The real ideological divide

Paul Krugman recently started off a post as follows:

I’ve been watching with sympathy as David Beckworth and Scott Sumner discover that their updated monetarism actually puts them on my side of the great ideological divide “” cast into the outer darkness along with John Maynard Keynes and Milton Friedman.

But what does the other side believe? Someone, I don’t know who at this point, sent me to this post by Robert Murphy, which is the best exposition I’ve seen yet of the Austrian view that’s sweeping the GOP

I certainly understand the point Krugman is making, and in a sense I agree.  But I also think this slides over a much more important ideological divide; one I still don’t fully understand.

Suppose you asked the top 100 macroeconomists in America whether they were with the 5 economists in the first paragraph, or Bob Murphy.  My guess is that at least 90 would be with us (and yes, that even includes new classicals like Robert Lucas.)  So the “outer darkness” is not all that lonely a place.

But here’s what I don’t know.  Why weren’t those 90 macroeconomists out picketing the Fed in October 2008, demanding easier money?  Well 89 of the 90, the other is in the Fed.   Back in late 2008 and early 2009 a few of us quasi-monetarists were just about the only people insisting on the urgent need for much more monetary stimulus.  A tiny handful of others (including Krugman) half-heartedly agreed it was worth a shot, and almost everyone else completely ignored monetary policy.  One argument was they assumed we were at the zero bound.  Actually, we weren’t at the zero bound in October 2008, but let’s say we were close.  The main problem with the zero bound argument is that there was no general understanding that monetary policy was ineffective at the zero bound among the macro elite.  Indeed many of them (Bernanke included) argued forcefully that the BOJ needed to do much more in the late 1990s and early 2000s

I seem to recall Krugman once saying something to the effect that Bernanke discovered things were much harder than it looked from the outside, once rates hit zero.  Yes, that’s right, but the thing Bernanke found out was not that the ideas he gave the Japanese don’t work, he found out that it was difficult to get his colleagues to agree to implement those ideas (or at least that’s what I assume.)   But whatever you think of Bernanke, none of that explains the behavior of the 89 economists discussed above.  Why weren’t they speaking out?

The reality is that the Fed almost always does roughly what the broad consensus of macroeconomists thinks they should do.  In late 2008 and early 2009 those 89 macroeconomists didn’t think we needed more monetary stimulus, or if they thought so didn’t speak out (I’d guess Svensson would have agreed with me.)  Naturally the Fed didn’t provide the needed monetary stimulus.  If the consensus of the 89 had been that QE2 should have been adopted in November 2008, not November 2010, it probably would have been done then.

I still don’t think the views of Murphy have broad acceptance among elite macroeconomists (if they do God help us.)  They certainly didn’t in 2007.  The big mystery is not explaining wacky views of Austrian bloggers and GOP economists who hope to get a gig as Sarah Palin’s chief economic advisor, but the broad mainstream of Ivy League macroeconomists.  I just did a post showing that Charles Calomiris opposed QE2 even though his rationale suggested it was needed.  Earlier I did a post showing that Frederic Mishkin did not think Fed stimulus was inadequate in late 2008 and early 2009, even though the key insights of his textbook clearly and unambiguously suggest it was.  Indeed the explanation of the crisis added to the 8th edition of his textbook is completely contradicted by his 4 key insights into monetary policy, which come just one page later!  I recall a talk by Robert Lucas a couple years ago, where he mentioned how in this situation the Fed needed to boost the money supply to offset a fall in velocity, but then for some strange reason suggested he though Bernanke was doing a good job.  I could go on and on.

The big mystery Krugman should investigate is not why people like Bob Murphy hold wacky opinions, but why his fellow elite macroeconomists seemed to suffer from mass amnesia in late 2008 and early 2009.

Krugman makes this observation later on:

Why is there such a strong correlation between nominal and real GDP? Why is there overwhelming evidence that when central banks decide to slow the economy, the economy does indeed slow? And on and on.

I’d love to know why our elite macroeconomists were not loudly demanding that the Fed do something to prevent (in 2009) the biggest fall in NGDP since 1938.

BTW, I appreciate the support from Paul Krugman; despite our previous disagreements I consider him the most brilliant macroeconomist in the blogosphere.  But I was slightly bemused by his comment that I had just “discovered” I was on Krugman’s side regarding demand shocks.  I feel like I’ve been here all along.  I can’t help remembering when I tried to remind Paul Krugman that we were (should have been?) on the same side in March 2009.  As Matt Yglesias pointed out, on the issue of monetary stimulus it is others that need to do some soul-searching:

The Great Recession has revealed a lack of capacity for dealing with monetary issues to be a major institutional weakness of the progressive movement.

Matt himself doesn’t lack an understanding.  I’d like to think that’s partly because he reads quasi-monetarist bloggers.  You know, the ones who said that rumors of QE2 would depreciate the dollar, raise equity prices, and raise inflation expectations—months before rumors of QE2 actually did depreciate the dollar, raise equity prices, and raise inflation expectations.

