Monday, October 14, 2013

Is Niall Ferguson Right?

Seems implausible, doesn't it? In fact, I'm sure that after reading the title to this post, many of you are already preparing to launch another round of pleas to Noah to cast me into the outer darkness, where there is weeping and gnashing of teeth. But hear me out for a bit.

I pretty much agree with everything our beloved blog owner said in his response to Ferguson on Friday. Professor Ferguson has clearly let his critics get under his skin, and he really ought to have better uses for his time than writing a series of extremely long anti-Krugman articles which, like the Police Academy movies, get less compelling with each installment.

Nevertheless, in his first installment Ferguson does land a direct hit on the issue of the Euro, documenting Krugman's repeated and sometimes confident predictions that the Eurozone would collapse between 2010 and 2012:
By my reckoning, Krugman wrote about the imminent break-up of the euro at least eleven times between April 2010 and July 2012:
1. April 29, 2010: "Is the euro itself in danger? In a word, yes. If European leaders don't start acting much more forcefully, providing Greece with enough help to avoid the worst, a chain reaction that starts with a Greek default and ends up wreaking much wider havoc looks all too possible."
2. May 6, 2010: "Many observers now expect the Greek tragedy to end in default; I'm increasingly convinced that they're too optimistic, that default will be accompanied or followed by departure from the euro."
3. September 11, 2011: "the euro is now at risk of collapse. ... the common European currency itself is under existential threat."
4. October 23, 2011: "[the] monetary system ... has turned into a deadly trap. ... it's looking more and more as if the euro system is doomed."
5. November 10, 2011: "This is the way the euro ends ... Not long ago, European leaders were insisting that Greece could and should stay on the euro while paying its debts in full. Now, with Italy falling off a cliff, it's hard to see how the euro can survive at all."
6. March 11, 2012: "Greece and Ireland ... had and have no good alternatives short of leaving the euro, an extreme step that, realistically, their leaders cannot take until all other options have failed - a state of affairs that, if you ask me, Greece is rapidly approaching."
7. April 15, 2012: "What is the alternative? ... Exit from the euro, and restoration of national currencies. You may say that this is inconceivable, and it would indeed be a hugely disruptive event both economically and politically. But continuing on the present course, imposing ever-harsher austerity on countries that are already suffering Depression-era unemployment, is what's truly inconceivable."
8. May 6, 2012: "One answer - an answer that makes more sense than almost anyone in Europe is willing to admit - would be to break up the euro, Europe's common currency. Europe wouldn't be in this fix if Greece still had its drachma, Spain its peseta, Ireland its punt, and so on, because Greece and Spain would have what they now lack: a quick way to restore cost-competitiveness and boost exports, namely devaluation."
9. May 17, 2012: "Apocalypse Fairly Soon ... Suddenly, it has become easy to see how the euro - that grand, flawed experiment in monetary union without political union - could come apart at the seams. We're not talking about a distant prospect, either. Things could fall apart with stunning speed, in a matter of months."
10. June 10, 2012: "utter catastrophe may be just around the corner."
11. July 29, 2012: "Will the euro really be saved? That remains very much in doubt." 
 Reading this section of Ferguson's article was particularly painful for me, as I was very much in agreement with Krugman on the likelihood of a Eurozone breakup. And, in fact, I still think the economic arguments Krugman used to support his position were sound.

And yet, it didn't happen. The Euro not only didn't implode, but as Ferguson notes, new countries continue to join.

The fact that Ferguson turned out to be wrong about hyperinflation or the budget deficit is easy to explain: he didn't know what he was talking about. Yet Krugman and others did know what they were talking about. And yet they were still wrong. 

As the political scientist Philip Tetlock has demonstrated, experts tend to be pretty bad at making accurate predictions even on areas that involve their subject of expertise:
In the most comprehensive analysis of expert prediction ever conducted, Philip Tetlock assembled a group of some 280 anonymous volunteers—economists, political scientists, intelligence analysts, journalists—whose work involved forecasting to some degree or other. These experts were then asked about a wide array of subjects. Will inflation rise, fall, or stay the same? Will the presidential election be won by a Republican or Democrat? Will there be open war on the Korean peninsula? Time frames varied. So did the relative turbulence of the moment when the questions were asked, as the experiment went on for years. In all, the experts made some 28,000 predictions. Time passed, the veracity of the predictions was determined, the data analyzed, and the average expert’s forecasts were revealed to be only slightly more accurate than random guessing—or, to put more harshly, only a bit better than the proverbial dart-throwing chimpanzee.
Not only do experts only do slightly better than chance, on average, but it turns out when it comes to making accurate predictions, level of expertise faces rapidly diminishing marginal returns:
In political and economic forecasting, we reach the inflection point surprisingly quickly. It lies in the vicinity of attentive readers of high-quality news outlets, such as The Economist. The predictive value added of Ph.Ds, tenured professorships and Nobel Prizes is not zero but it is disconcertingly close to zero.
When experts do turn out to be wrong, Tetlock reports, they typically do not concede that they have made a real error. Instead, they are inclined to make excuses: my predictions were right, it's just that the timing was off. I would've been right, but an unforeseeable factor changed the equation. And so on.

