Memo to Ezra Klein: Don’t believe Krugman

Paul Krugman has a new post where he makes the following assertion:

Ezra Klein has written in, asking for a post laying out the difference between the more or less Keynesian model Brad DeLong and I work with and the models others have been using – and how their predictions differ. It’s a good request, although the truth is that the other side in this debate doesn’t necessarily agree on a single model, or even use models at all.  Still, I think it is possible to describe the general views of the other guys “” and to see how off their predictions have been.

So: first of all, the other side in this debate generally adheres, more or less, to something like what Keynes called the “classical theory“ of employment, in which employment and output are basically determined by the supply side.

In the General Theory, John Maynard Keynes created a crude and inaccurate caricature of “classical economics.”  He argued that people like Pigou had models that simply assumed full employment.  In fact, economists like Pigou, Cassel, Hawtrey, Fisher, Hayek and others, believed that wages and prices were sticky in the short run.  They believed that nominal shocks (decreases in the money supply or increases in money demand) would have real effects in the short run, but merely change the price level in the long run.  Indeed this tradition goes all the way back to that most “classical” of classical economists–David Hume.  The standard macro model of the 1920s is in some important respects far closer to the modern new Keynesian model than is the crude model of the General Theory, which lacks a self-correcting mechanism in the long run.  Of course Keynes knew all this, and was being intentionally disingenuous in order to make his own model seem more revolutionary.

In his recent post Krugman has misrepresented the views of those he disagrees with in much the same way that Keynes did.  I’ve read most of the economists that he ridicules (except Fama), and they do not believe that nominal shocks have no short run real effects.  There are debates about whether it is most useful to think about nominal shocks as being essentially monetary, or due to Keynesian expenditure shocks, and there are also disputes about how much of the unemployment in the current recession is due to insufficient AD and how much is due to structural problems. For instance, Cochrane holds NGDP constant when evaluating fiscal stimulus, as he assumes changes in NGDP are a monetary policy issue.

My views are actually much closer to Krugman’s than these other figures on the role of AD in the current business cycle.  But if Klein takes Krugman’s word for it, and argues that economists on the right don’t think a decline in aggregate demand can raise unemployment, he may be in for some embarrassment when people dig up lots of public statements that show Krugman’s caricature of “classical economics” is almost as disingenuous as Keynes’ s.


Tags:

 
 
 

32 Responses to “Memo to Ezra Klein: Don’t believe Krugman”

  1. Gravatar of John Papola John Papola
    2. October 2010 at 09:49

    Krugman truly is the Keynes of our time, complete with his pandering to state power, misrepresentation of fact he clearly should know, and haughty condescension.

    What a waste.

  2. Gravatar of Lulu Wang Lulu Wang
    2. October 2010 at 10:00

    Well, I think the point that Krugman is trying to make is that the Cochrane type “one dollar in = one dollar out” argument is incorrect. His claims against one subset of economists may be misnamed, but his criticism of that thought process still seems valid.

  3. Gravatar of scott sumner scott sumner
    2. October 2010 at 10:38

    Yes, Krugman has many of Keynes’s strengths and weaknesses.

    Lulu, Then that’s the argument he should have made. Not imply these guys didn’t think AD shocks matter. And even that would have been misleading, because later in the Cochrane paper that Krugman ridicules, Cochrane says something like “of course fiscal policy might affect velocity, but if that’s the problem why not use monetary policy” It wasn’t those exact words, but something to that effect. It’s rather absurd to accuse a distinguished macroeconomist of not knowing that velocity can change. Krugman takes a few words out of context, and distorts what others say. I know first hand, as he’s done it to me.

  4. Gravatar of JimP JimP
    2. October 2010 at 11:24

    Lets face it shall we? Krugman is a hack and a thug – albeit one equipped (unfortunately) with a Noble Prize.

  5. Gravatar of Morgan Warstler Morgan Warstler
    2. October 2010 at 12:54

    So Scott’s head doesn’t spin…

    Scott’s problem is PERFECTLY nailed down by pig snot (DeLong):

    “The rise in the money stock will be offset by a fall in velocity. The transactions-fueling balances of the economy will not change because the extra money created by the Federal Reserve will be sopped up by an additional precautionary demand for money induced by the fall in the stock of the other safe assets that households and businesses wanted to hold.”

