Refuted economic doctrines

by John Q on February 1, 2009

I’ve been working away on my series of ideas about economic history, theory, policy that have been refuted, or at least sharply challenged by the experience of the bubble economy and the global financial crisis. Not wanting to overwhelm CT with econowonkery, I’ve posted the most recent ones on my blog. For those who like econowonkery, here’s a current list of the posts at my site

#1 The efficient markets hypothesis: Also posted at CT

#2 The case for privatisation: Also posted at CT

#3 The Great Moderation

#4 Individual retirement accounts

#5 Trickle down



Idiot/Savant 02.01.09 at 3:43 am

The link for #3 is broken (missing an “h”).


John Quiggin 02.01.09 at 3:48 am

Fixed, thanks


Dan in Euroland 02.01.09 at 3:57 am

I can’t get #3 to open.

The error message reads:
“Firefox doesn’t know how to open this address, because the protocol (ttp) isn’t associated with any program.”


Dan in Euroland 02.01.09 at 3:58 am

Works now, thanks.


chrismealy 02.01.09 at 4:50 am

I love it. I’d been thinking about the same thing after coming across the following a couple of days ago:

What a had-headed science when ulitmately nothing can be disproved. If the bubble has not broken it is because we are not yet in the long run. If the irrational noise trader makes more money than the rational trader it is because we are not yet in the long run — for only in the long run can the complexity of the economic relationships be known with statistical reliability!

That’s Paul Davidson from 1999.


chrismealy 02.01.09 at 4:53 am

Damn. I quoted the wrong part.

TEST: Despite all the empirical analysis done in the last forty years can any one on the net point out three economic propositions that have been disproven so that no economist believes in these propositions anymore?? (In physics, the phlogisten theory of combustible materials — once popular among scientists– no longer has any advocates. Is there something similar to phlogisten that empirica economists have disproven to the economics profession??)

I bet there are plenty of economists who still believe every item on Quiggin’s list.


notsneaky 02.01.09 at 6:22 am

I wouldn’t include the Great Moderation in the list of “doctrines” as rather it was just an economic phenomenon that came to an end. Between 1984 and 2005 output volatility (and that of other aggregates) WAS less than half what it was 1948-1984. Standard deviation of (1st diff in) GDP of .54 in the latter period, vs. a of 1.21 in the earlier one. Similar numbers hold for hours worked and estimated productivity.

And if you believe Gali and Gambetti in the AEJ Macroeconomics, Vol 1, Issue 1, it wasn’t just luck. So the trick is not to consign a very real economic phenomenon to the dustbin of history but to figure out what caused it and what ended it.

Other than that I’d agree with 4) and 5) but on 1) and 2) it depends on how far you want to push it (as discussed in regard to the EMH here previously)


Greg Ransom 02.01.09 at 6:40 am

No. 1 with a bullit — Keynesian economics.

Bush and the Fed explicitly were giving us Keynes — good and hard, for 8 plus years.

“Stimulus” and “bailouts” and below natural rate interest rates to stop “deflation” — again, and again, and again.

Keynes — refuted. Once again.

When will the cargo cult science be put in its grave, where it belongs?


Greg Ransom 02.01.09 at 6:42 am

Also refuted — the deeply naive hypothesis that Keynesian economists were honest people. Post boy number one: Paul Krugman.


andthenyoufall 02.01.09 at 9:14 am

Erhm. If you accept that weak reading of the “Great Moderation” phenomenon, notsneakie, then you must at least accept that this modest statistical blip was presented by many economists with astounding dishonesty and misdirection. Either the “Great Moderation” was a (false) causal claim about the connection between a technical change in how central banks operate and lower business cycle volatility, or it was a (correct) observation about a clever way to slice the data on business cycles, coupled with a (misleading) observation that this was just after Volcker et al. arrived on the scene.


Martin Bento 02.01.09 at 11:17 am

How much of the great moderation comes from counting the 72-83 period in with the rest of post WW2? If we compare 45-71 and 84-08, does this pronounced decline in volatility hold up? I’m actually asking because I don’t know the answer. The first period certainly had much greater increases in median standard of living, especially risk-adjusted and accounting for debt accumulation, so I’d want to see a lot of volatility decline to make up for that. Actually, I don’t think there could possibly have been enough volatility in the earlier period to compensate. And we look to be headed now into a period worse than the 70’s following a shorter period of stability.


James Wimberley 02.01.09 at 12:29 pm

Is it a good idea to have parallel comment threads on crossposts, especially where as here the discussion tends to be pretty technical? I assume you could close discussion on one post with a civil notice of the diversion.


JoB 02.01.09 at 4:25 pm

John maybe you can give the following a shot as well:

– if we don’t overpay the bosses, we’ll be run by idiots – we know now that overpay has attracted the idiots

– every kind of protection is ‘protectionism’ and every act of ‘protectionism’ is just one of the infinite number of attributes of The Devil – we know now that this reduces every kind of protection to a vanishing negative such that the one & only measure for future success of our offspring is whether they were born from the overpaid idiots above

– performance pay makes people work harder and the harder they work the better they perform – we know now that the only result of performance pay is that office hours are extended and sucking up to the boss is before long the only remaining human art whilst productivity per hour becomes the second vanishing negative ensuring that – when our offspring comes of age – they can forever be enslaved as underpaid idiots worshipping the latest versions of Paris Hilton


JoB 02.01.09 at 4:27 pm

Sorry, this should be the readable version (I hope):

– if we don’t overpay the bosses, we’ll be run by idiots – we know now that overpay has attracted the idiots

– every kind of protection is ‘protectionism’ and every act of ‘protectionism’ is just one of the infinite number of attributes of The Devil – we know now that this reduces every kind of protection to a vanishing negative such that the one & only measure for future success of our offspring is whether they were born from the overpaid idiots above

– performance pay makes people work harder and the harder they work the better they perform – we know now that the only result of performance pay is that office hours are extended and sucking up to the boss is before long the only remaining human art whilst productivity per hour becomes the second vanishing negative ensuring that – when our offspring comes of age – they can forever be enslaved as underpaid idiots worshipping the latest versions of Paris Hilton


Stuart 02.01.09 at 4:36 pm

– if we don’t overpay the bosses, we’ll be run by idiots – we know now that overpay has attracted the idiots

I wonder if there is a natural limit – around 4-8x the average salary you tend to attract the best person for a job, at 400x the average salary you tend to attract the greediest person to a job?


mpowell 02.01.09 at 4:54 pm

8: I’m not sure how much Keynes we got from Bush. Sure there was an economic stimulus (huge tax cut) with the economy entering a slow down at the start of Bush’s presidency.

