Thursday, October 18, 2012

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.


  1. Ya, I knew it was going to be bad when I read the title of his post.

    I have to say, Taylor is a guy that I used to have a ton of respect for... until he started blogging and I started reading a lot of his of the cuff thoughts. I still respect him obviously but the blogging has been revealing.

    1. Anonymous11:46 PM

      It's not just Taylor. You can say similar things about Cochrane, Holtz-Eakin, and Mankiw. All have a slew of great papers (and some decent textbooks). Looking purely at academic output, they're impressive. When they blog for Team Republican, there's just so many eye-rolling moments. There's "arguing from identities" issues. They say things that contradict their own academic work (and in some cases, what they say in their textbooks), or contradict things said in their own previous blog posts (usually as a result of Republicans doing a 180 on some policy belief). Sometimes they say things that just get even the most basic econ 101 things wrong.

      It's a bit odd because others are pro-GOP, but it's not THAT bad. I don't like the elasticities or growth rates Rosen uses in his analysis of a Romney-like tax plan. I think he's cherry-picking parameters to get the results he wants, but it's not like he's making basic fundamental mistakes (which Taylor, and especially Cochrane, have done a lot of over the past couple years). But why? Maybe they'll get legions of GOP voters to love them, but people in economics notice these mistakes and it does damage to their academic reputations. I swear there must be secret accounts in the Cayman Islands filling up with millions for each of them. Otherwise, I really can't understand their motivation.

      I purposely didn't include Prescott in the above list because he's always been a bit kooky.

    2. Cochrane, to my knowledge, does not work as a Republican advisor, though he obviously has conservative political leanings. His anti-stimulus ranting appears to be motivated primarily be a personal dislike of Paul Krugman...

    3. Anonymous10:42 AM

      I wasn't necessarily claiming all were paid advisers, although some obviously are (or have been). It's more about the stances they publicly take. More specifically, when they take stances that contradict (or disregard) what you'd think were uncontroversial or undisputed economic arguments for reasons that can't be justified other than a personal desire to make the policies of one party look good and the other bad.

      You may be right about Cochrane, that it's not so much pro-GOP, but anti-Krugman/DeLong. Either way, the main point stands. Whether it's partisan or personal, the quality of economic thought on the blog is sometimes much lower than his other work (for example, his asset pricing book), if not outright wrong on a very fundamental level.

    4. Maybe they'll get legions of GOP voters to love them, but people in economics notice these mistakes and it does damage to their academic reputations.
      Is this actually true? Are there economists that have been hurt by shilling for Republicans? Or do most of their colleagues agree or excuse them as Noah does above.

    5. Is this actually true? Are there economists that have been hurt by shilling for Republicans? Or do most of their colleagues agree or excuse them as Noah does above.

      This is very difficult to I always say, most people who disapprove of something do so silently.

      I will say that nobody I have ever met seems to take John Taylor seriously as a research scientist. But that was true before he went to work for Romney.

  2. Anonymous11:48 PM

    Very amusing to see Krugman (or all people) complain about politics hurting economics. (Okay, maybe it is no more amusing than seeing DeLong complain similarly, as he seems to do fairly routinely.)

    1. Well, I think there is a difference between economists with political leanings (Krugman, Cochrane, DeLong) and economists who actually work for political candidates (Taylor, Mankiw). Though I notice Mankiw has done an admirable job of not saying anything this election season...that is truly impressive.

    2. Mankiw usually doesn't say anything, but uses others to say essentially the same thing. e.g. he will post arguments among Taylor & Krugman (or Cochrane and Krugman, etc.) and conveniently leaves the conservative-leaning economist the last word.

      In fact, he did it with this very topic: Now both you and Krugman have responded ( and the likelihood of Mankiw updating his links is about .01 (unless of course Taylor responds again).

      Also see:
      (the subject of which happened to be completely off base -

      But yes, on other topics Mankiw definitely tends to be more silent.

    3. Anonymous9:11 AM

      In what sense is Krugman an economist with political leanings? He has been heavily critical of the Obama administration. My interpretation is that his 'political' statements are driven by his economic beliefs, whereas with people like Taylor and Mankiw it's the other way round.

    4. "Very amusing to see Krugman (or all people) complain about politics hurting economics."

      Who's been more right for the past few years than Krugman?

  3. Anonymous11:51 PM

    What about Mankiw? He is one of the most respected macroeconomists around. Why isn't he participating more actively in these debates? We all know his political preferences, but we still would like to know what he thinks as an economist about all this. He contents himself with referencing every once and again other people's ideas (especially if they are consistent with his apparent priors) but he does not seem to be thinking hard about these issues.

    1. Mankiw is also an advisor to the Romney campaign.

    2. Anonymous3:38 AM

      Mankiw is in a really weird spot.