    Scott’s exposed backside is Velocity. We are STILL above 1.6, and we are headed down, down, down.

    WHICH IS WHY Lacy Hunt is the economist who get it right, he realizes that both the Fiscal stimulus players and the Monetary stimulus players are now fully exposed as impotent:

    1. Fiscal has ZERO multiplier.
    2. Monetary can’t do do more than make up for V (see MF).

    Neither argument carries water. BUT, Scott’s (monetary stimulus) slightly carries a a bit more water, because MF and LACY would let Scott have A LITTLE BIT MORE QE, just to make sure inflation touched 2%.

    From there, we could even continue to set the target at 2% BUT:

    1. That’t a brutal set of handcuffs when we suddenly spend 6 months at 2.5%, and we have to target 1.5% immediately there after. Scott, I think FAILS to understand that side of the coin… unemployment may well be 7% when inflation hits 2.5%

    2. The BEST thing we could have then is fiscal policy hell bent on Productivity Gains (see country club Republicans). Deflationary effects would continue to allow a little more QE.

    —-

    Scott, I’m sorry phrases like “country club Republicans” throws you off your game, if I were you I’d redouble my efforts to enjoy concepts like “boss hog,” or practice imagining each small town’s local power brokers as the heroes rather than the villains in all the Hollywood movies.

    We’re not going to get a flat tax, or a consumption based tax anytime soon… and the piddly little QE needed to hit 2% inflation WON’T SCARE THEM…. so to make things better we need to get QUICKLY the millions of guys with cash in the bank FEEL GREAT ABOUT THEMSELVES.

    I advocate two things:

    1. Liquidate Foreclosed Housing
    2. Progressive Corporate taxes.

    Both of these are POLITICALLY DOABLE. Both take a certain kind of person (the wealthy in tens of thousands of small towns) and give them all the gravy….

    Suddenly, they have a bunch of cheap hard assets to buy, and they aren’t paying taxes on their first $10M in profits.

  6. Gravatar of Greg Ransom Greg Ransom
    2. October 2010 at 16:02

    Excellent.

    Krugman openly admits he doesn’t know any history of econ thought –and that he hasn’t read any of these economists you mention.

    He’s a disgrace, and everyone needs to know it.

    On the history of econ you mention, let me recommend David Laidler’s _Fabricating the Keynesian Revolution.

  7. Gravatar of Lord Lord
    2. October 2010 at 16:29

    The opposition has been a disgrace, from asserting accounting identities, a dollar must come from somewhere, asserting the great vacation, asserting fiscal is unnecessary since there is always monetary policy but then failing to conclude monetary policy should change. The most anyone can get out of them is it is a difficult problem, there may be no solution, more research, but regardless of their ignorance, austerity, higher interest rates, and less government are the cures to every problem. No they wouldn’t think a fall in aggregate demand would raise unemployment, but a rise in unemployment would decrease aggregate demand. Moreover, none of them seem to think anything can be done about it, just that it will have to fix itself. I see nothing of the brilliance of Fisher, for example. Now they may know what should be done but if so they are unwilling to declare it, either because they don’t believe it would be well received or they do not believe anything would work or they do not want it done.

  8. Gravatar of Jim Glass Jim Glass
    2. October 2010 at 16:53

    “Krugman truly is the Keynes of our time, complete with his pandering to state power”

    Krugman is much worse than Keynes. Keynes’s bios say that when his contemporaries pointed out to him that he was being unfair to the classicals and Pigou personally, he said yes, he knew, but he wanted his book to be noticed so he intended to “kick up a dust”.

    The difference between that and Krugman is that between using propaganda and believing your own propaganda. When Krugman relentlessly calls everyone he disagrees with “liar”, “evil”, “corrupt”, etc., he really believes it. I have Keynes’s collected popular writings and, and in it at least, he never goes off like that on anybody.

    Keynes in practice also was a whole lot less statist than the long line of followers who invoke him.

    E.g., Keynes never in his life actually supported deficit spending as stimulus, if one can believe the Palgrave:

    “Despite the fact that the economics of deficit finance began with the Keynesian Revolution, it has been conclusively established by Kregel (1985) that Keynes himself did not ever directly recommend government deficits as a tool of stabilization policy. Keynes played a conservative political hand and viewed budget deficits with a ‘clearly enunciated lack of enthusiasm’.”

