A number of Keynesian bloggers have recently expressed dismay that the rest of us don’t buy their model. Maybe it would help if they’d stop ignoring our criticisms of their model, and respond to our complaints. Here are some questions:
1. What is the proper measure of austerity? The textbooks talk about deficits. But most of the Keynesian bloggers focus on government purchases. So which is it? And if it’s purchases, why did these same bloggers claim that austerity would result from big tax increases in the US in 2013, and a big tax increase in Japan in 2014? And why does the measure chosen (ex post) usually seem to be the one that best supports their argument in that particular case?
2. Why do Keynesians show cross-sectional graphs of fiscal austerity and growth, mixing in countries that have their own independent monetary policy, with those that do not? (I.e. those lacking monetary offset.) And why don’t they respond to criticisms of those graphs? And why tout cross-sectional studies of fiscal policy at the level of American states, when no American state has an independent monetary policy?
3. Why claim that fiscal policy can be effective in the special case where a country is at the zero bound, and then claim that austerity caused the eurozone double-dip recession even though at the time the eurozone was not at the zero bound? The eurozone’s positive interest rates were prima facie evidence that the ECB had inflation right where it wanted it until 2013, or else they would have further cut their interest rate target.
4. When claiming that fiscal austerity reduced aggregate demand, why do Keynesians almost always provide data for RGDP growth, when NGDP growth is a much better proxy for AD? NGDP is a direct test for AD shocks, whereas RGDP can be impacted by either AD or AS. RGDP doesn’t show AD changes, it shows aggregate quantity demanded. RGDP rose in the US between 1865-96, was that more AD, or more quantity demand as supply rose?
5. The transmission mechanism between AD and RGDP in the Keynesian model runs through jobs. So why claim that low British RGDP growth was due to austerity when in an accounting sense it was almost all productivity—employment keeps hitting record highs? Is there a new Keynesian model I don’t know about where austerity kills output without killing jobs? A sort of reverse neutron bomb?
6. Why did Keynesians say that 2013 austerity in the US will be a test of market monetarism, and that slow growth in Britain “proves” austerity doesn’t work, but then when 2013 comes out with almost twice the US RGDP growth as 2012 (Q4 over Q4), they suddenly say that anecdotal evidence doesn’t matter?
7. Why act like anti-Keynesians are bizarre heterodox economists, who reject mainstream macroeconomics, when it is the modern Keynesians who have recently rejected the claim in the #1 monetary textbook in America that monetary policy remains effective at the zero bound. Keynesians have walked away from the standard textbook natural rate model that after 4 or 5 years wages and prices will adjust to a demand shock and employment will go back to the natural rate. Keynesians now talk about “paradox of toil,” and claim that employer-side payroll tax cuts (or wage flexibility) are not expansionary. Keynesians now claim that extended unemployment insurance doesn’t increase unemployment, even though they once said it did, and empirical studies show that the effect on unemployment was even positive in cities with extremely high unemployment rates.
Here’s Paul Krugman in 1999, a year after he wrote his famous “expectations trap” paper of 1998:
What continues to amaze me is this: Japan’s current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do – even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy – the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance – are rejected as dangerously radical and unbecoming of a dignified economy.
Will somebody please explain this to me?
Yes, and when you are done then please explain it to me.
Update: I’d also love to know what Keynesians think of the Dems having a socialist as their lead member on the Senate Budget Committee, who then appoints a MMTer to be chief economist. And Krugman says the GOP relies on voodoo economics!