Wednesday, October 12, 2011

Not recommended reading

But it's out there and it gets circulated, so we have to deal with it. Russ Roberts responds to Krugman's case on Keynesianism here. The most shocking thing to me was this:

"The evidence for the Keynesian worldview is very mixed. Most economists come down in favor or against it because of their prior ideological beliefs. Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government."

This is a statement about Russ that I wouldn't have even made before I read him say it himself. He holds his views on Keynesianism to conform to his ideology. That's a really disheartening thing to read, even though I've never been particularly in agreement with Russ in the past. I would have figured he at least had other objectives. Scientific conclusions based on adherence to an ideology are worthless. This is how we get the persistence of ideas like creationism and geocentrism. That isn't to say that in ruder stages of society creationism and geocentrism weren't decent explanations - they were decent at one time. But when the evidence starts to stack against them, adherence to ideology is what impedes scientific advances. That Russ actually embraces this is dumbfounding to me.

Needless to say, I see no evidence at all that that's why Krugman views Keynesianism favorably. Russ doesn't appear interested in offering any reason for thinking that's Krugman's motivation. It doesn't really make any sense. There are Keynesians who favor and oppose larger government (just as there was at one time a fairly active community of Austrian socialists). Your view on how the economy works doesn't require a certain political philosophy.

Much of the rest of the post is not recommended either, but unfortunately I don't have time to really get into the weeds of refuting it. Feel free to comment on this summary of the failures of Russ to make a convincing case:

1. He talks about stagflation as refuting Keynesianism. It obviously doesn't. He suggests that Krugman said you can never have high interest rates when you have high unemployment. He obviously didn't. That someone like Russ - an economics professor - could be reading Krugman for years now and not understand why he says under current circumstances they wouldn't be high (circumstances that didn't apply in the 1970s), and instead interprets it as "you can't have high interest rates with high unemployment" is unbelievable to me.

2. He talks about low multiplier estimates from Barro and Redlick as being evidence against Keynesianism. I've spoken to these studies numerous times not just here on F&OST, but also on previous posts of Russ's! Barro and Redlick show precisely what you would expect out of Keynesianism - outside of recessions, the multiplier is low and government spending crowds out private spending. You can't just choose to redefine Keynesianism as "the multiplier is HUGE" just because you want to. It's also worth noting that even if the multiplier were always small, it wouldn't matter. The multiplier is just a parameter. Early Keynesians thought it was a lot bigger than modern Keynesians think it is. So? It would be like discovering that the speed of light was actually slower (or faster) than original estimates suggested. Sure we'd have to recalibrate several things, but changing the parameter around wouldn't make relativity wrong. Likewise, changing our assessments of the parameters of the Keynesian model doesn't make the model itself wrong. Why Russ thinks it does is unclear to me. Again, he seems to just be saying "Keynesianism is the idea that government spending is great", rather than seeing it as a theory of how the economy functions.

3. He talks about the post-WWII boom again, despite the fact that lots of people (including people more prominent than me) have told him how he's misusing the episode. Why was there a post-WWII boom? Because demand was strong due to a very predictable microeconomic response to the lifting of price controls and demand in overseas markets. Once again, Russ is letting his ideology lead his economics (and I say this now because Russ has made the assertion himself). He wants to say Keynesianism amounts to "the economy is screwed without government spending". If that's what he wants to argue against, he can go find some theory that says that. Keynesianism doesn't.



Those were the big ones for me. Let me know your thoughts. This was a real eye-opener of a post for me. I hope Russ comes around to the idea that ideology is not the best guide for science.

40 comments:

  1. "Why was there a post-WWII boom? Because demand was strong due to a very predictable microeconomic response to the lifting of price controls and demand in overseas markets."

    One could also say that the savings rate was forced higher through wage and price controls as people could have consumed but were forced to put that desire on hold (playing into your hand admittedly). Through wage and price controls, major producers in the U.S. were very profitable as well which reinforces the claim that there were "forced savings" as a result of the U.s. being a command economy.

