Paul Krugman and the polemical style of blogging

Just got back from the AEA Meeting, where I happened to run into a lot of cool bloggers, including Mark Thoma, Ryan Avent, Alex Tabarrok, Justin Wolfers, and Steve Landsburg. Unfortunately, I didn't get a chance to meet Paul Krugman.

Anyway, back to blogging! On the subject of Krugman, I've been wanting to write something about this Tyler Cowen post ever since I read it last week, but with job interviews coming up, I didn't have the time. So this post is a little late.

In his post, Cowen let loose with a broad criticism of Krugman's polemical blogging style:

Krugman a) regularly demonizes his opponents, including those who hold Krugman’s old positions, and b) doesn’t work very hard to produce the strongest possible case against his arguments... 

Can you imagine the current Krugman writing something sufficiently multi-faceted that you might come away thinking — because of the piece itself — that the opposing point of view was the better one?... 

Krugman has shown a remarkable and impressive capacity to reinvent himself, more than once.  He could reinvent himself again [to be less one-sided] and become the most important American public intellectual — and perhaps intellectual — of his time.  Or he could keep his current status as a sharp and brilliant someone who has an enormous number of followers but relatively little influence over actual events[.]

I don't know if I agree with this. Yes, Krugman writes in a polemical style. He mocks ideas that he thinks are nonsense, he accuses people of misunderstanding basic economics, and he occasionally accuses certain writers of dishonesty. Is this a bad thing?

I say: it depends on what the world needs right now.

I think you can approach an econ blog in one of two basic ways. Way #1 is to put your complete thought process on a page - to lay out both sides of an argument, and explain why you arrived at a conclusion. This is what Cowen calls the "Humean" method, after David Hume. As I see it, the Humean method is what you use if you want to get the most out of a discussion with a well-informed but fundamentally disinterested interlocutor. If your conclusion is right, then the Humean method is likely to convince such an interlocutor to reach the same conclusion. If your conclusion is wrong, it maximizes the chance that the well-informed but disinterested interlocutor will see where you went wrong and help you to correct your mistake.

But not all interlocutors are disinterested. Some have political agendas. Some have strong personal biases. And not all interlocutors are well-informed. So if one uses the Humean method of argumentation, it is quite possible that your carefully considered ideas will be opposed by a totally biased person who doesn't bother to be nearly as even-handed as you, because he just doesn't care. And this biased opponent may, through his vehemence and the artificial simplicity of his arguments, succeed in convincing many poorly-informed third party observers of his point of view, even if yours has the weight of logic and evidence behind it. And society may suffer as a result.

In this situation, it may provide the most social benefit to adopt a more Hegelian method of argumentation. Hegel's idea of how good conclusions are reached has been described as a process of "thesis, antithesis, synthesis" - two people argue their cases as strongly as possible, and observers can pick and choose the best points of each. This is how our court system works, for example. In the context of econ blogs, using a Hegelian approach means saying "My opponents are going to do everything they can to push their point of view, so I had better do the same in order to balance them out."

This seems to be what Krugman is doing. He writes:

I realized that I also wanted to say something in response to the concern trolling, the “if you were more moderate you’d have more influence” stuff. Again, this amounts to wishing that we lived in a different world. First, there is no such thing in modern America as a pundit respected by both sides. Second, there are people writing about economic issues who are a lot less confrontational than I am; how often do you hear about them? This is not a game, and it is also not a dinner party; you have to be clear and forceful to get heard at all.

In other words, he's adopting a polemic style as a Hegelian tactic, to balance out bad guys who pull no punches.

That's a pretty extreme tactic for an academic type to use. But I can understand why Krugman might use it. After all, he lived through the Bush years - he witnessed the power of loudly repeated lies to overcome even-handed reasonable argumentation, in the run-up to the Iraq War. It's hard to go through something like that, and, as a famous pundit, to think that just maybe you might have been able to stop the madness if you had been just a little more forceful and a little less "fair and balanced." It's less of a worry for me, but only because my audience is fairly limited.

Has Krugman's polemical style been self-defeating? Cowen claims that Krugman has "relatively little influence over actual events," but as evidence he cites only a link to an earlier post of his that asserts the same thing. I can see the case, of course. Krugman warned that Obama was too conservative during the 2008 primaries, but Obama won anyway. Krugman advocated bank nationalization, bigger fiscal stimulus, and a tougher policy toward China's exchange rate peg - all to no avail.

But does that mean Krugman has little influence? The idea of "Keynesian economics" has re-entered the mainstream non-economist public dialogue, largely thanks to Krugman. Fiscal stimulus, which was once advocated only in the middle of economic free-fall by technocrats like Larry Summers, has become a rallying cry for a large number of people who think policy should take a more active role. And, most of all, Krugman's assault on the macroeconomics profession itself has caused much of the public to turn on the practitioners of macro, spurring them to scramble for new ideas, new approaches, and new data.

You may think those results are good things, or not. But I think it's very hard to argue that Krugman has not been enormously influential. As to the question of whether he is the most important American public intellectual of our time...well, I'm having a hard time thinking of who else would fit that description.

Krugman the moderate

"Even Paul Krugman has been known to say some rather nutty things at times."

Chris House was a bit surprised when that statement received considerable pushback. It seems like an innocuous, throwaway line, sort of like when a political writer says "and of course the Democratic party has its extremists too." A gesture toward centrism. But is it true?

Krugman is a bit unusual, in being both an economist who talks about serious economics, and an unabashed political pundit. Since politics is a highly emotional and highly subjective area, I wouldn't be surprised if people's emotional reaction to Krugman's politics - or politics itself - bleeds into their reading of his economic writing. On top of that, there exists a contingent of right-wing quasi-economists out there in the blogosphere who think Keynesianism is communism (you know who you are). And Krugman himself does occasionally say mean things about his rhetorical opponents (though he is pretty humble when it comes to the topic of his own expertise).

But when looked at dispassionately, how "nutty" is Krugman's economics itself?

Krugman's ideas about the macroeconomy seem to be something like this:

1. Recessions are usually caused by some sort of aggregate demand shocks, and monetary policy affects demand. There is a short-term inflation-unemployment tradeoff. If monetary policy is too easy in a boom (or during a negative supply shock like the 70s), you'll get harmful inflation. So the Fed should lean against the business cycle with monetary policy.

2. Under normal circumstances, recessions can and should be fought with monetary policy alone. But if nominal interest rates hit zero, then unconventional monetary policy can only work if the Fed can convince people of its commitment to keep policy easy for a long time after the recession. Since convincing people of that is very hard, fiscal policy is a better tool when nominal interest rates are zero.

3. Recessions are usually temporary things. But if the economy's trend growth rate is too slow, we could enter a period of "secular stagnation", where nominal interest rates continually hit zero. In this case, we need something special to boost us back to the more normal realm of positive interest rates - a higher inflation target, for example. An asset bubble might also do the trick, though with very damaging consequences down the road.

Are these beliefs nutty?

#1 is absolutely non-nutty, and is probably the majority view in the macroeconomics community. This is very close to the view of Milton Friedman. It's the view of New Keynesian models, which are the dominant type of DSGE model used at central banks.

#2 is a somewhat unusual view, but not out of the mainstream at all. It's basically just the theory outlined by Mike Woodford (probably the most influential macroeconomist working in academia today) and Gauti Eggertsson in 2003. Other prominent macroeconomists, such as Bob Hall, have also called for fiscal stimulus.

#3 is a very unusual view, which goes by the name of "secular stagnation" and has recently been propounded by Larry Summers. It is a new idea, and has not yet been the subject of much academic research. So while this isn't a mainstream view, I would call it "new", not "nutty". It certainly doesn't contradict the mainstream ideas in #1.

