Tuesday, January 24, 2012

Bob on 1920-1921

I'm running out now, but please see Bob Murphy on the Krugman post. He's absolutely right about the way I interpret his Freeman article - I'm going to check out the process of getting that corrected. RAE article should be free of this (thanks again to some careful review by Bob).

24 comments:

  1. Wherever there is a criticism of Austrians, I'll be there.

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  2. "Bob MurphyJan 24, 2012 08:13 AM

    Wherever there is a criticism of Austrians, I'll be there"


    Then you'd better do something about your plainly false assertions about 1920-1921. The grevious errors in the passage you cite from your book:

    (1) “As with the evaluation of Hoover’s high-wages policy, his high-federal-budget policy can be usefully contrasted with the depression occurring at the end of Woodrow Wilson’s watch.”

    There was no depression.
    According to Romer, real GNP contraction was 3.47% from 1919 to 1921. By contrast, a depression is where real output falls by 10% or more.
    Balke and Gordon’s figures show a GNP decline of 5.58% from 1920–1921 – a moderate recession, but still no depression.

    Figures here:

    http://socialdemocracy21stcentury.blogspot.com/2011/12/depression-of-19201921-austrian-myth.html

    1920-1921 wasn't like 1929-1933: there was no serious financial crisis, mass bank failures, or large collapsing asset bubble financed by large amounts of private debt (as there in fact was in 1929-1933). There was consequently no debt deflationary spiral in 1920-1921.

    (2) “We already know that Hoover faced 20+ percent unemployment after the second full year of his Keynesian stimulus policies.”

    Hoover did not engage in a countercyclical Keynesian stimulus designed to end the depression. Small increases in total government spending by trivial amounts in the face of massive GDP collapse do not constitute serious Keynesian stimulus.

    http://socialdemocracy21stcentury.blogspot.com/2011/05/herbert-hoovers-budget-deficits-drop-in.html

    (3) “Wilson/Harding, on the other hand, was Krugman’s worst nightmare, taking the axe to federal spending in a way that would have given even Ron Paul the willies, and during a depression to boot!”

    There was no depression, see (1)

    (4) “But Occam’s Razor recommends the simplest answer staring us in the face: the old-school economic wisdom was correct, while the newfangled Keynesian remedies proved disastrous.”

    There was no Keynesian countercyclical stimulus designed to end the depression in fiscal years 1929-1933.
    And as for austerity it did nothing much for a robust recovery in the 1890s.
    The moderate recession of 1890s caused high double digit unemployment for nearly a decade:

    Year Unemployment rate
    1892 3.72%
    1893 8.09%
    1894 12.33%
    1895 11.11%
    1896 11.965
    1897 12.43%
    1898 11.62%
    1899 8.66%
    1900 5.00%
    (Romer 1986: 31).

    http://socialdemocracy21stcentury.blogspot.com/2010/10/us-recession-of-19201921-some.html

    This is empirical evidence that flatly and blatantly contradicts your paeans to the free market. Furthermore, there was no central bank in the 1890s inflating the money supply. So you'd expect performance to be even better than 1920-1921, when a central bank did exist.

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  3. Further errors:

    In his Cambridge note, Daniel refers matter-of-factly to the “austerity” under Herbert Hoover. Huh? In the last fiscal year that can be attributed to Hoover, the federal budget deficit was 4.5% of GDP.”

    Government spending as a percentage of GDP does not tell you whether fiscal policy is actually expansionary or contractionary. Parroting "federal budget deficit was 4.5% of GDP" is pointless data unless context is given.

    In fiscal year 1930, Hoover actually ran a budget surplus, not a deficit. Federal policy was contractionary in this fiscal year.

    In fiscal year 1933, total federal spending was cut in relation to fiscal year 1932. Hoover introduced the Revenue Act of 1932 (June 6) which increased taxes across the board and applied to fiscal year 1932 and subsequent years. These were highly contractionary measures, and these two policies are the very antithesis of Keynesianism.

    So all you’re left with is fiscal year 1931 and 1932: Hoover did indeed raise federal spending in these years (especially in 1932, but then raised taxes at the same time), but it was woefully inadequate. In no sense do these miserable increases compared to the scale of the GDP collapse contradict Keynesian economics. Once you factor in state and local austerity and surpluses total federal spending barely moved.

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  4. Lord Keynes comes once again to the rescue, with his axe to grind with all of his blog posts and massive armada of evidence that he throws at anyone.

    Unfortunately for Lord Keynes, most of this has been discussed already (on his blog, of all places). The gory details can be found in Keynes numerous blog posts:

    "Real US GNP Growth Rates 1870–1913 in Romer

    Real US GNP Growth Rates 1870–1913 in Balke and Go...

