Very good sentences about austerity

Yes, it would be useful to do a more systematic study of fiscal austerity, but the Keynesians don’t seem to know how to do so. All I see are cross sectional studies that mix together countries with an independent monetary policy, with those that lack an independent monetary policy (like the eurozone members.) Mark Sadowski did a regression with only those countries having an independent monetary policy, and found the effect went away. No correlation between austerity and growth. This objection to Krugman’s graphs has been made over and over again, but he never responds.

Simon Wren-Lewis also gets the GDP growth data wrong, in a way that makes austerity look worse. He claims that RGDP growth was 2.3% in 2012 and 2.2% in 2013 (the year of austerity in the US.) But that’s annual y-o-y data, and since the austerity began on January 1st 2013, you need Q4 over Q4 data. In fact, RGDP growth in 2012, Q4 over Q4, was only 1.67%, whereas growth in the austerity year of 2013 nearly doubled to 3.13%.

Wren-Lewis says “other stuff happens.” Yes, but the “other stuff” that happened in 2013 is exactly what you might expect with aggressive monetary stimulus, whereas the other stuff that happened when Britain saw a couple years of low RGDP growth, was not at all what the Keynesian model predicts. The British growth slowdown was a productivity story (their job creation is more impressive than the US), and productivity slowdowns suggest supply-side factors (declining North Sea oil output, a structural shift from high compensation City jobs to low compensation service sector jobs, etc.)

Do I need to tell you that is from Scott Sumner?  I would add that the “other stuff” — for some but not all countries — is that the regenerative powers of a market economy are stronger than most Keynesians are willing to let on.  And you can buy into the entire Keynesian apparatus (I don’t) and still recognize that most of the time fiscal policy simply isn’t that important.


Mark is greatly missed (one hopes has his significant talents are now properly monetized). He brought a lot of sorely-needed statistical rigor to the debate.

Fiscal policy is extremely important to the economy of Washington, D.C.

Thing is, Keynesian economics is, at its heart, a gold standard model.

So no wonder it breaks down when applied to a fiat money economy.

Unfortunately, economists are too stupid to understand the implications of their own models, so zombie ideas march on.

@Daniel the're here now? Bummer. You seem to use the word 'stupid' a lot, seems there's some projection there.

Question: how different is monetary policy from fiscal policy? Not much. Both are attempts to use sticky wages or sticky prices and the money illusion to increase output short term (influencing either or both of short-term AD/AS). As such, even Sumners' 'target NGDP' monetary system is destined to fail, like the Keynesians fiscal system.

You're a moron.

It would be more constructive if you would be more specific about which "zombie ideas" you refer to so they can be tackled head on.

I usually assume that people who use words like "stupid" a lot are probably wrong. Among other things, they spend more time attacking people than actually upholding anything of value.

The zombie idea I'm refering to is the "liquidity trap"/"zero lower bound". Which only exists in the mind of Keynesians.

If it's such a zombie idea, it should be pretty easy to rip to shreds instead of bandying about terms that tend to predispose people to agree or disagree, like "Keynesian".

Seeing as how the "liquidity trap" bullsh*t is the main thing that sets apart Keynesianism, I'd say the use of the term if fully warranted.

And I don't think anyone needs to rip it to shreds, real-world events have already done so (see Abenomics and the devaluation of the Swiss Franc).

In other news - you think you're smart, but you're not.

You're so smart that you prove things without proving them.

So it's settled then, economists have finally come to a definite conclusion, right? Right?!

It's ironic to see economists fight each other tooth and nail over the most abstruse minutia in their models knowing that they were utterly useless when it came to seeing the biggest crisis of the last 80 years coming. What value do these people really produce?

It's called the efficient-market hypothesis (EMH). Look it up, moron.

The problem with the EMH is that it isn't testable in any meaningful sense. You run into issues such as the dual hypothesis problem (which requires an asset pricing model that can't exist) or you end up defining EMH in some trivial manner, such as everyone can't beat the market (duh, welcome to Lake Wobegon).

The only question is: how efficient?

