Sunday, December 21, 2014


Autopsy for Keynesian Economics. (I don't get to pick the titles BTW) A Wall Street Journal Oped. I'm trying for something cheery at Christmas, and a response to the many recent opeds that ISLM is just great and winning the battle of ideas.  As usual, the whole thing will be here in a month.
This year the tide changed in the economy. Growth seems finally to be returning. The tide also changed in economic ideas. The brief resurgence of traditional Keynesian ideas is washing away from the world of economic policy.
No government is remotely likely to spend trillions of dollars or euros in the name of “stimulus,” financed by blowout borrowing. The euro is intact: Even the Greeks and Italians, after six years of advice that their problems can be solved with one more devaluation and inflation, are sticking with the euro and addressing—however slowly—structural “supply” problems instead.
Read more at WSJ...

Update: Hoover has an ungated version here;  Cato has an ungated version here.


  1. With reference to defense spending, thought you might like this from Prof. Krugman's latest article: "The truth, however, is that war really, really doesn’t pay. The Iraq venture clearly ended up weakening the U.S. position in the world, while costing more than $800 billion in direct spending and much more in indirect ways." Didn't something else cost $800 billion dollars too?

  2. Some worthwhile points in the article but can we please put to bed supply side economics now? Decreasing tax rates on the wealthy didn't lead to a good economy in the 00's and increased tax rates on the wealthy have been followed by the best economy in 15 years.

    1. This may seem like a minor point but taxing high incomes is not the same thing as taxing the wealthy. I'm sure there is a lot of overlap between those groups, but a person who has a high income in a particular year is not necessarily wealthy, and vice versa.

      And I think saying this is the best economy in 15 years is a pretty big stretch. The last two quarters have been encouraging but overall growth has generally been mediocre. 5+ years after the recession ended, unemployment is still well above its pre-recession levels and median income is still below. Things seem to be moving in the right direction though. Hopefully it continues.

  3. Screeds aren't cheery, and your article is a screed. Your article has a thesis, but you abandoned it in favor of making mocking asides, tweets almost. You also abandoned points and transitions. None of your points transition. They aren't even points. Finally, you completely mischaracterize Keynes and continue to fail to understand his joke.
    Specifically, your restated thesis in your conclusion is "the policy world has abandoned the [Keynesian] notion that we can solve our problems with blowout borrowing, wasted spending, inflation, default and high taxes."
    Keynes advocated blowout borrowing? People such as Krugman and Shiller argue for blowout borrowing today? Blowout borrowing?
    Keynes advocated wasted spending? Ha! Keynes pointed out, hilariously I might add, that the Austrian's serious plan, gold-mining plan, was the most wasteful spending plan of all, to which anything would be an improvement, especially actual responsible infrastructure spending.
    Keynes advocated inflation and default as debt non-repayment strategies and high taxes as a debt repayment strategy? Moderate-to-low inflation perhaps, but default? Perhaps some tax increase during the boom, but probably not, and certainly not high taxes.
    How can the world abandon a straw man of your own creation?

  4. Red meat for the WSJ editorial page and other partisan hacks who have been wrong about everything for years. Bravo. This article got absolutely lit up by a range of economists today.

  5. Sorry, I will have to do this in two successive comments, cutting being undesirable.
    I would have interpreted this Autopsy article as a right-wing screed, a succulent gathering of imprecations thrown at "Keynesians" over the past few years, but for your good scholarship in recognizing that the preponderance of scientific economics supports Keynesian thinking in your Policy Penance post. The "Autopsy" in this later WSJ piece ( is in actuality that of the old pre-Keynesian anodynes it is composed of. The heart of this autopsy is a rhetorical question emerging from a thicket of misarguments.

    Starting with, the 2008-9 stimulus "fell flat." It didn't actually, since we have good estimates of its effectiveness, dozens, as your Policy Penance post acknowledges; but, as all Keynesians argued at the time, the stimulus' total effect was insufficient to 'unflatten' subsequent growth. The 2009 bill was all too temporary and inadequate. But you knew that.

    You also knew, and told us, that before the end of WWII Keynesians were forecasting a recession, that did not eventuate. You probably knew, but forgot, that this forecast was based on experience, the uncompensated diminution of demand from wartime spending experienced after WWI, followed by a sharp depression. Most importantly, you must also have temporarily forgotten that the post-war boom was soundly based on Keynesian policies: the Marshall Plan, to stimulate European demand [and US investment], and explicitly Keynes': the Bretton Woods system of sticky exchange rates, IMF of international rebalancers, and WB for pblic infrastuctural experiments. Most importantly, a Keynes-influenced fed led a regime of historically low interest rates, that well into the interstate era, allowed the marginal efficiency of capital to be shared equivalently by wages and profits.