Certainly when it comes to the Eurozone crisis, these are the excuses that jump readily to my mind. Sure, Europe has managed to stave off collapse for now. But the problems with the Euro are still there, and eventually they will out. The Eurozone would have collapsed if Draghi hadn't said that the ECB would do what it took to prevent it, and who could've foreseen that? And is Niall Ferguson really the best person to being making accusations here? Back during the height of the crisis he was speculating about a Eurozone break up too. 

I would like to go along with such excuses, but I can't quite make myself do it. While Draghi's intervention wasn't foreseen by a lot of people, it's hard to say that it wasn't foreseeable. And claiming that the Eurozone will collapse "someday" is all but unfalsifiable. I'm afraid the lesson here is that even getting the economics right doesn't help you much in predicting an outcome that depends not only on economics but also on politics (which, broadly speaking, most macroeconomic issues do).

According to Tetlock, there are ways to improve one's predictive accuracy. Experts "who tended to use one analytical tool in many different domains... preferred keeping their analysis simple and elegant by minimizing 'distractions'... [and] were unusually confident" were less accurate on average. By contrast, the better predictors:
used a wide assortment of analytical tools, sought out information from diverse sources, were comfortable with complexity and uncertainty, and were much less sure of themselves—they tended to talk in terms of possibilities and probabilities and were often happy to say “maybe.” In explaining their forecasts, they frequently shifted intellectual gears, sprinkling their speech with transition markers such as “although,” “but,” and “however.”

So I think that Ferguson is right that a little more humility is in order, even if he himself doesn't really practice what he preaches. 


  1. Rahul Menon3:56 AM

    Yes, Krugman was wrong in that he predicted the Eurozone would break and it didn't. But I do feel there is a huge huge difference between him and Niall Ferguson. The end result didn't occur, but based on Krugman's reading of it, it was a distinct possibility. The difference between Krugman and Ferguson is that while both get their end results wrong (the breakup of the Eurozone vs hyperinflation), the debate comes down to the methods and analysis used to reach that conclusion. I feel that this is one of the major arguments against Ferguson; not just that he is wrong in his predictions, it is that his theoretical framework leading up to his predictions is flawed and wrong. The fact that Krugman was wrong about the Eurozone is - to me- not a major case against him because I do feel his analysis was sound and it pointed to the distinct possibility of a breakup. To put Krugman on the same level as Ferguson simply because they both made wrong predictions is quite mistaken and little more than a whine from Ferguson.
    To be fair to Krugman, it did seem at the time that his prediction of a breaking Eurozone was based on the caveat that austerity would continue. You make it seem that Mario Draghi's actions were foreseeable; but really, looking at the intellectual (using the term very loosely) defence mounted in favour of austerity then AND now, was it really that foreseeable?

    1. Anonymous10:49 AM

      Your comment got me to thinking that Krugman's predictions and maybe the predictions of others affected the actions that followed to allow the Euro Zone to not break up. Newtonian action reaction kind of thingy.

  2. Anonymous4:22 AM

    Krguman's analysis of the problem -- gold standard esque euro embrace ruined competitiveness and made any kind of reasonable way out of the hole impossible + austerity sucks -- seems on point. The fact that Draghi eventually woke up and started buying bonds seems to have been hedged by Krugman-- and Krugman's interpretation of central bank intervention in periods such as this is much more on point than Fergusons HYPERINFLATION HYPER INFLATION HYPER INFLATION chant.

    It seems fair to say -- as Noah said in the original post -- that Krugman has been wrong and its a good time to talk about why he was wrong. The reason why we cant have the same level of discussion with Ferguson is because he either (a) lies, like when he doctored the CBO release (b) obscures facts hoping that someone isnt paying attention, like the way he changed the % of payments spent on debt (c) is horribly prejudiced, like when he declares that homosexuals are incapable of long term planning (d) or racist, like when he proclaims that spending millions of pounds to build an empire that expressly oppresses various dark people was a good thing but spending billions on things like social security is the road to the 'evil old 70s'

    And I dont think that Krugman in his blog is trying to be objective/academic, its that he is literally one of the few people in a position of prominence who is able to try and talk back against the tide of Mankiw/Ragoff/Ferguson from 08 onward, who printed reams and reams of articles in WSJ and other papers of note for the 'very serious people' to promote austerity and other policies that not only dont work but end up injuring the most vulnerable ones. The fact that Obama, Tim Geithner, Paul Ryan all agreed that there needs to be a Grand Bargain and the time for it was 2010 pretty much lets the cat out of the bag that various policy makers were generally amendable to this.

