble explaining turning points, unless there is a major fiscal or monetary policy action to account for the change.  This was well-known as long ago as the 1930s.  Brad DeLong cites a passage from Keynes about the depreciation of capital (see my previous coverage here, I am very familiar with this argument), but of course Keynes thought that mechanism was too weak and unreliable and thus he favored a mix of planning and nationalized investment.  In any case that mechanism explains only one chunk of the current recovery and furthermore I call a rising MPK a real factor too.

9. Krugman sometimes writes as if new and old Keynesian approaches are simply more and less rigorous versions of the same thing, but they clash on a number of important issues, a few of which I’ve mentioned above.  You don’t have to agree with Stephen Williamson on everything, or approve of his tone, to notice that many of his blog posts illuminate significant differences between New and Old Keynesianism.  Read through his archives.  There’s a lot of very smart stuff in there, even though it has become unstylish to respond to him very much.  He knows a lot about macroeconomics, usually more than the people he is criticizing, even if I often disagree with him on methodology.

10. Finally, it’s worth going through Krugman’s citations of his own successful predictions:

We said that as long as the economy remained deeply depressed, even a huge rise in the monetary base would not be inflationary, and that even huge budget deficits would not send interest rates soaring. And we said that fiscal austerity would be contractionary, not expansionary.

Funny enough, I also got those first two predictions right too, and on the third I have argued we haven’t seen real austerity yet.  I also was never very proud of myself for getting those predictions right, because I thought it did not show any particular acumen on my part, nor did I think it elevated me to an especially prophetic stature.  I actually prefer to think more about all the predictions I got wrong.  Here is Scott Sumner on the predictions he got right, an excellent record.  Perhaps Krugman’s successful predictions have come from a broader framework and not from Old Keynesianism per se?

In sum, one constructive response to the new data, and my post, would have been: “The Old Keynesian fortress actually is looking weaker these days.”

Another constructive response would have been to try to patch up the growing holes in the Old Keynesian approach, as applied to 2011-12, and try to salvage it vis-a-vis New Keynesianism and/or market monetarism.  No need to waste so much time on views which aren’t even in the running.

We didn’t get either of those.  This unfortunate outcome relates back to my earlier, broader point about focusing on the stronger arguments of the other point of view.  If one spends too much time knocking down and polemicizing against weak arguments, sooner or later all opposing arguments start looking weak.

Addendum: Mark Thoma adds comment.  And Ezra Klein comments.   Here is Krugman’s response.  There is no Orwellian move on my part, I’ve long been fine with new Keynesian ideas and there is a long paper trail to that effect, stretching back many years; to cite “real business cycle theory” in 2012 is in fact to refer to a bunch of them as part of the theory.  When it comes to RBC, Krugman is still living in 1983, a point which Stephen Williamson has made a few times as well.


"Funny enough, I also got those first two predictions right too, and on the third I have argued we haven’t seen real austerity yet."

I recall you saying that you don't really make predictions, so this comes as a bit of a surprise to me. Links? Thanks much.

"I am happy to report that I heard another Paul Krugman talk a few nights ago."

When I read that sentence, I thought this was a story about another, better PK, with a cheery, tolerant personality. Alas, I was disappointed.

If you analyse Tyler's posts he almost always pairs a kiss with a kick-in-the-balls. The only variation being whether the kiss precedes or succeds the kick.

He's playing the ball.

Tyler, I'm inclined to say Paul is winning this exchange hands down. The content of this post fails to address many of the questions people have been raising about your original post. For example, what exactly are the positive shocks you previously referred to as driving the recovery?

Start with "finding more gains from trade," see also my remarks in the post. It certainly wasn't fiscal policy, as the Old Keynesians were warning of fiscal drag.

Paul was kind enough to post links to his predictions. Could you do so too Tyler?

Here's what PK had to say back during the Bush deficits - http://www.nytimes.com/2003/03/11/opinion/11KRUG.html
which seems at variance with his opinions expressed in the blog posts TC cited above. PK counts on his loyal followers not having much recall of what he has claimed in the past. He has a tendency to shoot from the hip and seems largely unable to take the arguments of his intellectual adversaries seriously, preferring ad hominem attacks. Contrast TC's post which is measured and reasonable - he lays out his objections without trashing PK.


He's already written about this one. The difference is that he learned from his mistake.

That's pretty funny. He didn't mention that year after year, the deficits came in lower and lower than expected. But then again, his followers are a pretty gullible lot, so it's easy to put one past them.

