Friday, February 03, 2012

Tyler Cowen pounces on Keynesianism

The new payroll numbers are out, and the numbers are good. Tyler Cowen interprets the numbers to be a big refutation of Old Keynesian macroeconomic theories:
The “big loser” here?: Old Keynesianism.  You really can get a recovery when the real shocks are moderately positive.  You will note, as we have been told many many times by many many sources, fiscal and monetary policy have not been extremely pro-active in recent times; in fact the stimulus has been trickling to a close.  The big winners, apart from the American public?: real business cycle theory.  It is part of any cyclical explanation, whether one likes it or not. 
Another big loser is those liquidity trap theories which tell us that positive real shocks are bad for the economy because the AD curve has a perverse slope, etc., and that negative shocks might help spur recovery.  That theory is looking very weak, again.  I consider it the weakest economic theory that has any currency in the serious economics blogosphere.
In response, Ryan Avent tweeted: "What on earth is Tyler Cowen talking about?" I have to say, I share Ryan's sentiment. Here are the issues I have with Cowen's interpretation of the data:

1. This is one month of data. I think it may be time to add another principle to my list of Principles for Arguing With Economists: "One-Tick Economics" does not work. Time series are stochastic; one month of data, no matter how good or bad, is not enough to refute or support any macoreconomic theory. For reference, courtesy of Brad DeLong, here is a graph of the labor force/population ratio, with the most recent good news highlighted at the end:

Look carefully at that graph. Do you think that tick is enough to disprove Old Keynesianism and the liquidity trap, and provide strong support for Real Business Cycle theory? Tyler says yes. I say: Highly unlikely. To evaluate their models, macroeconomists look at time series containing hundreds upon hundreds of such data points, and it's still incredibly difficult to evaluate competing macroeconomic theories. One more month is not going to come along and settle the argument. Sorry. It just isn't.

And did Cowen seize on every month of terrible employment growth over the past three years to say "Wow, Real Business Cycle is the big loser from this data, and the big winner is Old Keynesianism!"? No, he did not.

2. Growth rates and levels are different things. Even if last month's good numbers signal that the economy is recovering, it is still in a deep hole. It has not recovered yet. To support this contention, let me cite a post from Tyler Cowen from two days ago:
[W]hat is striking about the broken line above isn’t where it now ends — at 10.3 per cent — but rather the lack of any meaningful, sustained improvement for more than two years. 
This alternative measure [of unemployment] has remained above 10 per cent since September 2009, and aside from a bit of skittishness (some of which is down to uncaptured seasonality) has mostly just moved sideways. 

So, over two years of complete employment stagnation do nothing to strengthen the case for liquidity traps in Cowen's mind, but one month of good employment numbers relegate Old Keynesianism to the dustbin of history. Right. Got it.

3. The "liquidity trap" is not as bad as it was before. Tyler apparently believes that liquidity trap theories dictate that an economy in a liquidity trap must experience poor employment growth each and every month of the year, unless and until the government launches a sufficiently large intervention. That is a massive, ridiculous straw-man. Liquidity traps are not held to last forever. In fact, here is evidence from Greg Mankiw that the U.S. may be out (or almost out) of a liquidity trap.

4. Where's the "real shock"? Tyler Cowen says that the latest data show that "You really can get a recovery when the real shocks are moderately positive." Does he have any data to show that we have experienced a "moderately positive real shock"? What kind of shock is he talking about? A positive technology shock? An uptick in people's willingness to work? I want to see this shock identified! (And make sure it's a structural shock..."higher manufacturing orders" does not count.)

More broadly, Cowen says: "The big winners, apart from the American public?: real business cycle theory." So, presumably, the three straight years of poor economic performance were caused by negative real shocks? By poor technological progress and/or people deciding they'd rather not work? Is Cowen really willing to make that argument?

To conclude: I am not saying that Old Keynesianism is right. I am not saying that liquidity-trap theory is right. What I am saying is that one month of data does not prove these theories wrong at all, especially when employment is still far below previous levels, and especially when there is evidence that the "liquidity trap" is not as severe as it once was. And what I am saying is that this one month of data does not in any way represent a vindication for Real business Cycle Theory, especially if I can't see the "real shock."  

Look, if you sit through three years of economic stagnation, watching and waiting for any single month of good employment data, and then as soon as one comes along you jump out and pounce and yell "See? Keynesianism is wrong, Real Business Cycle Theory wins!!!", well, eventually you're going to get your chance. But your conclusion, from a scientific standpoint, will be incredibly premature.

