Keynes is slowly losing (winning?)

Paul Krugman has an interesting blog post arguing that Keynes is slowly winning.  But, I must admit, I find it dismaying how little of the contrary evidence is considered.  Let’s say you set out to write a blog post about Keynes losing, what might you cite?:

1. Keynesians predicted disaster following the American fiscal sequester, and the pace of the recovery accelerated.

2. Even Obama and the Democrats are writing down, and seeing through, budgets with declining levels of discretionary spending.

3. The UK saw a rapid recovery, and the BOE kept nominal gdp growing at a good pace, even in the presence of a so-called “liquidity trap.”  This is not mainly due to the UK having “stopped tightening,” nor did the Continental economies which let up on austerity see similar recoveries.  Nor had the Keynesians predicted that letting up on tightening would bring such a strong recovery, Summers for instance had predicted exactly the opposite.

4. Rate of change recoveries in the Baltics — which really did try a kind of radical austerity — have been stronger and more rapid than Keynesians were predicting, even if absolute levels remain less than ideal.

5. France doesn’t seem to have much interest in trying additional government spending, even though their economy is flailing and no other attempted remedies have been successful.

6. Ireland finally is seeing a rapid recovery, albeit one with highly uneven distributional consequences and possibly another real estate bubble.  The “get the pain over with” approach is looking better right now than it did say two years ago.

7. It is the ECB which seems to hold all of the levers in the eurozone, and the Japanese central bank which is making the (possibly failed) splash in Abenomics.  That may be anti-anti-Keynesian, but it’s not exactly Keynesian either.

8 The Chinese have moved to discount rate cuts, and they seem to realize that more fiscal spending will only postpone their day of reckoning in terms of excess capacity.  That’s not an “anti-Keynesian” attitude, given the current features of their economy, but it’s not exactly screaming the relevance of Keynes’s GT either.

9. It looks like Germany actually will support some additional infrastructure spending.  You could call that a Keynesian victory, but more likely it also will be used to shut down further debate.  Here is one estimate of what will be done.  It’s not that much.

10. Japan is in a (supposed) liquidity trap, but negative real shocks have not in fact helped their economy, contra to the predictions of that model (start with here and here).  Nor does anyone think that the bad weather in the first quarter of U.S. 2014 was good for us, although a basic liquidity trap model implies it will boost inflation (beneficially) because the supply restrictions lead to price hikes which tax currency holdings and thus boost AD.  Come on, people, that is weak.

11. A lot of the cited predictions of the Keynesian or liquidity trap model are in fact simple predictions of efficient markets theory (such as on interest rates), predictions of market monetarism or credit-based macro theories (low inflation), or regularities that have held for decades (budget deficits not raising real interest rates).  It’s just not that convincing to keep on claiming these predictions as victories for Keynesianism and in fact I (among many others) predicted them all too.  I never thought I was much of a sage for getting those variables right.

12. Whether we like it or not, large chunks of Asia still seem to regard Keynesian economics with contempt.  They prefer to stress supply-side factors.

13. At the Nobel level, Mortensen, Pissarides, and Fama do not exactly count as Keynesian material, admittedly Shiller is on the other end of the scale, though even there I am not aware he has a strong record of speaking out on behalf of activist fiscal policy.

14. It is now widely acknowledged that there has been a productivity problem in recent times (or maybe longer), and thus those measurements of “the output gap” are looking smaller all the time.  Again (a common pattern in these points), nothing there implies “Keynes is wrong,” but it does make Keynes less relevant.

15. Where Keynesian views have looked very good is that government spending cuts do — these days — bring steeper and rougher gdp tumbles than was the case in the 1990s.  That is very important, but a) it is increasingly obvious that there is catch-up for countries with OK institutions, and b) correctly or not, the world really hasn’t been convinced there is major upside to expanding fiscal policy.

The point is not that these citations give you a fully balanced view — they don’t!  And it would be wrong to conclude that Keynes was anything other than a great, brilliant economist.  Rather these citations, plus many of Krugman’s points, give you some beginnings for this issue.  It’s not nearly “Keynes’s time” as much as many people are telling us, after all his biggest book is from 1936 and that is a long time ago.  Keynes is both winning and losing at the same time, like many other people too, fancy that.


It seems a bit odd that people overseas often seem to forget Australia, which was the only developed nation that had a Keynesian stimulus equal to the size of the size of the expected economic downturn and the only developed nation not to suffer a recession as a result of the Global Financial Crisis.

Obviously this is somewhat obscured by the fact that Australia is in the middle of a generation-long economic boom because of China. It is hard to see how the Australian economy could slip into recession as long as China is growing as fast as it is. Whether or not the previous government spent the family silver on their favorite clients or did nothing or went around stealing underwear. It really wouldn't matter short of genuine Third World kleptocracy incompetence.

You are on the internet so I don't see how you could possibly entertain this idea for more than a few minutes. It is wrong for two obvious reasons. Firstly, if you look at what happened to the price of Australia's mining exports after the GFC you'll see they plunged and stayed plunged for a considerable amount of time. Australia was fortunate that they picked up again thanks to stimulus in China and elsewhere, but mining certainly didn't prevent Australia from having a recession. Mining contracted more than the average of the rest of the economy, so it was a larger albatross around the neck than other sectors. Secondly, if you thought this through and maybe looked up one or two details, you'd see that if mining was responsible for Australia not suffering a recession then Australia dumped a stimulus equal to about 4.6% of GDP into a healthy economy without it feeding into inflation. You'll have to admit that's pretty darn amazing. Down right magical in fact. And if there is something magical about Australia that lets us do that then I see no reason for us not to have a big unsterilized 4.6% of GDP stimulus every year. Just think what we could do with all that stimulus money coming to us each year without inflation problems! It would be like living in a dreamland, which a number of people already appear to be doing.


(1) Looking at all exports, it doesn’t appear that there was a ‘prolonged’ decline from 2008 to 2014.

and here is a paper by the RBA looking at how the mining boom affected the Australian economy,
‘We find that the mining boom has substantially increased Australian living standards. By 2013, we estimate that it had raised real per capita household disposable income by 13 per cent, raised real wages by 6 per cent and lowered the unemployment rate by about 1¼ percentage points. There have also been costs. The boom has led to a large appreciation of the Australian dollar that has weighed on other industries exposed to trade, such as manufacturing and agriculture. However, because manufacturing benefits from higher demand for inputs to mining, the deindustrialisation that sometimes accompanies resource booms – the so-called ‘Dutch disease’ – has not been strong. We estimate that manufacturing output in 2013 was about 5 per cent below what it would have been without the boom.’

The whole paper is interesting



key sentence,
‘If it wasn’t for those net exports, the economy would have contracted.’

‘China is a big reason for that economic resilience. Australia sailed through its toughest challenge, the global financial crisis, thanks largely to China’s appetite for mined-in-Australia iron ore, coal, and other minerals. China is Australia’s No. 1 trading partner, accounting for more than a third of its exports.’

(2) You can dump 4.6% of stimulus into an economy and not have inflation…which is the point that Keynesianism often fails to produce the results expected. I do not see it amazing at all…just another example Keynesianism failing.

(3) 4.6% of GDP every year for a prolonged amount of time….you mean like the success story that is Japan?


Kai, look at what happened to Australia's mineral exports towards the end of 2008.


You state, 'Kai, look at what happened to Australia’s mineral exports towards the end of 2008.'

