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'What is their model?'

By Ezra Klein

Paul Krugman responds to the conservative mobilization against the Federal Reserve:

I know what my model is: I believe we’re suffering from a severe deleveraging shock, in which the immediate problem is to get someone to make up for the loss of debtors’ spending. (The Greek-letter and funny diagram version is coming soon.) According to that view, the Fed needs to do all it can to reduce the real rates unconstrained borrowers face, and could badly use help from fiscal policy, too. Quantitative easing is literally the least the Fed can do.

Obviously, these guys disagree. But what is their model? How do they think we got into a crisis that has depressed employment all around the advanced world?

I don’t think they have an answer; I think all they have are wild stories about how Obama’s Sharia-law Marxism has unnerved business, or something, with the effects mysteriously spreading to Spain and Latvia.

I think this is the right question, though David Brooks's column taking issue with the very idea of basing economic arguments on empirical models leaves me pessimistic that it'll be answered anytime soon. But one way to test your beliefs on it is this: If President John McCain had reappointed Bush's Federal Reserve chairman and that Federal Reserve chairman was attempting a second round of quantitative easing, would Doug Holtz-Eakin and William Kristol really be signing letters demanding that he stop?

Update: Reihan Salam offers one answer.

By Ezra Klein  | November 16, 2010; 2:43 PM ET
Categories:  Federal Reserve  
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Comments

"David Brooks's column taking issue with the very idea of basing economic arguments on empirical models leaves me pessimistic that it'll be answered anytime soon."

I would submit that what Brooks is arguing is that it's not possible to construct sufficiently accurate empirical models of an economy this complex such that you can use them to make highly specific policy determinations.

I.e. "These models can be used to make highly specific projections. If the government borrows $1 and then spends it, it will produce $1.50 worth of economic activity. If the government spends $800 billion on a stimulus package, that will produce 3.5 million in new jobs."

Posted by: jnc4p | November 16, 2010 2:57 PM | Report abuse

I expect incoming Florida governor Rick Scott to end state participation in a high-speed rail project, rejecting some $2 billion in federal funding because (1) the state will be stuck with future operating costs and (2) because the economy can't be stimulated by increasing the government's indebtedness. Scott will lead a movement to prohibit further spending under the stimulus act, thus reducing the federal budget deficit, which will make more money available to the private sector. There's only so much money to go around, and spending by government displaces constructive private economic activity (unless it's for military bases or NASA in Florida).

At least I think that's the spiel.

Posted by: DaveoftheCoonties | November 16, 2010 3:06 PM | Report abuse

There must be some way to reach a reasonable compromise.

Posted by: klautsack | November 16, 2010 3:21 PM | Report abuse

"If President John McCain had reappointed Bush's Federal Reserve chairman and that Federal Reserve chairman was attempting a second round of quantitative easing, would Doug Holtz-Eakin and William Kristol really be signing letters demanding that he stop?"

NO.

And thus concludes today's round of SATSQ.

Posted by: Nylund154 | November 16, 2010 3:37 PM | Report abuse

Paul Krugman is flat out lying about his model.

In 2006, Krugman was screaming about how the new Democrat congress needs to increase government spending.

Completely inconsistent with his so-called stated aggregate demand beliefs. Demand was pretty high back then.

Posted by: krazen1211 | November 16, 2010 3:52 PM | Report abuse

I wonder what Klein thinks of Krugman's recent admission re the coming "death panels":

...“some years down the pike, we’re going to get the real solution, which is going to be a combination of death panels and sales taxes”

http://www.classicalvalues.com/archives/2010/11/till_death_pane.html

Posted by: msoja | November 16, 2010 4:05 PM | Report abuse

msoja - You gotta problem with death panels?

Posted by: klautsack | November 16, 2010 4:16 PM | Report abuse

I'm just surprised anyone would take republican conservative "thinkers" seriously at this point.

They don't validate any of their work. They just reach into a barrel, pull out whatever is on top, scream it to the heavens and their sheep take it as gospel.

Proof? Evidence? Empirical data? Peer-reviews? Perish the thought!

Posted by: JERiv | November 16, 2010 4:37 PM | Report abuse

Brooks' column brought these quotes to mind:

"its statements and propositions are not derived from experience... They are not subject to verification or falsification on the ground of experience and facts."
-Ludwig von Mises on his economic theory

"[Social science theories can] never be verified or falsified by reference to facts."
-F.A. Hayek

Guys, your way of thinking clearly has no place in serious policy making.

Why? Well, Galactic Lord Xintar of the Orion Nebula, Cosmic Arbiter of All Things Economic, rode to my doorstep on a chariot pulled by unicorns last night and told me Keynesian models are correct.

What's that? Evidence? I thought you said that wasn't relevant to questions of economic theory.

Without evidence you can't take such an authoritative claim seriously?

Well now you know exactly how I feel about your claims.

Posted by: Bill_Casey | November 16, 2010 6:41 PM | Report abuse

Vacuous sloganeer msoja in "inability to detect black humor" shocker.

Posted by: pseudonymousinnc | November 16, 2010 7:12 PM | Report abuse

--*Vacuous sloganeer msoja in "inability to detect black humor" shocker.*--

Here's Krugman, "clarifying" his earlier remarks (cited above):

//cite
(a) health care costs will have to be controlled, which will surely require having Medicare and Medicaid decide what they’re willing to pay for — not really death panels, of course, but consideration of medical effectiveness and, at some point, how much we’re willing to spend for extreme care
//end cite

You see, not "really" death panels, just a bunch a good hearted, really smart folks making life and death decisions for the little people.

If that's "black humor", it's not funny, and it's all you, mousi.

Kruglink: http://krugman.blogs.nytimes.com/2010/11/14/death-panels-and-sales-taxes/

Posted by: msoja | November 16, 2010 8:29 PM | Report abuse

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