      On one hand, the campaign he is the chief economics adviser to is basically incoherent on economics. Lurching from embracing the gold standard to embracing military Keyensianism to trade wars to magical budgets that will be budgeted with secret provisions to 'no i wont cut spending in my first year because that will be a blow to the economy' to 'i will create 14 million new jobs!'.

      On the other hand, maybe all the 'technocratic' Republicans believe they need to be okay with this because their party's base is just too barbaric to understand basic economics and so you need to micro-target specific issues for specific districts which makes the incoherence understandable and excusable because presumably once in power Romney would actually do technocratic stuff as his past of being a relatively rational guy seems to suggest.

    3. Owe Jessen5:40 AM

      Probably, he prefers to be silent, instead of a) agreeing with R&R (because it would hurt Romney) or b) agreeing with B&H (because he may not share their conclusions).

    4. I think we can take our cue as to whether Romney will be technocratic on the economy -- or anything else -- from the Boca Raton speech.

      There he said that the economy will fix itself basically if anyone is elected. No technocratic claims there.

      And the Arab-Israeli problem would NOT fix itself no matter who was elected. No aspiring technocrat there.

      Finally, look at his performance on the recent troubles in the Middle East. Rushing out with a polarizing politicization of the situation even while the incident was still going on in Egypt. Hardly a technocrat. Just a smarmy opportunist who made even Mitch McConnell and John Boehner look statesmanlike at the time.

      Technocrats, for all their other failings, are about what they perceive to be the common good. Romney is about Romney, nothing more, nothing less.

  4. Very good post. I agree with you about good empirical work. But I think that one those who is convinced by RR has made a good out of sample prediction. That would be Paul Krugman who argued in 2008 that fiscal stimulus was a good idea, because the recession was a financial crisis recession and likely to be U shaped not V shaped.

    not the link I was after (probably an op ed not in the blog) but come on, don't you remember ? We are out of Krugman's sample and he nailed it.

    Also I disagree with the hope that economists not advise candidates. For economics to make the world a better place first it has to become a science and second economists have to influence policy. There is no way policy makers will allow people who weren't with them when they were candidates into their inner circles.

    Also campaign advisers can refuse to lie. I recall 2008 when Obama was arguing that health care reform without a mandate was possible (he was lying). A reporter tried to get David Cutler to express an opinion on the topic -- that is to lie or to get summarily fired from the Obama campaign. Cutler just didn't answer the question. Not a graceful dodge just stubborn refusal. That was not like Taylor (course then he just went back to Harvard so who cares and maybe the refusal to lie got him expelled even when the claim that a mandate was not needed was "inoperative"

    Again not the link I was after but I think Cutler fairly honest in a tight spot (and talking with an interviewer who believed what Cutler had to avoid explicitly contradicting)

    Totally frank ? Of course not, but not like Taylor at all. It can be done (it helps that Cutler is very smart and *very* self disciplined).

  5. Alan Goldhammer7:40 AM

    Good post outlining the key issues. With respect to the political issues (which I know more about than the economics ones as I'm just a poor chemist by training; maybe not so poor these days), it's worth noting that Taylor, Mankiw, and the non-mentioned Hubbard were all economic policy advisers in the Bush-2 White House and must have at one point or another sanctioned all the economic policies that dug this deep hole. I have yet to hear an apology for this.

  6. Noah:

    1. Excellent comments about John Taylor

    2. You should not have used the word science in connection with either paper, for neither comes close to being science

    3. The Michael Bordo & Joseph Haubrich paper is bunk, wholly lacking in any micro-foundations. I can only think of two relationships between our current economy and our economy pre-synthetic CDOs: (1) it is taking place in the same physical space and (2) by statute we use the same unit of measurement, the dollar.

    4. You post is very useful for making it plain that macroeconomics is a failed science because it hasn't learned how to cast out of the temple people who sell "bunk"

    The reason that it has failed is that in large part it has no measures for how much damage was done to the economy by the explosion of the synthetic weapons of mass economic destruction (using Munger's metaphor).

    If the crisis had been a forest fire that burned millions of acres, we could calculate that it will take so long to re-plant the trees and so much longer for them to grow to a height where they could be harvested. Look at auto mfg. The damage to GM and Chrysler and Ford and their suppliers was near total. Look at banking. The damage was near total. First, because TARP wasn't used to just restore capital. Second, because the 40% loss in home equity destroyed the ability of community commercial banks, which do most small business lending, to lend using seconds which was their primary means of doing business.

    This fault has really hurt Obama. No one has provided him with the facts with which to paint word pictures about how much work he had to do.

  7. Good post. Though I am not so sure people know how to discount the writing of a respected economist working for a candidate or administration. And if that's the public's primary exposure to economists I suspect it does real damage to the field.