It's not that everyone can't beat the market, it is that YOU can't beat the market. Like many cocky 18 year old sports fans, my first real-world introduction to the EMH was the world of sports gambling, which looks like easy money when you're standing on the sidelines.

But Sumner has had a bead on this thing for years. From February of 2009:

Reminds me of this:

Unfortunately, Friedmanism today has no tribe and is besieged on both sides by Austrian and Keynesian tribalists.

Friedmanism today has no tribe and is besieged on both sides by Austrian and Keynesian tribalists.

Somehow I do not think the two-digit population of eccentrics on the staff of the von Mises Institute are all that influential.

Yes, but a 'common sense' 'hard money good, inflation bad, monetary policy ineffective' mindset is extremely pervasive on both the left and right. Obama is one such example.

Friedman's ( and Sumner's) ideas are subtle and not well understood.

The Austrians do not say that monetary policy is ineffective. They say that the optimal policy is a currency board and make up strange excuses when confronted with the evolution of monetary aggregates and production levels during the Depression.

Art Deco,

Where in the world did you get that from? Look at Yeager, Horwitz, Selgin, Salter, etc.

From reading (1) Steve Hanke (who is the Austrian with mainstream connections) and intermediated correspondence with Robert Murphy.

Their popularizer Ron Paul is a well known gold bug. Do not know where you been.

Brief discussion of Hanke and Schuler of the v. Mises Institute here

Richard Ebeling, also of the von Mises Institute (this on gold rather than a currency board)

Robert Murphy on the historical gold standard:

Art Deco,

The article that you linked to from Bob isn't stating that market based currencies are the preferable way to go, but that there are actual intellectual discussions that occur involving market based currencies as a possible alternative rather than just nonsense. I'd say something similar about the piece from Ebeling. As someone who has read and studied the work done by the other scholars that I mentioned, you can't say that the opinions are the official opinions of "Austrians." Unless you happen to believe that the Mises Institute is official representative of all scholarly work done under the title of Austrian.

As someone who has read and studied the work done by the other scholars that I mentioned, you can’t say that the opinions are the official opinions of “Austrians.” Unless you happen to believe that the Mises Institute is official representative of all scholarly work done under the title of Austrian.
Yes, I do say that. If the output of the von Mises Institute is not indicative of what is bog standard Austrian policy prescription, nothing is. There are just not that many Austrians, and a large share of them are on the staff list at the von Mises Institute. You've made your case that there is some dispute over these ideas among Austrians (and you can find commentary from Steven Horwitz complaining that Austrian discussion is polluted by cranks). They are still Austrian notions, to the exclusion of other schools of thought among economists.

The dismal science indeed, all around.

But Keynesian economics can fix every woe, and austerity is bad; don't bother me with the counterevidence, says the left.

Wren-Lewis responds:

It would perhaps help the debate if Tyler could make his cash clearly and coherently, without being arch and linking to others saying stuff. Would be a first time in this blog's history...

How would it help the debate? You'd just say he's obviously doing faith-based economics that you don't need to respond to (maybe you post a government spending chart - as if one purely spending-based indicator equalled the fiscal stance).


You completely misread my comment. I have not said Tyler is wrong, but simply that he never ever laid out his case. I think it's important in any discussion where one takes sides to do so in order for others to be able to make a critique. Instead, we get this constant "good sentences" and "mood affiliation" crap, respectively, from which no coherent position - or any position, period - emerges. Except, of course, that there are indeed political factions in this debate, and Tyler very much aligns with his side. Like anybody else, but without ever having made an actual argument of his own, some vague comments nonwithstanding.

It's a blog, not an academic journal. But I do not doubt that your point is also appreciated.

Nathan W,

I agree: this is not an academic journal. Still, you got people like Cochrane, Krugman, Sumner, and Wren-Lewis doing their best to explain themselves, some doing quite a bit of modelling in the course, or even writing papers. The point is not that they are not engaging in motivated reasoning, or that I agree or not with one or the other. But that they all do their best to define and defend their stance. Tyler has not been doing anything the like, half a decade into the crisis regarding the topic at hand. In some imaginary world he seeks to include a wide range of views, in reality he just dissolves in rhetorical ploys, "mood affiliation" and the "very good sentences" just being the worst offenders in terms of empty concepts that disguise simple snark most of the time. Maybe, if he ever lays out a clear argument, it will carry him to the whatever his stance already is. In the meantime, not doing so and just engaging in this pseudo-evenhanded "Look what interesting stuff this guy there says", he appears really just the most politically motivated of all of them.