What about macroeconomic methodology? Unlike most working macroeconomists, Krugman has criticized the mainstream DSGE methodology, calling for the use of "ad-hoc" models like Old Keynesian IS-LM as a supplement to the more complex, intricate DSGE models - the rationale being that those models can be modified more quickly in an emergency and are more effective at communicating ideas to policymakers (or even to oneself). He is in general very skeptical of the value of the whole DSGE/microfoundations revolution.

This definitely puts Krugman out of the mainstream...of macroeconomics. Only a few maverick macro people, like Ricardo Caballero, speak out against the dominant paradigm. But outside of macro, the sentiment is less iconoclastic; plenty of non-macro economists wrinkle their noses at the mention of DSGE macro models. Krugman, in his academic career, was a trade theorist, which is close to macro, but not so close that his attitude toward DSGE is rebellious and eyebrow-raising.

Now, Krugman's rhetorical opponents have, upon occasion, accused him of wanting to tear up all of modern economics and replace it with the literary wisdom of musty old books. This accusation is partly motivated by Krugman's famous 2009 New York Times magazine article, "How did economists get it so wrong?", which was a blast of frustration leveled at the macroeconomics and financial economics professions for having missed the possibility of a crisis. You can judge for yourself whether you think the article was nutty; personally, I think it was pretty typical of the sentiment at the time among not just the public, but many economists themselves.

But the accusations that Krugman wants to tear up modern economics are overblown. They are typically made by people who don't like Krugman's overall worldview and approach - in other words, people who aren't buying the particular brand of modern macroeconomics that Krugman is selling. That leads them to caricature his views. I'm sure similar things are said behind a few closed doors in academia as well, by those academics who don't like even Krugman's mainstream ideas.

This is similar to the way conservative media tried for years to paint Hillary Clinton as a dangerous radical left-winger, despite her moderate stance on most issues. It was effective rhetoric. It got a lot of news media to buy into the story of Hillary the left-wing radical. It probably forced her to vote for the Iraq War in order to maintain centrist cred, thus leading to the victory of Barack Obama in the 2008 primaries. But it was never a realistic portrait of Hillary.

Nor is the portrait of Krugman as a radical fringe economist accurate. His economics is somewhat out of the mainstream on certain points, but generally within the standard deviation.


Updates:

Paul Krugman has more. Note that I didn't say that Krugman took Idea #2 from Eggertsson and Woodford, only that the ideas are the same!

Niall, the British Empire is over. Accept it.

I have been known to tease a fellow blogger or two, but there is really only one writer who makes me truly mad, and that is British historian Niall Ferguson. I will explain exactly why he makes me so mad at the end of this post. First, though, I want to say a few words about Mr. Ferguson's cover story in Newsweek magazine, entitled "Hit the Road, Barack". I should note that it imposes a heavy psychic cost for me to do so, since it requires that I actually read Niall Ferguson. But the public duty to expose BS and promote truth and intellectual honesty overrides such selfish concerns.

First, Ferguson alleges that Barack Obama has broken a bunch of his campaign promises:

[T]he question confronting the country...is whether the winner [of the 2008 election] has delivered on his promises. And the sad truth is that he has not.. 

[Obama] promised to “build the roads and bridges, the electric grids, and digital lines that feed our commerce and bind us together.” He promised to “restore science to its rightful place and wield technology’s wonders to raise health care’s quality and lower its cost.” And he promised to “transform our schools and colleges and universities to meet the demands of a new age.” Unfortunately the president’s scorecard on every single one of those bold pledges is pitiful.

First, I'll just quickly note that the American Recovery and Reinvestment Act contained substantial funding for infrastructure. So Ferguson, when he says that Obama has not built infrastructure, is simply asserting something that is not true. In the parlance of my generation, he is "spouting BS".

Next, let's examine the hypocrisy of the critique. Paul Ryan, the man about whom Ferguson says many glowing things (almost ignoring Romney), has proposed to cut infrastructure spending fairly dramatically. So Niall Ferguson is criticizing Obama for not promoting infrastructure enough, even as he praises a man who wants to gut infrastructure. Does this make any sense? Only if you accept "Obama must be defeated" as an axiom, which Ferguson does. Otherwise, no.

Next, we come to a pair of enormous, glaring, bald-faced self-contradictions. First, in the following passage, Ferguson derides Obama's stimulus as ineffectual, and lambastes him for increasing the deficit:

By the end of this year, according to the Congressional Budget Office (CBO), [the U.S. federal debt in public hands] will reach 70 percent of GDP. These figures significantly understate the debt problem, however. The ratio that matters is debt to revenue. That number has leapt upward from 165 percent in 2008 to 262 percent this year, according to figures from the International Monetary Fund. Among developed economies, only Ireland and Spain have seen a bigger deterioration. 

Not only did the initial fiscal stimulus fade after the sugar rush of 2009, but the president has done absolutely nothing to close the long-term gap between spending and revenue.

Yet scroll down, and we find Ferguson warning about the upcoming "fiscal cliff":

[B]arring some miracle, the country will hit a fiscal cliff on Jan. 1 as the Bush tax cuts expire and the first of $1.2 trillion of automatic, across-the-board spending cuts are imposed. The CBO estimates the net effect could be a 4 percent reduction in output.

Ferguson is criticizing Obama for allowing the "fiscal cliff" to happen. The fiscal cliff is a series of pre-arranged, automatic spending cuts and tax increases - in other words, things that will reduce the deficit. So Ferguson, who blasted Obama for increasing the deficit, is now blasting him for cutting the deficit.

Additionally, Ferguson warns that this pre-programmed austerity will cause GDP to contract. But if that's true, it must follow that deficits boost GDP - in other words, that stimulus works. I.e., the exact opposite of what Ferguson implies with his "sugar rush" comment and his many previous anti-stimulus writings. But Ferguson either fails to see this implication of his "fiscal cliff" critique, or else sees it and bulls right through it, refusing to sacrifice an Obama-bashing opportunity on the altar of self-consistency.

Backtracking a bit, we find Ferguson criticizing Obama on health care:

His much-vaunted health-care reform will not prevent spending on health programs growing from more than 5 percent of GDP today to almost 10 percent in 2037... the Patient Protection and Affordable Care Act (ACA) of 2010 did nothing to address the core defects of the system[.]

I'm not sure where Ferguson gets his numbers. But surely he can't have failed to notice the health care cost slowdown that everyone is talking about, can he? Now, maybe Obamacare gets some credit for the cost slowdown and maybe it doesn't, but the slowing trend certainly makes Ferguson's portents of doom seem very three-years-ago.

Ferguson sprays out some more random irrelevant stuff, like the fact that China is going to overtake the U.S. in total GDP. He fails to note how impossible it would be to stop that from occurring; if every Chinese person were to get a job flipping burgers at McDonald's (at the U.S. minimum wage), China's total GDP would be bigger than ours. That's how many Chinese people there are. Ferguson expects Obama to work some magic to let us stay ahead of a country 4.5 times our size?

Then we come to Ferguson's criticism of Obama's foreign policy, which veers into absurdism that would make Monty Python proud:

Obama completely missed the revolutionary wave of Middle Eastern democracy—precisely the wave the neocons had hoped to trigger with the overthrow of Saddam Hussein in Iraq. When revolution broke out—first in Iran, then in Tunisia, Egypt, Libya, and Syria—the president faced stark alternatives. He could try to catch the wave by lending his support to the youthful revolutionaries and trying to ride it in a direction advantageous to American interests. Or he could do nothing and let the forces of reaction prevail. 

In the case of Iran he did nothing, and the thugs of the Islamic Republic ruthlessly crushed the demonstrations. Ditto Syria. In Libya he was cajoled into intervening. In Egypt he tried to have it both ways, exhorting Egyptian President Hosni Mubarak to leave, then drawing back and recommending an “orderly transition.” The result was a foreign-policy debacle. 

So first, Ferguson credits Bush's invasion of Iraq with sparking the Arab Spring, and then he criticizes Obama for mishandling said Spring. Ferguson's mind - which I'm sure has an I.Q. above 17! - must be constantly confronting him with the scoreboard: zero new Middle Eastern democracies under Bush, three under Obama (four if Syria's rebellion succeeds), plus substantial democratic reforms in Morocco.