    On B-H's work I think not adjusting the recoveries on a per capita basis is nearly unforgivable in terms of being something any undergrad could easily grasp. Adjusting by working age population is even better (and really changes the story in Japan's case).

  8. Anonymous10:26 AM


    Interesting post. I assume you are also willing to discount the words of Larry Summers and Austin Goolsbee -- who, like Taylor, Mankiw, and Hubbard -- are individuals with excellent economist reputations who have also been surrogates for politicians.

    1. Not always, but when they are in campaign mode, sure.

  9. Nice discussion. It seems that John Taylor has tried to address the R&R critique as well as Paul Krugman's post:

    Funny thing - Taylor is ignoring your post. And of course Greg Mankiw who endorsed this Taylor reply is also ignoring your post. But then did we expect an honest debate from a former economist turned politician?

    1. Alan Goldhammer12:38 PM

      Quite right. The problem is that Taylor is accepting of alternative explanations without really digging down into the facts of the case. I remember the 1973 and 1981 recessions and to classify these as having a 'major' financial component is incorrect. Any financial component was at best minor.

      Now I have not read Taylor's self published book that he mentions in his blog (self published because he works at the institution that published it; kind of like blogging, correct?) even though it's available at a Kindle fire-sale price. I'm unsure that he is a reliable commenter on this given the blurb about the book (maybe he is as credible as Wallinson and Pinto on the origins of the housing bubble).

  10. Noah, love you blog, but just wondering why we shouldn't take Taylor serious, but should Krugman? While Taylor actively plays for Team Romney, isn't Krugman an active player for Team Democrat? While he's not working for a specific candidate, a significant portion of his writing is politically colored? Why the distinction?

    1. Probably because Krugman routinely criticizes the Democrats and calls them out when they say things that are incorrect. From the beginning he has complained endlessly about the size of the stimulus and Obama's premature pivot to focusing on the deficit.

      On the other hand, Taylor is supporting a nonexistent plan by Romney and pretending that Fed induced recessions were actually financial crises.

    2. Anonymous12:27 AM

      Krugman does not cherry pick numbers in his models to make his side look good. Krugman grew up as somebody wanting to understand how things work, relatively free of any swinging axes. What makes him look ideological is the near total infestation of politics in a large swath of modern policy makers. Krugman is a reaction to Taylorism, not the thing itself.

      Last week we had economic shills explaining the reasonablness of Romney tax proposals. Turns out all you have to do is something very different from what was proposed and it`s like falling off a log. Now we suddenly have a deep interest in only the recovery and can`t imagine why anybody would be interested in the size of the fall. The hackery isn`t quite as breathtaking as the obviousness of it. True hacks don`t work that hard because the point is only to confuse the majority with a reasonable sounding story. I don`t think Krugman is a hack because he tries too hard to be plausible in his arguments.

    3. "...isn't Krugman an active player for Team Democrat? While he's not working for a specific candidate, a significant portion of his writing is politically colored? Why the distinction?"

      Because he's right. I understand that in partisan politics, that doesn't matter, but I'd hope that it would in economics, as a science.

  11. "People know to take that into account when reading what he writes, and Taylor knows they take it into account."

    I think you're a bit too deep in the forest, here, Noah, and more than a bit over-optimistic. Most of the people at whom that kind of flim-flammery is aimed will not know any better. They'll see "respected economist" and assume that what he is saying is respectable economics instead of bald-faced campaign-mode selective truthiness. Personally, when it comes to peddling misinformation for pay, I think respect for your chosen field might over-rule 'just following orders', but then of course real science is full of examples of researchers setting their integrity aside when it comes to significant monetary or political rewards. I suppose Taylor is counting on the understanding that the "smoking is good for you!" and "global warming is a myth!" scientists haven't seen any sort of professional consequences from their decision to pimp out their credentials. He's probably right, and this will all be gladly forgotten by those economists who know better, perhaps following a few formal mea culpas for his "simple misunderstanding which he now sincerely regrets!"

  12. Anonymous1:35 PM

    I won't listen to John Taylor because he's politically biased. Instead, I'll only listen to Paul Krugman.

    1. You would do well to do so. Krugman relies on the evidence and explicit models even when to do otherwise would be convenient. Krugman for example has disputed inequality as the cause of our situation and he has often been critical of Democrats including Obama. You may not hold the same values, but you should respect reality and honesty.

  13. Noah, love you blog, but just wondering why we shouldn't take Taylor serious, but should Krugman? While Taylor actively plays for Team Romney, isn't Krugman an active player for Team Democrat? While he's not working for a specific candidate, a significant portion of his writing is politically colored? Why the distinction?

