 Okay so the session today is entitled Murphy versus Krugman. You can see the way I've set up this PowerPoint the importance of framing effects This you guys I'm betting. How many of you think this is photoshopped Okay, well this guy does all right. It's not photoshopped. That's really me Those are not really my muscles though just to be clear. So this was my Halloween costume so we're gonna talk a little bit about there is a A few perhaps you could say there's a reason that people associate me versus Krugman Tom would saw an entrepreneurial opportunity and tried to latch on to my wagon as I was going up. So this is This is for the throat in case you don't know let me just give up a plug for the podcast So Tom and I had this podcast contra Krugman. Let me say it was his idea He called me up originally and I was like, I don't know if I want to do that We're gonna be just you know pigeonholed and the more he talked about it. I said, oh, yeah We got to do this time. This is gonna be great And so what it is every week we take one of Krugman's op-ed columns and we go through it and dissect it And the point is to entertain but also to teach Austrian economics and show the flaws and in Keynesian analysis So let me just say some words about that for a minute cuz some people we get various types of criticism Some people say, you know, what do you do when you're giving this guy a platform and it's kind of like Well, I think the New York Times already did that and you know, he won that whole Nobel thing You know if you're into that stuff. So For better or worse a lot of people's room would say for worse Krugman has this platform And he is the voice of sort of snarky Keynesian economics. So Tom I said why couldn't we be the voice of snarky Austrian economics, right? And so So we what we do is that we critique his column, but it's Having said that I really do want to stress that a lot of people say oh my gosh Krugman such an idiot He's a moron. He's not all right And it's important to realize that like people times a lot times ask us whether we're talking about Krugman or Ben Bernanke or people of That nature and they say are these guys just stupid or are they evil and I always I'm very polite And I just say well, they're not stupid and I just leave it like that. All right, so All right, so as far as let me just mention what since I brought that topic up. I think the way Krugman Analyzes these things the way he goes to sleep at night. I don't think in his mind He's consciously lying about stuff I think to him this is a big game and he knows these economic models you can have any result you want pop out Because he knows how arbitrary is he's very clever. He can produce different results depending on what he needs the answer to be So that's something I'm gonna hit on it a little bit later But I want to say that officially up front that I that's really the problem I have with Krugman and you'll notice that if you listen to the podcast I make this point frequently It's not so much in any particular argument that what Krugman is saying and the assumptions He's making to get that result is that particularly crazy. I mean as an Austrian economist You say it's not good economics The methodology is bad and you know the type of model he's building is not good But the assumptions he picks and the things he's gonna include in the analysis and the stuff He says we can safely leave this aside for right now Those things change week to week But the thing that's always the same is that there's a role for bigger government and in particular There's a role for Hillary Clinton's bigger government. All right, and so that's partly why also He's he's you know vexes us so much is it's not even like he's in Idiologue so much as he's a partisan that he actually like really likes it's not even just he's a he's a Democrat with a capital D But a Hillary Clinton Democrat, so it's particularly Annoying in that respect so that's that's the point of the podcast and it's funny Like I say we get criticism from both sides when we started out and some people were telling us you guys are being too nice I think the guy would be okay I'm not I don't even know the guy's name to repeat it But he said something like you guys are just treating it like he's making honest intellectual mistakes when it's like this guy He's defrauded my uncle or something and I really want you guys to you know Sick it to him and then other people though say hey I try to share this with my friends who like Keynesian economics who like Paul Krugman and they say you guys are Snarky so we do we do face those those trades you can't make everybody happy so fortunately Tom and I have fun And if you guys want to listen go ahead so now here's another thing now this is not an actual photo This was not my previous Halloween costume. Let me explain this was actually in the economist So let me just give you the story here As to why this isn't again for those who don't know like why was this titled Murphy versus Krugman? It's more than simply all because Bob doesn't like that guy. There's there's more of the story. Although that is true so This was in the this was a caricature in the economist that was Developed it was talking about like the relationship of mainstream economics in the heterodox challengers and this is one of the Things they had so just to be clear. This is the only time I've ever been in the economist magazine thus far in my career so The the the backstory is so don't do it right now But at some point if you haven't seen it you and 25,000 other people have enjoyed this this video stoke the fear That I made the the background to this it's a it's a I'll condense the story for you But you I don't want to leave you guys in the in the dust and if I'm gonna show this picture You got to know what the heck generated this What happened was I got I was writing for me says that org articles criticizing Paul Krugman a lot about his macro policies and things like this nature and then This girl emails me and said hey, I was just at a Barnes and Noble or something where Krugman had a new book coming out I think it might have been his end this depression now But I can't remember like I've had to look at the timeline to see to be able to place it but he had some pop book that was coming out and He was doing the book tour and you know going and doing signings and so on and there was a Q&A session And so she was a fan of the Austrian school and so said hey Dr. Krugman This is great stuff But what you debate someone from the Austrian school about Austrian versus you know Keynesian macro economics when it comes to business cycles and why do we have the housing bust and so forth and He and she was telling me he said something like I know this is gonna sound elitist and I'm not and I'm dodging the question But it's not worth it. No serious economist takes the Austrians for real And I would just be giving them a platform for no reason. So no, I'm not gonna debate them Right, so he said that publicly to her and she was letting me know and so that I started Thinking okay, how can I you know get him to debate an Austrian and I went and saw that The the Facebook movie and you know, it's like yeah We need to like a big thing like that and it was getting me to think along those lines And so I came up with the idea and you remember those I forget the name of it with those animation You could make like animated figures talk to each other with does someone remember what the name of that was There's like eight things you guys have said none of those the ones I'm looking for okay Well, it's it's something that was not what they just all yelled out But anyway, it was like hello Jill would you like to go to the movie with me and she's like no I would not I'm busy that night and they like you would just talk like that. Okay. That wasn't like a re-enacted from my high school days that was So what I made a thing and I had a debate challenge to Krugman and the thing that made it unique if you will was There was a special platform for funding things where you had a lot of distributed Support for it and you could make conditional pledges right so it wasn't just saying hey I'm raising money to do some projects But it was if a sufficient number hit it then it would it would kick in right and so this was like the parent site And there were some spin-offs that were more commercial like for restaurant promotion stuff But this was like the original website that had this idea and so that was the platform I set it up on so it was like a no commitment But the higher so that the deal was the way it was structured is if Paul Krugman ever agreed to debate me then The pot of money that had accrued to that point would get donated to a New York City food bank Okay, and so that was the the leverage if you will says hey It's not you know, it's for charity and it's a New York City food bank if Paul Krugman would debate me And so then this just started you know I set up a website Krugman debate whatever and I started making these goofy videos to promote it So anyway, this was one of the the first ones where I'm training and I and I had my shirt off and so forth and I'm showing the guns and And so anyway it got up to be over a hundred thousand dollars was pledged You know so you people would put in their credit card information But your credit card wouldn't get dinged until Paul Krugman agreed to debate me and that clause got satisfied And so it was what I was thought was gonna happen was that like progressives would say Paul just destroy this guy and get a Hundred thousand dollars to go to the food bank, but that's I didn't see ever a single progressive Say to him. Why don't you just wipe the floor with this guy instead? It was all oh, this is blackmail, you know Like I was you know that the kids were about to eat and I was like no you don't not until So so anyway, so I had you know all these these videos and mostly like I was friends with Glen Jacobs, you know I was wondering could I get him to do like a rocky thing where he's you know Hulk Hogan and picking me up and throwing me and stuff, you know I had I was I was worried Krugman agreed to debate me before we unrolled all these videos that I had in mind Fortunately that didn't happen so but what ended up people ask me like what happened to this thing so one thing is that Krugman did officially say he wasn't gonna so I don't he says look up move Paul's book by Murphy on YouTube for his response All right, so if you go to YouTube and just the title of the video is move Paul's book is his official response What happened is he was Promoting a different book. He guys sells a lot of books. Yeah give him that he was on it like a talking your talk show radio Program and somebody called in and I don't know if the guy like ambushed him like told the call screen or one thing Or if the call screener thought this hey, this will be fun. Let's go instead ask him You know some question about GDP this will be this will be more interesting for people driving around listening But in any event this guy called it and he was yeah, dr. Krugman There's the the Austrian school of economics and they've you know They've made some good predictions and so on and I think there's this guy Bob Murphy's got this debate challenge And I'm wondering what you know, why aren't you debating him? And so Krugman's on the space on a live call and show and they the call screener let this guy through it's probably a closet Austrian and And so Krugman goes this is this is a serious policy debate This is not going to be settled by who has the quickest sound bite and what you know So like he's saying I'm just the clown and he's not gonna Debate me so that that was the official thing the other part was just two reasons for why I kind of let this Die away was well the third one is that now Tom and I have a podcast So that's a better vehicle, but the other thing was that it The the person I had contacted the head of the food bank just to make sure like the philanthropy guy the you know Who the raises funds for just to make sure they were okay with it It wasn't unseemly or anything and that if the check did come through they would be fine with it And I told him and he said yeah, that's fine Like we have barcrawls and we have all sorts of things that people do in the community You know he was gonna take money was gonna refuse the check But then his that guy left and some other guy was there and I was emailing him and he wasn't returning my emails Like I was just making sure are you still okay with this? So either he was busy or he was a Keynesian so that was that and then and the other thing too just There's a fine line between being funny and using a food bank as the vehicle and like I don't know I'm making fun Of people who are hungry, so I felt like I'm getting close to being a jerk So I backed off on that one so the moral of the story is if you want to boost your career I'm not saying it's for everybody, but if you do a topless scene sometimes things happen, so It's true in economics is true elsewhere Okay, let me talk a little bit about economics. That's probably why you're here So I'm gonna go through some of the issues that Krugman Talks about in his column and then to give you sort of the Austrian Response on this so one thing is Brexit now here his position has been a little bit nuanced and we'll talk about that But he did Start out so he agreed with the the common view that Brexit is gonna make the British people poorer And so let's make sure you understand them the mechanism by that He was saying was gonna be about 2% perpetual reduction in income. All right, and he was saying though just to be fair He was not thinking it was gonna be catastrophic He was so he said yeah, that's a big hit a lot of things would not be that big of a deal and that's pretty Significant, but he was saying that that's not in the grand scheme, you know that that huge thing but it will make them poorer and Tom and I took took that issue on in our in the podcast And so let me just make sure you understand the argument here because I think it's important rather a lot of people a lot of like free Market types and pro secession people who are against large centralized governments They were sort of taking that at face value the argument that all the British people are gonna be poorer because of this But they're saying hey, but you know money's not everything and who cares This is you know for a matter of political sovereignty, but Tom and I were questioning this So the first of all just think through the logic of it Why would it be the case that brexit would make the British people poorer? It would have to be because they're gonna lose access now to European markets And that was the analysis crewman was relying on he was doing back at the envelope calculations to talk about tariff rates in general being higher how much of British trade like pre entering the EU and then post and so forth That that was the arguments he was going through to try to see how much of an effect would this have and so Tom And I pointed out that okay, so you're you're admitting then that by being in The EU that means you have tariff barriers against outsiders Right because if that weren't the case of being in the in you allowed you to trade with the rest of the world Freely then whether you were in or out that wouldn't affect you right? So if the if the argument for remaining in in terms of helping your people in terms of they're just standard prosperity Is that you have access to the EU markets then that clearly means the people in the EU are not trading freely with the rest of the world So there was that element to be to just say for it that now at least the people in Great Britain have the ability To have unilateral trade deals with other countries around the world. So on that even taking this as a given It's not clear which way that cuts. It's possible that by having the freedom to contract with other countries and just have one off trade deals with them The great the people in Great Britain are going to have more Free trade on that but the other issue is just why Someone might if you were for free trade you might favor Secession as a more general principle and not just on this one particular Issue because the the larger context here is people were saying it's not just if Great Britain does it what if Other countries start one by one, you know, Germany says, you know We're sick of carrying this team and we're going to just go off and have our own thing and not have these Freeloading countries draining us and so on if countries just all start breaking apart. That's the thing people are really worried about And so Tom and I pointed out that if what the specific Concern is is tariff barriers and free and open trade Then the more secession there is you would think other things equal that would make a stronger argument for lower tariff barriers in general And so just think through the logic of it in the united states for example It it's possible you could have free trade within the united states But have a high tariff barrier, you know in terms of vis-a-vis the rest of the world, right? That has happened historically and the people who are Against free trade often point to the u.s. Example is showing see you can have a strong industrialized economy Getting richer even with high tariff barriers Okay, so if you're against tariffs you would say that was in spite of them and so on but Clearly it's possible for that to happen Your country doesn't plunge into utter chaos If you have high tariffs if you have a big country because what happens is the domestic free trade allows for the division of labor Internally, but it would be crazy for like an individual city To say we're going to have free trade domestically, but we're going to have a high tariff barrier Against the rest of the world right if it's just a city of a million people All right, and even more so like an individual household that would be really insane If one household had a tariff barrier against the rest of the world They would starve to death right you grow in your own food making your own clothes and so on So the the point we were saying is if secession became more widespread Then these countries they couldn't they wouldn't have the luxury of having high tariff barriers against the rest of the world They would have to lower their tariff barriers and also the smaller jurisdictions The more there's free mobility Just in terms of competition right that you if you have a smaller jurisdiction people have more exit options And that tends to keep the level of government Manageable so just isn't a side. I mean that's one of the arguments historians make For why did what we call political liberty? Why did that originate and what you would think of as western europe and not like in china or africa And one of the conventional explanations that has to do with geography and things of that nature But just for various reasons it wasn't planned. It was like a spontaneous order that People know sovereign had control over a wide expansive territory. There