Tuesday, May 22, 2012

This Takes the Cake...

I asked Robert P. Murphy these three simple questions in a previous post:
(1) Do you dispute that Sweden implemented a stimulus, with expansionary fiscal policy in 2009 and 2010?

(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?
His response is here, and demonstrates the intellectual bankrupcy of his position:
“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).

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.”
I see that Murphy:
(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:
Steve Keen, “Giving the Bird to the Stimulus?,” DebtWatch, August 18th, 2010.

Hayek, F. A. von. 1978. New Studies in Philosophy, Politics, Economics, and the History of Ideas, Routledge & Kegan Paul, London.


  1. Might be worth noting: 80 000 Swedish youths have moved to Norway to find jobs, that still leaves a percentage of 22.9% unemployed at 25 years or younger, out of a general unemployment of 7.8%. In Norway the figures are 8% youth and 2.7% general. The difference between the two countries may have little to do with stimulus packages?

    1. I was not sure I understand the question.

      (1) Norway implemented its own stimulus in 2009:


      (2) Norway had exceptional low unemployment before the crisis struck and managed to keep it below 4% despite its recession:


      (3) Sweden had comparatively higher unemployment even before 2008:


      (4) whatever differences in youth unemployment rates in both nations will be caused by a number of factors. But of course, the extent to which stimulus spending in each nation helped youth employment will be one.

    2. I just thought it worth mentioning that around 80 000 Swedes have found jobs in Norway, and I thought that this somehow should augment the figure of 390 000 now left without jobs when considering the Swedish economic situation. (Perhaps also the ease with which one can go back to school at taxpayer’s cost when there’s no job to be had, in either country; as well as be invalided out with a painful back or a depression, this on a healthy state pension given to ever person so retiring.)

      In short: yes the overall figures may show a recovery in Sweden, but this could partly be based on the high oil price that makes Norway continually richer. (Norway absorbs a lot of the Swedish exports.)

      For whatever it’s worth, there are also those that disagree with your main premise:



  2. Just so you know: Bob is mocking your misuse of logic rather than your economic theory.

    Of course the government can (via the use of monetary stimulus or more direct intervention ) get the economy to stage any level of recovery it wants to achieve. However history shows that the long term consequences of such interventions are always negative to society and the economy.

    1. "Of course the government can (via the use of monetary stimulus or more direct intervention ) get the economy to stage any level of recovery it wants to achieve.

      If he really believes that, most of his posts on this subject, questioning whether stimulus increases real output growth, are worthless.

      "However history shows that the long term consequences of such interventions are always negative to society and the economy.

      What is this the fantasy Austrian business cycle theory?

    2. Murphy's post is clearly saying that stimulus doesn't even give the semblance of recovery - a point that I dis-agree with him on. I agree with you that at least in the short-term stimulus will work well in boosting the economy in terms of the indicators you mention in your analysis.

      I don't think one needs to be an advocate of ABCT however to believe that intervention will introduce distortions into the economy (and into society) that will have negative longer-term consequences.

  3. LK,

    do you know of good papers on the Nordic model, specifically from a post keynesian perspective?

    1. I'd have to do a literature search, but this comes to mind:

      Philip Whyman, "Post Keynesianism, Socialisation of Investment and Swedish Wage Earner Funds," Cambridge Journal of Economics 30.1 (2006): 49–68.

  4. I now see that you've already answered the Barro claims - sorry!

  5. This is great.

    More nonsense from Bob Murphy and the right wing.

    Your post deriding ABCT is sound. I would think that this theory is central to Austrian economics, and is ridiculous.

    1. It is actually not central to Austrian economics. Carl Menger, the founder of the Austrian school, did not like Bohm Bawerk's theory (one in which the ABCT pays a lot of tribute to) on the relationship between capital and interest, and concluded that it was one of the greatest errors committed. You've mistaken capital-interest theory (which is very neo Ricardian) and capital theory (which is in fact central to Austrian economics). I would recommend a paper: On Austrian Capital Theory by Ludwig Lachmann (I believe it is free online)

  6. LK,

    I think the main problem is that you're trying to discuss an empirical question-a complicated and extensive research problem- through a blog.

    Bob is pointing out that it's not so easy to just look at x and y and then assume a causal relationship. For all we know, a, b or c could have affected y also.

    Personally, I think you could find evidence of stimulus increasing output, or at least stabilizing the economy- but these are econometric research questions, not blog ruminations.

  7. "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?"

    LK, wouldn't Ricardian equivalence kick in here. If government spending hasn't decreased and there is a large tax cut, any rational household or firm will know that this will offset by higher taxes in future and will not invest/consume. If they still do consume/invest now, there must be sometime in the future, when their spending will have to fall thanks to higher taxes and hence an expansion now will be offset by a recession later. Of course you can argue, the government should raise taxes when there's a boom, but that precisely would slow down output and cause the business cycle, wouldn't it?

  8. Aniruddha@August 4, 2012 12:10 AM

    Ricardian equivalence has always been a neoclassical myth: