Friday, October 28, 2011

A Response to a Good Question from Russ Roberts

Yesterday Russ Roberts posed this important question:

"So my challenge to Paul Krugman and Brad DeLong and Matt Yglesias and Daniel Kuehn and others who didn’t like my claims about ideology and truth-seeking is this: what evidence could you imagine that would dissuade you from supporting massive government spending?"

Upon further consideration, the question is a little more ambiguous than I thought as to whether he's refering to a specific policy position or simply to a Keynesian orientation. I will be dissuaded from "supporting massive government spending" when there's no need for "massive government spending" (or when debt levels pose bigger problems). Sometimes Russ writes as if Keynesians think the economy needs government spending all the time (see his claims in the past and in this post about the post-WWII period). That's not my understanding of things at all, and I've never been taught anything even resembling that. So when interest rates start to increase, when inflation gets particularly substantial, when unemployment starts to decline, then I will yield on government spending as a policy position.

But based on the discussion in the rest of the post I think what Russ is really getting at is "what would dissuade you from supporting massive government spending as a potential policy response" - in other words, what would make you abandon your Keynesian disposition? I can think of a couple things:

1. No more plausible empirical studies showing multipliers substantially greater than one during periods when we expect them to be greater than one. As Russ notes, we have a range of multiplier estimates. I haven't had the pleasure of doing a detailed literature review (although we've discussed in detail many of the recent papers on this blog), but Russ says that they go from 0.5 to 2.0, and that seems right based on what I have seen. The point I've raised with Russ multiple times now is that the estimation strategies for most of these papers along this range are convincing to me. There are better studies and worse studies, but even the best ones show this sort of range. Russ interprets that as a problem and even goes as far as claiming "No anti-stimulus economist is convinced by a multiplier of 2 from a regression. No pro-stimulus economist believes the multipliers of less than one", which of course he knows is not true because I've noted many times on his blog and this blog my acceptance of low-multiplier estimates like Barro's (much to Andrew Bossie's chagrin). The question for me is "do we have an explanatory framework that provides a reason why we see low multipliers in some situations and higher multipliers in other situations?", and the answer is most emphaticaly "yes". Keynesian and New Keynesian models do a very good job explaining the range of values we see. The most important consideration for policy today, of course, is that multipliers are high when the economy is depressed and low when it is strong. Here are estimates from Auerbach and Gorodnichenko's SVAR models that illustrate the point beautifully:

It would seriously shake my acceptance of Keynesianism if we stopped seeing this pattern in the empirical literature of high multipliers during depressed periods and low multipliers during growth periods. I know Russ thinks that people's views aren't substantially shaped by these sorts of empirical findings, but in my case he's simply wrong. I don't have a head for high-level theory - try as I may. Maybe readers aren't fully aware of this, but the theory I peddle here is very basic stuff. As an undergrad, I excelled in the stats and econometric courses. In my early career at the Urban Institute my job was to figure out ways to empirically estimate program impacts. I'm an empirical guy. Will one study sway me? No. The subject of study here is too complex. But if the body of evidence shifts, that will sway me. The body of evidence on the multiplier right now strongly suggests higher multipliers in depressed periods and low multipliers outside of depressed periods. And the best theory I have at my disposal for explaining why that is a Keynesian theory of the economy. Which leads me to the second thing that would change my mind:

2. A better theory that explains what we see in the world. Ultimately what's attractive about Keynesianism is the same thing that's attractive about any scientific theory: it seems to explain observed phenomena better than any alternative. It helps me understand why inflation isn't sky-rocketing right now despite what's been happening with the money supply. It helps me understand the behavior of interest rates despite what's been happening with government deficits. It helps me understand why a lot of resources would simply go unused. It helps me understand the multiplier estimates that these studies keep producing. And ultimately it makes a lot of sense. Micro-founded versions of it and non-micro-founded versions of it are relatively consistent with each other, which is reassuring.

Other theories can do parts of that, and I feel strongly that other processes (including the mechanism underlying Austrian business cycle theory) are also operating in the economy. That's great. A grand unified theory is probably not a reasonable expectation for a complex phenomenon like the macroeconomy, so I am willing to entertain all of that. But until I am informed of a theoretical framework that can explain all of this better and can still incorporate other important insights, my own theoretical framework is going to be basically Keynesian. I'm not alone on this point. Many people who are against fiscal stimulus as a policy position (because of other reservations or perhaps political views) also consider themselves within the Keynesian paradigm.


It's probably worth noting a couple things that won't change my mind.

1. Additional evidence that politicians are self-interested and that they act on those interests. I already know this. Nothing in my understanding of Keynesianism relies on this not being true. This is something I've always taken to be true, and something which I've always understood the science of economics to have accepted.

2. Failure of politicians to take Keynesian advice. If you thought that the government shouldn't do something, and they demonstrated a strong capacity to go ahead and do that thing anyway, would you consider that a reason to stop telling the government they shouldn't do it? I didn't think so. Let's please stop pretending this argument has any shread of logic or respectability to it.