I agree with Martin's criticisms.

It would be nice to read a directly stated opinion, with some factual support, as to what the problems are and how they should be addressed.

I think he does more to stir up debate here, and does his more carefully thought out work elsewhere. I don't come here for prepackaged ideas and/or fully fleshed out arguments, more so for the debate and variety.

At the very least we should be able to agree on what constitutes austerity and when it started. Wren-Lewis's graph looks accurate to me.

Size matters, but results matter more. Monetary stimulus is the first line of defense in a financial crisis because it's easily and quickly implemented, but I'd argue that the results leave a large part of the economy unsatisfied and in need of more stimulus. Did monetary stimulus prevent another great depression? Probably. Did monetary stimulus preserve the conditions that created the financial crisis? Probably. In a financial crisis, with the value of financial assets collapsing, there's no time for fiscal stimulus. Indeed, what's needed is a crisis manager not an economist. And sure enough, Geithner, who in his book describes himself as a crisis manager and not an economist, collaborated with Bernanke to craft and implement monetary stimulus to end the financial crisis. And it worked! It worked so well that the value of financial assets not only stopped collapsing but have been rising at historic rates, not only restoring bank balance sheets but sending them to records. Indeed, for everyone who owned financial assets, the monetary stimulus has been the gift that keeps on giving. Monetary stimulus: it's quick and leaves owners of financial assets satisfied. What about sectors of the economy other than the financial sector, are they satisfied? If there's another financial crisis, will those in the other sectors support another round of monetary stimulus? [Of course, this debate is only nominally about the effectiveness of monetary policy vs. fiscal policy. The real issue is inequality, as fiscal stimulus is just another term for redistribution, which explains the stridency of the two sides in the debate.]

If I understand the argument correctly and take the liberty of an extra half step, you mean that there was too much monetary stimulus because there wasn't time for fiscal stimulus, and this resulted in insufficient creative destruction in certain asset categories, and this left too little unsatiated demand (and capacity) for fiscal stimulus in those areas of the economy where they might have been most productive/efficient.

Did monetary stimulus preserve the conditions that created the financial crisis?

Are the delinquency rates on bank loan portfolios rising or declining? Is the ratio of outstanding mortgage debt to personal income rising or declining? Have trailing P/E ratios the last six years been above or below the median of the period running from 1966 to 2008?

Damn, you're so stupid, you're NOT EVEN WRONG.

Geithner, who in his book describes himself as a crisis manager and not an economist, collaborated with Bernanke to craft and implement monetary stimulus to end the financial crisis.

1. Foreign politicos who saw Geinther at work during the Asian crisis were pretty unimpressed with him.

2. I cannot see how Geinther matters more than any other member of the Federal Open Market Committee re QE.

3. The TARP program was Henry Paulson's initiative, amended by Barney Frank et al.

4. The guarantee on bank bonds was the work of Sheila Bair et al at the FDIC.

5. The conservatorship over Fannie Mae and Freddie Mac was sought by Henry Paulson and approved by Congress.

6. IIRC, Geithner actually was the conduit for the bridge loan to AIG (which was a loss for the Federal Reserve) and involved in the other Maiden Lane deals. Cannot recall v. the purchase of Merrill Lynch or the special dispensations for Bank of America and CItigroup.

7. Charles Calomiris complained in early 2009 that there was a playbook for containing financial crises that Paulson, Bernanke and Geithner had tossed out in favor of mad improvising. They were successful, but, per that particular expert, in a very messy and haphazard way.

Barney Frank restoring the saner mark-to-market rules that prevailed from the mid 1930s to 2007 doesn't get nearly enough credit.