    In other words, strongly Keynesian policies both facilitated and extended the post WWII boom. I think you knew that; but also that it will be the second line of Keynesianism's epitaph, to be written long in the unknown future. The choice to censor it is a recurrent problem when one's mind is changing.

  6. Part two
    Then, this, "Hurricanes are good, rising oil prices are good, and ATMs are bad, ... etc." What a string of wild misinterpretations! Where the ATM comes from I have no idea! The first is simply a statement that disasters engage recovery spending, just like wars, and adeptly led infrastructural development programs, depending on circumstances. The second is a misinterpretation of conventional Keynesianism, where the target variable is wages, to compensate for the productivity gains misallocated over the past several years, not prices, however much some "Keynesians" out there focus on them.

    Keynesians tell us to grow out of huge debts. Adequate core inflation would help there; but unless demand keeps up with capacity through wages growth, the only other remedy for swollen balance sheets is low interest rate rollover.

    As to the price mechanism, I am rather hopeful that the oil price decline will allow a lot of bosses to give a lot of raises, so that wages can begin rising enough to compensate for productivity advances. That's the core Keynesian proposition, the one whose absence from the this autopsy's causes of death speaks volumes.

    Penultimately, Keynesians want "... massive taxation and government control of incomes... " really? There is a literature on optimal taxation, and, absent alternatives, many instances when supposedly civilized nations have found it necessary to reallocate wealth, including the post WWII United States, quid pro quo, over the millennia. As an Italian American, I am quite familiar with a strain of thinking one could call "Mafia Keyensianism." This is sort of like banditry at the gates, and hardly bears mention in a scientific document such as this autopsy purports to be; and how anyone could say any Keynesian could be for it is a complete mystery.

    Well, anyway, what ties this autopsy together rather nicely as its own death cry is this.

    "Keynesians tell us that “sticky wages” are the big underlying economic problem. But why do they just repeat this story to justify inflation and stimulus? Why do they not advocate policies to undo minimum wages, labor laws, occupational licenses and other regulations that make wages stickier?"

    Really? Really? You have been repeating this. Keynesians do not tell us that "sticky wages", or indeed "sticky prices" are a problem! Each is a _phenomenon_. Workers resist attempts to reduce their standards of living. Sellers' prices are set using modeled demand parameters. Neither is an ideological issue. By advocating here that _Keynesians_, whose prime consciousness is on the standard of living, should advocate for the classical economic prescriptions, in modern language, of the "Mr. Pigou" Keynes argued so strenuously and successfully against in the General Theory seventy-five years gone! You can't mean that seriously, unless the "Plutocratic Capitalists" at the WSJ will not have it any other way.
    This leaves you in somewhat the same quandary, as those infamous climate deniers, who ignore the vast preponderance of the scientific evidence, to the cost of the planet, and their own opportunities to contribute. In the end, even Professor Pigou bowed in, "Keynes's General Theory: A retrospective view, 1951," whence the "in" joke, that Pigou ended his life rolling balls around in a bowl. I trust that the tragedies in this piece are your better nature's efforts to avoid the same fate!

  7. This article, like much of your economics, has been shrill, wrong, and bordering on sociopathic. You are a disgrace to your profession. I suggest you take a hiatus to ask yourself whether you are a scholar or a partisan hack.

    1. Brad de Long, is that you ? Projecting again ?

    2. I too am wondering what motivated Cochrane's WSJ blast (my guess: he is still very, very angry at Krugman), but I think your judgment of him here is way out of bounds. Cochrane is a distinguished professor at a top university. That's a very high honor earned only for outstanding scholarship. But he is also human, and like the rest of us, he may lose his temper from time to time.(Few of us get to do so in the WSJ, however.)

      The more I read of this the more convinced I am that we are witnessing a collision of cognitive styles, on top of everything else.

  8. This is the old "look, the economy starts to grow so your Keynesians are SOOO wrong" which Krugman and Wren-Lewis already picked apart back when Osbourne used it.

  9. Barkley Rosser attacks your column by writing on his blog, "[you failed] even to mention a single supposedly Keynesian economist who forecast a return to recession as a result of budget sequestration, a centerpiece of [your] embarrassing column.". But a quick Google search shows that a statement issue by 350 economists says the following, "At the end of the year, we face a congressionally-created 'fiscal cliff,' with automatic 'sequestration' spending cuts everyone agrees should be stopped to prevent a double-dip recession."

    So, here we have not just one, but 350 economists claiming a return to a recession due to the sequestration. Now, not all Keynesians were as bold as these 350 to claim a recession (at least not in public), but I would not be surprised if there wasn't an order of magnitude greater in number of Keynesians who predicted a slow down in growth. In any case the "centerpiece" of your column was easily supported with a Google search.