I have to go to my library to check out a copy of the Great Unraveling to see who was right - Krugman or Bill O'Reilly. O'Reilly called Krugman a liar concerning what he had claimed about the Bush tax cuts and Krugman denied it. O'Reilly said that it was in Krugman's columns and his book. I see that the video from the show is on lefty websites which put O'R down, but I thought I would do my own research, because I believe in "Trust but Verify".

How boring.

2003 is not post 2008. Different economic conditions, different fiscal policy prescriptions. It's pretty simple

Keynes never recommended deficits during a boom.

That's why I keep pointing out PK and BDL are mostly Keynesians by convenience; they're more accurately statists (NTTAWWT). Else, they would have been arguing for nondefense spending cuts during times of growth.

Fiscal policy has two parts: revenues and spending. 'Statism' does not dominate over Keynesianism, it merely inflects it.

One can be a Keynesian who calls for tax hikes during booms and increases in spending during busts. (Move policies towards a larger state)
Or one could be a Keynesian calling for spending cuts during booms and tax cuts during busts. (Move policies towards a smaller state).
Or one could take a status quo/neutral position - if you hike taxes in the boom, cut them in the bust. If you cut spending in the boom, cut spending in the bust. (Maintain an equilibrium state size).
Or one could not give a shit as long as fiscal policy is net contractionary in a boom and net expansionary in a bust. Or one could give a shit only insofar as certain policies are 'better' at, or 'better suited for', expansion or contraction than others.

So you could be a statist Keynesian, a small state Keynesian, a status quo Keynesian, or an apolitical/pragmatic Keynesian.

Of course that sort of nuance is going to be a bit hard to handle for those who hold the position that always and everywhere reflects the same politics: Cut spending and/or cut taxes, until the state disappears. (with, I suppose, some minimum bound for the minarchists.)

One can be a Keynesian who calls for tax hikes during booms and increases in spending during busts.

That's statism. Keynesianism would be distinguished by also calling for tax cuts during busts and spending cuts during booms, rather than an ever-increasing state.

Most minarchists would gladly settle for maximizing our position on the growth axis of the Rahn curve, which would look something like Hong Kong.

Did you think you were saying something I hadn't already said?

"you could be a statist Keynesian" - The post you replied to.

In a certain sense, insofar as Keynesianism calls for state economic policy, it is inherently statist.

But in the sense I am going for, Keynesian policies can be consonant with a wide variety of positions towards the size of the state.

So... what exactly is your point?

My point was that being a statist does not mean that one cannot be principled in their Keynesianism.
You seem to have admitted the point in accepting that a consistent Keynesian position is consonant with consistent 'statism.'

So the upshot of all this is that your prior post claiming one month of data was evidence of something, wasn't meant to argue against anything that anyone currently believes, but rather something that's been almost entirely abandoned?

Or am I wrong about that and there are a lot of Old Keynesians out there?

The main problem with the post that generated this discussion was that it claimed a single data point proved something rather broad. Can we all agree that was wrong?

The upshot is apparently that when Tyler says "real business cycle theory" he means "New Keynesianism". Who knew?

"Presumably he was very tired, he had a bad cold, he had to speak in a loud barbecue joint and bar,..."

I'm probably not alone in my foolish hope that you'd just kicked his ass in the parking lot.

I think that probably happened to PK a lot in elementary school and high school.

Needs it again. Bad.

Tyler you should really consider moderating your comments section.

" If one spends too much time knocking down and polemicizing against weak arguments, sooner or later all opposing arguments start looking weak."

Yes, he definitely targets weak arguments, but that's because he's conducting a war, not a debate. Krugman believes (or at least he's said so on many occasions) that his opponents -- Republicans and "right-wing" (his term) economists -- are either themselves malicious or dupes of malicious people, who (consciously or not) are pursuing goals that will result in massive negative results, on the order of trillions of dollars of loss, hardship and death. He believes he needs to win this battle on the stage of national opinion (and for better or worse, he is on it), or these terrible things will happen.

Picayune details like whether or not specific little arguments are right or wrong are irrelevant, and that's why he reacts so rudely to you -- as an average person might to the argument that "at least the trains ran on time." He thinks that if he grants any ground to you or any other "right-wing" footsoldiers, he may lose the war, and then the truly evil (again, his words) will use that as ammunition to enact policies that will harm billions of people. I imagine that's why he rarely repeats all the free trade stuff that he wrote in the 90's -- that position has been overrun by the enemy. He no doubt continues to believe those words then to be true, but talking about them today doesn't serve the greater purpose.