Show me half a year of solid growth under a regime of relative austerity and hard money, and I promise you I will seriously re-evaluate any and all of my own ideas about the relative importance of "real" and "nominal" shocks. We aren't there yet.

Update: Brad DeLong, quoting Keynes, reminds us that Old Keynesians believe that economies eventually recover without stimulus; they just think that stimulus makes them recover faster. Does Cowen really think that Old Keynesians believe that an economy will never emerge from recession without government action???

Update 2: Tyler Cowen has a lengthy response. His points:

* He says he against Old Keynesianism but not New Keynesianism (fair enough).

* He says that Old Keynesiansm predicts less mean-reversion in growth than does New Keynesianism (not sure that is right, see DeLong post above).

* The "recovery" is coming right after the end of fiscal stimulus (not a strong argument; including state govt. spending there was no stimulus)

* The Old Keynesian "paradox of thrift" seems to be more applicable in the middle of a crisis than during a slow recovery (um...that sounds to me like a vote of confidence for Old Keynesianism...)

* The Mortensen-Pissarides labor search model matches RBC theory, not Keynesianism (um...that's because RBC is part of the Mortensen-Pissarides model. Which, as it happens, also doesn't match a lot of important fact about recessions, as Robert Shimer has pointed out.)

* Corporate profits are strong (This actually is much worse news for New Keyensianism than Old!)

* "Real business cycle" models actually include most economic models and phenomena (Except, of course, all models that are used by central banks and professional macro forecasters!)

So, there you go.


  1. Yeah, this was one of Tyler's most underargued posts. If the trend continues, I'd cite this in favor of New Keynesian models, as the rotation of a new, more dovish FOMC has raised inflation expectations lately (as can be seen in the 5 and 10 year breakevens), but one data point does not a trend make.

  2. Anonymous1:11 PM

    Plenty of trend on employment, see the two twitter feeds I linked to...eurozone still worries me of course, we are not yet out of the woods. Tyler Cowen

  3. Anonymous1:23 PM

    What is it about a person's politics that can make them nucking futs?

    Get a month of good, positive job numbers, and they really come out of the woodpile.

  4. Anonymous1:36 PM

    Two points:
    "To evaluate their models, macroeconomists look at time series containing hundreds upon hundreds of such data points."

    Your point is valid. One month doesn't mean much, but "hundreds upon hundreds?" You see a lot of models tested with 50 years of quarterly data. That's 200. Sometimes you see even less. Or maybe, as a micro guy, I'm just used to working with tens of thousands (if not hundreds), that a few hundred seems pretty paltry.


    "What kind of shock is he talking about? A positive technology shock? An uptick in people's willingness to work? I want to see this shock identified!"

    Tyler's talking about RBC, so he's likely talking about growth in Total Factor Productivity, aka the Solow Residual, aka, the error term in a regression, aka, the stuff that ISN'T explained and can't be accounted for in said regression model. Sure, we can give it a fancy name and come up with a nice sounding story of what it actually represents, but it's just fancy name and a pleasant story for what is indeed just an error term in a regression.

    To put it harshly, RBC theory says that an error term randomly went up. Satisfying answer, right? Really gives one a sense of confidence that we understand this stuff well, doesn't it?

  5. One month doesn't mean much, but "hundreds upon hundreds?"

    Well, panel data from multiple countries.

    I'm trying to be charitable here; all macro data sucks, but one month is nothing...

  6. As a biologist, I take severe exception to the suggestion that Tyler Cowen possesses anything like the strength and grace of a cougar.

  7. What's hilarious about this is, who was it wrote an article exactly a year ago predicting "10 percent unemployment forever"? That would be ... Tyler Cowen.

    That's a special kind of chutzpah.

  8. Anonymous3:02 PM

    Tyler Cowen = glib.

  9. Anonymous3:11 PM

    I don't think it was intended to be a substantive attack on Keynesianism as much as it was a veiled attack on Krugman (among others).

  10. Tyler Cowen = glib.

    One has to be a better writer than Cowen to qualify as glib.

    Arguments between economists of the "my theory is better than your theory" variety are laughable since all their theories suck.

    RBC seems particularly bad since it comes down to "the economy changes because something magic happens outside the scope of the theory." Relying on random shocks to explain the interesting behavior is right up there with cargo cults and throwing virgins in volcanos.

  11. Anonymous5:23 PM

    Love the Tyler Cowen bashing. Tyler Cowen.

  12. bogmunds6:06 PM

    Wouldn't the current environment qualify as a win for the liquidity trap? Haven't policymakers actively responded to the liquidity trap through unconventional monetary policy which is perhaps helping the economy?

