Wednesday, April 24, 2013

KrugTron the Invincible

If you grew up in the 80s you probably remember Voltron. Although the show often had convoluted plotlines, it would somehow always end with Voltron (a super-powerful robot formed from five mechanical lions) facing off against a monster called a "Robeast". Voltron had plenty of weapons, but he would invariably strike the killing blow with his "Blazing Sword". Eventually the show became kind of routine, but to a four-year-old, it was pure gold.

In the econ blogosphere, a similar dynamic has played out over the last few years. Each week a Robeast will show up, bellowing predictions of inflation and/or soaring interest rates. And each week, Paul Krugman...I mean, KrugTron, Defender of the Blogoverse, will strike down the monster with a successful prediction of...low inflation and continued low interest rates. Goldbugs, "Austrians", New Classical economists, and harrumphing conservatives of all stripes have eagerly gone head-to-head with KrugTron in the prediction wars, and have been summarily cloven in twain.

Don't remember? Well here's a quick (partial) episode guide:

It's really kind of amazing. And in case there was any doubt as to KrugTron's prognosticatorial puissance, just ask the experts, who found that he pummeled all other pundits in prediction prowess, getting 14 out of 15 predictions right.

So it's fair to ask: What is KrugTron's Blazing Sword? How does he keep vanquishing the Robeast of the Week?

Well, Krugman himself will tell you that his secret weapon is simple, elementary Keynesian economics - a rough-and-ready IS-LM view of the world, backed up by sophisticated "liquidity trap" models like this one. In those models, low aggregate demand will always keep the economy trapped in a low-inflation, low-interest-rate world.

But I'm not so sure. Keynesian models aren't really used for forecasting the world; they're used as guides for policy. A Keynesian model, be it IS-LM or Liquidity Trap, tells you "If you do fiscal policy, the economy will respond thus." It doesn't tell you how the economy will do in total; that is jointly determined by policy and by the external "shocks" that the Keynesian models (like all macro models) take as given. 

Keynesian models didn't predict that unconventional monetary policy (QE2) would be insufficient to raise expectations of future inflation, and thus would be unable to bust us out of the liquidity trap. Nor did Keynesian models predict that private investors would be willing to ignore the possibility of a U.S. sovereign default, thus allowing the U.S. to avoid a spike in interest rates.

But Krugman did predict both of these things.

And here's the most interesting one. Krugman's earliest prediction victory came at the expense of John Paulson, one of history's most successful investors (although unlike the Robeasts pictured above, Paulson didn't seek out a battle with Krugman; he was set up as the anti-Krugman by a writer at Businessweek). In 2010, Paulson predicted a strong economic recovery. Such a recovery, if it had come, would have busted us straight out of the liquidity trap and allowed monetary policy to cause inflation. Paulson backed up his bet with billions, and rolled snake eyes.

But Paulson is no mere Robeast. He is no inflationista, "Austrian" econo-troll, or conservative ideologue. In fact, he has a large group of very skilled macroeconomists working for him. There is no way his team doesn't know Keynesian econ backwards and forwards.

Nor does Keynesian theory, of the type used by Krugman, insist that an economy will remain mired in recession without a fiscal stimulus to prime the pump. Sure, somewhere out there, there are models in which the economy can fall into a bad equilibrium that requires fiscal policy to kick it out (in fact, Miles Kimball and Bob Barsky are building such a model, but they are severely late in publishing the working paper; so hurry up, guys!). But IS-LM and the Eggertsson-Krugman model don't have this feature. In those Keynesian models, growth can recover on its own.

So how did Krugman know growth would be slow? He didn't (I hope) put his trust in Reinhart and Rogoff's assertion that growth is always slow after financial crises. Maybe he just assumed that the underlying drivers of aggregate demand are sluggish, but I think Paulson's team could have done that just as easily.

No, I think Krugman's real secret weapon is something else: Like Voltron before him, he's borrowing heavily from Japan.

See, I myself am fairly agnostic about Keynesian ideas. But I've expected nothing but low growth, low interest rates, and low inflation since 2008 (though I haven't been as confident about these things as Krugman, and am thus not in his class as a super-robot). I expected these things because of one simple proposition: We are like Japan

Since its land bubble popped in 1990, Japan has had low inflation and low interest rates and low growth, even as government debt mounted and quantitative easing was tried. Paul Krugman was there. He watched Japan carefully, and he often states that it deeply affected his thinking. In fact, it might not be an exaggeration to say that watching Japan made Krugman the Keynesian he is today.

Meanwhile, the Robeasts have all used a different example to inform their understanding of the world: America in the 70s and early 80s. That was a time when government intervention in the economy (seemingly) led to high inflation. This taught generations of conservative economists, politicians, pundits, and regular folks that government intervention leads to inflation. And that if you wait long enough (or maybe enact the right structural reforms), growth will come back on its own.

But America 2008-present has not looked like America 1975-1985. It has looked like Japan, 1990-present. The proper comparison was across space, not across time. Assuming that other countries are fundamentally different than ours - that cultural differences, or institutional differences, etc. make cross-country comparisons utterly worthless - has proven to be a losing bet.

So if you want to get into the economic prediction game, and you don't want to be sliced and diced by KrugTron's Blazing Sword, but you can't bring yourself to fully embrace Keynesianism, I have a suggestion: Take a good close look at Japan.

Meanwhile, the Austrians, goldbugs, and other assorted Robeasts will continue to provide us with our weekly entertainment.


  1. Krugman touts Keynes and throws around the term "liquidity trap" a lot. But he still seems to generally agree with Scott Sumner et al. that a determined central bank could stimulate demand even at the ZLB. In fact, I read his paper on the liquidity trap and Japan as basically arguing just this. Krugman calls himself a Keynesian, but I think his position would be better described as an anti-anti-keynesian.

    1. You have to remember that the paper he wrote on Japan was written in what, the late 90's? Also it's been a while since I read the paper but I'm pretty sure he was advocating for straight up helicopter drop type monetary policy.

    2. I think Krugman was clear that fiscal, not just monetary, stimulus was needed... and Congress refused to provide that in sufficient strength.

    3. Anonymous11:24 AM

      Actually, Krugman's claim is that ONLY stimulus is effective when at the ZLB. Conventional monetary policy has no effect if interest rates are already at zero -- there's no room for 'adjustment' left.

      And he refers to himself as a "neo-Keynsian" -- John Maynard did most of his work nearly a century ago, after all.

    4. Bill Ellis11:42 AM

      Why do Market Monetarist insist that recognizing that monetary policies can be effective is anti-Keynesian ?

      Sure, way back in the seventies Keynesianism, as it was, opposed and then had its flaws exposed Monetarist. But to my mind there is really nothing about monetarism that does not fit comfortably into Keynesian world view.

      To me the fundamental tenant of Keynesianism is that the government can and should do things that level off the business cycle and mitigate shocks. Monetary policy is a great tool for doing so. Keynes recognized it too.

      I think maybe most of the perceived disagreement comes from what are to me mostly semantical arguments about what is a Demand side vs Supply side approach.
      I mean... things like "Helicopter drops" can be seen as a monetary or a fiscal policy as... supply side or demand side.

    5. Anonymous12:59 PM


      You are generally right until you hit the zero lower bound (where we are now) for interest rates. Can't cut interest rates below zero, so stimulus is the only option. It is also important to note that Dr. K is only in favor of government stimulus at the zero lower bound--not always as a lot of his detractors intimate.

    6. This is the easy part, cut taxes, gov loans to businesses, invest in infrastructure, spend back to expansion.

      The hard part will be when/if expansion is underway to raise taxes, cut spending and pay off the deficit incurred with short term stimulus. I can hear the wailing from here, "unnecessary unemployment - disparate impact on minorities and small business - threatening the recovery..."

      It seems that using tax (fiscal) policy more and interest rate (monetary) less would be both better at flattening the business cycle and managing the federal budget.

    7. Bill Ellis3:14 PM


      Krugman does in fact think that "unconventional" monetary policy can be effective at the zero lower bound... through the inflation exceptions channel.

      And that is pretty much (sometimes using different nomenclature ) what most Monetarists are saying we need to do too. There are big conceptual differences on how they get there, but the Ks and Ms end up in much the same place.

      The conflict between them comes from Monetarists thinking that only monetary policy can save the day, and that Fiscal policy is either ineffective or harmful..... While Krugman and the Keynesians think a combination of both Fiscal and Monetary policies are the right thing to do... that they complement each other.

    8. The point I was trying to make was:

      1) A lot of Krugman's writing, including his paper on Japan, seem to indicate that he doesn't think monetary policy is necessarily ineffective at the ZLB, because it can operate through the expectations channels.