was a lot of splinter jurisdictions And so then competition among them the nobles and you know, they they stood up for their rights the magnet card and all that stuff And so they it was because of those reasons that political liberty as we know it sort of developed accidentally All right, so again saying we challenge krugman's Views on this thinking that it's it's not correct that that would be permanently poor Okay, another Aspect now and this is what i'm going to talk about what i mentioned earlier. This is one example I think i'm going to have another one in the talk about how krugman makes some assumptions For one argument where it buttresses the conclusion he wants But then next week when he needs the assumptions to go the other way he flips them So let me explain it in context of brexit and then relate it to an earlier column So with brexit Krugman had stuck his neck out saying yes, this is going to make them poorer the the british people if they do this But my colleagues who are predicting bloody disaster They're overshooting, you know, they're they're exaggerating. It's not going to be that bad And or at least i haven't seen anybody convince me why it would be so bad All right, so i i'm agreeing with krugman in that respect that he often does try to be nuanced. I will give him that uh credit And so he said okay what i'm seeing now is Once the stock market kind of recovered after the brexit vote krugman's thinking i told you guys and then a lot of his colleagues were saying The way that the mechanism by which brexit is going to cause really a really bad economy beyond just tariff barriers being slightly higher Is that it causes uncertainty right everybody freezes up Because they don't know what's coming right the the vote's uncertain It's not even clear if they actually are going to leave the eu now the people are reconsidering and seeing the logistical nightmares involved and so Krugman says okay, but think through like no one's shown me a model. Why why would uncertainty per se cause a long-term A long-term reduction in economic growth. He's saying and he walked through an example. He says yes, say some guy Wants to open a shopping mall in this district. That's heavily dependent on tourism and it you're forecasting and saying if Britain stays in then that flow is there and you want to invest in the mall But if not, you know if if you knew they were leaving then they wouldn't invest there And he's saying what they had uncertainty. How is that making us poorer than we otherwise would be relative To if we knew what was going to happen. Okay, so he's saying yes, you're going to be poor if they don't make that investment because of The brexit vote, but it's not like over and above because of the uncertainty because this point was eventually You'll know what's going to happen right if it's another 18 months then that just means okay instead of Investing in a smooth flow for a while Will happen as they'll be a drop in investment then when the uncertainty gets resolved. They'll be a big spike But he was saying over the long term It's just changing the timing of the investment. All right, so you guys you get you get his point So he's saying yeah right now investment might be lower than it otherwise would have been because of this uncertainty But five years from now looking backwards. It's not like aggregate investment in gdp is going to be Lower than it otherwise would have been it's just going to be lumpier It would have pushed it forward a little bit until we wait to see exactly what the situation is All right, so that's what's his argument and that's I actually kind of agree with that right that's that's good The problem is he made the exact opposite argument like two or three weeks earlier Where the context was there was I I forget I can I would have to look it up If you guys want if you want to see the thing I can get it for you after the talk but one of the fed Governors or somebody was talking about low interest rates and saying You know, we we don't think that Another ray cutter like negative interest rates is really on the margin Going to stimulate the economy very much He said because all it would really do is pull investment projects forward All right, so you guys so again, so Krugman's quoting someone who's critiquing The standard Keynesian view which says we need to goose spending Interest rates now are still too high and so we got to push them down to be even lower By the way, just as a general remark It's amazing to me that they push interest rates down to zero percent and they still say well, it's not enough Right, so it's it's amazing that how how far and they just keep saying well No, clearly it's not enough that what would the world need to look like for them to say Maybe this isn't working but back to this particular controversy So the the critic of Keynesian economics was saying It's not clear to me why pushing interest rates down another 25 basis points Is going to really do anything if somebody makes an investment because they go down a little bit Really, isn't that just going to be that they're building the factory now Because of the you know the bargain on interest rates instead of when they would have built it 18 months from now and so it's not going to over a five-year span Cause more total investment spending it's just going to pull it forward a little bit And Krugman was scratching his head at that saying I can't even come up with a model where that would be true All right, he's saying the critic is wrong. Of course if we if it boosts spending now It's going to have a permanent effect. So it's I suppose you could say in the two weeks span Krugman all of a sudden became more creative and all he could come up with a model But I think it more the better explanation and again, there's lots of examples like this is where Krugman Always ends up with the argument for the Keynesian policy prescription But he changes the assumptions to get the result that he wants Okay, let me talk a little bit about this issue of predictions and economics. So if you have been reading Krugman You know that he's he's made a big deal of this. All right, so it might be hard for you in the back to see this But he says uh At the bottom of the truth is that basic macro economics islm tight macro the stuff that's an econ 101 textbooks Has performed spectacularly well in this