The Dario Fo of Economics

What is the secret formula for winning a Nobel Prize? A bit of historical revisionism, a dash of Maoist puppet theater, and a heaping of terrible economic advice? Via Megan McArdle, Arnold Kling revisits this prophetic Paul Krugman column (Nobel in economics, 2008) from 2002:

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Kling, who once worked at Freddy Mac, spoke with Reason.tv back in September about the forthcoming bailouts:

Comments

[Guy_Smiley]

Wow... Apparently Greenspan was listening.

[P Brooks]

If I were King, I would have Paul Krugman beheaded.

[Warty]

Does anyone really take Paul Krugman seriously? He doesn't write columns, he writes tantrums about how much smarter he is than everyone else.

[John]

I about choked on my coffee when I read this. I wonder what people like Tony who site Krugman as some kind of oracle and also think that the housing bubble was completely the result of the evil Republicans not regulating enough think of this?

[Tulpa]

Krugman's Nobel Prize was deserved. The problem is that people don't treat the Prize as what it is, the recognition that a person has made an extraordinarily significant (but usually extremely narrow) contribution to the field. It is not supposed to be a certification of expertness over the entire field of economics, which is what it's painted as (especially by people who've won it).

Just because Albert Pujols won the MVP in baseball last year doesn't mean you want him to pitch the 9th with a one-run lead.

[Rich]

I hope Bernanke creates another tulip bubble to replace the housing bubble. I *like* tulips!

[alan]

Krugman's Nobel Prize was deserved. The problem is that people don't treat the Prize as what it is, the recognition that a person has made an extraordinarily significant (but usually extremely narrow) contribution to the field. It is not supposed to be a certification of expertness over the entire field of economics, which is what it's painted as (especially by people who've won it).

The problem with that thinking is most universities in the world have first rate economist who have spent their entire thirty plus year careers doing real, solid research, contributing to a broader understanding of the subject instead of spending just a few post graduate years building a reputation that once established allows them to become lazy hack, like you see in the quote above, who at this point has been a lazy hack far longer than he has been a serious economist. There are far too many economist more deserving than Krugman.

[Warty]

Rich, you made me do it.

[John]

That is a very good point Tulpa. And Krugman's nobel was deserved. He actually was once a reasonable guy. Peddling Prosperity is a good book about the limits of all economic theory. It is very even handed. Around 2001 he just went off the rails. I think he liked the attention of being a pundit. And the crazier shit he wrote the more people on the left liked him and the more successful he was.

[alan]

Damn it ta Hell, you can read over your submission three or four times and still not catch a simple grammatical error.

[alan]

I think he liked the attention of being a pundit. And the crazier shit he wrote the more people on the left liked him and the more successful he was.

Some on the left would call that a sign of market failure, but I think it is just an outlier trend that in the long run will be adjusted.

Around 2001 he just went off the rails.

I don't think his hackdom began with his NYT columns. His analysis during the '93 budget debate wasn't that great either.

[Tim Cavanaugh]

They say this column was all some meta-performance art by Krugman. He was really being ironical, and so forth...

[jsh]

His analysis during the '93 budget debate wasn't that great either.

http://www.nationalreview.com/nrof_luskin/kts200408090930.asp

Krugman: "Compare me ? compare me, uh, with anyone else, and I think you'll see that my forecasting record is not great."

[jsh]

They say this column was all some meta-performance art by Krugman. He was really being ironical, and so forth...

B.S. This is from 2006. Notice the lack of irony (then or retroactive):

http://krugman.blogs.nytimes.com/2006/10/30/credit-where-credit-is-due/?pagemode=print

Neeraj Mehra, Amritsar, India: Mr. Greenspan has done a disservice to the nation by creating the housing boom. As a layman-observer, that's the lingering thought I've had. Your article reaffirms it.