  3. sriram5:08 AM

    Didn't Krugman just admit a few days before the Niall whingeing that he got it wrong on the political side? (In response to Roggof) And his economic arguments remain remain valid for now.

    1. Anonymous11:15 AM

      Yep, this is the point. Krugman was writing, "the structure of the euro means that these countries are in for horrendous economic pain. So I think they will leave the eurozone." He was right about the former, but wrong about elites' tolerance for others' pain. So he was wrong, but not Niall Ferguson wrong. Tetlock is pretty inapposite here.

  4. The institute predicted numerous times in 2011 & 2012 that the Eurozone would remain intact for two reasons: 1.) the havoc from a country leaving would exceed the costs of bailing it out and 2.) Germany can cover it. 3) The general tendency for things to remain the same (inertia). Some bad predictions are due to a vendetta or grudge rather than an objective look at the facts.

    Second, why do most predictions fail? People tend to use historical analogues to extrapolate future events, but often there are very subtle differences between the past an present that can result in great differences in outcomes. Chaos theory studies the behavior of dynamical systems that are highly sensitive to initial conditions, an effect which is popularly referred to as the butterfly effect. Small differences in initial conditions (such as those due to rounding errors in numerical computation) yield widely diverging outcomes for such dynamical systems, rendering long-term prediction impossible in general.

    Most individuals cannot discern these subtle differences.

    1. Anonymous6:07 AM

      Using the third person now, are we? Bang-up job explaining chaos theory, too; maybe you could cover non-linear dynamics next, or cricket. Most people have difficulty understanding those, too. Since individuals have so much trouble with "these subtle differences," it's a good thing for all of us that you've got an institute behind you, even if it has trouble discerning "two" and "three."

  5. I would like to add my 5 cents here. Irrespective of what you think of Krugman, it is too easy to say: "His prediction did not realize => he must be an idiot!". Why? Because, we want to judge his prediction conditional on the information available at the time. Now, one may say that one could have predicted after some time that politicians would stick to the Euro no matter the cost. But especially in the beginning of the crisis, a break-up of the Euro-area seemed a possible outcome.

    1. No, eurozone breakup was NEVER in the cards. And I speak as an insider. I'm a citizen of member of EU and I lived and worked in Eurozone country for that time.
      Someone said, that Germany wouldn't allow it and he was bang on. I know a lot of Germans - nice people - and I know it is very unkind to say, but <>. And I endorse, as Germany - with their effectively 0% debt ceiling again is and will stay engine of the old continent.
      And Krugman is an idiot per his own description, as he calls names when catches someone on: fail in his predictions constantly, often lying, doctoring data and plainly misleading.

    2. part missing. Below update:
      and I know it is very unkind to say, but "when German says Europe, means "Germany". And I endorse, as Germany -

  6. Anonymous6:06 AM

    Using the third person now, are we? Bang-up job explaining chaos theory, too; maybe you could cover non-linear dynamics next, or cricket. Most people have difficulty understanding those, too. Since individuals have so much trouble with "these subtle differences," it's a good thing for all of us that you've got an institute behind you, even if it has trouble discerning "two" and "three."

  7. Anonymous6:36 AM

    Krugman is better at predicting economic outcomes given specific economic facts than predicting political decissions given specific economic facts. You may see the house on fire and predict the need of the fire men. The fire men actually showing up belongs to a different game.

  8. How did I know that it would be written by Josiah even before I saw who the author was? sigh. This is beginning to border on slate style contrarism. Krugman suggested the euro break up would happen due to tanking economies of the European periphery. European periphery continues to be terrible, but politicians decide to hold on. Ferguson predicts hyperinflation because something something 1970s something something Phillips curve something something Keynesianism is wrong. Hyperinflation, by the way, means 100% increase in price level over three years. Yes, totally comparable.

    1. Note as well that Krugman,.among others, was sceptical about the euro back in the 90s, for the same reason he's critical of it now.

    2. "How did I know that it would be written by Josiah even before I saw who the author was?"

      Because you're really good at predicting things?

    3. Anonymous11:43 AM

      No. Just your role seems predictable.

    4. No offense, but when your articles on the shared blog can be picked out by title alone, and it's not been three months since Noah took his leave, you ARE predictable.

  9. Anonymous7:31 AM

    In a word, no. Nice try, though.

  10. sibusisodan7:33 AM

    I'm confused. Precisely who needs some more humility here? Given that Krugman's predictions were highly hedged and contingent, and that he's admitted he got the political calculations wrong - what should he have done to meet this mythical criterion of sufficient humility?

