Cage match! Cage match!


The Chicago "School" gets a well deserved Smack-Down.
Why haven't these guys resigned in disgrace.


I really like the work of Fama and Cochrane, but they are dead wrong on this issue... Krugman just can't believe that such smart people are not getting it!!

Real business cycle theory was innovative, but that was 30 years ago... move on guys!


Have Fama or Cochrane replied to the criticism? Is it on?


The debate between these guys has definitely been very interesting to watch. It's also brought out all of their personalities. In my opinion, DeLong and Krugman are winning the debate, but I think they could do a lot better if they didn't present themselves in such a snarky way.


DeLong and Krugman are definitely losing. When you have to resort to being nasty, you have no argument. Quite simple actually.


This isn't a debate. It's embarrassing. To be blunt, it's like if people in my areas starting arguing about whether primes are infinite.


After the DeLong/Krugman were declared winners of the first round, Greg Mankiw, Cochrane/Fama's agent, was overheard saying: "the ref misunderstood John and Eugene's strategy! My count has them slightly ahead of Brad and Paul."


Note to Krugman: when you are astounded that otherwise intelligent people can't see something obvious, you might want to consider that maybe it's you who can't see the obvious. For example, recall the "oil non-bubble".


It's interesting to see that esteemed Professors can be just as childish as the 5-year-old next door.

And if Krugman and DeLong didn't make their replies steeped with such arrogance and condesencion, people might find them more palatable and less juvenile.


Go Chicago!

Imad Qureshi

Not that I am qualified but I think Krugman is much more convincing then Fama and Cochrane. He makes a lot more sense.


I can't help but wonder what the monetary impacts are to the market value of a Booth MBA?

C. Larity

I'll always wonder how that Nobel medal fit around Krugman's enormously inflated head. For a guy so adamantly opposed to Bush, Krugman uses the exact same methods to attack his opponents, branding them as idiots who don't understand.


An incontrovertible sign that the cable news ethic of "debate" has infected some of our finest minds.

On the up side, the public's getting more exposure to the internal debates of the profession than ever before. But that's double-edged: It might get more lay people (like me) interested to pick up a few books and see what all the fuss is about. It also might make lay people dismiss economics because it seems to them an unsettled science -- which they might take to mean (mistakenly) that it's all just opinion.

In any event, I wish all sides were more gracious. Especially Krugman -- I can understand the passion of his conviction, but you'd think that as a Nobel winner and high-profile writer he could afford to be more measured and less dismissive. Because Krugman is the most well-known to non-economists, I'd say the onus is on him to set a civil tone.


I love the back-and-forth between a) Krugman and Mankiw, and b)Delong/Krugman vs. people Mankiw quotes. I side with Krugman's ideas, but I don't like his abrasive and dogmatic style.

Kevin H

I haven't read beyond Cochrane's '3 Fallacies' but I already know he's wrong about all of them:

1. "Jobs created by stimulus spending are offset by jobs lost from the decline in private spending." Ok, but with the big exception that this offset can be delayed in time. He even makes that argument in #3 but fails to apply it back to #1. The basic idea would be to move the job losses to an economy which can sustain them with little impact on growth. The error he makes is to assume that jobs and the economy have a linear relationship. A few jobs added in a bad economy have a lot more impact than a few jobs lost in a good economy.

2. "The economy overall does not care if you buy a car, or if you lend money to a company that buys a forklift." Nope, the economy sometimes does care very much. If you have a well capatalized economy (like ours), there are plenty of forklifts to go around. Factories to make every conceivable device are ready to rehire workers the moment they think that there will be a market for their products. There is a complex interaction between market and producer that Cochrane is dismissing. Economies are a 'weakest link' type phenomenon. You can only have as many goods sold as the minimum of the total amount you can produce or the total amount you are willing to buy (supply-demand curves only add a very little elasticity to that basic cap). Right now we can produce more than we are willing to buy, so encouraging our willingness to buy is the only way to increase overall economic activity.

3. Cochrane almost hits it with his thirst fallacy: "The classic arguments for fiscal stimulus presume that the government can systematically fool people." It seems to me that this is close to the truth, if a bit overly negative. The fact is that people have had a fundamental psychological shift. When everyone is optimistic, there is an economic boost, and likewise, when everyone behaves in a pessimistic fashion, there is an economic hit. This is again because of the 'weakest link' type phenomenon in economics. It doesn't just matter what people can buy, or can do, they must also believe it is the right thing to do. The underlying weaknesses in the economy are bad enough, but pessimism turns bad into disaster. Therefore, simply making people less pessimistic can have a positive impact on the economy.