I suppose this sounds like I’m being a poor sport.  Two positive mentions in a row from Paul Krugman!  Let’s celebrate that fact and not look back on unpleasant memories that are best forgotten.

:)


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40 Responses to “The real ideological divide”

  1. Gravatar of cato cato
    19. January 2011 at 18:59

    out in the darkness with friedman..? are you kidding…this is why even when krugman is right these days, he is so perverse in how he states the claim.

  2. Gravatar of K K
    19. January 2011 at 20:56

    I don’t read him as saying you’ve just discovered AD. He’s saying you are discovering that, like him, your ideas put you in an ideological wilderness relative to establishment conservatism. And cmon… Keynes, Friedman, Krugman, Sumner!!! I think he likes you.

  3. Gravatar of Full Employment Hawk Full Employment Hawk
    19. January 2011 at 21:20

    The real divide between econonomists is between those who believe that, except for genuine supply shocks, which are relatively rare and easily recognized as such, the PROXIMATE cause of recessions is a drop in Aggreate Demand and that the solution is to increase Aggregate Demand, and those who deny this. The latter includes both the Austrians and the real business cycle theorists. Historically it also included Schumpeter.

    Monetarists and Keynesians may disagree on what causes the drops in Aggregated Demand and what to do to increase it, but the common view about the role of Aggregate Demand puts them fundamentally in the same camp.

  4. Gravatar of Rien Huizer Rien Huizer
    19. January 2011 at 21:25

    Fair enough, Austrians have no answers (although I remember that Mises and Lange had an interesting argument a long time ago where I guess Lange was ultimately declared the loser after long experiments with a managed economy in Eastern Europe). However, our rather defective navigational support system called national accounting was created by people who did not know then that economic planning in peacetime would be very difficult, and maybe that the scepticism (the Austrian residue that every economist should cherish) of the early Austrians about gvt intervention was warranted.

    Unfortunately, we are still working with an accounting system that no corporation would use and the various workarounds fail to inspire confidence for lack of useful data. We need tealeaves or leading indicators to develop a sense of what is going on, or, what the national accounts will tell us when it is already far too late. So, I sympathize with the economists on both sides of the “divide” : the Austrians have nothing to offer that would help government be an effective intervener, as is its task required by the electorate. But the real economists excel mainly in academia, as articulate spokesman for investment banks and gvt institutions based on still inadequate knowledge, especially about the what is relevant and timely enough to pay attention too when intervening.

    That brings me to the referenced NBER paper: I doubt that effects created by a Fed fighting cost pull inflation is a largely autarchic economy, as the US had during most of the observed period, are relevant to the period that you mentioned. The entire postwar history until the selective integration of China into the US economy, inflation would arise naturally from the balance of power in the labor market. That “controlled” recessions, with an effect more or less akin to letting steam escape from a boiler would result from monetary contractions in a structurally capacity-constrained economy has been accepted central bank wisdom for a very long time.

    However, since the changes in the global structure of production, the USD ha basically become the currency of an economy that is largely free of labor concentrations that are capable of collective action and thus unable to act as a capacity constraint. This creates a different structure of leaks and real trade feedback than would be the case in a world with responsive currencies. I would be surprised if the current US economy would deliver the same stimulus-response sequence as it had in the past (I do not think it does right now) and I doubt we know enough about that to have confidence in any type and dose of intervention and we may well be wasting a very large part of it on the development of China’s industrial capacity. Unfortunately, the electorate will not tolerate a “do nothing” policy, even if that were consistent with the crackpots advising teapots on the other side…

  5. Gravatar of Full Employment Hawk Full Employment Hawk
    19. January 2011 at 21:41

    “(although I remember that Mises and Lange had an interesting argument a long time ago where I guess Lange was ultimately declared the loser after long experiments with a managed economy in Eastern Europe).”

    Mieses and Hayek were right in their position that a centrally planned economy would not work (actually only part right because such an economy does work, it just does not work well).

    But that does not mean that they were right in their paranoid fear that the least departure from strict laissez-faire put us on the road to socilism. And they were wrong with respect to the Austrian theory of business cycles, which is to economics as astrology is to astronomy.

  6. Gravatar of dsvfvb dsvfvb
    20. January 2011 at 01:01

    Mieses and Hayek were right in their position that a centrally planned economy would not work (actually only part right because such an economy does work, it just does not work well).
    http://www.mk4-hair.com

  7. Gravatar of Paul Power Paul Power
    20. January 2011 at 01:58

    Scott:

    I once found myself defending my views alone “against all comers” simultaneously as it were. Even though the whole thing lasted only a short time, by the end I found it difficult to keep who among my opponents said what clear in my mind, and was . Think about Krugman’s memory lapse in that light.

  8. Gravatar of Andy Andy
    20. January 2011 at 02:47

    Krugman may be brilliant, but his blog should be called “Strawman attacks”

  9. Gravatar of scott sumner scott sumner
    20. January 2011 at 06:13

    cato, Yes, but my mind also works in strange ways, so I can sometimes see his twisted logic. As I said he is brilliant, but his insights sometimes lead him up blind alleys.