  11. Schadenboner8:54 AM

    Another day another #slatepitch from Josiah. Along with some poor-little-meeism worthy of Niall himself.

    2 out of 10, I ain't even mad, bro.

  12. That photo convinces me that Ferguson should totally be played by Steve Martin in the film adaptation :

  13. There is a big difference between being right or wrong in predicting a particular event, and being right or wrong about the economic pressures that certain fiscal and monetary policies are causing, and what kinds of changes would relieve those pressures. Anybody, including a non-economist such as myself, could have made a prediction that the Euro would hang together for entirely wrong reasons. Being right in this manner is not an impressive feat, it's luck. It might have more to do with the will of the national leaders, rather than any correct analysis of macroeconomic principles.

    Krugman correctly diagnosed why there were pressures for members to leave the monetary union. I read Krugman's statements about the Euro, even one's such as "the Euro is doomed" in the larger context of the prescriptions he was recommending, as a passionate plea to change the policies in the interest of the common good rather than as a commitment to a particular prognostication about the Euro's actual eventual fate. And given enough time, Krugman could still be vindicated that the ECB policies end up forcing some members to return to their own national currency. At the very least he was correct that member countries could avoid some serious problems by doing so. That's different from knowing what those countries will actually decide.

    1. Well said. Exactly. I read Krugman the same way - he wasn't "wrong," per se, because he was outlining a factual risk and explaining the alternatives and why one was better. Even The Economist (magazine) was echoing these ideas, fully discussing the very real possibility of a GrExit. Krugman didn't coin that term.

      At every step, Krugman was discussing the facts on the ground - even the deliveries of trucks of Euros - and it was always a leap for any reader to infer that, "According to Krugman, I should place financial bets on a Greek exit." Krugman never said anything close to that. He barely ever even departed from the "should" construct - which is not a prediction (not until *after* the exit). (see my longer comment, below)

      However, Krugman's "Greece *should* exit the Euro" did contain a testable prediction - that recovery would be slow and painful if the EU did not break up - not "V"-shaped. That prediction has been confirmed, and there is still every reason to believe Krugman's dependent predictions would have been confirmed had policy-makers made different choices (ie, if Dragi handn't promised unlimited lending). This is another confirmation of Krugman - his "should exit" construct always referred back to the reason - that the ECB had to provide a firm backstop - a lender-of-last-resort function. Thus, Krugman made an implicit prediction that *IF* Dragi provided unlimited credit to Greece, etc, THEN the impetus for Greece to exit would be significantly reduced. Result? Confirmed.

      So it is really a disservice for this blog to validate Ferguson's straw-man argument, confusing the very different kinds of predictions.

  14. To Krugman's credit, he has admitted that he was wrong about how long the Eurozone would persist.

    As for "claiming that the Eurozone will collapse "someday" is all but unfalsifiable." I'm not sure I'd go that far.

    The appropriate measure here shouldn't be whether it collapses "someday", but whether the Eurozone can get itself back to something resembling full employment with the Euro intact. While it's not clear exactly what that point is, there should eventually reach a point when most economists can agree that Europe's economy has recovered. This provides a reasonable time frame for testing the claims of the pro-Euro camp vs. the Euro skeptics.

  15. He was right about one thing at least: Krugman's vituperative, ad-hominem style make him painful to read for any but his partisan fans.

    1. Anonymous11:46 AM

      Oh dear. And yours is such self effacing manner.


    2. I have a hard time seeing Krugman as vituperative, and ad-hominem seems like an objectively false claim. I've never seen Krugman arbitrarily impugn people's character or launch personal attacks. He criticizes ideas, actions, and bad arguments, and he does so clearly stating his reasons for objection, and providing arguments and facts that back up his position, so that anybody is welcome to refute his arguments. And when that happens he is quick to admit mistakes and correct errors.

      I think if people find him uncomfortable to read it's because he punctures comfortable myths that they want to believe in, and because they are unable to refute his arguments. That is certainly frustrating to people, and shakes them up. The difference between such attacks on Krugman's style, and what Krugman does, is that Krugman provides economic reasons, historical reasons, and references to other people's own words to prove his points. It's understandable but not respectable when political partisans launch ad hominem attacks at Krugman simply because he's pointing out the uncomfortable truth, which possibly hurts their feelings.

      Anyone who claims Krugman is vituperative and indulges in ad hominem arguments should at least provide some specific examples of what they consider to be the worst offenses. What is asserted without evidence can easily be dismissed without evidence. There seems to be a "common wisdom" about Krugman that can't really be justified by solid arguments. Rather, it's a petty reaction to the frustration over Krugman advancing serious challenges to cherished partisan articles of faith.