    I do know that Keynes publicly opposed stimulative deficit spending in 1937 in Britain when unemployment was over 11%.

    Krugman once wrote that Keynes has suffered from the Law of Diminishing Disciples. I agree and shall not dwell too much on the irony of the comment. I’ll dwell on it just enough.
    🙂

  9. Gravatar of Jim Glass Jim Glass
    2. October 2010 at 17:00

    Re DeLong’s…

    “The rise in the money stock will be offset by a fall in velocity. The transactions-fueling balances of the economy will not change because the extra money created by the Federal Reserve will be sopped up by an additional precautionary demand for money induced by the fall in the stock of the other safe assets that households and businesses wanted to hold.”

    … I saw that too.

    Is the Bradster actually claiming here that the Fed couldn’t produce Weimar-Zimbabwe inflation if it tried, because “rise in the money stock will be offset by a fall in velocity”?

  10. Gravatar of Morgan Warstler Morgan Warstler
    2. October 2010 at 17:19

    No, DeLong is saying what Lacy says… V takes a hit when you do QE and it’s seen as desperate.

    And any HUGE effort would be seen as desperate, right up until all the Banks liquidate their T-Bills and buy commodities (Weimar).

    Whats interesting is that, when you keep the hawks happy and are sitting under 2%, and are focused like a laser on getting some deflationary effects: liquidating houses and making huge productivity gains (Progressive Corporate Taxes)…

    THEN, some conservative like MF and Lacy would say, “sure let’s do some QE and keep inflation going at 2%.”

    All of which means: Scott’s right in as much as he asks for little bites of QE and simultaneously does everything he can to encourage lower prices… so he gets to eat more small bites.

    In this way, QE does not lead the way, it follow along behind good old fashioned main street economics.

  11. Gravatar of scott sumner scott sumner
    2. October 2010 at 17:45

    JimP, Well he does get a bit carried away with his attacks on others. He seems to see a lot of enemies out there–everyone from right wing economists to the Chinese government.

    Morgan, Why can’t we do more than offset V.

    Greg, Yes, all of Laidler’s history of economics books are excellent.

    Lord, I agree that the right has had a very bad crisis. But that doesn’t make Krugman’s post accurate.

    Jim Glass, Good points about Keynes, but I’m not sure he never recommended fiscal stimulus. I believe he told FDR to do fiscal stimulus.

    It’s funny when Krugman and DeLong make fun of those that say more fiscal stimulus will have zero effect, and then turn around and say more monetary stimulus will have zero effect.

  12. Gravatar of Morgan Warstler Morgan Warstler
    2. October 2010 at 17:59

    Scott, because then it is seen as desperate, and will cause V.

    This fits nice and tight into your efforts at learning from MF and your post from last week…

    Sure we can do QE, but when we’re using it to cover for deflation, thats it.

    It’s actually very frustrating that you continue to argue with Krugman and DeLong… and don’t get serious with REAL guys – the kinds who have billions bet on their read of things.

    Lacy makes everything crystal clear, so does Mundell… why not concern yourself with the guys who real money actually listen too?

    The safety of the minor leagues?

  13. Gravatar of Morgan Warstler Morgan Warstler
    2. October 2010 at 18:02

    I told you long ago, we’d finally agree… you’ll be cheering for a liquidation in housing prices to drum up “non-desperate” QE.

    Now if I can just get you to support Progressive Corporate Taxes…. don’t you have a grad student you can put on my idea?

    Fame and tenure surely follow.

  14. Gravatar of meno meno
    2. October 2010 at 18:58

    “It’s funny when Krugman and DeLong make fun of those that say more fiscal stimulus will have zero effect, and then turn around and say more monetary stimulus will have zero effect.”

    Please explain.

    I thought their point was that in a liquidity trap you can’t effectively drop interest rates below zero, hence the standards techniques for monetary stimulus stop doing enough work. Hence you need something else – and they suggest the something is should be fiscal stimulus.

    1) Have I over-simplified their argument to the point that I misrepresent them?

    2) If that is their argument – why do you disagree?