    K, I said I agreed with the statement, it’s just that I think he slides over the real ideological divide, which is the role of monetary policy. Maybe I didn’t make that clear enough.

    In March 2009 my open letter made it clear Krugman and I were on the same side.

    Full Employment Hawk, You said;

    “The real divide between economists is between those who believe that, except for genuine supply shocks, which are relatively rare and easily recognized as such, the PROXIMATE cause of recessions is a drop in Aggreate Demand and that the solution is to increase Aggregate Demand, and those who deny this. The latter includes both the Austrians and the real business cycle theorists. Historically it also included Schumpeter.”

    I disagree, Austrians like Hayek thought demand shocks had real effects, and favored stabilizing NGDP. Many modern Austrians feel the same way. RBC proponents have more and more added demand shocks to their models, so again most acknowledge nominal shocks matter. The number of serious economists that think a Fed-induced deflation would not reduce output are tiny. That’s not the important divide.

    Rien, I didn’t say Austrians didn’t have answers, I said Bob Murphy didn’t have the right answers. Hayek is with Krugman and I.

    Labor didn’t cause inflation in the US, monetary policy did. Labor was far weaker in 1979 than in the 1950s, but inflation went from 2% to 13%.

    Fullemployment hawk, You said;

    “Mieses and Hayek were right in their position that a centrally planned economy would not work (actually only part right because such an economy does work, it just does not work well).
    But that does not mean that they were right in their paranoid fear that the least departure from strict laissez-faire put us on the road to socilism.”

    Hayek did not believe in complete laissez-faire, he favored lots of the things modern liberals favor. He was attacking the sort of statism that doesn’t even exists in the modern developed world.

    Paul, Yes, in the last part I was just joking around. Hence the smiley face.

    Andy, Unfortunately there are times when this is true.

  10. Gravatar of StatsGuy StatsGuy
    20. January 2011 at 06:45

    I’ve been leaving comments for Krugman to the effect that you and he should be penpals, and the real enemy is the von mises institute for at least six months. I therefore take credit for being that “someone, I forgot who”.

    On a slightly cynical note, I think it’s about time you call in your bet with bob murphy. Or at least, do a little gloating. I mean, really… just how wrong can you be? (I bet the economics profession would be significantly more disciplined in these outrageous claims if economists were _required_ to invest 20% of their salaries in bets that their predictions would come true – Murphy would be poorer and you could afford a really slick website.)

    http://consultingbyrpm.com/blog/2010/10/email-list-topic-why-are-we-not-in-hyperinflation.html

    And since you’re not grading finals right now and are obviously taking requests, here’s one: Hu is visiting the US, currency is an issue, and my favorite china blog now charges money for the good stuff. Chinese monetary ‘policy’ (which includes a broad range of instruments, just as I’ve argued it does in the US even though we don’t use many of those instruments) seems a little caught. It seems an opportune time to observe that the Fed did its job (late, sulking, and minimalist) in addressing its own domestic NGDP problem, which ultimately is forcing China to confront the consequences of its own monetary action via domestic commodity inflation – the narrow margin export engine thus finds its margins even tighter, forcing the issue directly. Anyway, you should never pass up an opportunity to gloat.

    So my remaining concerns are actually quite different – the impact of NGDP growth via monetary stimulus on inequality. This (along with environmental/energy concerns) still keeps me awake at night. China, it seems has achieved 10.3% growth (if you believe that number), but very lopsided. The US likewise. If growth slows, the inequality that has emerged will make social unrest even worse than it otherwise would have been (partly because the rich will bid up prices for scarce goods necessary for survival, like food and energy, since these will represent a smaller portion of their budgets).

    nice data lately in your posts

  11. Gravatar of Richard A. Richard A.
    20. January 2011 at 07:40

    Scott,
    I think too many in 2008 were looking at the massive increase in the monetary base while failing to notice or understand the contractionary effect of the fed’s IOR policy which drove down the money multiplier.

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. January 2011 at 09:07

    If we’re going to make gross generalizations about ideological divides I’ll say the following:

    1) The Neo-Keynesian economists are very tuned into the empirical facts and keenly acknowledge the economy is in very bad shape right now. But they genuinely feel that fiscal stimulus is more effective in ZIRP than monetary stimulus. DeLong has made an elaborate case that this is a “Minskyite” recession in which the best way out is by raising government deficits. Similarly Krugman has estimated that it would take trillions in QE to adequately stimulate the economy. They don’t think monetary stimulus would be ineffective, just that fiscal stimulus is far more efficient (and probably more democratic).

    2) The RBC/Neo-Classical economists aren’t very tuned into the empirical facts and barely acknowledge there has even been a recession. They know that additional monetary stimulus would be very effective at raising nominal expenditures but they don’t think it is necessary. Winess how Charles Calomiris was oblivious to the fact that NGDP has not been growing at 5% since the trough. If you asked him how far below trend it is right now I’m sure he would be way off the mark. And if you corrected him on his missperception he would simply wave his hands and say you’re making far too much of it. This is what makes the RBC/Neo-Classicists seem so ethereally blaise right now. They are too busy fine tuning their theoretical models of the economy to look out the windows of their ivory towers to witness a serious recession in action.