      2) Krugman also believes that fiscal policy can be effective at stoking demand.

      3) Most monetarists (I believe, including Friedman) agree with Krugman on points 1 and 2, but for a variety of reasons prefer monetary policy

      4) Old-school Keynesians dont believe monetary policy can be effective at the ZLB, hence the liquidity trap.

      5) Krugman's views are in some ways closer to the monetarists than the pure Keynesians in this regard.

      6) Krugman is particularly forceful and effective at taking down "anti-Keynesians" who are probably also "anti-monetarists".

    9. I think what some of the responses are trying to point out is that New Keynesian models tell us that increasing inflation expectations is effective at the ZLB, but the models make no predictions one way or another about whether helicopter-drops would actually affect inflation expectations.

      Given that, it makes perfect sense for Krugman, using the New Keynesian model, to argue for helicopter drops of money. The upside is that it might raise inflation expectations (the model makes no prediction about this), while the downside risk is that it has no effect. If you have total faith in New Keynesian theory, it is a one-sided bet that would be completely irrational not to make.

    10. Matthew, I agree with everything you wrote. My main point is really only that Krugman is very similar to a large number of other economists in being a New Keynesian. And to the extent that he won all the battles above, its because he was arguing against people who themselves were taking a position that should be seen as pretty adverse to the New Keynesian consensus.

      In a sense, he has gained a strong reputation because he has been arguing against people with viciously anti-new keynesian outlooks, who are really suspicious of government to begin with. And those people are wrong.

  2. I am a kind of outlier Austrian to the extent that a lot of Austrians seem to be getting angry with me at the moment and calling me a Keynesian (which may in fact be true, as I think in some ways Austrian subjectivism and Keynesian short-run breaking of Say's Law are actually natural bedfellows, but that's another story for another day). I never thought hyperinflation was imminent (although to my shame I did think a strong uptick possible with massive monetary expansion, although I guess US CPI has been much higher than Japan's, so maybe I was partially right...). I expected interest rates in the post-QE to fall and stay low for a long while, partially because that was Japan's experience and partially because my intuition is that monetary expansionism decreases interest rates. From the start I thought we were in a depression, and from the start I've been against government austerity because it increases economic slack (although around 2009-10 I did think it wouldn't be as bad as it has been because of expectations of lower future taxes, and that was one detail I got wrong).

    So how is it possible for a self-described Austrian like me to avoid the Robeast trap? Well, like Krugman, my understanding of the crisis from the start was heavily influenced by Japan and post-1929, wherein private deleveraging depresses investment and consumption. In fact Japan has probably exceeded the expectations even of Hyman Minsky by staying depressed even after the private sector has deleveraged to pre-bubble levels!

    But another factor is that it's very hard to grow when you have a bunch of inefficient bailed-out zombie corporations and financiers whose kept alive on liquidity life support which is another common factor between post-2008 West and post-1990 (let's call this the "financial zombie hypothesis"!). This is why I have advocated from the start of my time writing about the crisis that either the financial sectors need to be liquidated (which might cause a lot of damage elsewhere, so maybe not best to allow this to happen in a completely uncontrolled way) or at least severely restructured.

    Krugman has not really picked up the financial zombie hypothesis at all, and that's where I'd lay my criticism of him. His focus is aggregate demand, which is definitely one aspect, but both Japan and America seem to have had a lot of problems with transmission mechanisms, too. Now, maybe it's possible that zombification/malinvestment will kind of work itself out in the medium term without any liquidation or deliberate restructuring. Maybe new technology shocks like cheaper-than-coal solar and resultant falling energy costs will provide enough of a boost to counteract systemic problems stemming from financial zombification, and give the system a chance to work itself out.

    But if that doesn't play out, we really need to look at the state of the financial sector. Aggregate demand alone may not be enough.

    1. Krugman had had, indeed, picked up on the financial zombie angle of the present crisis. In numerous talks and publications, he advocated the breakup of TBTF banks and shadow banks. In his very early analysis for monetary response, he proposed that the Fed attempt "credible irresponsibility" as a second best alternative to breaking up banks and chanelling money for direct fiscal expansion.

    2. I don't think he has made any reference specifically to what I call the financial zombie hypothesis but I recall his words on shadow banking from, I think, 2010 and he did call for some pretty severe restructuring there. He's also made reference to the repeal of Glass-Steagall as a cause for the current malaise, which I agree with wholeheartedly. So overall I give him good marks, but wish he'd be a little more proactive about restructuring, as fixing broken financial transmission mechanisms very high priority.

    3. Anonymous1:04 PM

      Look at Japan's numbers per capita. A big part of Japan's current stagnation is its negative working age population growth (and negative population over all). You need very big productivity gains to overcome a shrinking population.

    4. There has been blog conjecture in Alphaville that QEn has basically kept pace with unwinding the derivatives market. The auction system is working, soaking up MBS's is working, but these securities derivatives still comprise much of the TBTF's collateral and holding treasuries is the only thing keeping liquidity going. The "excess reserves" are not "excess" if they are backstopping significant off-balance sheet risk.

      This entire monetary policy is simply holding up the banking system at the moment and not intended to force lending into the private sector. This is not exactly "zombie", there can be a recovery in the off balance sheet sector, it is happening... Regulation of off balance sheet investment and a reinstatement of GSA would be prudent if we want to avoid perpetual transfer of risk from private investor to the Fed...

      With deflation expectations on the horizon (indicated by unnecessary cash positions in corporate and investment portfolios) monetary policy is completely ineffective. Conservatives would be more likely to stimulus spend if they held the White House and the Congress. As it is they risk economic recovery if they allow fiscal stimulus. It is also a risk to continue to forestall recovery in the hopes that the recession will be blamed on Democrats, especially as other economic regions recant austerity and Japan may begin to get traction. Time will prove "Stimsterity", and conservatives are still sitting on the wrong side of that trade. Better to get out in front if yet possible, external validation of fiscal stimulus while continuing opposition from conservatives could be fatal especially combined with demographic trends. Conservatives have put the party in a lose-lose scenario.

    5. Anonymous:

      Look at Japan's numbers per capita. A big part of Japan's current stagnation is its negative working age population growth (and negative population over all). You need very big productivity gains to overcome a shrinking population.

      Agreed, demographics may well be the difference between Japan suffering for 20 years and having full-blown deflation, and America which has had some degree of recovery and disinflation rather than full-blown deflation.


      With deflation expectations on the horizon (indicated by unnecessary cash positions in corporate and investment portfolios) monetary policy is completely ineffective.

      We haven't tried direct helicopter money yet. This may be more symptomatic of a broken monetary transmission mechanism than monetary policy per se.

    6. erghammer9:41 PM

      For the first time ever, I have some direct knowledge relating to a comment thread, so I thought I'd jump in.
      Krugman spoke at my organization, and I stood up and asked him whether he thought financial regulation was key to the recovery, or whether it was up to fiscal policy now. He responded that financial regulation was necessary to prevent another crisis from erupting, but he said his focus is on fiscal policy. He clearly was not thinking that the zombification of finance was holding back recovery. Personally, Aziz, I do--and agree with your thesis.

    7. Erghammer — thanks very much for the clarification.

  3. I love this blog. I'm not sure which is more awesome - KrugTron or the Menagerie of Econo-Trolls post. Huzzah!

  4. Your thesis seems a little thin.
    How does Japan explain Krugman's correct analysis of goldbugism?
    Also, Krugman predicted the financial collapse being due to the unregulated shadow banking and financial deregulation way back in 2007:
    What did that have to do with Japan?
    Also, your causation seems the wrong way around (sound familiar). Surely Japan is just one example of a system that can be in a liquidity trap there have been others.

  5. Anonymous3:31 AM

    "No, I think Krugman's real secret weapon is something else: Like Voltron before him, he's borrowing heavily from Japan".
    I am not so sure.........

    I think, Krugman has a pretty good command of the best parts of both Neo-Keynesians and MMTers in a sense that Japanese Governments since Hashimoto - this guy raised taxes - had not.

  6. Meh... I could have won all these battles with the TIPS rate...

    1. Anonymous12:35 PM

      more details, please?

  7. Not an economist, but have read Keynes. Keynes believed that in our current situation unemployment was the only metric worth considering. That's pretty much it. Monetary tools will not be effective so direct hiring is the cure. That's not to say one doesn't use monetary tools, it's just to say they won't work all that well or all that quickly. Which is pretty much what's happened, isn't it. We didn't plunge into Depression, but we're not making much real headway and still suffer from high unemployment. Just like Keynes said it would be. Anyway, not being academically trained as an economist (just 101 micro and macro) I find Keynes pretty much spot on.

