Laffer’s Mistake Regarding Stimulus

Arthur Laffer isn’t a fan of Keynesian stimulus

On August 5^th, The Wall Street Journal ran an editorial titled “Arthur Laffer: The Real ‘Stimulus’ Record”. The author, Arthur Laffer, is an American economist best known for the Laffer Curve. The editorial begins as follows:

Policy makers in Washington and other capitals around the world are debating whether to implement another round of stimulus spending to combat high unemployment and sputtering growth rates. But before they leap, they should take a good hard look at how that worked the first time around.

It worked miserably, as indicated by the table nearby, which shows increases in government spending from 2007 to 2009 and subsequent changes in GDP growth rates. Of the 34 Organization for Economic Coöperation and Development nations, those with the largest spending spurts from 2007 to 2009 saw the least growth in GDP rates before and after the stimulus.

Regarding this nearby table, monetary economist David Glasner says the following in a critique of the Laffer editorial:

So how did Laffer perform his calculation? He doesn’t say. All he does is cite the IMF as the source for his table. Thanks a lot, Art; that was really helpful, but unfortunately, not helpful enough to figure out what you are talking about.

Glasner is referring to the fact that the table gives the source of the data simply as “International Monetary Fund”. It does seem that many discussions in the political arena are hamstrung (perhaps purposely) by the failure of the author to give a usable source, much less to explain his calculations. I’ve therefore taken the time to do what Laffer arguably should have done to begin with. I found this spreadsheet on the IMF site which appears to contain the numbers used by Laffer. The following two tables show how these numbers can be used to calculate Laffer’s figures:

Gross Domestic Product, Constant Prices
Percent change

Country	2006	2007	2008	2009	2010	2011	(08+09) minus (06+07)
United States	2.658	1.913	–0.337	–3.486	3.030	1.735	–8.4
Japan	1.693	2.192	–1.042	–5.527	4.435	–0.748	–10.5
Germany	3.889	3.394	0.809	–5.078	3.562	3.056	–11.6
France	2.658	2.234	–0.196	–2.631	1.382	1.715	–7.7
United Kingdom	2.607	3.466	–1.103	–4.373	2.092	0.655	–11.5
Italy	2.199	1.683	–1.156	–5.494	1.804	0.431	–10.5
Canada	2.823	2.200	0.689	–2.770	3.215	2.460	–7.1
Australia	2.682	4.676	2.500	1.373	2.544	2.035	–3.5
Spain	4.077	3.479	0.888	–3.740	–0.070	0.710	–10.4
Mexico	5.147	3.242	1.186	–6.275	5.543	3.967	–13.5
Korea	5.179	5.106	2.298	0.319	6.320	3.634	–7.7
Turkey	6.893	4.669	0.659	–4.826	9.006	8.460	–15.7
Netherlands	3.394	3.921	1.804	–3.479	1.633	1.266	–9.0
Switzerland	3.630	3.645	2.095	–1.878	2.714	1.851	–7.1
Sweden	4.557	3.431	–0.774	–4.845	5.845	3.991	–13.6
Poland	6.227	6.785	5.127	1.606	3.944	4.350	–6.3
Norway	2.443	2.652	0.009	–1.661	0.654	1.688	–6.7
Belgium	2.702	2.900	0.957	–2.841	2.266	1.893	–7.5
Austria	3.670	3.706	1.396	–3.810	2.315	3.107	–9.8
Denmark	3.395	1.583	–0.784	–5.834	1.296	1.050	–11.6
Chile	5.825	5.207	3.034	–0.860	6.137	5.924	–8.9
Greece	4.614	3.032	–0.137	–3.258	–3.507	–6.860	–11.0
Finland	4.411	5.335	0.294	–8.354	3.732	2.855	–17.8
Israel	5.594	5.497	4.028	0.837	4.846	4.707	–6.2
Portugal	1.448	2.365	–0.008	–2.908	1.383	–1.466	–6.7
Ireland	5.312	5.182	–2.972	–6.995	–0.430	0.705	–20.5
Czech Republic	7.020	5.735	3.099	–4.695	2.739	1.655	–14.4
New Zealand	0.997	2.840	–0.074	–2.071	1.215	1.441	–6.0
Hungary	3.900	0.100	0.900	–6.800	1.270	1.695	–9.9
Slovak Republic	8.345	10.494	5.751	–4.932	4.183	3.349	–18.0
Luxembourg	4.969	6.639	0.754	–5.300	2.678	1.004	–16.2
Slovenia	5.850	6.870	3.589	–8.008	1.380	–0.175	–17.1
Estonia	10.097	7.492	–3.671	–14.258	2.264	7.636	–35.5
Iceland	4.709	5.985	1.270	–6.807	–4.024	3.051	–16.2

General Government Total Expenditure
Percent of GDP

Country	2006	2007	2008	2009	2010	2011	2009 minus 2007
United States	35.852	36.672	39.196	43.981	42.142	41.397	7.3
Japan	34.489	33.312	35.730	39.982	39.002	40.675	6.7
Germany	45.559	43.506	44.046	48.104	47.869	45.625	4.6
France	52.934	52.595	53.329	56.725	56.668	56.321	4.1
United Kingdom	40.613	40.325	43.066	47.267	46.325	45.725	6.9
Italy	48.464	47.611	48.610	51.889	50.495	49.953	4.3
Canada	39.268	39.158	39.535	44.056	43.815	42.664	4.9
Australia	34.635	34.244	34.487	37.579	36.773	36.598	3.3
Spain	38.342	39.192	41.300	46.065	45.439	43.586	6.9
Mexico	22.818	23.148	24.606	28.314	26.928	26.211	5.2
Korea	21.535	21.886	22.387	23.030	20.999	21.658	1.1
Turkey	32.793	33.325	33.837	37.717	35.443	34.186	4.4
Netherlands	45.687	45.087	46.116	50.785	50.614	50.034	5.7
Switzerland	35.663	34.634	32.612	34.398	34.040	34.736	–0.2
Sweden	50.770	48.968	49.625	52.793	50.634	49.126	3.8
Poland	43.864	42.187	43.194	44.510	45.366	44.472	2.3
Norway	39.936	40.386	39.764	46.610	45.421	44.320	6.2
Belgium	48.603	48.320	49.900	53.828	52.942	53.450	5.5
Austria	49.141	48.602	49.335	52.893	52.603	50.449	4.3
Denmark	51.250	50.788	51.424	57.899	56.174	55.972	7.1
Chile	18.716	19.381	21.727	24.622	23.628	23.300	5.2
Greece	44.691	46.709	49.734	53.033	49.620	49.696	6.3
Finland	49.238	47.431	49.316	56.103	55.550	54.043	8.7
Israel	47.501	46.016	45.427	45.086	44.736	44.354	–0.9
Portugal	44.364	44.362	44.816	49.914	51.414	48.710	5.6
Ireland	33.406	36.194	42.301	47.937	65.637	44.143	11.7
Czech Republic	41.967	41.040	41.148	44.921	44.110	44.549	3.9
New Zealand	31.105	31.064	32.862	34.471	34.490	35.364	3.4
Hungary	52.164	50.641	49.205	51.380	49.453	48.441	0.7
Slovak Republic	36.521	34.210	35.049	41.704	41.100	38.375	7.5
Luxembourg	38.576	36.267	37.103	43.042	42.482	41.635	6.8
Slovenia	42.547	40.262	41.422	46.355	47.134	47.713	6.1
Estonia	34.573	34.853	41.037	47.654	44.713	43.123	12.8
Iceland	41.641	42.268	44.639	49.672	47.923	46.321	7.4

The numbers in the rightmost column of both tables exactly match the numbers in Laffer’s table. Hence, the first table shows that the change in real GDP growth in Laffer’s table is equal to the annual GDP changes in 2008 and 2009 minus the annual GDP changes in 2006 and 2007. The second table shows that the change in government spending in Laffer’s table is equal to the government spending in 2009 minus the government spending in 2007, both as a percent of GDP.

Based on these numbers, his editorial continues as follows:

The four nations—Estonia, Ireland, the Slovak Republic and Finland—with the biggest stimulus programs had the steepest declines in growth. The United States was no different, with greater spending (up 7.3%) followed by far lower growth rates (down 8.4%).

This statement is based on his calculations for these four nations, shown in bold in the rightmost column of the above tables. Regarding Laffer’s calculation of public spending as a percent of GDP, economist Lars Christensen says the following in another critique of the Laffer editorial:

One major problem with Laffer’s numbers is that he is using public spending as share of GDP to analyze the magnitude of change in fiscal policy. However, for a given level of public spending in euro (the currency today in Estonia) a drop in nominal GDP will naturally lead to an increase in public spending as share of GDP. This is obviously not fiscal stimulus. Instead it makes more sense to look at the level of public spending adjusted for inflation and this is exactly what I have done in the graph below. I also plot Estonian GDP growth in the graph. The data is [sic] yearly data and the source is IMF.