    Unfortunately I haven't been able to find data to confirm this theory but it seems just as plausible as "demand was strong due to a very predictable microeconomic response to the lifting of price controls and demand in overseas markets."

    Your view seems to differ from Krugman though who says it was all caused by an increase in government spending.

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  2. Should I give my spiel about my dissertation again?

    Anyway, my new favorite Russ Roberts quote is something to the effect of "I am very suspicious of democracy, that's why I'm a libertarian."

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  3. Again, I am forced to ask: has this guy actually read Keynes? Stagflation is a problem for Bastard Keynesianism but not for Keynes himself.

    Also, there was a post WW2 boom because long term interest rates remained low for a very long time.

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  4. Great post, I linked to it at my blog.

    Invisible Backhand
    http://www.reddit.com/r/CafeHayek/new/

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  5. The pearl clutching that goes on between economists is really very, very amusing.

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  6. More and more I am reminded of this strip from "Bloom County": http://www.gocomics.com/bloomcounty/2009/12/24

    The piece was actually published in the 1980s.

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  7. I agree with Daniel that Keynesians have reasonable good counter-arguments to the specific criticisms made by Robert. However I do agree with the quotation that Daniel starts with for different reasons.

    I feel it is possible to accept as valid many of the premises of Keynesianism (though not the framework used to arrive at them) and still be an anti-Keynsian.

    What I mean by this is that in my view common sense economics would lead one to accept that when AD is depressed then policies that will stimulate it are likely to lead to an increase in economic activity especially in a situation of price and wage stickiness. However the price to be paid for this stimulus especially if one accepts (and I don’t) the Keynesian argument that only fiscal-policy will work in some circumstances is that decisions that affect the use of the economies resources will shift away from the individual agent and towards state planners.

    I know that there are free-market orientated Keynesian out there for whom this is not true but generally for Keynesians this is not a problem. They believe that underlying the AD-issue is a market-failure that needs to be systematically addressed by state action. Beyond fiscal policy to address recessions they tend to support government action to address inequality, externalities and other types of perceived market failures.
    All of this leads there to be in my opinion a close alliance between Keynesian economics and social democratic polices and a belief in a larger state.

    Of course a similar thing applies to those who tend to believe that recession are themselves the result of state failure (like the Austrians with their ATBC) and whose economics will likewise be aligned with their libertarian political beliefs.

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  8. Robin Hanson tussled with Roberts' selectively skeptical epistemology here:
    http://www.overcomingbias.com/2007/10/what-wisdom-tra.html

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  9. I think Russ was just being humble by recognizing his bias. We're all biased. Anyone who thinks they interpret facts without filtering them through their preconceived notions of how the world works is frankly delusional.

    That's why science has peer review. Science is wise enough to recognize that people have a nasty tendency to distort facts.

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  10. http://krugman.blogs.nytimes.com/2011/10/12/i-am-not-your-mirror-image/?smid=tw-NytimesKrugman&seid=auto

    Krugman on Roberts on Krugman.

    I'm thinking of a New Yorker cartoon *Man adjusts necktie in mirror* caption: 'It came to him suddenly- he was an ideologue.'

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  11. Daniel,
    I am not an economist but have been interested in understanding economic theories and arguments. I came across your blog, which I have enjoyed reading for quite some time, through seeing you comment on cafehayek. I first visited cafehayek in hopes of trying to understand what a contemporary Austrian take on issues would look like and have been quite unimpressed with much of what is posted there.

    I think the final straw for me was the recent post by Boudreaux that took issue with the term 'income distribution' because income is earned not distributed. I found this so bizarre I laughed out loud and then saw your comment pointing out that of course that this is used in the tradition statistic meaning. This was then followed by claims that of course use of the term distribution was a purposeful attempt to sow confusion.

    Anyway, this leads me to the question I have for you - do you believe that the cafehayek crowd are actually capable of engaging in good faith attempts to debate issues using logic and empirical evidence or are they so wedded to their a priori 'knowledge' that this is simply no longer possible?