      Here are some examples from recent blog posts:

      "At the end of today’s This Week, Peggy Noonan said something to the effect that Republicans, for all their turmoil, are brimming with new ideas, while Democrats aren’t. And then time was up. Which was too bad, because I really wanted to ask, what new ideas are you talking about?"

      Oh dear. Pretty nasty because he wants Noonan to have to back up her claims with specifics. That is terrible because he might actually embarrass Washington media professionals by calling out empty claims and unfounded assertions they aren't really in a position to defend. How vituperative.

      And another: "Aha. Paul Ryan, the Serious, Honest Conservative (the media myth) — as opposed to Paul Ryan the unserious, dishonest partisan (always the reality) — made a brief reappearance over the past couple of days. Needless to say, his initiative was completely useless, and the debt talks were in breakdown."

      Here is a point Krugman has often made about Ryan, a public figure who puts himself forward and is thus fair game. But what he is really criticizing is the media, and the gullibility of people accepting Ryan and his proposals to be what counts as getting serious about budgets. There is a myth around Ryan that is uncritically accepted in the media and by much of the public. I saw Ryan being a dishonest politician many many times during the 2012 election. Sometime the truth is painful. And Krugman rightly pointed out what was wrong with Ryan's budget proposals: they were fictions the CBO couldn't even score unless Ryan provided made-up parameters to plug in, numbers that Ryan could provide no policy path describing how his hypotheticals could actually be made real. In short, that can't be taken seriously. It's nothing more than empty political talking points dressed up in invented numbers. And yet most of the media and US voters don't know this, because the media generally doesn't understand or report what is wrong with Ryan's proposals. Dismissing Krugman's critiques as "vituperative" and "ad hominem" just amounts to a superficial defense of such comfortable myths.

  16. Anonymous10:37 AM

    Hey Noah, it would be nice if you could have your guest bloggers do us the common courtesy of putting their bylines at the top of the post instead of burying them at the end. I wasted five or ten seconds of valuable time actually starting to read this thing.


  17. Do you just sit around and think to yourself, before you write a post here"how can I play devil's advocate today?"

    I'm not defending Krugman, by any means. It just seems your writing tries too hard to be contrarian, even if the premise is thin. Just curious.

  18. As someone who was explaining in 2011-12 why the Euro wouldn't break up, let me repeat now what Krugman and others were missing. It was mainly a matter of being misinformed about ECB politics and how it works. It was not a case of true experts mispredicting. It was a case of Krugman and many others making misinformed guesses.

    The crucial point missed was that the ECB governing council is dominated numerically by France and southern Europe. And besides they had Ireland with them. And Belgium. Even Austria for that matter. OMT was not a Draghi decision, it was a council decision. And it was predictable that the council would somehow backstop the southern Europeans.

    K and others wrongly imagined that Germany held an effective veto power at the ECB, similar to its effective veto power over most EU decisions. But the ECB council is structured very differently. Every euro area member country gets a seat (with expansion these will rotate, but not a big change). Plus six governors are chosen by the EU, where Germany, France and Italy use their weight to assure extra seats for themselves plus one ally chosen by each (to slightly simplify). Only in the selection of those latter six does country size matter. And they are outweighed by the mass of seats handed out one to each country. So tiny countries get big weight. Any informed analysis of ECB politics would have told you that Germany and its allies were outnumbered by far. But K., seeing how Germany threw its weight in EU decisions such as the ESM, wrongly assumed it could do the same at the ECB.

  19. I am not sure Neely has thought too deeply about probabilities to make such a post. A post event analysis always has a probability of 1 or 0 associated with it. Prior to this event, probabilities range from a minimum of 0 to a maximum of 1. So, just because the event didn't occur (P=0, post event) doesn't mean that the bet of P=0 prior to the event was a good one. Your certainty of an event should be reflected in the odds you would be willing to give someone in a bet. Do you really think Krugman would have given a $1 if I win, $1000 if I lose bet to someone that the Eurozone would collapse. I doubt it. Probably would have been more like $4 if I win $6 dollars if I lose. So the question is, a couple of years ago would either you or Ferguson have taken a $1 if the Eurozone stays together versus $1000 if it breaks up bet. Again, I doubt it.

  20. As an economist and a Greek, I have been criticizing Krugman from the beginning for his position on the likelihood of a Greek exit, which contributed to the massive outflow of funds from the Greek banking system thereby making life for millions of Greeks even more difficult that it already was.