crisis. All right, so this is a running theme with Krugman that His models predict better right that they make forecasts about what's going to happen with GDP inflation interest rates and that people who were warning against this stuff made their own set of predictions And the Keynesian predictions were right and the other predictions were wrong And so therefore Keynesian economics is is more scientific and the people clinging to these other views Are clearly unscientific and ideal ideologues right because they refuse to to move in the in the face of evidence against their favor Okay, so let me first just explain the standard austrian view And you know, how does this relate? How do you do science? In economics, so praxeology and predict prediction praxeology, of course, is the the logic of action I know some of this is review, but this is a subtle point and maybe I probably will say it in different words than what you Would have heard earlier in the week So yes, mis is definitely thought economics was a science All right, but its method was different from those in the natural sciences Okay, so what happens is in economics in particular They think the physicists are really smart and they want to be like the physicists Okay, they have there's a term like physics envy to make fun of economists who have this perspective and And so they wanted to model paul samuelson If you know that name was one who really took economics in that direction so that if you looked at Journal articles, they all became mathematical proofs and in economics journal articles So misa's thought that was a mistake That a better so this is me talking not misa's necessarily But what i'm saying is if you want to think of an analogy a better one is something like geometry Okay, so in physics Yeah, we don't really know anything about How an electron feels Okay, we don't know what it's like to be an electron All right, at least I don't maybe some of you do right, but you don't know what it's like to be an electron And so really all you can do when it comes to different models of nature Is make predictions about Observations you're gonna make that's really the criterion for what's a better theory than another one Whereas in economics, we do have some insight We know what it's like to you know have preferences and to Have a rational plan to achieve some goal to engage in action And so you can start from that premise now again if you want to like I say use an analogy Start starting from the action axiom you logically deduce things about action per se And so if that sounds weird to you and sounds unscientific or unrigorous Just use geometry as an analogy in geometry you do something very similar You start with axioms and you logically deduce propositions about that And you don't go out and test them All right, so if your teacher teaches you the Pythagorean theorem That's something if you grasp the the Truth of that you have it Right, you know what that is and you wouldn't say well, let me go test Let me go get a thousand triangles and measure them and see what percentage You know does this hold true and it's either a hundred percent or if it doesn't I'm going to think maybe I measured wrong And keep rechecking it If if that's what you were doing you would be missing the point you wouldn't get what it means to prove something in math All right, so certainly you can illustrate it And if you're going to teach kids the Pythagorean theorem You would do well to actually draw a triangle rather than just you know teaching it to them some abstract language That you wouldn't want to show it to them But again the the proof of the Pythagorean theorem is not something you do empirically right that would be missing the point It would be very misleading if you went if you allowed people to do that Again, it would just be to apply it to maybe get them to understand what it's saying to let them play with real world triangles But that's not the way you would prove it um But even having said that though Does that mean that that I just show you that geometry really is just a bunch of word games right because that's something critics Of massessy and praxeology say once they they hear mises talk about this is the way economic science should be built up They say okay, well then you're really just going around in a circle If you if everything in your conclusions is coming from your initial assumptions You put everything in in the beginning. It's like that's where the rabbit got in the hat And so we don't learn anything about the outside world. It just was all in our head originally And that may sound compelling to you if you're thinking of physics and chemistry That you know if you had physicists arguing about something and they refuse to actually go Look at a microscope or go look at a telescope to settle the matter They would be ridiculous. You know that that would be a silly way of proceeding But in geometry that wouldn't be a silly way of proceeding, right? That's exactly how you would do it and notice We think it's very useful to teach geometry that people who build bridges and so on They need to have that as a background foundation and we can argue about Why is that and philosophers and mathematicians do argue about that stuff? Like if we were in a different type of universe Would it be a waste of time to study geometry or will we study non euclidean and blah blah blah But clearly in the real world right now It is undeniably true that we still teach geometry this way From axiomatic foundations logical deductions and that we are gaining something important about the real world to motivate that If like martians showed up There's a sense in which if they said to us Hey, we don't what this word bachelor. What is that? We're unfamiliar with that and they said, oh, it's an unmarried male There's a sense in which we would really just be giving them information about our conventions You see what I mean that it's not like they could go back to their home planet And share that information and they said, oh, thank goodness. Now, we know what bachelor means that explains everything Well, if they were watching tv shows that that might explain that one, right? But you get the point that there we would merely be giving them a definition It would just be kind of giving them trivia about us Whereas if they showed up and they didn't have the Pythagorean