    The example I give above about income distribution is a perfect example. Clearly income distribution is a legitimate topic to discuss and their are different interpretations of the what we can conclude from it, but what Boudreaux seems to be attempting, and I've seen other examples of this on their blog, is to simply make the whole question illegitimate and in fact engaging in it becomes an actual attempt to dupe people.

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  12. "There are Keynesians who favor and oppose larger government..."

    Who are some Keynesians who favor smaller government (or at least "oppose larger government")?

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  13. Mark Bahner,

    Yes, who are these small government Keynesians and socialist Austrians? Six of each would suffice I would say.

    Anonymous Basterd

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  14. Paul Krugman gave an excellent response to Russ Roberts' post.

    He said that his worldview does not result in choosing Keynesianism, because he does not believe in any relation between income differences and macroeconomic full employment, despite him believing in equal incomes for the populace.

    Krugman: 1
    Roberts: 0

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  15. Prateek Sanjay,

    So economics is a sports bar.

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  16. "He said that his worldview does not result in choosing Keynesianism, because he does not believe in any relation between income differences and macroeconomic full employment, despite him believing in equal incomes for the populace."

    Typical Krugman, can't respond to criticism, so erects a straw man instead. I don't think Roberts said anywhere that Krugman is a Keynesian because he believes in income equality.

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  17. Sanjay: 1
    Gunnels: 0

    It's Miller time.

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  18. Why was there a post-WWII boom? Because demand was strong due to a very predictable microeconomic response to the lifting of price controls and demand in overseas markets. Once again, Russ is letting his ideology lead his economics (and I say this now because Russ has made the assertion himself). He wants to say Keynesianism amounts to "the economy is screwed without government spending". If that's what he wants to argue against, he can go find some theory that says that. Keynesianism doesn't.


    This is way to narrow a description of why

    For example, we trained and educated millions upon millions of people with skills that may them several times more productive than they were before the war, at very low cost

    second, there was optimism, vision, huge intangibles that you will never have the tools to measure

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  19. Argosy Jones,

    Way to reinforce my point.

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  20. Don't be a sore loser, Gary.

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  21. I'm curious, what exactly did I lose? What, do you think I'm some sort of supporter of Cafe Hayek? I have questioned why Daniel even hangs out and comments on Cafe Hayek a number of times in the past because the blog sucks (then again, so does Krugman's blog and whole bunches of econ blogs - Daniel's blog is better than most). However, I like Roberts podcast; he generally has interesting people on it that get a lot of time to speak their mind even when Roberts disagrees with them.

    All of which is just a long way of saying, your comment reinforces my point yet again.

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  22. There is clearly a heck of a lot of group/team identity going on amongst the various economic tribes. Thus the sports bar analogy (not original to me - I first heard about it in the context of electoral politics).

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  23. Argosy Jones,

    I had to search around a bit in Hume's _Essays, Moral, Political and Literary_ for these (sometimes my marginalia can obscure things), but they are indeed classics:

    "Interest and ambition, honour and shame, friendship and enmity, gratitude and revenge, are the prime movers of all public transactions; and these passions are of a very stubborn and intractable nature."

    "It is therefore, on opinion only that government is founded; and this maxim extends to the most despotic and most military governments, as well as to the most free and most popular."

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  24. Fearsome Tycoon, Russ didn't say so, but Krugman made a general point about an area of disconnect between political beliefs and macroeconomic understanding.

    Anyway, I get Krugman's point that liberals don't want an activist government per se, but an activist government that serves liberal goals. But I feel it's an unfortunate thing. Since the 1960s, young Western people have held the ridiculous notion that they must freely disobey their government when they don't like its laws, but use the government to push for laws the like. The result has been the perpetual chaos of civil disobedience in Britain, France, and America.

    Here comes the common fallacy of liberals and libertarians - they actually think there exists such a thing as an individual. People who are neither know better. The corporate nature of man should be a reminder that it's not up to any single isolated person to decide what laws are good and what laws are bad. If you want the government to serve your goals, you better start following the bad laws too. Otherwise, you can't just become a singular autarky who secedes from the state when he doesn't like it, but flees to it, when he does like it.