  8. Anonymous4:06 AM

    One of my favourite posts ever, 10/10 would read again.

  9. I like this:
    "Finally, those prognosticators with a law degree were more likely to be wrong."

    This is hardly surprising is it.
    Numerate - not necessary
    Scientific - not necessary
    Political - very, so much so that they don't understand that the (external) truth isn't decided by consensus.

  10. I think Krugman is a closet empiricist, with a thin vaneer of theorist over the top. I know he called himself once, the "accidental theorist", but his intuition (which really drives him - how else do you choose between different throw away oversimplified models) is formed by empiricism. He is a good observer.

    1. Anonymous8:14 AM

      Krugman called William Greider an "accidental theorist" not himself.

    2. You are correct, I misread that one. I'm sure though he talks somewhere about how he first got into economics. I guess it must be and it sounds sort of accidental. "How I work."

    3. In the academic sense, Krugman is no empiricist. While he's written lots of theory papers, he has never, to my knowledge, actually written an empirical paper in his career.

  11. Anonymous5:01 AM

    Hmmm....well there are an awful lot of economists making an awful lot of predictions all the time.

    One of them is going to get a run of luck. Krugman may simply have had a run of luck. You also don't ask, how many predictions has he made which were wrong? If he is so right, why isn't he super-rich?

    He'll carry on being right until all of a sudden he isn't. Then he will fade away.

    1. Anonymous7:46 AM

      Or maybe he is the fox of all foxes. It isn't that hard to be best when you are competing with a bunch of hedgehogs, according to Tetlock.

      You could of course be right about luck, but there is a difference between betting on outcomes and betting on outcomes with a causual explanation as well, and getting both right.

    2. your (anonymous) prediction. But see, the thing is, Krugman was making predictions that flew in the face of what most people thought. Yes, it might all be luck. Just like the Miami Heat.

    3. Anonymous10:33 AM

      There are lots of people right now making lots of predictions that most people wouldn't agree with. Some of those will be stunningly right.

    4. Hey look! A prediction!!

      "He'll carry on being right until all of a sudden he isn't. Then he will fade away."

      By your own analysis, it is not possible that you know anything, but, you might get lucky......

    5. Anonymous11:21 AM

      No, I didn't say that it is not possible to know anything.

      Lots of things in this world are predictable.

      Economics on the other hand has an abysmal forecasting record.

      Equally, can you exclude the possibility that Krugman is merely lucky in his predictions?

    6. Anonymous1:02 PM

      To some extent, that is all science really is. We make observations and predictions, aka theories. The theories that have the best track record "win".

      I think you have to remember that Krugman's predictions are not just shots in the dark. They are based on a model, and the model has been laid out for everyone to see.

      I would also answer to you that Krugman IS fabulously wealthy by his own terms. Not only is he very comfortable financially, he has immense respect and one of the most interesting careers in the world. I doubt he would wish to swap his life with anyone, especially some lost soul sipping a tropical alcoholic beverage in a cabana somewhere with nothing real or meaningful to do.

    7. Anonymous2:23 PM

      I do think that Krugman lives the life he always wanted, and mostly that life is based on success as an academic, Nobel Laureate, and columnist. So, he’s turned out as well as Bill Gates in terms of meeting his personal goals for his life.

      But, he does have a Caribbean vacation home where he goes for a break sometimes. He does like to lie on the beach, drinking alcoholic beverages, and proofread his next book. No word on how he feels about cabanas…

  12. Anonymous7:07 AM

    The US now may look a little like Japan c.1990, but there are important differences:

    1. the monetary (and fiscal?) policy response was faster (and stronger - US real rates are now negative, whereas they're positive in Japan)
    2. the initial asset bubble, though large, was smaller than Japan's of the 1980s
    3. (I think) that the US recapitalised its banks more quickly and more aggressively than they did in Japan, learning from the Scandinavian banking crises of the mid-1990s

    why was it obvious ex ante that these differences wouldn't be important enough?

    (also, if you've got a good primer on the Japanese boom, bust and lost decade I'd appreciate a link :) ).

    1. The biggest difference is that Japan's population is 98% native Japanese

      The populace loves deflation

      It keeps us out!

  13. Anonymous7:10 AM

    Krugman is quite rich (his conference appearances carry a high price tag) and he is certainly super famous.

    He's likely the only academic economist who is also a celebrity. He was also shrewd enough to borrow from the most perceptive parts of MMT - especially in what concerns the fundamental difference between private and public debt in monetarily sovereign countries.

    Finally - last but not least - he writes in an engaging and superbly clear style.

    The world is lucky to have found in him such a strong and credible voice against the superstition-based policies of austerity that are leading so many economies in the path towards disaster.

    1. Anonymous10:36 AM

      So, austerity is merely 'superstition-based' but oh-mighty-Krugman's awe inspiring pronouncements are somehow backed by a great weight of incontrovertible evidence?

    2. Anonymous11:27 AM


  14. dsquared7:14 AM

    When you say

    "Sure, somewhere out there, there are models in which the economy can fall into a bad equilibrium that requires fiscal policy to kick it out"

    By "somewhere out there", don't you mean "right there in the General Theory"? The "liquidity trap" is just the Keynesian underemployment equilibrium, plus the assertion that monetary policy can be ineffective.

    If you're presuming that inflation expectations can do the job, then you've got something close to a loanable funds theory of investment and interest. Which of course is the difference between Hicks-Keynes and Post-Keynes-Keynes.

  15. Anonymous7:18 AM

    We know how BIgG can create jobs directly. KrugTron holds direct BigG job creation as a reasonable option. He considers options that others refuse to consider.

    For conservatives, who want to roll back the NewDeal Spending and reduce social spending and BigG insurance programs, direct job creation by BigG is a non-starter. Despite the evidence, the don't BELIEVE in BigG job creation. They have taken the direct policy off the table. WIth no good, clear alternative, they dive into confidence fairyland and other nonesuch.

    The simple solution that would make the most sense (pay people to do what needs to be done and start the infrastructure bank today) is blocked by political ill will. A fine tuned policy is not necessary. We need an increase in millions of jobs and several percentage points of GDP to close the jobs and GDP gaps. Give a big burst of fiscal stimulus to push the economy back into moderation. Then economists can go back to models that delve into the finer points of maximizing GDP to tenths of a percent.

    jonny bake

  16. Anonymous7:38 AM

    In other words: "We are all Krugmanites now?"

  17. Anonymous7:49 AM

    So, Krugman's answer is that the US becomes more like Japan? With an ever more problematic debt burden?

    How does Krugman see that ending, exactly?

    1. Maybe you should read this blog post again...

  18. If Krugman forms the head, what part do you form, Noah?

    1. Anonymous1:29 PM

      THE Bob Murphy? Why even acknowledge this Keynesian jabroni?

  19. Anonymous7:51 AM

    Has anyone ever heard Krugman say what he thinks is the maximum percentage of GDP that should be controlled by the state?


      But my guess is his answer would be fairly low, 5% tops. He's no Galbraith (who one of my Masters advisors told me that Jamie said to my advisor that John and Jamie believe 90% of US industry should be state controlled... YIKES).

    2. Anonymous10:31 AM


      US government spending is already around 36/37% of GDP!

    3. Anonymous10:33 AM

      Nah, he's gonna go for more like 15-20%, just because he advocates a single payer national healthcare solution for the US, and globally that costs roughly 10-12% of GDP for Industrialized countries (compared to 18% for the more 'efficient' US model....) Add the 5% other top of that and its high teens.

    4. Anonymous10:38 AM

      This is bullshit. You are saying that Krugman really wants to see the government portion of GDP drop from the current 37% or so, down to under 20%???

      When on earth would that happen?

    5. EconomistDuNord11:01 AM

      Have you missed the entire point?

      Krugman would not say there's one "optimal" number; he's saying that in the unusual case of a liquidity trap, different things happen which call for different responses.

      This isn't terribly difficult, but it boggles the mind how the Austerians are unable to understand such a basic distinction, and go around spouting nonsense like the OP asked.

    6. Anonymous11:18 AM

      Like I said, what does he think the maximum should be? The point at which it becomes self-defeating? 40%? 50%, 60%?

      If you want to look at nonsense, look at the posts above where people appeared to think that Krugman would want 5% or 20% of GDP as state spending, a fraction of current levels.

    7. The problem is that it's not self-evident there is a constant point (short of 100%) at which the percentage of government spending becomes self-defeating (kind of like the top nominal tax rate, come to think of it). It will change depending on circumstances, and you could have stronger growth with higher government spending (and top tax rate) than a lower one (of either) dependning on what environment you're in.

