Krugman’s Blog, 2/19/13

Four posts yesterday.  First up was “Data, Stimulus and Human Nature:”

David Brooks writes about the limitations of Big Data, and makes some good points. But he goes astray, I think, when he touches on a subject near and dear to my own data-driven heart:

For example, we’ve had huge debates over the best economic stimulus, with mountains of data, and as far as I know not a single major player in this debate has been persuaded by data to switch sides.

Actually, he’s not quite right there, as I’ll explain in a minute. But it’s certainly true that neither stimulus advocates nor hard-line stimulus opponents have changed their positions. The question is, does this say something about the limits of data — or is it just a commentary on human nature, especially in a highly politicized environment?

For the truth is that there were some clear and very different predictions from each side of the debate — not about the success of the Obama stimulus, which even advocates like yours truly warned would fall far short, but about interest rates, inflation, and the effects of austerity policies. On these predictions, the data have spoken clearly; the problem is that people don’t want to hear.

And really, would you have expected otherwise? It would be lovely to live in a world in which the failure of interest rates to soar as predicted would lead Brian Riedl of Heritage and Niall Ferguson to concede that their anti-stimulus critiques of 2009 were based on a completely wrong model; in which the economic downturns that have followed austerity policies almost everywhere they have been applied would lead Alberto Alesina to concede that his work on expansionary austerity was probably flawed, and lead George Osborne to proclaim publicly that he led Britain down the wrong path. But such things very rarely happen, and the fact that they don’t happen has nothing to do with the limitations of data.

Indeed, such things rarely happen even in fields of endeavor that are largely insulated from politics, and in which the ethos is supposed to reward objectivity over ego. Science, Max Planck declared, progresses funeral by funeral. If quantum mechanics needs to rely on mortality to prevail, how much more so must this be true of Keynesian macroeconomics?

That said, if you look at players in the macro debate who would not face huge personal and/or political penalties for admitting that they were wrong, you actually do see data having a considerable impact. Most notably, the IMF has responded to the actual experience of austerity by conceding that it was probably underestimating fiscal multipliers by a factor of about 3.

So yes, it has been disappointing to see so many people sticking to their positions on fiscal policy despite overwhelming evidence that those positions are wrong. But the fault lies not in our data, but in ourselves.

Well.  Now we know he reads Bobo.  Let us pray that Bobo reads him.  Next up was “A Qualified Apology to Niall Ferguson:”

So, several people, including NF himself, have written in to say that Ferguson actually did concede that I was right about deficits and interest rates. Indeed he did; I missed it.

Unfortunately, there’s a very disturbing aspect to this sort-of concession; even while admitting that he had been wrong, Ferguson completely misrepresented his own earlier position, in an attempt to make it sound more defensible. Here’s his 2012 version:

FERGUSON: I think the issue here got a little confused, because Krugman wanted to portray me as a proponent of instant austerity, which I never was. My argument was that over ten years you have to have some credible plan to get back to fiscal balance because at some point you lose your credibility because on the present path, Congressional Budget Office figures make it clear, with every year the share of Federal tax revenues going to interest payments rises, there is a point after which it’s no longer credible. But I didn’t think that point was going to be this year or next year.

But here’s what he actually said in our original 2009 debate:

You can’t be a monetarist and a Keynesian simultaneously—at least I can’t see how you can, because if the aim of the monetarist policy is to keep interest rates down, to keep liquidity high, the effect of the Keynesian policy must be to drive interest rates up.

After all, $1.75 trillion is an awful lot of freshly minted treasuries to land on the bond market at a time of recession, and I still don’t quite know who is going to buy them. It’s certainly not going to be the Chinese. That worked fine in the good times, but what I call “Chimerica,” the marriage between China and America, is coming to an end. Maybe it’s going to end in a messy divorce.

No, the problem is that only the Fed can buy these freshly minted treasuries, and there is going to be, I predict, in the weeks and months ahead, a very painful tug-of-war between our monetary policy and our fiscal policy as the markets realize just what a vast quantity of bonds are going to have to be absorbed by the financial system this year. That will tend to drive the price of the bonds down, and drive up interest rates, which will also have an effect on mortgage rates—the precise opposite of what Ben Bernanke is trying to achieve at the Fed.

[Emphasis added.]

Points, then, for intellectual flexibility — but major demerits for trying to flush one’s own past statements down the memory hole.

The third post of the day was “Snark That Writes Itself:”

Erskine Bowles tells a Politico event — now that’s a match made in heaven — that

The idea of a grand bargain is at best on life support.

OK, is there anyone whose immediate reaction isn’t, “Let’s convene a death panel!”

Look, a grand bargain right now is a terrible idea. The simple fact is that our political system isn’t ready. Washington is divided between parties with utterly different visions of what our society should look like; Republicans, in particular, would wait maybe a minute before trying to renege on any bargain that raises rather than cuts taxes on the wealthy, and that leaves the basic structure of Medicare and Social Security intact. So grand-bargain negotiations are, in practice, just an attempt to create facts on the ground for future confrontations, not a good-faith effort to secure the nation’s fiscal future.

Meanwhile, the Kabuki of grand bargain negotiations absorbs all of DC’s political energy, making it impossible to talk seriously about the economic problems we have right now. And while it may be possible in principle to support stimulus now even while talking long-run austerity, as a practical matter all the debt rhetoric leads to short-run austerity too.

So let’s disconnect that respirator, and let Bowles and Simpson spend more time with their families.

The last post of the day was “WWS 543, International Trade Policy: Class 5”

The interwar trade collapse (pdf).



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