The question I have is this: Did he do the right thing - acting morally by engineering a housing boom, more as a bridge loan, until something else showed up at the horizon to shore up the economy - because he didn't have a choice, or did he undertake a path of mere political expediency? And, that's a question that's nagging me for a while.

Would appreciate it if you could shed some light.

Paul Krugman: As Paul McCulley of PIMCO remarked when the tech boom crashed, Greenspan needed to create a housing bubble to replace the technology bubble. So within limits he may have done the right thing. But by late 2004 he should have seen the danger signs and warned against what was happening; such a warning could have taken the place of rising interest rates. He didn't, and he left a terrible mess for Ben Bernanke.

[Sizzlechest]

Krugman already responded.

http://krugman.blogs.nytimes.com/2009/06/17/and-i-was-on-the-grassy-knoll-too/

Sounds like Megan McArdle was taking him out of context.

[R C Dean]

Looks like Krugman forgot that the intertubez forget nothing. His 2006 blog post above makes it sound like he meant his housing bubble proposal to be taken seriously.

[Guy_Smiley]

Does anyone really take Paul Krugman seriously?

Greenspan, by his actions, was in total agreement with him! So he takes his views seriously, at least.

The two of them should share a Nobel Prize In Economy Killing.

[jsh]

Krugman already responded.

Kind of a weak response ("if you believe that, you must also believe I shot Kennedy").

[Guy_Smiley]

if you believe that, you must also believe I shot Kennedy

By comparison, the bubble will be the cause of much more suffering.

[alan]

Krugman already responded.

Sounds like Megan McArdle was taking him out of context.

Because there is no context like metacontext, here is Keyenes:

The remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and keeping us permanently in a quasi-boom.

And we all know Krugman loves him some Keynes.

[John]

Krugman wasn't being ironic. If you read what he was writing in 2002 ect, he was constantly talking about the need to get spending up to get the economy going. He meant every word of what he said.

[Jordan]

Reposting Ben's comment from the previous thread to preempt Krugman's band of merry men:

If you think what he wrote in 2002 was offensive, then you'll really get annoyed reading what he wrote in 2001.

German Interview, undated

http://www.pkarchive.org/global/welt.html

"During phases of weak growth there are always those who say that lower interest rates will not help. They overlook the fact that low interest rates act through several channels. For instance, more housing is built, which expands the building sector. You must ask the opposite question: why in the world shouldn't you lower interest rates?"

July 18, 2001

http://www.pkarchive.org/economy/ML071801.html

"KRUGMAN: I think frankly it's got to be -- business investment is not going to be the driving force in this recovery. It has to come from things like housing, things that have not been (UNINTELLIGIBLE).

DOBBS: We see, Paul, housing at near record levels, we see automobile purchases near record levels. The consumer is still very much in this economy. Can he or she -- or I should say he and she, can they bring back this economy?

KRUGMAN: Well, as far as the arithmetic goes, yes, it is possible. Will the Fed cut interest rates enough? Will long-term rates fall enough to get the consumer, get the housing sector there in time? We don't know.

"

August 8th 2001

http://www.pkarchive.org/economy/ML082201.html

"KRUGMAN: I'm a little depressed. You know, inventories, probably that's over, the inventory slump. But you look at the things that could drive a recovery, business investment, nothing happening. Housing, long-term rates haven't fallen enough to produce a boom there. The trade balance is going to get worst before it gets better because the dollar is still very strong. It's not a happy picture."

August 14, 2001

http://www.pkarchive.org/column/81401.html

"Consumers, who already have low savings and high debt, probably can't contribute much. But housing, which is highly sensitive to interest rates, could help lead a recovery?. But there has been a peculiar disconnect between Fed policy and the financial variables that affect housing and trade. Housing demand depends on long-term rather than short-term interest rates - and though the Fed has cut short rates from 6.5 to 3.75 percent since the beginning of the year, the 10-year rate is slightly higher than it was on Jan. 1?. Sooner or later, of course, investors will realize that 2001 isn't 1998. When they do, mortgage rates and the dollar will come way down, and the conditions for a recovery led by housing and exports will be in place.