theorem Like if they're just mathematicians hadn't stumbled upon that in the centuries of martian existence to that point And one of our people taught it to them and then they went back to their home planet and taught it to all their You know little martian kids or whatever Then they really would have gained knowledge about reality You see you see that the distinction there and so by the same token If you taught them the proposition that Other things equal increasing the quantity of money Reduces the purchasing power of money or makes prices in general rise You have taught them something about reality Even though that's a non falsifiable proposition even if in reality the quantity of money goes way up And prices don't go way up that didn't just refute that proposition It's all other things aren't equal to demand a whole money went up for some reason All right, and that's so again, you see that there's you're telling something about reality by teaching economic science but the way you Learn those propositions and convey them to others is not The way you do things in science. It's not the scientific method the way you probably learned in school Where you know, you all you have a bunch of data you form a hypothesis you derive A falsifiable prediction from your hypothesis and then you go get new data and check it That you know, that's sort of that's not even really true a lot in the natural sciences But it's certainly not true. Mises would say the way economics should proceed Let me say one thing about this to really Because I think this point is is critical And this is one of the things where a lot of mainstream economists hit austrians on is this this point If you believe in free trade, how did you come to that conclusion? Was it because you were looking at regressions and you saw You know these this country had high tariff barriers that reduced them and then I looked at four quarters out And what was the t-test and so it was probably like you read Bastiat's Satire about the petition of the candle makers or you you know read some Thought experiment that David Friedman came up with and you just saw it and went oh, of course, right? And so What we do in terms of standard economic theory is things like that Where you just see it from a certain angle and it's obvious what the principle involved is and then yeah You got to have judgment to apply it in the real world But the principles themselves economic law is something you get through introspection Now having said all that Don't take away that mises was anti empirical He wasn't he and Hayek was founded a business a center to study business cycles, right? So that was clearly empirically motivated right so again I We stress this point and then sometimes people think we're saying don't ever look at statistics that that's not the issue The point is though the theory you have to go parse history and to look at the data You need to have a basic theory beforehand Okay, let me return now to specific things that Krugman said So it's interesting that he himself picked the criterion of Success in you know the predictions your model makes In order to you know judge the efficacy of a theory Because he has a couple of doozies. I'll give you a couple of them in this in this talk So the story here. Oops. Sorry about that. That's my computer. It looked fine. The growth was up there So this says during What was called the fiscal doomsday machine of the budget sequester? So if you remember if you're not familiar with us politics, there was A debate over the budget deal And of raising the debt ceiling and then the republicans slipped in this thing that was called a sequester That involved a combination of spending reductions and tax hikes in order to reduce the deficit And so this kicked in in early 2013 and krugman called it quote One of the worst policy decisions in u.s history, all right So he wasn't pulling any punches. He called it a fiscal doomsday machine. So as of april 2013 This is now to get your timeline right. So the congress is raising taxes cutting spending So those are you know austerity measures from the kanesian point of view But the fed at the time Was expanding again. It was more qe. All right, and so Krugman was saying we're going to get a good test now of kanesian versus market monetarist views So here you need to know the background the market monetarists. I'm curious. How many people know what that means okay, so The market monetarists they're based on Milton Friedman's Monetarism their modern day their their free market in general, but they're I would say not free market when it comes to they think the federal reserve has an important role to play in managing the money supply and in particular guys like scott sumner who's one of the leading market monetarists Says that the fed has been very tight since 2008 and so he says that's the problem That's what's been causing the slow growth. So The market monetarists were saying don't worry about the budget sequester Because the fed is going to inflate that will offset it. They'll maintain aggregate demand And Krugman was saying in april 2013 We're getting a good test of the kanesian versus market monetarist views And it's not looking good for them because as of that point Economic growth in 2013 was pretty sluggish Okay, so then what happened was the rest of 2013 actually turned out surprisingly well And let me just note something. I don't have it in terms of the slides But just to make sure you get the big picture. Do you guys how familiar are you with the fact that When obama came in The um His his team was led up by christina romer and they wanted to push through the uh stimulus package And they were ahead of this famous chart and predictions about the fact that If we do nothing unemployment is going to go up to a certain amount and that was supposed to be catastrophic And that's unacceptable if we have the obama stimulus package will limit the rise in unemployment So they passed the stimulus unemployment in in practice went up higher than they were warning would happen if they did nothing Right, so I want to get what happened. And so you would think Surely that's a feather in our cap as free market economists, right? And of course not the kanesians just said It's a good thing. We passed that obama stimulus because the economy was in worse shape than we realized Right, you