How Did Paul Krugman Get It So Wrong? (2011) [pdf]
faculty.chicagobooth.edu
faculty.chicagobooth.edu
My impression of his NYT columns for the past two decades, are that they seem to have predicted accurately the broad trends in the US and global economies, far more accurately than those of his detractors
https://en.wikipedia.org/wiki/Saltwater_and_freshwater_econo...
Tellingly, Cochrane chides Krugman for attributing a quote to him (C) that he "did not write." In the very next sentence, we learn that the "quote" is accurate and accurately attributed to him, just not something he "wrote." He also argues the quote is out of context, but fails to explain exactly how. Okay dude.
Cochrane goes on to assert that Krugman grossly distorts fresh water economics as allegedly setting forth the inability of government spending to increase employment. And yet, we have this https://faculty.chicagobooth.edu/john.cochrane/research/pape... , which clearly argues (by Cochrane himself) that the multiplier on fiscal stimulus is precisely equal to zero. That is, according to Cochrane, every dollar of government spending results in an equal and opposite dollar lost somewhere else in the economy as supposedly required by Ricardian equivalence. This is of course nonsense.
This is not an honest article.
For example, related to the "multiplier is precisely zero" paper, Cochrane says:
> Krugman asserts that I and others ‘believe’ ‘that an increase in government spending cannot, under any circumstances, increase employment’ and that we ‘argued that price fluctuations and shocks to demand actually had nothing to do with the business cycle’. These are just gross distortions,unsupported by any documentation or the lightest fact-checking, let alone by examination of any professional writing. And Krugman knows better. All economic models are simplified to exhibit one point; we all understand the real world is more complicated. Krugman’s job as a professional economist with a newspaper column is supposed to be to explain that to lay readers. These quotes about academic opponents would be rather like somebody looking up Krugman’s early work (which assumed away transport costs) and claiming in the Wall Street Journal, ‘Paul Krugman believes ocean shipping is free, how stupid’.
That is: Yes, his paper "said that", and no, that's not what his paper was saying. And a reasonable reading of his paper would have known that. And a thorough and charitable reading of this article would have revealed that.
The different view points are not exactly amicable because they quickly devolve into ideological fights.
[1]https://www.nytimes.com/2009/09/06/magazine/06Economic-t.htm...
Taleb made a career out of this: Economists use models that are don't consider fat-tails. The rating agencies used them, LTCM used them, Fannie and Freddie used them. Everyone thought spreading shitty risks across MBS, CDOs, CDS, CDS^2 mitigated the risk, but it turns out i did not.
As Taleb would say, the economists use models that assume we live in "mediocristan" but we live in "extremistan"
Krugman will probably write another article like this in 10-15 years, but instead of it being about housing debt, it will be about student loan debt.
I must quibble. Yes it is true that everyone thought spreading mitigated risk. In reality, it actually did mitigate the risk, just not to the extent expected by many. Indeed, a colleague of mine was desperately putting together a "recession" model for CDOs that included suitable co-variances lacking in the standard models (e.g., if foreclosure rates rise in an area past a certain threshold, house prices in general will be depressed ). There was no market for such a product because it introduced significant non-linearity in the valuation models. Nonetheless, clearly the folks at magnetar understood what was going on.
https://www.nytimes.com/2009/09/06/magazine/06Economic-t.htm...
But there are some entertaining quotations:
Any astute reader knows that personal attacks and innuendo mean the author has run out of ideas.
Following the last mystic oracle until he gets a judgment wrong, then casting him to the wolves, is not a good long-term strategy for identifying bubbles.
Krugman wants to be the Rush Limbaugh of the Left.
The case for free markets never was that markets are perfect. The case for free markets is that government control of markets, especially asset markets, has always been much worse.
Most citizens are caught up heavily, or lightly, in some (distracting) cause or another. But virtually no one questions whether the entire system is really, and truly able to keep up the charade.
The insanely wealthy have built up their warchests for the next big ass whipping to the global economy, but amongst the peasants, people are like "meh". When they should really be building a bit of bankroll for themselves, for the rainy day.
"...first by inflation, then by deflation, the government, the banks, and the corporations, will grow up around them and deprive the people of prosperity until their children wake up homeless ..." --no one famous said (but it's still true)
To his credit, Krugman has focused on pragmatic things like worker retraining, education, etc., but he also has called for tariffs [2].
Trump attempts to be seen as someone who adopts Reagan style deregulation and tax reduction, but in reality he has grown government spending and the budget deficit tremendously in his short time in office, and has created massive corporate welfare to many industries as well as steep taxes (in the form of tariffs) on firms that import goods from China, not to mention his threats of antitrust actions against tech [3].
Combined with the additional reductions in economic freedom that his trade deal adjustments with Canada and Mexico have wrought, he's ushered in tremendous bureaucratic overhead to oversee the process of making what are essentially superficial changes (yet which require tons of work by lawyers, etc. so that firms can comply). In general, a great deal of work and oversight for virtually no substantive benefit.
All this is pretty much exactly what Krugman has been calling for his entire career as a populist economist/columnist [4].
All of the below articles are Krugman making arguments that came later to be adopted by Trump as part of his rise to power. Note that Krugman's essays since Trump took office are blatantly partisan and largely nitpick Trump's execution of his ideas.
1. Krugman on the importance of the Rust Belt: https://krugman.blogs.nytimes.com/2013/07/21/a-tale-of-two-r...
2. Krugman calls for 25% across the board tariffs on Chinese goods: https://www.nytimes.com/2010/03/15/opinion/15krugman.html?sr...
3. Krugman on breaking up Amazon: https://www.nytimes.com/2014/10/20/opinion/paul-krugman-amaz...
4. Krugman on the failings of NAFTA https://www.nytimes.com/1993/11/10/opinion/in-america-nafta-...
Further, Krugman was very clear thst it was important for the government to spend heavily in a recession, when government spending wouldn’t crowd out private spending, and specially st the time (and even now) the US has a vast requirement for infrastructure maintenance, which thanks to the crash could have been gotten done on the cheap. It wasn’t an unconditional endorsement of government spending.
I didn’t read too much further into this article, because I was heavily involved in this particular aspect of the response to the financial crisis due to a project in class, and was well aware of what different commentators, including Krugman were saying, and this article mischaracterises the part that I do remember.
Politicians of both sides run into an incentive problem when implementing Keynesian policy because it requires what commentators denigrate as "austerity" in good times in addition to heavy recession spending. There's every incentive for politicians to keep the spending up in good times, and little (other than ideology or commitment to good governance, neither of which have proven especially important to most political actors) incentive in the other direction.
Uhh. Nope.
"literally what Donald Trump and the Republican Party, which were apparently anti-Keynesian economics are practicing."
Uhhh. Nope. I'll be wrong in my oversimplification, but at least more right than the above. Keynes' central argument was that in times of depressed aggregate demand and high unemployment, the government can play a massively positive role in stimulating aggregate demand. Keynes never argued in favor of stimulus at times like these.
Further: He argued for austerity at times like these, so that the budget would balance over the whole cycle. That idea has far more restraint and fiscal conservatism in it than either party has shown in decades.
One could argue that, with interest rates this low, borrowing to work on infrastructure makes sense. That may be a reasonable thing to do, but it's not a Keynesian policy (because we're at the wrong point in the business cycle).