  13. Anonymous6:37 PM

    It seems to me, as a regular reader of both Marginal Revolution and Conscience of Liberal, this is trying to take Krugman's trusty hook line(his repeated assertion that events follow a broadly Keynesian narrative) and use it against him - that events aren't Keynesian at all. No. Theyre RBC. Look that data says so. Now the Facts are on my side! Neener neener neener.

    O RLY

    His phrasing is almost IDENTICAL to Krugman's. Ive been reading CoaL long enough to recognise that turn of phrase.

  14. My knowledge of economics is scanty, but even I read Cowen and immediately thought "the climate is not the weather."

    Maybe it's wishful thinking, but I get a feeling that Tyler is desperate for credibility among his peers. For a long time DeLong and maybe Krugman treated him respectfully, but in the past year he has received many a drubbing from them, from this site, and from others.

  15. He looks like the staw man here.

  16. Despite being only one's month data, the data is good news for the current administration and the economists who, broadly, align with them. So the economists who, broadly, align against them are FORCES to stir the tea leaves and try to pull something negative out of the dregs.

    Cowen really has no choice but to be this ridiculous.

  17. Anonymous8:58 AM

    "Love the Tyler Cowen bashing. Tyler Cowen."

    Well, since you like it I'll pile on.

    100 years from now people will still be reading Keynes and saying he's brilliant...and for the most part, correct. 100 years from now, (heck, maybe 10) people will say "Tyler who?"

  18. Anonymous9:41 AM

    How can we be sure that the person claiming to be Tyler Cowen is Tyler Cowen? Seems kind of odd and petty for him to troll a place like this for insults.

  19. Anonymous9:54 AM

    The issues is not whether recover will not happen without Keynesian stimulus. The argument is that the economy will recover faster with stimulus than without it. Counterfactuals are difficult to do.

    Stimulus targeted at JOB creation is different from economic recovery. An economy can recover with lingering high unemployment. The primary argument for JOB creation stimulus is one of workforce investment (most training is on the job) and addressing the high negative social costs and opportunity costs of prolonged unemployment.

    A singular focus on growth misses the larger issues.

    -jonny bako

  20. Anonymous10:08 AM

    It's an amazing example of how academics can turn into vicious vipers when they're publicly shown to be wrong, wrong, wrong.

    Tyler has nothing left. So he lashes out.

    When will we stop paying attention and giving any credibility whatsoever to those who were so wrong through this last very serious crisis, and start bestowing credibility only on those who were persistently right?

    The only people who should take Tyler or Mankiw seriously are partisan hacks. Sensible people should just laugh at them and say, "show me some results and you'll get some credibility back."

    When will facts and truth start to matter again?

    This is a very sad and desperate time.

  21. Cowen is clearly taking swipes a Krugman with this particularly piece but what is also becoming clear is there really are no "Keynesians" in the ring to punch, there are only anti-Keynesians shadow boxing straw men viz

    "At the academic level, it reflects the defeat of the Keynesians at the hands of New Classical economists, without noting that things have moved on rather a lot since then. ...those economists who use (New) Keynesian theory generally think they are just applying standard macroeconomic analysis. ...They do not think of themselves as members of a school of thought – they thought they were part of the mainstream."

    "Keynesian analysis ...does not need to be embodied in a school of thought. However, for those that like schools of thought, I will replace it with a new one: the anti-Keynesian school of thought. It covers all those who attempt to dismiss Keynesian ideas like fiscal stimulus at the zero bound, or countercyclical fiscal policy in a monetary union, not through reasoned analysis, but by just labelling it Keynesian."

  22. Anonymous5:24 PM

    As an Econ Prof., I searched about to find high quality conservative economic commentary blog sites to recommend to the students. I thought that his site might be one, but after reading it frequently, I have concluded that sadly, there are none. Cowen is just a dilettante, as there seems never to be any analysis -- just a stream of oversized and under-considered tweets. How am I not surprised -- libertarians are just ideologues, and ideologues of every stripe just substitute cant for thought.

  23. Almost everyone who is capable of understanding macro models thinks that the old Keynesian models are wrong, seriously erroneous.

    It is a straw man argument to attack the old Keynesian models, if none actually take them seriously as models. Or at least that's what I thought, until I saw people taking (or claiming to take) seriously the old Keynesian models that have been deprecated for good reasons out of the macro modeling decades ago.

    Does anyone actually think that in the current situation a negative supply shock would be good?

