Liberal economist Paul Krugman appears to have cherry-picked data to support his belief in the Federal Reserve’s ability to stabilize the economy.
In a recent column responding to another economist, Krugman included a chart purporting to show that central bank interest rates have a significant effect on long-term investments.
Yet in a post for the Pragmatic Capitalism blog, entrepreneur and financial expert Cullen Roche asserts that Krugman “decided to remove 20 years worth of data because it fit his argument better.” And it appears to check out.
According to Roche, Krugman’s chart differs significantly from the version that would have showed up when he pulled the data from the Federal Reserve Economic Data (FRED) website, which extends from 1954 to 2015:
“When you add those years back in you get a result that shows a very weak correlation,” Roche writes, speculating that Krugman “[removed] almost 40 percent of an entire data set just because the data didn’t fit the narrative.” (RELATED: Paul Krugman’s Proof by Repeated Assertion)
“This is why people often complain about economics,” Roche concludes. “When economists take a data set and just blatantly alter it to fit their argument it doesn’t do much to help build credibility for their work.”
Krugman’s chart appears to support his conclusions with data points plotted over a 35-year period, but would have been much less conclusive had Krugman included the full range of available data, which covers a span of 55 years.
Krugman took issue with a recent white paper in which economist James Montier of GMO Capital accuses Krugman, Fed Chair Janet Yellen, and other Keynesians of “groupthink” in their adherence to the concept of a “natural” rate of interest. (RELATED: Krugman and the ‘Sneer Gap’)
Proponents of the theory assert that there is a constantly fluctuating equilibrium interest rate consistent with full employment of both labor and capital (i.e., high growth and low unemployment), and argue that the Fed should set monetary policy with reference to this rate.
Montier counters that empirical evidence does not support that conclusion, saying, “The natural rate of interest is simply assumed to exist.” (RELATED: Paul Ryan Takes on Chief Critic Paul Krugman)
Krugman undertook to defend himself against that charge in his column by suggesting that Montier “seems to have forgotten about housing” and other long-term investments, which Krugman says are much more responsive to interest rates.
To demonstrate this, Krugman provides the chart tracking the Federal Funds Rate (“the” interest rate in monetary policy) and new housing starts between 1965 and 2000. The inverse relationship between the two statistics, he says, shows that “monetary policy can matter a lot,” even to the extent of causing and ending recessions.
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