      Obviously, 100% government spending (or tax rate) is bad. So is 0%. In between, it really depends on the circumstances. In post-war Sweden, the percentage of government spending has consistently been over 50%. In the US during the Depression, it was around 20%. I daresay most people would prefer living in post-war Sweden to Depression-era America.

    8. Anonymous11:49 AM

      If Krugman is as well read in old, verified economic laws as assumed here, he will likely send you to Wagner's law.
      Not sure if you will like the results.
      Actually, I would like not you but the Club for Growth and affiliates to explain to me someday why they think they can refute this law in the long run, and how.
      Over hundred years of empiric confirmation vs. Norquist, could be interesting.

    9. Anonymous1:12 PM

      Can we make a distinction between government expenditures as a percentage of GDP and government "control"? If the government is just another consumer, that is very different from owning and operating all the utilities, for example.

      Recall, also, that Krugman is very much a capitalist and does believe in market-based competition. He has written along these lines in praising the energy markets opening up, and has come out for market-based solutions for dealing with pollution.

    10. Anonymous1:23 PM

      It is worth remembering that much of government spending is just handing out money which then gets spent in the private sector; consequently, social security, for example, doesn't create private/public spending inefficiencies (unless you think seniors spend money in a way that is less efficient for the economy).

      As to Dr. K, he would say, if you have 10% of you workforce sitting on the sidelines doing nothing, he would lower interest rates until business was willing to put capital to work employing them. If the private sector wont employ them, even when interest rates are at 0%, then the government should step in to create the demand for that employmnet--better building roads than having them sit around doing nothing. When demand picks up, business will want to emply capital to employ people to meet the demand. At that time, Dr. K would end the stimulus.

      He clearly prefers private sector employment and spending over public sector as can be shown by his arguments that government stimulus should only be used when it wont crowd out the private sector. But a lot of people aren't interested in the reality of his arguments--rather they want to pretend he is some sort of communist plotter because it makes them feel better.

    11. I was confused by anon's semantics. When you say "CONTROL" I'm thinking command and control economy, not what percentage of GDP is government spending.

    12. How can the question even be answered in the abstract?

  20. Anonymous7:55 AM

    I am highly dubious of all economics and economists.

    They do seem to compare very badly to the real sciences of physics and chemistry, for the obvious reason that you can prove what works in those fields.

    In economics there is no real test lab and no way of knowing what would have happened had you followed a different course of action.

    1. EconomistDuNord11:02 AM

      Then why are you trolling here?

    2. Anonymous11:08 AM

      Oh, so disagreement equal trolling, right?

    3. Anonymous11:49 AM

      DuNord, why are you such a troll??

    4. Anonymous1:25 PM

      No--reasoned disagreement does not equal trolling. posting that economics is crap on an economic site = trolling.

    5. EconomistDuNord4:24 PM

      The point is, if you're "highly dubious of all economics and economists", what on earth are you doing at this blog?

      Besides trolling.

    6. Anonymous1:20 PM

      It is only trolling if you show some evidence of said trolling. Everyone is a troll to you if they aren't convinced by your claims.

    7. All the old "science is only this" fallacy. Let's review the four types of science, shall we?

      1. Describable, predictable, and controllable, i.e., laboratory repeatable processes
      2. Predictable and describable, but uncontrollable, i.e., eclipses
      3. Observable, but unpredictable and uncontrollable, i.e., earthquakes, random behavior of particles in a nuclear immersion
      4. Unobservable, unpredictable, uncontrollable, i.e., human action

      Economics deals primarily with type 4 and occasionally type 3

  21. Anonymous7:56 AM

    This is the problem w/ macro-economists; you really conflate concepts, so let me help you out a little bit.

    Lion Voltron was not convoluted. That would be Vehicle Voltron. Seriously, what is more intimidating; lions? or a stack of Ford Escorts? And having a sea, land, and air force is really awesome . . . if you are planning a rescue mission. But we aren't planning a rescue mission. We are battling the Drule empire, and you don't need/want a rescue team, you want something that can kill. And what kills? A lion. What kills even more? 5 lions? What kills even more? Blazing Sword.

    Of course, the fact that Vehicle Voltron was comprised of various elements of a rescue mission gives rationale to why that Voltron had a 'why can't we all get along' political angle to it. That's great and all, but when dealing with King Zarkon, I prefer Lion diplomacy.

    Also, I think it more appropriate if you matched the goldbugs PK took down with characters from 'Visionaries'; basically, the tagline to that show would be fitting should goldbuggery take over policy:

    "It is a time when magic is more powerful than science . . . "

  22. Anonymous8:01 AM

    For all the ivory tower theories of egghead academic economists and macro-bullshitters as Nick Taleb calls them, the only ways in which the human race has ever sustainably progressed are through private enterprise, the application of technology and science, the rule of law, competition and political stability.

    Debt and more government spending ultimately do not progress society. They merely give temporary relief and leaves debts for someone else to pay off.

    1. Which debts are paid off more easily by future generations who can take advantage of the fruits of investments in infrastructure (physical as well as institutional), technology, science, and political and social stability that they themselves do not have to pay for. Or do you think that all scientists must start with observing apples falling out of trees?

    2. Not quite right. The only way the human race has ever progressed has been through productivity growth. That much is true, and "application of technology and science, the rule of law, competition and political stability" certainly help in that regard. "Private enterprise" too, if by that term, you mean "not Communism", but if you look at the 4 Asian tigers, other than HK, their rapid growth was aided in large part by industrial policy & protectionism (and HK was enriched a lot by the big autocratic state to its north). Laissez-faire they are not.

      Your next paragraph gives you away:
      "Debt and more government spending ultimately do not progress society."

      That's an expression of faith, and not an empirical statement. You have to be a ideological dogmatic fool to say that the Erie Canal (to give one example) did not progress society (or that it could have been funded privately).

      If you can not admit that in some circumstances, government investment is better than private investment, then you're as hopeless as the gold bugs.

    3. Precisely. Public goods like : Erie Canal, UVA, US Highways, DoD, etc. etc are all inescapable and hugely critical examples of the complementarity of public goods for private enterprise.

      Laissez Faire as a pure system, most likely cannot exist. Its an illusion. Also a free democracy needs to pay the price for maintaining a civilised society: government and taxes.

      This (and I have not gone through all the episodes yet....) is likely Noah's best post yet!

    4. Anonymous10:28 AM

      There is a silly argument being advanced here that questioning the size of the state means that you think society can run with no state at all.

      I have not said that there should be no government. It's a matter of how much government.

      In my view, the state is already far too large, especially here in Europe. It is now beginning to dominate economic and social life. It has been inexorably growing for 100 years. If that trend continues it will eventually grow to level that cannot possibly be supported by tax revenue. That way lies disaster.

      There is also an argument being advanced here that implies that all government spending is money well spent. I think that a huge percentage of government spending is pure waste which makes us all much poorer. Sure, building the Erie canal or whatever probably was a good thing. But what about all the pork-barrel, total waste projects that government have carried out? How well-off would we now be if those had never happened?

    5. EconomistDuNord11:04 AM

      I see... ever heard of a little thing called the "Internet"? That started as a US govt program.

      Wake up.

    6. Anonymous11:15 AM

      I thought Al Gore invented the internets.

      Anyway, why do we have this pesky private enterprise thing anyway?? The state is just so damn good at creating everything we need (and indeed, according to people on here it has invented everything we have ever had, fire, the wheel, oxygen, you name it!), why don't we just jack up state spending to 100% of GDP!!!

      I mean look at the USSR. They had a state sector that dominated their economy and look at the marvellous, world beating products they used to produce like the Trabant.

    7. "There is a silly argument being advanced here that questioning the size of the state means that you think society can run with no state at all."

      You mean this one?

      "Debt and more government spending ultimately do not progress society."


      "There is also an argument being advanced here that implies that all government spending is money well spent."

      There is? Mind pointing out who made that argument? Example please.


      "Anyway, why do we have this pesky private enterprise thing anyway??
      I mean look at the USSR."

      Oh I see. You are only capable of knocking down strawmen. Got it.

    8. Anonymous3:30 PM

      The fundamental, naïve bullshit part of Krugmanism is the idea that politicians will withdraw the stimulus when times get good again.

      Here in the UK we had a Labour government which dramatically expanded the proportion of GDP spent by the state.

      We are now running a massive budget deficit of about $180 billion a year, roughly equivalent to $1.8 trillion in the US.

      Now we have a new government which is making a very slow attempt to reduce that deficit by cutting spending by 2.7% in real terms over 7 years.

      You should hear the screams of 'savage Tory cuts' and the warnings of deaths, economic ruin, broken homes and God knows what else. And yet the cuts will only be taking spending back to where it was a few years ago under the Labour government when no-one in the state was screaming that they had too little money.

      A vast, government funded 'client state' is campaigning like crazy against all and any cuts. It's becoming almost impossible to get the state back out of areas for which they have taken responsibility.

      The state has been relentless expanding for 100 years. Sometime it's got to stop.

      If state spending gets jacked up by say, another 5% of GDP, then your average politician will find it much easier to just put off the evil day of cutting it and stay popular.

      Emergency spending will just slowly become the norm. And then when the next crisis hits, there will be another splurge of 'emergency' spending. Same with QE - what was once a policy only for a crisis is now becoming a magic pain relieving 'easy' option.

      And so the great con of currency debasement and the ever expanding state will go on, slowly sucking the life out of the private sector.

    9. Anonymous5:56 PM

      >> The fundamental, naïve bullshit part of Krugmanism is the idea that politicians will withdraw the stimulus when times get good again.

      They're doing a pretty good job of withdrawing it before times get good again.

    10. "The fundamental, naïve bullshit part of Krugmanism is the idea that politicians will withdraw the stimulus when times get good again."

      So, the thing is, you can hold dear to your pet little theory (of an ever-expanding state), or you could actually look at data.

      They withdrew stimulus in Singapore:



      Even China hasn't let spending rise as much as GDP growth:

      The UK has had a pro-austerity government, and the debt-to-GDP ratio has actually risen:

      Surprise, surprise! The debt-to-GDP ratio has a denominator as well as a numerator, and austerity doesn't expand GDP in a debt-deflation world nearly as well as stimulus does.

      Maybe you mean American conservatives can't be counted on to be fiscally responsible? I can buy that. In the US, the GOP has been the fiscally irresponsibly party in recent times, with irresponsible tax cuts for the rich during relatively good times and a couple of massive unfunded wars.

    11. Nathanael8:09 PM

      "the only ways in which the human race has ever sustainably progressed are through..."

      government-funded infrastructure, government-funded scientific research, the rule of law, democracy (to get rid of bad governments), and peace.

      Wow, this post brought out the right-wing idiot trolls.

  23. Anonymous8:07 AM

    It may be that Krugman is (I cringe a bit to write this) too modest. It may be that Noah is similarly giving Krugman too little credit. Krugman claims to rely on two bits of theory for all his success. Noah suggests that Krugman was essentially lucky in his choice of historical study.

    Often, we look for (and argue between) single causes for outcomes when no single cause is sufficient. It's complicated out there. Krugman tacitly acknowledges this in his aw-shucks explanation of his success, when he proceeds to criticize his opponents for beginning from the conclusion and then building an analysis to suit the conclusion.

    It may be judgement and thoroughness that allow Krugman to see the elephant while others, eyes tight shut, claim to have found snakes and trees. If we were not in a Keynesian situation, would Krugman be wrong over and over, or would he adopt a model appropriate to the times? It seems to me that it's entirely possible to drive a Keynesian model in the wrong direction, but he hasn't. That suggests something more than just a lucky choice of model and a lucky focus on Japan.

    1. randy3:00 PM

      If you read Krugman books, like "The Return of Depression Economics", the entire thesis is that because of the 0% interest rate lower bound, Keynes applies. Before the Great Recession, Krugman was a vocal opponent of wars of folly. After the financial crisis is when Krugman started joking that someone should fake an invasion by space aliens to provoke a massive military buildup (WWII-style stimulus) world-wide.

      I guess that means that Bush’s mistake was not lying the country into a war, but the timing thereof. If only he had waited until the last year of his term…

  24. This analysis is a little cartoonish, yuk yuk yuk...

    But seriously. You've replaced the entire economic debate with a simplistic epistemological one: Looking at 70s/80s US makes you a conservative, looking at Japan makes you Krugmanish.

    I wish it were that simple, but reality is probably more like this: The better you are with words, the better you will be at explaining what you really meant ex post facto. Krugman is an excellent writer and very deft at covering up his past prediction errors with elaborate rationalization. That's a great skill for an academic to have. All the other folks you mentioned, as great as they might be, don't quite have Krugman's knack for rationalizing after the fact.

    Sumner's also pretty good at this, but his reasoning is a bit more circular than Krugman's.

    Just my humble opinion.

    1. Honestly Krugman's writing style in his op-eds grates on me. He's very deft at writing academic papers however.

      And yes, absolutely yes Sumner's reasoning is the most circular of circular.

    2. Anonymous11:09 AM

      Ryan, really?

      "Krugman's a good writer" is the best counterpoint you have? And no examples of this claimed "elaborate rationalization" to be found, apparently?


    3. Anonymous11:58 AM

      Ryan's dead on here. Example: "I predicted the housing bubble... mumble, mumble... back when I called for the creation of one..."

    4. Ryan is right on. Here is an example of a prediction error:

      and here is the rationalization:

    5. Yep, Krugman is no seer of seers. His predictive successes are mainly due to the three smash hits of 1. low inflation, 2. low interest rates, and 3. low growth.

    6. EconomistDuNord4:28 PM

      Lol, oh gee, is that it? 1. low inflation, 2. low interest rates, and 3. low growth? Rather big stuff, wouldn't you say, Noah?

      And you leave out the housing bubble and all sorts of political predictions that were prescient.

      He's as much a seer as we have today.

      Which I guess was the point of your original post.

    7. Yeah, but no human gets predictions right 100% of the time!

    8. "And you leave out the housing bubble..."

      Well, a lot of people suspected there was a bubble. But they underpredicted its impact if and when it burst, including Krugman. Here are his exact words (
      "What about what would happen when the bubble burst? I personally failed to realize how big the “knock-on” effects would be..."

    9. Nathanael8:06 PM

      "Looking at 70s/80s US makes you a conservative,...."
      Only if you misunderstand what happened in the 1970s.

      Oil supply restriction, folks, oil supply restriction. Oil-based economy. Can't switch off of oil quickly, it takes decades.

      Therefore oil supply restriction CREATES INFLATION --
      WHILE creating unemployment. Simple as that.

      (Yes, a bit of the inflation started a bit before the OPEC oil shock... but after a DROUGHT, which has the same effect, since the economy is also food-dependent.)

      Someone talking about peak oil could have explained it! But instead the economics profession ran down stupid rabbit-holes, led by Milton Friedman and Lucas and god knows who else.

      I would like to know what caused the economics profession to ignore the obvious and correct explanation for stagflation for *upwards of 40 years* (they're still ignoring it!). There is something really odd about that.

      Even Jimmy Carter *eventually* figured out what the issue was, when he put on a sweater and put solar panels on the White House, and *still* the economics profession mostly ignored it. (Environmental economists are probably an honorable exception.)

    10. Nathanael,

      I don't know if it is worth my time to respond, as you have shown an absolute disregard for facts when they are inconvenient to your ideology. Inflation was creeping up even before the oil shocks. In fact, there was a whole debate between Tobin and Friedman in the early 1970s, before the oil crises, over what was causing this. Tobin, influenced by Keynes, was arguing that inflation was cost-push. His ideas were responsible for Nixon's (Republican) price controls and going after unions. Friedman, influenced by Irving Fisher, argued that the rise was driven by monetary policy. His ideas were behind Paul Volcker's (appointed by Carter, a Democrat) monetary tightening in the early 1980s. Judging by who was able to curb inflation better, I would say that Friedman was pretty much the winner. Even Krugman admits this. Stupid rabbit hole? You may want to take a break from the Kool-aid!

  25. "Keynesian models didn't predict that unconventional monetary policy (QE2) would be insufficient to raise expectations of future inflation, and thus would be unable to bust us out of the liquidity trap."

    Yes they did. Price setting in the NK model, and therefore inflation expectations are driven by the difference between the real and the natural rate. Money is usually left out of the NK model, for the simple reason that contingent on the nominal short rate, it doesn't have any impact on the real economy. But you can certainly put it in there (see e.g. Peter Ireland) if you are interested in looking at the money demand itself. If you do that, of course, you'll still see that QE is futile to the extent that it doesn't move i. And at the ZLB, it doesn't move i.

    Anyways, it's not really a *Keynesian* result, it's pretty basic non-arbitrage finance. It's quite a tall order to write a GE model with semi-sane agents in which swapping zero yield government debt for zero yield government "reserves" is going to make any difference whatsoever. In fact, it requires some pretty weird magical thinking (*cough* Market Monarists). The liquidity trap exists in all kinds on non-sticky price models. Stephen Williamson, who is definitely no Keynesian will tell you that QE is futile and both Andolfatto and Cochrane have recently discussed non-sticky liquidity trap models.