But Ferguson absolutely ties himself in knots with his attempts to turn that scoreboard upside down. Obama was cajoled into intervening in Libya! Egypt was somehow a failure! Let's not mention Tunisia! And let's conveniently forget the fact that Iraq is still not a functioning democracy! Oh, and Obama should have invaded Iran to support the Green Revolution (but drone strikes in Pakistan are illegal)!!!

But the most ludicrous moment in this foreign-policy farce comes when Ferguson says:

Remarkably the president polls relatively strongly on national security.

Oh geez, I wonder why. Maybe it's because, oh, I don't know, Obama killed Osama bin Laden, ended the stupid Iraq War, improved relations with most of our allies, and helped bring about three or more new democracies in the Middle East? Maybe that is why the people like President Barack on national security? Oh, no. Couldn't be. The American people must be fools! Blind, mistaken, misled fools!

...pant, pant...

OK, let me catch my breath...

Anyway, much of the rest of the article is devoted to a hagiography of Paul Ryan, which I will not touch on other than to mention that, surprise of surprises, Ferguson utterly ignores the deficit-ballooning aspects of Ryan's budget plan, repeating the - can I call it a lie? pretty please? - mantra that Ryan is a fiscal conservative and deficit-cutter.

So basically, what we have here is a pedestrian, poorly written, poorly-thought-out, self-contradictory, often counterfactual anti-Obama screed. But it is not enough for me to simply point this out. Instead, I want to examine why Niall Ferguson has thrown away the ancient Western traditions of logic and reason in a frenzy of partisan animus. I submit to you that Ferguson's true motivations are fairly transparent. Witness his ideal of what foreign policy should be:

Meanwhile, the fiscal train wreck has already initiated a process of steep cuts in the defense budget, at a time when it is very far from clear that the world has become a safer place—least of all in the Middle East. 

For me the president’s greatest failure has been not to think through the implications of...challenges to American power...(emphasis mine)

Niall Ferguson wants the United States to be an empire. An historian, Ferguson has always been enchanted with the British Empire of his forebears. He has also long been enchanted with the notion that the United States can and should become the successor to the British Empire, and that we Americans have been shirking our duty by pretending to be just another live-and-let-live nation-state. He seems to have been especially enchanted by that magic moment in 2003 and 2004, when it seemed that under George W. Bush and the neoconservatives, America was finally taking up the mantle of empire. The failure of the Iraqi adventure, and the collapse of popular support for similar adventures, must have felt to Niall Ferguson like something beautiful was being snatched from his hands.

Now, Ferguson hopes, under a Romney/Ryan (or Ryan/Romney?) presidency, America has a chance at completing the mission that George Bush started, and returning to its path to glory as British Empire II.

But - and this is why he makes me so angry - Niall Ferguson badly misunderstands my country. We are a Republic, not an Empire, and we always will be. We rejected the mantle of Anglo-Saxon world domination in the Philippines, again in Vietnam, and again in Iraq. And we will always reject it. We do not want to go forth and educate and enlighten the brown people at the point of our Tomahawk missiles, Mr. Ferguson. We want to invite them here, to live with us, to work for us and hire us, to marry our children, to become part of this country. Even, yes, to lead this country, as Barack Obama, for all his faults, has done. We do not want to conquer the world. We want to become the world.

The British Empire is over, Niall. It had its day. We can debate eternally how much good it did, but now it is done, and it is not coming back. Stop trying to screw up my Republic in your doomed effort to bring it back.

Update: Also see this excellent James Fallows takedown of Ferguson's atrocious piece.

Update 2: Also see Joe Weisenthal discuss Ferguson's disastrous attempts to analyze and predict the economy.

Update 3: And you really must read Matt O'Brien's epic fact-check of Ferguson's article.

Update 4: Here is a good roundup of Ferguson beatdowns from Joe Coscarelli, which unfortunately doesn't include mine, but does include contributions by Brad DeLong, Paul Krugman, and Matt Yglesias. Also see more from Ezra Klein and Mark Thoma.

Update 5: Niall Ferguson responds, mostly to Matt O'Brien. He does not mention me, nor does he address any of the points I make in this post.

Update 6: Here is Paul Krugman with a thoughtful discourse on Niall Ferguson's wrongness.

Update 7: Here is Dan Drezner with a fact-check of Ferguson's foreign policy claims.

Did the Krugman insurgency fail?

Is New Old Keynesianism dead? I encourage everyone to read Henry Farrell and John Quiggin's new article, "Consensus, Dissensus and Economic Ideas: The Rise and Fall of Keynesianism During the Economic Crisis." Basically, Keynesian policy briefly regained its old throne when everyone was panicking in 2009 - everyone became a Keynesian in a foxhole, as Bob Lucas would say - but this brief consensus fell apart under an assault from austerity-minded European central bank economists in 2010-11.

This makes me step back and think about the whole econ blogosphere over the past several years. The thing that inspired me to start blogging was the famous Paul Krugman article, "How Did Economists Get It So Wrong", published in September 2009 (that, and John Cochrane's dismissive response). Before that article, I had seen the econ blogosphere as mostly about micro, and mostly about "everyday economics" - pointing out cute little observations about how daily life reflects economic behavior and incentives. It was kind of interesting, but not really. Then, suddenly, it became something very different. A war was on. The blogosphere was Ground Zero for a very deep and fundamental argument about the purpose and practice of macroeconomics. And suddenly, the policy consequences couldn't be more important. After spending a year sitting on the sidelines of that argument, I decided to turn Noahpinion - which had just been a personal bullshit diary - into an economics blog.

Now it seems that the war is winding down. Arguments still flare up over the proper use of microfoundations, or over monetary policy. But - and this is just a feeling I get - the frequency of titanic clashes seems to have peaked.

Undoubtedly, this is just because of the economic situation. We're not in a boom by any means, but we're no longer in a crisis, or even obviously stagnating. Policymakers have emerged from their foxholes; they no longer feel a need to deviate from the comfortable pre-2008 consensus that monetary policy is the only necessary tool of demand management. I believe that this is the reason for the "fall of Keynesianism" described by Farrell and Quiggin.

So does that mean Krugman's insurgency failed? Seen narrowly as a push for countercyclical fiscal policy, I'd have to conclude "yes." Even Obama's "stimulus" bill was mostly just temporary tax breaks, not spending increases as Keynesian theory would recommend. All around the developed world, instinctive fear of debt made the policy recommendations of Krugman and other Old Keynesians a political non-starter regardless of their theoretical justification.

What about in academia? The crisis provoked a mini-boom in macro papers focusing either on Keynesian theory (e.g. Eggertsson & Krugman 2010) or empirics (e.g. Nakamura & Steinsson 2011). But I don't see this as a big deal. The theorizing is just DSGE with a couple frictions; the profession has not yet felt a collective need to overturn the basic methods and philosophy of macroeconomics, as Robert Lucas and others did in the 1970s. The analytical framework that emerged from that 1970s revolution, which remains absolutely dominant in macro to this day, has again and again proven itself flexible enough to build models to suit any passing fad or consensus opinion. This is not to say that DSGE can accurately describe any phenomenon - merely that it is capable of telling a mathematical story that delivers basically any desired policy conclusion. So after fiscal policy goes out of vogue, Old Keynesian models may go back to near where they were pre-crisis - subjects of study for smart people, but not accepted by the main body of the profession. The consensus may shuffle toward the ideas of Hall and Eggertsson and Krugman, but the change will be marginal.

Like the wars of Louis XIV, the push for a rehabilitation of Old Keynesianism has resulted in a lot of sound and fury, but only modest territorial gains.