The stock market literally bottomed on March 9, 2009, the day Frank said his committee would have those changed back.

I think you mean book value accounting. Mark - to - market was in place for some time after 1993 in reaction to the S & L mess. I think the complaint about it was that it conflates liquidity and solvency. Your remark about the stock market is a post hoc fallacy.

Post hoc obviously, but 'fallacy' I don't agree. It may not be the only factor but it's not merely coincidental. The exact day Frank said banks didn't have to watch their capital evaporate because they had to mark their loans to what they'd sell for that day instead of what they were intrinsically worth the market hit bottom, turned sharply higher and never looked back. Capital stopped fleeing the system.

The rule was in place from the 1930s until 2007 when some greedy idiots said 'hey let's allow banks to mark their loans to where they can sell for in this crazy frothy market'....of course on the way down it hurts big time. One of the reasons the S&L crisis was a relatively contained situation and not a 2008-style mess was that rule. Once it was gone in 2007, 2008 happened.

Take a look at some of Brian Wesbury's stuff over at First Trust.

I do not recall the loan portfolios of commercial banks were that much of a problem (bar Wachovia, WaMu, and Citigroup). Residential real estate loans did have very elevated delinquency rates , peaking in 2010, well after the crisis point (the condition of commerical real estate portfolios was worse in 1991 among commercial banks, much less savings banks). Various sorts of institutions were sitting on mortgage backed securities of uncertain value and futures, options, swaps, and derivatives of very uncertain value. IIRC, what triggered the partial nationalization of Citigroup was obligations derived from a shizzy instrument that Robert Rubin said he had never heard of (some sort of 'put'). What brought down AIG was un-hedged credit default swaps.

@msgkings Ok, ill bite, how do you determine what a loan is "intrinsically worth"?

If you consider that most of the fiscal stimulus went to wealth bankers (a lot of it anyways), I don't think the argument that fiscal stimulus is about redistribution really pans out. I believe it should have been more redistributive than it was.

I don't have a very strong opinion here. I tend to buy the logic of AD and AS in the Keynesian sense, and am not interested in discussing crowding out with people who are unwilling to acknowledge the possibility of crowding in.

My point is a different one, with regard to the data.

There are business cycles.

Once there is austerity, probably you're pretty far down in the doldrums of the business cycle.

In some cases, it will make things worse through effects on AD. But in some (probably many) cases it will occur at the very moment when the business cycle was already turning.

The point is that standard estimation methods will confound these effects, easily explaining the lack of effect presented in their paper.

I think it would be more interesting to go back to the data and treat the cases of austerity associated with worse and better outcomes, and try to understand why it appears to work when it appears to work and why it doesn't when it doesn't. This would be useful in trying to understand when austerity might be useful, as compared to trying to establish general rules like (austerity always destroys everything, austerity always fixes everything ,or austerity never does anything in particular).

I suppose it's a business cycle in the sense that different sectors (and, hence, different regions) in the U.S. have experienced ups and downs that, over time, should even out with effective monetary and fiscal policies that facilitate the cycle. Krugman has a post on his blog this morning in which he describes the cycle in Europe, with capital flows from one region (Germany) to another (the southern fringe), the former region experiencing deflation and rapid economic growth in large part from the sale of goods to the southern fringe (facilitated by the deflation and lower prices for its goods) while the latter region experienced inflation (and little if any economic growth due to the inflation and higher prices for it goods). When the inevitable tide turned (i.e., the cycle), the two regions should swap places, with Germany experiencing inflation (making its goods less competitive) and the southern fringe experiencing deflation (making its goods more competitive). However, Germany isn't cooperating, refusing to adopt inflationary measures even as the southern fringe is experiencing deflation, upsetting the cycle and causing the southern fringe to be stuck in a combination of deflation and no economic growth. In the U.S., a combination of monetary policy (primarily low interest rates) and fiscal policy (subsidies for home ownership) resulted in bubbles (financial assets and housing) which eventually burst, setting off a financial crisis, the response to which was to adopt monetary stimulus to stop the value of financial assets from collapsing further and, eventually, to inflate the value of financial assets (restoring bank balance sheets) while letting the housing sector (and the manufacturing sector that supplies the goods for it) to continue its deflationary spiral until reaching its "natural" value, the effect of which was to shift economic growth and value (back to) to the financial sector (and the regions where it is primarily located) and away from the housing (construction and manufacturing) sector. One could say that what's occurring in Europe and in the U.S. is simply the application of the golden rule: he who has the gold makes the rules, Germany in Europe and the financial sector in the U.S.

