On Smith On Cochrane On Keynesians
Noah Smith has an excellent post which is very critical of something John Cochrane wrote. I added a couple more criticisms in comments
Your post is very good as usual. I’d add a couple of things.
Cochrane wrote “With the 2013 sequester, Keynesians warned that reduced spending and the end of 99-week unemployment benefits would drive the economy back to recession. Instead, unemployment came down faster than expected, and growth returned, albeit modestly. ”
Exactly which Keynesians predicted that sequestration would cause a recession ? I think that as a matter of good editorial policy, names with citations in support of all such claims should be demanded (I am not saying the WSJ must publish the names, just that a competent editor should demand that the author prove that the author can name such names).
I note *again* that, there is no puzzle to Keynesians about why sequestration wasn’t followed by a marked change in the growth path of GDP (let alone a recession). The reason is that sequestration did not cause a marked change in the path of US G — real government consumption and investment. It was threatened in advance. It was a change to annual budgets which doesn’t force a sudden shift in spending within the year. Much of G is state and local. It declined and declined, then increased. The rate of GDP growth is clearly correlated with G growth. Economists should look at such data before writing.
Quick look at the graph (don’t look at the x-axis) can you guess when sequestration started ?
Also note sequestration hit March 1 2013, extended unemployment benefits ended January 2014. Lumping them together is very casual data analysis. This is quite important because, when one considers state and local spending too, there has been constant anti-Keynesian austerity since ARRA stimulus spending peaked. Thus a stone Keynesian would predict consistently disappointing growth (at least until the past 2 quarters see the graph). This is exactly what happened (where “disappointing” means below Fed forecasts and that is just a fact).
“The Phillips curve failed to understand inflation in the 1970s and its quick end in the 1980s, and disappeared in our recession as unemployment soared with steady inflation.”
First does the WSJ employ editors ? Obviously a curve didn’t understand. Understanding requires a brain. The Phillips curve is brainless. It is not the only brainless entity.
The Phillips curve was never Keynesian doctrine. The prominent Keynesians used expectations augmented Phillips curves which fit the data from the 70s and 80s well. The end of the US inflation included a huge recession. This fits the Keynesians story and not at all the Lucas supply function or RBC stories. In contrast, in Europe, the disaster which followed disinflation was almost as far from predictions based on New Keynesian models as from those based on new classical models. Cochrane is relying on false claims about intellectual history. To many links but google James Forder Oxford.
Or again, names and cites. He will not be able to cite a prominent Keynesian who said the expectations un-augmented* Phillips curve is stable, because no such person exists. I count Phillips as a prominent Keynesian. They don’t have Paris and never really did.
* update: typo corrected
It has been fun or perhaps the better word is satisfying to watch you, BDL, Noah Smith, Dean Baker and others take down Cochran’s latest rant. At this point Cochran has devolved into a sputtering ideologue who prostitutes whatever academic credibility he may have had into serving a series of partisan priors.
But the larger discussion brings up a much larger point about the state and place of the discipline of economics. Folks like Adam Smith were known as political economists with the descriptive political carrying quite a bit of weight. There was at least a tacit acknowledgement, and usually more than tacit, that a series of normative moral preferences underpinned much of economics.
In his book “Technopoly” Neil Postman discusses the problem of being captured by our tools. It seems very much that economists and social scientists in general have been captured by statistical technique while often ignoring moral and normative assumptions and foundations that are the beginning of most of their discussions.
Richard Green (by way of Thoma) has had a nice discussion of this: http://real-estate-and-urban.blogspot.com/2014/12/the-limits-of-knowledge-in-economics_23.html
I am also reminded of the Borges story, “On Exactitude in Science”, which imagined a map so accurate that its scale was “mile for mile”. Economics is a slice of the human experience, albeit an ever larger slice as we accept the idea that Homo Economicus has replaced Homo Sapiens. That acceptance has led to the illusion that we can so well measure the realm of human economic interaction that we can make not only useful, but fully deterministic, predictions about how the economy (and therefore human society) behaves.
From Friedman’s appeal to a sort of sola self-interest to Becker’s attempts a apology for discrimination as a purely economic phenomenon we have been captured by a reductionist sort of economic scientism that dons a veil of precision that is hardly deserved.
Better that folks like Cochran and Mankiw admitted at the start that their interpretations are designed to lead to certain specific conclusions about how justice is distributed in the economic forum than to pretend that they have discovered certain innate and perfect characteristics of economic behavior. The same caveat goes for economists on the Left although I think that folks like Krugman and Stiglitz tend to do a bit of a better job in admitting their prejudices with respect certain distributions and outcomes as being more just.
Economics is a discipline that describes systems but it doesn’t do this in a simply scientific sense like a biologist. The actors in those systems may have certain behaviors that can be correlated to certain outcomes but the descriptions that arise from those observations can never be perfect or even very precise as future predictors. Even on a macro level institutions and masses of individuals operate in ways that are not easily reduced to specific rules.
Cochran seems to be on a path that inevitably leads to this: https://www.youtube.com/results?search_query=Tom+Waits+Step+right+up
Very nice post indeed.
You respectable economists love this game of Whack-A-Mole, don’t you?
When are you going to realize that Cochrane is endemic to the prevailing methodology in economics? As long as it’s about telling stories about equilibrium it will be fertile ground for ideologues of every stripe.
Krugman’s stories are no less ideological than Cochrane’s. The difference, as Krugman explains, is that reality has a well known liberal bias.
Having the right bias is not the same as having a method that works.