Nor do I think Krugman's push against microfoundations will provoke a return to aggregate-only models. First of all, that assault was always a bit half-hearted - in principle, microfoundations are highly desirable for any macro model. The problem is more with the poor (but convenient) choice of microfoundations that macroeconomists have been willing to accept since DSGE came into vogue.

So a layperson might conclude that the insurgency that Krugman launched in September 2009 - and which has consumed and defined the econ blogosphere since then - was ultimately defeated. But I do not believe that this is the case. Although the battle for New Old Keynesianism is mostly over, the Krugman insurgency launched a much deeper, more profound, and more long-lasting war. It shook the philosophical foundation of macroeconomics, and that foundation is still shaking.

Since 2008, everyone had been asking: "Why did macroeconomists miss the crisis?" Even the Queen of England asked it! Shouldn't we expect macro theory to help us avoid macroeconomic disasters? Of course, the profession at first closed ranks against the criticism. Economists protested that Rational Expectations or the Efficient Markets Hypothesis made it impossible to predict a crisis. These protests mostly fell on deaf ears (and rightly so, because they are logically fallacious). Still, the reflexive wagon-circling made it hard to pin down exactly where economists had gone wrong - after all, if all the experts insist that experts have value, who are non-experts to disagree?

But when Krugman, a Nobel Prize winner, came out and said publicly that the macro profession had allowed itself to be satisfied with uselessness and irrelevance, it broke the facade of unity. Like Greg Smith departing Goldman Sachs, here was an insider who was willing to stand up and say that the whole system was rotten. And then Krugman went further. After revealing that top economists were dissatisfied with macro's ability to predict crises, Krugman revealed that they also couldn't agree on how to deal with crises. That's where the push for Old Keynesianism came in. It may not have resulted in a permanent sea change in macroeconomists' modeling consensus, but it told the public that there were deep divisions within the profession on the question of how to fight recessions.

And that, really, was all the public needed to know. If macroeconomists hadn't conclusively discovered how to avert crises and also hadn't conclusively discovered how to recover from crises, what good had they done for society? Why were we paying professors hundreds of thousands of dollars to study this subject if nothing usable had emerged?

Of course, it would be wrong to paint the challenge to macro as a one-man Krugman Show. It isn't. Even the stalwarts of the profession have been questioning how much macroeconomists really understand - see John Cochrane and Greg Mankiw, for a couple of examples. But it was Krugman who took this argument public, who took the case to the wider educated lay populace, and aired macro's dirty laundry to millions of engineers, scientists, financiers, businesspeople, politicians, lawyers, and journalists. What Krugman (and Brad DeLong) did to macro was similar, in some ways, to what Lee Smolin and Peter Woit did to string theory - except on a much bigger stage, since Krugman is such a huge name in his field, and macroeconomics has a lot more important policy ramifications than the theory of black holes.

So the battle over Keynesianism may be over, with the New Old Keynesians fought to a bloody standstill, but the wider Macro Wars have only begun. As for how this affects the blogosphere and the rest of econ's public face, one thing is for sure - we're not going back to talking about how abortion affects crime rates.

(Side note: Since my PhD will be done soon, I think I may turn this post into a book this summer, if I have the time...)


Update: Krugman comments, and notes that A) were it not for the New Old Keynesians, damaging austerity might have been implemented to a greater degree, further harming the world economy. That's a good point; policy is all about the balance of forces. Krugman also says - and I absolutely agree with this - that tere is a deep rumbling of dissatisfaction and disillusionment with the current paradigm among grad students and assistant profs, which will eventually build into a large wave of change. The Krugman insurgency was the beginning of the new Macro Wars, not the end.

Standard Republican narrative of history (John Taylor edition)

According to John Taylor, the reason that the recovery from the 2008-9 recession has not been as rapid as the recovery from the 1981-2 recession is that Reagan's policies were better than Obama's policies:

We are not really recovering from the recession, at least not compared to the period after previous big recessions such as the early 1980s...The reason is pretty clear. In the Wall Street Journal piece I refer to and quote from a memo written by President Reagan’s economic adviser George Shultz and others after the 1980 election. It laid out the long run economic strategy they recommended and which Reagan followed. Contrast that with the memo Larry Summers sent to President-elect Obama after the 2008 election, which is making the internet rounds. It laid out the short-run Keynesian policy Summers recommended and which Obama has followed. The big policy differences largely explain the big economic performance differences. (emphasis mine)

And what are those big policy differences? In the WSJ article, Taylor spends a lot of time making a general case for "economic freedom," but names only one concrete policy difference between Reagan and Obama: Reagan enacted permanent tax cuts, while Obama enacted temporary tax rebates (in the ARRA). Taylor argues that Reagan's permanent tax cuts represent policy based on predictability and stability, while Obama's policies represent short-term, unreliable interventions.

This is a very standard intellectual-Republican narrative of economic history. Which, again, does not mean it is wrong. But I do see some big problems with Taylor's analysis.

Problem 1: Reagan's permanent tax cuts were enacted in early 1981, before the steep recession. This means that any effect that those tax rates had on the 1983 recovery had to have come not from the policy change, but from the low tax rates that were in place. However, in 2010, thanks to the Bush tax cuts, stable permanent long-term income tax rates were lower under Obama than they were under Reagan. If low permanent tax rates caused a rapid recovery in 1983, why didn't even lower permanent tax rates cause a rapid recovery in 2010?

In other words, if the 1981-2 recession was fundamentally the same kind of event as the 2008-9 recession, then Taylor is concluding that Obama's temporary tax cuts (or other actions, such as saying bad things about "business") substantially prolonged the current slump. I suppose that is possible - it's a claim that many Republicans have repeated - but it seems like a difficult case to make. A lot harder of a case, in fact, than simply saying "Reagan's policies were better than Obama's."


Problem 2: There are other historical examples of deep recessions besides the one in the early 80s. When we compare policies and results between now and the Great Depression, for example, especially in Britain, we are tempted to reach conclusions very different from Taylor's. I'll outsource this part of the argument to Brad DeLong:

This many months after the start of the Great Depression, the British economy was rapidly converging back to its pre-depression level of production under Chancellor of the Exchequer Neville Chamberlain's policy of using stimulative policies to restore the price level to its pre-Great Depression trajectory. 

By contrast, the Cameron-Osborne policies of expansion-through-austerity have produced a flatline for real GDP, and the odds are high that British real GDP is headed down again. 

In less than a year, if current forecasts come true, the Cameron-Osborne Depression will not be the worst depression in Britain since the Great Depression, but the worst depression in Britain… probably ever.

So if you want to ascribe economic outcomes to broad differences in economic policy, why only look at the Reagan years? Why not look at the Depression? And why look only at the U.S. instead of at other countries as well?


Problem 3: The 2008-9 recession does not seem very comparable to the 1981-2 recession. For one thing, the early 80s recession immediately followed (and, most believe, was precipitated by) a huge hike in interest rates by the Federal Reserve (which was trying to beat inflation). That meant that as soon as rates were allowed to fall, the force that had spiked U.S. GDP growth would be removed. In contrast, the 2008-9 recession occurred during a period of historically low interest rates, which were dropped to zero shortly after the recession began. This left the Fed without its usual method of boosting GDP growth. Even more importantly, the difference also indicates that the "shocks" that caused the two recessions were fundamentally different - a policy shock in the case of the early 80s recession, but some other kind of shock in the case of the 2008-9 recession.


In other words, I think this simple standard Republican narrative does not fit the facts. It is tempting, especially for politically conservative economists, to conclude that Reagan's tax cuts made everything about the U.S. economy awesome, and that something done or said by the left-leaning Obama made everything go wrong. But that conclusion just doesn't square with the evidence that we see when we look out the window. I think a more complex narrative is needed.

Update: Paul Krugman points out that Reagan raised taxes in 1982. Which means that A) Reagan's 1981 tax cuts were not quite as predictable, stable, and long-term as Taylor claims, and B) according to Taylor, this Reagan policy should have hindered the 1983 recovery.