    Well, there is a difference...Krugman is not employed by Obama. Biases and conflicts of interest are two different things.

    But yes, you should always take bias into account when deciding how much to take anyone's claims at face value. If you think there's bias, just do more digging, and see for yourself. That's the rationalist approach.

    1. Alan Goldhammer2:26 PM

      More often than not, Krugman presents data on his blog to support either his opinion or to argue against others. The FRED database is the great leveler in all of this and FWIW, I seldom see Conservative bloggers making any use of it at all. If Economics want to be taken seriously, it needs to focus on the data and what can either be proven or disproven by it. Though as a chemist speaking to a one time physicist, I think you know that. :-)

  14. Anonymous2:31 PM

    Here are 8 of the past 10 posts or columns by Paul Krugman. I don't see how anyone can claim that Krugman is less partisan than John Taylor.

    Snow Job on Jobs
    Mitt Romney says he has a plan that would create millions of jobs. It’s a five-point plan to nowhere.

    Death By Ideology
    Despite what Mitt Romney says, the lack of health insurance does kill people.

    Triumph of the Wrong?
    Politically good things may be about to happen to very bad ideas.

    Truth About Jobs
    The data show an improving economy, and that’s what the right wing can’t handle.

    Romney’s Sick Joke
    Mitt Romney’s claim that pre-existing conditions are covered under his health plan was his biggest of many misleading statements in Wednesday’s debate.

    Understanding Romneynomics
    Personal awesomeness to the rescue.

    Small-Time Mitt
    A plucky little startup, financed by Latin oligarchs.

    Itsy Bitsy Bain
    Mitt Romney, mom-and-pop business owner.

    1. I don't see how anyone can claim that Krugman is less partisan than John Taylor.

      The question is, what does it mean to be partisan? Krugman has written a lot of posts criticizing Obama. Taylor has never, to my knowledge, written any that criticize Romney or any other Republican.

      I think there is a difference between ideology and partisanship...

    2. Anonymous3:33 PM

      So do you determine partisanship as a relative measure? For example, trying to parse your argument, if I write 10 articles condemning Democrats I am branded “partisan,” but I am merely “ideological” if I write 10 articles lauding Democrats but additionally pen 10 articles condemning some Democratic individual arguing he is not liberal enough?

      Merriam-Webster defines “ideology” as:
      (1) visionary theorizing or
      (2)(a) a systematic body of concepts especially about human life or culture, (b) a manner or the content of thinking characteristic of an individual, group, or culture, and (c) the integrated assertions, theories and aims that constitute a sociopolitical program.

      “Partisan” is defined as “a firm adherent to a party, faction, cause, or person; especially: one exhibiting blind, prejudiced, and unreasoning allegiance.”

      If we’re arguing about the appropriate designations, I’m not sure that Taylor and Krugman are distinguishable under these definitions, particularly "partisan." We can certainly debate the degree to which the second clause of “partisan” applies—I’m guessing that calculation will depend significantly upon one’s ideological proclivities—but both Taylor and Krugman are firm adherents to a party, faction, cause, or person (especially in the context of the presidential election). Claiming Krugman is merely ideological while Taylor is partisan rings hollow.

    3. You don't see any difference when an economist is working for a candidate currently running for office? You think that fact is entirely irrelevant and beside the point? Well, I guess if so, I can't really convince you otherwise...

      But in any case, I think this is a bit beside the point. The point is, B&H's argument is worth engaging regardless of the partisan proclivities of the people who promote and disparage the argument on their blogs. So in this post I tried to engage their analysis in an intellectually honest manner...

    4. Krugman opposing Romney's policies or lack thereof doesn't make him partisan, only opinionated. Where is the error in anything he wrote? Where is the evidence that he ignored in coming to his judgment? You may not like his values. You may object to his selection of data. You may find his models insufficient. Does he bend these to support Obama? No, and that is the primary difference. He holds them up and finds both wanting, but Romney above and beyond all. Taylor can't do this and expect to keep his position and so doesn't. Is it what he believes or what he finds convenient? Probably both as he doesn't seem curious enough about the data to recognize its shortcomings.

    5. Phil Koop5:00 PM

      Look, when you say that "[Taylor] is not being a scientist right now, he is being a politician", you are saying that Taylor is writing for political expediency things that he himself does not believe. No matter how wrong Krugman may be about your favorite point, if you think that he is being wrong on purpose, you just aren't reading very well.

      On the other hand, I don't think that employment is the acid test. Brad DeLong has responded to this post, and as puts it: "As more than two former cabinet-level appointees have asked me about Taylor: 'Why is he doing this? I wouldn't have done that. I wouldn't do that.'"