    The problem with Krugman is that he is truly a macroeconomist, and worse, one who believes that a simple IS-LM analysis does the job (some call it Keynesian, yet Keynes was much more aware of the complexities of real life). In Krugman's model there is Greece with Euro and Greece with its own currency. There is no discussion, however, of what the process of transition from one state to another should look like, and the transaction costs resulting from the necessary institutional changes, the uncertainty, and the speculative behavior. Or about the willingness of voters to return to the days when the political business cycle (inflating the economy before the elections and impose austerity after) was alive and kicking, when large currency devaluations used to bankrupt companies that had made the mistake of borrowing in foreign currency, and so on.

    The real arrogance here is the belief that one can figure out what is "best" for Greece with absolutely no knowledge of how everyday life works there, that an extremely abstract model, by itself, tells you all you need to know. And it is sad that Krugman still thinks he was "right" from an economic standpoint.

    1. Are you saying Krugman was directly responsible for the outflow of funds from the Greek banking system? That seems like a stretch if you are.

      How about the damage done by conservative criticisms of Greece, implying that it is the poster child of exactly how not to run a country, a place full of lazy welfare bums and extravagent socialists who deserve the economic pain of extreme austerity because of their moral failure to exercise restraint? That is really the way "Greece" as a metaphor has been tossed about in the US media by conservatives. I would think that would be far more upsetting than anything Krugman ever said, which always seemed to me to actually be concerned about the welfare of the Greeks. Krugman pointed out for me a fact that would probabaly amaze most American conservatives: Greeks work longer hours annually than Germans. The difference is productivity. And also the Euro prevents adjustments in currency valuations from rebalancing harmful trade imbalances between northern and southern Euro zone countries. Isn't this an essential part of Krugman's argument, that imposing all the blame and harsh fiscal austerity on Greece is not justified, because a uniform monetary policy makes some of Greece's hardships inevitable within the Eurozone? I readily admit I don't understand all the economics here, but from my reading of Krugman over the last several years, it seems like he is one of the few trying to counter act the "beat up on Greece" mentality.

      I'm not an economist, I program computers, but I learn a thing or two from reading Krugman. I never got the impression that he recommended that Greece exit from the Euro, or that he thinks IS-LM models alone are adequate to make predictions or to decide policy. Rather, I got the impression that he uses IS-LM models to teach general concepts to help explain and compare various policy approaches.

      I agree I don't recall seeing Krugman discuss what the transition costs would be for Greece. But to be fair, I don't recall him recommending that Greece leave the Euro. Rather he suggested that could end up happening because of problems with the Eurozone and how its central banking operates.

      Here is an example of what I'm talking about:

      He doesn't just blame Greece, nor does he say the only solution is for Greece to exit. He points out problems, and recommends that other parts of the Euro zone recognize their own portion of fault in the situation and make adjustments accordingly.

  21. There are qualitative differences between these "mistakes".

    Krugman never said, "Greece should leave the Euro, because once it does IT WILL RAIN GUMDROPS AND EVERY TREE WILL GROW XBOX 360s". He very clearly laid out a case of two terrible, painful courses, and made a judgment that one would be less odious than the other.

    Ferguson, on the other hand, declares there is INVISIBLE HYPERINFLATION that the government is hushing up.

    One is an honest misjudgement, and the other is tin foil hattery.

  22. Anonymous2:51 PM

    sibusisodan: "Given that Krugman's predictions were highly hedged and contingent, and that he's admitted he got the political calculations wrong - what should he have done to meet this mythical criterion of sufficient humility?"

    Correct. Please folks, READ what Krugman was saying. The Euro was in grave crisis at the time and still is, because the core inflexibility still exists. Everything he was saying was true, plus the collapse/exit stuff was "highly hedged and contingent" as correctly pointed out by sibusisodan. Krugman was pointing out possible courses, as correctly highlighted by Brendan Herlihy

    To paraphrase, it is sad that commentators who see only what they want to see still think they are "right" from an economic standpoint,

  23. Anonymous3:23 PM

    the inflection point ... lies in the vicinity of attentive readers of high-quality news outlets

    So a lot of those bloggers out there that Ferguson is so dismissive of are almost as good as the best highly credentialed and skilled professor.

    Ferguson's piece about Twitter followers shows that he has gone completely off his nut.

  24. Josiah: You're making a mistake in that Krugman's and Ferguson's "predictions" were very different kinds of predictions. Take Ferguson's hyper-inflation claim. First, he indicated that the CPI was already wrong, and then also predicted that it would soon be off by a factor of 10 (ie "move the decimal point."). This is a very specific prediction that is asserted on very high confidence - which turned out to be completely wrong. Notice that it did NOT turn out to be wrong because some 3rd party policy decisions undermined the prediction. It was simply wrong, right from the start, because it was based on a faulty concept of the world.

    Now compare that to Krugman's Euro concerns. These were 100% based on fact. Greek really was suffering at the hands of the Troika, and really did have the option of leaving the EU - and Krugman's prediction was that if the Troika's actions caused Greek politicians to choose to exit the Euro, the EU would likely fall apart. That hypothetical prediction was never tested because Greece politicians never decided to leave the Euro.