    Real GDP and GDP per capita, 1870-1913, Selected N...
    US Real GNP 1945–1973

    Real US GNP Growth Rates 1870–1900 in Romer

    Real US GNP Growth Rates 1870–1900 in Balke and Go...
    US Real GNP Growth in the 1880s

    Why was US Unemployment so High in the 1890s?

    The US Recessions of the 1890s in Balke and Gordon...

    US Real GNP Estimates 1869–1879"

    All of which are from November of 2011. In my criticisms of these figures, I noted that with Romer and Balke and Gordon's revised GNP estimates off of Lebergott, the Panic of 1893 and the subsequent recession was much lighter in terms of GNP decline than Kuznet/Kendritch initially suggested. As a result, Romer's revised and Lebergott's unemployment figures, which are based partly off of such massive declines, are overstated. Lord Keynes and I went back and forth, each step of the way Lord Keynes starting a new blog post until we eventually got to the supposed Keynesian "Golden Era" of 1945-1973.

    As for the Depression of 1920-21, on a somewhat interesting note, couldn't the "softness" in GNP decline be attributed to the decline in government taxes and spending? I haven't looked at the facts fully yet, but this is an important caveat.

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  5. "the Panic of 1893 and the subsequent recession was much lighter in terms of GNP decline than Kuznet/Kendritch initially suggested. As a result, Romer's revised and Lebergott's unemployment figures, which are based partly off of such massive declines, are overstated."

    (1) ALL GNP figures for the 19th century are estimates, open to questions about method and accuracy.

    (2) No matter what unmeployment figures you use, unemployment was a disaster in the 1890s: something went badly wrong with the US economy in these years.

    (3) I already answered your criticisms: it is clear that the US was a newly industrialising economy in the late 19th century, and in this respect was very much like modern China.

    All your nonsense refuted here:

    http://socialdemocracy21stcentury.blogspot.com/2012/01/us-unemployment-in-1890s.html

    The 1890s give no support at all to the view that austerity brings prosperity.

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  6. Lord keynes once again decides to take the battle to his own blog page, I have posted a response there. Notice how Lord Keynes initially called the 1890s a very bad depression with unemployment as high as 18% and calamitous GNP contractions, now we have unemployment peaking at only 8% and mild GNP contractions ON PAR with 1920 to 1921

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  7. "Notice how Lord Keynes initially called the 1890s a very bad depression with unemployment as high as 18% and calamitous GNP contractions"

    I said no such thing. Even in my post a long time ago in early 2011 I never referred to it as a depression and gave Romer's revised unemployment estimates:

    http://socialdemocracy21stcentury.blogspot.com/2011/01/us-gnp-estimates-in-recession-of-1890s.html

    You are either mistaken or lying.

    "now we have unemployment peaking at only 8% and mild GNP contractions ON PAR with 1920 to 1921"

    By Balke and Gordon's figures, the US had a DOUBLE DIP recession in the 1890s: from 1893–1894 GNP fell by 2.96%, with a recovery in 1895, but a further recession in 1896 with real GNP falling by 2.27%

    So you can't even get that right.

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  8. "Lord Keynes" is just arguing over word definitions, nothing more.

    Murphy says the economy was in depression. "Lord Keynes" says "No it wasn't! I define a depression as a drop of 10% real GNP!"

    Murphy says Hoover engaged in historically unprecedented government spending programs. "Lord Keynes" says "No he didn't! I define "SERIOUS" government spending programs as more than whatever existed!"

    How utterly hilarious.

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  9. Yes Lord Keynes, there was no central bank in the 1890s, but that doesn't indict "free markets" because the US money supply process was still very much affected by the federal regulations of the National Banking System that made it difficult for national banks to respond to increased in the demand for money, especially those associated with harvest season or sectoral problems (e.g. the railroads in 1893). The panics of 1893 and 1907 were classic examples of government intervention (and in the name of financing the Civil War no less) gone bad.

    Those of us who actually know the economic history of the period are happy to point out the flaws in your arguments anytime you'd like.

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  10. "Yes Lord Keynes, there was no central bank in the 1890s, but that doesn't indict "free markets" because the US money supply process was still very much affected by the federal regulations "

    This is a straw man. I don't claim that the 1890s was a Rothbardian fantasy world: I said it was relatively more laisez faire in comparison with 1920-1921 . And that is correct.