The subsidies to home ownership have been in place since 1937. The low interest rates were in place from the fall of 2002 to the fall of 2004. The point at which housing prices detached themselves from nominal incomes was around about 1997 on the Case-Shiller 10 city index. Something else was at work there generating that bubble.

n the U.S., a combination of monetary policy (primarily low interest rates) and fiscal policy (subsidies for home ownership) resulted in bubbles (financial assets and housing)

Are you saying that monetary policy should have been more expansionary pre-2008 ? Because that's what your complaint about "low interest rates" implies.

Or (more likely) are you some moron repeating stuff he heard other morons spout ?

The term "moron" has been used 5 x on this thread, all by you. The term 'stupid' has been used 4x, twice by you and twice quoting you. Can you dial it back? Very few people are so knowledgeable on these topics they're in a position to talk to others that way and the ones who are (Krugman excepted) generally refrain.

Seconded. Daniel, you are tirelessly and tiresomely uncivil.

The correct term is 'asshole'. You guys may take the high road with that douche but I won't.

I think msgkings is being too kind.

There are two options:

A. Spend a billion $ to fix problem X

B. Spend less $ to fix problem X

Seems if there is "No correlation between austerity and growth." I'd go with option B, as I wouldn't be a billion $ in the hole when the crisis is over/

Krugman has mastered the art of hurling the most vile invective at others for their (his view) perceived mistakes and absolutely ignoring / stonewalling on his legion of errors.

He is not just s bad economist but a disaster of a human being.

The man has personality problems up the wazoo. Bradford deLong does as well.

Interestingly enough, the man was not a sectary prior to about 2001. Age does bad things to some people.

Compared to Krugster and the like, Brad is a reasonable person by comparison . He is right on several things, wrong on others

They both may be right or wrong on this that or the next thing. Neither one conducts himself in print in a manner fitting for late middle aged men (54 and 61 respectively) with tenured academic positions at research universities. Compare them to Sumner or Lawrence Lindsey or Casey Mulligan. Sumner, Lindsey, and Mulligan are advocates. deLong and Krugman are adolescents.

replace fiscal with monetary and Krugman with Sumner and you could write exactly the same essay.

It's pretension of whale-like proportions for academics who probably employ others to file their tax returns to use analysis based on bogus statistics to make policy recommendations that can affect for good or ill millions of innocents. The conversation is akin to the scholastics arguing over the number of angels that can dance on the head of a pin but that discussion didn't produce inflation.

Good monetary policy is invisible.

Bad monetary policy feels like the end of capitalism.

You, on the other hand, are an obscurantist moron.

Our economists are extremely pretentious, yes indeed.

They can't prevent actual national economic problems.
They can't even predict such problems specifically.
They can't cure the problems that arise.
They can't even agree on their core economic principles.

Yet they talk & write endlessly and ostentatiously with the self-confidence of a fundamentalist preacher presenting the the will of god. Their layman followers slavishly agonize over every detail and nuance in a quest foe economic salvation.

The religious metaphor (angels on pinheads) is quite apt. Economics discussions are largely faith-based ideological interactions. Most economics is para-religion in practice.

They can’t prevent actual national economic problems.
Yes they can, if you listen to them. Economists disagree among themselves about the optimal way to navigate the business cycle (which is seldom that important). The vast bulk not talking book will tell you not to impose rent controls, not to subsidize particular economic sectors, and to attempt a variety of tools to address environmental problems (other than command-and-control regulations). We'd be better off if politicians heeded these counsels.

It's mostly "our" fault. Who reads economists who say "it's complicated and I don't really know, but here are ten ways to get ten different answers"?