    1. I don't understand.

      It seems that the "" link only strengthens Professor Cochrane's point. I looked at the names on the list: Sylvia Allegretto, Michael Ash, Dean Baker (a "card-carrying Keynesian"- his own words), John Roemer, Justin Wolfers, Robert Reich..." I wouldn't necessarily, call all of these economists Keynesians, but they are certainly not freshwater economists.

      Anyway, the crux of the article is absolutely valid: (1) the missing deflationary spiral (this is a VERY SERIOUS problem for Keynsians- and some have been working hard on it, see below) and (2) the booming growth (%5 last quarter!) despite the sequester.

      For years, the "Keynesian camp" has been harping on the "freshwater camp" over their inflation predictions (see:

      Either this criticism is unfair or Keynesians need to be judged by their predictions (or, more precisely, prognostication), as well!

      I hope that the recent economic events lead to a reduction of this criticism and some interesting new theories. It seems that the latter is already happening:

      Some economists have provided a patch-up theory:

      Notice, though, that the patch-up theory is DSGE New Keynesian model.It's nice to see that policy institution is using a New Keynesian model.

      Anyway, great points, Professor Cochrane! Though I would have preferred a less combative tone.

  10. No, Keynesians don't want broken windows for people to fix, buried dollars for people to mine, new wars for people to fight, natural disasters for people to rebuild, alien invasions for people to fight, or wasted waste for people to waste.

    Keynesians want appropriate (not additional or discretionary but necessary and proper) countercyclical fiscal policy including both automatic and nonautomatic measures. The idea is as follows:

    When interest rates are low and unemployment is high, many necessary projects become proper for government to take on (businesses won't). When interest rates are high or unemployment is low, many necessary projects become improper for government to take on (businesses will).

    1. Sorry, that's just price = present value, which anyone agrees with. Even my anti=stimulus opeds that Krugman keeps flogging around say that low interest rates, low prices and available contractors makes more projects have positive present values. What makes an argument "Keynesian" is precisely the proposition that we get a multiplier effect out of completely wasted spending.

    2. My understanding has always been that Keynesians consider any increase in spending and/or deficits to be stimulative in a depressed economy (although certain types of spending would have a larger effect than others).

      Remember Brad DeLong back in 2009: "anything that boosts the government's deficit over the next two years passes the benefit-cost test--anything at all."

    3. Thank you for your indulgence and your kind reply. The "completely wasted" concept you're stuck on is Keynes's witty sarcasm: "Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better [my emphasis]." That whole section VI is dripping in sarcasm -- it's like taking a bath in sarcasm. His point is that high unemployment is very bad, terrifically wasteful. And his prescription is increasing government spending on sensible projects that reduce unemployment and are supported by classical economics (price = present value).

    4. Delong's unstated assumption is that the spending will be something decent since it would be scored by CBO, debated in the media and in Congress, passed by Congress, and signed into law by President Obama; by anything he doesn't mean literally anything.

    5. I can't speak to what Delong's unstated assumptions were, but I thought saying "anything" and "anything at all" without listing any caveats seemed pretty straightforward. In any case, maybe this quote from Krugman is more explicit:

      "This is the kind of environment in which Keynes’s hypothetical policy of burying currency in coalmines and letting the private sector dig it up – or my version, which involves faking a threat from nonexistent space aliens – becomes a good thing; spending is good, and while productive spending is best, unproductive spending is still better than nothing."

    6. Thanks for the pushback Zack and for hosting and moderating Prof. Cochrane.

      What Delong, Krugman, Wren-Lewis, and Keynes -- and others -- are talking about is what economists should do when the economy, as it is now, is at ZLB with high unemployment. The specific topic for economic discussion is the output gap, visualized nicely by Wren-Lewis for Europe here and by Krugman for the USA here.

      What Keynes is saying is that economists should advise statesmen -- and Zack in your Krugman link, Krugman, following Summers, expands statesmen to include CEOs -- to spend money so that the output gap goes from negative to zero. Thus the job that Keynes tasks economists with is telling statesmen the amount and duration of the spending required to raise the output gap to zero.

      What Keynes is saying is that it's not the job of the economist to tell the statesmen what specific projects to spend the money on, because that's the statesmen's job to figure out. However Keynes does say that it is the economist's job to tell the statesmen which projects are more productive than others ("more sensible to build houses").

      Keynes laments, in a world-weary Cassandra-esque way, that statesmen are "apt to reach a preference for wholly 'wasteful' forms of loan expenditure rather than for partly wasteful forms [emphasis original]."

      Keynes's attitude next is well, so be it; I can't control statesmen, just advise them to spend an amount for a duration on the productive projects I recommend; and I'll console myself as long as they spend money raising the output gap; I'll accept that as an economist I've done all I can do.