GDP Growth And Government Expenditures for Estonia: 2006–2011

To the right is a similar graph, also showing public spending adjusted for inflation (blue line) and GDP growth (red line) for Estonia. It also shows public spending as a percentage of GDP (green line), the spending values used by Laffer.

The following table shows the values for real public spending as calculated from the IMF data:

General government total expenditure
Constant national currency* (index 2006=100)

Country	2006	2007	2008	2009	2010	2011	2009 minus 2007
United States	100.0	104.3	109.4	120.1	118.0	116.7	15.8
Japan	100.0	97.7	101.0	107.7	108.2	110.1	10.0
Germany	100.0	98.0	98.3	102.9	105.6	101.9	4.9
France	100.0	102.6	103.2	107.2	107.6	108.0	4.7
United Kingdom	100.0	102.7	107.9	112.7	112.3	109.3	10.1
Italy	100.0	100.2	100.2	102.4	100.2	98.0	2.2
Canada	100.0	103.0	106.4	112.8	117.1	117.2	9.8
Australia	100.0	105.5	111.3	121.1	124.5	127.6	15.6
Spain	100.0	106.2	111.0	119.6	116.0	110.2	13.4
Mexico	100.0	106.4	115.8	123.8	124.2	128.2	17.4
Korea	100.0	106.3	109.4	113.6	110.9	115.9	7.3
Turkey	100.0	103.9	107.7	113.2	113.5	121.5	9.3
Netherlands	100.0	102.8	107.0	112.2	114.0	112.9	9.3
Switzerland	100.0	102.4	98.5	102.6	103.6	108.2	0.1
Sweden	100.0	100.7	101.3	102.4	103.3	103.8	1.7
Poland	100.0	104.2	110.9	116.4	121.9	123.3	12.2
Norway	100.0	106.2	111.8	118.1	120.3	124.5	11.9
Belgium	100.0	102.8	104.8	111.2	111.3	113.0	8.4
Austria	100.0	102.4	103.9	107.8	109.8	107.0	5.4
Denmark	100.0	101.2	102.5	108.4	108.1	106.9	7.1
Chile	100.0	109.3	116.9	134.6	145.3	151.1	25.3
Greece	100.0	109.1	116.2	121.3	106.2	97.6	12.3
Finland	100.0	102.9	106.3	110.5	112.1	112.5	7.7
Israel	100.0	102.1	101.5	103.3	105.9	108.5	1.2
Portugal	100.0	102.8	102.7	113.1	117.7	107.1	10.4
Ireland	100.0	112.2	120.6	124.0	167.5	111.7	11.7
Czech Republic	100.0	103.9	102.9	108.0	105.6	105.5	4.2
New Zealand	100.0	104.9	110.0	114.0	117.2	121.1	9.1
Hungary	100.0	94.9	92.4	89.4	85.6	85.0	–5.6
Slovak Republic	100.0	102.7	110.1	122.0	125.0	117.8	19.3
Luxembourg	100.0	101.6	105.7	115.8	120.4	118.9	14.3
Slovenia	100.0	101.7	106.8	112.2	112.4	112.4	10.6
Estonia	100.0	113.5	122.8	121.2	114.2	117.0	7.7
Iceland	100.0	108.2	115.2	115.4	108.4	107.1	7.2

A careful comparison of Christensen’s graph and the graph above shows that real public spending (blue line) increases slightly faster on the former, reaching about 122 in 2011 versus 117 in the latter. This is likely because the graph above is using “Inflation, average consumer prices” as given in the IMF data, whereas Christensen’s data is likely using an alternate measure of inflation. However, the shapes of the line are basically the same and Christensen’s following statement holds true for both:

So what happened in 2009? Inflation adjusted public spending dropped! This is what makes Estonia unique. The Estonian government did NOT implement Keynesian policies rather it did the opposite. It cut spending. This is clear from the graph (the blue line). It is also clear from the graph that the Estonian government introduced further austerity measures and cut public spending further in 2010. This is of course what Laffer calls “fiscal stimulus”.

In fact, the four countries with the most fiscal stimulus as measured by the real increase in public spending from 2007 to 2009 were Chile (25.3), the Slovak Republic (19.3), Mexico (17.4), and the United States (15.8)! That includes only one of Laffer’s choice of four countries with the lowest growth in GDP rates. The other three had much lower increases in public spending of 11.7 (Ireland) and 7.7 (Estonia and Finland).

In summary, Laffer makes a number of mistakes in his editorial. The first is to compare growth in GDP rates with government spending as a percent of GDP. He is testing for a relationship between two variables but expressing one of them (spending) in terms of the other (GDP). That is, he is linking them by design! As an example of this link, suppose that spending remains constant but GDP drops. By simple arithmetic, this will cause spending as a percentage of GDP to rise and be interpreted by Laffer as stimulus. This seems like an incredibly elementary mistake for a professional economist to be making.

The second mistake is to select one span of data and look at only those data. Laffer chooses to look at GDP growth from 2006 to 2009 and government spending from 2007 to 2009. The tables at this link show calculations for these same variables going out to 2011 instead of 2009. As is evident, this causes the results to be very different. For example, the four nations with the highest drop in GDP growth rates are Slovenia (-23.1), the Slovak Republic (-22.0), Greece (-21.1), and Iceland (-19.7), when the span is increased from 2009 to 2011.

It’s often a good idea to look at all of the available data in graphical format (such as the one above) to get a look over all possible time spans. Similar graphs for Finland, Ireland, and the Slovak Republic can be found at the aforementioned link.

Finally, Laffer makes the mistake of not giving a precise source that allows his calculations to be checked. This may be as much of a mistake of The Wall Street Journal as it is for Laffer. I believe that all publications should mandate that precise sources be given and, if possible, links be provided to background material that explains the author’s calculations. Then, others will be able to check the author’s work, especially in the case where the publications chooses not to do so or does a poor job of doing so.

Arthur Laffer’s Anti-Stimulus Curve Ball is a Foul (business.time.com)
Arthur Laffer: The Real ‘Stimulus’ Record — WSJ.com (cg68doc.newsvine.com)
Arthur Laffer: Wall Street Journal Op-Ed Proves He Still Has Much to Learn (thenewamerican.com)

This entry was posted by Reed Davis on August 22, 2012 at 3:00 am, and is filed under Economy. Follow any responses to this post through RSS 2.0.You can leave a response or trackback from your own site.

Comments (94)
Related Posts
About Reed Davis

#1 written by shortchain 9 months ago

Reed,
On thinking this over, it seems to me that the word “mistake” is not appropriate here. A clear and obvious attempt by using cherry-picked data and a carefully honed “metric” to reach a conclusion that was desired.

I’m sure a lot of people who already believed the conclusion will find his “analysis” convincing.
#2 written by Michael Weiss 9 months ago

shortchain,

it seems to me that the word “mistake” is not appropriate here.

I agree that it’s probably not a mistake. If it’s intentional, though, we have to assume malice. I try to give people the benefit of the doubt.
#3 written by WA7th 9 months ago

He looks malicious in the photo.
#4 written by dcpetterson 9 months ago

Let’s be clear on what Laffer did and why he did it. Laffer lied. He claimed that the nations with the largest stimulus had the smallest GDP growth, when in fact, the truth is the opposite. The nations with the smallest GDP growth engaged in the most severe austerity measures, and the nations with the most actual stimulus spending had the highest growth in GDP.

This also shows the misleading nature of the current conservative fetish for expressing everything as a fraction of GDP.

Laffer lied because telling the truth reveals that Laffer’s ideas, and the ideas of the austerity school of modern economics, are precisely wrong.
#5 written by rgbact 9 months ago

Keynesianism vs.supply-side.…..man made global warming vs. denialism. Lets just agree to scrap the exhaustive analyses and admit people will believe whatever theories fit their personal ideology. Sometimes I wonder if economics is much different than the trench warfare/unproductive food fight world that is our government.
#6 written by shortchain 9 months ago

I’m not willing to go so far as to call Laffer’s error a lie with malicious intent. I think what happened here is that he has managed to fool himself. I suspect that, if he even reads a critique of his article, he’ll find a way to believe his omissions and commissions are valid, compounding his errors. Which raises the issue as to who is more a fool, the person who fools himself, or the person who believes a person who has managed to fool himself. I think the second person is more a fool, don’t you?
#7 written by shortchain 9 months ago

rgbact,
In the cases you mention: Keynesian versus trickle-down and AGW versus denialism, there is one side that is correct and one side that is wrong. Sure, if it isn’t important to identify where the truth lies, we can shrug and say “matter of opinion” — but that carries a cost if someone with actual policy-making authority takes that attitude and believes up is down.

