Nameless Examples

From Paul Krugman,

We currently have a deeply depressed economy [and] will probably have a depressed economy through 2013 as well, if not beyond.

The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.

OK, I remain uncertain, albeit skeptical, on the issue of stimulus and open to persuasion, so I’d love to look at some of these many examples. Unfortunately, Krugman doesn’t actually mention any of them; he only says they exist. No specific cases. No authors. No linkies. No hints. Nuthin’.

It sounds mysteriously like that vast number of civilizations that collapsed because they abandoned traditional marriage. I’m always hearing that there’s a long list, but nobody’s ever given me an example of that, either.

And I’m not the only one who wishes Krugman would be a little more specific (check out his link to Alesina’s counter-factual findings).

Advertisements

About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
This entry was posted in Economical Musings. Bookmark the permalink.

11 Responses to Nameless Examples

  1. Michael Heath says:

    Wasn’t the U.S. in 1937 one example? I’m asking, not telling; it’s been a longtime since I took economics. James – don’t you have an economic text which covers this topic?

    The prime experiment which could provide counter-evidence to mainstream economists’ understanding of recessionary economics is the U.K.’s current policy under David Cameron, which has the U.K. hoping to increase confidence and demand with contractionary policies. This increase in confidence is supposed to come about by businesses perceiving that demand will exist in the future because the U.K.’s government has the discipline to manage its debt and therefore not plunge the U.K. into a financial meltdown in the next dip in the business cycle.

  2. James Hanley says:

    Michael, That one’s disputed. Stimulus advocates argue it was caused by cuts in government spending (e.g., cuts in numbers of people employed by the WPA), but Friedman argued that the Fed reduced the money supply through an increase in bank reserve requirements. Each side has an argument, but since both these things happened about the same time, I don’t know how we could tease out their differing effects. A more marginal viewpoint is that the economy was recovering before 1937 in part because the Supreme Court was striking down FDR’s interventionist New Deal policies, but in 1937 it began upholding those policies, scaring off investors. So I think too much was going on in 1937 to make a confident argument about any of those factors being monocausal.

    Let’s hope, for the U.K.’s sake, if not for the sake of theory, that their experiment succeeds. Either way it bears close watching.

  3. Matty says:

    Great, we’re not just burning public services and antagonising those who deliver them by messing up their pensions, we’re also going against mainstream economists. Now I feel so much better.

  4. James Hanley says:

    Doing some reading around the web, it appears that Germany is a counter-example to Krugman’s non-specified examples. Obama, Summers and Geithner begged Merkel to increase spending, but instead Germany reduced their budget with a plan that was 60% spending cuts and 40% tax increases, and it seems to have come out of the recession more strongly than the U.S.

  5. Krugman reminds me of Apple: wildly exciting but buggy as all hell. I’ve noticed that people who like Apple also tend to like Paul Krugman. Coincidence? Probably.

  6. Lance says:

    James,

    Your point – counter point with Michael Heath seems to be exemplary of the postmortem “just so” analysis that I find typical of economic theory.

    This may very well be the state of the science since no independent trials can be conducted with a “control” economy to be used as counter example.

    Still, If find this kind of retro-analysis to be fraught with the opportunity for confirmation bias. I’m not saying that you or Micheal are actively engaged in purposeful deception, just that in the analysis of such complex systems there are multiple lines of “evidence” that can track well to one or another theory while another set of parameters supports a differnet, perhaps exclusionary, hypothesis.

    I suppose that macro-economics is so intertwined with political science that subjective interpretation is inevitable even when the investigators do not do so intentionally. Of course I suspect that many of them are not so pure in their objectivity. Mr. Krugman comes to mind.

  7. Lance says:

    Apologies to Mr. Heath for misspelling Michael in the second instance, I even spell checked the damn post but I apparently posted the un-spell checked version.

  8. James K says:

    The sheer inconsistency of the evidence is one reason I’m Keynesian-agnostic. The problem is that its exceedingly hard to generate good data on macroeconomic phenomena.

  9. Mr. Hanley,

    You may be right about the causes of the “Roosevelt recession,” but I think any example will be difficult because causality is hard to establish, a point I think Lance was making above. I do have a question about the monetarist point–that the fed’s reduction of the money supply may have helped bring on that recession–….is that the same thing as “reducing spending”? It seems to me that New Deal style aid was intended to help the “Demand” portion of the economy by, effectively, interjecting more money into the economy. In other words, maybe (assuming I’m not talking out of my —), monetary policy and government aid, in this case, were two aspects of the same phenomenon.

  10. ppnl says:

    I don’t no crap about economics but as I understand it you stimulate the economy by increasing the money supply. This is usually done by the fed lowering interest rates. This can also be done by government spending. Now as I understand it fiscal policy is considered a blunt instrument and monetary policy is much preferred. But still cutting spending seems to work against the feds attempt to inject money.

    The debt problem cannot be solved by cutting spending anyway. Economic growth is the only thing that will solve it.

  11. James Hanley says:

    Pierre,

    No, reducing the money supply does reduce total spending, but it’s not the same as reducing government spending. Reducing the money supply makes it impossible to spend as much, shrinking the economy, simply because there’s less total to spend. Reducing government spending doesn’t result in less total money available to spend–the money is still there, it’s just that government has stopped spending it. The debate is what happens then: Keynesians say total spending drops because the private sector doesn’t pick up the slack (because, in a recession, there’s too little aggregate demand); Monetarists say total spending doesn’t drop because the private sector picks up the spending the government has dropped (although they might agree that there could be a short time lag in that process).

    So, although this is a bit simplified, a Keynesian might answer a qualified yes to your question, but a monetarist would answer a qualified no. At least that’s how I understand it.

Comments are closed.