Murphy on Keynesianism and Great Recession

His views on the recent crisis in the US are given here.




The problems with his video are as follows:

(1) Romer’s estimates of the level of unemployment with stimulus were wrong, but given that you cannot precisely predict the future or do so with objective probability scores, this is hardly much of a point.

Romer and others underestimated the severity of the recession. This does not disprove the fundamentals of Keynesian theory.

The whole underlying argument of Murphy’s talk is that the stimulus “failed.” If this were so, then why did the US recession end in 2009 and positive real output growth resume? Failure would have been a continuing recession even in the face of fiscal expansion.

(2) It is fascinating how modern Austrians are now driven to extremes so absurd that they appear to deny that government increases in national income can raise output and employment.

In fact, not even Hayek or other die-hard Austrians have denied this. Take this statement by the extreme Rothbardian Huerta de Soto:

“What should be done if, under certain circumstances, it appears politically ‘impossible’ to take the measures necessary to make labor markets flexible, abandon protectionism and promote the readjustment which is the prerequisite of any recovery? This is an extremely intriguing question of economic policy, and its answer must depend on a correct evaluation of the severity of each particular set of circumstances. Although theory suggests that any policy which consists of an artificial increase in consumption, in public spending and in credit expansion is counterproductive, no one denies that, in the short run, it is possible to absorb any volume of unemployment by simply raising public spending or credit expansion, albeit at the cost of interrupting the readjustment process and aggravating the eventual recession.

Nonetheless Hayek himself admitted that, under certain circumstances, a situation might become so desperate that politically the only remaining option would be to intervene again, which is like giving a drink to a man with a hangover. In 1939 Hayek made the following related comments:

it has, of course, never been denied that employment can be rapidly increased, and a position of ‘full employment’ achieved in the shortest possible time by means of monetary expansion. ... All that has been contended is that the kind of full employment which can be created in this way is inherently unstable, and that to create employment by these means is to perpetuate fluctuations. There may be desperate situations in which it may indeed be necessary to increase employment at all costs, even if it be only for a short period—perhaps the situation in which Dr. Brüning found himself in Germany in 1932 was such a situation in which desperate means would have been justified. But the economist should not conceal the fact that to aim at the maximum of employment which can be achieved in the short run by means of monetary policy is essentially the policy of the desperado who has nothing to lose and everything to gain from a short breathing space.

Now let us suppose politicians ignore the economist’s recommendations and circumstances do not permit the liberalization of the economy, and therefore unemployment becomes widespread, the readjustment is never completed and the economy enters a phase of cumulative contraction. Furthermore let us suppose it is politically impossible to take any appropriate measure and the situation even threatens to end in a revolution. What type of monetary expansion would be the least disturbing from an economic standpoint? In this case the policy with the least damaging effects, though it would still exert some very harmful ones on the economic system, would be the adoption of a program of public works which would give work to the unemployed at relatively reduced wages, so workers could later move on quickly to other more profitable and comfortable activities once circumstances improved. At any rate it would be important to refrain from the direct granting of loans to companies from the productive stages furthest from consumption. Thus a policy of government aid to the unemployed, in exchange for the actual completion of works of social value at low pay (in order to avoid providing an incentive for workers to remain chronically unemployed) would be the least debilitating under the extreme conditions described above.” (Huerta de Soto 2012: 452–456).

But these days neo-Austrianism appears to deny even this.

(3) What is important to note here is that Murphy attacks New Keynesianism, and has a poor understanding of Post Keynesianism.

(4) By 18.00 onwards Murphy starts to sound like a New Classical and requires Ricardian equivalence and rational expectations for his idea that people cut their spending as the stimulus was implemented in anticipation of future tax increases. But Ricardian equivalence and rational expectations are not even supported by Austrian economics, and one can only marvel at the breath-taking hypocrisy here.

(5) Regarding predictions and the real world: the trouble with libertarians is that they are so focussed on the US, and rarely look at the rest of the world. In numerous other countries, governments used countercyclical fiscal policy and ended their recessions and kept unemployment low: e.g., Australia, Norway, South Korea, and Germany. Of course we hear not a word about any of this from Austrians like Murphy.

(6) Regarding the success of Keynesianism in the 1930s, Murphy is ignorant. There were nations in the 1930s that successfully used fiscal stimulus:

“Keynesian Stimulus in New Zealand: 1936–1938,” September 23, 2011.

“Takahashi Korekiyo and Fiscal Stimulus in Japan in the 1930s,” August 27, 2011.

“Fiscal Stimulus in Germany 1933–1936,” September 3, 2011.

(7) Murphy’s analysis of the Eurozone is flawed.

Murphy’s main point appears to be that Europe has not cut enough from government spending. He grudgingly admits that in Greece, Spain and Ireland total spending has been cut, and economic problems have persisted. Strangely, he ignores the countries that pursued much more extreme austerity: Latvia, Estonia and Lithuania. What happened there is confirmation of the disastrous consequences of fiscal contraction.

Murphy attacks bank bailouts in Europe. At this point, the bizarre nature of Murphy’s Austrian analysis reveals itself. Throughout his talk, Murphy is trying to suggest that austerity and liquidationism will cause recovery better than recoveries caused by fiscal expansion: yet allowing the financial sector to collapse is precisely a measure that would induce the worst depression imaginable.

Liquidationism by definition means the worst types of recessions/depressions possible.