    So I'd say you're pretty well exactly wrong about this, and that Krugman's claim that he is just following the logical consequences of his model is exactly right. If you want to understand why the inflationistas are wrong, but you "can't bring yourself to fully embrace Keynesianism" I have a better idea: embrace non-arbitrage finance and the fact that the monetary authority controls the real rate. The rest is details.

    1. Anonymous9:42 AM

      It's quite a tall order to write a GE model with semi-sane agents in which swapping zero yield government debt for zero yield government "reserves" is going to make any difference whatsoever.

      Apart from the fact it leaves the private sector better off (the Pigou effect) if it were really true that reserves and government debt were equivalent then nobody would buy government debt. Is that what we observe?

  26. Anonymous8:58 AM

    Krugman's preferred model, IS-LM was "right" in this crisis by pure accient. Its predictions were 180 deg. wrong for 28 years straight 1980-2007 (it predicted rising yields in the US, while they kept falling), and yet now Krugman claims that "using econ 101" he predicted rates to be low in the US post crisis. Rates were set low by the Fed not by the market for loanable funds as IS-LM posits.

    IS-LM doesn't even differentiate between money borrowing countries (Greece, all Eurozone) and money issuing countries (US, UK, Japan). So IS-LM predicted US, UK and Japan correctly (by accident) and it got Greece, Italy and Portugal wrong. It did the opposite 1980-2007: got the US, UK and Japan wrong and Greece et al. correct. Some model. On the other hand models based on understanding monetary operations got all of those correct in both periods.

    1. This comment has been removed by the author.

    2. Anonymous11:35 AM

      RonT, I guess you have not been exposed or you do not read Krugman's daily notes. Saying that Krugman was right by accident sounds ridiculous to me. Often, he presents clear explanations about his positions, including data, models, charts, etc. When you look at it with an open mind, you can see a rational mind doing amazing work. The man is just brilliant. It all makes sense. Of course, he has many enemies among the people he destroys with his analysis. Those enemies are distorting his views as often as possible because they just do not get it or because they just hate him.
      The world is full of economics charlatans that do not know much about the subject but that somehow cover the media. Unfortunately there are also economists that allow their political biases to clog their thinking and arrive to wrong conclusions. In addition, there are the ones that may know better but that do not want to accept it because of their political and/or financial interests. Among all of that, it is of great value to have somebody like Krugman, a brilliant economist that is willing to say it as it is and has the energy to continuously fight for it. If you want to really learn about macroeconomics, start by readying his daily blog.

    3. Anonymous11:43 AM

      I read his blog daily. He is brilliant. But IS-LM is still junk. Was completely wrong pre crisis in the US case. Address that instead of singing praises of a person.

    4. Anonymous12:33 PM

      I don't hold you responsible to read every comment before writing your own but (whine!) you really should address the possibility that Krugman is more than a slave to a model.

      If you do read his regular blog posts, then you will have seen his assertion that he picks among models when looking at problems, depending on which model seems to him most apt for the job. You claim IS-LM is "bunk". That sort of smells of what he has been criticizing in all those analysts, pols and pundits who have gotten everything wrong in this episode. IS-LM is wrong because "everybody knows" it's wrong. Krugman claims it is the right tool for this job. He gets good results.

      You seem to be judging the workman by his tools. That's problematic because it begs the entire big old question of whether IS-LM is a tool worth using. You simply declare it to be bad, regardless of the fact that Krugman gets results with it, when he decides it's the right tool. If we judge the workman by his work, rather than his tools, we have to say Krugman is a good workman. If he's good, then should we not trust him over you in his judgement regarding choice of tools?

      He claims that at other times, and for other purposes, he'd choose another model. Absent evidence that he is lying, what's the point of trying to saddle him with IS-LM and only IS-LM?

    5. Anonymous12:36 PM

      By the way, second anonymous is not the same anonymous as first anonymous. Second and third (me) are the same anonymous.

    6. Anonymous1:08 PM

      Not really. The Fed from 1980-2007 only influenced interest rates by intervening in the loanable funds market; that doesn't change the model. Nothing in the model says to ignore the behavior of the central bank.

      The basic insight of the model is:

      An increase in desire for savings will lower interest rates and/or lower GDP.
      An increase in desire for investment will increase interest rates and/or increase GDP.
      An increase in desire for liquidity (or a decrease in the supply of money) will increase interest rates and/or lower GDP.
      A decrease in desire for liquidity (or an increase in supply of money) will lower interest rates and/or increase GDP.

      None of this really failed in any of the examples you've cited.

      The whole point of IS/LM is it's very dynamic. Neither liquidity preference nor loanable funds alone determine interest rates, and either or both interest rates and GDP can adjust.

    7. Anonymous1:37 PM

      Anonymous 2/3

      IS-LM gives you now correct prediction for US/Japan/UK (sovereign states) and wrong prediction for Greece/Portugal/Cyprus/Slovenia (non sovereign states). Who do you know how to "choose the right tool", i.e. choose IS-LM for sovereign states and not for non-sovereign states? Either you are lucky or the insight has to come from outside of IS-LM, from understanding that sovereignty matters. Krugman didn't understand this prior to 2011, so if he chose the right tool it was by accident.

    8. Anonymous3:59 PM

      Well yes, international trade and currency issues are external to IS/LM. So you need to use other models to address those things. He often uses Mundell/Fleming as an extension to IS/LM to deal with international trade issues, for example. And he has developed models for dealing with currency crises as well.

      You are missing though that IS/LM can also be a flexible tool for dealing with these other problems. For example, see "Are Currency Crises Self-Fulfilling" (link) from 1996, pages 372-373, where he uses IS/LM to demonstrate the problems with the European Monetary System in 1992-1993. He opposed the Euro for similar reasons; the analysis of a non-sovereign currency isn't that different from one forced to peg to a foreign currency.

  27. "So how did Krugman know growth would be slow? He didn't (I hope) put his trust in Reinhart and Rogoff's assertion that growth is always slow after financial crises. Maybe he just assumed that the underlying drivers of aggregate demand are sluggish, but I think Paulson's team could have done that just as easily."

    You seem to quite like that particular R&R paper, so not quite sure why you're dismissing it :) For sure, Krugtron learned a lot from Japan, but I don't think his predictions are just lucky 1-1 transfers. It's more a recognition that when the aggregate demand falls dramatically (not just any bubble pop) it takes a long time to recover.

    I took a look at that B&H paper-- interesting how they divide crises into "recessions with recovery at least as rapid as the downturn" and "recessions with recovery slower than the downturn." The later category? 1919, 1929, 1991, 2009. That Krugman recognized the latest as the latter type, and Paulson did not, is no great surprise.

  28. Here's a preview of the cartoon that follows KrugTron

  29. This article sums up perfectly what Krugman does

    He lies about what the Austrian perspective is - he probably doesn't understand it - and then corrects the mistake by consulting with baby-sitters. (You should get that joke).

    And the best part is: usually his solution contradicts a solution he gave a few hours ago.

    Or, the solution is something glaringly stupid like an alien invasion.

    Or, his solution is exactly what the REAL Austrian position is.

    So, calling him awesome is tantamount to being an idiot.

    1. Groundbreaking analysis from someone that links to Mises.

    2. Anonymous10:06 AM

      "Or, the solution is something glaringly stupid like an alien invasion"

      Amazing how many Austrian-leaning people still throw this around. If you don't understand what he was saying here, and how exactly it corresponds to Einstein's thought experiment about what you would see if you rode on a beam of light, then your opinion is worth diddly-squat, and any accusation that other people don't understand your position is hugely ironic

    3. Anonymous11:11 AM

      Austrians are unable to make any valid points because the evidence is overwhelmingly against them. So they spit stuff.

    4. "He lies about what the Austrian perspective is - he probably doesn't understand it"

      Fully agree he probably doesn't understand it, all attempts by rational people to understand it have failed.

      But if he doesn't understand it, how is he lying about it. Maybe he is genuinely confused about it.

    5. Anonymous12:05 PM

      It is HIGHLY entertaining to read the complete idiocy of Krugnesians, how they troll, attack, spit, and generally throw their own shit in an increasingly erratic and inaccurate manner.

    6. "It is HIGHLY entertaining to read the complete idiocy of Krugnesians, how they troll, attack, spit, and generally throw their own shit in an increasingly erratic and inaccurate manner."