I don't want to armchair psychologize or demonize Krugman, because I feel everyone tends to think like that: when you're opposing something that is truly wrong, no one goes out of their way to analyze their arguments, or take care to ensure they're addressing only the strongest points of the apologists. I feel like he's taken a form of Pascal's wager: when the risk is so great, can he afford to let any doubts fester?

Hasn't he only recently said this?

It's a deleveraging recession. Everything is going to fill the de-leveraging hole. Protecting people from bankruptcy may be counter-productive in that it precludes debt restructuring. It's not our fault the government makes a mockery of bankruptcy. Professor Krugman is now writing about debt deleveraging.

Well said

Well, the Republicans started a war over the debt ceiling on false pretenses. Sound familiar?

Anticipating the question, here are the false pretenses:
1. Government spending caused the economy
2. Taxes must never, ever be raised (except, of course, when the payroll tax holiday expires)
3. We can make significant cuts in government spending without touching entitlements or the military
4. Making those cuts in the middle slow growth will actually help the economy

Oops, formatting left something to be desired

1. Government spending caused the recession

2. Taxes must never, ever be raised (except, of course, when the payroll tax holiday expires)

3. We can make significant cuts in government spending without touching entitlements or the military

4. Making those cuts in the middle slow growth will actually help the economy

It seems that this whole exchange is just the latest in a series in which Tyler says he is Bayesian updating in one direction, and other bloggers read that as a statement about what he believes. When Tyler says that "Old Keynesianism" is looking worse, I usually take that literally. It's not a statement about what he believes. I think Tyler expects a far more careful reading from his readers than most bloggers do, for better or worse.

That being said, the two arguments seem to have merged in this post, so I could be completely misreading him (see above).

You say "the same Paul Krugman" was lucid, charming, instructive and had praise for MR. The other Paul Krugman paraphrases a quote by a totalitarian mass murderer as justification for insulting his opponents, and makes an absolute hash of macroeconomics (head over to Money Illusion for more recent evidence.) Doesn't this demonstrate that there are at least two different Paul Krugmans living inside the same head?

Pretty sure one of them is his wife.

His wife? Why do people keep saying this shamelessly?

Because he's pretty much had his skull colonized by his wife?

New Yorker article:
...When he has a draft, he gives it to Wells to edit. Early on, she edited a lot—she had, they felt, a better sense than he did of how to communicate economics to the layperson. (She is also an economist—they met when she was a postdoc at M.I.T. and he was teaching there.) But he’s much better at that now, and these days she focusses on making him less dry, less abstract, angrier. Recently, he gave her a draft of an article he’d done for Rolling Stone. He had written, “As Obama tries to deal with the crisis, he will get no help from Republican leaders,” and after this she inserted the sentence “Worse yet, he’ll get obstruction and lies.” Where he had written that the stimulus bill would at best “mitigate the slump, not cure it,” she crossed out that phrase and substituted “somewhat soften the economic hardship that we face for the next few years.” Here and there, she suggested things for him to add. “This would be a good place to flesh out the vehement objections from the G.O.P. and bankers to nationalization,” she wrote on page 9. “Show us all their huffing and puffing before you dismiss it as nonsense in the following graf.”

On the rare occasion when they disagree about something, she will be the one urging him to be more outraged or recalcitrant.

There is a clear difference in the tone and style between Krugman the public speaker and Krugman-whoever the writer

There's another Paul Krugman, the one of the past, which slagged Bush for spending too much and passionately supported free trade in the 90's. I liked him a lot!

Oh that Krugman died back at the end of the 90s.... his corpse, one of the walking dead, has something that looks like a column at the New York Times which means lots of people insecure about their position in New York have to suck up to him even if it means a reverse cowgirl.

He also slagged the Bush tax cuts.

How many versions of Keynsianism are there?

There's the abandoned neoclassical synthesis, New Keynesianism, post-Keynesianism. I'm not sure which of these Tyler thinks is 'old Keynesianism'

He's thinking of pre-Lucas Critique "Neo-Keynesianism" (I.E. Samuelson, et. all) I'd imagine.

"Old Keynesianism" is a slavish adherence to Samuelson and Keynes.

Samuelson and Keynes verge on mutually exclusive.