    That is just stupid. And that is why I don't like the Tea Party or Occupy Wall Street.

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  25. As for Austrian School Socialists, search for information on Vienna Fabians.

    Hayek was a Fabian Socialist, and he was converted to his later brand of economic thinking by people he met among the Fabians.

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  26. Prateek Sanjay,

    "If you want the government to serve your goals, you better start following the bad laws too."

    What are the three things that guide political behavior in modern times? People are (a) guided by their particular interests, (b) guided by the interests of the group they identify with and (c) by more abstract ideologies. I - like Hume - think the most dangerous of these is the latter of the three; people following their particular interests (which in part means pursuing and attacking the laws of a society) is the least dangerous. So yeah, following what laws you like and protesting the rest for your particular interests isn't that big of a deal - even though that sort of thing offends a lot of so-called "high minded" people (who are animated by very abstract, totalizing notions of what is and is not appropriate re: human interaction). That's mostly what the Tea Party was about as far as I can tell (following particularist interests); I don't know about OWS.

    "The corporate nature of man should be a reminder that it's not up to any single isolated person to decide what laws are good and what laws are bad."

    The corporate nature of human beings is an idealized abstraction; in the nitty, gritty of actual life it varies tremendously across societies, so there is a lot less to this "nature" than is generally ascribed to it (meaning one ought not hang a lot intellectual baggage on it). It is essentially in fact a historical creation of a lot of very thick webs of negotiation and numerous other social processes and one should expect it to change - particularly as more and more people are involved in a commercial society (the rise of gay rights ought not surprise anyone in other words).

    Whatever you mean by libertarian is not what I mean by libertarian.

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  27. 'Who are some Keynesians who favor smaller government (or at least "oppose larger government")?'

    Karl Smith & the other guys at MB are libertarian Keynesians. Ditto Greg Mankiw. Keynes himself thought government shouldn't go over 25% of GDP (although he probably didn't consider Baumol's Cost Disease). Republicans throughout the golden age were Keynesians.

    Socialist Austrians, well Hayek & many Hayekians actually aren't too bothered about government providing services, though obviously they vehemently oppose central banking.

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  28. "Republicans throughout the golden age were Keynesians."

    A Republican from the 1950s or 1960s is not really a small government Republican (whatever one thinks of small government Republicans). They were in fact "national greatness" types for the most part, and were more than happy to pour tons of tax dollars into projects to promote such an ideology.

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  29. "Karl Smith & the other guys at MB are libertarian Keynesians."

    I expect that most Libertarians (with a capital “L”...members of the Libertarian Party) would consider "libertarian Keynesians" to be oxymoronic. Wonderful Wikipedia's article on libertarianism states:

    http://en.wikipedia.org/wiki/Libertarianism

    "According to the The (sic! I love it!) U.S. Libertarian party, libertarianism is the advocacy of a government that is funded voluntarily and limited to protecting individuals from coercion and violence.[3]"

    If the "government is funded voluntarily and limited to protecting individuals from coercion and violence," then as a practical matter, government would be so small, and so limited in scope, that the "stimulus" dreamed of by Paul Krugman (and John Maynard Keynes) simply could not exist. If government was “funded voluntarily” then there is little likelihood that the government’s funding would go up during recessions. And if the government is “limited to protecting individuals from coercion and violence” then, as a practical matter, virtually the entire federal government would disappear. No Department of Education. No Department of Health and Human Services. No Department of Energy. Etc. Etc.

    So it would not be possible to be a “libertarian” Keynesian, according to the U.S. Libertarian Party definition.

    But I’ll try to contact the people you mentioned, and see what they think the proper size of the federal government is.

    P.S. “Keynes himself thought government shouldn't go over 25% of GDP…”

    Is that the federal government size, or government at all levels?

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  30. "Republicans throughout the golden age were Keynesians."

    I don't know what the "golden age" is, so I can't comment. Do you have some specific people in mind?