    6. Anonymous5:08 PM


      Yes, I do think that political affiliation is relevant, but I don’t think that it is determinative. I believe that an economist—or a volunteer, or a political strategist, or a pollster, etc…—can be affiliated or employed by a campaign and not abandon his or her ideological foundation and principles and ability to constructively contribute to a worthwhile debate. Conversely, I think that an economist can not be employed by a campaign but can still display an extraordinary level of commitment to that campaign, and can be partisan. My point is that the mere fact that Taylor (or any other economist) is affiliated with a campaign should not discredit his intellectual contributions with a branding of being “partisan,” especially if another individual’s work is artificially elevated as a result. I very much appreciate your acknowledgement of the difference between ideology and partisanship; I just wanted to press on the way it was applied to the Taylor/Krugman comparison. Underestimating the validity of an argument by letting it be colored by partisan affiliation is a disservice to the broader debate, no matter which side you support. I would rather an argument be distinguished based on merit rather than on a false dichotomy that artificially diminishes based on assigning the pejorative label “partisan.”

    7. "Here are 8 of the past 10 posts or columns by Paul Krugman. I don't see how anyone can claim that Krugman is less partisan than John Taylor."

      Simple - is Krugman or Taylor more correct?

    8. Here are 8 of the past 10 posts or columns by Paul Krugman. I don't see how anyone can claim that Krugman is less partisan than John Taylor.

      This is nonsense. What Krugman relies on are facts and data - you know that reality which, as it turns out, has a liberal bias.

      Krugman and I have walked very similar paths. In the 90's we were both almost 100% apolitical. What got him politicized was the outright economic stupidity of the Bush administration, which, unfortunately, some famous former economists signed on with (or, rather, sold out to.) Similarly, the Bush admin. radicalized me, although it started with the ridiculous Clinton impeachment.

      What you are proposing, anon, is a blatantly false equivalence.


  15. Anonymous2:49 PM

    Warren Buffett said he likes recessions because when the tide goes out it reveals who is wearing no pants. Is it better in the long run to let the creative destruction of the pantless happen, instead of protecting them by trying to prevent the tide from going out?

    Austrians say the pantless must be wiped out and find some pants, or bad money will chase out good in the long run. Keyensians say the pantless are an important source of demand for GDP and we must try to keep the tide from going out at all costs.

    I now return you to your torturing the data until it complies with your biases.

    1. Because ignoring it and replacing it with your own biases is always superior. It saves from experiencing cognitive dissonance.

    2. Ben Johannson5:10 PM

      And in this fairy-tale recession of yours only the bad and unvirtuous are harmed. Those good and pure of economic heart are of course left untouched and pristine.

      Another moral fable masked as a school of thought.

    3. Anonymous9:57 AM

      Morality has nothing to do with it. "Positive cash flow" is not virtue, it's just economic viability. The "pantless" are those sustained by credit alone.

      Solyndra created a $500M crater. Would it have been better that it get more credit and later blow a $1B crater? $100B? $10T? Even when you say a country is a "closed world", its bankruptcy released $500M of credit and assets to those who can put it to more efficient use, maybe a better solar panel maker.

    4. If the tide was beginning to drop unexpectedly, I'd be at least somewhat concerned about a incoming tsunami. A wall of water ten feet tall or higher does not discriminate between those wearing pants and those not wearing pants. Also, just to strain the metaphor even further, carrying gold around in one's pants is not a survival strategy in the event of a tsunami.

      @anon2, to bring this back to the real world, the factories that Solyndra sold off at bankruptcy, were designed to produce Copper-Indium-Gallium-Selenium (CIGS) solar panels. I doubt that once Solyndra's assets were sold at auction as lots that (a)$500M was generated, (b)anyone actually manufactured solar panels with their newly acquired equipment, and (c)that all of Solyndra's manufacturing equipment was of some value to others.

      I can also be nearly certain Solyndra, or a contractor programmed computer code to operate the machinery in their factory. I doubt very much any of this code has any sort of use or value outside Solyndra. Money certainly went into writing the code, but if no one can use the code for anything, of what value is it? I suppose one could try to learn more about how to manufacture CIGS panels, and really only CIGS panels, but CIGS panels remain uneconomical to produce, so what is the value of this code?

  16. Yes, let's measure based on recovery:

    You break your leg. Ten years ago, you sprained your ankle. Comparing your mobility at the time of the ankle sprain to your mobility three weeks later, you have a minor improvement.

    Comparing when your leg was broken to your mobility three weeks later (while still in a cast), you have improved much more than you did since the ankle sprain.

    Clearly, one should prefer the recovery from the broken leg. Just ask B&H (or John Taylor).