This may be helpful.


"I actually prefer to think more about all the predictions I got wrong."

That is why you are an interesting read while Krugman reads like the Rush Limbaugh of the lefty economics world. Krugman will die before he admits he is wrong (unless his mea culpa is part of a larger effort to prove how much right he is now).

If we don't have consensus on what really happened in the 1930s, it is really foolish to think that one person has all the answers to what is going on right now.

If PK wanted you to have consensus he'd have given it to you.

You constantly write terse posts that are clearly meant to be incendiary and then hide under the "no one understands me mother" banner.
Increasingly, one feels that TC has elevated trolling to an art form.

Come on, that's not true. Finally, Cowen has lied out his views in detail and added the arguments, I think more than anyone expected. It seems an eternity he did that last time. Which is not to say that he really should have expected anybody to think of a strong argument behind assertions like:"the other big looser?... the liquidity trap... weakest idea..." with no argument added. He really shouldn't ask that others ought to smell that there is something else, good discussion is not only a function of the receiver's effort to decode what the sender could possibly have meant when the message sent is sloppy at best.

That said I'm happy he spelt it out now and I'm curious to see the reactions.

Nah! Just read the first reaction. I hoped for more...

Yup, credit RBC in the last post and then make the new one about the wonders of New Keynesian over good Old K.
Either he is becoming incredibly sloppy or just trolling. Either way, not flattering to the MR audience.

Look, I'm d'accord that there was really no way to guess that the old post was about giving credit to New Keynsianism - and Cowen has to ask himself if it's really everbody else's fault to have 'misread' him, as even those agreeing with him (I'd also be curious what THEY say, now) read it the way Delong, Krugman, Noah Smith, Daniel Kuehn etc read it, just approvingly.

But something more important happened. Cowen put out detailed arguments, in a way that does not depend upon others amounting to some philosophical ideal as elevating the other's ideas beyond what they even alluded to, or guessing them, or whatever. See, he's simply written them down, right here. So hopefully, the tedious meta-posting about how other bloggers have to behave and write and respond (from all sides) can stop now and we can read about real arguments, as the sender takes some responsibility of what he actually writes, rahter than insisting that everbody else rightly guess what he meant.

Keeping that in mind, I'd really like to see Krugman to give a more thourough response to the arguments than asking who was right in the first place and whose fault whatever is. This childish back and forth isn't even fun in higschool class debates...

" So hopefully, the tedious meta-posting about how other bloggers have to behave and write and respond (from all sides) can stop now and we can read about real arguments, as the sender takes some responsibility of what he actually writes, rahter than insisting that everbody else rightly guess what he meant."


There is always a grey area in these arguments but it does seem clear that Tyler Cowen has always called himself a Keynesian. Yes a 'New' Keynesian, but a Keynesian none the less. It's also clear that Paul Krugman wrote the following:

"The Great Anti-Keynesian Flip-Out
Keynesian economists made some pretty clear predictions around 3 years ago – predictions that were very much at odds with what anti-Keynesians were saying. All these predictions have been borne out. And some of the anti-Keynesians seem to be in the process of acknowledging, at least in a grudging way, that they got it wrong.

But some anti-Keynesians have tried to save their dignity, or something, by attacking supposed Keynesian propositions that nobody actually, you know, proposed. The usual one is to claim that Keynesians predicted great results from the Obama stimulus (which I very noisily did not). But Tyler Cowen has come up with something truly strange. He seems to believe that any good news anywhere somehow refutes Keynes.

I’d say that this was attacking a straw man, but that would be an insult to straw men. What is going on in Cowen’s head?

It seems pretty clear that since Cowen hasn't been a 100% Keynesian cheer leader, that PK automatically lumps him in the 'enemy' camp. The argument is obviously flawed on multiple grounds. Not the least of which is that Krugman not just acknowledges, but trumpets the fact that his argument is basically a straw man argument. That's a ridiculous stance for a reasonable person to take.

I've seen him speak. He was subtle and reasonable unlike all of his political writing. I am on board with the spouse conspiracy.

One problem is that Krugman divides everything into "friends" and "enemies." That's not how academia is supposed to work. You disagree with someone, fine. But you don't put him in the "enemies" box and come at everything like a pugilist.

It's not clear to me that academic discourse should stay apolitical if academics themselves do not stay apolitical. There's certainly a question of thresholds, but I don't think it's really a workable norm that discourse in the academy never confront people's non-academic commitments and their use of their academic work outside of academic contexts.