Asian-Americans destroy the "maker/taker" narrative

The absurd outburst of Nate Silver Denialism was just the most egregious example of the alternate reality bubble that the American conservative movement has been constructing over the last decade-and-change - the phenomenon that used to be called "epistemic closure." In this devastating analysis, Conor Friedersdorf lays out just how monumentally stupid is is for a movement to divorce itself from extant reality:

I see a coalition that has lost all perspective, partly because there's no cost to broadcasting or publishing inane bullshit. In fact, it's often very profitable. A lot of cynical people have gotten rich broadcasting and publishing red meat for movement conservative consumption.

Since the election, I've been reading The Corner, the group blog of the National Review, a publication which probably still represents the intellectual forefront of the conservative movement. I've seen some very intelligent and thoughtful discussion there, and also some absolute head-in-the-sand denialist comfort-food. But one thing I don't see anyone challenging is the master narrative of modern American conservatism: the "maker/taker" story.

The "maker/taker" story is exactly the "47 percent" story that Mitt Romney told at that fund-raiser. It's the idea that the Democrats' core constituency is a bunch of lazy and/or untalented "takers" who want to use the government to steal from the hard-working "makers". Here's The Corner's David French summing up the idea:

To tens of millions of American voters, a conservative message of self-reliance and individual economic freedom is, quite frankly, terrifying. 

First, each of Obama’s core constituencies (single women, African-Americans, and Latinos) is seriously — and disproportionately — economically disadvantaged compared to the classic paradigm of the white, college-educated Republican voter. The rates of poverty and near-poverty among these groups are much greater, thus causing a critical mass of both populations to suffer — even if they’re technically middle class — from a greater degree of economic insecurity...Ideologically and historically they are pre-disposed towards statism as the means of alleviating economic insecurity and distress.

As you can see, the "maker/taker" narrative has a strong ethnic angle; the "takers" are supposed to be mostly minorities and single women. White men and their wives produce things; blacks, Hispanics, and sluts single women live on the dole. Naturally, this ethnic angle plays well with the conservative "base", i.e. Southern and exurban working-class whites for whom politics is ethnic and tribal. Here's Fox News' Bill O'Reilly reinforcing that racial version of the narrative:

The white establishment is now the minority. And the voters, many of them, feel that the economic system is stacked against them and they want stuff. You are going to see a tremendous Hispanic vote for President Obama. Overwhelming black vote for President Obama. And women will probably break President Obama’s way. People feel that they are entitled to things and which candidate, between the two, is going to give them things?

So, here's the problem: The narrative is wrong. Completely, utterly, wrong. The Democrats' appeal is not based on people "wanting stuff". And how do I know this? I know it because Asian-Americans voted for Obama by a 3-to-1 margin. Check this out:

Much has been made of the Latino vote and its crucial role in boosting President Obama to victory, but it was Asian Americans who made the most dramatic shift in support for the president Tuesday. 

Exit polls show that 73% of Asian Americans backed Obama, an 11-point increase since 2008.  Asian Americans came out in such force for Obama that they topped Latinos as his second-most supportive ethnic group, behind African Americans... 

While Asians accounted for just 3% of the electorate – up from 2% in 2008 – their overwhelming support made them a key component of the Obama coalition, especially in swing states like Virginia, Florida and Colorado.  

And their numbers are increasing rapidly. They were the fastest-growing ethnic group from 2000 to 2010... 

73% [of Asian-American voters] supported Democrats in congressional races.

So, for those of you who don't know this, Asian-Americans make more money than white Americans. Thus, they pay more income tax. And Asians are half as likely as the average American to be on welfare.

Thus, Asian-Americans, by the Romney/O'Reilly/French definition, are "makers", not "takers". Even more than whites. They're also more likely to be married. And to start businesses.

And yet Asian-Americans broke for Obama 3-to-1. David French should definitely be including them in his list of Obama's "core constituencies". The fact that he doesn't do so is a telling sign of "epistemic closure" - of conservatives not seeing what is plainly in front of them, preferring instead to repeat to themselves a pleasant, soothing, but false story.

If they're not "takers", why did Asian-Americans break so strongly for Obama? The answer is pretty clear: Conservative ethnic identity politics. The American conservative movement has made it abundantly clear that it sees America as a "white people country", and views Asians - like blacks and Hispanics - as guests (at best) or interlopers (at worst). The blood-and-soil white ethnocentrism of the conservative movement makes Asians feel like permanent foreigners in their own country, and they don't like feeling like that. Who would?

I'm pretty sure this is the right answer. Why? Because I myself am a member of a group that is demographically and electorally similar to Asian-Americans - namely, Jewish-Americans. Jews are America's second-richest religious group (behind Hindus), and yet Jewish voters broke almost 3-to-1 for Obama this year, and more than 3-to-1 in 2008. Why do Jews vote Democratic? Simple: for all their talk of "Judeo-Christian values" and support for Israel (as if anyone cares about that!), the Republicans make it clear that they think the ethnic core of America is not just white, but Christian as well. Jews don't want to have their schools lead them in prayers to Jesus. We don't like it when Bill O'Reilly demands that stores put only "Merry Christmas" on their holiday banners, and not "Happy Channukah". 

We Jews are not stupid; we know that the grassroots of the conservative movement, at least in its present incarnation, will never accept us as true "sons of the soil". The liberal movement will. It's as simple as that. And I'm pretty sure Asian-Americans are thinking along similar lines.

So if conservative intellectuals really want to turn their movement away from the self-destructive path that they're on, they need to face up to one overwhelmingly important piece of reality: White (Christian) ethnocentrism is turning everyone else against them. Getting rid of that ethnocentrism will take more than putting some Hispanics, or some Asians, or some Jews on the speaker's podium. It will take more than pretending to vote for - or even actually voting for! - Herman Cain or Marco Rubio or Bobby Jindal.

What will it mean? It will mean no longer talking about a "culture war". It will mean no longer talking about the "real America". It will mean rejecting race-baiters like Rush Limbaugh and Glenn Beck and Andrew Breitbart - not grudgingly, but wholeheartedly. It will mean rejecting nativist groups like the Minutemen. It will mean admitting that the Civil War was all about slavery, and that the Confederacy were the bad guys. It will mean disavowing the whole stupid narrative that blacks and Hispanics are a bunch of lazy "takers".

In other words, it will mean doing a lot more than the conservative movement is currently prepared to do. But guys, at least face up to reality. At least open your eyes and see what the rest of America really thinks about you. The Asian-American vote is an unmistakable sign that your master narrative is wrong.


Update: Lots of other people are saying the same thing. For example, here's Chris Hayes. Also, here's Paul Krugman with a nice graph.

Update 2: In a new article, Charles Murray says much the same thing as this blog post. Which is interesting, given Murray's prominent role in promoting the general white-supremacist overtone of the conservative movement.

Update 3: Richard Posner is with us too.

Hoover Institute recommends Hooverite policies

Via John Taylor, today's "dog bites man" story:

Why has the recovery been so slow? What can we do about it? Alan Greenspan, George Shultz, Ed Prescott, Steve Davis, Nick Bloom, John Cochrane, Bob Hall, Lee Ohanian, John Cogan and I recently met at the Hoover Institution at Stanford to present papers and discuss the issue with other economists and policy makers including Myron Scholes, Michael Boskin, Ron McKinnon and many others...In sum there was considerable agreement that (1) policy uncertainty was a major problem in the slow recovery, (2) short run stimulus packages were not the answer going forward, and (3) policy reforms that would normally be considered helpful in the long run would actually be very helpful right now in the short run.

Wow, shocking. The recession is Obama's fault for being a crypto-socialist, stimulus doesn't work, and the rich should get tax cuts. Who would have ever guessed that this team of mavericks would reach such a startling conclusion?