    So, in my opinion, the academic divide is between those who notice we’re in a serious recession but don’t really know how to get out of it (witness DeLong’s weirdly elegant but ultimatly useless hairsplitting of the three types of AD driven recessions), and those who know perfectly well how to get out of it but don’t think conditions are bad enough to justify any action (“what recession?”).

    Although the Austrian point of view may not be well represented in universities it is pervasive in the business community so it should not be discounted as a major force. The Great Recession helped to discredit academic macroeconomists thanks to their display of the above characteristics. And the general public doesn’t read research journals or econ blogs. They read the WSJ and Forbes. And when those publications trot out an academic economist instead of an Austrian “business economist” (e.g. John Tamny) it’s usually an RBC/Neo-Classicist who will not even acknowledge that the economy is in bad shape (and from their side of a six figure salary things probably look perfectly fine). So my perception is that the layperson may not be an Austrian but she by and large holds Austrian views.

    As for models it’s interesting to note the three different takes on the economy:

    1) Krugman likes the “Washington Baby-Sitting Coop” story/model so much that he’s now used it in two different books. Too bad he hasn’t noticed that it shows the real effects of monetary stimulus in the face of sticky prices more that it says anything about the effectiveness of fiscal policy.

    2) RBC/Neo-Classicists are far too serious to construct models of the economy for the general public. Nevertheless their models are tragically useless in the face of the largest demand driven recession in a seculum. I saw a research presentation by an RBC Fed economist last fall in which he attempted to simulate “bubbles” through variations in technological progress. The effects were ludicrously small and totally irrelevant. But except for a rabid Neo-Keynesian and an outspoken heterodox economist, he was treated with a chilling level of respect by his audience.

    3. Austrians don’t usually construct models so Bob Murphy’s “Sushi Model of Capital Consumption” is somewhat revealing. Essentially a recession in Sushi output occurs because the islanders malinvest (under the advice of Paul Krugman) and fail to maintain their nets and fishing boats. I fail to see how this is relevant to our current situation. Is the current recession really due to a lack of investment is useful capital? Isn’t the real consumption of useful capital taking place right now? Menzie Chinn recently alluded to the fact that growth in potential RGDP has probably slowed in the face of a persistent and massive output gap. And I keep reading local news stories about well maintained manufacturing facilities that were highly profitable until just three years ago being torn down because no one expects sufficient demand to come back anytime soon.

  13. Gravatar of Full Employment Hawk Full Employment Hawk
    20. January 2011 at 09:16

    “while failing to notice or understand the contractionary effect of the fed’s IOR policy which drove down the money multiplier”

    However M1 also grew rapidly in the second half of 2008. At the beginning of the year it was not growing, while at the end of the year it was growing at about 14%. That was a lot less than the growth of the monetary base, and does represent a major reduction in the M1 money multiplier. Undoubtedly M1 would have grown significantly more if the Fed had not started paying interest on ERs. But that rate of growth in M1 would indicate that monetary policy was expansionary and was offset by a major reduction in the velocity of M1.

    The rate of growth in M2 also increased in the second half of 2008 but the increase was much smaller. The problem I see with M2 is that there is very little, if any, structural relationship between the monetary base and NM1M2. NM1M2 appears to be reverse caused, its growth depending on the growth of NGDP, rather than affecting the growth of NGDP.

  14. Gravatar of Bogdan Bogdan
    20. January 2011 at 09:16

    Do you think the Fed’s preoupation with the health of the financial sector hindered its ability to keep the rate of growth of NGDP to trend? What’s your opinion of the whole credit allocation/bail out/unconventional purchasing of financial assets? Could quantitative easing have been done in a different way?

  15. Gravatar of Lord Lord
    20. January 2011 at 10:09

    So what is your take on their actions? I agree with Mark though I would distinguish vulgar Austrianism from the views of Hayek who is rejected by them. Vulgar Austrianism is the naive, common, and popular version, one based on (a rather twisted) morality and emotion than empiricism. I don’t believe these others are Austrian, so is it a matter of obliviousness, a matter of ideology (not liking the implications and what would be necessary so ignoring, suppressing, or rejecting them), a matter of politics (not willing to admit any truth that might assist your opponents), a matter of defensiveness (no willingness to admit erroneous prior beliefs), or maybe they really are vulgar Austrians in their heart of hearts as is most of business and the public.

  16. Gravatar of Greg Ransom Greg Ransom
    20. January 2011 at 10:32

    Typically, Krugman knowingly misrepresents the “divide”.

    “Austrians”, Hayek-influenced, and Hayek-quoting macroeconomists are the most significant contingent within the list of economists Krugman is “sympathetic” with:

    — Beckworth

    — Horwitz

    — Sumner

    — Glasner

    — Selgin

    There is nothing at all incompatible with a Hayekian monetary disequilibrium / stable NGDP perspective and a Hayekian capital structure perspective — ask Steve Horwitz, Larry White, or Georgle Selgin.