We still have what seems to be the weakest recovery in US history, at least for which we have decent data. One month of good news does not change that, especially considering that some of the recent good data may come from the intersection of seasonal adjustments and relatively warm, dry winter weather.

Do remember that the payroll data in early-2011 started with a bang, and the fizzled so badly that some professional forecasters were warning about recession in August 2011. It could happen again.

What about the narrative that uncertainty about policy inhibiting hiring and investment and so slowed the recovery? Has that view been refuted?

And has the data rejected Kling's PSST narrative?

As for the wonderful job market, the ratio of employment to working age population has seen essentially no recovery from cycle trough and is close to the lowest since 1983. The drop in the unemployment rate is largely an illusion caused by falling labor force participation, concentrated in those under 55 years old.

"Remember all the talk of the upward-sloping aggregate demand curve? That would imply more output and the expectation of further output gains can make the liquidity trap worse."

Not exactly. It implies that upward shifts in aggregate supply can make the liquidity trap worse. Those shifts may or may not be associated empirically with increased output, and increased output may or may not be associated with upward shifts in aggregate supply. This particular employment report showed no increase in labor force participation, so there's no particular reason to think that it indicates an upward shift in aggregate supply. Moreover, I don't know about you, but during 2011, with labor force participation declining, import prices rising, and productivity growth slowing, it sure seemed to me that aggregate supply was shifting downward, which, according to the theory you criticize, is what should lead us to expect increased demand in the immediate future. It seems to me that this employment report is a point in favor of the upward sloping aggregate demand curve theory.

I'm not really inclined to read through this right now but I'm going to assume this is just classic backpedaling after Krugman called you out for your ridiculous assertion the other day

You're not inclined to do anything except being a supercilious troll.

Any economist who lumps a New Keynesian like Tyler into the anti-Keynesian camp is setting up the daddy of all straw men. And his constant attempts to treat mainstream RBC and New Keynesian views as dismissable while talking about Keynesianism as if it's holy writ or Einstein's theory is doing a disservice to his colleagues and his profession.

But then CBBB is just a malicious dork who always lowers the tone of the comments. I hope that PK pays him something more than peanuts.

I'm not a long follower of MR of Cowen, so, just for clarification: TC is a new-keynesian? I thought he was an austrian or some kind of neo-austrian, who really like the idea that agregates are somewhat misleading and that something related to structural factors (short supply of STEM etc.) were important.

He's an doubly-heterodox Austrian who accepts rational expectations and the comovement problem; see his Risk and Business Cycles book (which IMO Tyler does not blog enough about). This moves him much closer to the New Keynesian camp in practice. Think New Keynesian but with an Austrian-flavored adjustment problem instead of the standard NK near-rational stuff.

Aggregates being "somewhat misleading" isn't "austrian," it's basic math.

I think Manoel was implying that 'really liking the idea that aggregates are misleading' is Austrian. (Or, in other words, fetishizing the misleading-ness of aggregates is Austrian.)

But aggregates being 'somewhat misleading' isn't basic math. Aggregates having the potential of being "misleading" is basic math.

Aggregates fundamentally reduce granularity. They only contingently mislead. But that goes both ways. Disaggregations fundamentally increase granularity. But that can also contingently mislead. Granularity, or the lack thereof, is neither inherently misleading or inherently instructive.

Sometimes more granularity is enlightening, sometimes it isn't. Misleading-ness is a pragmatic, not a mathematical, concept.

One of your best posts, thorough and interesting, thanks for sharing.

Of course this does not refute the standard account of fiscal policy, namely that it can work but is hard to pull off politically in a manner which contributes to sustainable growth. The correct answer for the timing of recovery, relative to the end of stimulus, is “confounding factors,” but that is exactly the point. The confounding factors are more important than we had thought, and the fiscal stimulus not quite as important as we had been led to believe.

Yes, and I think this is the key point that needs wider consensus, so that the debate can start being more useful.

BTW, if you're wondering what the heck New vs Old Keynesianism means, the wiki is pretty helpful.


Neo-Keynesian would be what Tyler means by "Old-Keynesian" in case anybody is getting confused.

Last week it was that the austerity of the last three years, and not stimulus that resulted in a turnaround from a severe financial and economic crisis not seen since 1929; this week it is I am a new Keynesian, as I define the term.

I am what I am.

The world would be better without labels.