I am not so much worried about the decline in 2008, which was shortlived, but rather that its impact to OVERALL trade (which fared welll during the Great Recession by and large) has been considerable, and in some ways unexpected, and that it muddying the water in your effort to isolate Austrlalia's fiscal response as the sole factor for Austaila's benign reaction to the Great Recession. Besides, as you may know, the current spot price of minerals rarely impacts the current and short-term operations of mining companies (by short term i mean within 1-2 years) as what is being mined and sold is already in committed contracts. There are also other financial engineering techniques that insulate mining companies from unexpected short-term declines in prices. Perhaps you should be thanking free-market proponants Hayek, instead of Keynes for how the mining industry fared in Oz.


And what about Japan? Aren't they following your exact Keynesian prescription of borrowing and dumping huge amounts payaola on the population....yearly?

Did Australia ever get close to the zero-rate bound? I thought that even (New) Keynesians like Krugman agreed that, away from the zero-rate bound, fiscal policy didn't matter due to monetary offset. Australia's success at avoiding a deep recession was due to monetary policy, not fiscal policy.

BC, Australia had a stimulus intentionally to avoid coming up against the zero-rate bound. Once it's been hit things have been left a bit late. But if you look at the real cash rate (calculated using the average of weighted median and trimmed mean inflation) then that did become negative for an extended period. It is clear that the 4.6% percent of GDP stimulus made up for a short fall that otherwise would have occurred because it didn't feed into inflation. If that's not the case then we're left with magic having occurred.

How nice of you to try to have your cake and eat it too. Interest rates never hit zero in Australia - therefore, any talk of "Keynesian stimulus" if either obfuscation or idiocy.

Daniel, interest rates not hitting zero was quite intentional. Zero interest rates are not a good thing. Now you could tell me your definition of what a Keynesian stimulus is, I think it's the sort of stimulus Keynes would have recommended in the situation we were in, which is what we had, but you might have your own take on that. But are you suggesting that Australia had a stimulus equal to 4.6% of GDP in a healthy economy without that feeding into inflation? Because, as I've mentioned, that would be magical.

Just to be clear, I will point out that the stimulus Australia had was what we call Keynesian. It probably would not have been exactly what Keynes would have prescribed, to no small part on account of how he had been dead for over 50 years and so had missed out on a lot.

Go read what Keynes actually said on the matter (wrong as it was), and get back to me after you're done.

Daniel, rather than read up on Keynes, I'm more interested in finding out if you think Australia added a stimulus of 4.6% of GDP to a healthy economy without it feeding inflation. Is that what you believe happened?

Public borrowing doesn't bring about new money into existence. The central bank does that.

Now go away and edumacate yourself. You're an embarassement.

So Daniel, are you saying that if Australia had another 4.6% of GDP sterilized stimulis right now in an economy that isn't (at the moment) close to the lower bound it wouldn't feed inflation?

You are literally so stupid you cannot begin to grasp the implications of your pet theory.

Are you actually saying the price level is determined by gov't spending ? So we have the enlightened folks in Parliament to thank for two decades of low and stable inflation ?

You're so stupid it's mind-boggling.

So Daniel, do you think that if Australia had a stimulus equal to 4.6% of GDP now it wouldn't feed inflation? If you give me a simple yes or no I'll be able to understand what your answer is.

The price level is set by the central bank. So the answer is NO.


Thank you for your reply Daniel. So just to be clear, if Australia at this time had a stimulus equal to say 50% of GDP and stimulus payments of tens of thousands of dollars were given to all Australian citizens you don't think this would feed inflation?

You really aren't very smart, are you ?

How many times do I have to repeat myself ?

The price level is set by the central bank, since it is they who control the supply (and demand) of base money.

Can you understand that, or is it too much for your feeble brain ?

So Daniel, if the Reserve Bank deposited $50,000 in the bank account of every adult Australian you don't think this would result in people purchasing more than they would otherwise, leading to shortages in the supply of goods which then lead to higher prices and an increase in inflation? You don't think that would happen?

Where does that hypothetical money come from, imbecile ?

If it's newly-created - then yes, you'll have inflation.

If it's the result of redistribution - then you won't.

I'm starting to get tired of your stupidity.

Daniel, I'm inclined to think that if the Reserve Bank placed $50,000 in the bank account of every adult Australian we'd have a situation that would lead to inflation whether the stimulus was sterilized or unsterilized.

I'm inclined to think you're an idiot.

Daniel, do you somehow think that the central bank sets the price level without adjusting interest rates?

To me it sounds like Daniel was flipping through some undergrad macro textbook and stumbled upon the quantity equation:

"So MV=PY, and if we assume V is constant, that P is fully-flexible, even in the short-run, and that Y only depends on the factors of production, then there's a one-to-one correlation between M and P, and nothing else effects P...." And at that point he decided that's all there was to know about macroeconomics, so he slammed the book shut and called anryone who thought otherwise an idiot.

At least, that's the impression I get reading this sub-thread.

Jason Dick - interest rates are only one of the many tools a central bank can use. Give up on your obsession with them.

Nylund - you're a moron. One of very many, I might add.

Okay, Daniel. What tools did the central bank of Australia use to offset the dramatic inflationary pressure of 4.6% of GDP in additional spending?

the dramatic inflationary pressure of 4.6% of GDP in additional spending

Not that I'd expect an idiot like you to understand what I'm driving at.

99.9% of neutral observers reading this conversation agree that all the shouting of "moron" is projection.

It seems a bit odd how armchair economists prattle about "Keynesian stimulus" while ignoring the elephant in the room - namely, that the RBA kept NGDP growing at a steady pace (unlike the Fed, the ECB and the BOJ).

I am slightly amused to see that Daniel's response to any substantive question is name calling. The rhetorical tool of the frustrated five-year old.


Daniel is a dick, not doubt. They type of guy, I am sure I would enjoy fighting. However, you have to get past his dickness and think about what he says. He makes good points, even if you want to punch him in the face for the way he does it.

Oh look, an internet tough guy.

What you call "substantive question", I call "stuff only an idiot would say".

But then again, this is an internet comment section, so intelligence is bound to be scarce.

Yes: the above two sentences are self-illustrating, in fact.

The rhetorical tool of the frustrated five-year old.

That's not fair, edm. He's clearly a frustrated seventeen-year-old.

You, sir, are offensive; being so adds nothing to the discussion, and detracts from whatever merit your point of view might have.

The stimulus was irrelevant in Australia. As someone else mentioned, it was as relevant as the resources boom. What was relevant [ENTIRELY thanks to the previous rightwing government] is that the ENTIRE national debt was paid off deliberately piece-by-piece before the crisis. And the ENTIRE banking sector had undergone regulatory reform. So you can go back to sunning yourself by the billabong with your super safely in your pocket.

So Michael G. Heller, do you believe that Australia was able to have a stimulus equal to 4.6% of GDP in a healthy economy without it feeding inflation? How did that happen?

You seem to have missed the point. It's because of the Black Swans in Australia. Not be confused with the Black Armbands I hasten to add. It's a historical lesson learnt about sudden and unexpected vulnerability in harsh environments. Among all the advanced countries Australia was uniquely well prepared for an economic crisis - robust, resilient, antifragile. Not perfect of course. Bad housing sector policy for example. But in fiscal and monetary terms it was rock solid before the global debt bust thanks to Treasurer Peter Costello's careful husbanding. Read my lips - it had no debt. Getit?

So, Michael G Heller, if Australia didn't have a stimulus equal to 4.6% of GDP do you think that its economy would have contracted by about 4.6%?

4.6% is the magic number. Why am I living in Australia rather than the UK? I can get 4.6% interest on the savings built up in the balanced budget years. Stop worrying, Ronald, you're in paradise.

