Monday, August 12, 2013

Why I am still an optimistic free market Keynesian

Krugman and Sumner have been tossing around reactions to the policy failures associated with the crisis. There have been policy failures, but I don't understand why some people are such pessimists about it.

I'm an optimist because I can imagine as a very realistic prospect at least two other worlds:
1. A world where ARRA failed and QE was never tried - a really awful, awful world that could have happened but didn't, and

2. A world where ARRA was twice as big and spent more wisely and where QE was bigger, had better forward guidance, and IOR was scrapped - a better world.
Of course, we got the world we got, which carries frustrations with it but also could be worse.

Market monetarists tend to be very dismal either because they define success as adopting their particular policy instrument (rather than a particular monetary stance), or because they define the monetary stance according to macroeconomic outcomes and not relative to a plausible counter-factual policy. I have some sympathy with the latter - we're clearly "tight" now. But I have little sympathy with defining the policy stance itself by whether or not the desired outcome is achieved - this "do or do not, there is no try" crap. That makes for good movies but it's dumb practically speaking. We can definitely try things that fail and you know what - we've still tried that thing.

Keynesians are somewhat better on this count, so it's unfortunate that Krugman is such a downer about it. Keynesians have output gaps, Okun's law, and multiplier estimates that make it easier to avoid the Yoda garbage and just say "you know what - it could have been worse and at least we got a couple hundred billion in". Kind of like the New Deal in fact. It didn't do much, as we all know, but Americans still radiate with pride decades later over the work of the WPA and the CCC.

Interestingly enough the roles are switched here - Krugman is talking pessimistic and Sumner is talking optimistic. But generally speaking I find that market monetarists are more downers than the Keynesians because of the difference in how they define their goals (Keynesians also think market monetarists have it half right whereas market monetarists seem hell-bent on refusing to take "yes" for an answer from Keynesians on monetary policy).

This is also why I simply don't get the "public choice" argument (I have to put that in quotes for the sake of the dignity of public choice theory) against Keynesianism that says that if politicians are going to botch it up you are somehow obligated to abandon it. I think the actual world is better than the first scenario I described above even though I'd prefer to see the second scenario to both the actual world and the first scenario. It makes exactly zero sense to say that because there are policy failures out there and I can't trust politicians to implement Keynesianism perfectly that it's worthless enterprise. That's like saying because I won't be a completely perfect dad the most sensible thing to do is to never have kids in the first place. Nonsense.

It's very easy to lose perspective amidst the short-run disappointments, but in the big picture there's good reason to stay optimistic and at the very least recognize that it could have been worse and that it's a good thing it wasn't.

15 comments:

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    1. Give up control? I don't think anyone's assuming autocracy here. If so it seems like it would be irrelevant.

      But the point is much simpler than that. What actually happened is better than #1, even though I'd like to see #2. Badly executed public choice analysis says that because public choice problems prevent us from getting #2 the whole Keynesian project is a mistake (i.e. - pursue #1). That makes no sense at all. The actual "failed" policy is preferable to #1.

      My theory incorporates political behavior so I'm not sure what you're talking about. It doesn't necessarily formally model them as agents but then again neither do most libertarian analyses of the impact of inflation!

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    2. re: "Counter-factuals cannot be proved, so I guess you can say pretty much anything you want about what could've or would've or should've been."

      Your second clause doesn't follow at all from your first clause.

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    4. No it does not. But as long as you have rules for evaluating estimates of counter-factuals the idea that "you can say pretty much anything" is very, very wrong.

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  2. http://www.zerohedge.com/news/2013-08-13/hindenburg-omen-strikes-again-biggest-cluster-record

    What a great world we're heading into.

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  3. A "public choice" argument could be that it's harder to get Congress plus the President to agree on something than to get the Federal Reserve board to agree on its equivalent.

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  4. Daniel manages in a Nietzschean fashion to turn every "in spite of" into a "because of". Whatever gets you through the night, I suppose.

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  5. Your Dad metaphor is off. Closer to Keynesians say "anybody kid with an imperfect Dad should be put in an institution" and Public Choice says imperfect Dads beat remote, low-information and low-incentive bureaucrats. Now you see?

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    1. You are completely getting things backwards here. Keynesians say that some kids have imperfect dads but the problems with those dads don't automatically justify a worse outcome of putting them in institutions. Many public choicers (obviously I don't think this is the ideal application) say that because the dad is imperfect there shouldn't be a dad and the kid should be in an institution. I'm saying that you don't trade a second best scenario for a third best scenario just because it's not a first best scenario.

      Now you may disagree with Keynesian macroeconomics, in which case you would rerank the outcomes, but a lot of public choicers say things like "even if Keynesian macro were correct the public choice problems should prevent you from pursuing it".

      If you disagree with Keynesian macro, then that's a macro conversation and not really a public choice conversation.

      You are crossing those two wires there - changing the rank ordering of outcomes and confusing it with the problems that public choice speaks to. Given a rank ordering of outcomes, if public choice leads you to drop a second best for a third best, you're not doing public choice theory right. If you want to talk about the ranking of outcomes that's an entirely different conversation.

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  6. The problem here is definition of default states. You agree that Dad is default and institution is intervention, correct? Yet on economics you flip it and now intervention is default and laissez faire is intervention? Odd.

    Important because the error may lead you to to assume a competence to Keynesian intervention as implicit state-of-nature (note implicit; I think you're making an unconscious assumption here). Fathers as caregivers and laissez-faire have earned default status, both logically and by long empirical experience, such that alternatives deserve strict cross-examination. Keynes and Platonic kids-raised-by-institutions have not earned that status.

    This unconscious assumption may be clouding your conclusions elsewhere.

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    1. If you want to have a discussion about macroeconomics, that's different from a discussion about public choice. You're confusing the two, as you seem to realize in this last comment.

      I prefer not to use analogies with parenting to do my macroeconomics. A contractionary policy is as interventionist as an expansionary policy, just in a different direction.

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    2. You, not I, introduced the metaphor you "prefer not to use."

      But you're missing the deeper point, which is that you start from a lopsided skepticism. You should be as skeptical of your stubborn facts as you (correctly) are of laissez-faire.

      The Fed has, as you know, the best data ("facts") out there. How well did it serve them in '08 and how well might a fact-ignoring Mises have done. That is the question. Maybe better, maybe worse, but you might profit from an even-handed skepticism.

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