But is it fair to criticize Keynes for the worst possible application of his policy? A government should be running deficits only when it has to, not all the time. Honestly, Bush is no Keynesian. He would have found an excuse to cut taxes for the rich regardless. And deregulating the financial system isn’t part of the Keynes platform last time I checked.

Are you one of those who think the current stimulus package proposed is a bad idea then? Maybe you should review the economic history of the Hoover administration a little more carefully.


roger 02.01.09 at 5:17 pm

Although I think #8 sounds like one of those astonishingly weird Austrians, whose general advice is that the economy should serve to make most people poorer cause, well, they deserve to be, he is right to remember that very recently we experienced a recession. One of the things I find highly amusing about the rightwing economists sudden revival of Ricardian equivalences and the like is that these economic bogies apparently only arise if a Democrat is in the White House. But when a Republican is in the White House, creating massive deficits, not a peep would you hear from Fama or Mankiw.

I think the chiefk, the no. 1 refuted economic doctrine is the assumption that somehow we are starting out with a fully private side economy. It is astonishing to hear economists assume that we have full employment and not stop for a second to reflect that, since the 1940s, all that means is that the private sector employs around 80 percent of the employable in the most laissez faire developed economy – the U.S. In Australia, I think the average is about 75 percent. In other words, if we had to rely on the private sector since WWII, we would have persistant, Great Depression style unemployment. This empirical fact would, one would think, somehow insinuate itself into the models of even the most Fresh of the Freshwater economists – yet one looks in vain for any compromise with the reality of all the developed economies of the past 60 some years.

So – no. 1 fallacy would seem to me to be the pretence that we don’t live in a mixed economy. Everything else follows.;


mpowell 02.01.09 at 5:34 pm

17: Well, of course Ricardian equivalence doesn’t apply for Republicans. The purpose of tax cuts for the rich is not actually to stimulate the economy. The purpose is first order: to get rich people more money!


Walt 02.01.09 at 7:25 pm

roger, Greg is in fact the internet’s most obsessive Austrian.


John Quiggin 02.01.09 at 8:21 pm

James, I’m up and down about cross-posting. Discussions often tend to go in different directions, which is a plus, although sometimes you get the same errors in two places, which is a bit of a drag.


notsneaky 02.01.09 at 8:32 pm

Martin, I was wondering the same thing myself but couldn’t find anything substantial that would address that question. Usually there’s just talk of evidence for a ‘structural break’ around 1984/5. But eyeballing the graphs in the above mentioned Galli and Gambetti and drawing perhaps unwarranted conclusions (I’m looking at the unconditional ones) it looks like the volatility of output was lower for 48-73 by a little bit (say a 1.25 sd vs. one around 1.4 for 74-84) but not as low as the post 85 (the unconditional one being about .7 (the fact this is the unconditional one is what makes it slightly different from the numbers I gave above).
So if you were to compare output volatility 48-71 to 85-05 yes the decline would still hold up but the difference wouldn’t be as big.

Interestingly the lower volatility in the earliest period 48-73 looks like it’s mostly due to lower volatility in hours worked whereas in the same period productivity volatility was about as high as it was 74-84. Part of the big decline in volatility 85-05 is due to the fact that the volatility of BOTH hours worked and labor productivity declined. This makes one wonder about how specifically the Great Moderation is being reversed currently.


notsneaky 02.01.09 at 8:52 pm

Re: 10
I don’t know who you are referring to about a dishonest misrepresentation there in your comment. You’re just engaging in innuendo typical of these discussions. If you got somebody specific in mind then we can talk about them and whether or not they were/are representative.
On the whole it’s hard to call the GM a “statistical blip”. Close to 20 years of lower output volatility is nothing to sneeze at. As to its causes, there’s always been a strand of thinking among macroeconomists, particularly those of the New Classical persuasion, who just chalked it up to pure luck, not wishing to have to admit that prudent discretionary monetary policy can be stabilizing . The other main explanation was that in fact it was better monetary policy which was at least partly responsible. The third explanation which John Q originally mentioned was that it was financial innovation which was the driving force while out there wasn’t really widely believed. And if John just means that this third explanation is dead now in his list of refuted economic doctrines then I have no problem agreeing with him.

Basically, if the shocks that the central bank has to deal with are not too extreme, then that policy has in fact gotten better (whereas the 70’s had both extreme shocks and incompetent monetary policy (blame Nixon)). This was the case 85-05. Now we’re back too extreme shocks and we’re scrambling for an idea how monetary policy should be conducted in a new environment.


