The third sentence (or actually part of the second sentence) of Scott Sumner's post is:
Keynesian: Fiscal austerity is contractionary at the zero bound regardless of whether you have an independent central bank.
Note: "at the zero bound" and "regardless of ... independent central bank". Sumner recognizes the Keynesian model ...
Then he says that this graph shows fiscal contraction has no effect in countries (some at the ZLB, some not ... who cares!) with exclusively independent central banks (forget the regardless above, that didn't matter) after throwing out the countries without independent central banks:
What???!!!
Basically Scott Sumner undid his sentence:
Keynesian: Fiscal austerity is contractionary at the zero bound regardless of whether you have an independent central bank.
You could even take out the "austerity" in that sentence as we see in the first point below. This is not what Keynesian's say at all. This is the same garbage analysis I've seen before from Sadowski and Sumner:
1. Iceland is a garbage data point. It was never at the ZLB (at 6% back in 2014, today it's at 5.75%) and the fiscal consolidation treated as austerity is simply disingenuous (it happens after the finance minister declared victory over the recession!). It's just intellectual malpractice of the worst kind. You can go into the gory details here.
2. Why eliminate countries without independent monetary policy? Austerity at the ZLB doesn't care if you control your monetary policy or not. That assumes the market monetarist model in order to prove the market monetarist model. Those points should not be removed. Note Scott's sentence! It is contractionary at the ZLB regardless of whether you have an independent central bank!
As I say here:
Sumner does cite approvingly of a purported "takedown" of Krugman's austerity graph, but that "takedown" assumes the market monetarist model in order to throw out data (basically, all the liquidity trap countries) that make up the bulk of the correlation.
Let's just throw out all the bulk of the liquidity trap countries engaging in austerity! Lo and behold, what's left over says austerity isn't contractionary.
3. You can't include countries that aren't at the ZLB in order to say something about austerity at the ZLB. South Korea (2% in 2014, 1.5% today), Australia (it was at 2.5% in 2014, 2% today), and New Zealand (3.5% back in 2014, 3.25% today) weren't at the ZLB in 2014. So not only have we thrown out all the liquidity trap countries, but we get to add in a bunch that aren't in a liquidity trap! Sumner does recognize the zero lower bound -- remember his sentence quoted at the top of this post. But somehow it only selectively applies to data that he wants to include.
Overall, this is Sumner's blog post where we replace "austerity isn't contractionary at the ZLB" with "all swans are black"
All swans are black. So let's throw all the white swans out of the data set and put in a bunch of black ducks. Look: all birds are black!
Really???!!!
I used to think Sumner was the best advocate of the monetarist position. I mean he even pulled Matthew Yglesias over to the dark side. But this is really disappointing. You can't assume your model in order to include or leave out data points that favor or disfavor your model. You just can't do that. It's wrong.
Does this really pass for economic research? It makes me sad.
No wonder there hasn't been any uptake of the information transfer model. Economists don't know what good research looks like.
All swans are black = All countries get contractionary results if austerity is practiced at the ZLB (this is what needs to be disproved)
ReplyDeleteSo let's throw all the white swans out of the data set = throw out countries with no independent CB
Put in a bunch of black ducks = lets include countries not at the ZLB in the sample
all birds are black = All countries get contractionary results if austerity is practiced
And Scott then proves this conclusion is incorrect.
Is that your point ?
If so, then I agree that adding in black ducks is bad, but it is irrelevant. .
DeleteCountries with no independent CB are not white swans if they actually had austerity, but black swans with a particular attribute (no independent CB).
Scott's refutation is that black swans with a different attribute (an independent CB) avoid austerity.
Hence despite the unnecessary inclusion of black ducks his proof against "All swans are black" stands as he does show examples of non-black swans.
"Scott's refutation is that black swans" = "Scott's refutation is that some swans"
DeleteThat's not how I put it. Black swan is country with austerity at the ZLB that doesn't have contraction. Black duck is a country with austerity that isn't at the ZLB, but does have contraction.
DeleteAll swans are black = austerity isn't contractionary at the ZLB
All birds are black = austerity isn't contractionary (at ZLB or not)
I put up a pedantic logic version here:
http://informationtransfereconomics.blogspot.com/2015/06/fiscal-austerity-logic-fail.html
Ask yourself: What is the reason for throwing out the white swans?
They don't have independent central banks. That is a key important fact for monetarism, but not for the Keynesian view. The Keynesian view doesn't care about independence, only the ZLB, so you can't throw out the non-independent central banks and claim the result is inconsistent with the Keynesian formulation.
Additionally, countries with independent central banks and austerity can't experience contraction in this formulation -- if any do, it contradicts the model.
Correction:
DeleteBlack duck is a country with austerity that isn't at the ZLB, and doesn't have contraction.
Another way: no countries have independent central banks at the ZLB in the Keynesian view (the actions of the CB don't do anything).
DeleteTherefore throwing out the countries without independent central banks should throw out all the countries at the ZLB if you take the Keynesian definition of "independent", i.e. effective, central bank.
Let me go thru your other posts but I'm not getting " throwing out the countries without independent central banks should throw out all the countries at the ZLB if you take the Keynesian definition of "independent", i.e. effective, central bank."
DeleteWhy can't countries with no independent central banks be at the ZLB ?
In the Keynesian view, if a central bank is at the ZLB, monetary policy is ineffective. This puts it in the same position as a country without an independent central bank: monetary policy can't offset fiscal policy. In this sense (for this problem and looking at this data) a bank at the ZLB is logically equivalent to a non-independent central bank.
DeleteJason, I copied the the data from chart 3 of Sumner's post to a spreadsheet and did a curve fit. Then I removed Iceland, Australia, New Zealand and Korea and did another curve fit. Here it is.
ReplyDeleteNice, Tom!
DeleteI'd say that is inconclusive: there really aren't enough data points left to make any conclusion.
The original Sadowski graph showed an R^2 of 4.2e-5 (already pretty inconclusive) -- I can't imagine it has gotten better removing a couple of points.
The thing is that the monetarist and Keynesian views can't really be shown with the same graph. The set of points that the Keynesian liquidity trap view wants to look at are ZLB countries. The set of points the monetarist view wants to look at are independent central banks (ICB). These sets aren't equal, and there just aren't enough countries in the intersection of ZLB and ICB to make any conclusion.
I'm not disputing the fact that both theories can be confirmed by the data (actually, the monetarist theory isn't falsifiable ... even though the EU had contractionary austerity and an ICB it's because the ECB is incompetent: no true scotsman/no true ICB). I'm disputing the fact that the Keynesian view can be ruled out by the data. It especially can rule it out if you throw out all the data that confirms the model (non-ICB's)!
Essentially what happens (I think) is that all those "Euro Area" countries go from a high weighting (in Scott's chart's #1 and #2) to a low weighting (all of them being rolled up into one "Euro Area" point) in chart #3.
ReplyDeleteBut what's the best way to weight those points? With the size of each economy? As just one per central bank (i.e. what Mark did)?
Yes you're right that's a great observation: the weighting goes from essentially 1 to 1/19 ~ 0.05 for Euro member states.
DeleteI have no idea what the proper weighting is, but it isn't Singapore = 1 and Spain = 0.05.
Since we are using relative changes (fractions of NGDP or current account balance) there doesn't seem to be any reason to not weight the countries equally.
Hempel's Raven paradox.
ReplyDeleteIf you translate "All ravens are black," into predicate logic you get, "Whatever X may be, X is a raven only if it is black". That is equivalent to, "Whatever X may be, X is not a raven, or it is black." A black duck is not a raven, and it is black, so it is confirmatory evidence. Hempel made that point in his original paper.
Thanks Bill -- I should have made a reference to that!
DeleteAbout austerity.
ReplyDeleteI looked up CAPB. It means cyclically adjusted primary balance. Primary balance I get. You can run a primary surplus before paying your creditors their payments due. So even if you run a deficit, you are reining in government spending in relation to revenues. But cyclically adjusted? Are you kidding? Austerity is not foregoing a second dessert, austerity is going to bed hungry. Where you are in the cycle matters.
Jason I don't know if you read this piece of Sumner over at Econolog.
ReplyDeletehttp://www.themoneyillusion.com/?p=29692
Sumner is not really held in very high regard among macroeconomists anyway. He's seen for what he is-a bit of a joke, really. Sort or the Rush Limbaugh of monetary economics. Employs the same tactics.
ReplyDeleteAl Franken once said that on Rush is where you get punished for knowing things. That's Sumner's blog in a nutshell. Good work though