I'm a bit confused, Michael. Australia had a stimulus of about 4.6% of GDP and it didn't lead to inflation. If the economy would have contracted without it, then we know what happened to that stimulus. It made up for the short fall that otherwise would have occurred. But if the Australian economy was healthy at that time and didn't require the stimulus, then where did it go? Is Australia such a great place that we can have a 4.6% of GDP stimulus each year without it feeding inflation? If so, I think I'll buy a jet ski with the next load of stimulus money and the year after that I'll crocodile proof my mum's yard and buy her a cat.

That makes sense. You can't buy your mum a cat until you crocodile proof the yard. But I don't know the answer to the inflation question. Let's trust in the non-Keynesians to sort it out.

Okay, Michael, but I don't see how you can confidently state that the stimulis was irrelevant when you don't even know what happened to it. When a stimulis equal to 4.6% of GDP disappears like that I think it's pretty likely it went into preventing an economic contraction that otherwise would have taken place.

oh, what a modeler!

Ronald, inflation is everywhere and always a monetary, not fiscal, phenomenon. Government borrowing and spending is a fiscal policy. It doesn't create any new money, so how could it cause inflation? Remember, Keynes didn't say that the government central bank should print up money to generate a stimulus -- he said that it should borrow in lean times and pay back in flush times.

Russ, let's say the government borrows $10 billion at 2% interest and then deposits one million dollars in the bank accounts of 10,000 homeless people. You don't think there would be any uptick in the Consumer Price Index as a result of this?

"And the ENTIRE banking sector had undergone regulatory reform"

You have absolutely no idea what you're talking about. WHAT regulatory reform? Something, anything… ??

Also, the 'previous right wing gov't' allowed private sector debt to explode, as the mother of all housing bubbles was allowed to grow continuously.

Last, gov't debt as a & of GDP was the lowest in the OECD. & it was only 'paid off' by privatising state owned businesses and assets.

Travel much?

Funnily enough, the fiscal stimulus in Australia was designed with a randomisation mechanism to allow its effect to be estimated after the fact. This is what they found:

Unsurprisingly the government at the time didn't exactly go out of their way to draw people's attention to said finding.

From the paper; "It should also be pointed out that Johnson et al (2006) and Parker et al. (2013) find a significant effect of the stimulus payments when using a broad measure of consumption that includes durables goods. We do not have data on (weekly) durables goods expenditures, hence are unable to explore the causal response of durables goods. ... our findings thus do not allow us to reach a conclusion of the effect that the fiscal stimulus had on overall household consumption ..."

This paper finds that non-durable consumption was not much affected by the stimulus. This is not too surprising. Durable goods (autos, housing, appliances) are what you would expect to be most affected by the economic cycle, and by not addressing this area, the paper does NOT undercut the hypothesis that the Australian stimulus worked as advertised.

I hate to involve myself in religious debates, but here is an alternate theory about Australia:

Ted, the Reserve Bank of Australia regards interest rates of below 3% to be a danger zone where not enough room is left to respond to negative shocks to the economy by cutting interest rates. Because the effects of the Global Financial Crisis would result in interest rates having to fall into the danger zone, a fiscal stimulus package was crafted by the Treasury to prevent this. This fiscal stimulus is what we call a Keynesian stimulus. And it worked. The Reserve Bank was able to keep interest rates at 3% or higher right up until May 2013.

Why do you assume somebody who reads an econ blog would be unfamiliar with the term "Keynesian stimulus?" It makes you come off as a bit of a jackass.

Ted, I didn't want to call Australia's fiscal stimulus a Keynesian stimulus in case I upset people who think Australia's fiscal stimulus shouldn't be called a Keynesian stimulus. So I qualified my statement by writing that it was what we called a Keynesian stimulus, as in that's what people in Australia called it. Whether this explanation makes me appear to be more or less of a jackass I can not say.

Less. Thanks.

It seems odd to say Australia had a Keynesian stimulus. That just goes to show the phrase Keynesian stimulus has twisted in the wind. We see in Australia a demonstration of the supremacy of monetary policy to stabilize nominal growth, and through stable nominal growth, stabilize employment.

Laura, we had a fiscal stimulus equal to 4.6% of GDP. I'm not sure, but I don't think that can accurately be described as being monetary policy.

I always like to get a better idea on why it might have worked when it failed in other situations. If you can refine a model so it is more accurate & has less ridiculous assumptions, you obviously get a much more flexible & accurate model.

Some of the unique aspects of the situation were:
1. Australia's economy was receiving support from a growing China that was also fiscally boosting it economy substantially. At the same time, developing nations were putting deflationary pressure on the world economy.
2. Australia had a much lower debt ration than most other developed countries & generally a sounded fiscal budget.
3. Not certain, but the quality of Australia's stimulus could of been much better directed & targeted to area of potential expansion than other countries. Similarly, I believe there was less internal issue in the federal government at the time compared to other developed countries allowing it to have more effective & better timed responses.

There is also one other basic question that needs to be at least considered. Did the stimulus work because they got lucky? Were they in the right stage of the business cycle & got the right support at the right time to stave off the worst of the crisis. There is always a bias to claim that success was due to understanding & not because of good fortune.

Glad to see PK get called out on that post.

Krugman only writes one post, repeatedly. It's called "I love government spending, and I'm going to prove how great it is by making things up and never considering any alternate views."

He is called out on it every single time he writes it. Fat lot of good it does.

False on all counts. PK cites facts. His detractors like you don't care to rebut them. Fact: the US has had super monetary base growth and zero interest rates and low inflation. Fact: Countries that did undertake large fiscal stimulus like China and Australia (and the US to a lessor extent) have performed much better post crisis than those that didn't (Europe)

Yes, and the fed is paying banks not to spend the new money.

This is pretty hilarious. Why don't we just stimulate until we're all rich!

The definitions of "winning and losing" seem to conflate two concepts: 1. Are the model's predictions accurate? 2. Is it popular with policy makers?

Those two things are not only distinct, but not necessarily even correlated.

Personally, I am not interested in number 2. I do not take their actions as a sign that one particular action is correct or incorrect. The list of poor policy decisions (in any realm) is too long to think that just because someone did it based on some theory then that theory is correct. Policy makers have acted based on poor theories too many times to count. To think otherwise would mean that no one should ever distrust government actions.

For the first, the complication with all theories, especially those concerning macroeconomics, is that every policy needs to be compared to the unrealized (and thus unobserved) missing counterfactual. It's not so much did "thing I care about" go up (down) but did it go up (down) by more or less than it otherwise would have? The best we can do is look at natural experiments. For macro, there are rarely good ones.

The end result is that neither Tyler, no PK, has really said anything that would sway my beliefs one way or the other.

Very good comment.

You are right about the two issues being separate.

However, Krugman's post was about #2, with #1 brought in as a supporting argument for its popularity ("the anti-Keynesians have been wrong about everything"--with typical Krugman subtlety). I think Tyler is just responding to the argument Krugman made.

Also, #2 may be mostly irrelevant as a measure of correctness of the theory, but it is awfully important nonetheless.

Of course, 2 must be discounted. The actions that a policy maker takes may be influenced by many factors far beyond the economic problem that need to be solved. For example, when a politician denies climate change to take a course of action to reduce clean air, is that based on sound scientific knowledge or is that a reflection of how he thinks he can get funding for his political campaign or how he can solidify his base of voters. When personal agenda is coupled with power to make policy decision, a bad theory (e.g., my backyard is frozen, what global warming are you talking about) can be used to justify anything.

It is not a surprise that politicians would grab on a bad economic theory, austerity in the environment of a zero lower-bound, to justify their wrongful policy. It's a surprise that economists who propose such a theory could continue to justify it by saying that QE will cause inflation and if inflation hasn't been seen for several years, just keeping on waiting for more years until it goes up.