What happened to American pragmatism?

Long post but I am sure that all your readers are grateful that you wrote it. Will think about it some more and perhaps write another comment. A simple story for now.

I think you have attempted to hide "confounding factors" under the rug - when in fact they should have a central role in evaluating the fiscal intervention against a counterfactual. Suppose a patient has a severe bacterial infection that is causes him considerable suffering. On the first day, a doctor checks him out and tells him that it will take 30 days to be rid of the infection without treatment but that they are other options (light antibiotics - 15 days to be cured, heavy 5 days). In fact (and no one knows this ex-ante), the infection is actually more severe and will actually take 60 days without treatment.

Consider three cases :

a) He does nothing and the body takes 60 days to get rid of the infection (naturally).
b) The patient receives a light dose of antibiotics and gets better in 30 days (when he expected 15).
c) The patient receives a heavy dose and gets better in 15 days (when he expected 5).

I think it is fair to assume that the US economy got the light dose and got better in 30 days. If you expected it to work in 15 days with a light course, you were mistaken right at the beginning.

Lesson : We need a clear understanding of the counterfactual to be able to make firm conclusions about the impact of the recent fiscal intervention.

(Of course antibiotics have side effects and (c.p.) hurt you in the long run !)

I'm stealing this.

I'm stealing it too, but in my version, the "light dose" consists of the doctor stabbing the guy repeatedly with knives.

After 30 days in the ICU, the massive internal bleeding has stopped and there are some signs that the infection is slowly ebbing. The doctor explains this away by saying the disease was inherited and was worse than he realized. Given that, he asks that the guy be grateful for the Light Dose Stabbing, because without it he'd undoubtedly be stone dead.

Hyperbolic much? Did you come here from PK-land?

"New Keysnianism", is that what you kids are calling it these days?


I particularly like the part where Niall Ferguson claims that he was never for austerity measures *now*, but at some day in the far future. All of his cheerleading for Cameron's austerity measures must have happened in a time warp in that case, or some simulation of one, in which he somehow was fooled into thinking now was really ten years from now and he was cheering Cameron on in the future.

Also this of yours:

"Frankly, it is a bit of an embarrassment for many commentators that the (admittedly weak) recovery is coming right after the end of the fiscal stimulus."

Right, because the notion that stimulus has any effect other than an instantaneous effect exactly at the time it's implemented is clearly just crazy liberal economics. Or that claiming that stimulus helped things from falling even further precludes the economy ever picking up at any other time in the future.

The term dates from the early 1990s and dominates central banking worldwide. Think Romer, Summers, Mankiw, etc.

Jeo, all we know is that A) the stimulus didn't do what the supporters said it was going to (potentially because the financial crisis was worse than they expected) and B) people calling for more stimulus after the first stimulus warned of dire consequences for the economy once the old stimulus ran out.

Now, I understand that things may have been worse without the stimulus and things may be better now with more stimulus. But we have no counter-factual and the only evidence we have suggests that at best the stimulus prevented things from getting worse. You might call pro stimulus arguments "crazy liberal economics" or whatever, but I think it is more accurately described as "seriously over-selling their position given the data."

Following up on Jeo's 2nd point above, I think you miss the mark, Dr. Cowen, in your comment on the embarrassing timing of recovery and end of the stimulus. This point may have rhetorical value, but not logical value. As Krugman has pointed out (http://krugman.blogs.nytimes.com/2009/12/27/stimulus-timing/), the stimulative effect of ARRA turned negative more than a year ago, and has since been moderating.

This is exactly what Cowen is responding to! Thanks for digging it up.

Nice try. Dr. Cowen referred to "the end of the fiscal stimulus" when the logically correct reference would have been the peak of the stimulus several quarters previously.

Some of us read your blog specifically because you occasionally allow evidence greater weight than ideology. Don't take it as a personal affront that people point out when you fail to provide evidence for your assertions: rather, take it as a complement that they expect you to.

Of course, that requires you to continue to do so.

Bingo. Tyler made an ill-thought-out post and got called on it - it happens to all of us sometimes. But he now responds to criticism of his ridiculous boast that any good news vindicates RBC by disowning those "early 80s" RBC ideologues (who look very much alive and well to me, BTW) and claiming we are all Keynesians now - even the RBC lot. Not very convincing.

Go back to arguing with evidence rather than labels, Tyler. Then we can still have passionate arguments but the arguments just might shed some light as well as heat.