      That's the frame in which to see the statements. If it turns out that some of the statesmen's projects weren't productive as evaluated individually, we can still console ourselves that overall the output gap went from negative to zero.

      Delong was talking about a jobs bill. Krugman recommended temporarily spending nearly $1 Trillion, "about 6 percent of GDP." And he said, "Yes, I know, it would have been politically impossible — but we’re just doing the economics here."

    7. I thought the issue at hand here was whether Keynesian models show a multiplier from any new spending- even spending that is not productive. Obviously Keynes didn't think burying bottles of cash was an optimal stimulus policy, just like modern Keynesians don't think faking an alien invasion is optimal. However, they are very clear that it would have a stimulative effect and would be better than doing nothing. Are we at least in agreement on this point?

    8. Zack,

      Yes, Keynesian models say that when the economy is at ZLB with high unemployment and a GDP output gap, it's beneficial to the economy (which if you want to think about a multiplier yes it means a multiplier greater than 1) for statesmen to agree to raise debt and to spend the money on anything -- anything at all that they'll actually agree to including building pyramids (to keep the hyperbole) -- that lowers unemployment and closes the output gap.

      This Keynesian spending should be limited in amount and duration to lower unemployment and close the output gap. This spending primes the economic pump, putting idle workers back to work, stimulating the economy.

      My objection is to this whole "not productive" characterization as if Keynesians are actually seriously recommending to our statesmen that they try to waste as much money as possible in whatever ridiculous way they want even such that "fraud is good; thieves have notoriously high marginal propensities to consume."

      The focus should not be on "not productive" or "wasteful" spending because that misses the point, which is the huge amount of waste occurring when capital is available but not flowing and laborers are available but not working. The focus should be let's take this opportunity to fix our crumbling infrastructure. Krugman suggested about $1 trillion is what we should spend, and the ASCE said that it would take $3.6 trillion to upgrade our infrastructure.

      Finally, what is or isn't productive is politics as much as or even more than economics. What's productive about going to the moon, as an example? Nothing, but, but, but, think of all the science we learned and all the people working and all the related businesses that formed etc. Even the pyramids are a wonderful tourist attraction.

      Thanks for this nice conversation. Best Regards,


    9. Thanks, you too. I guess we'll have to agree to disagree about some of this, but if nothing else its an interesting debate. One of the things I enjoy about this blog is that, unlike some other econ sites, the comments section is actually a place for serious discussion (other than the occasional trolls of course).

  11. Here's a better (though still problematic and with which I disagree) version of your op-ed, as you really need an editor and your friends at the WSJ aren't helping you:

    The economy is getting better because of policies to address structural problems not because of Keynesian prescriptions for government to increase demand.

    First, Keynesian prescriptions are irresponsible and impractical. Government efforts to increase demand have faltered and will always falter because responsible politicians are rightfully reluctant to increase government debt.

    Keynesians tell us not to worry about increasing government debt because inflation will spare us from ever having to pay. The Obama administration has ignored that advice, promising long-run solutions to the debt problem from day one.

    In Keynesian models, government spending stimulates even if totally wasted. Even hurricanes and rising oil prices are good because the destruction caused will raise inflation and occasion government spending, stimulating output. Waste and destruction are ridiculous and irresponsible, so Keynesians routinely dress stimulus in “infrastructure” clothes.

    Infrastructure spending is needed now, as everyone who has hit a pothole will tell you. But people feel they’ve been had when they discover that the economics is about wasted spending, and that infrastructure was a veneer to pass a bill.

    Why is “infrastructure” spending abstract or anecdotal, not a plan for actual, valuable, concrete projects?

    Some examples of appropriate infrastructure spending are responsible investments in Keystone XL pipeline, LNG export terminals, nuclear power plants and dams. One example of inappropriate infrastructure spending is irresponsible waste on high-speed trains to nowhere.

    Also, too often the Environmental Protection Agency makes it nearly impossible to build anything in the U.S. What ends up happening is that needed roads and bridges are opposed as suburban sprawl, while other projects that are basically “crony boondoggles” are supported.

    Second, Keynesians just don’t make sense. Keynesians argue that spending saved the economy in World War II and then they call for defense cutbacks today. Keynesians told us that once interest rates got stuck at or near zero, economies would fall into a deflationary spiral, yet it hasn’t happened and keeps not happening.

    Keynesians tell us that “sticky wages” are the big underlying economic problem, but they don’t advocate policies to undo minimum wages, labor laws, occupational licenses and other regulations that make wages stickier.

    So, no thanks to the senseless, impractical, and irresponsible Keynesians, the economy is improving. Still, though, growth is too slow and not enough people are working. The responsible way forward is to continue to ignore the Keynesian prescriptions and to continue to address our structural problems.

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