October 7, 2001

http://www.pkarchive.org/economy/ML071801.html

"Post-terror nerves aside, what mainly ails the U.S. economy is too much of a good thing. During the bubble years businesses overspent on capital equipment; the resulting overhang of excess capacity is a drag on investment, and hence a drag on the economy as a whole.

In time this overhang will be worked off. Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer. But it seems inevitable that there will also be a fiscal stimulus package.

"

Dec 28, 2001

http://www.pkarchive.org/column/122801.html

"The good news about the U.S. economy is that it fell into recession, but it didn't fall off a cliff. Most of the credit probably goes to the dogged optimism of American consumers, but the Fed's dramatic interest rate cuts helped keep housing strong even as business investment plunged."

[jsh]

Jordan, I wish you had edited out the whitespace before posting that.

[Jordan]

Good point. Live and learn.

[Silentz]

Jordan, that's still SO out of context. I'm sure that between the pieces you "randomly" selected, there's all kinds of stuff that he says that shows he meant nothing of the sort.

Yeah, that's it. Now where's my koolaid?

[Sean W. Malone]

Man... Krugman's people were all over the board yesterday, and... as dumb/ignorant as their master. Wonder if more fun will ensue today.

[John]

They seem pretty quiet Sean. Also, I mean Jordan's post pretty much ends the issue. We all need to bookmark this thread for future use.

[Tim Cavanaugh]

Krugman already responded.

http://krugman.blogs.nytimes.com/2009/06/17/and-i-was-on-the-grassy-knoll-too/

Sounds like Megan McArdle was taking him out of context.

If they ever approve it, here's the comment I put up -- with great thanks to Ben for the quotes:

Your glib and flippant dismissal of your own words would be easier to believe if you had not gone on to say in 2006 that Greenspan did the right thing "within limits" in generating the housing bubble. Here's your own blog post: http://tiny.cc/5Iy3Q

And then there are these choice quotes from 2001:

"I think frankly it's got to be - business investment is not going to be the driving force in this recovery. It has to come from things like housing, things that have not been (UNINTELLIGIBLE)? Well, as far as the arithmetic goes, yes, it is possible. Will the Fed cut interest rates enough? Will long-term rates fall enough to get the consumer, get the housing sector there in time? We don't know."

"Housing, long-term rates haven't fallen enough to produce a boom there."

"[H]ousing, which is highly sensitive to interest rates, could help lead a recovery?. But there has been a peculiar disconnect between Fed policy and the financial variables that affect housing and trade. Housing demand depends on long-term rather than short-term interest rates - and though the Fed has cut short rates from 6.5 to 3.75 percent since the beginning of the year, the 10-year rate is slightly higher than it was on Jan. 1?. Sooner or later, of course, investors will realize that 2001 isn't 1998. When they do, mortgage rates and the dollar will come way down, and the conditions for a recovery led by housing and exports will be in place."

"Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer."

"[T]he Fed's dramatic interest rate cuts helped keep housing strong even as business investment plunged."

You didn't just analyze the practice of inflating housing to jumpstart the economy; you advocated for it.

No doubt you'd say that it was a good idea at the time, but was mismanaged by the officials (sort of like the invasion of Iraq?). But intervention is a blunt instrument. You can't bellyache when you get the expected results.

[Tulpa]

I put up a comment like an hour ago and it has yet to be displayed. The disclaimer on the side says that comments will be posted as long as they are "on topic and not abusive". Not sure how the comment about the vampire ad on the sidebar and Krugman's resemblance to "Badgeman" passed that test, but OK.

[Paul]

Does anyone really take Paul Krugman seriously? He doesn't write columns, he writes tantrums about how much smarter he is than everyone else.

Apparently, you don't listen to the NPR/Paul Krugman News Hour

[Marc]

Is it possible that Krugman is writing ironically all the time?