3. Paul Samuelson and the post-WWII economy. I've been reading up on this in detail and am still forming my reaction to it, but I'm tiring of this argument too. People have explained to Russ Roberts and David Henderson many times why it's not surprising from a Keynesian perspective that the post-WWII economy would do relatively well. It's not a convoluted argument either - it's pretty straightforward. Russ writes that "they explained it away" as if there is something underhanded or insincere about what we've said. If he's going to react to counter-arguments that way there's not much I can do - he's clearly made up his mind on this. And it's also clear he thinks a valid test of Keynesianism is whether the economy can do well without government stimulus - which is an absurd test. Of course it can. Keynesian theory doesn't say it can't. Paul Samuelson was indeed worried about the post-war economy. You know who argued against these fears? (1.) John Maynard Keynes, (2.) Nicholas Kaldor, (3.) the CED (institute which promoted Keynesianism in business circles), (4.) The Brookings Institution (quite Keynesian at the time), (5.) Alvin Hansen (a.k.a. "The American Keynes"). Samuelson was swimming against the tide on this one. I think Abba Lerner disagreed with him too, although I'm still hunting that source down. William Beveridge is unclear on what he thinks in the book of his that I have and was reading last night, but he seems like he might disagree with Samuelson too. You know who agreed with Samuelson and who also expected a post-war depression? Friedrich Hayek. I don't blog at "Cafe Samuelson", but Russ still blogs at "Cafe Hayek" - yet for some reason we still have to deal with this Samuelson/WWII nonsense as apparently definitive of what we think every single time we have this discussion. Can we bury this please?


  1. Great post.

    "You know who agreed with Samuelson and who also expected a post-war depression? Friedrich Hayek."

    Do you know where he said this?

  2. While I agree with you Daniel, I've got a question. You say you have a lot of experience in statistics. How good is your training in mathematics? Can you do differentiation and integration in calculus? What about differential equations?

  3. "what evidence could you imagine that would dissuade you from supporting massive government spending?"

    I think the answer is pretty easy: high interest rates on government debt, leading to crowding out effects. Absent that, our case is strong.

  4. Blue Aurora - less than many grad students in economics, but I hit all the bases you mention. All calculus is covered, as is partial and ordinary differential equations, and real analysis. I've been getting a crash-course in some topology and metric theory this semester too.

  5. Daniel, can you give us more about your Hayek claim? Also (but less important to me), can you show where Keynes et al. thought the economy would be fine after the war? If you covered this in earlier post(s) I missed it.

  6. You can also add Lawrence Robert Klein (Nobel prize winner) to the list of prominent Keynesians who explicitly said no depression would follow after WW2.

    Bob, for Keynes see

    I think I now remember reading what Daniel is referring to regarding Hayek, but I can't remember where I read it.

  7. On Hayek - LK has blogged on it a couple times (here for example: / Obviously he says it for different reasons than Samuelson. It’s during one of his interviews from the 80s. He said he expected the inflationary boom of the war to end in a crash, and failed to anticipate “that the inflationary boom could continue for two decades” – which as LK points out is a weak answer because the two decades after the war were not inflationary at all.

    It’s confusing because he also says “I didn’t think we’d slip into a depression”, but in the context of saying that he thought the inflationary boom would end it’s clear that what he means is that the war set up another boom bust cycle that was about to bust.

    I don’t know if he ever wrote any of this down at the time – that is all Hayek’s account of what he thought in a later interview. If you come across anything he actually wrote in the 40s I’d be interested in it.

  8. What's incredible about this whole Samuelson thing continuing to circulate is that Alvin Hansen (the "American Keynes") provided an optimistic view of the post-war period in the chapter immediately before Samuelson's chapter in the Harris volume that everyone quotes! So to even get to Samuelson to quote him you have to pass over an optimistic reading of a Keynesian that was even more famous at the time.

    Not only that, but the thing that Samuelson repeats in his chapter (that nobody ever seems to quote) is that most people are optimistic about the post-war prospects - and he's frustrated with that because he thinks they're ignoring real risks.

  9. Daniel, for what it's worth, after reading that Hayek interview (from LK's post) I don't think it's accurate to say, "You know who agreed with Samuelson and who also expected a post-war depression? Friedrich Hayek." I'm not saying you were lying, and I understand what makes you say that, but I don't think it's accurate. If an astronomer expected solar flares would cause a worldwide calamity in 1946, it would be rather misleading to say, "You know who agrees with Samuelson on a post-war depression? This astronomer."

    Also, you and LK don't know what Hayek means by an inflationary boom. He thought 1925-1929 was an inflationary boom. But you guys would say it obviously wasn't, since CPI was stable. So you're using different definitions of "inflation." Maybe your definition is better, but you didn't blow up Hayek's point by referring to CPI. (Also, LK has a weird notion of low and subdued inflation in the post-war period. Yes, it's low and subdued compared to the ravages after 1968.)

  10. The inflation point I'll grant you. But I'm not sure what you're talking about with respect to the astronomer and their lack of comparability. You mean just because they had different understandings of the business cycle?

  11. @Daniel Kuehn: I see. How about mathematical logic? Are you covering any of that at American University?

    The reason I ask is because Michael Emmett Brady once stated that you need at least an advanced understanding (recommended at the undergraduate level) of mathematics in order to understand "An Investigation of the Laws of Thought" by George Boole or "A Treatise on Probability" by John Maynard Keynes. Dr. Brady also once said his undergraduate major's concentration was in "Mathematical Logic", so I think he has a solid understanding of the Boole/Keynes connection in mathematics.

    I believe I've shown it to you before, but here's his "Road Map" to understanding the upper and lower bounds of probability, which comes from Keynes's mathematics fellowship treatise-derived work, "A Treatise on Probability". It's only nine pages long.

  12. Hi Daniel, I also found Roberts' question interesting and I also like your response. I used them as examples for an own comment on the science and ideology issue:

  13. Daniel, two things made me say that it was inaccurate to say Hayek expected a postwar depression:

    (A) He explicitly denied that he expected a depression.

    (B) In the context of your post, you make it sound like Hayek thought it was the same mechanism. I actually held open the possibility that Hayek said a massive shift in government spending could lead to a fall in MV and then with sticky wages blah blah blah. I had no idea you meant that Hayek thought an ABC was in progress.

    I understand your broader point, that if pro-Hayek people like Russ Roberts are going to zing Samuelson, then why aren't they zinging Hayek? I'm not just saying, in the context you made it sound like Hayek was specifically tying his prediction to the end of the war.


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