    For political and academic knife-fight reasons, Krugman intentionally hides this fact, and pretends the opposite.

  17. Gravatar of Greg Ransom Greg Ransom
    20. January 2011 at 10:36

    Here’s the basic Austrian position of Horwitz, Selgin, White and other “Austrian” influence macroeconomists, as articulated by Horwitz:

    “in the heat of the crisis in September of 2008, the responsible thing for the Fed, or any central bank, to have done was to follow the traditional practice for such banks during a crisis: which is to be prepared to create liquidity to match the need for it by lending to sound banks. That’s Bagehot’s rule and that’s all I’ve ever defended .. the Fed did precisely the opposite of that”

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. January 2011 at 10:53

    Just to be clear, I too make the distinction between between academic Austrians and “vulgar” Austrians. However, since the John Tamnys of the world are far more visible than the George Selgins there is natural, although ultimately incorrect tendency to identify Austrian economics with the former rather than the latter.

  19. Gravatar of Greg Ransom Greg Ransom
    20. January 2011 at 10:57

    “There is nothing at all incompatible with a Hayekian monetary disequilibrium / stable NGDP perspective and a Hayekian capital structure perspective.”

    I’ll go further.

    A Hayekian monetary disequilibrium / stable NGDP perspective without changing relative price and production input relations is incompetent economics.

  20. Gravatar of W. Peden W. Peden
    20. January 2011 at 11:09

    Full Employment Hawk,

    M1 is a very narrow monetary aggregate, so why would you use it to tell if monetary policy is expansionary or contractionary? I seem to remember a hilarious Paul Krugman argument that used M1 as an indicator of monetary policy (and ignored any sort of lags) back in late 2008, but otherwise economists generally know that narrow aggregates like M1 are not good indicators of monetary policy.

    If one has to look at monetary aggregates, the clearest story is told by M3: we see a peak in early 2008 (partly distorted by the behaviour of the money markets during that period) followed by a long, long plunge, which begins to reverse in late 2010.

  21. Gravatar of david david
    20. January 2011 at 12:48

    @Mark A. Sadowski

    When the Keynesians underwent such splits, they split into loudly bickering camps, calling themselves different names: paleo-, post-, etc. Austrians today of the Boettke variety are obviously different in analytical approach from Hayek, who in turn is obviously different from Bohm-Bawerk.

    And politically there is a vast gulf between, say, Hayek and Rothbard. Despite Greg Ransom’s direst wishes, since Hayek’s politics are not distinct from what modern social democracies tend towards, when people say “Austrian” they will be referring to Rothbard’s anarchocapitalist tendencies, not Hayek’s welfare state. The John Tamny types only cheer on this trend.

    Non-Austrian camps often label Selgin etc. as neo-Austrian but there seems to be an internal resistance toward acknowledging differences. Modern macro and micro is fundamentally neoclassical, and even the new-institutional, game-theoretic, and complexity approaches that neo-Austrians quote approvingly are neoclassical in character. Recall that the neoclassicals were on the socialist side of the Lange-Hayek argument!

    Neo-Austrian, sure, in the sense that Neo-Keynesians are still Keynesian in character, even though Hick’s ISLM discards Keynes’ uncertainty and so on. But not something accurately described as Austrian, yes?

  22. Gravatar of D. F. Linton D. F. Linton
    20. January 2011 at 13:03

    There are no Austrian “elite macro-economists” for the same reason that one doesn’t expect there to be an atheist Pope.

  23. Gravatar of Benjamin Cole Benjamin Cole
    20. January 2011 at 13:06

    These are fascinating times–and yes, I think politics is everywhere now.

    John Taylor–now he says the Fed was loose while Bush jr. was President. Did he ever say so then? Nothing that I can find. In fact, in 2006 he gushed over Japanese QE. Gushed!

    But now Taylor has found religion again. It’s all a little bit too pat.

    To be fair to Bernanke, the second round of QE was a “new” policy for the Fed. (Let’s say the first round was not really volitional). Whenever doing something new, blunders and slowness are the norm.

    The good news is, nothing succeeds like success. The Dow is rallying, the economy is growing. The anti-QE ranting will sound increasingly shrill the longer the recovery lasts, and without appreciable inflation, as i contend it will.

    You can’t say “QE is terrible and btw, the Dow crossed over 13k today, and inflation is under 2 percent.”