    Regards,

    Meno

  15. Gravatar of Lord Lord
    2. October 2010 at 20:45

    About the only error in Krugman’s piece is to refer to them as classical since they are nothing of the sort. I wonder what Milton Friedman’s speed of rotation is these days.

  16. Gravatar of Mark Mark
    2. October 2010 at 20:46

    Scott Sumner: “Not imply these guys didn’t think AD shocks matter.”

    But this is not what Krugman says. Krugman said, “the other side in this debate generally adheres, more or less, to something like what Keynes called the “classical theory” of employment, in which employment and output are basically determined by the supply side.”

    How do we get from this statement to the implication that AD shocks do not matter? We don’t. You are taking a very hedged and tentative statement and trying to push it to the extreme. Krugman is trying to summarize the views of a broad array of people and his explanation is defensible.

    Moreover, it seems to me that more economists are willing to believe that AD contractions lead to recessions than are willing to believe that AD expansions (e.g. “pushing on a string”) lead to recovery. That is a genuine point of contention and Krugman gets at that by pointing out differences of opinion on the effectiveness of monetary and fiscal stimulus.

    The fact that many of the economists Krugman criticizes would agree that a monetary contraction can lead to a recession — a view where the empirical support is quite overwhelming — does not really affect his argument.

  17. Gravatar of W. Peden W. Peden
    3. October 2010 at 02:31

    Prof. Sumner,

    I do remember Keynes saying a lot of things about public works, which is a fiscal stimulus of sorts. However, there are a number of differences between what inter-war British economists meant by “public works” and post-war Keynesian ideas about fiscal stimulus-

    (1) Public works directly target unemployment, e.g. one takes some unemployed young people from the city where there is a labour surplus into a country town where there is a shortage of cheap labour and you get them to build a path through a forest. There is a path just outside my home’s garden which was built in such a way in the 1920s.

    (2) Public works are budget-neutral. You COULD have public works and deficit spending, but it’s not a requirement.

    (3) Public works were to be handled by local authorities, rather than the central government.

    There are many recommendations of public works in Keynes’s writings, but I can’t remember any talk of fiscal stimulus in the modern sense at all, let alone recommendations of it.

    Of course, the list of ways in which Keynes was not a Keynesian is pretty long. For example, Tim Congdon (in “Keynes, the Keynesians and Monetarism) points of that Keynes had a mainstream view of the function of prices in an economy. When Keynes said that he and Hayek agreed on most things (and everything in a full-employment economy) I seem to remember that he meant prices as well. This is why there is little (if any) mention of prices & incomes policies in his work.

    However, by the 1970s, British Keynesians had a view of prices that had more in common with Marxists than Keynes. Prices were deteremined by “power”. Since the function of the state, in their view, was to redistribute power in an enlightened way, prices & incomes policies made perfect sense. Even into the 1980s, after the Winter of Discontent, Keynesianism and incomes policies were seen as two sides of the same coin in Britain.

    Frankly, I would be surprised if Krugman has even read the General Theory cover-to-cover, let alone the Treatise, the Tract and so on. Most Keynesian economists I’ve met haven’t read anything from before the General Theory, on the grounds that the other stuff “isn’t Keynes”.

  18. Gravatar of David Tomlin David Tomlin
    3. October 2010 at 04:13

    W. Peden:

    However, by the 1970s, British Keynesians had a view of prices that had more in common with Marxists than Keynes. Prices were deteremined by “power”. Since the function of the state, in their view, was to redistribute power in an enlightened way, prices & incomes policies made perfect sense.

    Similar views were prevalent in the U.S. as well, leading to a brief experiment with wage-price controls during the Nixon administration.

  19. Gravatar of Michael Carroll Michael Carroll
    3. October 2010 at 06:51

    Is anyone aware of a coherent non-Krugman explanation why after the stimulus and a prolonged of period near zero interest rates bond rates are at historic lows and real inflation is basically zero?

  20. Gravatar of Morgan Warstler Morgan Warstler
    3. October 2010 at 10:45

    @Mike Carroll,

    Of course, but Scott won’t spend his time delving into the arguments of opposition past Kling.

    The completely coherent explanation is handcuffs brought about by Monetizing the Debt – as in the Fed acquired the toxic assets of banks, who took the money they got and used it to buy T-Bills, lots and lots of T-Bills.

