Speak for yourself, or why anti-Keynesian views survive

“The evidence for the Keynesian worldview is very mixed. Most economists come down in favor or against it because of their prior ideological beliefs. Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government.”

Statements like this tell us rather a lot about those who make them. As statements about why people hold macroeconomic views they are wide of the mark. Of course there is confirmation bias, and ideological bias, but as the term ‘bias’ suggests, it does not mean that evidence has no impact on the views of the majority of academics.

The big/small government idea makes no theoretical sense. Why would wanting a larger state make someone a Keynesian? Many Keynesians, and most New Keynesians, nowadays acknowledge that monetary policy should be used to manage demand when it can. They also know that any fiscal stimulus only works, or at least works best, if it involves temporary increases in government spending. So being a Keynesian is not a very effective way of getting a larger state.

It is also obviously false empirically. In the UK and US a large majority of economists appear to hold Keynesian views. I think it rather unlikely that a similar majority want a large state, and I can think of some notable Keynesians who clearly do not. Central bank models are typically Keynesian. Does that mean central banks want a larger state? No, it means the evidence suggests Keynesian economics works.

Russ Roberts says more recently:

“The evidence is a mess leaving each of us free to cherry-pick what sustains our worldview be it ideological or philosophical or just consistent with our flavor of economics.”

Ryan Bourne of the Institute of Economic Affairs goes further:

“when the facts change, the Keynesians don’t change their minds.”

To illustrate their belief that Keynesians ignore awkward facts both the authors above use the example of US growth following the 2013 sequester. (In my experience anti-Keynesians tend to shy away from data series, and especially econometrics, and prefer evidence of the ‘they said this, and it didn’t happen’ kind - particularly if ‘they’ happens to be Paul Krugman.) The problem is that this episode actually illustrates the opposite: that anti-Keynesians are so keen to grasp anything that appears to conflict with Keynesian ideas that they fail to do simple analysis and ignore others that do.

In this post I just looked at the data and did some simple arithmetic to show that this episode was quite consistent with Keynesian fiscal policy analysis. I’m sure others have done the same. But such analysis just gets ignored: they have a superficially good story, and that is all that matters. (Read this post to see how Scott Sumner in response to my work dug himself an even deeper hole.)

Why do we have to go over, yet again, that the clear majority of studies show that Obama’s stimulus worked. Why do we have to keep going over why UK growth in 2013 does not prove austerity works? Why do these people never mention the meta studies that confirm basic Keynesian analysis of fiscal policy? Because they want to believe that the “evidence is a mess” so they can carry on holding their anti-Keynesian views.

Parts of the political right have always had a deep ideological problem with Keynesian analysis. As Colander and Landreth describe, the first US Keynesian textbook was banned. New Classical economists, for all the many positive contributions they brought to macro (in the view of most mainstream Keynesians), also tried to overthrow Keynesian analysis and they failed. 

When anti-Keynesians tell you that support or otherwise for Keynesian macroeconomics depends on belief about the size of the state, they are telling something about where their own views come from. When they tell you everyone ignores evidence that conflicts with their views, they are telling you how they treat evidence. And the fact that some on the right take this position tells you why anti-Keynesian views continue to survive despite overwhelming evidence in favour of Keynesian theory.

The New Keynesian model in grad school macro teaching

Despite appearances to the contrary, I do not think Krugman and DeLong actually disagree with me on the dominance or otherwise of the New Keynesian business cycle model in academia. I wrote:

“Yet in many who were part of the New Classical revolution, or who were taught by its leaders, there remains a deep antagonism to Keynesian ideas…. As a result, in certain places NK theory was tolerated rather than embraced, or was quietly marginalised.”

That was a key point of the post, although I admit I did take rather a long time getting there.

So I do not think there is any qualitative disagreement. The New Keynesian model is the dominant model of business cycles in central banks. In academia it is not dominant. Is it still the framework of first choice for the majority, as I suspect, or only about half of academics, as DeLong suggests? Impressions gained from non-random contacts or gatherings are not good evidence, so I was relying more on this survey, but that is just one particular sample. And it would be interesting to know results for other countries besides the US - particularly those that have chosen to embrace austerity or advocate it for others.

I did find some evidence from a survey of grad students undertaken by David Colander in 2005. This only covered the major US schools, but from Table 5 you will find that 22% of students from Chicago believed price rigidities were unimportant, while the equivalent number for Harvard was zero. 13% of Chicago students and 20% from Stanford disagreed that ‘fiscal policy can be an effective stabilizer’ (Table 6). But perhaps more revealing are some of the observations Colander makes in the text. Here is one.

“The students told me that the differences in policy views on macro that showed up in the survey did not reflect what they were taught about policy in macro, since they were taught almost nothing about macro policy, but reflected their undergraduate training. When asked about survey results showing that students at his school had changed their views on policy, one student stated, “I think that in the macro course we never talked about monetary or fiscal policy, although it might have been slipped in as a variable in one particular model, but that wasn’t the focus, so it didn’t come from the courses.” Another stated, “Monetary and fiscal policy are not abstract enough to be a question that would be answered in a macro course.”

I guess it might be possible to teach the NK model as if you were not talking about policy, but it would be an odd thing to do. 

For me this reaffirms Paul Krugman comment that, “It would be interesting to know how many graduate departments were in fact teaching New Keynesian macro in 2008”. Even if records on this are not immediately available, memories should still be reasonably fresh. And knowing what is taught in 2013 should at least give us a lower bound. A good indicator of academics’ views is what they teach or what they were taught. I don’t think this information has been collected by anyone, and I think it would be a valuable thing to do if anyone has the time. [1] What I am pretty sure about is that, in twenty years time, some people will write about this, and it would be nice for them to have some more concrete evidence: the time to collect it is now.

[1] I think the key number here should be the proportion of a core masters macro course that is devoted to New Keynesian analysis (i.e. any DSGE model with sticky prices, and policy analysis using that model). Obviously zero would be a very interesting finding, but one week out of twenty is also somewhat suggestive. Measurement is tricky of course, but my quick estimate of this number for the current Oxford MPhil, which would also apply to 2008, is around 20-30%.

Information on current teaching should either be available from the web, or available on request from the departments. However it would be interesting to try and collect information from recent students as a cross check. As one academic once told me: “I intended to cover NK economics but I just ran out of time”.