  24. Gravatar of flow5 flow5
    20. January 2011 at 13:33

    0.0613
    0.0753
    0.0651
    0.0543
    0.0469
    0.0354
    0.0287
    0.0240
    0.0328
    0.0292
    0.0385
    0.0380
    0.0371
    0.0383
    0.0518
    0.0603
    0.0651
    0.0700
    0.0617
    0.0638
    0.0675
    0.0627
    0.0662
    0.0635
    0.0649
    0.0664 2nd qtr 2006
    0.0558
    0.0539
    0.0460
    0.0495
    0.0524
    0.0499 should have started easing 3rd qtr 2007
    0.0391
    0.0331 free fall after 3rd qtr 2008
    0.0231
    -0.0070
    -0.0195
    -0.0302
    -0.0256
    0.0061
    0.0282
    0.0388
    0.0447

    Scott’s right. Just look at the y-o-y nominal gDp numbers. It also shows that Greenspan never tightened.

  25. Gravatar of johnleemk johnleemk
    20. January 2011 at 14:28

    david,

    Excellent observation. I usually focus on distinguishing different strands of libertarianism/classical liberalism. Many different people with different kinds of thinking arrive at the same general kinds of conclusions — everyone from 1990s Paul Krugman (the guy who defended sweatshops) and even Paul Samuelson (“What good does it do a black youth to know that an employer must pay him $2 an hour if the fact that he must be paid that amount is what keeps him from getting a job?”) to Murray Rothbard is a libertarian in the sense that they think the modern state interferes too much and/or society could benefit from less government control. Compared to the general population, these people want smaller government.

    But obviously there are many different kinds of libertarians/descendants of classical liberalism. Krugman and Samuelson are left liberals; Rothbard is an Austrian. Hayek and Friedman might be better classified as neoliberals, rather than Austrians or classical liberals (although I think the latter is how they defined themselves, I think both envisioned a somewhat larger role for the state than the original classical liberals). Ron Paul is a paleoconservative, whose ideology probably descends from 19th century American conservatism (which descends from classical liberalism).

    (Obviously there’s a lot of cross-pollination going on, with the Austrians influencing the neoliberals influencing the left liberals and so on.) I think it’s absolutely fascinating how there are so many different-but-related schools of thought all descending from one ancestor: 18th-century classical liberalism. Many of the people belonging to these ideologies would firmly deny they’re related, but it’s there.

    I think thinking about the history of liberalism/libertarianism this way illuminates a lot of puzzling questions, like why leftism in the US is so different from leftism in Europe. European leftism is often much more influenced by socialism and Marxism, which matured very distinctly as separate from classical liberalism; American leftism sprung out of the original liberalism, with some ancillary influence from European leftism at the margins. Likewise, conservatism in Europe is actually radically conservative (neo-fascism, monarchism, etc.), while conservatism in America likewise sprung out of classical liberalism.

    This taxonomic thinking also explains why classical liberalism remains a distinct ideology in Europe, and why the UK Liberal Democrats fit so uneasily into the standard American scheme of classification (their economic platform is probably best described as more welfare, less regulation). And it explains how the generally left-leaning, mostly Democratic-voting American economic profession is still almost unanimously libertarian in the sense that its members want less government regulation, relative to the median voter.

    If you ask me, there are a lot of libertarians out there, in the sense that there are a lot of people who want smaller government, or less government than the median voter wants. The problem is that these libertarians are so divided — many of them don’t identify as libertarian, many others are too busy labeling other libertarians as heretical (some vulgar Austrians label any monetarist, Friedman included, as a statist) — that they can’t accomplish much. Even Krugman probably wants smaller government in the sense that he thinks trade barriers are often counterproductive, rent control is a bad idea, etc. but he’d rather vote for the Democrats. There’s just no way I can see to unite libertarianism. Perhaps we should all go back to being classical liberals?

    Apologies for this rather long digression. To your original point, david, this is probably why in his oft-discussed essay, Bryan Caplan explicitly does not consider Hayek an Austrian, restricting himself to rebutting von Mises and Rothbard.

  26. Gravatar of scott sumner scott sumner
    20. January 2011 at 15:32

    Statsguy, Thanks for getting Paul and I to sing kumbaya.

    I actually don’t do bets with people I like. And I like Bob. If Bob was a stranger and someone I could trust (and odd combo) I would have bet $1,000,000.

    China is an interesting case, They are doing what I favor–gradually raising the yuan, but I think a tad faster would be appropriate right now. Maybe 5% over the next year.

    I can’t imagine how monetary policy could impact equality, except by causing disasters. My preference is to deal with inequality by going toward the Singapore high saving model. As long as people like me save boatloads of money and families right next door save almost nothing, we will have great inequality.

    China has great inequality, but the trends aren’t always what people assume. How many Americans know that in the last 5 years factory wages in China have increased many times faster than the wages of college grads.

    Richard, Yes, but even worse they were ignoring asset prices, which Mishkin’s text tells us is the way to spot tight money.

    Mark, You said;

    “1) The Neo-Keynesian economists are very tuned into the empirical facts and keenly acknowledge the economy is in very bad shape right now. But they genuinely feel that fiscal stimulus is more effective in ZIRP than monetary stimulus. DeLong has made an elaborate case that this is a “Minskyite” recession in which the best way out is by raising government deficits. Similarly Krugman has estimated that it would take trillions in QE to adequately stimulate the economy. They don’t think monetary stimulus would be ineffective, just that fiscal stimulus is far more efficient (and probably more democratic).”

