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Krugman and Other Stuff

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I recently found myself on Paul Krugman’s bad side [2] by suggesting that his ideological bias informs his views on economics in the same way that my biases affect my views on economics. My point is that we all have a tendency to view evidence and the world around us through various preconceived notions. I don’t think it’s a coincidence that most interventionist economists favored Obama’s $800 billion stimulus package. I don’t think it’s a coincidence that they are pretty confident that it worked. Similarly, those of us who want smaller government opposed the stimulus package and see it as a failure.

When confronted with evidence that conflicts with either our ideology or our stance as policy advocates or just our past claims on how the world works, people on all sides of those divides find ways to dismiss it or explain it away. Krugman claims he is a Keynesian who favors fiscal stimulus because the evidence is convincing. But there are Nobel Prize winning economists or of similar quality who find the evidence unconvincing. How does that work? How can both sides find the evidence convincing? Is it possible that there is too much evidence which allows advocates on both sides to pick and choose what they find convincing and what they find unconvincing?

Krugman will concede [3] he has made some bad predictions about the expected scope of the housing crisis or what moves bond prices. But I cannot remember him ever admitting that there is evidence against the power of fiscal policy to fight recession, just to take one example of a fundamental principle that underlies his worldview.

The question each of us must ask is whether there is any evidence that might dissuade us from our position on Keynesianism or the minimum wage or any other contentious policy issue.

It seems pretty clear that we are mostly impervious to evidence that challenges our most fundamental principles about how the world works. Here are a few examples from Krugman’s writing that illustrate the problem. I pick on him only because he appears to believe he is impervious to bias or at least writes as if he is.

When there was an increase in the payroll tax in January 2013 and the sequester reduced spending beginning in March 2013, Krugman wrote [4] that monetary policy, which was expansionary, would not be able to offset the impact of fiscal policy:

…as Mike Konczal points out, we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens…

Sorry, guys, but as a practical matter the Fed – while it should be doing more – can’t make up for contractionary fiscal policy in the face of a depressed economy.

When the economy grew more quickly in 2013 than in 2012, the test was no longer a test. Here is Krugman in January of 2014:

Incidentally, these other factors are why I don’t take seriously the claims of market monetarists that the failure of growth to collapse in 2013 somehow showed that fiscal policy doesn’t matter. US austerity, although a really bad thing, wasn’t nearly as intense as what happened in southern Europe; it was small enough that it could be, and I’d argue was, more or less offset by other stuff over the course of a single year.

Strange answer. As Scott Sumner pointed out [5], it wasn’t that growth didn’t collapse. The economy grew faster, particularly in the 3rd and 4th quarter when the sequester took effect. But the key is the phrase in the last sentence–the reference to “other stuff.” Krugman’s answer is that if it weren’t for “other stuff” the economy would have collapsed.

There is always “other stuff.”

When it’s convenient, Krugman ignores the “other stuff.” (We all do.) So according to Krugman, the economy of Kansas is struggling [6] because the governor cut taxes. One variable explains everything. We can ignore the other stuff. Or Iceland is doing better than Ireland [7] because Iceland didn’t listen to those foolish austerians and rejected the fiscal austerity that Ireland fell prey to. One variable, fiscal policy, explains everything. When it’s convenient, when it confirms our worldview, the other stuff can be ignored. More troubling for Krugman’s claims is that it appears that Iceland actually embraced austerity [8] big time—raising taxes and cutting spending [9]. How will Krugman explain Iceland’s success? Must be other stuff. But there is always other stuff. The world is a complicated place. I would suggest that our job as economists is to always remember the existence of other stuff, all the time and not just when it’s convenient.

So my point for Krugman and others is that too many macroeconomists suffer from the post hoc ergo propter hoc fallacy—after this, therefore because of this and ignoring other causal factors. We are all prone to confirmation bias, interpreting the events of the word and sophisticated econometric studies as all on our side. I think government regulation is too intrusive. Does that explain the mediocre recovery from the Great Recession? Convenient for my worldview as an explanation, but very unproven. Is there evidence? Sure, but it is nothing close to decisive. It’s just a correlation. This is a problem that afflicts all parts of the ideological spectrum. An honest economist should concede that the world is a complicated place and that teasing out causality or the impact of one variable on a massively-complex economy is a fool’s game.

Nassim Taleb calls it the narrative fallacy, the tendency we all have to construct a consistent narrative by emphasizing some aspects of the world around us while ignore others. Jonathan Haidt uses the metaphor of the elephant and the rider. The elephant is our heart, the rider, our mind. The elephant usually goes where it wants but it is not so hard for the rider to convince himself after the fact that that was indeed the direction he was headed all along. Macroeconomists and economists in general would be wise to read Taleb and Haidt.

Krugman misinterpreted me. Maybe it’s my fault. But he interpreted me to be saying something cynical—that macroeconomists pretend to have certain theories in order to advance their ideologies. I don’t think that’s true. The reality is scarier. Most of us, including myself, have trouble even imagining that the other side could be right. After all, all the evidence is on my side! But it isn’t true. The evidence is a mess leaving each of us free to cherry-pick what sustains our worldview be it ideological or philosophical or just consistent with our flavor of economics.

This does not mean that evidence is irrelevant or that we come to our views without any evidence at all. There are lots of different kinds of evidence. There is logic and intuition and experience. There are facts that matter. But we should stop pretending macroeconomics is anything remotely like the physical sciences where models can actually be tested and implemented. There is too much other stuff going on at the same time that we cannot control for. Economics is more like history where different theories are supported by various facts and evidence but few facts or studies or natural experiments, if any, are decisive. This isn’t cynical. It’s honest.

Noah Smith’s thoughts on this issue are here [10].

Adam Ozimek’s thoughts are here [11] and here [12].

My earlier response to Krugman on a related attack is here [13].

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