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Fun With Graphs! Murphy vs. Erdmann

Summary:
I don’t want to put too much stock in this post. My main point is to demonstrate that you can tell just about any story you want, if you play with FRED long enough. This is why Russ Roberts asks people when they present their slides showing p-values: “How many regressions did you run before you got this result?” (He talks about that in this interview.) Anyway, in the comments of a recent post here, Kevin Erdmann rushed to defend the honor of Scott Sumner. Erdmann challenged my view (which is actually close to the conventional wisdom) of what happened with the housing crash. Among other points, he presented the following chart and commentary: [Kevin Erdmann talking about the above:] “The funny thing is, if you look at Phoenix – the quintessential bubble city –

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I don’t want to put too much stock in this post. My main point is to demonstrate that you can tell just about any story you want, if you play with FRED long enough. This is why Russ Roberts asks people when they present their slides showing p-values: “How many regressions did you run before you got this result?” (He talks about that in this interview.)

Anyway, in the comments of a recent post here, Kevin Erdmann rushed to defend the honor of Scott Sumner. Erdmann challenged my view (which is actually close to the conventional wisdom) of what happened with the housing crash. Among other points, he presented the following chart and commentary:

[Kevin Erdmann talking about the above:] “The funny thing is, if you look at Phoenix – the quintessential bubble city – construction and non-construction employment also both start to drop at the same time in mid 2006. And, in Phoenix, where you might think the drop in construction should have led the collapse, the drop in non-construction employment was actually a little sharper than the drop in construction employment.”

You can stare at Kevin’s chart for a bit and see if you follow his argument. (If you see Elvis, you’ve been staring too long.) Make sure you look at the units he uses.

OK, great. Now I’ll take the same variables Kevin chose, but I’ll pick different units. That gives me this picture:

I would argue that my picture corresponds pretty closely to the conventional wisdom on this one. Construction employment (expressed as an index, since after all there are way more total jobs than simply construction jobs) spiked and tanked far more severely in Phoenix than general employment. Contrary to Scott Sumner’s interpretation, you can clearly see that the collapse in construction employment slowed the rate of growth in total employment and “pulled it down”–it wasn’t that these construction workers were easily absorbed into other sectors, so long as the Bernank kept NGDP humming. (That was Scott’s theory, when he was looking at the stats on new housing starts.)

Before closing, one thing I’ll admit: I had expected the national unemployment rate to lag the Phoenix one, and that isn’t apparently correct. (It’s not on this chart I’m showing you–I wanted to just use Kevin’s variables–but I added it on my other browser tab to see.) So that might be a feather in Kevin’s cap.

Last point: Kevin says in his comment, “Yet, something caused all of that job growth and migration [in Phoenix] to suddenly break down in mid 2006.”

This observation is way more consistent with the Austrian story, than with Sumner’s story. According to Sumner, everything was fine until a self-fulfilling prophecy occurred in 2008, when the markets suddenly expected the Fed to fall asleep at the wheel and let NGDP growth collapse. The Fed said “Yep that is indeed what we’re going to do,” and then we had the worst recession since the 1930s, for no other reason than that the Fed stopped paying attention to TIPS yields. There was no “real” “structural” problem in the economy that would have required a recession. (Of course I’m somewhat caricaturing Scott’s position to make a point, but this isn’t made up.)

In contrast, the Austrian story says that the Fed slashed rates after the dot-com crash, brought them down to 1% by June 2003, held them there for a year, then started raising rates from June 2004 onward. So yeah, I agree that “tight money” caused the crash, but not in the way Scott means.

Note also that our disagreement on this is similar to how Krugman thought he blew me up (story here) by pointing out that central banks can influence the business cycle. Right, that’s key to the Austrian theory. Monetary disturbances cause malinvestments–setting in motion an unsustainable inflationary boom–which then necessitate a bust for “real” reasons. The Austrian theory is neither purely demand nor purely real.

Robert Murphy
Christian, Austrian economist, and libertarian theorist. Research Prof at Texas Tech and author of *Choice*. Paul Krugman's worst nightmare.

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