      It is highly entertaining to see simple-minded Austrians talk about trolling, attacking, and throwing shit (anyone can see that there was no attempt by you to try to convince anyone that you're actually right in your post) when they do nothing but that (and anonymously, no less)! If your goal was to convince people to join your cause, you're actually doing the opposite. If your goal was to throw a adolescent-style temper tantrum, then job well done!

    7. Anonymous1:43 PM

      Anonymous12:05 PM

      It is HIGHLY entertaining to read the complete idiocy of Krugnesians, how they troll, attack, spit, and generally throw their own shit in an increasingly erratic and inaccurate manner.


      It is highly entertaining when people reply to their own comments anonymously.

  30. Anonymous10:01 AM

    A KrugTron bestiary? Genius!

  31. But, Krugman was an outlier in his prescription for Japan, then and now. So his understanding of Japan can't really be an explanation for his understanding of the US now, as his understanding of Japan has never been established as a generally agreed upon explanation of their facts.

    I think the place to look for Krugman's success is in value functions. Economics used to always be called 'political economy' for good reason. Krugman or other's can characterize his views on topics beyond economics (narrowly defined) but it's very difficult not to notice a strong correlation between economists who were correct in the past 5 years or so, and economists who are broadly described as progressive. Correlation? I do believe. Cause and effect? hard to know, perhaps both simply come from some common generating factor for accuracy...

    1. Anonymous12:42 PM

      Um, Krugman's understanding of Japan then can easily be counted as a foundation for his understanding of the US now. Your argument requires that Krugman rely on the views of others for his views. There is no reason he should. The rest of us may have been unable to reach the same conclusion as Krugman if we rely on generally accepted history, but Krugman is both likely to remember his own story regarding Japan, and is intellectually consistent in relying on his own Japan story in analyzing the US.

  32. Noah,

    I see that Krugman has responded saying pretty much what I just said. But he also acknowledges your point that Japan is relevant which, of course, is true. It's all well and good to have a model that reflects basic sanity, but sometimes models that seemed really right are still refuted by evidence. But now we've had Japan (and the US and UK) and we see that you can double or triple the base and inflation doesn't move, not even a tiny bit, exactly as expected. So the model made sense, any non-crackpot can see it, and the data backs it up. The issue ought to have been considered closed years ago.


    We all know that IS/LM is a static toy model, the only practical use of which is that it captures the salient feature of the liquidity trap. The real world is *multi-period* and obviously you can't understand the great moderation without a real model of inflation dynamics. Krugman understands that just fine. What makes him a good economist is knowing the assumptions underlying each model and understanding the relevance of those assumptions in answering particular real world questions.

    Like you said, consistency with basic monetary operations (finance) is a critical element for even starting to get things right. And there are many good models that build on that and get lots of particular things right. But no current model that I'm aware of correctly models all the features that I would consider important over the last ten years. And if you are thinking of MMT, that isn't even a model.

    1. Anonymous11:35 AM

      MMT isn't a model? So what is it? Let's call it a shmodel, whatever. Important thing: it gets things right, and predicts them right. The industry started to see it, they won't bother with BS neoKeynesian stuff.

  33. Krugman reminds me a lot of I.F. Stone in the sense that both were keen observers relatively unblinkered by ideology. And both were/are islands of sanity struggling against the delusional mainstream. (Stone, like Krugman, was not afraid to criticize the excesses of his natural allies on the left.)

  34. Anonymous10:40 AM

    To me, there is a kind of parallel between what's allowable in medical trials and what is not, and what Krugman wants permissible in economics experiments and what he does not want. We don't allow medicine to indiscriminately inflict pain and misery to test drugs and procedures. He has been saying basically the same thing about economics experimentation. And it helps that he shows that there are probably alternatives to bleeding test subjects to death.

  35. He also glances at prediction markets from time to time. Something that very few forecasters ever think to do.

  36. The Tyler Durden photoshop made me laugh. Hardcore!

    Krugman has been prescient and is a brilliant writer who can explain complicate ideas in clear language. He "shows his work." And he admits when he's wrong, he's only human, and sometimes he'll go overboard (who wouldn't when you have rightwingers raging at you 24/7?) He's not afraid to give as good as he gets. And he has a great sense of humor.

    He's right 99 percent of the time. I think he was wrong to push the idea that monetary policy is dead in the water. Seemed like he was doing it partly to help push harder for fiscal policy, a worthy goal, but it gives the Fed a pass. He does admit that Bernanke should try and show some "Rooseveltian Resolve." Its sort of contradictory, b/c Bernanke did react specifically to criticisms from the press and Krugman.

    I disagreed with him about nationalizing some of the banks back in 2009 during the stress tests time. I thought the economy was too fragile and that the markets would freak out. But turns out Krugman was exactly right, just as he was right that the stimulus was too small, something he called in real time. Rock on.

    1. EconomistDuNord11:14 AM

      Agreed 100%, especially about the banks in 2009. It would be a far superior world now if we'd followed Krugman's advice on that.

    2. I think Krugman's assessment of monetary policy is a bit more nuanced than you are portraying here. He obviously realizes that monetary policy is a very poor way to stimulate the economy (I think I heard the pushing on a string analogy from him first). And here we are 5 years after the crisis hit with the Fed having undertaken massive quantitative easing and asset buying (to the tune of trillions of dollars) over the last few years and how has the economy responded - well pretty much exactly as it would if they hadn't done anything - regular growth levels and persistently high unemployment. It's obvious that fiscal policy would have created demand in the economy and that monetary policy is only the politically acceptable thing to do at the moment - hence we are stuck with the tools we have.

  37. Anonymous11:19 AM

    What about Krugman vs. Mankiw?

    1. Which Krugman vs. Mankiw debate are you referring to? I must have missed that one.

    2. Anonymous12:47 PM

      Krugman and DeLong chastised Mankiw over his observation that the Obama administrations growth projections were unrealistic. Krugman and DeLong were wrong.

    3. To be fair we haven't hit the "years later" part of the accelerated growth because to have predicted we would still be doing austerity 5 years after the crisis and having not recovered would be insane - this is what passes for serious policy these days.

    4. Anonymous2:01 PM

      good catch. it takes a Keynesian to catch a Keynesian

    5. Krugman is right that unit root tests have very low power (this is just a statistics fact), so Mankiw doesn't really know if there's a unit root in GDP, and in fact cannot know. However, it's worth noting that Krugman's own predictions of continued slow growth fit Mankiw's story pretty well. But also there are the contingent effects of policy - Krugman advocates fiscal stimulus, and if he's right that stimulus would be effective, then a stimulus would cause the stagnation to end, meaning that this recession would not be consistent with Mankiw's story.

      All in all, I don't think there's much difference between the two here.

    6. Anonymous2:21 PM

      Krugman on August 28, 2009....

      "Contrary to what some think, we’d actually expect growth over the next decade to be somewhat above trend, as the economy picks up some of the current slack. That’s what the historical record tells us actually happens."

      So instead, if we had high growth the last few years, he still would have been right.

    7. Bill Ellis2:30 PM

      It seems that Krugman's beef was not with Mankiw's prediction, but how he made it. ... based on"Unit Roots".

      From the link above..."But to invoke the unit root thing to disparage growth forecasts now involves more than a bit of deliberate obtuseness. How can you fail to acknowledge that there’s huge slack capacity in the economy right now? And yes, we can expect fast growth if and when that capacity comes back into use."

    8. Yes, agree with Bill Ellis. Good thing I saved him from the monster pit at the last minute...

  38. Anonymous11:20 AM

    There is one huge difference between the US and Japan: population growth.

    Pop. of Japan in 1990: 123,611,167
    Pop. of Japan in 2012: 127,530,000 (3.17% growth in 22 years)

    Pop. of the US in 2007: 301,580,000
    Pop. of the US in 2012: 313,914,040 (4.1% growth in 5 years)

    Huzzah for immigration and overall American fecundity!

    1. Anonymous8:39 PM

      Good point. Clearly, Japan should open its borders to third world immigrants. Millions of Somalians, Pakistanis and Yemenites will be a great addition to Japan, and improve the nation's quality of life significantly.

  39. Bill Ellis11:49 AM

    If Noah wants to take a day off to responding to commenters, all he has to do is blog a positive Krugman post...and Krugman's army will show up to defend it for him.