I read his blog because he's not a hateful, condescending jackass to people that disagree with him.

"2. Brad DeLong suggested not long ago that the short-run model, rather than the long-run model, will apply for a minimum of five years, and possibly up to fifteen years."

NBER dates the most recent recession to December 2007. Are you really going to quibble over a one-year difference here? It is 4 years and two months since the start of the recession and we are seeing some early, somewhat muted signs of recovery.

"3. Frankly, it is a bit of an embarrassment for many commentators that the (admittedly weak) recovery is coming right after the end of the fiscal stimulus."

It might be an embarrassment if the U.S. was the only country in the world that tried fiscal stimulus but, fortunately, it is not. I hear very little about East Asian countries and Australia on this blog.

Bingo again. As an Australian I am amazed that no international macroeconomists have studied the (very neo-Keynesian) policy response down here, how effective it has clearly been and the reasons why it worked so well where others haven't - our local guys have, but then they have trouble getting published in American journals. Living at the bottom end of the world has its drawbacks.

You mean like Japan?

Hi Tyler,

I'll ignore that "tone" admonishment and take the compliment. But what's this about?

"...even though it has become unstylish to respond to him very much."

When was it stylish to respond to me? When was it unstylish? Oh well. Too boring and commonplace I guess.


Your blog would have a wider audience if you didn't ignore the admonishment. A calm tone speaks to a calm and collected mind capable of rational thought. You are obviously bright and a highly regarded expert - your blog would be very popular if your tone was different. Replace every angry sentence with a table or graph and your readership will explode.

I'm not angry when I write these things, and am not an angry person, as anyone who knows me could tell you. "Tone" is sometimes supplied in part by the reader (here I'm sounding like a deconstructionist). Further, what you say is in fact incorrect. As Krugman has pointed out, what gets masses of readers interest in a blog is edginess. Indeed, when I first started doing it, a sure way of getting readers was to purposely offend someone. I didn't just do this at random of course. I thought the offense was justified. All the same I learned a lot about how to pull peoples' chains. I don't know what you're seeing in terms of how people respond to me, but what I see is a steady increase in hits per day. My readership is in fact large, though I am something of a niche as the content is a little more demanding than the usual. Serious academics read it, which I know because I run into people at conferences who have talked to me about it. Powerful people also read it, and have conversations with me by email that I hold in confidence. Actually, I think I have some influence (maybe small, but what the heck) among people who actually make policy, particularly in the Fed system. I'm certainly pleased. What more could I ask for? A reputation for snark is better than a reputation for stupidity.

I knew someone who took a doctoral class you taught. He said that you were a nice guy and a great teacher and taught technique as well as intuition. But your comment above seems immature or "belonging to an Ivory tower" or is perhaps just typical of a certain type of economist whose idols happen to enjoy behaving like assholes. It is possible be a good academic and a good human being. Anyway this conversation is asymmetric and it is wrong for me to continue it.

"...type of economist whose idols happen to enjoy behaving like assholes."

Here are some people in the profession I admire: Bob Lucas, Mike Woodford, Ed Prescott, Mark Gertler, Narayana Kocherlakota, Nobu Kiyotaki. None of those people are assholes. Indeed they are caring human beings. I can attest to this, as they are all my friends, and I have had many occasions to observe their behavior. They are all phenomenal macroeconomists too. What exactly is the problem here?

"calm tone speaks to a calm and collected mind capable of rational thought"

Very true, but oh! the irony.

Tyler Cowen eloquently explains in this post why he is a socialist. I shall exercise more caution when I read this blog henceforth.

That much has been obvious for a long time...


I've read you for years. It aggravated me when the Krugzilla satellites all happily and snidely dismissed you as a trolling Koch brothers plant, but I can't say I was surprised.

But speaking of not being surprised... Come on. I conjecture that you knew that posting a "gaining in status/declining in status" statement involving Keynes in any form or fashion -- without showing your work -- would summon the exact Krugzilla reaction that you got.

I agree with your views in the previous food fight over civility, but I do feel compelled to make the point that I have never read anyone who has been able to maintain such a (nearly) affect-free writing pose as you do. (Maybe in your private life you're a screaming dish-thrower, but... I doubt it.)

The only sense of emotionality I can recall detecting in any of your posts are a fairly regular sense that you're smirking while you're posting (I tend to smirk along with you, or imagined-you, so I don't say that disparagingly), and a handful of times the sense that you're annoyed. Plot the Cowen emotionality data points and all I can say is that nobody else I've read for a long time comes even close to fitting that curve.