Would it not be better if our policy-makers were guided by the best available knowledge? One has to suspect that the policies might be more effective that way.
#8 written by Mule Rider 9 months ago

Arguably, both “Keynesianism” and “trickle-down” are wrong. And one of the biggest problems in debating economic issues (among others) in modern times is it takes on a binary nature where you can’t join in unless you MUST BELONG to either ONE of TWO pre-ordained “camps.” The idea is to put people in a neat little box where you can shout them down (or past them) with little more than talking points. Disgusting ideological blindness and arrogance at its finest.
#9 written by Mainer 9 months ago

At this point to have Laffer even given an audience is pretty pathetic. Can any one honestly find any data that supports any thing he has ever espoused? I not only believe him to be a liar but not even a very intelligent one. But hey that is just my opinion so blow it off as you wish.
#10 written by shortchain 9 months ago

Mule,
No economic theory is completely right — but that doesn’t mean you have to interpret everything in a Manichean fashion just so you can spout meaningless twaddle.

One of those theories is more correct than the other.

Take your ridiculous adherence to the Austrian school and shove it.
#11 written by rgbact 9 months ago

“Take your ridiculous adherence to the Austrian school and shove it.”

Food fight!
#12 written by Michael Weiss 9 months ago

shortchain,

Take your ridiculous adherence to the Austrian school and shove it.

Really, was that necessary?
#13 written by shortchain 9 months ago

Michael,
Sorry, but I’m not going to put up with any crap from the half-horse, half-donkey (and I’m pretty sure which half of the horse he got).

The insults are, in his case, a method of bullying. He shuts down discussion that way, or derails it.
#14 written by Mule Rider 9 months ago

“Take your ridiculous adherence to the Austrian school and shove it.”

Thanks for making my point. You couldn’t have fulfilled the prophecy any better. Assign me into a pre-ordained camp to put me into a “neat little box” to define my economic argument? Check. Shouting down at/past me to discredit me? Check. Using only talking points? Check.

I’ve said repeatedly I warm to many ideas put forth by Austrianism but don’t adhere to everything or even the vast majority of things that the Austrian School represents.

“The insults are, in his case, a method of bullying. He shuts down discussion that way, or derails it.”

Absolutely mind-boggling and hilarious that you would hurl this accusation after the little outburst you had.
#15 written by shortchain 9 months ago

Mule,
I could not care less about just how your nonsensical and undocumented personal theory of economics differs from Austrian theories. Does it use any actual, you know, mathematics? Not apparently. Does it rely on actual, you know, observed econometric data? Not apparently. As such, it is merely another form of wishful thinking, distinguishable only around the margins from the wishful thinking that is Austrian economics — and equally pointless, as, by your own past admissions, it is useless for any predictive purpose. As they say in physics, “it’s not even wrong.”

Now, you may want to turn this discussion of Laffer’s mistakes into a discussion of your “theories” — but I’ll just go elsewhere now. You may further insult me as you like — since I lack any respect for you, your intellect, or your supposed understanding of economics, it will be wasted effort, unless it somehow makes you feel better. If so, have at it, with my blessings.
#16 written by filistro 9 months ago

Look you kids, don’t make me come down there!

I’m really, really busy today, and if I have to take time out to come down there and knock heads together, you’re ALL gonna be sorry.
#17 written by Michael Weiss 9 months ago

Mule,

I’ve said repeatedly I warm to many ideas put forth by Austrianism but don’t adhere to everything or even the vast majority of things that the Austrian School represents.

Indeed you have. So let’s inject some substance into the conversation, turn away from the rhetoric, and ignore the insults, shall we?

What’s your opinion of Laffer’s argument? And what about the methods he used to craft the argument?
#18 written by Max 9 months ago

I will once again pose the challenge. Anyone can play. As Mr. Laffer and his “curve” have now been around for three decades, this should be a simple exercise.

Please show definitively where the national effective rate of income taxation currently resides on Mr. Laffer’s “curve”. Mr. Laffer surely has a proof somewhere that can be quoted.

Second, please show definitively, based on Mr. Laffer’s theory, the effective rate of income taxation that provides the maximum tax revenue as shown on his “curve”.

If either, or neither, of these questions can be answered, after 3 decades, then it can be safely assumed that Mr. Laffer, his “curve” and those who adhere to his theory are full of shit.
#19 written by Mule Rider 9 months ago

To anybody watching this, I want you to keep this in mind the next time I’m lambasted for being the one to immediately go into defensive/abrasive/insulting/snot-slinging mode.

“Does it use any actual, you know, mathematics? Not apparently. Does it rely on actual, you know, observed econometric data? Not apparently.”

Patently false. Everything I’ve done academically or professionally related to economics, as well as my beliefs in the field, have a statistical foundation. Don’t confuse the fact that I don’t have (or make) the time to put together elaborate quantitative presentations when I present my economic arguments here — as Michael is often able to do — as proof that there is ZERO mathematical foundation for my beliefs.

“You may further insult me as you like…”

I haven’t insulted you at ll in this thread. I made a point that it’s not all about “Keynesianism vs. Trickle-Down” and you went and threw a tantrum. And made my point perfectly in the process.

“and equally pointless, as, by your own past admissions, it is useless for any predictive purpose”

That is a gross mischaracterization of what I’ve said over and over and over again. Never have I said the economic tools I or Austrians use are “useless for any predictive purpose.” I’ve said repeatedly that the Austrian viewpoint can be quite useful in making predictions, but there are some extreme limitations on the predictive capabilities in some areas of economics, and Austrians are at least honest enough to admit that it’s not statistically sound to try doing so.…unlike some other schools of thoughts that swear it’s all nothing more than a tidy little formula from your textbook where you plug a few numbers in and magically get the right answer. That’s just flat-out wrong and is a misuse of statistics.
#20 written by Mule Rider 9 months ago

Michael,

Sorry, but I guess my opinions are worthless and would only insult shortchain and possibly others who are cherished members of the family, so I’ll just shut keep my mouth shut and slink away for now.
#21 written by Michael Weiss 9 months ago

Max,

show definitively where the national effective rate of income taxation currently resides on Mr. Laffer’s “curve”. Mr. Laffer surely has a proof somewhere that can be quoted.

I’d have to go back and dig through some old stuff to find the exact details, but we’re clearly on the left slope of the curve.

Second, please show definitively, based on Mr. Laffer’s theory, the effective rate of income taxation that provides the maximum tax revenue as shown on his “curve”.

It’s hard to get too definitive, since there are localized distortions that come from various tax policies. That said, at a very broad level, it seems from the analysis I did that we hit the peak at a top effective income tax rate at around 25%. That’s been a marginal rate in the 40–50% range, based on our current progressivity. Including the other federal taxes (Social Security, Medicare, etc.) that comes to a top effective tax rate in the mid-30s.
#22 written by Michael Weiss 9 months ago

Mule,
Considering that we have far more readers than the ones who regularly (or even infrequently) comment here, it’s an overreaction to be concerned with shortchain’s take on your opinion. I’m assuming that you are confident enough to allow your take to stand up to actual scrutiny and debate.
#23 written by Mule Rider 9 months ago

“I’m assuming that you are confident enough to allow your take to stand up to actual scrutiny and debate.”

Yes, I am, although I don’t mind being a bit of a contrarian or acting a little bratty if I feel like I’m being unfairly attacked.

“What’s your opinion of Laffer’s argument? And what about the methods he used to craft the argument?”

His approach appears to be over-simplified. And I tend to agree with the critiques about his approach. I do, however, cringe to see the word “austerity” used with regard to real government spending declining ever so silghtly from 2008 to 2009 in Estonia.
#24 written by dcpetterson 9 months ago

Lets just agree to scrap the exhaustive analyses and admit people
will believe whatever theories fit their personal ideology.

No, let’s use the actual data, and use that data honestly. I’ve had enough of people claiming they are entitled to their own facts.

Laffer manipulated the data to achieve a pre-determined conclusion. It is possible he didn’t do this intentionally. Perhaps he is merely incompetent and/or ideologically blind instead of malicious. But he shouldn’t be allowed to get away with such fraud.

The sad thing is, there exists a valid Austrian argument to be made here, even with honest data. But Laffer is not an Austrian. He’s a Charlatan. There’s a difference.

I’d imagine an actual Austrian argument would go something like this:

Yes of course, the countries with the biggest stimulus spending increased their GDP the most. Federal spending is part of GDP, so, by definition, increasing federal spending is going to increase GDP in the short term. But short-term gains aren’t what a good and healthy economy is about.

What we really want to do (our hypothetical Austrian might say) is to put our resources into the most efficient possible places. That takes years to accomplish, especially when you’re in the midst of a crisis as bad as we’ve had the last few years. Simply spending money to achieve a temporary increase in GDP won’t get you anywhere, because you have no way of knowing whether you’re spending that money in the proper places.

It isn’t about increasing GDP, or even about decreasing unemployment. In fact, in the short term, in order to make the necessary and proper corrections, you might have to decrease GDP and increase unemployment, as capital shifts to more healthy locations. Therefore, the nations that had the highest GDP growth are not necessarily doing the proper things, and may, in fact, be harming themselves the most.

In other words, GDP growth and unemployment decrease are the wrong metrics to use in determining what is the best course for any modern economy. None of this analysis is proper, because it’s looking at the wrong things.