But I kid. Actually, the story of the Hoover conference is a little more interesting. It seems to have been pretty evenly split between people who simply re-asserted the standard conservative line, and people who supported either Keynesian solutions or an end to Republican obstructionism, but whose conclusions were spun in the writeup to fit the conference's (or Taylor's) preferred conservative policy line. So let's look at the specifics of what was said, as reported by Taylor.

First, George Schultz:

George Shultz led off by arguing that diagnosing the problem and thus finding a solution was extraordinarily important now, not only for the future of the United States but also for its leadership around world.

Mmm, you don't say...

Tax reform, entitlement reform, monetary reform, and K-12 education reform were at the top of [Schultz's] pro-growth policy list.

Because if we haven't diagnosed the disease, we might as well recommend that the patient drink lots of fluid and get plenty of exercise. That seems to be the idea here. Actually, I am pretty cool with that, since I like it when people admit how much we don't really know. It shouldn't be interpreted as blaming "uncertainty" or calling for austerity, though.

On to Alan Greenspan:

Alan Greenspan presented empirical evidence that policy uncertainty caused by government activism was a major problem holding back growth, and that the first priority should be to start reducing the deficit immediately; investment is being crowded out now.

Wow, empirical evidence that policy uncertainty is holding back growth? Show, us, please! Sadly, Greenspan's evidence appears to be proprietary, and only available to people who pay Greenspan Associates for the privilege of hearing that Obama's crypto-socialism is crippling the economy. Whereas the rest of us poor folks are forced to post all our evidence to the contrary online, for free. 

Nick Bloom, by contrast, actually does have some evidence. With Scott Baker and Steven Davis, he constructs a measure of policy uncertainty that matches historical events like 9/11, and then shows that this measure has spiked recently as well. That is well done! Of course, it's not certain which way the causality runs; large economic crises necessitate large policy responses, and there will probably be uncertainty as to what those responses will be. But anyway, Bloom appears to have produced by far the best available study on the role of uncertainty, and he should be applauded for this. Note: John Taylor fails to mention that, according to Bloom's measurements, the main sources of uncertainty in the current recession have been A) Republican brinksmanship over the debt ceiling, B) Europe, and C) efforts to sue Obama's health care bill out of existence...

Anyway, onward! Next up we have Ed Prescott:

Ed Prescott had the most dramatic policy proposal which he argued would cause a major boom and restore strong growth. He would simultaneously reform the tax code and entitlement programs by slashing marginal tax rates which would increase employment and productivity.

This line actually made me laugh out loud. A "dramatic policy proposal"...cut tax rates for the rich! Ed Prescott, you maverick, you.

But now I come to a presenter with a very differentparadigm...Robert Hall, whom a professor in my department once called the "greatest macroeconomist working today":

Bob Hall argued that fiscal policy was not working, and focused on alleviating the zero lower bound constraint on monetary policy. 

This phrasing makes Hall sound like an opponent of fiscal policy. But actually, the exact opposite is true! Hall is one of the most eminent "Keynesians" in the field, a big proponent of government expenditure as a way to get out of recessions. If you don't believe me, read this paper he wrote on fiscal stimulus. In fact, I was pretty surprised to see his name on the Hoover conference list, given this fact.

So why is Hall now saying that "fiscal policy 'was' not working"? Well, what he almost certainly means is that most of Obama's ARRA stimulus came not in the form of government purchases of things like infrastructure, but as tax credits and grants to the states, both of which were promptly saved rather than spent. This is a point that has been made by, among others, Paul Krugman and John Taylor. 

So what Hall actually said at the Hoover conference was almost certainly "Congress should borrow money and buy more infrastructure, but since it appears unwilling to do so, the Fed should print money and buy financial assets." In other words, pretty much the standard Keynesian line (Update: via Paul Krugman, I find out that Hall's position is that Obama's stimulus did help make the recession less severe, and that the stimulus should have been larger). As for John Taylor himself, the paper he presented at the Hoover conference was the one I discussed here, which said pretty much the same thing that Hall said - stimulus spending should have been more about spending on infrastructure, and less about handing people blocks of cash that they promptly stuck under their mattresses.

Which is a good point, but not really an argument for austerity.

Finally, there was Lee Ohanian:

Lee Ohanian showed that unemployment remained high in part because of restrictions on foreclosure proceedings which increased search unemployment by allowing people to stay in their homes for longer periods of time.

That's kind of interesting, actually.

Anyway, let's sum up. What we have here appears to be a conference to which the Hoover Institute invited A) prominent conservatives (Greenspan, Prescott, Cochrane, and Ohanian), and B) people who happened to be sitting nextdoor at Stanford (Bloom, Hall, and Taylor), with an eye to reiterating and affirming standard conservative policy prescriptions: austerity, tax cuts for the rich, etc. What they got wasn't quite that, but it was close enough where the dissenting voices could be spun to sound as if they agreed with the party line. Not sure if it was someone at Hoover or just Taylor himself doing the spinning. But either way, the conference shows that even in relatively conservative circles, substantial deviations from the party line can't help but pop up. Put enough smart people in the room, and at least a couple smart things will probably end up getting said.

Update: Paul Krugman thinks John Taylor heavily spun the conference results. Taylor begs to differ. In particular, Taylor says that things were discussed at the conference that were not contained in prior research by the presenters. That is, of course, usually the case at conferences; I am looking forward to seeing the discussion published.

I do have one quibble with Taylor, btw. In his new post, he writes:

Krugman claims that my summary mischaracterized the presentation of my Stanford colleague Bob Hall...As part of his presentation Bob said that now and going forward we should assume “no chance of conventional fiscal expansion; rather, possible cutbacks motivated by excessive federal debt.” That is why Bob focused his paper at the conference on monetary policy and the problem of the zero lower bound, and that was what all the discussion of his paper was about, rather than on his earlier work on the multiplier[.]

But in his original summary, Taylor wrote: "Bob Hall argued that fiscal policy was not working." (emphasis mine on both quotes)

"Not working" and "not politically feasible" are two very, very different things.

Update 2: Brad DeLong notices the same discrepancy between Taylor's posts.

Update 3: Menzie Chinn elaborates on how Nick Bloom's research supports the hypothesis that it is Republican fiscal brinkmanship, not Obama administration regulatory policy, that is causing uncertainty. Well worth a read.

Reinhart-Rogoff vs. Bordo-Haubrich (with grandstanding by John Taylor)

If you follow econ blogs at all, you'll have been reading lots about the dustup between Carmen Reinhart & Kenneth Rogoff, whose research argues that financial crises cause slow economic recoveries, and Michael Bordo & Joseph Haubrich, whose research argues that recoveries after financial crises are usually very rapid. Here is a Bloomberg op-ed by R&R defending their work.

The argument is politically important, because it tells us how good the Obama administration has been doing. If R&R are right, then Obama has been a good steward of the economy, since America's recovery has slightly outperformed the average of their sample of historical post-crisis recoveries. But if B&H are right, then Obama has done a historically bad job. Thus it is no surprise to find Mitt Romney's economic advisors, in particular John Taylor, hawking the Bordo-Haubrich research and disparaging that of Reinhart and Rogoff.

First of all, do not listen to John Taylor. He is not being a scientist right now, he is being a politician. Paul Krugman is right; this is an example of how politics hurts the academic discipline of economics. But unlike Krugman I think it's inevitable; you can hardly expect John Taylor not to do his job and support his boss. People know to take that into account when reading what he writes, and Taylor knows they take it into account. Are we ever going to get economists to stop advising political candidates? Are we ever going to get political candidates to stop insisting that their advisors support their campaign narrative? To each of these questions I answer: Maybe, but I am not optimistic.

But do pay attention to the academic dispute between R&R and B&H. It's very interesting. How do the two research teams arrive at such different conclusions? Essentially, there are three big differences in the methodologies used by the two teams. 

Difference 1: R&R compare recoveries across different countries. B&H only look at the U.S.

Difference 2: R&R define the "strength of a recovery" as the time required to reach the pre-crisis level of GDP per capita; B&H define the "strength of a recovery" as the rate of total GDP growth at a certain time following the trough of the recession.