    The other "prediction" Krugman made has become warped. You could say that Krugman predicted what Greek politicians "would" do - but note that Ferguson's errors were never dependent on predictions of what policy-makers would do. Humans are infinitely unpredictable, and that's why Ferguson's error is so egregious - it had nothing to do with merely guessing human choices wrong.

    But while Krugman did fail to predict the ECB and Greek policy-maker's choices, what Krugman was really saying was, "Greece should exit the Euro because once they do, their economy will be able to recover much more quickly, assuming they make no stupid errors. However, this will likely cause the EU to fall apart - but that's okay - it was a foolish idea, as structured, anyway. It needs to be revised and maybe the breakup will provide the impetus - or maybe the threat of breakup will provide the impetus - to setup of robust fiscal and financial union." In fact, Krugman basically said that on several occasions.

    Notice that this was a dependent prediction, again - it was never tested because Greece didn't exit. The real test of Krugman's predictive prowess would have been a Greek (or Portugal, or Spanish, or Italian) exit, then observe the comparative effects of that economy under a depreciated currency vs any-country-other-than-Germany on the Euro. As Krugman also pointed out many times, it probably would have played out (ie, that's a prediction) like the difference between the US and UK vs France during the 1928-1937 years, where France stayed on the gold standard and suffered, while the US and UK saw relatively good recoveries.

    Note, I'm not trying to say here that, thus, Krugman is better than Ferguson (Krugman *is* better than Ferguson). Rather, I'm just using the two as examples to illustrate different kinds of "prediction." Krugman probably misphrased his real prediction many times, putting it in "would" terms rather than "should ... because (prediction)" terms - but he also put it in the correct "should ... because (prediction)" terms many times, too.

    1. Anonymous11:25 AM

      Excellent post.

  25. I'm not sure Krugman got the economics right. It would be easy for Greece to reintroduce its own currency, but that doesn't give Greece the ability to "devalue", at least not right away. As a practical matter, the New Drachma would have to be pegged to the euro until the crisis passes. So it might solve the next crisis, but not the current one.

  26. Thanks to CA for reminding me that there were two stages of "EU breakup is imminent!" hysteria. I was referring to the second stage, when it became clear that Germany wasn't willing to boost the ESM's firepower which wouldn't be enough to backstop Italy and Spain. At that point it fell on the ECB, and if you knew who held the votes on the ECB governing council, you knew the ECB was going to step in and provide the backstop. If you didn't know, you ran around yelling "EU breakup is imminent!"

    The earlier stage was all about Greece. Its government wasn't following through on its bailout program promises and its voters nearly elected outright opponents of the program. And so many people were running around yelling "Grexit is imminent!" But it wasn't. Because even the program opponents made very clear they wanted to keep the euro, and the EU has no means to kick Greece out. Doing so formally, through the EU, would require a treaty change. Doing so informally, through an ECB governing council freeze on the Greek NCB's ability to lend out euros, which would have forced the Greek government and NCB into simultaneous default, would require a two-thirds vote of the ECB council - which means it would require southern European votes. Either way it would have been a declaration that the euro was disintegrating and sent panic through periphery markets. There was just no support for doing that, at all.

  27. But too many here are accepting that Ferguson is accurately quoting Krugman without actually looking at the articles Krugman wrote. In almost every article, he is pointing to a "danger " of one or more countries leaving the euro, then pointing out ways it could be saved. So in the May 2010 column he does in fact use the quoted language, but then says "Logically, I see three ways Greece could stay on the euro," and then goes on to describe them. In the April 2012 column he says "if European leaders really wanted to save the euro they would be looking for an alternative course. And the shape of such an alternative course is actually fairly clear....". In June 2012, "So could the euro be saved? Yes, probably. Should it be saved? Yes, even though its creation now looks like a huge mistake....". In the March 2012 column, the language about Greece rapidly approaching the "extreme step" of leaving the euro is there, but immediately after Krugman writes "Germany and the European Central Bank could take action to make that extreme step less necessary, both by demanding less austerity and doing more to boost the European economy as a whole.". In the "Apocalypse fairly soon" column he in fact says "This doesn't have to happen; the euro (or at least most of it) could still be saved.". In the May 6, 2012 column he actually says, "And that, believe it or not, means the euro and the European project now have have a better chance of surviving than they did a few days ago."

    The point is, Krugman was never making a "call" about the euro, as Ferguson puts it. He was always just laying out a possibility and then talking about how it could be avoided or minimized. I actually think, reading back, that he was close to 100% right. Or is anyone now saying that a Greek exit was never even a possibility?