Stuart 02.01.09 at 9:04 pm

Isn’t there a fourth possibility for the GM – every time a recession was predicted, governments engineered an increase in debt to paper over the cracks, and two decades was the limit of how long the system could bear the continually growing debt burden?


mpowell 02.01.09 at 9:58 pm

22: Regarding this issue, I’m not sure the idea that better monetary/fiscal policy can be helpful is dead, yet. It seems to have been effective for smaller events, ie. recessions. But if you’re going to measure it’s performance against event like the Great Depression, you need more than 20 years to see if we’re doing a better job at preventing these kinds of huge disruptions or recovering from them. I think you need at least 1 or 2 examples. Already, though, it looks like we’re going to be skipping the 4 years of Hooverism from the last time around.


andthenyoufall 02.01.09 at 10:00 pm

Re:22, let us start with the question of under what circumstances we would call the “GM” a statistical blip, because I would love to learn something about innovative data mining techniques. From my humble point of view, there have been two declared recessions in America (right?) between 1984 and 2004 (the unsneezable-at twenty years in question?), which gives us two observations of the volatility of the business cycle during the GM. Now you can slice that up into twenty observations, and you can carefully pick countries that didn’t have economic problems during the period and throw them in with the US, but if our question is how volatile the business cycle is from peak to trough…

Two data points is nothing to laugh at! People who study WWI would love to have a second data point. However, on the whole it’s pretty easy to call a blip a blip. If I won the lottery twice that would certainly be nothing to sneeze at, but it would still be a statistical blip.

As for the innuendo, re-read 10, with special attention to the disjunction. I just think people unjustified causal claims. (Now you have me trying to come up with dirty puns on “Taylor curves” and “Volcker”…)


mpowell 02.01.09 at 10:01 pm

23: This is indeed a concern. I think you’re potentially phrasing it wrong, however. Greenspan specifically targeted wage inflation for his rate increases to avoid the economy overheating. This may have been a large part of the reason for median wage stagnation over the time period we are discussing. Ultimately I think we are facing a demand side problem here that was addressed in the last 8 years with asset inflation, but you could argue that it was the fed’s response to a strong economy that should be called into question, not its response when the economy was weak.


Alex 02.01.09 at 10:03 pm


If one subscribes to the view that Greenspan’s reaction to decrease interest rates as an orthodox response to the internet bubble was one major factor in the current crisis, then it’s pretty hard to defend the Great Moderation.
Making good money for a long time by transporting nitroglycerin is not necessarily a good business idea, when there is evidence that you can easily blow up.

But other than that, I don’t see that how the current crisis refutes much of anything that was not refuted before. The strong forms of EMH were refuted for anyone with good sense — but that doesn’t mean, by itself, that in a comparative institutional welfare analysis, strongly market oriented systems don’t fare better than the alternatives.
For privatization, one really needs to scratch the barrel to claim that somehow the current crisis changes anything in the discussion about the merits of privatizing public utilities and the like.

Similarly, can one really claim that the severity of the crisis has some non-negligible correlation with following or not following supply-side policies? It seems like just another case of the crisis being an opportunity for some to ride their hobby horses.

The strongest case is for number 4 — but maybe the lesson is that there should be provisions for conservative investments, a lesson that many in the financial word could follow profitably.

I think the crisis changed a lot in the sociology of the economic profession, mainly that people who where somewhat impervious to good critiques might be more open-minded. But I don’t think that the quality of the critiques has changed much due to the current crisis. And the good critiques of many economic models don’t have only implications that fit with John Q.’s political tastes.


Martin Bento 02.01.09 at 10:10 pm

Notsneaky, thanks for the response. I do wonder in these comparisons whether the fact that some parameters are measured differently than before is properly factored in. Nowadays, we have hedonic adjustments, rental equivalents for owned residences, changes in how we evaluate substitute goods, all of which change how we measure inflation. Leaving aside whether the new measuring system is better or worse, it seems like comparisons across time should adjust for these things, just as they adjust for inflation effects themselves. Yet I’ve seen recent unemployment directly compared to 70’s unemployment in nominal, though my understanding is that the current unemployment rate would be about 12% if measured as in the 70s.


notsneaky 02.01.09 at 10:29 pm

“there have been two declared recessions in America (right?)”

Wrong. There’s been a dozen or so.


notsneaky 02.01.09 at 10:30 pm

Ay, sorry. I read 1984 as 1948. Yes, two declared recessions.


notsneaky 02.01.09 at 10:30 pm

I’m gonna go watch the Super Bowl, will reply later.


bjk 02.01.09 at 10:51 pm

“The proportion of Americans below this fixed poverty line fell from 25 per cent in the late 1950s to 11 per cent in 1974. Since then it has fluctuated, reaching 12.5 per cent in 2007”

Immigration? Immigration was halted from 1925 to 1965. That might have had an effect . . . .

Also, the success of trickle down economics is best demonstrated by the shift of the tax burden to the wealthy.

The top 5% pay 60% of federal income taxes, and the bottom 50% pay 3% of all federal income taxes. How is that not a great triumph of trickle down economics?


bjk 02.01.09 at 10:59 pm

The nation’s immigrant population (legal and illegal) reached a record of 37.9 million in 2007.

Immigrants accounted for one in eight U.S. residents in 2007, the highest level in 80 years. In 1970 it was one in 21; in 1980 it was one in 16; and in 1990 it was one in 13.

Do you think that might have had an effect on income levels? I think so, especially when so many are unskilled.


John Quiggin 02.02.09 at 12:22 am

bjk, silly talking points about the Federal income tax won’t fly here. If you want to analyse the burden of taxes on income, you have to include Social Security taxes.

And, it’s hard to see how an increase in the immigrant proportion from 5 to 12.5 over the period since 1970 could really drive the kinds of outcomes we’ve seen.


MH 02.02.09 at 2:03 am

Your points #2 (end of privatization) and #4 (end of IRAs) struck me as related. In Pittsburgh (Obligatory remark: Go Steelers), there has been a fair bit of privatization and are proposals for more. The privatization isn’t done for efficiency or ideology. The privatization is being done to meet the obligations of the defined-benefits pension plan of the city. There isn’t a Republican or free-marketer involved in city government. It’s all Democrats, nearly all of whom are were they are because of the support of a union-based political machine (of which the public sector unions are now the biggest group).