You know how Krugzilla is. He's not going to change. I also wish there were fewer sentences of the form "[blank] matters" with the last word in moral italics. Still... Krugzilla-antagonism coming from you, the feeling I get is along the lines of a couple kids fighting and one of them is puppeteering the arms of the other, "Why are you hitting yourself? Why are you hitting yourself? Stop hitting yourself!" Krugzilla has flogged simple Keynesian arguments for years now, and he's shown his work. If it takes a model to beat a model, and I believe that's the economist norm here, dismissing him with a drive-by one-liner is going to provoke a predictable response.

All of that said, this is armchair psychology and thus likely says more about me than about anybody else. I have the sense that a large subset of your readers also read Krugzilla and are able to perform the task of adjusting for temperament and intellectual habit, and, dare I say it, enjoy reading the both of you fairly equally. (Wild idea, I know.)

(The rest post over there about how you're a KOCH PLANT, and the mouth breathing equivalents here always post about what a total embarrassing idiot Krugzilla is. I like to pretend these folks are a minority.)

Keynes also said that with zero interest rates, capital becomes nonscarce and full employment is achieved. That clearly hasn't happened, despite real interest rates being at zero for a while now.

Hmm not sure about this, as:

1) Keynes wrote explicitly that during a depression a public works program might be required to give the economy the boost it needs before the low rate of interest is sufficient to sustain full employment.

2) His analysis was mostly referring to long-term rates, which aren't anywhere near as low as short-term ones right now.

Interest rates on short-term bonds are negative in real terms. Interest rates on long-term bonds are near zero. Capital's still plenty scarce. Of course, no one knows quite the hell Keynes meant by capital becoming "nonscarce," since he appears to contradict himself in the same sentence, and I'm not sure he knew what he meant, either.

Mr. Cowen,

I'm a Krugman reader but also a strong advocate of taking in a healthy dose of diverse and opposing viewpoints because that's the only way we can ever hope to approach "truth" (reality).

I would really like to understand you, but you have a very strange way of speaking/writing. You're extraordinarily indirect and self-referential. Maybe that's you're intent - you're just writing for your in-crowd. Or maybe you're tired of criticism so you keep it all nice and fuzzy - and slippery. Or maybe you're just a really open-minded person who can't help but see "both sides" in everything. I can relate to that, too, but it doesn't stop me from expressing an opinion, my estimation of its strength, and my reasons for that estimation.

In the odd chance you actually read this comment, let me give you an example. You said this:

"I’ve long been fine with new Keynesian ideas and there is a long paper trail to that effect, stretching back many years;to cite “real business cycle theory” in 2012 is in fact to refer to a bunch of them as part of the theory. When it comes to RBC, Krugman is still living in 1983,..."

What, exactly, are you saying there? I'm not confused because I don't know anything about politics around 1983 or RBC. I'm confused because I can't figure out what *you* think about Krugman and the political splits present in 1983. And what are you talking about when you use the word "them"? Your long history of New Keynesian papers??? What does that have to do with "citing RBC"? And what are you saying about RBC? Are you saying RBC has evolved since 1983 while simultaneously saying you are not a proponent of it, either in 1983 or 2012???

This is all pretty confusing word choice. I encourage you to say what you mean, say it clearly, or else don't get mad that people like I or Krugman can't understand your history of papers...

I just tried to digest what you're trying to say in your "New vs Old" contrast link. Here's another example of you saying absolutely nothing(!!!!!):

"4. What to make of the liquidity trap? One of Krugman’s models (with Eggertsson) suggests that a very low rate on T-Bills implies an upward-sloping AD curve, and other counterintuitive results, but most new Keynesian models would not bring you to this conclusion. This is a big difference with important practical policy conclusions."

Even if I knew everything you're claiming to know here, and I agreed with you, I wouldn't *know* that I agreed with you because you didn't say anything of substance. You didn't take a position!!! You just vomited a lot of words and suggested knowledge, and you leave it to your readers to piece together probability estimates of what you could possibly mean!

Please don't disregard me as calling for oversimplification. I'm not. I'm a systems engineer immersed in an ocean of nuance. Krugman doesn't approach the world in a black and white fashion - but when you read his stuff, you usually know where he stands and understand how where he draws the dividing lines on issues and concepts.

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