    But my point here is not to show that Krugman is "invincible.". It's that when you put the Ferguson quotes in their context, you see just how dishonest he is -- Ferguson, that is. It really doesn't give me much confidence in reading his history books -- they're well-written, but who knows how he selected from his sources?

    1. Anonymous11:31 AM

      Another excellent comment. Having read Krugman throughout the entire period at issue, I was surprised to see his writings characterized as having predicted a Greek exit from the Euro. Thanks for demonstrating what I had vaguely sensed -- Ferguson substantially misrepresents Krugman's position. No surprise, really.

  28. On Euro - Fat lady has not sung. Euro is a defunct concept toward "world currency" and to get there, they have to bribe small nations with loans and non-competitive investments. If the US politicians were to realize that a new golden era awaits - mostly due to shale gas and oil as well as automation, and stop bickering about budget deficit or debt, there would be one world currency, the almighty dollar. Economic expansion in the US is unstoppable.

  29. I agree with other posters. Both Krugman and Fergusson were wrong. However they were not the same kind of wrongness, like Isaac Asimov wrote here:

    Krugman was basically saying "Euro forces countries to go through internal devaluation that is such a painful process for some of those like Greece and Spain that these countries will leave the Eurozone". The first part is still true, Greece is now probably a modern western country in historically deepest and longest demand depression - even counting Great Depression in.

    His second part did not come true, but it is still "less wrong" compared to nonsense Nial Ferguson spouts. The only explanation why we do not live through hyperinflation is that he uses wrong model to stuidy reality at get-go.

  30. I scanned through most of the posts and none that I saw mentioned that Berlusconi was going to pull Italy out of the Euro before he was removed. Could Krugman have predicted that Berlusconi would be removed? - his middle name is not Cassandra.

  31. Bill Ellis1:32 PM

    No, Josiah Neeley, Niall Ferguson is not Right. Because what he is selling, and what you are asking us to buy, is that Krugman is a hypocrite. ( in case you missed the point of Niall's 3 part diatribe that was it.) But the only way to buy what you are selling is to first buy the false equivalency that you present us.


    Krugman's logic was and is sound. The euro is the the biggest obstacle to the recovery of the debtor nations of the EU.
    He thought that the pressures would most likely lead to the demise of the Euro. He was wrong.(so far?) And he has admitted it. No one had to call him out.

    Ferguson's logic on a host of issues was/is not sound, and on a big mess of issues he has never admitted he was wrong. When confronted with logical arguments that corner him he cries victimhood. His bad behavior is serial and unending. People call him out on it.

    Now you may feel that no matter how obstinately a person of great influence peddles ignorant and harmful memes, they don't deserve the kind of "incivility" Krugman heaps on them. ( I would disagree) But you can't possibly say that because Krugman is "wrong" about the Eruo that he is like Ferguson, so a hypocrite.

    Buy your logic...any argument that has a bit of truth can be called right. Anyone who smears someone can be called justified if some small part of their attack is based in fact.

    And no I am not being unfair to buy taking your simple "innocently" intended point out of context. You are trying to ignore the context that this issue actually exists in. I put your "point" back into that context.

  32. "The starting point is that we had a monstrous housing bubble, and Janet Yellen recognized it in real time." - Paul Krugman


    of course there will be people who worship paul krugman as a prophet no matter how many times he is wrong

  33. Anonymous4:53 PM

    Having read each of Krugman's predictions as they occurred, I had no need to reread them based upon Niall's account. But I also had an understanding of why these predictions were made. A lot of times, people tend to base predictions upon what they would like to happen in some part of their mind. For Krugman, I believe he felt the better outcome for the masses of people would be for the Euro to break up, therefore when the economic analysis proved to him that a lot of people would suffer unnecessarily if it didn't break up, he wished it would break up to spare the people, and there was a good mathematical basis why it might be a better result.

    Perhaps a breakup would actually create a better long-term outcome. We'll probably never know, but the reasons for creating it were definitely a bit misguided.

    Mathematically, most people would have been better off without the Euro. Sometimes the purpose of a prediction is to get others to understand the gravity of the situation in a way they refuse to face.

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  36. "The predictive value added of Ph.Ds, tenured professorships and Nobel Prizes is not zero but it is disconcertingly close to zero."

    Predicting how some particular aspect (such as the survival of the Euro) of the biggest financial crisis in generations is going to play out isn't much of a test of predictive capacity of experts in the subject area. A more relevant question is how accurate (and early) each of them was in predicting the crisis itself in the first place. The worldwide housing bubble and the associated credit crisis built up for years - how early did Krugman and Ferguson unequivocally announce the impending crisis?

    1. Like Yellen, Krugman thought there was probably a housing bubble, but it would be a bump on the road, and the fed could easily reflate the economy.