    Over the past 15 years I read plenty of new Keynesians saying monetary policy was effective at the zero bound. What happened to that conventional wisdom?

    Krugman’s trillions number is if they don’t do inflation targeting. He argues they should but are too conservative. I agree. My solution is to pressure them to be less conservative, not give up.

    Krugman was also wrong about QE2.

    Is Calomiris an RBC type? I didn’t think so. But your broader point is interesting. Commenter Greg Ransom often argues Hayek wasn’t up to speed with the data in the early 1930s. He opposed stimulus then, but later said it would have been appropriate.

    Your final comment about fairly new factories torn down reminds me of a debate I had with some commenters, who didn’t agree when I called housing construction “investment.” They saw it as part of a consumption-oriented society. It’s far more investment than factories. The longer something lasts the more capital-like it is. A can of beer is capital, but depreciates rapidly as it is drunk. Factories last a few decades rarely longer. The house I live in is 90 years old and perfectly fine. Two houses away is a house from 1769.

    Those extra couple million houses were built a few years too soon. But US pop. rises 3 million per year. They’ll end up being used for maybe 97 of there 100 year history. People need to take a deep breath about this housing fiasco–it’s not that bad. (Greg will tell me how naive I am.)

    Full Employment hawk, But M1 and M2 were shown not to be reliable in the 1980s. Divisia indices did better, but we don’t even have good data for those. So on what basis could they draw those conclusions? (Not disagreeing with you, just pointing out there were no good reasons for them to assume that–not after the 1980s.)

    Bogdan, Yes, it was like bailing water out of the boat without plugging the leak. NGDP targeting would have been much better. I opposed bailing out Lehman. But given the Ied let NGDP collapse, a bailout would have been worth a shot in retrospect. But it’s horrible public policy in general.

    Lord, Who’s actions? I agree about Hayek–he would have been with me, not Murphy.

    Greg, Yes, I think Krugman oversimplifies the Austrians. I don’t know if he’s studied them enough to understand the difference. I know he hasn’t studied Hayek as much as you, but then no one has. :)

    David, That sounds right.

    D.F. Linton. That’s a good one. I suppose Selgin is my favorite Austrian, but I’m told he rejects that label. Garrison, White, Horwitz, etc are quite good. I wasn’t referring to them in my post.

    flow5, Yes, monetary policy in 2006 was easier than in 2002 and 2003. Many people miss that point.

  27. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. January 2011 at 17:02

    No Scott, I didn’t mean to imply Calomiris is an RBC economist. I would characterize him as a Neo-Classicist who’s informed by the economics of asymmetric information. In any case if I had to lump him into one of only two general categories I think he belongs squarely where I placed him (with other similarly knowledgable yet clearly oblivious right wingers). And despite his nod to Ben McCallum, I certainly don’t consider him to be a “Quasi-Monetarist”.

    Your point about housing is excellent. My own house will turn 50 next year and it’s holding up just fine. And how many years will it take of substantially below average housing starts before population growth means that those couple of million overbuilds are needed? In my opinion we would already be there, provided NGDP were at trend.

  28. Gravatar of JimP JimP
    20. January 2011 at 17:29

    QE2 works

    http://online.barrons.com/article/SB50001424052970204853904576090902595560880.html?mod=BOL_hps_dc

  29. Gravatar of Greg Ransom Greg Ransom
    20. January 2011 at 19:26

    Two things.

    Hayek was in Britain and his policy focus was on British disequilibrium dating from 1925.

    Second, no one at the time knew the facts as we know them today — indeed our fact base on the early 1930s continues to expand and evolve. And what those facts mean continues to be essentially contested — and even the collection and reporting of these facts is not independent of essentially contested theory.

  30. Gravatar of Greg Ransom Greg Ransom
    20. January 2011 at 19:30

    Beckworth’s stuff and your stuff cited by Krugman is enough to establish thAt Krufman has been exposed to enough information not to make the error Krugman makes.

    His distortion is most clearly deliberate.

  31. Gravatar of Greg Ransom Greg Ransom
    20. January 2011 at 19:32

    Their is much evidence that Krugman has never read Hayek or basically any economics published before 1970 — we have this on Krugman’s own word, Krugman brags that he can’t bring himself to read such stuff.

  32. Gravatar of david david
    20. January 2011 at 20:30

    Over the past 15 years I read plenty of new Keynesians saying monetary policy was effective at the zero bound. What happened to that conventional wisdom?

    A guess:

    Academics look at the phrase “monetary policy” and imagine interest rate levers and the entire broad class of strategies that hammer M. Or E[pi].

    Policymakers, and panicking academics, look at “let’s buy tons and tons of financial assets” and, um, don’t recognize this as monetary policy. Initially, anyway…

  33. Gravatar of Edwin A Edwin A
    20. January 2011 at 21:00

    “There is nothing at all incompatible with a Hayekian monetary disequilibrium / stable NGDP perspective and a Hayekian capital structure perspective “” ask Steve Horwitz, Larry White, or Georgle Selgin.