Kevin H

after reading Fama's arguments, I'm going to retract my argument against Fallacy #1. He just didn't phrase it as well as Fama did.


Krugman correctly contends that "(a)n increase in G doesn't reduce I one for one, it increases GDP, which leads to higher S and T." However, what he fails to consider is what this "higher S and T" really means. Let's consider.

First, the "higher S and T" essentially tells us that the government ends up paying for the increase in G that it puts forth. This must be the case if the government does not print new money because it has to get those funds from somewhere. Where does the government get the money? It can either issue debt or raise taxes. By raising taxes the government has a "higher...T," and by raising debt the government creates a "higher S"; this validates Krugman's +G = +(S+T) equation and graph.

Second, we should consider what raising taxes does. Effectively, an increase in taxes will reduce the spending power of the country's actors (private individuals and companies). Obviously, when a country's actors have less spending power, they have less money to invest (I).

Third, we should ask what the effect of government debt issuance actually is. When the government issues debt, actors in the economy choose to give that government money as an investment. The opportunity cost of giving money to the government for investment is a reduction in the amount of savings that those actors would have made in the open savings markets (i.e. banks). So the people invest in the government as opposed to privately. The government utilizes these funds to pay off the cost of increasing G, as opposed to investing that money in growth as those open market entities would. Effectually, we therefore see a reduction in I.

In conclusion, +G = +(S+T) = +S or +T.
But, +T = -I and +S(in government debt) = -I.
So, +G = +(S+T) = +S or + T = -I and/or -I.
And, therefore, +G = -I.

In case you missed it, Cochrane and Fama are arguing this exact point, they simply skip the middle step of equating an increase in savings and taxes to a reduction in investment. It seems to me that Krugman, in an overtly pompous nature, over-simplifies their argument and misses the true essence of their point: If government increase spending(G), the money has to come from somewhere, and this 'somewhere' is money that actors would have spent investing elsewhere (I).

Ultimately, Krugman's beliefs might hold in the short-run because the reduction in I will lag behind the growth in G. But, fundamentally the contention that the increase in government spending will create a cost that must be had by society must be true. The question then becomes whether the gains in the short-run will be able to off-set the long-term costs. I believe that Cochrane and Fama are arguing that those long-term costs outweigh the short-term gains. They would contend that the money taken from economic actors to spend on G now produces at a rate worse than if the money had been left within the economy.

Therefore, the argument between DeLong/Krugman and Cochrane/Fama is a pretty classic one: Will the government be able to spend money more efficiently than the private sector? Intuitively, I am partial to believing that individual actors spend money more efficiently, but the current economic status appears to be different than the normal downturn in a market economy, so I am less sure. As such, I would contend that a stimulus package might be beneficial, if done correctly.

Spending on infrastructure may produce benefits that outweigh the production that such money would have taken on otherwise is certainly possible (and even likely in certain areas). However, too much government spending and government spending in the wrong sectors will probably result in inefficiencies that could have been avoided by leaving the money with private actors. Thus, in conclusion, perhaps a scaled down version of the stimulus package is the best option for maximizing the output of each dollar in our economy.

I would love to hear thoughts from others.


Bobby G

Soo uhh.... what's the reason why government debt spending is better than private sector debt spending? I don't think it is. Granted it's very difficult to have private sector debt spending after the government-regulated private debt spending system went to hell, but that's not the private sector's fault... if anything that should be testament to how government intervention is inefficient and, in economic terms, dangerous.

Every time. Every time someone says we should have government interference I want to ask them to answer the following questions:

1) Can government intervention ever be MORE efficient than an externality-free private market? (hint: the answer is no).

2) Given that the government should only intervene when there is a market failure, how capable is the government of identifying, correctly, the market failure? (recent evidence points to: hardly capable).

3) Assuming the government is able to accurately identify the market failure, how capable is it of knowing the best way to fix the market failure? (naturally skewed incentive structures always force deadweight loss here, even under ideal scenarios. On top of that, our political system practically necessitates huge deadweight loss itself)

4) Assuming the government is able to know the best fix to the correctly-identified market failure, how efficient can it be when attempting to apply the fix? (Once again, skewed and unaligned incentive structures come into play, as well as the idea that government jobs can never pull the same talent as the private sector)

If the cost of the market failure is less than the cost of government inefficiency, the government should not intervene. I wish everyone would address those questions before proposing intervention.