On the front lines.

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Battle of the Economics Bloggers

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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The gladiatorial arena that is macroeconomics blogging is always exciting. One crowd-pleaser is Scott Sumner, a professor at Bentley University, who is the champion fighter of a team that calls itself the market monetarists. They believe that it’s the Federal Reserve’s job to fight recessions, doing whatever it takes in the way of monetary easing in order to get nominal gross domestic product (click on the link for a full explanation) back to a healthy trend. They fight a running battle with a group loosely known as the Keynesians, who believe that the Fed can’t do the job on its own, and needs help from Congress in the form of fiscal stimulus.

In the macro gladiator arena, there is no reason not to indulge in a little trash-talking. So Sumner didn’t hold back when he recently declared that Keynesianism is dead as a doornail:

Ever since the spectacular implosion of Keynesian economics in 2013, I've seen increasingly desperate attempts to somehow salvage the model.

As we say on Twitter, #shotsfired! The basic market monetarist case against the Keynesians is that U.S. federal government spending, and deficits, have both been decreasing relative to GDP in recent years, and that this hasn’t brought us to economic ruin. Just for reference, here is a picture of federal government spending:

 And here is a picture of real gross domestic product:

As you can see, government spending flatlined for about four years (and deficits declined) but GDP kept right on growing. In the mind of the market monetarists, that’s case closed -- Keynesianism is dead.

Naturally, the Keynesians would beg to differ. Some could claim that spending matters more than deficits -- since federal spending stayed flat, the overall effect of fiscal policy was neutral in 2013. Others might claim that what matters is total government spending, including state and local governments, which boosted outlays quite a bit in 2013. Sumner, in his post, waves away these objections, accusing Keynesians of a “shell game” in which they claim to care about whichever method supports their thesis.

The Keynesians, of course, are unlikely to take this lying down. Robert Waldmann, a blogger and noted gladiator of the Keynesian team, responded in a post of his own. He reviews the record of people and groups who made macro forecasts in 2013 using models that could roughly be described as “Keynesian,” and finds that they didn’t do so badly. In another post, he gives his reading of the evidence, which I will not try to summarize, but which supports the Keynesian position.

The reason I won’t summarize that post--– or the many, many more that have been written back and forth on the subject -- is that there is simply an infinity of arguments you can make on one side or the other. The gladiators will never run out of weapons.

Keynesians, if they so desired, could turn to different measures of fiscal stimulus -- federal spending, total spending, government purchases (which don’t include transfer payments), or deficits. They might claim that the economy’s underlying trend was low when stimulus was high, or high when stimulus was low, meaning that what looks like a smooth line can be interpreted as a real effect of policy. They could also switch between “New Keynesian” and “Old Keynesian” versions of the theories in question, which is especially helpful because each theory itself comes in multiple flavors.

Market monetarists have it even easier. Their credo is that the Fed is basically omnipotent, and so everything that happens is a result either of A) Fed actions, or B) expectations of Fed actions. If government spending goes up and GDP goes up, the market monetarists can say that it wasn’t because of fiscal stimulus, but because the Fed decided to be more dovish, and people realized that. They can also use the same trend trick as anyone else -- if the Fed seems to tighten and growth doesn’t plunge, they can say that the Fed stifled what would otherwise have been a sudden burst of growth.

To make things worse, all the gladiators in this combat are looking at noisy time series data with very short samples, and making inferences about policy that might or might not operate with a lag, in an environment in which everything is changing at once. And the gladiators are free to pick out any data point that supports their thesis, and ignore the others.

A time-series econometrician would blanch if you presented her with that kind of analysis. She wouldn’t even give it the time of day. Instead, she’d do a historical study, using data as far back as she could go, instead of picking one or two recent points. She would have to use some theory to guide her along, too. And even then, her conclusions would come with huge uncertainty.

So who’s right? The answer is that we can’t really know. Chris Sims, winner of the 2011 Economics Nobel Prize, has found lots of evidence that monetary policy has an effect on the economy. Prestigious macroeconomists such as Robert Hall have found that fiscal policy has an effect as well. Maybe the market monetarists and the Keynesians are both a little bit right and a little bit wrong.

But tentative conclusions like that are so much less fun than gladiatorial combat.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net