  17. Anonymous4:05 PM

    Noah, a splendid post, as always, but Robert's query has traction. Why fear "datamining" in dealing with historical events that approach uniqueness more closely than they resemble a large n of widgets? Krugman seems to have gotten even the mechanisms underlying his predictions correct. If he did it with case-oriented historical comparison rather than with unaided statistical reasoning, so much the better for the former, eh? If the phenomena of depressions are more like those of wars than like those of rows of corn, then why are statistical scruples relevant? Do they not distract us from the very patterns in experience that show us what is happening?

  18. Anonymous5:15 PM

    About Krugman (and Cochrane) v Taylor-- you can't trust economists about politically-charged economic questions when they are dependent on candidates. Krugman criticises Obama's economic policies rather often. Has Taylor written analogous critiques of Romney's economic policies? Krugman was clear about the policies that Obama and Bernanke should follow, when neither were doing it. Is there an analogous Taylor economic vision that he believes Romney ought to follow, no matter what Romney plans to do? Krugman is independent of Obama, though partisan, just as Cochrane was in opposing the stimulus; Taylor is not independent of Romney, and given his knowledge of economics and passion for public affairs, his silence shows it. The serious question is-- why is there no analogously independent and responsible Krugman counterpart somewhere in the conservative media with a similar record of predictive success who can also use FRED etc intelligently to comment on politics and the economy from the data? And, more importantly, what would s/he recommend to America, the UK, and the Eurozone, if s/he existed? The right field is empty.

  19. Anonymous6:11 PM

    Noah, tell me just one Krugman paper, and 2 or 3 sentences, why you think it is good.

    I am still looking for one single economists, who can do that.

    1. Gladly:

      This paper is so badass. It microfounds the idea of agglomeration (or clustering) and basically provides a rationale for cities to exist. The model can easily replicate the Zipf distribution of city sizes that is found in most countries, as well as the "agglomeration shadow" effect that explains why it is very difficult for cities to form between two existing major cities. In addition, it can explain why rapidly growing cities whose growth is interrupted by a war or disaster tend to resume rapid growth, while stagnant cities tend to shrink semi-permanently after disasters.

    2. Anonymous1:23 PM

      Are we reading the same paper? It does not mention any Zipf law, it contains no city size, nor a distribution of it.

      Furthermore Krugman admits in Journal of Japanese and International Economies 10,399 (1996)
      "In large part this is a report of failure— that is, while there must be a compelling explanation of the astonishing
      empirical regularity in question, I have not found it."

      That he essentially doesnt get beyond
      SIMON, H. (1955), On a class of skew distribution functions, Biometrika.

      Maybe you give it another try with my question?

    3. Are we reading the same paper? It does not mention any Zipf law, it contains no city size, nor a distribution of it.

      No, but the model is capable of reproducing the Zipf distribution. For a demonstration of that and an explanation of why it works, see this book:

      I was not aware of the quote you cite, but apparently later Fujita figured it out (in fact I know Fujita, and he mentioned this once). It does work.

      Maybe you give it another try with my question?

      Nope, won't be necessary...

    4. Anonymous3:23 PM

      Come on,

      Krugman 1991 talks transport costs, production functions and wages, and city sizes or any random process for founding a new city is not mentioned.

      Krugman 1996 just reproduces the Simon 1955 derivation for zipfs law from this random process only, no costs of any kind, there is zero additional, original thought.

      What are you reading? It cant be your Krugman 1991 reference.

    5. Krugman (1991) lays down the basic idea. More advanced versions of the theory - which incorporate things like random processes for founding new cities - all rely, fundamentally, on the agglomeration process detailed in Krugman (1991). The paper contains a deep theoretical insight that ends up being empirically useful. I'd say that that is a highly successful paper.

    6. Anonymous6:05 PM

      Krugman 1991 talks about transport costs as a driving factor, and in a regime 33 - 100 % price adder, which is way to high, further as a discriminator between core and periphery, whereas in reality it does not matter where it goes, because the loading / unloading is most of it.

      The mechanism leading to the agglomeration is completely different, independent of any costs, was found by Simon first, and merely repeated by Krugman 1996, works completely independent of the 1991 paper. The empirical fact was long known before any theory, so theory is not useful here.

      But apparently the 1991 paper was very successful with other economists.

      Do you really have nothing better than this for why some economists admire that Krugman so much ?

    7. Krugman 1991 talks about transport costs as a driving factor

      Actually, it gets more interesting. Using Krugman's setup, Fujita proves that as transport costs fall, there is a U-shaped pattern in overall agglomeration. Meaning that for low enough transport costs, urbanization actually reverses!

      and in a regime 33 - 100 % price adder, which is way to high, further as a discriminator between core and periphery, whereas in reality it does not matter where it goes, because the loading / unloading is most of it.

      I'm sorry, I don't understand what this means. Can you explain a little more clearly?