Or so I imagine a thoughtful and honest Austrian might say. But see, thoughtful and honest Austrians can’t say that, at least not in public, because the entire world sentiment today is geared toward GDP growth and unemployment shrinkage. Any prescription which requires prolonging the pain and possibly even increasing unemployment is going to be shouted out of the room.

Which is why Laffer has to pretend to use GDP growth as his metric, and why he has to bend the facts to fit what he wants to accomplish. Either he doesn’t understand the first thing about math, or he has to hope his readers don’t, because the only way he can make a case for austerity by using GDP is by lying.

If you’re going to make a case for austerity, you cannot use GDP growth as your desired metric. You can certainly make an intellectually honest case for austerity, but not based on short-term GDP growth. It’s that simple, and Laffer is doing outright destructive harm to the austerian case with his fraudulent use of manipulated data.
#25 written by dawolf 9 months ago

Mule - “I do, however, cringe to see the word “austerity” used with regard to real government spending declining ever so silghtly from 2008 to 2009 in Estonia. “

I don’t know the specifics of Estonia, but in general in a recession government spending (both actual and as a percentage of GDP) will automatically rise, due to such items as lower tax revenues, higher spending on unemployment benefits and some people retiring who hadn’t yet (higher pensions).

For the real level of expenditure to fall, there had to be some austerity measures. I don’t know the magnitude of those though..
#26 written by dcpetterson 9 months ago

And one of the biggest problems in debating economic issues (among
others) in modern times is it takes on a binary nature where you can’t
join in unless you MUST BELONG to either ONE of TWO pre-ordained
“camps.”

Amen, brother. I’ve said all along that no single economic theory covers everything, or has a patent on Truth. (psychology is the same way, incidentally.) A practical and useful approach takes pieces of whatever works, and modifies them to fit current situations.

Of course, that doesn’t mean anyone is entitled to invent or misrepresent data. I think all of us here are agreed on that (except, possibly, rgbact).
#27 written by Mule Rider 9 months ago

Wow, great post in #24, DC. Just wow.

I know I’ve been hard on you many times before about “not understanding the Austrian argument” but you did very well there with your hypothetical scenario, and thanks for acknowledging an Austrian can come at this in a thoughtful and honest way.…I’m floored by this and feel like I owe you an apology and a hug for all the crap I’ve said previously. Thanks again.

And, by the way, I do believe people can also approach the argument in an honest and thoughtful with with a predominantly Keynesian perspective, even if I don’t agree with many of their prescriptions.
#28 written by dawolf 9 months ago

Mule — good response in #27.

From my own personal perspective: I am a Keynesian (to the extent that I’ve studied it, I certainly would not count myself as an expert). I definitely don’t think all stimuli are equal. Specifically, I think that tax cuts are a bit of a nonsense in tough times, as by definition those who are paying taxes are still in employment, therefore being affected by the downturn less than those out of employment. And just throwing a bunch of money into cash for those who would spend it quickly seems such a waste. I’m sure it has some positive effects but what I would rather see happen is:

1)First of all, few austerity measures for the sake of austerity. One austerity measure I agree with is wage freezes for those on high wages (and in some cases, wage cuts). But then, I don’t think Government in general should be paying very high wages as a matter of course so that’s a position I would hold in good times as well.

2)I think higher employment is the best remedy. Lots of people out of work: hire them to do useful things. My personal two favourites (being British, I don’t know about in America) would be

2A) Invest a LOT of money into building renewable energy, including supporting the financing of some manufacturing plants to build wind turbines, and supporting the financing of the installations themselves. The benefit of this is that finance costs (specifically, high interest rates) are one of the main components of wind energy costs and so this support:
*pays for itself long term;*creates employment;*reduces oil, coal and gas imports;*helps us meet our renewable energy goals;*gives us the opportunity of selling wind tech abroad (this is the most nebulous however)

2B) Invest in building housing which the government does NOT sell but rents out. This:*pays for itself long term;*creates employment;*increases the quality of housing (if done properly)*helps lower rental costs

But I don’t see anything like this happening.
#29 written by dcpetterson 9 months ago

Mule, thanks for the kind words. I know I’m often harsh too.

I feel I have a handle on Austrian arguments (though I acknowledge I’m certainly not an authority) — I just don’t agree with them. I enjoy learning about other modes of thought. First, it gives me a wider view of the world. And second, if I do end up disagreeing (which is never a foregone conclusion) it gives me more powerful arguments.

(By the way, one of the many reasons I try to understand views I disagree with is that it makes my fiction more interesting. Many of my characters I like the most are ones I disagree with the most. And even though I disagree with them, I have to make their positions interesting and even sympathetic to my readers.)

So I want to be clear on this — I disagree with what I hope was a reasonable description of Austrian thought in #24. I simply lament the inability to have an honest national discussion of these issues. If I have to take a position contrary to my own in order to have that discussion, I’ll do my best to do so, but I know I can’t do as well as someone who actually agrees with that position.
#30 written by Michael Weiss 9 months ago

DC,

But see, thoughtful and honest Austrians can’t say that, at least not in public, because the entire world sentiment today is geared toward GDP growth and unemployment shrinkage. Any prescription which requires prolonging the pain and possibly even increasing unemployment is going to be shouted out of the room.

And thoughtful and honest Keynesians in politics have the same problem with agreeing to spend less on many things, and bank money for future recessions, when the economy is humming along.

Since I haven’t been blogging during good economic times, nobody has gotten to see me attack politicians for increasing spending during those times.
#31 written by channelclemente 9 months ago

Without getting into the subterranean world of Austrian Economic Theory and giggling too much, maybe looking a bit a Laffer’s potential motivation for creating a truthy bit of flotsam or jetsam. Laffer is CEO of a private investment consulting firm and a Kudlow buddy. He is certainly well aware of the old meme…

“Trade Kensian and Speak Austrian”.

(http://www.businessinsider.com/trade-keynesian-speak-austrian-2012–4)

It’s sort of the basis of pump and dump, or to be charitable a little economic hysteria is good for sales of investment instruments. Considering that Laffers public statements and ‘data’ look suspiciously similar to ones recently pushed by Niall Fergusion’s cover story in Time this week, I have a new found faith in serendipity . Oddly, Krugman nailed Ferguson for the same issues as those identified by Mr. Davis.

Three cheers for synchronicity. How’s that for being charitable!
#32 written by GROG 9 months ago

Reed,

I commend you on your exhaustive research and diligence to discredit Laffer and supply side economics. Well done.

Am I to assume you have you done the same to credit stimulus spending and demand side economics?

For example, have you done the same type of research, data collection, and analysis to show that we’re better off because of the impressive amount of stimulus spending in the U.S. (and the rest of the developed world) since 2009 than we would have been under “normal” spending conditions?
#33 written by dcpetterson 9 months ago

Grog,

I don’t know if Reed has done that work. I don’t know if he is out to “prove” or “disprove” anything. My impression of him is that he (like Michael) mostly follows the data to see where it goes.

But you may find some interesting information to address some of your questions here. I haven’t read it yet, but it sounds interesting.
#34 written by channelclemente 9 months ago

Aside from the confused issue that is Austrian Economic Theory, the question of the stimulus applied in 2009 has lots of data to support it. To begin with the economist in Chicago called for a vote on the topic, and something in the range of 80% of a large group of economist recognized it as working.

http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_cw5O9LNJL1oz4Xi

You have to take the interpretive value of that vote on faith, I would suppose. The CBO was certainly convinced.

http://www.washingtonpost.com/business/economy/congressional-budget-office-defends-stimulus/2012/06/06/gJQAnFnjJV_story.html
#35 written by Michael Weiss 9 months ago

channelclemente,

the economist in Chicago called for a vote on the topic, and something in the range of 80% of a large group of economist recognized it as working

Of course they would. They’re Keynesians. Truth be told, though, Austrians would typically agree (as DC observed earlier today) that the stimulus was working…in the sense that it made the economy between then and now more active than it would have otherwise been. Sort of like cocaine will keep you awake when you otherwise would have been sleeping. But Austrians consider it to be very like that example, in that they believe it to be unhealthy, delays the inevitable crash, and makes the crash that much harder when it (inevitably) arrives.

In other words, asking if the stimulus “worked” is merely asking the wrong question, in the Austrian School’s view.
#36 written by shortchain 9 months ago

That poll also asked if the stimulus would stimulate revenue so that, over time, the cost of the stimulus would be recovered. Here’s an article that describes their answers. (Of course, as DC would say, if the economy had dropped off the face of the Earth, the cost would have far outweighed the cost of the stimulus — but that’s only a hypothetical, now, unless the world economy takes the US economy down in the next few quarters.)

Also, Ezra Klein at the WaPo gives links to 9 studies that look at the issue. Take your pick about which one you want to believe.
#37 written by dcpetterson 9 months ago

(Of course, as DC would say, if the economy had dropped off the face
of the Earth, the cost would have far outweighed the cost of the stimulus — but that’s only a hypothetical, now, unless the world economy takes the US economy down in the next few quarters.)