Retired and current employees are allowing/abetting the sale of the city’s assets, and thereby future union jobs, in an attempt to fund their own retirement (and very probably failing at it). These are not small sales. They sold the water system years ago and are now talking about selling all of the parking garages because their pension fund took as big of a hit as everybody’s 401k.

I guess my general point is private retirement took a huge hit, but none of the alternatives look much better. The idea of retiring while you are healthy (or least being able to do so in comfort) is more likely to be the eventual victim of any crisis that gets too deep.


foxmarks 02.02.09 at 3:59 am

@JQ #34

Isn’t this thread a list of silly talking points about a sociologist’s misunderstanding of economics? I’m not sure, since I gave up after the latest one (#5), wherein your argument against a trickle-down strawman rests on a fallacy. You assert figures on household income which have been soundly challenged, if not completely refuted. Income is composed of more than factors than simply wages.

Perhaps you’re more insightful than you seem, constrained by the limits of blogging? Should I bother with #1-4, or are they similarly unsound?


John Quiggin 02.02.09 at 4:08 am

At a minimum, it’s an economist’s misunderstanding of economics (look me up). But your objection makes no sense. Of course, household income is made up of more than wages, but that doesn’t “challenge or refute” the US Census figures on household income. And if you want to understand movements in household incomes it is obviously sensible to look at wages, since they are the biggest single component. Finally, as I’m sure the philosophers here will confirm, a factual claim cannot constitute a fallacy, even when it is deployed against a strawman.

I can’t resist the inference that the “Fox” in your pseudonym reflects your sources of information.


notsneaky 02.02.09 at 4:51 am

Ok, that was a good game even if I had no emotional attachment for either team. Anyway,

I don’t think it matters how many official recessions were in each period. You could have a 20 year recession with no volatility with output shrinking by say 2% per year (in first differences which is what we’re looking at here). Volatility is just volatility so I’m not sure what your point is. There’s no ‘volatility of the business cycle’ except in the sense of ‘volatility of output’ here. And usually the data is at quarterly frequency (though I’m sure the result is robust to doing it annually) so in fact we have 140 observations for the earlier period and 80 for the latter. Again I’m not sure what the relevance of this is. The very fact that we have so few peaks and troughs in the latter period is itself evidence for the reduced volatility, not “a limited number of observations”. And no one’s “carefully pick(ing) countries” here, so far we’re just talking about US data. But yes, the GM is a phenomenon that was more or less present in all OECD countries, without having to pick carefully.

I still don’t get who you’re accusing of misrepresentation here. Volcker? John Taylor?


notsneaky 02.02.09 at 4:58 am

Martin, yeah the measurement issue has gotten attention. The classic paper here, even before anyone started talking about a Great Moderation, is Christina Romer’s analysis of the data which attributed the decline in volatility since WWII on better data in the latter period. Basically, more measurement error in the earlier period amplified the volatility.

There might be something to this but the decline between the earliest period 48-73 and 74-85 sort of speaks against it.

As to adjustments and making sure we’re comparing like to like, I’m pretty sure that the GDP data is used consistently (the changes in inflation measurement coming out of the Boskin commission – which would be the biggest source of difference here – can be and were applied retroactively). I’m a little less sure about the definition of the unemployment rate but I doubt the difference in measurment would be that much. Where specifically did you see this argument made?


andthenyoufall 02.02.09 at 6:38 am

Quarterly! So much the better. But presumably the fact of interest is not strictly speaking the standard deviation on quarterly output, but the severity of the expansion and the recession relative to total growth over the course of the business cycle. So splitting up each cycle into as many observations as possible does not make the analysis more significant.

I’m not accusing anyone of anything. Rather, scholars who discuss the Great Moderation examine both the observed trend or break (which was “just a phenomenon that came to an end,” as you put it, notsneakie), and their causal interpretation of it, which implied that only some fraction of the decline in volatility would come to an end. JQ calls this combination of the fact and the interpretation a doctrine, and furthermore notes that said doctrine is false. If anyone were to claim that no doctrine has been refuted because no causal interpretation was seriously entertained (which seems to be somebody’s position here, just saying) he would be accusing a number of people of saying things they didn’t believe. Among others, Bernanke, Stock and Watson, who seem to have invented the term and the preferred explanation.


notsneaky 02.02.09 at 7:00 am

“But presumably the fact of interest is not strictly speaking the standard deviation on quarterly output, but the severity of the expansion and the recession relative to total growth over the course of the business cycle.”

No, the whole point is to separate the growth part from the volatility part (detrend the data). You can have (low growth, low volatility) economies, economies (low growth, high volatility) economies, (high growth, low volatility) economies and (high growth, high volatility economies). But this is called the Great MODERATION, not the Great Moderation AND the Great Increase In Growth Rates. Which isn’t to say that growth rate is not important (in fact I’m quite sympathetic to the view that it is almost all that is important) just that it’s a different question. There’s a difference between a mean and a variance.

Stock and Watson’s preferred explanation was, AFAIK, the “good luck hypothesis”, or in other words, no casual interpretation, shocks hitting the economy just got smaller for awhile there. So what you’re saying is that the “doctrine” of “good luck” has been refuted?

So, specifically, what doctrine, rather than an observed empirical fact (however “historical” it may now well be) has been refuted?


John Quiggin 02.02.09 at 7:39 am

To restate, the doctrine I aimed to refute is the claim that, regardless of their theoretical justification or lack of it, the policies of the past three decades or so are empirically justified by the macroeconomic performance they have delivered, as shown by the Great Moderation.

Als0 (I’ll go back and add this in) the crisis has refuted the specific causal claim that the capacity for risk management associated with financial liberalisation produced, and was capable of sustaining, improved stability in output and other real variables.