Difference 3: R&R define a "financial crisis" much more narrowly than B&H.

Let's talk about Difference #1. Because B&H include only the U.S., they ignore episodes like Japan's crisis-and-recovery in the early 1990s. This means that, for one thing, B&H have a much smaller sample than R&R. If you believe that every nation is fundamentally different, this is unavoidable; but if you believe that "financial crises" are a universal phenomenon, then B&H are making a big mistake. 

It also means that B&H are comparing across different periods of history. This doesn't seem appropriate to me. For one thing, in its earlier history, the United States was experiencing "catch-up growth", which means that the trend rate of growth was much higher than it is now. For another thing, past eras had considerably higher productivity growth than the current era, which also raised the trend rate of U.S. growth. Finally, as R&R point out in their op-ed, U.S. population growth was higher in the past. B&H, by failing to detrend their GDP series, leave out all of these important facts.

Basically, I think R&R's methodology is much better here. B&H, by refusing to even look at other countries, are potentially throwing away a huge amount of information. Sure, combining samples across countries introduces a lot of omitted variables, but you can always just compare within-country analyses to cross-country analyses and note whether and how the two are different. And you can always just make a list of potential cross-country structural differences. Then you let the reader decide for herself whether cross-country or single-country makes more sense. I think this is much better than simply choosing one specification and sticking with it.

OK, let's talk about Difference #2. This is partly a case of an apples-to-oranges comparison; the two research teams are measuring different things, and their stories are not necessarily incompatible. B&H tell a story of a "string-plucking" effect, where financial crises are followed by very deep recessions, and deeper recessions mean faster, but longer, recoveries. R&R's observation that recoveries from financial crises take longer than others could be consistent with that string-plucking story. 

(The point of contention appears to be over the "shape" of recoveries - R&R contend that financial crises produce L-shaped recoveries, while B&H say there is no conclusive evidence of that. The difference is caused by the difference in the definition of "financial crises", which we'll discuss in a moment.)

Note, by the way, that this second point shows that John Taylor is being a bit disingenuous when he uses B&H's results as a stick with which to beat the Obama Administration. Here, and again here, Taylor agrees with B&H and R&R that "there is no disagreement that recessions associated with financial crises have tended to be deeper than those without financial crises." In the "string-plucking" model proposed in the appendix of B&H's paper, they claim that deeper recessions will be followed by faster recoveries; in this model, one reason for a slower recovery under Obama is that the recession of 2009 was not as deep as recessions during the 1800s. So John Taylor is overlooking the obvious implication of B&H's model - that Obama slowed the recovery by reducing the severity of the recession.

OK, on to Difference #3 - the definition of a "financial crisis". My instincts tell me that B&H's more expansive definition of financial crisis is wrongheaded - after all, they include 1981 as a "financial crisis", even though basically everyone believes that that was a "Fed recession" caused by the Volcker disinflation. Intuition strongly suggests that R&R's restrictive definition of a "financial crisis" is much more credible.

BUT, I don't think we should always trust our intuition. It is certainly possible that R&R constructed their definition of "financial crises" by looking at the data, picking out L-shaped recoveries, noticing that what happened to the financial systems of countries right before those L-shaped recoveries looked different in some respects from what happened prior to V-shaped recoveries, and then defined those observed differences as "financial crises". 

Is this a bad or wrong approach? Heck no! It's exactly what I would have done. It's a naturalistic approach. You observe patterns in nature and you write them down. That's how science gets all of its insights.

But it's an incomplete approach. If you observe a pattern and then conclude that the pattern is structural, you are data-mining. Before we believe a theory, we need to use it to make out-of-sample predictions. In this case, what that means is that before we accept R&R's definition of "financial crisis", we really need to wait and watch history unfold, and see if subsequent L-shaped recoveries still correlate with the things R&R define as the essential characteristics of a "financial crisis". That will take a long time.

Alternatively, we could use microfoundations. If we successfully identified the processes by which R&R-defined financial crises affect recoveries (and B&H-defined crises don't), we could conclude in favor of R&R's definition without having to wait for out-of-sample crises to unfold.

But until we do at least one of those things, I am not willing to say with certainty that R&R's definition of crises, intuitive though it may be, is better than B&H's.

So, in conclusion: I like R&R's approach better than B&H's, because it comes at the problem from more different angles. This is how I think the best empirical research is done; you ask a question, and then you attack that question with multiple data sources, multiple alternative assumptions, and multiple models. This is how Justin Wolfers, for example, attacked the question of whether prediction markets or opinion polls do a better job of forecasting election results. B&H don't do this; they throw away the information contained in other countries, and they don't try alternative definitions of "financial crisis". In addition, I think they make a mistake by not adjusting their GDP growth data for long-term trends.

And I think no one should take John Taylor's promotion of B&H's results seriously, since he is part of Team Romney.

However, this does not mean I totally believe the results of Reinhart & Rogoff. The fact that their results ring true to me might just be a function of how long those results have been publicized in the media. The fact is, the data sample they have to work with is small and riddled with all kinds of potential confounding effects and omitted variables. That is what macro has to deal with, folks. It ain't pretty.

The state of the Macro Wars

New Update: The pessimism in this post has been proven (somewhat) wrong. Bernanke just announced that the Fed will buy $40B of mortgage-backed securities every month until the economy improves. This is notable for two reasons. First, unconventional assets are being purchased rather than U.S. government bonds; this sends a strong signal that the Fed is considering the full range (or at least a fuller range) of tools at its disposal. Second of all, the asset purchases are open-ended, meaning that the Fed is targeting a level rather than a growth rate; Bernanke intends to force the U.S. economy to make up the ground it lost in the recent recession, rather than simply to resume the pre-recession growth rate at a permanently lower level. It looks like the Pro-Easing Alliance has the Hard-Money Coalition on the back foot, for now...

*  *  *

It's hard to deny that the Macro Wars have died down. Paul Krugman, whose crusade for fiscal stimulus often made him resemble a bear taking swipes at a horde of angry bees, wrote this today:

I’ve been pounding the drum for Keynesian policies ever since the financial crisis struck; I was one of the few people to talk negatively about Obama’s inaugural address, because it seemed to miss the point that we were suffering from inadequate demand; and I was frantic about the inadequate size of the stimulus. 

So, am I upset over the virtual absence of demand-side rhetoric in Obama’s speech yesterday? 

Let’s be realistic: the public doesn’t get Keynesian economics. The president could use the bully pulpit to try and change that, and I’ve been urging him to do that. But not two months before an election. 

And we know that the administration has demand-boosting on its mind; the American Jobs Act was very much a Keynesian-type plan, and everything I know says that it’s a good view of the kind of thing the inner circle supports. It’s reasonably certain that there will be attempts to provide more demand if Obama wins, and that’s all you can ask for at the moment.

Meanwhile, John Cochrane, Krugman's principal antagonist in the Macro Wars, has called fiscal stimulus "an economically interesting proposition", and has come out against the type of "austerity" being practiced in Europe. And people in general seem to have realized that stimulus is politically feasible when the economy is in free-fall, but generally not during long slow recoveries - "everyone is a Keynesian in a foxhole". The Stimulus War didn't lead to anything remotely resembling a consensus, but all parties (including the various other "sides" in the conflict, like Scott Sumner) seem to want to spend their rhetorical resources elsewhere for the moment.