Yes. It’s hard to say something “cost too much” if it prevented the end of the world.

On the other hand — and I’m not joking with what follows — there are economists who claim that something which in the future will prevent the end of the world, might cost too much today. You have to follow me here.

Take global warming. Suppose 1) if you do nothing about it, then civilization will collapse within 100 years and humanity will be thrown forever back into the stone age, but 2) if we spend, say, $1 trillion now, we can prevent that catastrophe. (Neither of those possibilities are likely, by the way. I’m using this as an example.)

Now, a “normal” person might say, “Hey, if we can prevent the end of civilization, it’s got to be worth it, right?”

But there are many economists who would say, “The inevitable collapse is far enough in the future, and is total enough, that it’s not worth preventing. After the collapse, all money and all economic assets are valueless anyway, so there is no way to compare the value of that future world to the value of $1 trillion today. Furthermore, we can’t predict the value of anything to children and grandchildren who may not be born, since the collapse will unavoidably lead to us having fewer descendents. In other words, since the collapse will mean our grandchildren will never be born, those not-born grandchildren didn’t lose anything, which means the cost of a world collapse is basically zero. Therefore, you and I are better off just keeping the $1 trillion and spending it on whatever we want.”

I kid you not. There is a species of economists who insist it is better to allow the world to end than to spend a plumb nickle to prevent it. This actually is one of the reasons conservatives economists oppose things like cap-and-trade or alternate fuel sources or anti-pollution measures — not because they don’t think these things will bring economic and ecological and even civilizational disaster, but because the present cost of preventing the disaster, in their view, inevitably is more than the future value of a rescued world, since the value of a collapsed world cannot be calculated, being zero or less.

How’s that for insane?
#38 written by channelclemente 9 months ago

The trouble with Mise and Hayek’s take on the business cycle was what they recognized was not the mistake of monetary policy as a buffer, but that that the cycle was inherently non linear. Being reductionist at heart, they were too frightened to admit that any parameter, whether governmental tinkering or natural (whatever that is) can drive the cycle to non linearity. What Keynes recognized, rightly I think, is that when you were aware of the causes…you could buffer the system. It’s somewhat disingenuous as an Austrian to rail against tinkering with the natural law you believe inherent in the system while in the same breath admitting that perhaps unknowable parameters, varying in a unrecognized way can drive the business cycle into extreme variation without intervention. The ‘let the system recover at it’s on equilibrium’ is more a statement of faith than utility in my opinion. I think of Austrians as adherents of the ‘look for the coin under the lamplight’ even though it was dropped in the dark, or ignorance is bliss school of economics.

As to the Chicago ‘vote’, then the 20% who thought there was no help from the stimulus were all Austrian. Somewhere in the critique, they were all Keynesians, lurks a tautology.

Since the system described by Adam Smith in the Theory of Moral Sentiments (1759) and The Wealth of Nations (1776) sets the parameters of the modern free enterprize, it is almost a requirement that economics, as a human construct, be ‘managed’ , because he wrote the books to chain commerce in the service of man, not the contrary. It often suprises people that Smith wrote two books on the subject, and in the order he wrote them.

So I give Mise credit for being wise enough to recognize the risk of tinkering, but as I read Hayek, he warned only that tinkering was risky in a nonlinear system. For instance Hayek wasn’t adverse to something like Medicare, just that it be applied like Social Security, universally as opposed to targeted. Modern Hayekians such as the Paulistas miss that point.
#39 written by Michael Weiss 9 months ago

DC,

But there are many economists who would say “… the cost of a world collapse is basically zero. Therefore, you and I are better off just keeping the $1 trillion and spending it on whatever we want.”

Who? I’d like a reference or two on that one.
#40 written by dcpetterson 9 months ago

Michael,

I’ll have to look it up again. I read a reference in Freakonomics, and did some research a few years back. It was so off-the-wall I’ve blocked most of the names. Might take some doing to find these weirdos again.
#41 written by Michael Weiss 9 months ago

channelclemente

Somewhere in the critique, they were all Keynesians, lurks a tautology.

More of a tauntology. I meant it somewhat tongue-in-cheek.
#42 written by Reed Davis 9 months ago

GROG wrote:

I commend you on your exhaustive research and diligence to discredit Laffer and supply side economics. Well done.

Am I to assume you have you done the same to credit stimulus spending and demand side economics?

I make no claim to have discredited supply-side economics, credit stimulus spending, or demand side economics. I am not an economist nor do I play one on TV. I am a math major and have long been bothered that a mere math major with a couple of hours to spend can do much to discredit an editorial in a national publication by a well-known economist. I look at this as a case study like many I have done before. Most of those cases followed the same pattern. They are based on basically good data but data that is incomplete and arguably cherry-picked. Invariably such data is given a very generic source (like International Monetary Fund on Laffer’s chart) that makes it difficult for others to analyze the data. As I concluded my post, I believe that all publications should mandate that precise sources be given and, if possible, links be provided to background material that explains the author’s calculations. Then, others will be able to check the author’s work, especially in the case where the publications chooses not to do so or does a poor job of doing so.

We are living in the 21^st century where nearly all of this data is online. There is no reason why all publications cannot provide a link to precise sources and, if possible, the authors calculations. I have long ignored such poorly sourced articles. If more people would do the same, I suspect that such poorly sourced articles would become a thing of the past.
#43 written by GROG 9 months ago

Reed,

I am a math major and have long been bothered that a mere math major with a couple of hours to spend can do much to discredit an editorial in a national publication by a well-known economist. I look at this as a case study like many I have done before. Most of those cases followed the same pattern. They are based on basically good data but data that is incomplete and arguably cherry-picked.

Have you done the same work to discredit other well known national economists? Perhaps a pro-Keynesian, anti-supply side economist, like, say, a Paul Krugman? Or have you only attempted to discredit those on the right of the political spectrum?
#44 written by Monotreme 9 months ago

GROG asks,

Have you done the same work to discredit other well known national economists?

I think you’re being unfair here. Science, according to Popper, proceeds by formulating hypotheses (“lower taxes lead to increases in GDP”) then collecting data that either support the hypothesis or refute it.

If there is extensive data supporting interlocked hypotheses, then these interlocked hypotheses can become a “theory”. If there is any data refuting a hypothesis, then it becomes “sewage”.

Laffer’s hypothesis is sewage.
#45 written by dcpetterson 9 months ago

Grog,

Have you done the same work to discredit other well known national economists?

Reed’s article didn’t “discredit” Laffer. Reed’s article poked enormous holes in one of Laffer’s articles.

A whole bunch of economists (and the Real World) have discredited Laffer.
#46 written by Max 9 months ago

From #18 and #21,

Michael, good try, but no cigar so far. Eliminate any “local” distortions. We are talking strictly about federal income tax rates, for simplicity sake.

And I really would like to see where Mr. Laffer did his OWN work on this subject.

I will state again: Mr. Laffer, in claiming this “curve”, did noting more than state the very obvious. That at 0% tax rate, no income is generated, at “some” point a maximum revenue is generated (although he seems to leave out any possibility there well may be multiple such points), and at 100% tax rate no income will be generated. He does NOT even project the SHAPE of the “curve”.

I note that no one has countered that assertion as of yet.
#47 written by dawolf 9 months ago

btw, that picture above — did some evil Keynesian steal part of his sleeves or soemthing? (to give work to a tailor perhaps?)
#48 written by dawolf 9 months ago

GROG — “Have you done the same work to discredit other well known national economists? Perhaps a pro-Keynesian, anti-supply side economist, like, say, a Paul Krugman? Or have you only attempted to discredit those on the right of the political spectrum?”

You miss the point I think. Your first principle when checking someone elses work is to check the veracity of the work, and if that leads the work to be discredited then it is. If the work is not discredited, then it isn’t. I doubt if Reed started by trying to discredit it — he probably look at it and said to himself “that doesn’t make sense”, looked into it further and found he was right. If he’s not seeing obvious errors in Krugmans work, then it is a false equivalance that he should be investigating both equally — it adds a bias to the results.
#49 written by Monotreme 9 months ago

DC said,

In other words, since the collapse will mean our grandchildren will never be born, those not-born grandchildren didn’t lose anything, which means the cost of a world collapse is basically zero. Therefore, you and I are better off just keeping the $1 trillion and spending it on whatever we want.

I’m pretty sure DC is talking about the “Weitzman-Gollier puzzle”:

http://www.economist.com/node/14994731

http://www.economics.harvard.edu/faculty/weitzman/files/discountinglongterm(2).pdf
#50 written by Mule Rider 9 months ago

“Have you done the same work to discredit other well known national economists? Perhaps a pro-Keynesian, anti-supply side economist, like, say, a Paul Krugman?”

There’s a ton of stuff out there that rips the arguments of Krugman and his ilk to shreds. The problem is that Keynesians have a bully pulpit in the economic realm and are able to shout down and blithely dismiss opposing arguments as biased, cherry-picked BS, regardless of whether or not it’s actually true.

