Saturday, February 6, 2010


The Empirical Evidence for Fiscal Stimulus...Anyone? Bueller?

In this post Paul Krugman explains that a popular critique of the benefits of fiscal expansion is a non sequitur, since the authors improperly look at deficit spending in periods where there is no liquidity trap (and hence we shouldn't be surprised if deficit spending doesn't spur growth). A fair test of Keynesianism would only look at big deficit spending during periods where central banks had pushed interest rates down to the zero bound:
First, the whole stimulus debate is supposed to be about what happens when interest rates are up against the zero bound....Yet the Alesina-Ardagna analysis doesn’t make that distinction; Japan in the 90s, which was up against the zero bound, is treated the same as a batch of countries in the 70s and 80s, when interest rates were quite high.

Second, they use a statistical method to identify fiscal expansions — trying to identify large changes in the structural balance. But how well does that technique work? When I want to think about Japan, I go to the work of Adam Posen, who tells me that Japan’s only really serious stimulus plan came in 1995. So I turn to the appendix table in Alesina/Ardagna, and find that 1995 isn’t there — whereas 2005 and 2007, which I’ve never heard of as stimulus years, are.

So to put it bluntly, I’m not much persuaded by a paper that doesn’t even identify the one clear example we have in the postwar period of large Keynesian stimulus in a zero-rate environment.

Are there any papers that, in my view, do this right? Yes: Almunia et al, which uses data from the 30s — a zero-rate era — and uses defense spending as an instrument to identify spending changes. And their results look pretty Keynesian.
Everyone got that? Krugman admits that the only two examples in world history to test the effectiveness of Keynesian policies are:

(1) The world in the 1930s, and

(2) Japan in 1995.

These are the two examples to prove how good Keynesian policies are at fixing economies and stimulating growth.

By the way, don't say World War II you silly fool--Krugman has explicitly argued that that isn't a test of Keynesian fiscal remedies.

So we have to base all Keynesian off of one instance, which the economy never really recovered. Hmm that's how we do science right?
And Keynesians like to tell us they are the real deal empirical social scientists unlike all those whacky Austrians with their praxeology!

Tom Woods in a recent talk had some interesting examples of Keynesian failures. The great depression (not) of 1946 and, of course, Samuelson predicting the Soviets would bury the US right up until the Berlin Wall fell on top of him.

The later isn't an example of stimulus but it is an example of reality free economics from deep in the heart of Keynes country.

It seems to be that Austrians, who explicitly reject empiricism as the ultimate test of economic propositions do a better job empirically, than do schools of economics that claim to be empirical but that in practice aren't.

Let's call this "The paradox of the empirical success of non-empirical economics."

Interesting this paradox may not be confined to economics. Or so my doctor told me early in the year. I asked him about this new, much hyped "evidence based medicine" (a.k.a. EBM) movement in the medical world. He said "there is no evidence evidence based medicine is actually superior."

My doctor wasn't being a smart alec. At least, not in this instance. There seem to a newbie like me some serious and credible criticisms of EBM. (For example, see PDF here).

Maybe this is a worthy research project for an under-employed Austrian. Maybe we need a compare and contrast between the Economic "Empiricist" vs Economic Praxeologist debate and the medical debate for and against EBM. There seem to be some useful analogies here. (Of course that statement is speculative and theoretical and not empirical.)

One interesting critque of EBM is that it suits the interests of health managers, insurance companies and bean counters and does not do a good job as far as actual doctors and patients are concerned. It's managerialism uber alles.

Swap state managers for health managers and actual economic actors for doctors and patients and it sounds like Keynesian deja vu all over again!
Well, if Japan hasn't really tried but one fiscal stimulus, then where in the hell did all that government debt come from?
It's always safe to say that Keynesian ideas have no basis in logic, history or fact. The ideas make no sense. If one is basing his economic theory purely upon an analysis of historical events, the experience of the 1920 depression should have disproved Keynesianism for all time. Even the liberals now concede the existence of the 1937 double dip. Of course, they always blame that and everything else upon "not doing enough". But there is no logical or historical basis for "doing enough" as Krugman demands.

In the end, their only response to criticism is to spew venom and attack their critics as anti-intellectual populists who simply refuse to understand "economics".

The Keynesians are pathetic and should be easy pickings especially now that Americans have seen explicit Keynesianism in action and reject it overwhelmingly.
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