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