don't want to get how how they dealt with that. Okay The opposite happened when it came to the sequester So leading up to when they were going to have these tax hikes And spending cuts so from a kanesian point of view, that's the last thing in the world You want to do when there's a weak economy, right because it reduces aggregate demand And so they were kanesian forecasts They were predicting what would happen with and without the budget sequester to get a sense of on the margin How big of a deal is this going to be and so they had unemployment and gdp forecasts saying If congress goes ahead and foolishly implements this sequester You know unemployment will do such and such gdp will do such and such if they don't You know if they avoid this insanity This will be the baseline and it was the mirror image where they did the sequester the thing the kanesians said don't do And the economy did better Then the kanesian forecast said would happen if they didn't do the sequester Okay, so it was like the flip the flip and there again They didn't talk about that too much because it wasn't like such a big people weren't calling them on it because it wasn't as prominent As the obama's stimulus package, but again there the the argument would have to be Uh, oh, thank goodness the economy was in a lot stronger shape so that when they hit us with this sequester We were able to weather the blow more than we previously realized All right, so again It's the exact way the world would look if the austrians were correct But the kanesians can always just say well, you know counterfactuals, you know, you can you can prove anything you want okay, so Back to this particular controversy with krugman He was again in the early 2013 when things looked bad for the economy was running victory laps saying oh This is a good test of our views versus the market monitorists And it's not looking good for them and i'm not paraphrasing he that he literally said it's not looking good You know he and then by 20 january 2014 The economy had turned around Outperforming what the people were forecasting And so at that point you can imagine some market monitorists were saying Hey, I think this show is that we were right that the fed offset the budget austerity, right? And that their their expect qe was able to offset and keep aggregate demand up there And krugman wrote a column with no sense of irony Saying and then you've got these market monitors somehow claiming that 2013 was a test Of these two views when clearly they should know no one country's experience can test two rival macro theories All right, so do you get what i'm saying? He was saying this is a good test and running victory laps when he thought he was going to win Then when he lost he said i can't believe these fools think this is a good test All right, i'm not i'm not you might think oh come on. You're probably exaggerating for no i'm not That's exactly the way it happened Okay, then the story gets even better So remember that was from april 2013 to 2014 Time passes people forget that krugman You know had been saying how bad 2013 was going to be as a as a demonstration that his view was right By the end of 2014 the economy was doing a lot better than people had thought and so at this point What do you think krugman said so you know what i've been wrong for a while Maybe i'm just going to stop and think about what i did in the corner That's not what he did instead. He's running victory laps Saying the obama boom shows these conservative critics of obama care are crazy They were warning us that obama care was going to cripple the economy because all these job losses They were wrong and yet these clowns continue to hold their outdated right wing views even though the data shows their forecasts were wrong So you see what he did there? So again, it's if the economy is bad It proves that they needed more stimulus just like krugman has been warning if the economy is good It proves that the critics of obama care were wrong just like krugman predicted You see how that works so it's heads canes wins tails hayek loses okay Let me spend a little bit and then i would do want to take some of your questions Let me just run through it would be dishonest of me to talk about this and not bring up the awkward fact In case you don't know I foolishly made a $500 bet. There's a sky david r. Henderson. He blogs an econ log Brian kaplan had made a bet with me about inflation because I was concerned about You know what bernanke was doing? I thought cpi inflation was going to be high Brian kaplan said you want to bet on it? I said okay david henderson also thought I was wrong And he got me to bet for $500 I lost that bet. All right and then I think brad dalong like put it on his calendar or something because right when it happened he blogged about it And so krugman and dalong were mentioning me by name and saying see these crazy Austrian ideologues. They lose a bet about inflation. They were totally wrong and yet they cling To their model. So I know this sounds so so for one thing You know, what did you learn? Did you guys you know this family guy clip? Do you guys know family guy? So this what happened here was they're at a baseball game and this kid catches the ball and uh Or sorry stewie has the ball and this kid had a bat and stewie says I say can I trade you my bat for your ball? And he goes, okay, and then gets it and then stewie smacks him in the face of the bat and takes the ball and says What did you learn? Okay, so what what did I learn about here is You want to be careful shooting your mouth off and doing things if you're known as a representative Austrian economics Because what was happening is I was making a bet with my own judgment Having written several things about why Austrian economics doesn't make formal predictions and so on all this stuff I just went through with you guys about its logical deductions And so but it was awkward. It was it was a pr Awkwardness, right? And so anyway, it was it was bad It never even occurred to me that if I lost that bet then people were going to say I'll see Austrian economics is wrong So that's what I'm saying was the the foolishness of it that I thought I was making a bet with David, but what's particularly Interesting about this. It's not like David Henderson was a Keynesian. He also was for austerity He had written studies for I