Have you noticed that whenever mention is made of secession, establishment types always say, “that issue was settled in 1865”?

The humor columnist for the New York Times, Paul Krugman, has recently taken to defending his vulgar Keynesianism against its critics by accusing them of making arguments that rely on the existence of a “confidence fairy.” By this mockery, Krugman seeks to dismiss the critics as unscientific blockheads, in contrast to his own supreme status as a Nobel Prize-winning economic scientist.

George Selgin commented on my post, "Krugman and Macroeconomics," expressing reservations about my statement that his and Steve Horwitz's version of Austrian business cycle theory incorporates significant Keynesian elements. My belated reply, which follows, is long enough to warrant a separate post:

George, thanks so much for your comment, with which I mostly agree. I admit that many pre-Keynesian economists, Hayek, and some Monetarists all saw negative velocity shocks as one important source of depressions or recessions. But I still think it is fair to describe that view as Keynesian. After all, a Keynesian attack of "animal spirits" is nothing more nor less than a velocity shock. Indeed, I would identify this as the central proposition of Keynesian business cycle theory, although the Keynesian insistence upon referring to changes in velocity (i.e., money demand) as changes in "autonomous spending," or even worse, as a divergence between "planned saving and planned investment," often obscured this simple fact.

Three distinct positions on velocity seem to have dominated the debate after Keynes: (1) the traditional Keynesian view that autonomous falls in velocity were the only source of economic downturns because the money stock, for the most part, did not matter; (2) the orthodox Monetarist position, as exemplified by Milton Friedman, that the cyclical behavior of velocity was mainly a function of what was happening to the money stock, and that therefore, while in theory velocity shocks could cause economic fluctuations, in practice fluctuations are almost always driven by the money stock;  therefore velocity...

I am quoted extensively by Louise Story, "Deal May Avert Default, but Some Ask, 'Is That Good?'" in the Business Day section of today's (August 1) New York Times, p. B4. The print version of the article is slightly shorter than the online version and unfortunately dropped the paragraph on Tyler Cowen.

Marc Joffe, a former employee of Moody's, has just posted an outstanding explanation, entitled "US Debt Ceiling Crisis: Rating the Rating Agencies," of why the rating agencies have strong incentives NOT to accurately downgrade government issues.

As Marc points out: "since rating agencies are regulated by the United States, European Union and other sovereign authorities, they may have reason to fear retaliation from their regulators. While such fears appear to have a basis in Europe where official criticism of the agencies has been frequent, we have yet to see a similar problem in the United States.

"Second, sovereign rating changes may impact other ratings in ways that create commercial challenges for rating agencies and investors. Given the dependence of numerous bond-issuing entities on the US government, a Treasury downgrade may trigger a large number of municipal, corporate and structured finance issuer downgrades as well. This cascade of downgrades would impose challenges on a rating agency’s internal systems, staff research skills and relationships with affected issuers.

"To the extent that certain institutional investors are restricted to investing in AAA securities, a Treasury downgrade would result in the forced liquidation of many assets. Institutional investors – who often purchase research, data and analytics from ratings firms – may react negatively to such a scenario. Moreover, such portfolio changes could substantially impact interest rates. If these interest rate changes are blamed on the rating agencies, they may suffer...