It’s funny the lenghts some of these guys will go to silence the opposition. There used to be regular commenters on Krugman’s articles that would point out major fallacies and data-slicing/cherry-picking that Krugman would use to craft the narrative he wanted, but one not necessarily in line with the real world. Anyway, Krugman, having never addressed any of these criticisms, eventually made a couple of posts along the way (from late 2010 through earlier this year) basically dismissing all of these people as “paid shills,” “disinformation agents,” and “trolls” and said he would no longer tolerate that on his blog. He then basically kicked off a moderation policy that removed all dissenting opinion.

Make no mistake, Paul Krugman is one of the most close-minded, hateful, spiteful, and condescending human beings on the planet.
#51 written by dcpetterson 9 months ago

@dawolf

btw, that picture above — did some evil Keynesian steal part of his
sleeves or soemthing? (to give work to a tailor perhaps?)

LOL! I’ve got to say, that’s clever. And wonderfully obscure.
#52 written by dcpetterson 9 months ago

There are two kinds of people. The first kind can make rational and correct deductions based on meager evidence.
#53 written by Mule Rider 9 months ago

http://www.americanthinker.com/2010/08/paul_krugman_gives_up_1.html

This is a terrific account of the egomaniacal world of Paul Krugman that documents his recent descent into close-minded charlatanism.
#54 written by filistro 9 months ago

@dawolf… btw, that picture above — did some evil Keynesian steal part of his
sleeves or soemthing?

LOL… trust a spiffy Brit to make note of this sartorial faux pas

I think the shortened sleeves are intended to show off snowy white starched shirt cuffs and a pair of massive gold monogrammed cufflinks ostentatiously designed to put peons in their place. When the short sleeves display nothing but a wrinkled blue cuff with plastic buttons, they just look sort of… cheesy.

Actually, the effect is kind of Laffable.
#55 written by Michael Weiss 9 months ago

GROG,
Reed had something come up and won’t be able to respond to comments for a while. Don’t hold his lack of answer against him. I won’t deign to answer on his behalf, either.
#56 written by Michael Weiss 9 months ago

Max,

Michael, good try, but no cigar so far. Eliminate any “local” distortions. We are talking strictly about federal income tax rates, for simplicity sake.

It’s silly to look only at federal income tax rates. If people are being taxed on their income, and the rate of taxation is the causal factor affecting their collective behavior, then we must look at all income taxes collectively.

Mr. Laffer, in claiming this “curve”, did noting more than state the very obvious. That at 0% tax rate, no income is generated, at “some” point a maximum revenue is generated (although he seems to leave out any possibility there well may be multiple such points), and at 100% tax rate no income will be generated. He does NOT even project the SHAPE of the “curve”.

Absolutely. He didn’t intend to do anything more, either. It wasn’t until he became a bit of an unintentional celebrity that there was any desire for him to do more.
#57 written by dcpetterson 9 months ago

Mule, thanks for the link to American Thinker. I tried to read the article — I really, truly did — but the first nine or ten paragraphs were so full of empty insults and wild distortions that I couldn’t see any reason to keep muddling through. I get it. Fred Douglass is envious of Paul Krugmann’s success and fame and accuracy, and wants to mount a supposed David-vs-Goliath campaign.

I’d rather talk about policy than personality.
#58 written by Mule Rider 9 months ago

” but the first nine or ten paragraphs were so full of empty insults and wild distortions that I couldn’t see any reason to keep muddling through.”

You’re free to interpret it that way, but I would strongly disagree. No doubt there is some mild sniping, but there is sufficient logic — with supportive links — showing how weak Krugman’s foundation is that it’s silly to just blithely dismiss it.

By the way, there are many of us out here who view Krugman’s daily spewings as little more than “full of empty insults and wild distortions” that it’s not really worth the time, effort, and energy to muddle through it. Krugman was once a respected economist but not anymore; that’s why he’s been forced to retreat to his little blog and Ivory Tower there at Princeton and lash out at the rest of the world with hate and vitriol. He’s a close-minded and vapid little man. And most of his arguments have been proven a sham.
#59 written by Max 9 months ago

Mule,

Thank you and congratulations. This is the personality I know you to be capable of projecting. I hope that you will continue down this path, and you will get no personal guff from me whatever.
#60 written by dcpetterson 9 months ago

We all have are most (and least) favorite reads, don’t we?

I’ve noticed something that frequently amuses me. If one agrees with a given writer, one tends to see that writer as witty, either urbane or earthy, clever, insightful, rational and carefully-reasoned. If one disagrees with a writer who is nearly identical in tone and ability, but opposite in viewpoint, that person is witless, uncharming, dull-headed, irrational and incapable of logical thought.

I truly don’t care if Krugman (or Douglass or any other political or economics writer) is a cruel and ugly jackass who sets puppies on fire and steals and ice cream from children. I’m more interested in the arguments they present, and I find Krugman usually pretty convincing (notice I said “usually” — I don’t blindly agree with anyone on everything).

And actually, Krugman is still respected as an economist by nearly everyone who respected him before he won his Nobel (I say “nearly” simply because I’m sure someone can find someone who knows someone who read someone who claims to have heard that someone changed their mind). It’s simply that the people who disagreed with him then (and still do now) have gotten a lot louder and more shrill since his work has been recognized with the honor. But all that, of course, is irrelevant — what counts is the arguments themselves, and how much they seem to match the Real World (tm). And rather than talk in generalities, we should attempt to address a specific point or two.
#61 written by Michael Weiss 9 months ago

Mule,

This is a terrific account of the egomaniacal world of Paul Krugman that documents his recent descent into close-minded charlatanism.

I must confess I had higher expectations based on your description than I got from the content of the article. That’s not to say that I don’t think Krugman is egomaniacal; frankly, it’s hard to get where he has gotten without the ego blowing up, either as an effect of getting there or as the cause of getting there. Kind of like Henry Kissinger, though perhaps not quite to that level of ego.

But I dug into the copious references that Fred Douglass, the article’s author, provided. The Krugman articles to which he linked didn’t say what he claimed they did. All of papers I saw to which he linked (which, admittedly, was only five as of this writing) had major structural flaws that jumped out at me immediately.

None of this is meant to suggest that Krugman is always (or even usually) correct. I don’t read his articles much, so I’m not in a position to assess his accuracy. I merely looked at the critique you provided. To the extent that he stifles critiques of his articles, I believe it is bad policy. He should welcome the debate.
#62 written by Michael Weiss 9 months ago

filistro,

Actually, the effect is kind of Laffable.

A woman after my own heart.
#63 written by Mule Rider 9 months ago

“I must confess I had higher expectations based on your description than I got from the content of the article.”

Admittedly, it comes off as a little rantish, and with some of the links now bad or to questionable material (though I feel most tell the story the author intends and are right on the money in pointing out either Krugman’s bad attitude or sloppy methods), it’s probably not the most effective critique. But there are plenty of other sites out there that do that, and like my favorite — Krugman-in-Wonderland — they’re all going to have good points mixed in with some petty insults and a few ineffective/bad critiques themselves.

I just don’t get why Krugman seems to be above reproach in that regard. He gets to unload full-on snark and condescension and make some sloppy errors (biased, cherry-picked presentations) yet people seem to give him a pass with, “Oh but he’s the esteemed Nobel Price-winning professor from Princeton.” From anybody else, particularly those that try to critique him, it’s, “Oh geez, another stupid/jealous lowlife from the obscure world of the internet thinking he can hang with Dr. K. It’s just impossible to wade through their diatribes for all the insults and snark.” Wait, what????

“I merely looked at the critique you provided. To the extent that he stifles critiques of his articles, I believe it is bad policy. He should welcome the debate.”

That’s the crux of the problem with Krugman. He is completely disinterested in entertaining any other viewpoint. To him, the matter is settled and to acknowledge the dissenting opinion would be giving a voice to those where it isn’t desrved. In his world, it’s, “I’m Paul Krugman. I won a Nobel Prize. I’m always right. QED.”
#64 written by Michael Weiss 9 months ago

Mule,

That’s the crux of the problem with Krugman. He is completely disinterested in entertaining any other viewpoint.

Sure, fine. But that doesn’t make everything he says wrong, any more than Rush Limbaugh’s disintrest in entertaining any other viewpoint makes everything he says wrong.

I just don’t get why Krugman seems to be above reproach in that regard.

I don’t think he is. But every time I have looked into complaints about the facts and/or logic he uses in his articles, I’ve come up empty. Perhaps some hit the mark, but they’re sufficiently few in number that I haven’t been able to find one in my (admittedly nonexhaustive) searches. It’s not for lack of trying, either. And, yes, KiW has been one place I’ve looked. The only complaint that seems to have merit is that he has a seriously outsized ego.
#65 written by Mule Rider 9 months ago

“…Rush Limbaugh’s disintrest in entertaining any other viewpoint makes everything he says wrong.”