  24. Well, aside from the idiocy, about being fittable an a model, real shocks actually do occur. In this case, the month is probably evidence of cracks in the politically motivated layoff tendency imposed during the post 11/2008 Republican party membership handshake. Their grip has held for _almost_ the four years necessary; but at this point nobody with half a fortune is willing to wait yet another four years to put it to at least some use. Viva la politica!

  25. Anonymous4:19 AM

    does this mean we get to continue our trillion dollar plus federal deficit, as it is not keynesian?

  26. Is there a reason everyone treats Cowen like he's not a bought-and-paid-for Koch whore? All those George Mason University think tanks are Koch-funded propaganda machines.

  27. Taryn Hart said...

    " Is there a reason everyone treats Cowen like he's not a bought-and-paid-for Koch whore? All those George Mason University think tanks are Koch-funded propaganda machines."

    Because if economists started treating people who work in intellectual br*thels like whores, then they'd have to piss off a lot of prominent people in economics.

  28. Anonymous10:40 PM

    In my opinion, there has been a palpable increase of vitriol in the econoblogosphere in recent months. I have felt for some time that the blog format tends to bring out the worst in people, in part because of its impersonality. In my own experience, I have felt that I was becoming someone I didn’t like – frustrated, impatient, and critical.

    I believe that some of these heated exchanges are driven by fundamental differences that will not be bridged or won by either party. Cowen has recently complained about the comportment of Krugman and others. However, Cowen’s tone is certainly no better. Giving shouts out via links does not make for civility as these are generally veneer deep expressions of respect that rub off from the slightest abrasion. Cowen talks of his admiration for Krugman. I concur. He’s a great intellect. Cowen then tries to suggest that Krugman’s weaknesses, specifically his temperament, undermine his intellectual potential.

    I think it’s worthwhile considering limitations of various varieties. Cowen recently referenced Dostoevsky in a manner that most literarily sophisticated people would characterize as shallow if not ignorant. If Cowen’s purpose was to demonstrate a lack of intellectual depth, he succeeded. He then postures with forgetting is not failing. I would argue that passing or even acing is not learning. Claiming that you read something is different from demonstrating that you understand it. Retaining information is different from applying it, and so on. Perhaps the goal is to achieve a tenured professorship so that you can comfortably dismiss these important differences. If this is the case, Cowen has again succeeded.

    However, if the goal is scholarship, then this approach would be a failure. Academics hold privileged positions, to be sure. But it’s not because of the colors of their diploma, but rather for the opportunities they have to improve society. They are its intellectual pillars. They are meant to advance knowledge, and if perchance they also have depth of character, even provide wisdom. But if an academic is only endowed with a marginally better intellect, which in my opinion is true of most if not all academics, and a significantly larger ego, then his or her contributions will be barely worth the time.

    Cowen was right about the faulty logic surrounding the recent conclusions about marriage and poverty. It should also be noted that Krugman changed his stance. Apparently, his ego did not dominate his intellect. Can Cowen say the same?

    There are a great many academics that quietly conduct research and scholarship of the highest quality. I admire them, and I hope that they are recognized for their work. But even if they never get the number of Twitter followers as Cowen has, they probably have garnered more respect for their good grace and decency than he could ever hope to have.

  29. Anonymous10:22 PM

    Not me. Somebody else. There it is.

    Here’s my problem: Tyler Cowen is an idiot. I don’t want to read anything by him, secret or otherwise. Everything I’ve ever read by him has simply appalled me with its stunning fatuity. (He once wrote something so unbelievably stupid—search for “shoplifted”—that I felt compelled to contact him and correct him, just to preserve my sanity. It took a couple of emails before he finally conceded—search for “shoplifting”.)
    Of course, I do my best not to read any of his drivel. But because many other people, including some whose writings I enjoy, are under the inexplicable illusion that Cowen isn’t an idiot, they read his garbage, and even quote him from time to time, and before I know it I’m stuck reading yet another of that moron’s deeply boneheaded “insights”. I would therefore gladly pay good money for him to keep everything he writes, not just his stupid bonus blog, secret.

    Now someone could probably write a piece of client software to filter all his crap out of my browser. The problem is that if he wanted to, he could most likely figure out a way around any such filter. What’s needed instead is some kind of market mechanism whereby I could join up with the millions of people out there who surely recognize that merely glancing at Cowen’s scribblings destroys brain cells, and pay him to keep Marginal Masturbation and all the rest of his imbicility away from the vulnerable public. But as far as I know, no such mechanism exists. Do any of you armchair economists out there have any ideas?”

  30. JohnM3:01 PM

    Be nice if you'd caption your photos. Maybe not everyone knows who these guys are or their relevance to post.