David in NY 02.02.09 at 6:34 pm

I have recently met a clear indicator that “trickle-down” economics has failed. I recently heard the estimable (and I’m sure economically literate) Sen. John Kyl (R-Delusion) say that we should not do a big jobs stimulus package because that would only be “trickle-down” econmics, while tax cuts would give money directly to people. Kyl certainly seemed to understand that “trickle-down” economics was a bad thing, though he was most interested in distorting what it was.

(Kyl did not much note that most of the money in tax cuts would go to rich people and that they would be unlikely to spend much of that money, but never mind. Nor did he seem to think that funding jobs, whose wages went directly to workers, was anything but a trickle-down situation.)


Alex R 02.02.09 at 6:58 pm

John, I wonder if you’d care to comment on how the current economic crisis has affected discussion of the so-called “equity premium puzzle”. Is there even still a significant equity premium to be explained at this point? To the extent that there is, does straightforward rational risk aversion seem more plausible given the direct evidence of the likelihood of large declines?


roger 02.02.09 at 7:20 pm

Refuted, maybe, b ut you can’t wean the economists from their fairy tales. Thus, Glaeser, explaining it all to us in the TNR:

‘This crisis, which has buffeted every bourse and rocked every government, had humble origins. It began with ordinary homes in Las Vegas and Miami and Cleveland. The arcane magic of mortgagebacked securities meant that few observers realized just how sensitive the entire world had become to fluctuations in the American housing market, but that is exactly what happened. The troubles began, as is well known, in the subprime market, where a bout of extreme optimism led investors to think that the dross of no-down-payment loans to high-risk borrowers could be transformed into the gold of triple-A securities.”

Of course, total bullshit, mistaking an effect – the extension of credit – for a cause. The cause, of course, was thirty years of battering the bargaining power of labor, so that median household incomes barely crept up in the eighties, had a flurry of good increases in the late nineties, and then came to a standstill until about 2006. And since all robbery of the masses requires political covering, at the same time households were battered and single earning households became double earning households, the government systematically removed limits and regulations on the credit sector, allowing households to, in essence, give themselves the raises they weren’t getting through master card and your friendly WashMu teaser rate mortgage.

Glaeser doesn’t get it. He’s paid not to get it. His career is dedicated to not getting it. Like the pinhead #36, but in a more urbane voice, he is a groupie of the upper five percent quintile. Except, unlike the music industry, where the groupies follow the stars, in economics, the groupies sing the songs for their favorite stars – those taking home the just rewards of their innovations, their LBOs, Junk bonds, cds-es, and other fine and beautiful pilferings. The groupies, of course, always find plenty of space in the media – the NYT is overflowing with U of Chi people at Freakonomics or Economix willing to spread the most insane propaganda in order to keep the asymmetry in wealth goig just a little bit longer


John Quiggin 02.02.09 at 7:55 pm

Alex R, the equity premium is discussed, briefly, in #2. Here’s what I say

Although many explanations of this ‘equity premium puzzle’ have been offered, for present purposes they can be divided into two classes
(i) those which assume that the EMH is true, and imply that the equity premium is a correct reflection of economic risk, independent of equity markets
(ii) those in which the risk premium for equity reflects failures in equity markets that lead people to prefer holding bonds
In the light of the GFC and the events leading up to it, the case for explanations of type (ii) is overwhelmingly strong


foxmarks 02.02.09 at 8:01 pm


Your claim to be an economist is of similar character to asserting one is Frenchman because he can speak the French language. You speak with a sociologist’s accent.

The fallacy arises from the non-factual nature of at least one premise. If you want to jerk me off with language, I’ll have fun, but it doesn’t make your assertion about “trickle down” any more sound.

You contend “trickle down” doesn’t happen. I’m living in a world of enormous wealth and comfort, almost none of which I created. If it didn’t trickle down (which is non-economic rhetoric anyway), how did I get access to all this great stuff?

To understand household income, in context of asserting something about (non-) increased utility or welfare, you must consider non-wage compensation and the sort of goods the wage component can purchase. Most of what the bottom quintile enjoys in 2009 could not be afforded by anyone in 1969.

To pick one example, there were no statins in 1969. Today, the lowest earners can choose to buy these life-saving drugs for less than an hour’s wage. Tell me how people who are not dead thanks to widespread cheap medicine are not better off.

Further, to discuss household income requires a thorough analysis of what “household” means. You touched on that, but seem to drop the inquiry when you saw something that fit your view.

But, thanks for visiting my blog. Non-economists are welcome there, too.


John Quiggin 02.02.09 at 10:06 pm

OK, I get it now. “Economists” engage in evidence-free logic chopping to reach pre-ordained libertarian conclusions. “Sociologists” do nasty things like looking at evidence. But apparently, I could have saved myself, if only I’d ignored the facts that gave the wrong answer.

Sadly you made a bit of a mistake by introducing an actual fact into the discussion. The statins were discovered by Professor Akira Endo, of whom Wikipedia tells us “Apart from the recognition, Endo never derived financial benefit from his discovery, despite the fact that statins are amongst the most widely-prescribed medications.”

Of course, since you don’t appear to have a clue what “trickle-down” means, you might not get the point.


Kevin Donoghue 02.02.09 at 10:53 pm

Ah, but John, while all these new-fangled economic doctrines have been refuted, Say’s Law is making a comeback. Or maybe it’s the Treasury View, I’m not sure. Anyway there seems to be some Conservation of Bullshit principle at work. And Paul Krugman has reduced Tyler Cowen to babbling incoherence with an argument that looks like something out of an introductory macroeconomics textbook circa 1980. It’s all very depressing.


roger 02.02.09 at 11:37 pm

It would be a waste of time to discuss things with the glue sniffing randian and his “economist” friends, but he does bring out an odd aporia in the conservative mindmeld. On the one hand, there is this idea that inequality is a figment of the imagination and that households have never had it so good. You can live like a king on 60,000 dollars! Now, if this is true, why would they object so much, then, to a few points increase in the marginal tax rates for the wealthy? Obviously the wealthy are benefitting like the rest of us from being richer than rich, so if we raised the rate to, say, Truman-esque levels – ninety percent – what harm will it do our upper five percentiles? since 10 million dollars today is, apparently in the great, unnoticed hedonic deflation, worth 100 million in 1970, then taking, say, nine million away would leave our fortunate soul with what is practically 10 million dollars. Plus, of course,we can pay off the deficit – oh, the most important of all things to ever do in the whole world – by raising the money from those who have it, who will suffer nada. Those billionaires with 1oo million – take away 90 and they still have 100 million in 1970s terms.