False equivalence. No one much cares when one larger-than-life blowhard radio personality wants to challenge another over The Truth and dismissed, but it’s something to note when highly esteemed members of the economic community — with roughly equal status and acclaim as Dr. Krugman — openly challenge some of his work and point out errors and/or “sloppiness” in his data usage, and he simply sneers and makes insults and hides behind his computer screen or the gates at Princeton University.

“But every time I have looked into complaints about the facts and/or logic he uses in his articles, I’ve come up empty.”

No offense, but I’d reckon part of that comes from the fact that you have preconceived notions to make you skeptical of anything anti-Keynesian.

“Perhaps some hit the mark, but they’re sufficiently few in number that I haven’t been able to find one in my (admittedly nonexhaustive) searches.”

Admittedly, in the internet age, the signal-to-noise ratio is pretty weak as every blowhard with a little free time wants to get his voice out there “calling out the big boys.” Many are weak, and even the guys who have the credentials to do it often get caught up flexing their own ego and spending more time on flinging a little condescension and snark at Krugman for his perceived mistakes than making it clear what problems they have with is methodology.

“It’s not for lack of trying, either. And, yes, KiW has been one place I’ve looked. The only complaint that seems to have merit is that he has a seriously outsized ego.”

They do focus on that, yes, and as I alluded to above, that’s a real problem that keeps any real debate from happening. But at the risk of going all tu quoque, I think that’s one of the biggest gripes about Krugman. He rarely makes logical economic arguments anymore. It’s primarily snipes and critiques of conservatives/Republicans and very few data-driven arguments. He’s more of a political operative spewing ideological bull than substance.
#66 written by Michael Weiss 9 months ago

Mule,

No offense, but I’d reckon part of that comes from the fact that you have preconceived notions to make you skeptical of anything anti-Keynesian.

You’d think, but that’s not how I operate when I’m in the mode I’m in when I’m looking at the Krugman Kritiques.

Admittedly, in the internet age, the signal-to-noise ratio is pretty weak as every blowhard with a little free time wants to get his voice out there “calling out the big boys.”

And therein lies the problem. I can’t find the signal in all that noise. I want to find the signal. I want to see a good, solid challenge to Keynesian theory.

I think that’s one of the biggest gripes about Krugman. He rarely makes logical economic arguments anymore.

It happens to a lot of people. All it means in this case is that we should focus our attention elsewhere when discussing Keynesian countercyclical economics.
#67 written by Mule Rider 9 months ago

“I want to find the signal. I want to see a good, solid challenge to Keynesian theory.”

Admittedly I’m puzzled by this statement and have to ask, “Why is that?”

Because if you perceived there to be a credible challenge to the economic theory your embrace, wouldn’t that shake the foundation of your own belief system, i.e. that you could be “wrong”?

It seems more logical that you would find the perceived absence of a credible challenge to be an indictment of all these other so-called “theories” and justification that Keynesian policy prescriptions are the proper course of action.

I’m sorry, Michael, but for as balanced as you are, the logic isn’t always there.
#68 written by mclever 9 months ago

@Mule

Considering that I find I share Michael’s outlook on many topics, I will suggest that you misunderstand the way people like he and I approach things like economic theory. We like to see preconceived ideas burst–or at least given a good poking–but only if the logic of the criticism is sound and the evidence clear. Nothing better than discovering something new that allows you to view the situation with new eyes.

So, the fact that he can conceive that there could be a credible challenge to an idea that he presently holds as valid doesn’t shake the foundations of his belief system. For many moderately liberal thinkers, it’s structural to their belief system that any idea could be shown wrong. And, whenever an idea seems too tightly beholden, folks with a mindset like Michael’s are more apt to search even harder for something to poke at it.

Not that I want to speak for Michael on anything, but your insinuation that he was illogical about something was too big a lure for me to pass.
#69 written by Michael Weiss 9 months ago

mclever said it better than I could have. Hit the nail on the head.
#70 written by GROG 9 months ago

@Mule,

Regarding Krugman, I stumbled across this piece while surfing the web last night. It’s a good example of the Krugman tactics you alluded to earlier.

I don’t have time to delve too deeply into it tonight, but the most glaring example of sleight of hand in this piece is found in his two graphs — “Changes in Employment” and “Rates of Wage Change”. (There are other problems with his analysis here as well.)

Why do you suppose he used actual change in employment, but used rate of change in wages?

This is just one example, even in this piece, of the type of tactics Krugman uses all the time.
#71 written by dcpetterson 9 months ago

mclever,

Well said. I love learning new things, and having my preconceptions challenged. I love it so much, that’s what my fiction is almost entirely about — challenging preconceptions, mine along with (I hope) my readers’.

I tend not to have opinions on things I don’t know about. How can I agree or disagree with something I don’t understand? I didn’t have any opinion about Austrian economics, for instance, until I crammed some on the topic. There are some useful ideas there, but I find most of it to be intellectually lazy, and mostly just an attempt to justify misanthropy.

I came to that conclusion after reading a bunch of stuff from the people who agree with it. I haven’t read anything about Austrian thought (other than some comments from Michael) written by people who disagree with it.

I would love to write a Michel-Crichton-type thriller where the hero is an Austrian economist. It would push my envelope, and force me to find out even more about that philosophy, and would challenge still more of my preconceptions.

Maybe I should put that novel into my queue.…
#72 written by Mule Rider 9 months ago

Thanks for that, GROG. Yeah, if you pay close attention to what he spews — hell, it doesn’t even have to be that close — you’ll find some pretty big flaws/manipulations in how he presents his argument.

I used to read him semi-regularly but just got to where I couldn’t stomach his narcissism, snark, and condescension anymore, so I’ve hardly paid attention to what he’s put out there the past several months.

We all just see the world a little differently, I guess, but I’ve seen numerous factual arguments that present a credible challenge to the policy prescriptions of Keynesianism. That self-described Keynesians don’t see those arguments as credible is of little concern to me nor does it shake my on belief system in economic theory. I feel like I’ve given Keynesianism an honest look through the years, but I can never get around the idea of having a central bank or central government thwart market signals with coercive action and come away with any other conclusion than it has serious negative long-term consequences.
#73 written by shortchain 9 months ago

GROG,
How is it misdirection when Krugman says, right above the graphs, that the “signature” of a structural imbalance is:

job losses should be concentrated in the bloated sectors, that
employment should if anything be rising elsewhere — and wages should be
rising in the unbloated sectors more rapidly than in the bloated ones.

This is not Krugman’s problem. He’s very clear about what he’s doing.

Since he’s saying that employment should be rising elsewhere (which only requires that you look at the numbers, to see if it’s going up or down), but that you need to look at where the wages are rising faster (which requires you to look at the derivative).

You seem to have a fundamental problem understanding the difference between 0^th-order analysis (rising versus falling) and 1^st-order analysis (comparisons with rates of change).
#74 written by dcpetterson 9 months ago

Grog:

Why do you suppose he used actual change in employment, but used rate of change in wages?

I don’t know. Why do you suppose he did?
#75 written by dcpetterson 9 months ago

Mule,

Instead of generalized insults directed at Krugman, can you give a specific example of something he’s said that you disagree with, and why you disagree with it?
#76 written by Michael Weiss 9 months ago

Mule,

I can never get around the idea of having a central bank or central government thwart market signals with coercive action and come away with any other conclusion than it has serious negative long-term consequences.

It certainly can, but I have yet to see a credible explanation as to why it must, which is generally a key article of faith of Austrian adherents. In fact, it’s treated more as a postulate than a theorem.
#77 written by shortchain 9 months ago

Michael,
Don’t you mean as an article of faith, rather than as a postulate?
#78 written by Michael Weiss 9 months ago

shortchain,

Don’t you mean as an article of faith, rather than as a postulate?

The distinction is subtle, but the definition of “postulate” that I’m using here is:

A thing suggested or assumed as true as the basis for reasoning, discussion, or belief.
#79 written by shortchain 9 months ago

Michael,
The difference is that a postulate can be questioned, and its truth can be discussed in an abstract way. An article of faith cannot, by a believer. Anyone who suggests that it might not be true is a filthy infidel.
#80 written by dcpetterson 9 months ago

In mathematics, a postulate is assumed to be true before you begin a discussion. “Given these preconditions (ex: we’re operating on the surface of a sphere rather than a plane), what can we say about the sum of the three angles of a triangle?”

An equivalent in economics is, “Given that having a central bank or central government thwart market signals with coercive action will have serious negative long-term consequences, what happens when a central bank raises interest rates?” Any attempt to answer with a desirable outcome will elicit variations on: “… but we’ve already said that central banks will inevitably cause damage, no matter what they do.”
#81 written by Mule Rider 9 months ago

“Instead of generalized insults directed at Krugman, can you give a specific example of something he’s said that you disagree with, and why you disagree with it?“

If you’d asked me that a couple of years ago, I’d have obliged. But I’ve hardly read him lately and what little I skimmed to contribute to this discussion confirmed he’s just as snarky, condescending, and egotistical as ever. So pardon me for refusing to hold my nose long enough to wade through his vitriolic BS to find something specific to respond to.…and I trust you’ll accept my excuse on good faith because you’ve used the exact same excuse to refrain from wading through materials I’ve presented from libertarian-leaning economists.