      The mechanism leading to the agglomeration is completely different, independent of any costs, was found by Simon first, and merely repeated by Krugman 1996, works completely independent of the 1991 paper. The empirical fact was long known before any theory, so theory is not useful here.

      I'm not sure this is true...I'll have to check out the Simon paper. Do you have a link or title for that paper?

      Do you really have nothing better than this for why some economists admire that Krugman so much ?

      This is one of the two theories that won him a Nobel prize. The other is "new trade theory".

    8. @noah

      1. Your “Actually, it gets more interesting.”
      Very Good !

      2. With regard to the Simon Paper:
      Adding to the reference given above Volume and page numbers
      “SIMON, H. (1955), On a class of skew distribution functions, Biometrika.”
      42, 425 – 440
      Ill got it from my library server, some 500 km away.. It was easy to find without volume and page numbers. You shouldn’t have any difficulties to find that on yours. BTW, do you have free access to NBER papers?

      3. “and in a regime 33 - 100 % price adder”
      “Only tau of manufactured goods arrive”, a somewhat weird way to describe transport costs. In my Germany goods don’t “fall of the lorry” and transportation is billed. A tau of 0.5 means 1/(1-tau) = 100 % transportation costs on top of the price of the manufactured. Understandable ?

      In general, transportation costs are low nowadays (3- 10%, and weakly dependent on distance), my milk and butter come typically from 500 km away, tomatoes, bananas from 1000 – 10000 km, and manufactured goods from (smartphones, coffee machines at 13 Euro, etc) all over the world, with practically zero difference between the heart of cities like Berlin, Paris, London, and any other tiny village in this land. Food and similar stuff cost exactly the same at any discounter like ALDI and LIDL in ANY place. And so do most service I use, medical, lawyer, hair cutter.

      One could even make the case that agriculture transport is more expensive, since it requires cooling, has some time constraints, in contrast to manufactured goods. And I consume a lot more food in volume and weight than manufactured stuff. And the boundaries between them are very blurred today.

      Even the biggest cities today and back in 1991 don’t produce a significant number of manufactured goods locally.
      In stark contrast to the hyper simplified assumption of Krugman: Zero transport cost for agriculture, and transport for manufactured goods the governing factor.

      4. Fujita, M
      I got his 1999 book “The spatial economy” together with his 1989 “Urban Economic Theory” from my local 5 km university library. I assume that is good enough reference for you and most people here. Please tell me otherwise.

      Starting to work through them. At the very first glance, not so exciting. The 2001 edition page 220, Simon as “extremely nihilistic and simplistic”?

      Huugh, its an accurate description, Krugman just copied, and is at least admitting to have problems with to accept (something I like in people)

      Fujita’s assessment of basic theory (Chapter one of 1999 edition) looks pretty similar to my spreadsheet for choosing my present location, except mine was more detailed and quantitative. Transport costs a minor role, transport time way more important, environment and access too. At a very first glance.

      5. second one of Krugman’s Nobel papers.
      Maybe you start calling and defending it as well ? Would be very interesting for me. How about we play a little game here, like Feyerabend and Lakatos, I am the aggressor/ advocatus diaboli, and you the defender of present day anglo macroeconomics, in contrast to our beloved Ordnungspolitik : - ). But lets stick with krugmans papers here. I ll might get to understand where my blind spots may be, and you can be the young hero, defending the economist establishment, against some old shop floor engineer? If you can that : - ) You could score lots of points with future employers !

  20. Some reflections...

    1) I haven't taken anything John Taylor has written or said seriously in a very long time. This is mostly because I have long since reached the conclusion that he's much more interested in winning arguments (and elections) than in seeking the truth.

    2) I have major doubts about Reinhart and Rogoff's work. Take their paper on public debt overhangs from April for example:

    I came away thinking (counter to R&R's conclusion) that the primary cause of public debt leverage in advanced economies, and the associated slow economic growth, is war (the Napoleonic Wars, the Belgian-Dutch War, the Third Carlist Wars, the Franco-Prussian War, WW I, WW II, the Greek Civil War, etc.) War tends to raise the debt numerator and reduce the GDP denominator. And in my opinion slow economic growth naturally follows as a result of postwar devastation and/or disarmament.

    3) I also have major doubts about Michael Bordo's work. Take his paper on inequality and financial crises from March for example:

    Granted there are flaws with his major argument, but in my opinion his most glaring elementary error is his claim that nominal interest rates are a good measure of monetary policy stance. After all nominal interest rates were very low in the contractionary part of the Great Depression and were very high in the inflationary 1970s, and yet no one is seriously making the claim that monetary policy was loose in the Depression and tight under Arthur Burns.

    (Ironically Bordo uses a credit variable developed by Moritz Schularick and Alan Taylor (the "good" Taylor) but in his most recent paper reaches starkly different conclusions from them.)