Ah, but that is when the aporia kicks in, for it turns out that though inequality is a mere fever dream, if we don’t encourage it by lowering taxes on the wealthy, we’ll all fall into the lower depths. Cause the wealthy are so wise, don’t you know. Investing in what has served the lot of us,even the rotten lower 80 percent who are benefitting from the amazingly low cost of health care in the U.S.


M. Gordon 02.03.09 at 1:14 am

I’m no economist, but I did read your essays with some interest, and I think a modicum of understanding. Your data refuting the trickle-down hypothesis are compelling, but I do think foxmarks makes a good point, even if he does so in an asinine way. Can you explain in a non-snarky way how you would refute his point? I think Roger’s point @50 is interesting, but it’s not a refutation; he allows that we’ve all gotten wealthier in some respects, and makes that the basis for saying that wealth redistribution should be painless. It doesn’t refute the underlying claim that we’ve all gotten wealthier.


Righteous Bubba 02.03.09 at 1:57 am

It doesn’t refute the underlying claim that we’ve all gotten wealthier.

The trickle was foxmarks’s point.


Walt 02.03.09 at 1:59 am

I’m sorry, John. Now that I know that despite a lifelong career in economics you are secretly a sociologist, I’ll have to ignore everything you say from now on.

M. Gordon: Foxmark’s argument has nothing to do with “trickle-down economics”. I’m not even sure he knows what the term means. Well-functioning market economies can produce great wealth; no one is arguing otherwise. Trickle-down is a specific claim that we need to cut taxes on the rich.


notsneaky 02.03.09 at 2:02 am


John, I think I pretty much agreed with your second paragraph. I guess the difference is that I don’t think nor ever thought that the Great Moderation was due to financial liberalization in the first place. I also never got the impression that was the main explanation for it either (the main explanations either being ‘good luck’ or a better monetary policy). Which is why I think the first paragraph is just too vague to constitute a doctrine – the policies of the past three decades – to be refuted. Again, if by these policies you mean just financial liberalization, then yeah. But the policies of the past three decades (+ a few years) also included a big change in how monetary policy was conducted; moving from fueling the political business cycle (Nixon and Arthur Burns) to giving Monetarism a try (unsuccessfully targeting the money supply) to finally settling on a fairly workable policy of following some version of Taylor’s Rule.

And basically I don’t think that the present crisis really puts the way that monetary has been conducted ever since the failed monetarist experiment of the early 80’s into question – though of course now we’re in a world where monetary policy is not going to work.
The obvious counterargument here is that Greenspan should’ve popped the bubble in the early 00’s (as noted somewhere above) but that argument, in addition to only applying to the tail end of the GM, rests on a couple of intertemporal fallacies.


M. Gordon 02.03.09 at 3:10 am

Walt: You seem to be taking a very narrow definition of “trickle down economics”. John’s definition of “trickle down economics”, from his post, is that “financial deregulation and favorable tax treatment of capital income, will ultimately benefit everybody”. It doesn’t state that it will equalize incomes, or benefit everybody equally. John seems to take as a given that we have been following policies that fit the first part of the definition. He points to stagnation in income as evidence that it has failed. But, if everybody IS, in fact, better off, because goods are cheaper and wonders abound (cell phones, the electric interwebs, medical marvels), then it seems difficult to claim that it has been disproven. This is not to say that it has been proven, but I would say its demise has been greatly exaggerated.


Righteous Bubba 02.03.09 at 3:57 am

But, if everybody IS, in fact, better off,

…then it was done by neutrino osmosis or evolutionary brickmaking or tentacle-parsing. Or some new definition of trickle-down whatsit.


engels 02.03.09 at 3:59 am

I’m living in a world of enormous wealth and comfort, almost none of which I created. If it didn’t trickle down (which is non-economic rhetoric anyway), how did I get access to all this great stuff?

Trickle up? No, that’s not it: how about “syphon up”… “syphon off”? Anyway, I am sure you get the idea…


Barbar 02.03.09 at 4:29 am

The confusion between “trickle-down” economics and “I have some new gadgets” economics is enlightening.


M. Gordon 02.03.09 at 6:39 am

I think what’s enlightening is that even if you go begging for a serious discussion you can’t get anything other than snark around here.


John Quiggin 02.03.09 at 6:47 am

MG, I had a serious response half-written, but of course snark is faster and more fun.

I think you are setting the bar a bit too low. Given steady technical progress, much of it originally generated outside the commercial sector (statins and the interwebs being obvious examples), it would be pretty startling to see no progress at all. At a minimum, you’d expect some degree of quality improvement.

When you look at the data, you see that, for the poor, that’s all there is. Standard price indexes show no real gains, so if the poor have gained anything it’s from largely exogenous improvements in product variety.

For people at the median, the relevant question is not whether they are better off, but whether they are better off than they would have been if the policy institutions of the postwar period, such as steeply progressive taxation, had remained in place. Again, looking at the technical progress generated by pure public good research alone, it’s hard to see that income growth could have been much slower than it has been for this group.

If you accept these judgements, then none of the increased wealth of the rich has trickled down to the rest of the population.