Like that KITH skit about the guy with the speech impediment that makes him sound perpetually sarcastic?

[Brian G]

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Why are all the pretty ones so dumb?

[Soda]

Krugman was not advocating a housing bubble, that would be insane. It wasn't irony either, he was saying that to maintain growth you'd need a housing bubble. That doesn't mean the price you pay for the growth is worth it.

Also, Arnold Kling is defending Krugman here:
Arnold Kling: Defending what Paul Krugman Wrote

[John]

Soda,

Was he joking in the quotes listed above? Krugman had a very consistent position in 02-03. His position was that the fed needed to lower interest rates raising housing prices and giving people money to spend.

[Warty]

Tim, you might notice that no comments have been approved since 10:19. It's almost as if no one wants to tell Paul how smart he is.

[Sean W. Malone]

Soda.... Have you bothered to read Krugmans statements again & again & again which consistently advocate for exactly that kind of government intervention?

I mean shit man... We've all linked to about a dozen different instances of Krugman, not-ironically, advocating for exactly this kind of thing.

For a guy like Krugman (and really any committed Keynesian) the price is "always" worth it! Cause you see, you get... a multiplier... or something... that makes up for it. And who cares about the long run anyway, as Keynes said, afterall - "in the long run, we're all dead"

[Paul]

Soda, from your own link:

4. Paul Krugman and Brad DeLong thought that Greenspan kept rates too high in 2002. This makes them poorly positioned to criticize Greenspan now for keeping rates too low. I am pretty sure that Brad is guilty of this hypocrisy. I believe that Paul is not.

[roystgnr]

In case it's forever stuck in the NYT "awaiting moderation" memory hole, a copy of my comment:

Ah, I see, so when you said "To fight this recession the Fed needs ? a housing bubble", that wasn't a *prescriptive* statement? You were actually trying to argue that we shouldn't "fight" recessions, that the Fed should do nothing, and that recessions should be allowed to correct naturally through the market rather than artificially through central planning? Your conversion to Austrian economics must have been a fascinating one - perhaps you should write about it sometime so your statements aren't so easily misinterpreted in the future!

[alan]

I get the impression from reading anything Krugman has to say about interest rates the he believe sinterest rates exist for the purpose of managing the business cycle, and whatever value interest rates serve to gauge risk, is more or less a nuisance imposed by actors in the economy that makes the job of a macroeconmist that much harder.

[John]

Paul,

That quote makes no sense. Kling admits that both Delong and Kurgman criticized Greenspan for not dropping rates in 2002. Yet, Delong is a hypocrite and Krugman isn't. Why? Kling just expects us to take his word for it because he and Krugman have traded blowjobs over the subject I guess.

[jsh]

I posted my 2006 quote to the NYT comments section along w/ my argument that joke or not, this is an admission that the bubble was caused by the Fed. We'll see how that plays out.

[Sean W. Malone]

jsh - I made that point around here 2-3 days ago, and was having a good talk with a buddy about it.

How is it that an unabashed Keynesian who constantly levels complaints against the Austrian School, derisively referring to the ABCT as the "hangover theory" can simultaneously acknowledge that their underlying premise - that a central bank at the root of money creation & which controls interest rates can/does cause inflationary bubbles - is correct??

Regardless of whether or not he was "advocating" for the Federal reserve to do that is completely irrelevant to the fact that by Krugman's own admission - they have the power to do so... Which he has argued against since the beginning of the current recession time & time again. Krugman is one of the most internally inconsistent, illogical humans whose words I've ever had the misfortune of reading.

[Paul]

All I know is, everytime Krugman talks on NPR (which is fucking constantly), I have fantasies about putting him into a headlock until he passes out.

[Soda]

Ouch, my mistake. I really thought that Krugman wouldn't go as far as suggesting the housing bubble would be worth it. Cavanaugh's post (almost directly above mine, again, ouch) proves me wrong. Carry on and nevermind.