think mercadis About the Canadian experience of cutting their budget and being pro austerity And so it was like two free market economists who were against Keynesianism made a bet with each other And one one and one lost and then Krugman saying see the free market guy lost so therefore So I was I've been trying to come up with an analogy for that, but nothing really does it justice So if you guys have one, let me know Just to round out this discussion What's pretty funny is Krugman also has made bad inflation predictions, right? So it's it might sound like I'm saying, okay Yeah, I got that one wrong but in the grand scheme, but no Krugman was also wrong about inflation himself The other way so he says here That there's an ongoing process of disinflation that could in the not too long Lead to outright deflation. Japan here we come. So he wrote that in 2010 Looking at this these particular measures of inflation. So you see It went up and then it plummeted Right, you know after the the the crisis and so Krugman in early 2010 Was saying these measures of price inflation might go negative Okay, so he was worrying about outright deflation at that point And this is how things turned out. So I'm using here the same Measures he was using at this point, right when that came down He was warning that it was going to keep going to go negative And just a few months after he wrote that you see how much they went up Okay, so it's not like he hit that one out of the park. Okay Then you say, okay So he was warning about deflation, but you were warning about inflation trying to scare people So yours was the more egregious error It would be convenient if paul krugman ever Hysterically warned about big inflation wouldn't it fortunately he did So this was a memo september 1982 paul krugman and larry summers when the council of economic advisors writing this to martin feldstein And they were warning at that time That I realized it's hard to read They were saying that it was really just rates decline and the economy recovers expect the real exchange rate and real commodity prices to return to historical levels Will add five percentage points to future increases in the consumer price index increase, right? So as of 1982 remember there had been the high inflation in the late 70s There was that recession inflation price inflation. I'm talking about rates came down And so krugman in 1982 september 82 is warning Once the economy gets through this bad recession and goes back to normal growth We think price inflation is going to rise five percentage points And so you can see that's the point at which they made that prediction All right, and so right then cpi was running about five percent It was like 4.9 at that point. So if it went up to five percentage points more that would be a 10 percent Cp cpi increase so ironically in 1982 krugman made just about literally the same prediction That I ended up making and it wasn't that paul krugman was an austrian in 1982 And then because of this humbling experience became a kanesian. It's that he was, you know, still a kanesian at that time Okay, let me uh, we just probably have time for a couple more a couple questions just to Round out this discussion. Any any questions? Yeah Yeah, I think so the question is do other people notice the apparent Backtracking and flip-flopping. I don't know because it's to catch that stuff I mean he is very precise and so like I said, no one thing that he writes Is all that controversial like he makes a bunch of assumptions and spins out the the thing So you would kind of have to really be a religious reader of krugman and have a really good memory And so I'm blessed with having a good memory and I'm cursed with that. I'm a religious reader of paul krugman So it The thing that people dislike about krugman is he makes it so personal like he literally if you guys don't know I mean the part of the reason people like the podcast I go So conferences around the world people come up to me and the first thing they say is yeah, we hate krugman, too Right. It is amazing. He's like the leading anti-export of the united states Um, and and so that's the thing that he he literally calls his critics naves and fools Right that if he has a column titled naves and fools, right saying that they're you know, they're evil either evil or Foolish Do you have time for me one more? Yep Okay, so yeah real quickly. I know we're out of time So the question is why couldn't the fed just indefinitely keep interest rates low? I think they could so long as conventional measures of price inflation don't Blow up like that. That's really the thing that would ultimately make them in a typical boom bus cycle You know, there's easy money easy money low artificially low interest rates Usually the thing that makes the Fed or the or the commercial banks back off that is they see rising measures of consumer price inflation So this it hasn't happened this time and there's various reasons for why that might not be Having said all that even a lot of I think Fed officials they know that this this is not sustainable and they're coming up with You know trying to explain saying well look at asset prices and so it's ironic I think a lot of Fed officials are halfway decent economists And they know that what we did yet was necessary to get through that crisis in their minds But we can't just keep doing this forever even if the standard metric reuse like unemployment and Price inflation are not signaling. You got to jack up rates right now. I think they realize we kind of have to ease back and the last thing I'll say on that is Janet Yellen so far just don't be thinking. Oh, yeah, Janet Yellen. Just crazy money printer She oversaw what was called the taper and since uh, like October 2014 the fed's balance sheet has been roughly stable They just been rolling over assets as they mature and holding a constant balance sheet So in terms of high level like what's called the monetary base The Fed actually has been holding pat for like a year and a half at this point All right, so just make sure you and you can look at like measures of the dollar the dollar strengthened sharply against other currencies In that period so just it's more a new one So if you want to talk about crazy inflation is yeah, that's Bernanke But Bernanke and Yellen have played different roles in this. Okay. Thanks everybody