M. Gordon 02.03.09 at 7:02 am

Okay, so THAT I accept as a reasonable argument. If I am understanding you correctly (parsing the jargon as best I can with my mere physicist’s brain), we can basically discount improvements in quality of life that can be reasonably attributed to the public sector, since funding for these are pretty much orthogonal, at best, or antithetical, at worst, to the philosophy underlying “trickle down economics”, and then ask if there’s any other real improvement, and your answer is, essentially, no. I think there’s a lot of complicated issues about how to measure all these things and assess them, but that’s obviously what the pros are paid for. All I wanted was a reasonable counter proposition on the table. I’m still disappointed with the stable of CT regulars, though.


John Quiggin 02.03.09 at 7:08 am

BTW, I finally worked out what our Randoid friend was on about. He has apparently got a third-hand and garbled version of this Minneapolis Fed study appropriately illustrated with a half-full glass. If you compare the Fed piece to the post above and the earlier linked discussion, you can see that most of the points raised by the Fed were covered, though obviously with more of a “half-empty” interpretation. Still, I agree with the Fed that an excessive focus on the unimpressive performance of median household incomes detracts from the much bigger problem that the poor have made no progress at all.

It’s true, as the Fed mentions, that non-wage compensation has increased faster than wages, but it’s also true that non-wage compensation of all kinds is much higher at the top of the income distribution than at the bottom. Health insurance is probably the most widely distributed form of non-wage income, but only 62 per cent of workers are currently covered, and this percentage is declining fast. Most union workers, but less than half of non-union workers are covered by pension plans
After that you move on to fringe benefits, bonuses, stock options and the like, which have grown massively and of which the average worker sees hardly any.


Brett Bellmore 02.03.09 at 12:24 pm

“But is it fair to criticize Keynes for the worst possible application of his policy?”

If I advocated a policy which involved asking alcoholics to engage in moderate drinking, would I be responsible for the subsequent binges, DTs, and drunk driving?

Counter-cyclical spending probably does work, but it can not be applied by real-world politicians in a democracy, and asking them to is just encouraging them to run continual deficits. Shouldn’t he have realized this? So, yes, I think he bears some of the blame.


Barry 02.03.09 at 3:13 pm

Brett Bellmore 02.03.09 at 12:24 pm

“If I advocated a policy which involved asking alcoholics to engage in moderate drinking, would I be responsible for the subsequent binges, DTs, and drunk driving?

Counter-cyclical spending probably does work, but it can not be applied by real-world politicians in a democracy, and asking them to is just encouraging them to run continual deficits. Shouldn’t he have realized this? So, yes, I think he bears some of the blame.”

Wow. Said after 8 years of Bush, and a quarter-century of supply-side econofraud.


lemuel pitkin 02.03.09 at 4:24 pm

I don’t think nor ever thought that the Great Moderation was due to financial liberalization in the first place. I also never got the impression that was the main explanation for it either (the main explanations either being ‘good luck’ or a better monetary policy).

What about improved supply-chain management and the shift in production and employment from goods to services? Especially since the volatility of output has declined by much more than the volatility of sales (and the volatility of household income and consumption have not declined at all).


foxmarks 02.03.09 at 6:47 pm


O.K., professor, what does trickle down mean to you? I inferred, it seems in error, that “a rising tide lifts all boats” was a handy shorthand for your notion. You must have meant something other than what you wrote.

And, it’s just a tickle in my happy place to see your barb about being “evidence-based” followed up by some deeper research. So, you were semi-evidence-based at first dash. Again, you searched until you found what fit your sociological worldview and quit digging.

To enable your noble preference for ad-hominems over reason, here’s another personalized tale from which you might glean the irrelevances:

Thirty years ago my income was in the mid quintile. Today I’m in the bottom decile. And I’ve never been much of a saver. I spend what I earn. Yet, today I am richer. How is that possible, professor? Where do I fit on your little charts?

I’m hinting at another flaw in the income premise—the households in each quintile are not the same people over any meaningful span of time.

Mock away!

@Several of y’all

I contend “trickle down” is a non-economic term. I has a ring of economic truthiness, but as we attempt to define it, it loses value, becomes less precise. We find we are actually arguing several different ideas. In his original post, the professor is attempting to refute rhetoric, which is a fool’s errand.


Righteous Bubba 02.03.09 at 6:51 pm

People in the Soviet Union became demonstrably more rich from 1917 through 1991. Therefore trickle-down economics works.


Barbar 02.03.09 at 6:55 pm

America became noticeably richer after the New Deal and World War II. Therefore trickle-down economics works.


Barbar 02.03.09 at 7:02 pm

Because individuals tend to move from one part of the income distribution to another over the course of their lifetimes, it makes no sense to compare the overall income distribution of one society to the overall income distribution of another society to see if one society is doing better than the other.


foxmarks 02.03.09 at 7:08 pm

As an aside, if you need to dehumanize me with epithets like “Randroid”, why not go all the way and just call me fuckface? As a compromise, I consider myself more of an anarchist than libertarian, so maybe call me a “Spooney”?


Righteous Bubba 02.03.09 at 7:12 pm

It’s clear that your ability to define things is not to be trusted, yourself included.


Martin Bento 02.03.09 at 8:29 pm


The argument I’ve seen made – and in the blogs not in peer-reviewed literature as it’s too hot off the presses for that – is that comparisons of the current unemployment rate to that of the 70s or early 80s are not accounting for changes in measurement.

As for inflation, I would be surprised if the biggest difference in recent years is not the accounting for the prices of owned residences in rental equivalences rather than actual prices. If home prices from 2002 – 2006 were counted fully as inflation, I think they would qualify as hyperinflation (isn’t the standard 25% a year?).

