Quote of the Day: October 13, 2011: Steve Job on Heathkits
Hoisted from Comments: Department of "Huh?!": Founding Fathers Edition

Paul Krugman's Ire Is a Fearsome Thing: Responding to Evidence Department

Over the past fifteen years, we economists have had a number of lessons. No, the problem of depression prevention has not been solved. No, the major banks do not have the ability to manage or even assess the risks that they are running. No, the Federal Reserve does not have the power and the will to build a firewall between financial distress and the real economy of employment and production. No, the labor market does not move quickly back to a full employment equilibrium. No, 9% unemployment does not galvanize Washington into action to fix it. No, the full-employment equilibrium-restoring forces in the market are not strong.

Many of us economists--I would say all economists worthy of the name--who did not forecast all six of these in advance have been working hard at rethinking our positions. We have been trying to figure out why our Visualizations of the Cosmic All were so awry. And we have been trying to construct better Visualizations of the Cosmic All.

Others--cal them ideologues--haven't changed their mind about a blessed thing over the last fifteen years.

And now Paul Krugman's ire is aroused as these ideologues claim to think that he is one of them: he is not--he is not in the same business that they are:

I Am Not Your Mirror Image: Russ Roberts tries to debunk my explanation of the reasons to believe in a broadly Keynesian view of the world — and reveals more than he intended…. oberts treats my statement that we have a lot of evidence on the effects of monetary policy, not so much on fiscal policy, as being somehow slippery. But if you are at all familiar with the reality of macroeconomic policy, you know that there’s an obvious reason: monetary policy, which is set by a small committee without the need to pass legislation, is routinely used as a tool for managing the economy; discretionary fiscal policy isn’t…. Roberts also says, well, I choose some studies of austerity, but others reach different conclusions. Yes — but not all studies are created equal. In fact, the last two years of research on fiscal policy have clarified a lot.

Initially, a lot of credence was given to work like that of Alesina and Ardagna, which tried to identity changes in fiscal policy using mildly fancy time-series analysis — and seemed to find evidence of expansionary contraction. But everyone who looked at that work closely quickly noticed that their supposed episodes of both stimulus and austerity didn’t seem to correspond at all to known changes in policy. When economists started doing studies using the Milton Friedman/ Romer and Romer method –that is, using historical information to identify actual changes in policy — the results turned clearly Keynesian.

But the main thing wrong with Roberts’s piece is the assumption that people like me are just mirror images of people like him:

Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government. Both of us can find evidence for our worldviews.

This is wrong on multiple levels. First of all, while conservatives see smaller government as an end in itself, liberals don’t see bigger government the same way…. [L]iberals want government to do certain things, like provide essential health care; the size of government per se isn’t the objective.

Second, Keynesianism is not and never has been about promoting bigger government. Outside the US, this is obvious…. Even in the US, when the political heat isn’t so intense, you find conservative economists promoting quite Keynesian views of stabilization policy — Greg Mankiw is the editor of two volumes on New Keynesian Economics, and the Bushies were quite happy to argue for tax cuts as a way to boost spending.

What is true is that some conservatives in America have always opposed Keynesian thought because they believe it legitimizes an active role for government — but that’s not what Keynesianism is about, and not the reason I or others support it.

Which brings me to the final point. Russ Roberts may choose his economic views because they support his political prejudices. I try not to…. I’m trying to figure this thing out, as best I can. If you’re not, we’re not in the same business.