“It certainly can, but I have yet to see a credible explanation as to why it must, which is generally a key article of faith of Austrian adherents. In fact, it’s treated more as a postulate than a theorem.”

I think there are some materials out there — likely on the mises.org site — that take a stab at why it “must” or “will” be the case.
#82 written by dcpetterson 9 months ago

If you’d asked me that a couple of years ago, I’d have obliged. But
I’ve hardly read him lately and what little I skimmed to contribute to
this discussion confirmed he’s just as snarky, condescending, and
egotistical as ever.

Understood. It doesn’t tell me much about your policy differences with him, however.

So pardon me for refusing to hold my nose
long enough to wade through his vitriolic BS to find something
specific to respond to.…and I trust you’ll accept my excuse on good
faith because you’ve used the exact same excuse to refrain from wading
through materials I’ve presented from libertarian-leaning
economists.

Sure. Good faith accepted. I just won’t bother to respond to your criticisms of Krugman then, since there’s nothing of substance to which I can respond. And that’s fine, there’s nothing wrong with blowing off steam, if that’s what you’d like to do.

The difference, though, is that I don’t tend to pick out a “libertarian economist” to complain about, and then refuse to discuss that writer’s work. I might decline after we’ve been talking for a while, and then you recommend someone, and I find I can’t get through the nonsense. I don’t make a specific point about objecting to the logic of a specific writer, if I’m not willing to discuss that writer. You did specifically single out Krugman as being flawed and mistaken, not just unreadable, and then refuse to discuss why he’s flawed and mistaken. YMMV, but I don’t see the situations as comparable.

In any case, live and let live, I say. If you don’t want to discuss the meat of his ideas, we won’t.
#83 written by Mule Rider 9 months ago

“And that’s fine, there’s nothing wrong with blowing off steam, if that’s what you’d like to do.“

And that pretty much sums it up.….and thanks, by the way, for coming to a reasonable understanding on the matter. I agree that, if I call him out specifically, it makes sense for there to be follow-questions trying to get at the heart of my disagreement with him. Maybe there’ll be an opportunity down the road to go over something meaty, but for right now, I feel like I’d just be trying to see how far I can piss.
#84 written by Michael Weiss 9 months ago

DC,

Any attempt to answer with a desirable outcome will elicit variations on: “… but we’ve already said that central banks will inevitably cause damage, no matter what they do.”

Exactly.
#85 written by GROG 9 months ago

DC from #74:

I don’t know. Why do you suppose he did?

Because he was trying to make the data appear to be something they are not.

Krugman argues that the current unemployment problem we face today has nothing to do with a misallocation of jobs that is being corrected by the market. He believes in the Keynesian theory the recession is caused by a slump in demand.

He correctly esplains that the the structural theory implies that if “we had too many workers in the wrong industries, we have to expect a depressed level of overall employment as workers are moved out of these ‘bloated’ sectors.”

Krugman claims the change in employment has been about the same in construction, manufacturing, and services between 2007 and 2011. He concludes that the signature of a structural problem just isn’t there” and asks us to trust him as “a closer look doesn’t do much better.”

The problem is, if someone does take a closer look, they will see that the construction sector employed 5% of the American workforce. Manufacturing employed 10% and services employed 84% of all jobs. If you do the math, jobs in the service sector was reduced by 2%, manufacturing fell by 15% and construction by 27%. This is a bit different than what Krugman wants his readers to believe.

Not to mention that manufacturing has been losing jobs since the 1960’s.

Austrians would say that loose monetary policy and affordable housing policy caused the housing bubble and in turn a misallocation of resources in the construction industry. According to the BLS figures that Krugman used, construction saw a 27% decline in employment between 2007 and 2011 compared to 2% in the service sector and 4.5% overall.

This is what happens when we take the closer look that Krugman warned us about.
#86 written by dcpetterson 9 months ago

Grog,

Thanks for responding. So, I get it, that you think we need fewer people who are reasonably paid, with benefits, building America’s infrastructure — but more burger flippers at minimum wage with no benefits. I get that.

And again, I thank you for responding. But you didn’t answer my question, and you didn’t address the point you made before. Let’s try again.

You had asked,

Why do you suppose he used actual change in employment, but used rate of change in wages?

You wanted to make your own point, and you used percent of change in employment in those industry sectors (which is not the same as “rate of change”). But then you did not, in any way, address change in wages, whether actual, or percent, or rate, or any other related metric.

So, once more, to address the question you asked: What point do you think Krugman made by using actual change in employment numbers? What point did he make with rate of change in wages? And why would he use those different metrics?

I’m not asking what metrics you would have used to make the point you want to make. I’m asking why he used those metrics, and what point you think he was making (since that’s what you asked).

Then let’s go farther, and address the point you want to make. If indeed there is a case of “misallocation” going on, what would you expect to happen to rate of change in wages? What actually did happen to the rate of change in wages?
#87 written by dcpetterson 9 months ago

By the way, you only quoted a portion of Krugman’s position (or rather, you quoted one partial expression of it). Here is the full point:

OK, so what should be the signature of that story? Surely it is that job
losses should be concentrated in the bloated sectors, that employment
should if anything be rising elsewhere — and wages should be rising in
the unbloated sectors more rapidly than in the bloated ones.

Do we see employment rising in the under-allocated sectors? Do we see a significant difference in the rate of change in wages between the sectors you think are “over-allocated” vs. “under-allocated”?
#88 written by shortchain 9 months ago
I’ll back up DC’s observations with these suggestions (and my take on them) for GROG, as a means of answering his question and educating the rest of us:

Did Krugman claim that employment would be down equally in all sectors? (I say: no, he didn’t, just that all would be down.)

When there is not enough work for workers in some sector, over the short run (a couple of years), do companies reduce the pay of people in that sector, or do they reduce employment? (I say employment, mostly.)

When there is a demand for people in some sector, do companies immediately go out and hire people, or do they instead post hiring notices and start competing for workers by raising the wages they offer? (In most sectors you cannot simply go out and round up more RF engineers, more nurses, more heavy equipment operators — there’s an inevitable lag before people can be made available.)

IMO, this is why the “signature” of a structural imbalance in employment is the way Krugman says it is, and why you sometimes have to look at the derivative of a metric, not simply the increment.

But hey, what do I know, I’m just a mathematician/computer engineer with delusions of competence in my own field, not a trained economist. If someone will explain to me why I am utterly wrong, I would listen quietly, if not graciously.
#89 written by Max 9 months ago

“The good Christian should beware the mathematician and all those who make empty prophecies. The danger already exists that the mathematicians have made a covenant with the devil to darken the spirit and to confine man in the bonds of hell.”

— Saint Augustine
#90 written by filistro 9 months ago

“The danger already exists that the mathematicians have made a
covenant with the devil to darken the spirit and to confine man in the
bonds of hell.”

Well, I certainly believe that. (I’ve always thought there was something devilishly fascinating about shortchain… )
#91 written by GROG 9 months ago

Why did Krugman decide to use actual number of job losses per sector rather than a percent of change in each sector? Especially when one sector employs 84% of all jobs and another employs 5%? Why is actual losses more meaningful than percent of jobs in each sector?

Thanks.
#92 written by GROG 9 months ago

DC,

Why did Krugman decide to use actual number of job losses per sector rather than a percent of change in each sector? Especially when one sector employs 84% of all jobs and another employs 5%? Why is actual losses more meaningful than percent of jobs in each sector?

Thanks.
#93 written by Michael Weiss 9 months ago

GROG,
I know you asked DC, but I’m going to take a stab at this.

Why did Krugman decide to use actual number of job losses per sector rather than a percent of change in each sector?

Because in rebalancing, you want to look at where the individual jobs are going. If you look at percentages, it tends to skew the relative job movements. That is, a loss of 1,000 jobs in a sector with 84% of all jobs would look effectively like zero, while that same 1,000 moving into the sector with 5% would be a significant improvement. And vice versa, of course.

Does that make sense?
#94 written by dcpetterson 9 months ago

Grog,

I’ll try to address your question after you address mine. Back in #70, you asked (and I think this was meant as rhetorical, not as an honest question, because I suspect you already think you have an answer to it),

Why do you suppose he [Krugman] used actual change in employment, but used rate of change in wages?

In #74, I said,

I don’t know. Why do you suppose he did?

You still haven’t answered. Well, you gave a portion of a deflection (as I pointed out in #87), but you didn’t really address what “number of jobs losses” would mean, nor did you say anything at all about wage changes (up, down, actual, percent, or rate). In #92, you asked,

Why did Krugman decide to use actual number of job losses per sector rather than a percent of change in each sector?

… which is a different question again, unrelated to any of the questions we’ve asked each other so far. As I said, I’ll try to address your question after I understand what you think Krugman was trying to show by using the metrics he did.

Thanks.
Name (required)

Mail (will not be published) (required)

Website

You must be logged in to post a comment.
Comment Feed for this Post