(And as one of the commenters to Mario's post points out, don't miss this related column by Niall Ferguson.)
Rizzo, and Ferguson, on Krugman
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(And as one of the commenters to Mario's post points out, don't miss this related column by Niall Ferguson.)
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{ 18 comments }
Interesting posts Don!
Haha – I think Krugman would also argue that until recently he and others who unapologetically claimed Keynes was the heretic! Ah well – dominant theories come, get discredit, refine themselves during their time in the wilderness, and come back more convincing than their original incarnations.
I'd encourage everyone to actually go through and read the whole piece from the New York Review of Books, though. It's very interesting. And I think Krugman has a point at least insofar as a lot of economists lately seem to be talking past each other without even realizing it. He's famously called it the "Dark Age of Macroeconomics" where "freshwater" departments act like Keynes never existed and "salt water" departments act like there's nothing but Keynes. I think that's probably overstating the point a little too much, but at it's base I think it is an interesting and correct insight. Ferguson may have been aware of what the General Theory says, but he seemed perfectly willing to write it off as a historical curiosity.
Recent news on Treasury yields suggest it could be time to start winding down some of the expansionary monetary policy. But that doesn't change the fact (indeed, Ferguson seems to IMPLY it in crediting Bernanke with preventing a second Great Depression) that the much feared liquidity trap was and is a real possibility, and therefore that Krugman's rebuttal to Ferguson at least deserves a hearing.
I think any chatter about "Ferguson got it right" or "Krugman got it right" at the forum is much like what Fenyman said about quantam mechanics – if someone claims to understand it, they don't. We don't know yet exactly who is right, at least at this point – but both stories are very plausible and responsible economists should read both of them eagerly.
Very, very interesting post Don.
http://www.youtube.com/watch?v=2Imv8s9wqn0
He only talks about financing the debt at the beginning of this – and he's not saying that interest rates won't rise as a result – but this clip should caution people against assuming some great Krugman/Ferguson divergence.
At the bottom of the Ferguson column you'll find this:
The writer is Laurence A. Tisch professor of history at Harvard University and author of The Ascent of Money (Penguin)
I don't think Ferguson wrote the column.
MnM,
What makes you think the column was not written by Niall Ferguson?
Here is what Niall's own website says about him
"Niall Ferguson, MA, D.Phil., is Laurence A. Tisch Professor of History at Harvard University and William Ziegler Professor of Business Administration at Harvard Business School. He is also a Senior Research Fellow at Jesus College, Oxford University, and a Senior Fellow at the Hoover Institution, Stanford University.
"
link here
MnM – it's an honorarium attached to the professorship
Oh, so it should read:
The writer is the Laurence A. Tisch professor of history at Harvard University and author of The Ascent of Money (Penguin)
Or perhaps "a…professor…"
Got it. Thanks for the clarification S Andrews and Daniel Kuehn.
What Daniel said: anybody who claims to understand the monetary system probably doesn't.
I do think Krugman has a point when he says:
Henry Hein -
I agree with that too, although I'm always loathe to bring it up here because this crowd is fairly sincere in their frustration with Bush as they are with Obama.
It doesn't mean he doesn't have a point on that, though, as a criticism of other (more mainstream, less Cafe Hayek) critics. I think the answer is that countercyclical fiscal policy is appropriate in my mind. I'm not unconcerned about deficits, but I'm a lot more comfortable with large deficits in downturns than during Bush years, sure! You occassionally also hear the corrolary of this – that if we're comfortable with Obama's deficits why did we whine so much about Bush's? The eminently obvious answer is that not all deficits are created equal. A deficit to fund two wars and tax cuts during a period of economic growth is a very different creature than a deficit during the largest downturn since the Great Depression. The only way to miss that difference is if you don't believe in countercyclical spending in the first place – which largely excuses this crowd.
And I must say, it's something I always appreciate not only about Cafe Hayek but also about places like Cato. There is no whiff of partisanship around these places – they are consistent. I think they're wrong and naive on a few issues, but they aren't politically opportunistic, and that's always nice.
I think it's a tremendous leap in logic to believe that an economist who supports tax cuts is in favor of large deficits.
It's a non-sequitir; and possibly a special case ad-hominem.
MnM -
Why?
Deficits and tax cuts are both pretty context specific. I don't know who isn't "in favor" of them under some circumstances… the question is under what circumstances.
Daniel,
I'm not entirely certain how to answer. It doesn't seem to follow from "I'm in favor of tax cuts" that "I'm also in favor of large deficits".
Taxing and spending are different. Making an inference about one based upon knowledge of the other seems like poor reasoning to me.
I might be able to give you a better answer than the above if I understood your rationale for linking the two…
"…don't miss this related column by Niall Ferguson…"
Why? So we can read how this historian believes that the bailouts, TARP, and the stimulus plan saved our economy? He needs to stick with history.
Tax cuts are a much better stimulus than government spending—there is much less lag in the stimulus (if you believe in that sort of thing), and the money will find its way to better places. As for economists who have believed that deficit spending can be mild, there is deficit spending, then there is deficit spending. Borrowing a few hundred billion dollars (or a few percent that is under economic growth and productivity is one thing), but blowing trillions is another. Saying that those who have excused deficits in the past have somehow changed their stripes, ignores magnitude. Hey, my first econ professor was Alan Bliner; was he an inflation dove—yes, but a ten percent increase in the money supply—no!
Tax rates were cut.
After those rate-cuts, the government took in more money. Not… that that is a good thing…
deficits caused by tax cuts
Is this an implicit admission that governments never cut spending?
MnM -
I think we're confusing each other. I'm not saying that support for tax cuts imply large deficits at all. I thought you were saying you can't support both simultaneously.
What I'm saying is that there's nothing inconsistent about supporting both, but you don't necessarily have to support one if you support the other. The point is, both are very context specific. Sometimes tax cuts are responsible, sometimes they're not. Sometimes deficits are responsible, sometimes they're not. Did you think I said that you have to always support both??
Albatross -
The generally accepted take on this is that tax cuts are weaker stimulus than spending, but they do get out into the economy quicker – which is why most people were advocating a combination of spending and tax cuts in the stimulus package.
I am fairly new to this blog and love it. Have read a decent amount of Austrian scholarship and have a question. I am now wading through the General Theory of EIM and find it very difficult to understand. Is this usual? Should I keep reading it? Cliff-style notes?
Keep reading it Jeffrey!
I think the beginning is harder because he's setting things up and defining his terms, and that was just a very different process back in 30s than what it is today. As you move through to the actual analysis it reads much more smoothly. He's a great writer – a lot of that dry Victorian wit that makes it fun to read.
I've always heard the Austrians are a lot more dense and much harder to read through, although now that I've come on here I've heard people say exactly the opposite! I think Hayek is probably better for general consumption than some of the others.