    For political and academic knife-fight reasons, Krugman intentionally hides this fact, and pretends the opposite.”

    I really doubt it’s deliberate. I say it’s just ignorance. Krugman’s view of Austrian economics seems to come almost entirely from his own comment section and from what I’ve seen they’re mostly of the Rothbard variety. Outside a few esoteric blogs, you’re really the only Austrian I’ve seen around who actually really knows Hayek and his macro. I mean, I’ve seen Austrian wave Hayek’s flag, but they all follow Rothbard and Mises. In the top two social news website, reddit and digg, I have yet to encounter a libertarian or Austrian who probably knows Hayek favored nominal gdp targeting.

    I’m willing to bet Krugman hasn’t heard of Steve Horwitz, Larry White, and Georgle Selgin. And you’re probably overestimating how much Krugman reads Sumner and Beckworth. Most likely he checks out the occasional link from Delong. The Austrians Krugman encounters are screaming hyperinflation and want to end the fed immediately.

    Do you know Bob Roddis or at least seen him around? That guy is everywhere in the Austrian blogosphere and I think he barely found out a couple days ago about Hayek’s money printing ideas in the comment section of Murphy’s blog. If that guy didn’t know, I can’t really expect Krugman to know.
    http://consultingbyrpm.com/blog/2011/01/is-there-a-conservative-case-for-qe.html#comments

  34. Gravatar of Full Employment Hawk Full Employment Hawk
    21. January 2011 at 07:24

    ” In my opinion we would already be there, provided NGDP were at trend.”

    That raises an interesting question that needs to be more fully addressed: Would there be a housing surplus if the economy were at potential output and full employment, so that all the people who are living with parents or doubling up could buy the home or condo they would want to buy if they could afford it?

  35. Gravatar of Jeff Jeff
    21. January 2011 at 13:15

    Politics and professional interests. Most academic economists are political liberals, and liberals would rather see fiscal expansion than monetary expansion. I think that covers most of your missing 89 economists.

    The big-name macro economists who you might expect to be your allies, the ones who aren’t political liberals, are also almost all people who make their living doing DSGE models that are mostly useless for addressing questions about monetary policy or financial crises. It is not in their professional interest to acknowledge that accessible, mostly verbal, quasi-monetarism is actually more useful than the highly mathematical models that only a few high priests can work with.

    The profession is very badly off track.

  36. Gravatar of edeast edeast
    21. January 2011 at 21:40

    I think Krugman shit-the-bed with the Tucson blame conservative rhetoric article, and was trying to make amends/ isolate the harder right from you, frum, etc.

  37. Gravatar of scott sumner scott sumner
    22. January 2011 at 07:29

    Mark, The key is whether he believes nominal shocks affect RGDP. Robert Lucas does. If he does, he’s in with me Krugman and Lucas.

    JimP, That’s right.

    Greg, Anyone who even read the daily papers knew that both RGDP and prices were falling fast in the early 1930s. That means NGDP was plunging.

    David, Yes, academics look at E[pi] — so why weren’t they screaming for easier money in late 2008?

    Edwin, I find your take on Krugman to be far more plausible than Greg’s take.

    Full E. H.,

    Yes, that was my claim.

    Jeff, I hope that wasn’t the reason for the liberals. If so they did a great disservice to Obama, as only monetary policy could have prevented this fiasco.

    By the way, even Krugman says there is no case of fiscal stimulus when rates are not at zero. So it’s not clear that liberals are that corrupt.

    Yes, the profession is certainly badly off track.

    edeast, the first part of your comment is certainly correct, the Economist had a devastating critique of that Krugman piece.

  38. Gravatar of Morgan Warstler Morgan Warstler
    22. January 2011 at 08:23

    “By the way, even Krugman says there is no case of fiscal stimulus when rates are not at zero. So it’s not clear that liberals are that corrupt.”

    Wait, was DeKrugman arguing to put rates at zero when they were at 1%? If so, then the liberal (Eco)SocialWorkers expect to have Fiscal, and they’d still be corrupt.

  39. Gravatar of nanute nanute
    22. January 2011 at 13:35

    Scott,
    Great post. Thanks to David Beckworth for the link. I’m of the opinion that the most overlooked factor in getting the growth required to sustain economic recovery (domestic) is the M1M being in negative territory. (It being obvious that 10% unemployment is a given.) Would it not be safe to argue that increases in M1 via the fed is less in real terms than what is nominal? I think it would be better to stimulate directly rather than hope that QE2 does the magic. The output gap and lack of direct spending by ordinary consumers and the unemployed needs the stimulus. Talks of cutting unemployment and no prospect of employment levels rising in the foreseeable future does not bode well for any form of positive GDP. Current political winds indicate the problem is in for a compound fracture.

  40. Gravatar of ssumner ssumner
    23. January 2011 at 19:56

    Morgan, I take him at his word.

    Nanute, I focus on expected NGDP, not M1, but either way we need easier money.

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