[Michael Ejercito]

His position was that the fed needed to lower interest rates raising housing prices and giving people money to spend.

Making housing less affordable.

[jsh]

Making housing less affordable.

And upping their debts (this only works if people borrow against their houses for consumer spending).

[Sean W. Malone]

I love that NONE of your guys' comments are up on Krugman's blog yet. It's all sycophantic drivel...

[jsh]

Some more comments have survived moderation:

http://krugman.blogs.nytimes.com/2009/06/17/and-i-was-on-the-grassy-knoll-too/

[Soda]

I've got to add, I'm stunned. Fucking stunned. This will sound naive but I never thought Krugman was this far gone. I hadn't followed him that closely since my undergrad days (yeah, I know it shows) when I read his work on international trade. I had heard he'd gone way left and ultra Keynesian with his NYT op-eds. But advocating a bubble is pure insanity. Looks like he got caught and might have almost gotten away with it with the advocating vs. predicting distinction. But this dodge doesn't jibe with his other statements. Holy shit.

[jsh]

But advocating a bubble is pure insanity. Looks like he got caught and might have almost gotten away with it with the advocating vs. predicting distinction. But this dodge doesn't jibe with his other statements.

And I might have gotten away with it too, if it weren't for you meddling kids and your dog. 🙂

[Soda]

Hah! Nicely done, jsh.

[Paul]

Look, this is a guy who thinks that Obama's stimulus plan of trillions is 'too small'. Even Keynes didn't believe in this type of deficit spending. My guess is if Keynes saw Krugman in action, Keynes would disavow Keynesian economics.

[Steve Smith]

Looks to me that Krugman, if anything, was rather prescient in 2002. Since "bubbles" are the purest manifestation of unfettered and unregulated free market policies, you would think that the large-L Libertarians at this site would have understood his point.

[John]

Soda,

Good for you for admitting you were mistaken about Krugman. That rarely happens here.

[Paul]

Good for you for admitting you were mistaken about Krugman. That rarely happens here.

I too was mistaken about Krugman. He's worse than I thought.

[Sean W. Malone]

Steve... Are you high? A joke? I can't tell... I'll be back after lunch to check.

[Paul]

Since "bubbles" are the purest manifestation of unfettered and unregulated free market policies

So that begs the question: Why did we have a bubble? These markets were neither unfettered nor unregulated. Moody's and Standard and Poor's, the two ratings agencies given special legal status by the Federal Government to rate bonds, lowered the ratings on these debt instruments and whammo, the race to the bottom began when these institutions were required to sell by law because they lost their AAA status, thus driving their value even lower. Had law and regulation not required these agencies to sell, we most certainly would have seen a much more orderly deflation of the bubble while each investment house took time to ferret out what the instruments were worth, and thus sort them out based on value.

[alan]

My guess is if Keynes saw Krugman in action, Keynes would disavow Keynesian economics.

My guess is you are right. From Keynes' correspondance with Hayek in his later years, commenting on his own experience, he seemed to come around to realizing much of General Theory was overstated.

[Paul]

From Keynes' correspondance with Hayek in his later years, commenting on his own experience, he seemed to come around to realizing much of General Theory was overstated.

I do know that there are modern self-proclaimed Keynesian economists who are horrified at modern politicians use of so-called "deficit spending". It may be that General Theory is overused as much as it was overstated.

[JB]

Fuck Paul Krugman that walking, talking shit-stain.

[some fed]

Frankly, the best part about all of this for me is that Arnold Kling saw the quote here (the comment thread to an H&R post from Monday).

Congratulations, Patrick!

[Sean W. Malone]

What, Steve hasn't come back to support his idiocy? Damn.

[jsh]

Weird, the NYT has approved comments to the KrugBlog that were posted well after mine.

[jsh]

More Krug from Jan 08. Granted, he went on to blame the usual suspects, but this contradicts "we need to spend trillions or we're DOOMED!! I tell ya DOOMED!!!"

http://www.nytimes.com/2008/01/18/opinion/18krugman.html?_r=1

...For reasons I'll explain later, it's unlikely that America will experience a recession as severe as that in, say, Argentina. ...

