(1) Do you dispute that Sweden implemented a stimulus, with expansionary fiscal policy in 2009 and 2010?His response is here, and demonstrates the intellectual bankrupcy of his position:
(2) Do you dispute that the Swedish recession ended about the middle of 2009 after this stimulus was implemented, and real output growth resumed? If “yes,” then what in your view caused the end of the recession and real output growth that Sweden has had subsequently? Magic?
(3) Do you dispute that the Swedish recovery led to rising tax revenues? That the budget deficit fell?
“LK, do you really not see the problem in your argument? You might be right, but I could use your same approach to “demonstrate” that the Obama stimulus package caused the US economy to suddenly become much worse than people thought (a la Romer unemployment forecasts).I see that Murphy:
Look, do you dispute that there was a thunder storm in Sweden in 2008 and also in 2009? Do you dispute that there was an ensuing recovery? Surely you can’t deny, then, that the thunderstorms caused the recovery. Only someone versed in magic would deny this obvious causality.
The reason you think your argument is better than mine, is that you believe on antecedent grounds that stimulus spending causes economies to recover. Yet that is precisely what we are debating. If someone genuinely believed that thunderstorms caused economic growth (maybe by breaking windows?) then he’d find my own argument compelling.”
(1) refuses to answer the questions. This is very telling.
(2) Murphy asserts that the relationship of cause and effect running from fiscal expansion to real output growth is in doubt, yet refuses to explain how Sweden had real output growth after its stimulus.
(3) Murphy resorts to a absurd example. No one has ever argued that thunderstorms cause economic recovery. But the empirical evidence that expansionary fiscal policy, whether through tax cuts and/or increases in government spending, causes rises in private investment and consumption is overwhelming.
For example, if the government held its level of current spending stable, and implemented a large tax cut (making up for the shortfall by borrowing), would Murphy deny that this would stimulate the private sector?
(4) In fact, the very logic of the Austrian business cycle theory requires that monetary expansion (and presumably when accompanied by fiscal stimulus) causes booms that drive demand for capital goods over and above the scarce resources available for this investment. Murphy has now taken a position that destroys even the logic of his own Austrian business cycle theory, for, if both monetary and fiscal stimulus do not cause increases in private sector investment and consumption, how could an Austrian business cycle even occur?
Not even Hayek was so stupid as to deny that higher government expenditure can increase employment:“… a ‘secondary depression’ caused by an induced deflation should of course be prevented by appropriate monetary counter-measures. .... I no longer think ... [sc. deflation] is a politically possible method and we shall have to find other means to restore the flexibility of the wage structure than the present method of raising all wages except those which must fall relatively to all others. Nor did I ever doubt that in most situations employment could be temporarily increased by increasing money expenditure. There was one classical occasion when I even admitted that this might be politically necessary, whatever the long run economic harm it did.” (Hayek 1978: 210–211).(5) Finally, if we turn to a recent example, Steve Keen provides a careful sectoral breakdown of Australian national accounts showing exactly how Australia’s economic growth after 2008 was the result of the federal government stimulus:
Hayek, F. A. von. 1978. New Studies in Philosophy, Politics, Economics, and the History of Ideas, Routledge & Kegan Paul, London.