It isn't just about right and wrong as scientists. It's about the providing the wrongful justification for politicians with agenda to inflict unnecessary pain on the populace. Ultimately, it's a moral issue for the economists. For much of the populace, it's their life.

Ad 3) - PPI added at least 0.25% to the GDP every year since 2011 (total paid out is about 16bn, UK GDP is about 1.6bn, so it's 1% over 4 years). If money multiplier is > 1, then it's anywhere between 0.3-0.5% per year.

Which actuallly does support Keynes. See, a few things that get missed (IMO) is that most often Keynes advice to spend is interpreted as "state spending via intermediaries". Keynes' anecdote is actually "pay people to dig holes and fill them", i.e. move the cash to a broadest audience possible. Which incidentally the 3) above with PPI seesm to support, rather than contradict.

State spending ala Japan and a lot of other states via intermediaries can be effective only if the money pass down. For which there's too many incentives not to.

On the supply side. TBH, "supply creates its own demand" is just so off this world that I can't see how it ever coudl have been practiced. It's wealth that makes demand, not supply. Pushed ad-absurdum, if I have a fully automated factory that employs no-one, and there are no other employers in the town, I can crank as much stuff as I want, almost as cheaply as I want, but no-one will be able to buy it.

Supply side entirely ignores that more supply does not automatically mean more means to pay for the supply, indeed, it can run contrary (with increased automation). We (the world) have massive demand problem. Or rather I'd say the demand is there, but there are two prerequisites to be able to satisfy demand. The supply (and there's plenty of that), but also the ability to _pay_ for the supply. And there's not enough of that. And that's what it all really boils down to. If you have an IT company where marginal cost of sale is 0, so any gain goes to a few beneficiaries (few employees, owners, debt holders). But someone still has to pay for it, and unless those folks are getting money somehow, they can't.

A capitalism w/o a reasonable (this does not mean "equal", it just means w/o massive concentration on the top end) distribution of income is doomed to fail, as the ability to satisfy the demand evaporates.

Where Krugman has clearly won, even if some non-Keynesians have also won, is on his prediction of continued low inflation despite monetary stimulus. His liquidity trap theory was a fine way of explaining it, though there are also other ways. His liquidity trap theory is not from Keynes, really, but from Hicks, Most Keynesians expected QE to be somewhat more inflationary, as standard New Keynesian models predicted.

Where Krugman has partly won is in convincing a huge part of society of the benefits of fiscal stimulus and the horrors of austerity, especially young left-liberals. Large numbers of starry eyed young leftist idealists are now in favor of more military spending if it will boost aggregate demand. The counterexamples Tyler cites are all correct but they seem to be easily ignored.

Where Krugman has won nominally but not in real terms is in getting the "secular stagnation" theory accepted. Though for some reason most people wrongly credit Summers for reviving it, and seemingly no two people agree on what exactly secular stagnation means, and nobody's paying attention to Krugman's complaint that they're getting the meaning of it wrong. Increasingly it merely means national real growth rates have slowed, for any old hodge podge of reasons you like.

Where Krugman has mostly lost is in convincing governments of the benefits of fiscal stimulus and the horrors of austerity.

Where he most deserves to lose is his laser focus on calibrating aggregate spending, when even a pure socialist knows that future growth rates depend on how well each and every specific investment decision succeeds.

PS Where Krugman has also won is in convincing most people of the horrors of deflation. Others have helped including non-Keynesians. But even if most people don't understand why - they think it's because consumers delay purchases (nonsense), or debt is harder to repay (a problem of surprise disinflation, not of deflation). And even if his own explanation doesn't fully make sense - he claims deflation results in overly high real interest rates, but borrowers measure real rates in terms of their own future expected incomes, not expected future consumer prices. No matter, most people are certain that deflation is a danger.

low inflation despite monetary stimulus

Seeing as how US NGDP growth rate has been 4% in the last few year, I conclude that only an idiot would talk about ""monetary stimulus".

It's M*V, not M !

If you triple the monetary base while velocity goes down by a factor of 4, you have TIGHT MONEY !

"Large numbers of starry eyed young leftist idealists are now in favor of more military spending if it will boost aggregate demand."

Not really. Those "starry eyed young leftist idealists" would rather see spending on infrastructure and rolling back the unprecedented loss of public employment, primarily K-12 education. Unfortunately we live in a time where investing into America is considered radical Keynesianism.

Investing into America was not always so contentious.

"Unprecedented loss of public employment, primarily K-12 education."


I see that you are dataphobe. Don't be scared, the data does not bite, it only challenges your predetermined worldview.

There data is right here.

If you want some graphs in case you can't read the data, then here.

We rolled back a decade of student-teacher ratio gains.

Ever hear of reversion to the mean?
We experienced a temporary surplus of teachers which has now been corrected.


There is no magical mean or natural average for student to teacher ratio. However, as I pointed out, we have experienced a significant fiscal contraction on the state and local level. Your implication that the housing bubble and the financial crises had a beneficial consequence of correcting a surplus of teachers is simply preposterous. I cannot even comprehend the amount of mental gymnastics needed to arrive at that conclusion.

"investing into America" cannot be done by a non-profit entity. Without profits, "investing" is a concept that does not make sense.

"“investing into America” cannot be done by a non-profit entity."

What!?! Investment is new capital stock. Yes, the government can play a role by increasing the nations capital stock and infrastructure.

" rolling back the unprecedented loss of public employment, primarily K-12 education."

Yes, the CHILDREN are SUFFERING!! The $10K a year per student isn't enough!!!

Seeing the endless back-and-forth about the virtues of Keynesianism (vs Austrianism, or MMT, or other such cockamamie ideas), I am more and more convinced that most economists are in fact idiots who cannot grasp the implications of their own theories.

So-called "Keynesianism" relies on an assumption of a fixed monetary base. When you cannot increase M, you have to try to influence V.

However, we no longer live in a world where M is fixed. Until we do, Keynesianism is useless.

RIP, you will not be missed.

"The UK saw a rapid recovery" - this can't be right? Took 6 years for GDP to regain pre-crisis peak. On a per capita basis still well down...

1) The recovery took awhile to come, then it was rapid once it started. Perhaps this matters to the kind of story you want to tell about it, but my point is just that "rapid" is accurate.

2) The UK's recovery might not be that impressive absent context. But it is doing far better than most of Europe.

'Recovery' implies progress from recessionary trough surely? In which case 'rapid' is not quite right. Really what you are saying is current rate of UK growth is rapid relative to other countries, which is a different story. 'most of Europe' of course includes the Eurozone (different circumstances - i.e. most countries don't have control over their currency) and which, of course, was subject to austerity measures so it's not clear what value that comparison brings in this debate...

Again I'll put forth my simple rules:

1. Print money and increase fiscal stimulus (tax cuts are fine if you don't want actual gov't spending, Obama's stimulus was about 50% tax cuts).

2. Do you have inflation picking up?

3. If yes, go to 1, no go to 4.

4. Decrease #1.

Point here is that ultimately Keynesian policies are about proving you have achieved full employment, that you cannot increase output anymore given the current supply side policies and resources you have. Things like the unemployment rate decreasing are useful metrics but flawed (a low unemployment rate hides the fact that there are people not in the labor force who might come back in if demand increased)..

It is fair to test Keynesian claims that austerity would make the crises worse yet as many on the right have pointed out austerity has been imperfectly implemented. Consider total gov't spending in the US ( It rose rapidly after 2006 from 5T to a bit over 6T. While the increase then stopped it hasn't really gone down. At the same time monetary stimulus remained strong. While policy did not utilize my method above to confirm full employment, it was not a clean test of austerity inducing under-employment.