    The anarcho-capitalist conception of the "pure free market" is an imaginary, fantasy world, as utterly non-existent as Marx's pure communist, classless society. Yes, you can scream all you want that America in the 19th century wasn't an imaginary anarcho-capitalist system. But then why bother to appeal to it as if it vindicates your Austrian economics? Why appeal to 1920-1921 when it was even further from your anarcho-capitalist fantasy? And when the Fed rate cuts must have caused (by the logic of your own trade cycle theory) just another unsustainable malinvestment boom in higher order capital goods?

    In the real-world capitalism, the money supply is endogenous, and fractional reserve banking isn't frauduent.

    "Those of us who actually know the economic history of the period are happy to point out the flaws in your arguments anytime you'd like."

    You're welcome to point out the alleged flaws in my most recent post. But I doubt you will. Talk is cheap.

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  11. If anybody is still reading this, I point you to the fun exchanges Lord Keynes and I are having at my blog on these matters. For this crowd, I note with irony that Lord Keynes is saying we should define depressions based on what happens to real output, not on whether (say) unemployment is in double digits, or farmers see interest rates go through the roof. Production over People is Lord Keynes' motto! I am a rabble-rousing Austrian on these matters; I say we're in a depression right now.

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  12. "For this crowd, I note with irony that Lord Keynes is saying we should define depressions based on what happens to real output, not on whether (say) unemployment is in double digits"

    The technical definition of a depression is where the value of real output falls by 10% or more.

    I do deny that unemployment is an important measure of the health of an economy. You're making things up.

    "I am a rabble-rousing Austrian on these matters; I say we're in a depression right now"

    We are in a period of severe unemployment where real GDP is far from potential GDP: in short, a shocked economy in the aftermath of a severe recession (analogous to the US in 1934-1939).

    You are just using a rhetorical trick by saying "we're in a depression right now": you imply that real output is still falling and that we had no quarters of positive GDP growth.

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    Replies
    1. LK,

      Where are you getting your technical definition of a depression from?

      According to this wikipedia page, there is no agreed upon "technical definition" of a depression among economists;

      http://en.wikipedia.org/wiki/Depression_(economics)

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    2. (1) Yes, I know it is often said there is no strict and formal definition, universally used. But that just reinforces the need for defining the term. Anyway, in my experience, the definition "where value of real output falls by 10% or more" is widely used by economists and in textbooks.

      E.g.,

      "There is no formal definition of a depression ... An informal definition is an economic contraction in which output falls by more than 10 percent."

      Todd A. Knoop, Recessions and depressions: understanding business cycles

      "A severe (GDP down by 10%) or prolonged (three or four years) recession is referred to as an economic depression"

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

      (2) my point is crucial: if you are going to refer to "depressions" then define what you mean by it carefully and use it consistently.

      (3) it is misleading to refer to a situation where real output is growing as "depression" or "recession". Logically these words refer to periods where real output falls/contracts. People like Murphy are robbing the words of proper meaning for rhetorical effect.

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    3. "People like Murphy are robbing the words of proper meaning for rhetorical effect"

      Right. Especially when the 1920-21 depression has been historically referred to as...the Depression of 1920-21.

      http://en.wikipedia.org/wiki/Depression_of_1920-21

      Delete
  13. Moreover, I notice you don't respond or reply to any of my actual criticisms of your assertions about the 1920-1921 recession?

    Is this because your can't? Is this an admission of defeat, is it?
    (see how easy it is to dishonestly attribute a view to someone by the straw man fallacy?).

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  14. I usually call 1920-1921 a "depression" because it's always been referred to as a "depression". There is no agreed upon definition. Depressions are just severe recessions.

    If anything, the word "depression" was used in the olden days to talk specifically about sharp price drops (which for a long time was the only thing they had good data on). "Recession" has only come into usage in the age when sharp deflations have not been a major part of our experience of economic hardship.

    I'm with Bob - unemployment absolutely matters, and if I had to pick one sign of a depression/recession I'd pick that. Real GDP depends crucially on things like population growth that may have nothing to do with the economic phenomenon of a recession. For example, Japanese demographics are almost certainly part of the story of their lost decade. But what we really care about is the underutilization of the factors of production. Usually that comes with low GDP, of course.

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  15. "If anything, the word "depression" was used in the olden days to talk specifically about sharp price drops (which for a long time was the only thing they had good data on). "

    That is correct. But we are not talking about what people meant by it in the 19th century, are we. What is requird here is a given definition of depression and then STICKING to that definiton.

    In modern economics, the most widespread technical definition of depression is where real output (real GNP/GDP) collapses by 10% or more. 1920-1921 was not a depression under this definition.