    Which allows Krugman to say, “what bond vigilantes?” until of course in nightmare scenario, the banks suddenly decide they don’t want to own T-Bills and decide to say own Commodities… which puts all that cash into the economy. (Gonzalo Lira)

    That may be fantasy… but the BRUTAL REALITY, even Scott will agree with, is this: We cannot have interest rates go up on Federal borrowing because interest on debt will suddenly consume HALF our tax revenue… and then all bets are off… FINALLY, we will have to talk about municipal and state defaults and bankruptcies.

    And when the bond holders start to get haircuts (like they should have gotten long ago), the cost of future borrowing will look like Greece and Ireland and we can get out the long knives and do god’s work against the Public Employees.

    I’ll say it again… if Scott was half the Monetarist he claims to be he’d stop doing battle with Fiscal Liberals, and start doing battle with guys like:

    Lacy Hunt
    Zero Hedge
    Denninger
    Mish

    If Friedman was around, he’d be reading and responding to those guys, Scott should at least be taking his ideas up against the coherent opposition and stop picking fights with non-economists like DeKrugman.

  21. Gravatar of scott sumner scott sumner
    3. October 2010 at 10:49

    Morgan, Why should we have any corporate taxes?

    Meno, Since when is interest rate targeting the only way to do monetary policy? Why not increase the money supply? They’d say it won’t work. But when people suggest increasing the budget deficit might not work, they act like the people are crazy.

    Lord, No, it’s not just that he refers to them as classical, he also suggests they believe demand shocks don’t matter, only supply shocks matter.

    Mark, You said;

    Scott Sumner: “Not imply these guys didn’t think AD shocks matter.”
    But this is not what Krugman says. Krugman said, “the other side in this debate generally adheres, more or less, to something like what Keynes called the “classical theory” of employment, in which employment and output are basically determined by the supply side.”
    How do we get from this statement to the implication that AD shocks do not matter? We don’t. You are taking a very hedged and tentative statement and trying to push it to the extreme. Krugman is trying to summarize the views of a broad array of people and his explanation is defensible.”

    You can’t have it both ways. If all Krugman is saying is these guys are standard mainstream economists who think that both supply and demand shocks matter, then what is the point of his post? In fact, he is not saying that. If output is determined on the supply side, then demand shocks don’t matter for output.

    You said;

    “Moreover, it seems to me that more economists are willing to believe that AD contractions lead to recessions than are willing to believe that AD expansions (e.g. “pushing on a string”) lead to recovery. That is a genuine point of contention and Krugman gets at that by pointing out differences of opinion on the effectiveness of monetary and fiscal stimulus.”

    First of all, you’re all confused about the pushing on a string argument. It doesn’t mean more AD fails to boost output, it means more money fails to boost AD. Indeed both Krugman and Cochrane have made that argument in the past few years, so that point does not separate the two camps.

    W. Peden, Yes, those are very good points. I’ll reserve judgment on the deficit question, as my memory is poor. But I agree with almost everything you say. BTW, I have read the three Keynes books you mention, as well as some of his other writings.

    David Tomlin, That’s right.

    Michael, Sure. In the late 1990s Milton Friedman argued that the low level of inflation and interest rates in Japan were due to tight money, despite low rates and a big increase in the monetary base. I presume he’d make the same argument today. That’s my argument, and I’ve been just as right as Krugman. Of course Krugman doesn’t agree, he thinks money’s been very loose, and policy has been ineffective.

  22. Gravatar of Morgan Warstler Morgan Warstler
    3. October 2010 at 11:00

    Scott, we shouldn’t have any corporate taxes. You’ll see I say so here:

    http://biggovernment.com/mwarstler/2010/09/15/jan-2011-agenda-progressive-corporate-taxes/

    We are not both theorists here, we are Scott Sumner, an economist who can stand up urge the GOP take a positive action that can ACTUALLY PASS.

    It isn’t a magic wand for you to wave, it is me getting to go scream “I’ve won over Sumner,” and then move on from there.

    There may be a short window of opportunity for Tea Party politics to make some tax changes, the trick is finding the one that best silences the left / Obama, and does the most to encourage risk taking… it’s a Very Elegant solution.

    Progressive Corporate Taxes is the winning issue… and I’ll be glad to have you aboard.