Krugman is absolutely right that the austerity/Austrian theory was tested and failed horribly in the last 5 years or so. You can assert that failing to employ Keynesian policies to their limit was tested but there the theories predictions are not clean. Keynesian theory does not predict the end of the world in that case but just a slower recovery, and lack of achieving full employment.

"austerity/Austrian theory was tested and failed horribly in the last 5 years or so"

Really? Compared to what?

Theory predicted that printing lots of money would make lots of inflation. Didn't happen. Likewise 'expansionary austerity' failed as well.

The first claim was pretty decisively disproven, but the second is not at all clear.

Yeah, as long as you don't eat or drive or heat your home, there hasn't been any inflation at all. You make a truly fantastic point.

Before Mitt Romney won the GOP nomination Newt Gingrich was running on gas prices. He was promising if elected he could get gas down to $2.75 a gallon. Right now in NJ gas is $2.58 a gallon.

See: shale. In other news, after a Republican congressional wave, humans landed a probe on a comet.

Boonton: consistently wrong.

Boonton, rhetorical question (that means I don't want you to write your answer here because you'll be more concerned about saving face than avoiding error): So the papers say there's no inflation, but the government is acknowledged to be printing lots of money. Where does it go?

Keynes = clever but wrong.

1. I do not see how that is a rhetorical question.

2. Where does it go? Well why would printing money cause inflation? Think about mechanics here.

Bakery makes 100 rolls a day and sells them for $1 each. Gov't prints $200 and gives it to roll eaters. What happens:

A. People show up buying 2 rolls each instead of 1. Bakery runs out of rolls after 50 customers leaving the next 50 frustrated.
A2 Bakery realizes early they are selling a lot of rolls, so they raise the price to $2.

B. The bakery realizes they are selling more rolls than usual. They happen to have a spare oven so they fire it up and make 200 rolls instead of 100.

C. People are worried so they take the extra $100 and stuff it in their mattresses. The bakery sells as many rolls as it did before so prices don't change and roll baking doesn't increase.

Inflation only happens in A. B represents stimulus doing what it is supposed to do. C represents a Keynesian liquidity trap.

The liquidity trap does not exist.

Now go away.

US Money supply appears to have tripled over the last few years. Are you going to tell us prices tripled or GDP tripled?

It's M*V, moron, not just M.

Daniel, do you realize that when you call morons morons, they stop listening to you? How can you get them to be less stupid when you call them stupid all the time?

Booton, you go from $100 chasing 100 rolls to $200 chasing 100 rolls.
Price is now $2 per roll. There is your inflation.

Unless the bakers make 100 more rolls, which Boonton very clearly mentioned.

thank you. This is an example of the type of thinking Krugman rails against. You have to think about the model you are using and not just rattle off pronouncements. Hidden in declarations like "$200 chasing 100 rolls" are hidden assumptions like the bakery is operating at full capacity and cannot respond by making more rolls or that people getting an extra $100 in their pocket will respond automatically by going out and trying to buy twice as many rolls as they did before.

Mechanically if you dramatically increase money supply but do not see inflation, then something else is happening.

It’s M*V, moron, not just M.

M is still money supply and a decrease in V would seem to be the same thing as possibility C, the liquidity trap. There are more dollar bills printed but because people do not want to use them to buy rolls someone who is just counting sales at the bakery will not see any of those new bills crossing over the counter. All that new money ends up in the mattress rather than as part of real transactions that impact GDP.

I will assume then that you are not the same Daniel who wrote hours before that the liquidity trap does not exist since it would be pretyt mornoic to say that and then post that falling V is why we don't see inflation.

Most likely both will happen. The bakery will be producing 150 rolls for 1.33 a piece.
There is still inflation happening, unless you believe this is completely one sided.

The fact that you need to look at M*V and not just M does not confirm the existence of a "liquidity trap", you idiot.

I agree the A,B, C are just extremes and most likely some combination of them will happen but if you do not have A, then you must have some combination of B or C. In either case I have not heard an argument against continuing to push easier money until you start getting A.

in my house all the V is going down ABOVE the mattress. WooH!

Dan knows what I'm talking about

The short answer is very little of the newly created money ever reaches circulation. Most of it winds up as excess deposits with the Fed, and these dollars can not be "lent out" by banks.

Ie, Krugman is a pure partisan hack liar, not an economist, said more politely by Tyler.

Krug has written 20 articles on no recent rise in inflation, screaming about his correctness, but whitewashes or flat out lies about his and Keynesianism's giant litany of failure.

*Which* Keynesians - paleo-Keynesians or neo-Keynesians? Scott Sumner maintains that the Market Monetarists are neo-Keynesians and that they're winning!

Krugman has a habit of confounding anti-anti Keynesianism (the belief that neither monetary nor fiscal stimulus should be employed in a crisis) with "Kenesinaism." His evidence is that anti-anti-Keynesianism is loosing. This is unfortunate in that it fails to identify the exact errors of policy during the Recession and recovery, namely, that monetary authorities did not keep NGDP growing at pre-crisis trend and fiscal authorities did not invest in projects projects whose net present values became positive at low borrowing costs - a fiscal response that would look a lot like crude keynesianism. That crude Keynesiam (fiscal only response) would be an improvement over no fiscal stimulus when there was also a less than optimal monetary response is correct, but advocating it without explaining the reasoning looses a teaching moment.

Scott Sumner is better in that he clearly focuses on the monetary response, but elides the role of increased public investment.

Why doesn't Cowen consider the possibility that QE helped compensate and negate the effects of austerity? It could be that the original Obama stimulus combined with the efforts of the Federal Reserve strengthened the economy enough so that it was able to weather austerity and the sequester better than anticipated. The fact that Cowen doesn't consider this a possibility is just another example of his anti-government, anti-Keynesian bias.

And how is QE Keynesian, exactly?

Exactly. Scott Sumner, Milton Fridman...these people recognize the folly of Keynesianism.

Remember that line about burying money in bottles and letting free enterprise dig them up? That is essentially the same as QE.

Keynes seems very pro-printer in the lit I've read

badass writer, too

Fracking is what saved our economy from the financial meltdown, the stimulus has very little to do with the recovery. The economy of the 2000s was fundamentally unsound due to an ongoing energy crisis in the US. In the 2000s we were discussing building terminals to import LNG all the while China was increasing demand for oil. So what happened was oil wealth was not being reinvested into oil development because most believed in Peak Oil theory and that Iraq would stabilize and provide supply relief. The potential of fracking just happened to come to light in 2008 while the world economy was collapsing.

"Keynesians predicted disaster following the American fiscal sequester, and the pace of the recovery accelerated."

The "recovery" is still really lame historically speaking despite the efforts of the Fed.

Krugman is exploiting an anomaly in right-wing economics among the hard money types to discredit right-wing economics generally. Clever, but it won't last.

Scott Sumner has been more right more consistently than all y'all for six years running now.

I'm not sure how any can possibly be convinced or have their minds changed after reading Krugman.

He's preaching to the choir.

There are so many inaccurate statements in the numbered items in this post I don't even know where to begin.

I'm going to have a Happy Thanksgiving with my family instead.

Happy Thanksgiving.

`And don't forget the postwar prosperity, which followed the biggest reduction in government spending in the history of advanced economies.


RGDP was lower in 1950 than it was in 1945.

I don't understand how Fama and Shiller are related to the Keynesianism debate, since their key results don't really bear on the questions of fiscal stimulus, recession, inflation, etc.

Because, like Krugman, they have Nobel prizes in economics.