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  31. Mark,

    I don't really think a 'no true scotsman' definition of libertarianism is going to help us here. If the government is only 'limited to protecting individuals from coercion and violence' then I'd like to see you justify private property rights, laws against fraud, limited liability laws and a whole bunch of other institutions that make capitalism tick.

    Keynes was English so there was no federal government. He meant the totality of government.

    The golden age was the period post ww2- 1973 where the economy grew quickly and living standards rose across the board, with no (or very few) major recessions/crises.

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  32. Hi Cahal,

    The definition of libertarianism I gave is hardly a "no true Scotsman" definition. Even Thomas Jefferson *wrote* this (though his actions may have differed from his words):

    "A wise and frugal government which shall restrain men from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government."

    So Jefferson was essentially saying that the only thing the government should do is to protect people from violence and coercion.

    And it is a fact that the federal government, from the time of the signing of the Constitution to the beginning of the Civil War, spent no more than about 3% of GDP, except in times of war (and I mean real war, like the War of 1812...not the phony wars we're involved in now).

    I forget the details, but a poll of Libertarian Party members about the optimal size of government returned values ranging from zero to 50% of it's current size, and averaged about 8 percent of its current size. In other words, the average Libertarian Party member wants to return the federal government (as a percentage of GDP) to the size it was for the first ~80 years of this country's existence.

    Keynesianism would simply not be possible if the size of the federal government averaged about 3 percent of GDP (i.e., somewhat less than $500 billion a year in total spending).

    "The golden age was the period post ww2- 1973 where the economy grew quickly and living standards rose across the board, with no (or very few) major recessions/crises."

    OK, that's your definition of the "golden age." I'd say it was more like the 1990s.

    But in any case, the fact that there were Republicans from ww2 to 1973 who were Keynesians doesn't mean much. The Republican Party has always been a party of Big Government...with a few notable exceptions, such as Ron Paul (who is definitely not a Keynesian).

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  33. Evaluating government spending as a % of GDP across time ignores Baumol's Cost Disease. To reduce federal government to 3% of GDP now would be to make it so weak as to be ineffective.

    Also - putting aside the definition of 'Keynesianism' - whether governments can run countercyclical fiscal policy has little to do with the size of the government. They can borrow/print and spend whether they are 3% of GDP or 30%.

    Post WW2 is not simply my definition of the golden age; it is regarded by everyone as a golden age. It is empirically recognised by economists as so:

    http://en.wikipedia.org/wiki/Post%E2%80%93World_War_II_economic_expansion

    Nobody thinks the 1990s were a golden age - what growth there was was largely the dot com bubble.

    Though Jefferson is obviously advocating a small state, his definition is very vague. The founding fathers also had many caveats to those kinds of statements, for example they viewed private property as a means to serve society rather than an end in itself, and thought it should be limited if it were affecting people negatively. I also highly doubt they'd oppose things like public schools.

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  34. Who is and is not a libertarian is a pointless endeavor much of the time; noisy logomachy in other words. Indeed, as often as not a discussion along those lines boils down to people smuggling in their own archetype for what a libertarian is so as to either beat it up or praise it.

    So, for example, Mankiw isn't what a lot of people would consider a libertarian; but if Mankiw wants to call himself that (and as I recall, he does so with a number of provisos) I'm not going to jump up and down about it (there is probably a big enough tent for him to be in it).

    Cahal,

    "The golden age was the period post ww2- 1973 where the economy grew quickly and living standards rose across the board, with no (or very few) major recessions/crises."

    I'd call 1968 a "crisis" of the first magnitude; France, for example, came within in a hair's breadth of a full on revolution to give one example. That is just the first of the crises of the period that come to mind.

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  35. Cahal,

    "I also highly doubt they'd oppose things like public schools."

    If you read say Benjamin Rush you find a lot of talk about creating a single, unified people via education. He talks about things like a "supreme regard" for the nation, etc. being their primary role. There was a lot of loose talk like that at the time.

    Now this is a common theme (e.g., Horace Mann) in public school education throughout American history (thus the efforts to enforce anti-Catholic bigotry, anti-immigrant bigotry, etc. in the 19th century and well into the 20th by the states). It also explains in significant part why you can get a better, more well rounded education in biology (particularly when it comes to evolution) in the U.S. in most Catholic schools as compared to public schools. This theme is one of the primary knocks against public schools as they exist today in the U.S. IMO.

