Or does Krugman merely want John Cochrane to be a Bayesian?
It seems to me that Cochrane’s position – he only said it was a danger, not that it would happen at any particular time, so it signifies nothing if it doesn’t happen even after four years have passed – is just untenable in its strong form. If saying that something is a danger carries no implications for the likelihood that it will actually occur, what is the point of saying it? You might as well stand up there and say “Nice day for weather” or sing “Mary had a little lamb.”
No, clearly talking about the danger of inflation was some kind of statement about probabilities – in particular, a statement that the probability of inflation is, according to the speaker’s model of the world, higher than it is in other peoples’ models of the world. And that means that actual events do or at least should matter – they may not prove that one model is wrong and another is right, but they should certainly affect your assessment of which model is more likely to be right.
In short, it’s a Bayesian thing.
Now let’s apply this to market monetarism. Early in 2013 Krugman claimed that MM was about to be tested:
as Mike Konczal points out, we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens.
And the results aren’t looking good for the monetarists: despite the Fed’s fairly dramatic changes in both policy and policy announcements, austerity seems to be taking its toll.
The results are now almost complete. So far both RGDP and NGDP growth, as well as job growth, has outperformed the 2012 pace. So MM easily passed the test. And how did Krugman react?
One way to look at the US economy in 2013 is that it was, in effect, trying to begin a strong recovery, but was held back by terrible federal fiscal policy. Housing was making a comeback, state and local austerity was, if not going into reverse, at least not getting more intense, household spending was starting to revive as debt levels came down. But the feds were raising the payroll tax, slashing spending via the sequester, and more.
Incidentally, these other factors are why I don’t take seriously the claims of market monetarists that the failure of growth to collapse in 2013 somehow showed that fiscal policy doesn’t matter. US austerity, although a really bad thing, wasn’t nearly as intense as what happened in southern Europe; it was small enough that it could be, and I’d argue was, more or less offset by other stuff over the course of a single year.
Here’s more from Krugman (titled “The Year of the Weasal“):
This is, I’d argue, a significant development, because it gives us a new window into the nature of the disagreement. As late as last year you could view this as a legitimate contest between rival models. But we’ve now seen that one side of the debate not only refuses to take evidence into account, but tries to dodge personal responsibility for getting it wrong. This has gone from a test of ideas to a test of character, and a lot of people failed.
I don’t think I even need to comment.
[Update, In case Noah is reading, maybe I do need to comment. I mean one shouldn’t attack others and then do the same thing. Obviously I am not saying either Krugman or Cochrane lack character.]
And then this:
No, really. Business Insider contacted him about his 2009 warning that soaring inflation and interest rates were just around the corner — and he not only admits that he was wrong, he admits that his error signified something wrong with his overall economic model:
“Usually when you find the model this far off, you’ve probably got something wrong with the model, not that the world has changed,” he said. “Inflation does not appear to be monetary base driven,” he said.
This is a remarkable act of intellectual honesty — remarkable because it happens so rarely.
Finally something on which I agree with Krugman. Yes, it happens so rarely.
PS. I have a post over at Econlog that looks at this Krugman response from a somewhat different angle.
PPS. Saturos directed me to a Noah Smith post on people who do not update their priors.