The transition from the Great Depression into the Golden Age of social democratic capitalism was Keynesian, it wasn't supply-sider, Koch-funded theory. Austrian, "sound finance" theory is what got the global economy into Depression in the first place.

Actually, it was bad investment decisions, as it always is, but I'm sure you're not interested in reality.

6. Is the best argument in favor of Keynesians. Ireland tried austerity and it failed badly. The U.S. and Germany did stimulus and succeeded. There are many other good arguments against Keynesians but this is not one.

I think austerity saw some isolated success because not everyone did it. In fact, I wonder what the global "net" was during the Great Recession: stimulus or austerity? Some of you geniuses probably know...

Whatever the case: does anyone really think that--- during a severe slump---we can all go into austerity at the same time? How could you possibly stave off deflation? My head spins trying to digest that notion.

Yes, Iceland tried austerity and it worked.

"Keynesians predicted disaster following the American fiscal sequester, and the pace of the recovery accelerated"

No what they predicted was that the pace would be slower than if we didn't have the sequester. I don;t get it I thought that economists believe that correlation doesn't by itself prove correlation?

Do you want to argue that the pace of growth would have been slower if we had not had the sequester? If not then I don't get how this sinks Keynesianism no matter how many times Sumner declares that it has.

Regarding number 3 which 'continental economies' do you have in mind that relaxed austerity?

"France doesn’t seem to have much interest in trying additional government spending, even though their economy is flailing and no other attempted remedies have been successful."

So maybe if France did have 'much interest' their economy would not be flailing.

"Ireland finally is seeing a rapid recovery, albeit one with highly uneven distributional consequences and possibly another real estate bubble. The “get the pain over with” approach is looking better right now than it did say two years ago"

So two years ago you couldn't have written this post? I'm pretty sure you believed in austerity back then as well, if one takes a casual perusal of your archives.

Keynes has been discredited since the 1970s. There is no trade off between unemployment and inflation. The argument in favor of Keynes is an argument in favor of a bureaucratic elite, of which Krugman wishes he was a member, planning the economy.

C'mon Ejk you can do better than that. That only makes sense to the extent that you believe the crude version of the Phillips Curve is necessary for Keynesianism. For you to talk of Keynes is just absurd as the Phillips Curve came long after him.

Meanwhile its the RBCers that claimed to have discredit Keynes who are today the most discredited.

The basis of Keynesian Economics is raising the price level will reduce unemployment. The idea that workers have adaptive not rational expectations. Anything else is a basterdized version of Keynesian Economics.

Stimulus programs work according to Keynes by raising the price level and causing the real wage to decline, thus leading to more hiring.

Mike, you need to go back to MacroEcon 101 and read the section on Keynes. It is exactly as I described.

Well I for one am not so sure adaptive expectations were the wrong way to go. I'm a total skeptic of RE anyway and nothing that happened during the 70s or later proved its validity just that allegedly AE assumed people are stupid and it's not nice to assume people are stupid. However, are you claiming that Keynes believed in the Phillips Curve before Phillips even developed it? What then was new about it? Why did everyone treat the PC as something new in the late 50s?

I should also add that Keynes works if you believe that public dissavings will not be offset by increased private savings. But during the 2008-09 recession, we did see private savings increase as public dissavings increased. Thus proving Barro's Are Govt Bonds Net Wealth?

You're late to the game, Ejk. Keynes was discredited after the great depression of 1947 didn't happen.

What about the infamous Keynes multiplier on government spending? People focus on the US "stimulus" program but their real stimulus was the much higher deficit. Somewhere there is $4-6 trillion a year in missing economic activity that supposedly results from the multiplier.

Who has a $4.6 trillion dollar deficit?

^^guy who doesn't understand the concept of multipliers^^

Delusional leftist crap.

'Delusional leftist crap'

Yep, it's good to know that only Krugman doesn't give a fair hearing to the other sides views, clearly conservatives are very respectful and make actual intellectual arguments, not just swearing and name calling.

Do you understand that that was merely an insult, and not an argument? Leftists are generally idiots, but that doesn't say anything about the arguments they put forth for their ideas. Don't fall into the ad-hominem fallacy fallacy.

re point 3
I'm looking at GDP vs time for the UK!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_mktp_cd&scale_y=lin&ind_y=false&rdim=region&idim=country:GBR:IND:FRA&ifdim=region&tstart=722926800000&tend=1385614800000&hl=en_US&dl=en&ind=false

and I have to say, it doesn't look that impressive
If this is "rapid recovery" time to short Western Europe

re point 4, the baltics
aside from the fact that these are really small countrys (I mean, you don't normally compare a toyota corolla with a Mack Truck) we are looking at at least 6, maybe more, years before we get back to 2008 GDP levels
this is good ?!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_mktp_cd&scale_y=lin&ind_y=false&rdim=region&idim=country:LVA:LTU:EST&ifdim=region&tstart=722926800000&tend=1385614800000&hl=en_US&dl=en&ind=false

I don't know what Keynes the person would say to this -- but Keynesianism, as practiced in the real world, is just a fancy euphemism for "debt, debt, and more debt". The students who buried themselves in student loans to listen to Mr Krugman are still buried in loans, still without hope of getting a job that pays enough to justify those extra costs. In a similar vein, the federal government has been digging itself deeper and deeper in debt -- in the name of "Keynesian policy" -- with no hope from any political party to stop the deficit spending.

Mr Krugman keeps saying "now is not the time to pay the debt back" ... but given Mr Krugman's advanced age and the lack of any plan to control spending even 10 years hence, one has to wonder if Mr Krugman counts himself among those that will have to sacrifice to pay back these debts. "We" (meaning the arrogant few) decide how to spend the money, but "we" (as in not Krugman) will be expected to make all the sacrifices at some undetermined point in the future.

Krugman's arguments from an economic standpoint are questionable -- but from a morality and ethics standpoint, he is literally stealing money from babies. His generation of "experts" claim all the benefits, while some future generation gets the responsibility of paying back his debts.

Stealing from the future is not an economic policy. And in my readings of Keynes, Keynes always talked about paying the debts back himself. When is Mr Krugman (not future generations) going to repay these debts?

So far this "stimulus" amounts to $1.2 trillion in unpayable student loans, and $17 trillion in federal debt, and another $40 trillion in "promised" (but unfunded) entitlement spending -- and none of these so called Keynesians, from either political party, has any sort of a plan to repay the debts. Not even a hint.

This discussion is about ethics and morality, not just economics. If Mr Krugman ever gets off Princeton Univeristy's campus to see the world outside, I would challenge him to repay at least some of the debts he already insisted were necessary.

Dear GOS
The gov't finances its deficit, mostly, by selling bonds, no ?
And the people who buy these bonds do so voluntarily - no one is forcing me to go to fidelity or whatever and buy bonds
If I buy a 10,000 dollar US bond, voluntarily, and give it to my children, isn't that a benefit to at least one member of future generations ?
And if my children have to pay higher taxes, isn't it sort of a wash ?
The point is, depending on which Americans (and, despite yellow peril hysteria, it is mostly Americans) buy bonds, we can say we owe it to ourselves (or not - it is not so simple)

PS: your math is wrong, methinks
quote So far this “stimulus” amounts to $1.2 trillion in unpayable student loans, and $17 trillion in federal debt
If "this stimulus" refers to obama era stuff, - there was 10 or so when Obama took office (depending on when his budget kicks in); of the remaining 7, most is not (not) stimulus, but bush tax cuts, bush afghan/iraq war, etc
PPS: as to the 40t or so in unfunded realize this is over a long period of time, in an economy which is (today) 17t a year ?

Oh, so you are just making partisan excuses. This Keynesian nonsense has been going on for decades, under both parties. Uncle Sam has been spending more than it takes in for a good 50 years -- each President just makes the previous mess worse.

But you don't care about the country's long term future. You like to divide the country against itself along partisan lines -- so you and your bureaucratic friends can keep living well on future generation's credit cards.

You are a coward.

The Fed buy the bonds with the people's currency. That isn't a voluntary transaction.

Tyler Cowen says, quote
1. Keynesians predicted disaster following the American fiscal sequester, and the pace of the recovery accelerated.
Wiki says that PK and others said we would loose 700,000 jobs.
On the other hand, we are (as PK reminds us all the time) a 15T economy; last quarter we grew at ~ 4 (600 billion) so, given the quarter to quarter variation in the economys growth, the effect of an the 85B of sequester might be hard to see; I mean, if you have 400B in growth, how are you going to see ~ 40B in loss due to sequester ?

Turns out, far as I can tell, that the sequester did (per C Rampell) have a substantial effect on jobs
there are also anecdotal accounts

And evidence of serious problems due to sequester

Now the point here is that Keynesian made a specific, theory backed charge: that if the gov't cuts spending, in a depressed economy (sequester) job losses will follow
TC disputes that idea
far as i can tell, the Keynesian have the best of the argument, but I am an amateur

Ezra -- you completely ignore the cost of those jobs that you think are being saved. If Keynesian spending saves one job today, and turns your children into debt slaves, how is that a good thing?

Why doesn't future generations' welfare factor into any of these "theories"?

Keynesians don't have any argument at all. Whether or not you are an amateur is not an excuse. Tell us how you intend to repay the debts needed to delay (not avoid) those government job losses?

The long term (+20year) cost is not, afaik, the issue between PK and TC; the issue is, did the sequester harm or help the economy today ?
That seems to me to be the position staked out by TC (Tyler, I'm off, slap me down).

Kenyes has been dead for decades. The recent "sequester" (your label) was fraud. The government continued spending on everything they deemed "critical" -- which is virtually everything.

Spending beyond the country's means has been going on for decades. Austerity never happened to Washington DC or to people like Krugman.

Krugman has no intention of ever paying any debts -- not student, not Treasuries, not entitlements, nothing.

It is dishonest at best.

"Krugman has no intention of ever paying any debts — not student, not Treasuries, not entitlements, nothing.
it is dishonest at best "
well, it isn't dishonest, cause, iirc, PK and others explicitly say that there is no reason to pay off the debts, ever - they can be rolled over in perpetuity
might not be what you like, but it isn't dishonest

Toe-may-toe, toe-mah-toe ... Rolling over debts in perpetuity is just a dishonest way of saying Krugman planned to default from the beginning. He never intended to pay.

That is called fraud, Ezra.

Spending "beyond the country's means?" What is the current cost of the debt as a percentage of GDP? That would seem to me to be the best measure of whether something is beyond one's means--what it actually costs us. I believe that percentage is currently at or near post-WWII lows.

Maynard G Deadbeat -- Whomever taught you common sense owes you a refund. "Living beyond one's means" is any amount greater than your income. Cost of debt is irrelevent, unless you have been bamboozled by the likes of Krugman.

If you have $100, you may not spend more than $100. Period, amen, end of discussion. If you borrow more than $100, you must pay it back during your lifetime, or you must default. Unless you are a deadbeat like Krugman, debt is only a way to shift your consumption across time (spend more now using debt, means you spend less later so the debt gets repaid). The one and only way to exceed this number is by default.

Can't believe any educated person would need this explained....

To suggest that the debt can be rolled over into perpetuity is truly an argument of a dolt.

GOS--under your position and prescription, corporations would never borrow to expand business and individuals would never borrow to buy houses. When they do consider whether or not to borrow, the cost of the debt is extremely important. It is the primary factor in determining whether the debt is within their means. It's no different with a country. If there is a risk of default, the market will say so. Right now the market is telling us (long term interest rates at historic lows) there is zero chance of default.

As for my education, since you seem to call it into question, I am quite well-educated and well read, thank you. I try to keep up with both sides in economic matters, primarily Cochrane and Cowan on the right and Krugman and Baker on the left, but many others as well, as time permits. I am sure you are well educated enough to know that name calling and being rude does nothing to strengthen your position and argument. In fact, they weaken both.

That said, I am happy to have a polite and civilized discussion with you on this topic if you care to engage in one.

Maynard G Deadbeat -- you need to go back and read what John Maynard Keynes wrote, and stop listening to political hacks like Krugman. Keynes himself said debts needed to be paid back during periods of economic growth, so there would be borrowing room available during the next downturn -- Keynes himself advocated central economic planners running counter cyclical policies. For that matter, even the political hack Krugman has admitted that his stimulus debts need to be repaid someday, he just thinks now is not the time. Like most deadbeats, he advocates paying the debt back after he is gone, when it will be someone else's responsibility. Deadbeat Krugman will not make any sacrifices himself.

As for your stupid comments about what "the market" is telling us, perhaps you might want to learn how to read the Fed's own publications. The Fed bought 70% of all net Treasury issuance since QE3 started -- and Bernanke / Yellen are central planners, not a market of any kind.

Like your hero Krugman, you Maynard are nothing but a political hack masquerading as though you understand economics. Like Ann Coultier, you and Krugman are entitled to your personal opinions (no matter how wrong they are) -- but you are not an economist and no matter how many authors you claim to read, you clearly do not understand any of them... you don't even understand what Keynes wrote.

I don't know whether you actually "read" (run your eyes over?) the economic writings you claim, but your reading comprehension is just plain wrong.

"If there is a risk of default, the market will say so. Right now the market is telling us (long term interest rates at historic lows) there is zero chance of default."

When the Fed buys 40% of the market of bonds, the pricing is distorted. Have the Fed sell off those bonds tomorrow and what would the interest rates tell you about the default rate?

We live in an ongoing Keynsian economy which is why Krugman was wrong about the stimulus being too small. More Keynsian stimulus results in diminishing returns because the economy is always being infused with Keynsian stimulus.

Our economy was saved by fracking, and any stimulus that attempted to bring back the economy of the 2000s would have failed because the economy of the 2000s was deeply flawed due to an ongoing energy crisis. A free market economy can only function when demand results in more investment and development and supply is increased or displaced. So the high energy prices failed to result in increased production which resulted in bad investments in real estate. High prices must lead to investment that satisfies demand which is finally what happened with the fracking revolution.

What matters for sustained growth isnt Keynesian Economics. It is the Solow Growth Model, that determines growth rates.

Medicare, SS, Medicaid, food stamps, and deficit spending exist so as far as I am concerned Keynes won. I also believe that is why stimulus doesn't work because the most productive government spending is constantly taking place.

That said, with regard to the US economy since 2008 the private sector and fracking is what pulled this economy out of the Great Recession. No amount of government spending in the form of stimulus could have pulled us out of the Great Recession without solving our energy crisis. I think Medicaid, EITC, ACA employer mandates, and food stamps are undermining the economy by distorting the job market and wage growth.

One of the few reasonable comments here.

More Keynsian stimulus results in diminishing returns because the economy is always being infused with Keynsian stimulus. -
I don't think you know what Keynesian stimulus means, what diminishing returns means. or even what infused means.

I bet you have a poster of Paul Krugman in your dorm room.

I'd be interested in reading your substantive response to Boonton. I think he's suggesting that Keynsian stimulus is something different than the recurring deficit spending that has occurred, with a few exceptions, throughout the entire history of the U.S.

Also, would be interested in seeing some economic data on the macroeconomic effect cracking has had.