And most especially, decision makers want simple answers, and so people who give the simple answers they are hoping to get are more likely to get those jobs.

We need to hire decision makers who can handle advice that involves significant uncertainty, and most especially, which challenges their preconceptions. But instead we hire decision makers who give good pep talks and corroborate our pre-existing world views.

There are some issues with the way Sumner calculates the growth rates that introduce a lot of error -- in fact, his assertions can be entirely attributed to error and it is difficult to make a case that growth has been anything other than constant over the entire post-recession period:

Isn't your analysis just further strengthening Sumner's view? I mean if you cannot detect the austerity in the GDP trend line, we should do austerity right? I mean no point in growing Government debt if we don't have to.

Please explain Mr Jason Smith how you know that GDP is a smooth function and how much of the quarterly variations are estimation noise? BTW, I don't disagree with the idea that a lot of these analyses are cherry picking data points on both sides of the debate. It's like climate science.

In climate science, ONE time there was a case of cherry picked data, and because they were good scientists they came clean about it.

Something about tree rings, but they were not sufficiently representative.

Key thing being that good scientists come clean about this stuff. But when those good calls get bandied about so many years later, it becomes difficult to do good science.

Mr Jason Smith's method (log linear model) is guaranteed to maximize the estimate of the uncertainty in the measurement. So let's at least get that on the table Mr Smith.

Needless to say, that from a German perspective (a look at the IMF data : - )
as referenced by me as anonymous at 9:05 at the SWL site,

both are wrong and the Bundesbank is right

Hurray for deflation!

An in the countries with 0 inflation in the last ten years, Switzerland and Japan, that had what dramatically negative effects,

according to your opinion, based on referenced data ?

genauer has a bit of a point...the whole world is going to demographically look like Japan someday, Europe is starting to now...deflation may be the future. But Japan is a safe, healthy, prosperous first world place, not sure that's so bad for the whole world.

the whole world is going to demographically look like Japan someday, Europe is starting to now

The total fertility rate of European countries averages to 1.6, higher than Japan's 1.4. European counties' fertility problems are of more recent vintage and less intractible, with a number of countries registering partial (Russia) or near-full recoveries (France, Britain).

The ECB and Germany could profit from the Swiss example.

where would we be without some good old-fashioned German racism ?

Sumner in this post and often leaves out the point that "Keynesians" usually assume: that Monetary policy has been constrained by inflation hawk, gold bugs and similar vermin. When Monetary policy is constrained in being able to meet its targets, fiscal policy can play a positive role. Moreover, even if monetary policy were optimal, the low interest rates on long term bonds during the recession and recovery ought to mean higher levels of government investment on projects whose net present value have become positive. Although this ought to be an "automatic stabilizer," this would look like "fiscal policy." "Keynesianism in practice is basally an argument against budget deficit cutting in a recession. Has Krugman ever argued for anything different?

When Monetary policy is constrained in being able to meet its targets, fiscal policy can play a positive role.

It's called "monetary offset". Look it up, moron.

That's the 6th time on this thread you've called someone a moron.

that Monetary policy has been constrained by inflation hawk, gold bugs and similar vermin.
No it has not. There are no gold bugs with any influence over domestic monetary policy. Steve Hanke's consulting work is for foreign governments. As for inflation hawks, the Federal Reserve's judgment of tolerable inflation has for more than 30 years run to about 2.4% per annum v. the 1.7% per annum which prevailed during the period running from 1952 to 1965 or the lower figures registered prior to 1929.

So the Fed gets to determine what level of inflation is "tolerable"? How come we don't get to vote on that in our precious representative democracy?

Oh, but you do. When the Federal Reserve is insouciant about inflation, the political office holders are put out on the curb. See Carter, Jimmy.

Actually, this is one of the few areas that almost everyone with an INFORMED opinion on the matter agrees on.

Keep the politicians as far away as possible from this. Leave it to the technocrats. Keep it out of elections.

Really. I will argue for people's involvement and free expression in a million ways, but monetary policy is basically figured out, so keep meddling politickers out of it.

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