Heavyweight Bout: Steil Flattens Krugman

Benn Steil, director of international economics at the Council on Foreign Relations, does not take an Austrian school approach to his knockout of Krugman. But students of Austrian school economics will appreciate Steil's correct focus on monetary policy and it is a total destruction of Krugman.



The Austerity Wars: Debunking Paul Krugman
By Benn Steil

Since the financial crisis of 2008, there has been a robust, and at times heated, debate among economists over the proper role of activist fiscal policy—not just in a slump, but in an economy like ours, that’s been in recovery for years. No one has been more active in that debate than Nobel economist and New York Times columnist Paul Krugman.

“How many people, I wonder,” Krugman recently asked, “even among economists who have eagerly taken sides in the austerity debate, have a sense of what the overall picture looks like since the great turn to austerity in 2010?”

Thus the man who has most eagerly taken the anti-“austerity” side of the debate sets us up for the Big Picture—the bracing, visual proof that he was right all along about the need for much more government spending. And here it is.

Paul Krugman’s Figure

Looking at 33 advanced countries over four years, from 2010 to 2013, Krugman plots the change in real gross domestic product (GDP) against real government purchases. They clearly move together. “Does this picture,” he then asks triumphantly and rhetorically, “make you think that Keynesian economics is nonsense?”

Right?

Wrong.

Though he could easily have done so, Krugman decided not to look at whether monetary policy mattered. What is remarkable about this is that eminently respectable economists had been pointing out this failure for years. 

Read the rest here.