The most productive government spending is already taking place so the next dollar spent is less productive. Check out government spending as a % of GDP since 1900 and you will see the opportunities simply don't exist like they did in 1940--our military is strong, SS exists, and our infrastructure is constantly being upgraded and speedy development is difficult due to NIMBY (contrast California HSR project with Hoover Dam).

Here is a short article on fracking,

Gene, I respectfully disagree with your assertion about productive government spending. From a Keynesian perspective, the most productive government spending is that which is likely to increase aggregate demand--spending with a high multiplier. That would be spending that goes as directly as possible into the hands of people who will spend it.

Keynes illustrated this through an absurdly exaggerated example to make his point. He said, facetiously of course, that in a recession, government should bury containers of money and then pay its unemployed citizens to dig them up. This would be the most productive government spending in such times.

There may be opposition to it on political or ideological grounds, but the closest thing to this type of productive spending would be things like more unemployment payments, higher welfare payments, increasing food stamps, hiring more teachers and other government workers. Or simply paying people to do work--any work, including public works projects.

So don't really understand your diminishing returns argument.

Thanks for the article. It's a bit short on economic data and analysis on cracking, though not short on conclusions. :-)

"Fracking" not "cracking" of course. Auto-correct claims another victim.

One more point. I did check out government spending as a % of GDP. It would appear total government spending, as well as spending at every level of government, by this measure, is down since 2009. See:

Across the board by about 5%.

Keynes died in 1946 so he did not witness the amazing post-WWII boom. The Western nations have all developed economies with varying degrees of free enterprise and government spending. Some Western nations also benefit from oil and gas reserves. I would argue the US has figured out the best mix of government spending and free enterprise. Our dynamic private sector is why fracking and Google were developed here. I also don't mind wealth inequality in the US because the Gates and Jobs of the US generally do not sit on the money or build the equivalent of "Versailles".

Stimulus delivered in the form of food stamps or unemployment benefits that increases obesity and decreases desire to look for a job is simply not productive government spending. SS retirement benefits do not distort the job market but SS disability might if it is abused. Food stamps benefits have generally been directed at children and mothers because children can't work and raising children is productive work. So our ongoing food stamp program is a very productive use of taxpayer dollars as long as it is not encouraging irresponsible behavior in the form of single mothers.


The concept here is to ensure that demand is large enough to utilize all of supply. WWII was a case where demand exceeded supply, we know that because we had inflation, price control, shortages etc.

Stimulus would only have 'diminishing returns' in the sense that as you get closer to full employment you run out of options to expand GDP by doing more stimulus. Maxing out supply would have to show up as inflation picking up, wages increasing, and real interest rates going up.

Your post seems to envision diminishing returns as meaning you run out of ideas to spend money on.

First this is hardly the case. There's plenty of things we could spend serious money on if we wanted too. Take an amount like $500B over 3 years and I'm sure we could generate a short list of lots of useful things we could do with that money (rebuild bridges, resurface bad roads, upgrade critical rail infrastructure, get a couple of dozen space probes out there, etc.)

Second even if we couldn't think of things to spend money on you can give the money to people to spend themselves. You could do payroll tax holidays, aid to states to reduce their taxes, extend unemployment, food stamps etc.

Others here are discussing diminishing returns in the context of the multiplier. I think this is somewhat mistaken since the size of the multiplier depends upon how far you are from full employment. In a huge Depression just about everything and anything would have a large multiplier and if something doesn't then it doesn't really cost anything anyway. Consider, we borrow $100B and give it to Warren Buffett. Buffett spends none of it and stashes it all in savings. Well yes borrowing went up $100B but so did savings essentially making it a wash.

" I think he’s suggesting that Keynsian stimulus is something different than the recurring deficit spending that has occurred, "

But he's wrong. There is no difference.

how would you, or your family, value much better treatments for people who are paralyzed, cancer, heart disease, bad backs, blindness/deafness....

I bring this up, cause as a scientist, I know that we could use a *lot* more federal RnD - say an extra 100 -150bn a year

Surely, you and most Americans would say that a cure for spinal cord paralysis is money well spent, that those dollars are giving good return
the point is, yeah, we built dams and roads, now we need other stuff

Well, turns out we still need that stuff too, Ezra.

You mentioned infrastructure spending as stimulus in the reply below--NIMBY makes infrastructure spending for stimulus very difficult. I can give you multiple examples of NIMBY concerns saving cities or central planners disregarding concerns with disastrous impacts. The old Penn Station in NYC is at the top of the list. The Big Dig was actually a fix to central planning that destroyed neighborhoods. The guy that defined infrastructure spending for decades also wanted to essentially destroy the French Quarter in New Orleans with an interstate...NIMBY stopped it! In "The Sun Also Rises" Jake Barnes is critical of the "progress" of central planners in Paris creating boulevards through neighborhoods.

Don't get me wrong, I generally support big infrastructure projects, but if a person like Robert Moses happened to be in charge of stimulus spending the damage to our cities could be disastrous. Of course that would never happen today because it happened in the past and people began organizing to stop the destruction of our cities and now it takes a looooong time to get things built.

Obama even referenced this when he said "shovel ready jobs" don't exist...and that is a good thing!

There's a debate? Where?

I find that the word "Keynesian" or "Keynes" tends to cause people to line themselves with high predictably into different camps along what will often approach ideological lines, whereas I think the debate would be more constructively be framed as when supply-side and demand-side analysis, and monetary versus fiscal policy, is more or less likely to be a more suitable response. Presumably, there will be times when insights from all across the spectrum will positively contribute to understanding of what the heck is the relationship to what is done to try to steer an economy somewhat (if even through specific instances of insisting on doing nothing in certain areas of activity) and recorded outcomes of whatever actually happened in periods of time during and/or after the policy/program or what have you is implemented.

I do think that a lot of people are quite responsible in treating this as a primarily technical question, but just saying that putting it on Keynes I think leads people to consistently oversimplify either one or the other side of the debate and line up with greater consistency along ideological lines.

I think if this were to be convincing, then the numbers in each of these cases would be looked at more deeply and then given some comparative context. The recovery in the US may have not been as bad as
Europe's but is certainly not a cause for joy-- as in -- what is happening to wages and what happened to the labor market participation.
If you read enough of PK's stuff, each of TC's assertions or at least the most clear of them--as some of them seem fairly marginal (maybe that's why he calls his blog such:) ) , then you would see that those assertions are contradicted. I understand for those who either dislike his progressive point of view or his Keynesian approach PK's prominence is kind of like a
White Whale, but rather than flood the air with contradictory points of view, how about doing some solid work on data and use historical context to test your ideas. Then, you too can get the attention you deserve-- good and bad.

"Attempted riposte."

Please contrast Tyler and Krugman. A class guy vs. a zealot rabid dog fruitcake.

That his beliefs are religious and precisely not subject to test and refutation, or we'd have been done with them in 1946, yet he hurdles this exact accusation at others, is merely why he's wrong. How he conducts himself is why he's a zealot rabid dog fruitcake.

Well, turns out we still need that stuff too.

"There may be opposition to it on political or ideological grounds, but the closest thing to this type of productive spending would be things like more unemployment payments, higher welfare payments, increasing food stamps, hiring more teachers and other government workers. Or simply paying people to do work–any work, including public works projects."

This isn't true. "Hiring teachers" is a terrible blanket statement that makes liberals feel warm and fuzzy, but hiring teachers for no reason other than they are teachers doesn't produce economic returns. I suppose I shouldn't have bothered to reply when you noted that "paying people to do work- any work" is a good thing; that alone denotes you have serious deficiencies in critical thinking skills.

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