  21. 4) So, what about this latest tiff?

    Well, R&R's definition of financial crisis mostly deals with things that aren't relevant to the US Great Recession. They identify five kinds of financial crisis: 1) external sovereign default, 2) domestic sovereign default, 3) exchange rate crisis, 4) inflation crisis and 5) banking crisis. Thus their definition of financial crisis is primarily focused on issues involving public debt (exchange rate crisis and inflation crises can be a form of sovereign default), and the most serious crises nearly always involve current account reversals. The US Great Recession may have boosted public debt levels, but even R&R classify it only as a banking crisis, and if anything the global financial crisis has led to an inflow of foreign capital seeking safety. Furthermore, only a small fraction of the cases examined by R&R are banking crisis involving high income countries under high capital mobility. Thus it's not clear to me how relevant most of R&R's research is to the US Great Recession.

    Bordo doesn't waste much breath on explaining how he classified the episodes he studies as financial crises. Most people don't think of the 1974 and 1982 recession as financial crisis so this came as a surprise to me as well. Bordo cites a paper by David Lopez-Salido and Edward Nelson:

    On first glance Lopez-Salido and Nelson's evidence seems weak but it had me going back to R&R and I realized that R&R’s evidence actually seems even thinner. R&R define a bank crisis as the “closure, merging, takeover or large scale government assistance of an important financial institution”, which quite frankly is vague, and depending on one’s criteria threshold, could easily be true of the 1974 and 1982 recessions (see Lopez-Salido and Nelson for more information).

    This morning I noticed Krugman referring to credit spreads in his blog in the context of this debate:

    And that had me thinking, what a great idea, let’s see what the credit spreads looked like in 1974 and 1982:

    By that criterion the 1974 and 1982 recessions are only slightly behind the Great Recession and well ahead of the Savings and Loan Crisis, which is classified as a financial crisis by R&R, as “financial crises” go. And for what it’s worth, in terms of actual bank closings, while there were 157 in 2010, at 119, there were almost as many in 1982.

    5) The bottom line is, I’m not sure R&R’s research is all that relevant to the US Great Recession. So if you restrict yourself to US financial crises, even limiting yourself to R&R’s list, the current recovery is weak even correcting for trend (I’ve looked at this in terms of both NGDP and RGDP). And if you include the 1974 and 1982 recession, which is not as an outrageous idea as I initially thought, it looks even worse. More importantly, I’m not even sure what the direction of causality from recession to financial crises is, provided one can even agree on an appropriate definition of “financial crisis” with respect to the US.

    I’ve always felt that what has made the current recession so bad are the poor monetary, fiscal and regulatory policies that led to it, and the poor policy responses to it. In my opinion the evocation of R&R’s “This Time is Different” has almost always been simply an excuse to do nothing. In the final analysis the Taylor exploitation of this debate is an election year distraction from an honest discussion of what constitutes better macroeconomic policy.

  22. JJ Hunsicker9:30 AM

    Good thing that Krugman never plays politics then... so say the Socialists

  23. Anonymous8:48 PM

    I would like to know how somone can be respectable, the sort of person who you wouldn't be embarassed to be seen with, and still rape students with overcharged text books (mankiw, krugman....)
    their is something obscene about these multimillionaire "academics" who make poor students pay so muc for textbooks

  24. Anonymous11:07 PM

    Thought from a non-economist: I will use the currency as my parameter for recovery. If I devalue it enough I should be able to show a strong recovery in per capita gdp. The fact they can't buy coffee will be irrelevant. It seems arrogant to me to be defining this current recovery when we have no idea what the effects will be on the $ five years from now. If it only is devalued 8% in five years we can say it wasn't to bad. If it's I missing something?

  25. Paul Krugman is right; this is an example of how politics hurts the academic discipline of economics.

    Is this a joke? Projection? Who is more partisan and politicised that Paul effing Krugman?

  26. I was a little grumpy with my wording, sorry

    1. In the meanwhile I have read Fujita, Krugman, Venables, and I am less than impressed. I do not find a single plot where they compare their extremely simplified models to real world data. And I see this as extremely typical for the “pattern Krugman” PK.

    2. I am actually interested in discussing some more papers, either of Krugman, but also some, Krugman gave glowing references, e.g. some 1992 Singapore vs Hong Kong, and Cobb-Douglas, Solow 1957, which , to my understanding have grave mechanical flaws, rendering the results invalid. Are you interested or do you know by chance people / blogs, where people read, analyze, understand , and then discuss economic papers? I may be just some old engineer, but I have about 90 papers and patents, close to 1000 citations, and a recent GMAT in the upper 3% of my age bracket : - ) Could be interesting for folks, who spend their whole live so far in academia. Curious.