Which brings up another point. It seems to me we use “inflation” to mean too different things. One is the cost of living, in which case it may make sense to only look at what people are consuming to pursue their lifestyles and leave out their investments. But we also use it to measure the value of money, which I think would be best determined across the entire body of things money is exchanged for. This would seem to be the definition of inflation that would be relevant to monetary policy, if the latter is to target inflation. If we do that, though, much of the “increase of wealth” since the 80s that the Friedmanites brag of is simple inflation. Volcker largely transferred inflation from consumer goods to assets, rather than ending it. And if monetary policy followed inflation under this definition, the dot com (possibly) and real estate (definitely) bubbles should have brought interest rates up and therefore been self-limiting.


Martin Bento 02.03.09 at 8:37 pm

Perhaps the strongest claim refuted by all this is that the financial industry is so wise and benevolent that they should be given a large share of control of monetary policy at the expense of democratic checks and balances. I refer to the independence of central banks (let’s set aside the argument about whether the Fed is public or private; it is a hybrid, with both interests represented in the FOMC. Don’t know how it works outside the US). The Fed has now bought garbage for trillions to save the banks, without asking anyone and refusing to tell anyone the specifics. I think this will and should be a major issue as the implications become clear.


lemuel pitkin 02.03.09 at 10:24 pm

Martin, I’m afriad you’re missing hte point about the Great Moderation. The term refers specifically to reduced volatility of GDP (at the scale of years or quarters). Unemployment doesn’t come into it. Asset prices don’t come into it either, since changes in asset prices don’t contribute to GDP.

The question is not whether the two decades after the mid-1980s saw lower volatility of GDP (and some related measures): they did! The question is whether this was due to better montary policy (John Q. says no, notsneaky says yes) as opposed to some other factor.

It seems to me we use “inflation” to mean too different things. One is the cost of living, in which case it may make sense to only look at what people are consuming to pursue their lifestyles and leave out their investments. But we also use it to measure the value of money, which I think would be best determined across the entire body of things money is exchanged for.

This is true, of course, which is why there are a number of different inflation measures in use, such as the CPI and the GDP deflator. We can obviously debate whether these measures are legitimate, and which one is most appropriate for a given question. But while these issues are important in mesauring long-term growth, they aren’t really relevant to the Great Moderation, since again that refers to volatility on the scale of a year or so, and different inflation measures aren’t going to diverge much over that timescale.


Martin Bento 02.03.09 at 11:25 pm

Lemuel, yes, I’m aware of that and may have wandered off-topic some, but the general topic of this thread is economic ideas that have been undermined by recent events, not just the Great Moderation. The specific notion I was talking about in terms of inflation measure was the spectacular growth attributed to the last couple of decades by Milton Friedman among others. I seem to recall him claiming that economic liberalization since 1980 had created the greatest increase of wealth of any comparable timespan in history. Asset inflation seems relevant to that claim. As for multiple measures of inflation, sure, but it would seem that the measuer the Fed actually uses to set monetary policy does not include asset inflation, as the Fed did not seem to consider the last several years as a high inflation period. Consider that home owners spend a huge portion of their income on the homes, it seems like that would have been considered an inflationary period had home prices been measured at face value, rather than in rental equivalents.


Lee A. Arnold 02.04.09 at 6:26 am

You trickle-down believers appear to misunderstand both economics and history.

Goods and services improve in quality and decrease in price always, or almost always. That is not “trickle-down.” That is productivity growth.

That used to happen ALONGSIDE increases in income.

Now, we’re getting productivity growth without increases in income. Something new for the United States.

So, the productivity growth is being less evenly distributed than before. In fact that lowers the overall standard of living from what it could be.

“Trickle down” was the political rhetoric claiming that tax cuts for the rich improve incomes at the bottom. Decisively refuted — indeed the reverse effect appears to be true. The bottom quintiles are a bit more impoverished.

“Rising tide lifts all boats” in U.S. political rhetoric has always referred to incomes, also.


roger 02.04.09 at 7:45 pm

John, your refuted economic beliefs seem to be sort of the charter used by the NYT to select the economists to which it gives space – if the economist believes every one of those things, he gets to write op eds and join in the fun at the Economix blog. Of which two recent entries really made me laugh. One is by the ever wrong Casey Mulligan, McCain’s economic advisor and the guy who thinks our spike in unemployment is caused by a rash of lazyitis – really, the workers of america are gettin’ too much money! Today he is proposing that the commercial real estate market is doing extra well, in spite of the naysayers. He uses a typically whacky, cherry picked chart that shows commercial real estate did not bubble as much as residential – wow, talk about one of your strong proofs! As one commenter pointed out, in the real world, in which there are money market funds invested in commercial real estate, like TIAA-CREF real estate fund, losses last year stood at 17 percent.

But Mulligan is well known as a Friedman apparatchik. What I find more amusing are economists like Glaeser. His post on the super bowl celebrating sun belt real estate was a hoot – and an unconscious indicator that the economics mainstream still has its dead talons firmly clenched in the magic idea of the self-correcting market. This is what he said about Phoenix:

“The fact that Phoenix has experienced a 42 percent housing price drop since its June 2006 peak is a sign of the area’s strength, not weakness. The high housing prices were always unsustainable, because of Phoenix’s capacity to build. Unrestricted supply meant the price boom was always a mirage. The decline in prices reflects the ability of Phoenix’s great growth machine to create inexpensive housing. ”

Only an economist could get the NYT to publish such gobbledy gook. Imagine if our weatherpersons applied the self adjusting model to weather reports: good news! A hurricane is approaching the city!


Brian 02.06.09 at 6:23 pm

wow, verbally duelling economists. that’s kinda fun. what would be better is if someone called for a dance-off (the peaceful solution to trash-talkin) – older folks might relate to “racing for pinkslips.” the point is performance. name drop and study cite until you’re blue in the face, but it’s all hot air until the money hits the road. Does anyone here apply their brilliance by placing personal capital at risk AND have proof of profitability? If so, that would end the bickering toute de suite.

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