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  36. Cahal,

    Not to pick on the U.S.; publicly funded education has long been the vehicle by which states try to perpetuate themselves. That was in significant part why Elizabeth I spent so lavishly (for the time) on public education (which Shakespeare took part of until his father fell on hard times and he had to leave school at fourteen). Of course education often backfires - it can lead to healthy skepticism.

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  37. Mark Bahner -

    1. Historical context seems relevant to the size of government, right. Economic surplus which we might want to spend on social luxuries, capacity of government to govern, etc. all seem extremely important. In the 1780s I would probably want a federal government that was 3% of GDP and didn't do much either. In the 2010s I don't think that would be adequate. I think it's dangerous to assume that Jefferson of the 1780s would want to see the exact same federal government in the 2010s. Jefferson of all people knew the historical context of these things - that's why he wanted the government to remain so democratic.

    2. Even at that time, though, Jefferson supported considerably more than what you suggest he supported. That's a nice sentiment you quoted, but you'll see elsewhere he talks about how people can be coerced by primogeniture, inequality, private corporations, etc. - not to mention his support for public support for science and exploration. You are reading his talk about coercion through libertarian eyes, not Jefferson's eyes.

    3. This: "Keynesianism would simply not be possible if the size of the federal government averaged about 3 percent of GDP" makes no sense and it's the reason why I wrote my post last night about how "small government Keynesian" is not an oxymoron. Keynesianism is a theory of how the economy works. Whether the government can or would want to act on it to do anything has nothing to do with it. Keynesianism
    is absolutely "possible" with government at 3% of GDP. In fact, since we were talking about Jefferson, Jefferson made some very Keynesian/Malthusian assertions to Jean Baptiste Say in a letter about the U.S. economy. Many people have pointed out that Franklin even had a liquidity preference theory of the interest rate. Keynesianism is fine. Fiscal policy is what may or may not be possible with a government that small. However, even in THAT case they could still do monetary policy.

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  38. That's like saying "relativity simply isn't possible at the current energy levels we can achieve" when what you really mean is "transporting ourselves to another point in space-time by creating our own wormhole is not possible at the current energy levels we can achieve".

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  39. "Scientific conclusions based on adherence to an ideology are worthless." I agree completely. It also seems close to obvious to me that economics is not "science" as I understand the attributes of things you can call "science". I am certain that I have biases, and many to most of my beliefs are fundamentally irrational. This is true for every one of us. I suspect there is a strong correlation between a given person's belief in the "science" content of economics and their agreement or disagreement with Russ's article.

    To me, Russ's article was a blinding glimpse of the obvious. You have biases. Those blind you to things you don't want to believe, and draw you to things you do want to believe.

    I find Krugman's response to be particularly ironic, in that as I read him, his biases scream. To wit, his prediction that the stimulus would not work because it was "too small". If this there is science behind this claim, share with us the math that supports this empirically, or simply say "I think it may be too small."

    If economics were science, it would be possible for there to be empirically correct answers to things like optimum income redistribution schemes, ideal tax structures, and certainty of X stimulus having Y impact. My BIAS is those ideas are preposterous.

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  40. Krugman did share his back of the envelope math, and we discuss the empirical work on fiscal policy on this blog all the time Charles.

    re: "If economics were science, it would be possible for there to be empirically correct answers to things like optimum income redistribution schemes, ideal tax structures, and certainty of X stimulus having Y impact."

    I don't agree with the first half of this claim.
    "Optimum" and "ideal" imply a value system. Those aren't really scientific claims. The last thing you list (certainty of X stimulus having Y impact) is something that economists have correct answers to. Now, they're estimates and they're probabilistic answers - but not all sciences provide precise deterministic answers. The only two that really do are chemistry and physics. The economy is a complex system so that sort of determinism is largely absent (just like biology, meteorology, geology, etc).

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