[Sean W. Malone]

This is about the 5th link/discussion of the 2002 KrugBlog piece over at Mises, but it's amusing to me because Mark Thorton basically lifts the entirety of Ben's enormous chunk of moronic/evil(?) Krugman quotes:

Found here

[Sean W. Malone]

My comment on KrugBlog (since no one else's has shown up yet!):

C'mon Paul... This is ridiculous. As is your "moderated" comments board (by which I mean, filtered so that not a single comment appears from anyone who exposes your absurd lie with links & evidence from your many years of advocating exactly the policy that you appear to in your 2002 statement).

You've advocated for a perpetual bubble over & over, and the internet archives only help those of us who've been paying attention to keep you from forgetting.

Continue your attempts at wriggling your way out of your own bad predictions and worse ideas, but here's a barrage of quotes from your own mouth & pen, sir:
http://blog.mises.org/archives/010153.asp

Perhaps you've forgotten all those. But do you have the guts to let your readers see... That remains to be seen I guess. (This comment will be posted elsewhere, as I won't be holding my breath for your board's "approval").

To all the commenters here like "Sabrina Star", rolling their eyes at the rest of us, your smugness suits you about as well as it does on Krugman himself... But self-congratulations, ad hominem attacks and snide remarks really can't help you out of this one. Your dear leader can't weasel out of his own advocacy quite so easily.

Finally Dr. Krugman - It's also worth noting that you've showed your hand to the Austrian school here, as you've obviously admitted that the Federal Reserve is capable of artificially creating a bubble. Since you recognize that it's possible, will you now go on record admitting that that's exactly what happened here?

No more "animal spirits", no more "deregulation" canards (we all know Bush was the biggest regulator since Nixon already - http://www.reason.com/news/show/130328.html & http://cei.org/news-release/2009/06/17/obama-overregulation-plan-wont-fix-financial-crisis). I want to see you admit that you realize the accuracy of the Austrian Business Cycle Theory, and that the bubble in housing was a direct result of what you said (and yes, advocated) in 2002.

Admit that you understand that this crisis was caused by exactly the kind of Keynesian policies you've been advocating for your entire career.

[jsh]

Still a backlog of unposted comments to the NY Times website. Thank God they have Obama to make me give them money, because I'd never pay those idiots voluntarily.

[jsh]

There are a couple of good posts on the Mises blog about all this:

http://blog.mises.org/blog/

[Sean W. Malone]

For the record-keeping. My post to KrugBlog was finally approved 2 days later.

I may note that within the first 2 days of my refreshing the KrugBlog, the only people who's comments popped up immediately were sycophantic idiots. But now, 2-3 days after the fact, there's a ton of real responses... I saw Tim Cavanaughs, and others from around here & at the LvMI. But interestingly, the date-stamp on mine is from the 17th... Which means that if anyone ever goes back over this 10 years from now, it will look like the comments just came in in order.

[gregshilpa]

Established in 1997, St. Gregorious Edu-Guidance is a leading education consultancy services providing exemplary service to students all over India. We deal in Admissions to all major professional courses in Premier Institutes across India. We are your one step solution for all career related needs, it may be MD, MBBS BE, BTech (ALL BRANCHES), , MDS, BDS, BPharm, BArch, MBA, MTech, MS, , PhD or any other courses. We provide personalized career solutions on an individual basis keeping in mind the aspirations of our client as well as the affordability factor.
FOR ALL CAREER RELATED NEEDS CONTACT US :
St. Gregorious Edu-Guidance,
#2, 2nd Floor,
J J Complex, Above Chemmannur Jewellers,
Marthahalli - P O,
Bangalore - 560037
Karnataka
e-mail :[e-mail]
Contact: [phone]
[phone], [phone]
080-32416570, 41719562