    By adopting Murphy's loose definition of depression, I can claim that virtually the whole 1890s after 1893 was in a depression. Only it wasn't really by the other important metric we: real GNP growth. There was positive GNP growth in 1895 and 1897-1900. What happened was a severe shock to the economy and real GNP falling well below its potential. High unemployemnt persisited for years. This is different sitation from an actual depression (severe fall in output by 10% or more).

    (3) I'm with Bob - unemployment absolutely matters, and if I had to pick one sign of a depression/recession I'd pick that

    I do not deny that unemployment is an important gauge of the health of an economy.

    Murphy is misleading when he refers to the current situation as a "depression" - that strongly implies that real output is continuing to collapse. It isn't, and it's misleading to imply or suggest so.

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  16. Right, I'm not saying we use that definition. I'm saying that the only time it has ever been consistently used is with reference to sharp deflations.

    re: "What is requird here is a given definition of depression and then STICKING to that definiton."

    Which is exactly why I think people are being a little skeptical of your own definition that as far as we can tell you've just made up.

    Where does this definition come from, exactly?

    re: "In modern economics, the most widespread technical definition of depression is where real output (real GNP/GDP) collapses by 10% or more. 1920-1921 was not a depression under this definition."

    You've said this. Where do you get this?

    I personally don't care what's a depression and what's a recession. What's more important, IMO, is:

    1. How much hardship/unemployment/lost output is there (a continuous measure), and
    2. Is there a financial crisis associated with it, and
    3. Is there a liquidity trap associated with it

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  17. "Which is exactly why I think people are being a little skeptical of your own definition that as far as we can tell you've just made up"

    >re: "In modern economics, the most widespread technical
    > definition of depression is where real output (real GNP/GDP)
    > collapses by 10% or more. 1920-1921 was not a depression under > this definition."

    You've said this. Where do you get this


    Some sources, both from academic specialist, business, and popular writings:
    (1)
    "There is no formal definition of a depression ... An informal definition is an economic contraction in which output falls by more than 10 percent."

    Todd A. Knoop, Recessions and depressions: understanding business cycles, p. 14.

    (2)
    "If the GDP drops by more than 10 percent, it signals the beginning of a depression. "
    Jason Porterfield, How a Depression Works, p. 13.

    (3)
    "Some economists say that if gross domestic product were to decline at a 10 percent or greater annualized rate for some unspecified period of time, that would be a depression."

    Richard A. Posner, The crisis of capitalist democracy, p. 218.

    (4)
    "Currently, the term “depression” usually refers to any economic downturn in which real GDP declines by 10 percent or more

    Susan U. Raymond, Nonprofit Finance for Hard Times, p. 100, n. 2.

    (5) Even in the Wikipedia entry (which I hesitate to cite):

    "Another proposed definition of depression includes two general rules: (1) a decline in real GDP exceeding 10%, or (2) a recession lasting 2 or more years."

    http://en.wikipedia.org/wiki/Depression_%28economics%29
    -----

    I could find you many other examples in specialist economic literature where depression is defined in this sense.

    I do hope you reconsider accusing me of having "just made up" my definition of a depression.

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  18. Oh OK - so it's just a proposed definition. I was being too flippant with "just made up". This is something that few people have said, but that you wouldn't find as an academic standard for talking about downturns. As far as I can tell only one of those guys is even a macroeconomist.

    All people are telling you, LK, is that it's not some kind of standard definition that anyone is bound by, so nobody should be brow-beaten for using the word "depression" in this case.

    The fact that none of us have ever heard of that definition should be telling.

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  19. "The most common definition of a depression is a long period in which GDP or consumption declines at least 10%"

    "Obama's Economic Fish Stories," July 21, 2010
    http://online.wsj.com/article/SB10001424052748703724104575378751776758256.html

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  20. And, if you want to play dueling citations I'm sure we could find more people saying there isn't a solid demarcation than we could saying it means a 10% decline.

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  21. I dont think the differences between are very great.

    No, I am not interested in a "dueling citation". I accept fully that other economists use "depression" loosely or in a sense different from the one I cite.

    "All people are telling you, LK, is that it's not some kind of standard definition that anyone is bound by, "

    (1) I accept people might not feel bound by it. I accept even economist have no universal, strict definition.

    (2) In that case, I again say: give your definition of "depression" and then consistently employ that definition, and see where it leads you.

    (3) In the case of Murphy, by a consistent use of his "definition" of depression (merely high unemployment) I can claim that many years in the 19th century the US economy was in repeated depression, even when it had positive GNP growth. I could demonstrate that most capitalist economies outside of 1945-1973 were in near continous depression
    because they had high involuntary unemployment. But by that point I have robbed the word of useful meaning: something is wrong with Murphy's self serving definition, and this the point I am making.

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