  23. Gravatar of What Keynes Meant by "Involuntary Unemployment" | economy eyes What Keynes Meant by "Involuntary Unemployment" | economy eyes
    3. October 2010 at 14:17

    […] was dishonest, because those classicals were essentially New Keynesians. It is equally reckless to say that what Krugman wrote “the other side in this debate generally adheres, more or less, to […]

  24. Gravatar of James James
    3. October 2010 at 15:33

    It is sad and funny to see Krugman imply that Macro has made no progress since 1936. There is Krugman’s side which only knows as much as Keynes in 1936, and the other side which only knows “classical” pre-1936 econ. DSGE models- what are those?

  25. Gravatar of Edwin A Edwin A
    4. October 2010 at 02:55

    @ economy eyes link

    Wow, that’s a pretty good takedown by Waldmann.

  26. Gravatar of scott sumner scott sumner
    4. October 2010 at 05:53

    Morgan, The tax used to be progressive, did they change it?

    James, Good point.

    Edwin, I presume you’re being sarcastic about Waldmann, He overlooks the fact that Keynes admitted he was unfair to Pigou. And he claims Krugman is accusing Cochrane, et al, of being standard new Keynesians who think both supply and demand shocks matter. But isn’t Krugman one himself? Somehow I don’t think Krugman means “new Keynesian” when he accuses someone of being “classical.”

    Keynes says Pigou assumed that the economy was always at full employment. And that you can tell that’s false by just looking around. Keynes must think Pigou is pretty stupid, not knowing something that one could see by just opening one’s eyes. Pigou did a major study of unemployment, and wrote a whole book on it. Yet he somehow failed to notice that the economy was not always at full employment? I don’t think so.

  27. Gravatar of marcus nunes marcus nunes
    4. October 2010 at 08:17

    One of these days he´ll get to mention you (and say that you have “absolutely nothing in common with what he says”)
    http://krugman.blogs.nytimes.com/2010/10/04/math-models-and-mystification/

  28. Gravatar of Morgan Warstler Morgan Warstler
    4. October 2010 at 12:43

    Scott, ya know it’d be better if you just read the post I wrote…

    This is the current tax policy:

    http://www.smbiz.com/sbrl001.html

    The issue is that MOST small businesses pass profits through, my idea is a PCT that encourages them to not take profits.

    So basically something like: no taxes for companies under $10M in profits, 35% over $1B.

    This operates as a giant consumption tax / tax cut pointed directly at Main Street wealthy. It passes by Fortune 1000 management and Wall Street,we just make sure they stay listed as employees… with fat taxable salaries

    Again, it is SELLABLE because we don’t have to extend the Bush tax cuts for the rich, we just let the the Main Street rich keep the money in their businesses where it’s more likely to get invested / risked on new productivity gain plays, etc.

    Grab one of your grad students and tell them to start running the numbers!

  29. Gravatar of TheMoneyIllusion » DeLong and Waldmann defend the indefensible (i.e. Krugman) TheMoneyIllusion » DeLong and Waldmann defend the indefensible (i.e. Krugman)
    4. October 2010 at 18:31

    […] was dishonest, because those classicals were essentially New Keynesians. It is equally reckless to say that what Krugman wrote “the other side in this debate generally adheres, more or less, to […]

  30. Gravatar of scott sumner scott sumner
    5. October 2010 at 06:12

    Marcus, Thanks, One thing I don’t criticize him for is math. I use even less math than he does.

    Morgan, A tax on profits gets passed on in higher prices or lower wages–it’s not a tax on consumption.

  31. Gravatar of Morgan Warstler Morgan Warstler
    5. October 2010 at 08:11

    Scott, don’t be dense.

    Current situation: SMB are S corps, they make $1M profits they pass through to owners – who pay income taxes 35%…. might as well because you are going to pay 35%+ if you keep it in company.

    My new plan: since they pay no taxes if they keep $$$ in company (first $10M), they don’t pass the profits through to themselves. They pay themselves a smaller salary, they cut back on their CONSUMPTION.

    The company profits are now being invested.

    Can we agree my plan is effectively a tax on consumption?

  32. Gravatar of scott sumner scott sumner
    7. October 2010 at 05:55

    Morgan, Fine, but then make it apply to all corporations.

Leave a Reply