Paul Krugman took a macro forecast from Mark Zandi, and then after the fact compared it to the actual trajectory of GDP. Krugman concluded that Keynesian theory was vindicated, when in fact the results are more in line with what the critics predicted would happen. FULL ARTICLE by Robert P. Murphy
Source link: http://archive.mises.org/15125/have-events-vindicated-keynesian-models/
Have Events Vindicated Keynesian Models?
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I accept the swimming pool analogy, along with the cost of moving the water from one end of the pool to the other. I would add that the water level was determined by the supply & demand for each factor of production. That system of reward & punishment maximizes the use of resources. So in addition to the cost of moving the water, is moving the factors of production to less optimal usage. For example, increasing the payment for labor, decreases that wealth from having a greater return.
In other words, supply & demand optimizes the allocation of resources, so any change will reduce economic development. There can of course be some short range gain (analogous to an addict getting a fix, or borrowing money that will be repaid with interest). Yet the best strategy for economic development is not to artificially change the payoff, but to increase the value of any factor of production to the end product for the consumer.
It has become clear to me that Paul Krugman does not believe what he writes. His columns are so full of half truths, obfusications and logical fallacies that they cannot possibly describe an intelligent person’s belief system. I have reached the conclusion he is writing from the position of the central planner; a Mustapha Mond, deceiving those that wish to be deceived. I believe his primary motivation is simple redistribution, by the Fed and by the the Congress. How else could one call what happened in the real estate bubble “a product of free market capitalism and lack of regulation” (even Krugman knows the FDIC and GSAs, Congress and the Fed played primary roles) or that job growth under Clinton (higher taxes) and Bush (ostensibly lower taxes) proves higher taxes leads to job growth? I believe he does this because of his belief that it is more humane to redistribute and plan than it is to rely on markets to decide prices. I also believe he knows his system is unworkable and that he constantly moves the bar so he can push off the realization of the consequences of this madness one more day.
Krugman is either delusional or deceitful. I believe it is the latter.
Murphy, as a good Austrian you are ignorant of econometrics
Let’s say for a moment that Krugman is right (I know, I know); and let’s say that the result of an economic turnaround expands the tax base 50% – if that’s even possible. Given the size of the deficit, which will continue to add to the gargantuan debt, along with QE III…XI, is there really a way to avoid an eventual collapse of the dollar?
Why would one even waste his/her time on macro/micro economics? Trying to attach the physical science with the social? It seems to me that all that become obsess with this eventually become insane. After reading some books/articules of Keynes, it seems to me he was with an affliction akin to syphilis.
I do not see how those charts vindicate the Keynesian Model at all. I admit that I am a novice when it comes to macro economics eventhough I feel that I have a good grasp of the various theories involved in it. Just from a simple glance at those charts alone it appears to me that the old bucket with a hole in the bottom would be a better analogy to describe what we are seeing in them. If you pour enough water into that empty bucket the water, or in this case, the GDP will rise as we see at the end of 2009. However, when you stop pouring the water into the bucket the water levels continue to fall due to the water exiting through the bottom. That, in my opinion, is what we see occuring at the end of 2010.
Its my view what Krugman proposes would only work if the economy is structurally sound and from everything I have read that simply is not the case. What I am saying is, there have been no attempts to repair the hole in the bottom of our bucket. Therefore, I conclude that Keynesianism only covers up those economic structural problems and only for a short period of time. The Austrian School though forces painful changes in the economy if necessary allowing for a much stronger economic foundation to built upon in the future.
Joe O. actually said something similar to what I was thinking, but first I wanted to see if I could clear something up.
I realize that you say “critics” without specifically naming yourself, but assuming you’re a critic:
Are you contending that, in general: 1) people and businesses in the economy will react negatively to news of an impending stimulus (meaning they will somehow act in a manner to slow growth because of this information), 2) while the stimulus is being doled out through various projects the effect will be negligible, and 3) that once the stimulus has been spent, the market participants will then start acting in a different manner that increases growth, due to the lack of a stimulus?
Is fiscal stimulus largely a separate issue from the business cycle? The reason I am a little confused is because I would expect fiscal stimulus (which comes out of “thin air”, at least in the short term) to actually have a stimulating effect as its proponents claim (in a similar manner to Fed monetary expansion), only – to use some more analogies – not “jumpstart” the economy, but act more as an actual stimulant like caffeine, and “wear off” after a short time. This is the story that I see in the graphs, not the story you seem to be describing.
How does your story explain the now negative slope in the last few quarters?
Thanks!
Even a broken clock is right twice a day. The “beauty” of the Keynesian theorists is that since there is no real logic required to explain market fluctuations then the truth can be whatever these nimrods manufacture. “Fiscal Policy works when it is tried”, really? Which fiscal policy? Does working mean the economy really improves or does working mean that politicians and the public still buy this rubbish? The scary part about Krugman and others of his ilk is that the neo-Marxists need a guy like this to create faux statistics that they can sound bite to the sleeping masses. The transfer of wealth to the government sector will eventually overwhelm the carrying capacity of the people that produce the wealth. Eventually, no one will be able to produce enough wealth to hold up Krugman’s house of cards. Of course, at that point he can conveniently say that not enough Keynesian theory was applied to maintain the status quo. Under Keynes he can never be wrong as long as he can find a receptive audience. Krugman and his minions need Keynes to be vindicated. Because in a world where markets prevail, truth matters and politicians exist only to protect our rights instead of involving themselves in financial matters these bottom feeders would find themselves without cause or gainful employment.
Prof. Murphy,
If I understand you, you are saying that Zandi was right in his prediction of what would have happened absent a stimulus but wrong about the effect of the stimulus, whereas Krugman would say he got the effect of the stimulus right but his forecast about the underlying economy was too rosy. So your view would be that if there had been no stimulus, unemployment have topped out at around 8%, right?
Dear Prof. Murphy,
Either you have made a simple mistake or have descended into the kind of number misinformation that has lead our “economist” talking heads into the toilet. The number you quote as the GDP in 2009 is actually the one reported on 1/1/2009, i.e. the GDP change for 2008! For 2009, according to the statistics on that page, GDP actually increased by nearly 3%. If anything, Zandi underestimated the GDP growth. See:
http://research.stlouisfed.org/fred2/graph/?chart_type=line&s1id=GDPC1&s1range=5yrs
Turning to GDP performance, it’s even worse. Zandi had forecast a slight 0.3 percent drop in real GDP, if the government wisely implemented his suggested stimulus. Zandi had warned that if the government did nothing, then 2009 GDP might fall a “stunning” 2.2 percent in a single year — the horrors!
Well, with the actual Obama stimulus that passed early in the year, real GDP in 2009 fell 2.6 percent compared to the previous year, i.e., a worse decline than Zandi’s projection for a no-stimulus scenario.
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