A number of other financial blogs have taken Krugman to task of late, and never being one to pass up a good opportunity, I feel obliged to pile on in hopes that perhaps one more knock on his credibility will be enough to unseat him as a legitimate economist. This is something that should have been done a long time ago. Before he started writing for the NY Times and before he was awarded a Nobel Prize for, uh, what exactly?
The most recent barrage of attacks on his legitimacy has been in regards to his self-defense of what his proposed policies were in the aftermath of the dot.com collapse. Krugman is the prototypical Keynesian. A government bureaucrat's best friend. His solution to any problem is for government to spend more money and for central banks to create more money. So naturally, after the bubble had popped in 2001, Krugman was egging Alan Greenspan on to do more - even as interest rates were being slashed and lending standards were being thrown in the dustbin of history.
I had, perhaps foolishly assumed, that Krugman would at least own up to this misjudgment, this massive overraction. I had thought he would have issued a mea culpa along the lines of, "hey, at the time things looked pretty bleak and only in hindsight can we see that was the wrong course of action." I assumed his loyal social democrat fans had simply brushed off this rather large misstep and given him the benefit of the doubt. But here, I have committed one of the most crass of Keynesian errors: I assumed too much.
Far from actually owning up to his poor judgement, Krugman has actually gone so far as to deny his stated intent at the time. Thankfully, we have the internet. And the internet never forgets.
To start, we look at Krugman's post this week:
One of the funny aspects of being a somewhat, um, forceful writer is that I’m regularly accused of all sorts of villainy. I was personally responsible for the demise of Enron; my nonexistent son worked for Hillary; etc.. The latest seems to be that I called for the creation of a housing bubble — in fact, the bubble is my fault! The claim seems to be based on this piece.
Guys, read it again. It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.
I knew this was a pile of crap before even looking into it further. Krugman (and all Keynesians) explicitly advise inflation as a matter of public policy during every recession. It goes hand in hand with insistence on an "elastic currency" (ie. inflatable currency). But not only is his denial inconsistent with basic Keynesian economics, but it is a total cop-out, and a very typical one at that. It is a bit of a trend that I have noticed for economists to do this. Krugman argues for a certain policy measure to be taken from the vantage point of someone else (in this case Greenspan). This way, if it doesn't work out, one can say that it was not explicit advice. If it does work out, all the credit can be taken. Kind of like saying, "if I were you, I'd order the steak dinner." When the person says the steak was terrible, you can respond by saying, "aha, I said 'if I were you.' But I'm not you, so you can't blame me for ordering it."
Of course, there's far more evidence to suggest Krugman is not only shrewdly playing with words or being inconsistent. He explicitly stated on his very own blog a number of times his desire for a housing bubble to replace the tech bubble. And it is clear that he is advocating it as policy - policy that was, as we know, adopted into practice.
Senior fellow at the Ludwig von Mises Institute, Mark Thornton, combed through Krugman's old posts. What he found is posted below:
German Interview, undated
"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?"
May 2, 2001
I've always favored the let-bygones-be-bygones view over the crime-and-punishment view. That is, I've always believed that a speculative bubble need not lead to a recession, as long as interest rates are cut quickly enough to stimulate alternative investments. But I had to face the fact that speculative bubbles usually are followed by recessions. My excuse has been that this was because the policy makers moved too slowly -- that central banks were typically too slow to cut interest rates in the face of a burst bubble, giving the downturn time to build up a lot of momentum. That was why I, like many others, was frustrated at the smallish cut at the last Federal Open Market Committee meeting: I was pretty sure that Alan Greenspan had the tools to prevent a disastrous recession, but worried that he might be getting behind the curve.
However, let's give credit where credit is due: Mr. Greenspan has cut rates since then. And while some of us may have been urging him to move even faster, the Fed's four interest-rate cuts since the slowdown became apparent represent an unusually aggressive response by historical standards. It's still not clear that Mr. Greenspan has caught up with the curve -- let's have at least one more rate cut, please -- but the interest-rate cuts do, cross your fingers, seem to be having an effect.
If we succeed in avoiding recession, this will mark a big win for let- bygones-be-bygones, and a big loss for crime-and-punishment. And that will be very good news not just for this business cycle, but for business cycles to come.
July 18, 2001
"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 8^th 2001
"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
"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
"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
"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."
Those are just the applicable quotes from 2001. Other astute investigators have pulled out this quote:
NYT Editorial, August 2nd, 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.
It should be absolutely clear what Krugman's intention was. It was the same intent that drives all inflation proponents - to confiscate wealth from savers in order to benefit special interests, notably the banking industry, and to ensure that government has the means to waste money on social projects, wars, and the enrichment of bureaucrats and policy advisors (of which Krugman is exhibit A).
So it should be no surprise to us that Krugman and other notable Keynesians are unconscionably advocating that government attempt to inflate its way out of this mess as well. Anything to save the utopian bloated government that they worship. Anything to save the confiscatory system that has enriched them to this point. They know as well as anyone else, that a liquidation of the malinvestment they created would leave them standing naked. So they scratch and claw to keep their perceived legitimacy.
Thankfully for us, the internet doesn't forget. Keynesians cannot deny that they caused the crash like they did in the 30's. The evidence is as clear as the sky is blue. And no matter how hard they try to blow, there is no bubble big enough to replace the housing/consumption/derivatives bubble that has preceded this. People are sick of the serial bubble blowing and they won't play along any longer. The massive credit creation attempts are being met with the sound of crickets. Consumers aren't borrowing - even at low rates. In fact, they're paying back debt instead. Corporations aren't borrowing to invest in productive capacity. They're firing workers and paying off debt as well. Like all credit bubbles, the chickens are coming home to roost. Government spending isn't even close to being able to replace the private sector. The deflationary spiral that Keynesians have promised to be a relic of the past, isn't. It was only postponed. Instead of experiencing a couple of months of deflation every 4 years, we're getting 80 years of it at once. It is going to be terrible. It is going to be vicious.
But if there's one positive that we can take away it's this: a century of baseless theories that have plagued us without end will be relegated to the dustbin of history. After what we are about to go through, no possible justification for the rampant inflationism, thoughtless interventionism and morally backward focus on price stability will ever be tolerated again.
And economists like Paul Krugman will be a mere footnote in books that nobody will bother reading.
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