But another Macro War is brewing out here in the Econosphere. This time, it's about monetary policy. Unlike in the fight over stimulus - an idea that had been out of the academic mainstream for decades - the battle lines in the Monetary Policy War are pretty clearly drawn. On one side we have people who think monetary policy should be focusing on boosting GDP - this includes monetarists like Miles Kimball and David Glasner, "NGDP Level Targeting" evangelists like Scott Sumner and David Beckworth, Keynesians like Krugman, Brad DeLong and Mark Thoma, and monetarist-leaning folks like Karl Smith, Matt Yglesias, Ryan Avent, and Evan Soltas. Although there are flashes of internal dissent, all of these folks are essentially allies; they support the idea of a Fed that is far more active in pumping up growth, by either "printing money and buying stuff", or by promising to do so in the future. And they are backed up by the academic firepower of Mike Woodford, who wrote the book on New Keynesian economics, and has come out in a big way in favor of more monetary easing. Even Tyler Cowen, a big detractor of Keynesian ideas, has cautiously endorsed the idea. (Update: Christina Romer and a number of Fed officials have also come out in favor of more easing.)

The forces arrayed against the Pro-Easing Alliance seem at first glance to be pretty low on manpower. Chief among the econ-bloggy opponents of easing are John Cochrane, John Taylor, and Steve Williamson. They argue that the Fed should worry more about preventing inflation than boosting output. The arguments here are that A) the Fed's ability to boost output is very weak, and B) inflation is a much bigger danger than people realize.

However, the illusion that the Hard Money Coalition is outnumbered is just that - an illusion. Behind them stand a vast shadow army of Wall Street Journal op-ed writers, "Austrians" who believe that loose money is the root of all evil, and Fed officials like Jim Bullard, Narayana Kocherlakota, and Charles Plosser who instinctively worry about inflation first and foremost. That army has been powerful enough to stay the hand of Ben Bernanke, a New Keynesian who as an academic was a champion of an activist Fed.

Furthermore, the battleground is different this time. With stimulus, the audience was Congress, which is strongly biased toward looking like it's doing something. With monetary easing, the target audience is the Fed, which is staffed by technocrats. Most of those technocrats were educated to believe that the Fed's inflation-fighting credibility is its most valuable asset. They were also trained at a time when the 70s were fresh in people's minds and the Depression-like crisis of 2008-present was still far in the future. 

Finally, the deck may be stacked against the pro-stimulus side. Supporters of fiscal stimulus believes that it works independently of expectations, but pro-easing monetarists all admit that expectations are crucial to the success of monetary easing, especially at the zero lower bound of nominal interest rates. This gives the home-court advantage to the Hard Money Coalition. To win, all they have to do is convince the public that the pro-easing consensus is weak enough that promises of easy money into the indefinite future will inevitably be broken. Casting doubt on the expansionary power of the Fed can therefore be a self-fulfilling prophecy.

In other words, monetary easing may be more popular among economists than was fiscal stimulus, but may end up being a harder sell. It's sad to say, but the Macro Wars may seem increasingly like the Trojan War, with the Pro-Easing Alliance playing the role of Cassandra...

(Note: Oh, you want to know which side I'm on? Although I'm skeptical of New Keynesian models and monetarist ideas, I agree with Tyler Cowen that unemployment is obviously a much much much bigger problem than the faint specter of 4% or 6% or even 8% inflation, so we should try quantitative easing, forward guidance, NGDP targeting, etc. So count me on the side of the Pro-Easing Alliance. Though for all the reasons listed above, I'm not too sanguine about our chances of victory...)

Update: Underscoring my pessimism about monetary easing, here Mark Thoma asks economists about the chances that the Fed will implement NGDP targeting (one of the simplest and most-discussed forms of monetary easing) over the next 5 years. Most of the 44 economists answered either "low" (18) or "very low" (13), with some giving "even odds" (8) and a few saying "zero" (4). If surveyed, I would have answered "low", putting me near the median.

Why macro is hard (Taylor/Krugman edition)

In the latest volley in the Stimulus Wars (giggle), John Taylor explains why he doesn't think the ARRA, commonly called "the stimulus" or "Obama's stimulus", increased GDP:

For the parts of the packages which include temporary tax rebates or temporary tax cuts I find no significant consumption effect using regression analysis and controlling for other factors that affect consumption. If you look at a chart of the tax rebates in 2008, for example, the evidence is striking: There was a big increase in personal disposable income at the time of the rebate, but no similar change in consumption... 

In the case of the 2009 stimulus package, there was also an attempt to increase significantly government purchases of goods and services. But the evidence is that this attempt largely failed. A special satellite account produced by the Bureau of Economic Analysis shows that federal infrastructure investment—at the peak quarter—increased by only .05 percent of GDP as a result of the stimulus and federal government consumption by only .14 percent... 

While state and local governments received substantial grants under the 2009 stimulus, a statistical analysis by John Cogan and me shows that they did not use these grants to increase their purchases of goods and services as many had predicted. Instead they reduced net borrowing and increased transfer payments.

It's important to realize, as Mark Thoma explains, that Taylor is not saying that stimulus can't work theoretically, but that the specific "stimulus" enacted in the ARRA didn't work.

Tayor makes three separate arguments here. The first is that the tax rebates in the ARRA failed to increase household consumption. This doesn't seem like an incredibly controversial argument, since A) there exist decent ways to forecast what consumption would have been in the absence of the ARRA, and B) Keynesian theories predict that transfer payments make for much worse stimulus than government expenditure. But note that one of those things that forecasts consumption is wealth; when the ARRA was passed, household wealth was plummeting due to the collapse in housing prices, and thus it is possible that the ARRA stopped consumption from collapsing.

Taylor's second argument is that the ARRA failed to increase federal government purchases - i.e., "true" federal stimulus - by much. This definitely matches the evidence gathered by Paul Krugman in a recent series of posts (see here, here, here, and here) showing that total U.S. government expenditure fell during the recent recession. So, not much argument here. 

Finally, Taylor claims that the ARRA did not do much to change government purchases at the state level. This is very hard to prove, since we don't have a good model of state government behavior. Paul Krugman claims that without the ARRA, state expenditure would have fallen even more, because states would have run up against borrowing constraints. Taylor obviously doesn't think that would have happened.

Who's right? It's hard to know, and this really illustrates the main difficulty in doing macroeconomics: lack of a good "counterfactual." History only happens once; it's just damn hard to tell how things would have changed if people had made different decisions, just by looking at what ended up actually happening.

The only reliable way to get a "counterfactual" - and, thus, the only way to tell if a policy worked - is to have a good theoretical model of how policies work. But one of the things required for a model to be "good" is for it to be tested against data. And all too often, the only data we have to test our macro theories is...you guessed it...one single run of history. And that run of history is pretty short - less than a century of quarterly aggregate data on a small handful of variables.

Now, if we could believe in cross-country comparisons, then we could basically have several simultaneous "runs" of history to compare, and this would help us be more certain about our models. But cross-country comparisons are notoriously hard to do, and countries' economies are also dependent on each other to some degree.

This is why, in my opinion, the only way to build really believable and reliable models is to use microfoundations (or, if the macroeconomy is big enough to display emergent properties, to use agent-based modeling). Without those techniques, macro is doomed to be a lot more like history than science. 

Which is not to say macro is doomed! History is not a useless way of understanding the world. Observing and recording events and then making reasonable speculations as to their causes - e.g., saying "I think states would have run up against borrowing constraints without ARRA" - is not a useless endeavor by any means. For thousands of years of human civilization - up until Francis Bacon & co. - that was the only way we had of understanding the world around us, and it did lead to a slow steady increase in human knowledge. It's just that history is a less powerful way of understanding the world than science. If we could make macro a science, that would be awesome.

In the meantime, regarding the current debate, you may ask: Who do I believe, Taylor or Krugman? I guess I mostly side with Taylor here. Krugman is probably right that if there had been no ARRA, states would have spent even less as they bumped up against borrowing constraints. But the states still would have saved a portion of the ARRA money (or passed it on to households as tax rebates or transfers), substantially reducing the ARRA's fiscal multiplier. I believe that direct federal government purchases - increased infrastructure investment - makes for by far the best stimulus. The fact that there was almost none of this in the ARRA was a major, major policy failure. I think that that failure overshadows the small benefit that the ARRA might have had in supporting state purchases. And I think that that is a point on which Krugman and other stimulus advocates would broadly agree.