    1. Someone's too clever for his own good...

      *pushes button to drop Bill Ellis into monster pit*

  40. OK so you linked to a whole lot of articles where Krugman says that Krugman was right. Not surprising.

    You linked to an independent study by "experts" (actually students) also - here are Krugman's predictions used in the independent study:

    "Home prices are in free fall. Unemployment is rising. Consumer confidence is plumbing depths not seen since 1980. When will it all end?...Probably not until 2010 or later."
    "[the home value recovery process] took more than five years...if the current housing slump runs the same schedule, we won't be seeing a recovery until 2011 or later."
    "We probably won't find another bubble [to invest in]--at least not one big enough to fuel a quick recovery."
    "If the current slump follows the typical modern pattern, the economy will stay depressed well into 2010 if not beyond."
    "[This slow economy will leave] plenty of time for the public to start blaming the new incumbent and punish him in the midterm elections."
    "Proponents of expanded [financial] regulation...will have to contend with very well-financed opposition from the financial industry."
    "Even if we don't have a formal recession--and the odds are now that we will"
    "Whoever receives the Democratic presidential nomination will receive labor's support in the general election."
    "[in the Summer of 2009] President Barack Obama is about to unveil his plan for universal health care. His health policy experts have...concluded that the plan really needs to include a...mandate."
    "If [President Obama] tries to include a mandate in the plan, he'll face a barrage of misleading attacks from conservatives who oppose universal health care in any form."
    "Raising fuel efficiency is something we can and will do."
    "That's going to be hard--if [Obama] is the nominee--to refute Mr. McCain when he makes similar arguments on behalf of such things as privatizing veteran's care."
    "The only way the Fed's action could work is through the slap-in-the-face-effect: by creating a pause in the selling frenzy, the Fed could give hysterical markets a chance to regain their sense of perspective."
    "Things [in the economy] will probably get considerably worse before they get better"
    "Once the economy is on the road to recovery, the wheeler-dealers will be making money again--and will lobby hard against anybody who tries to limit their bottom lines."
    "If and when [a German recession] happens, Mrs. Merkel and her ministers will surely reconsider their position [about giving aid to other EU countries]"
    "Here's what will definitely happen when Gen. David Petraeus testifies before Congress next week: he'll assert that the surge has reduced violence in Iraq--as long as you don't count Sunnis killed by Sunnis, Shiites killed by Shiites, Iraqis killed by car bombs and people shot in the front of the head."

    Note the overlap, and also the degree of difficulty of each of the above.

    More importantly note that these are all after the crisis that, you guessed it, Krugman failed to predict, caused by a housing bubble that he thought would be a good thing to encourage.

    Having got that off my chest, yes the US is most likely following the same path as Japan. Funnily enough Krugman seems to think this is a good thing.

    1. Anonymous12:31 PM


      On all of the issues of the economy I am just as good as a predictor as Krugman.

    2. Anonymous1:08 PM

      First of all, the majority of these predictions (I'll get to that in a second) are not of the type Noah was referring to. They are not about the recession and how best to address it. Second, a large number of these aren't even predictions and/or are not incorrect. I also question where you picked these up. This looks very Glenn Beckish to me.

      "Even if we don't have a formal recession--and the odds are now that we will" - uhh dont really see how that one was wrong (again without a cite or time or... something its difficult to de-rantify your rant).

      "Raising fuel efficiency is something we can and will do." - uhh seems like fuel efficiency has been raised. I just saw a ford commercial the other day advertising a gasoline engine that gets 37 mpg.... I repeat... a FORD commercial.

      "Home prices are in free fall. Unemployment is rising. Consumer confidence is plumbing depths not seen since 1980. When will it all end?...Probably not until 2010 or later." - uhhhh, are you smoking crack?

      "If the current slump follows the typical modern pattern, the economy will stay depressed well into 2010 if not beyond." - uhhh I would say +1 for Krugman here too.

      "[This slow economy will leave] plenty of time for the public to start blaming the new incumbent and punish him in the midterm elections." - KrugTron nailed this one too (more crack?), Romney just ran an incompetent campaign.

      "Things [in the economy] will probably get considerably worse before they get better" - hmmmm, this one is interesting because again he nailed it yet you were smoking crack. also because I dont think there was any debate about that anywhere.

      Need we go on.

    3. Anonymous1:10 PM

      ... even predictions and/or are incorrect.

    4. Anonymous,

      You missed my point completely.

      These are from the study itself. Yes they are mostly correct.

  41. I guess this post garners accolades from a certain breed of retro-nerds, but the rest of us would rather read more general-public kind of stuff.

  42. Anonymous12:38 PM

    Ridiculous and a bit hilarious that one can learn more about economics from reading Zero Hedge than from attaining a PhD in it from an Ivy League institution.

    As though the fact that the Fed has been able to push this dollar Ponzi scheme as far along as it has, beyond all expectation, somehow disproves those who are correctly calling it for the Ponzi scheme that it is.

    "The Krugman-Keynesian Cargo Cult is incapable of distinguishing between productive investment and profligate spending. Keynesian cultists focus on an incredibly blunt and misleading indicator of gross domestic product: GDP. Burn down a house and rebuild it, pay people to dig a hole and fill it, build bridges to nowhere, buy costly weapons systems the military doesn't even want, purchase boatloads of particle board furniture from China that's headed for the landfill: it's all equally wonderful to the Keynesian apologists because it boosts GDP.

    "Incredible as it seems to GDP-worshippers, there is a difference between productive investment and squandering money. A productive investment generates a multiplier effect: most importantly, it increases productivity which then creates value, surplus and wealth.

    "There is no multiplier in building McMansions in the middle of nowhere, bridges to nowhere, particle board shelving from China or a university degree in film studies, etc. Housing is consumption, a bridge to nowhere is consumption, particle board shelving is consumption, and a $180,000 bachelor's degree in a field of study with near-zero economic premium in the real economy is also consumption."

  43. RAstudent12:38 PM

    KrugTron converted me. There is no way on earth one could have carefully read Krugman from about 2008 or so and argue that he hasn't been consistently more accurate about the nature of the current recession and the important policy questions of the day.

    I am no macro-economist (rather I no-name non academic econometrician) but I have taken my fair share of macro and must say had low probability priors with respect to Keyensian theory and ISLM pre-crisis, although I was ignorant to liquidity traps at the time and how that changes everything. As time went by it became quite obvious that Krugman's predictions were proving themselves to be more accurate. Being an econometrician (and a fairly serious poker player) that makes a living off producing predictions (about people or otherwise), I live and die by taking no personal stake in any given model of the whatever. In other words, my priors readily change when new information becomes available and it becomes obvious I was wrong (or right). Could Krugman be lucky, sure. But I dont think one's run of luck lasts for much more than a year in anything. My interest in various forms of gaming has taught me that much.

    Two questions:
    1.) Why didnt Voltron just turn into the giant robot from the get go rather than fight and lose as the 5 lions? That really used to bother me as a kid.
    2.) Why does it seem like Krugman is the 5 lions in talking head TV type debates, yet fight like Voltron in the blog world?

    1. 1.) Why didnt Voltron just turn into the giant robot from the get go rather than fight and lose as the 5 lions? That really used to bother me as a kid.


      2.) Why does it seem like Krugman is the 5 lions in talking head TV type debates, yet fight like Voltron in the blog world?

      He's a shy, bookish, academic guy.

      Let me at those derp-spouting conservative TV pundits and see who comes out in one piece! ;-)

    2. Anonymous8:22 PM

      I would love to see you try to spew your neo-Keynesian econometric-wrapped nonsense in the presence of someone who actually understands real-world economics from the ground up and see how that works out for you.

      The only reason that Krugman gets paid to disseminate his retarded rhetoric on television is because he's the main spokespiece for the banking establishment. What's that you say? Krugman 'the NOBEL PRIZE WINNER' says we should pump a few trillion more into the too big to fail banks to 'stimulate' things? What a coincidence! That's exactly what we were thinking as well. YAWN.

      The only thing that Krugmanites have to use against the Schiff/Paul types is 'they can't predict EXACTLY when the bad stuff will happen.' As though even the smartest trader is able to time the markets so finely.

      What is for certain, anyway, is that the Fed will, in the not-too-distant future, have to raise rates--way up--thus bringing down the whole house of Keynesian cards, or else be willing to destroy the dollar. Given the extreme political unpopularity of the first option, smart money (none of it Keynesian) is betting on the latter.

    3. RAstudent8:53 PM

      The austerian doubles down, shocker!

      Any day now, those rates are gonna rise. Any day now we are gonna see that hyper-inflation... Any day now... By 2010, I mean 2011, I really meant 2012, no no no I said by 2013... by 2014?!@... 2015?

      Hmm perhaps your austerian wrapped logic is flawed. Perhaps krugman is right about liquidity traps. Maybe just maybe your model of the world is wrong and the one predicting we would have low inflation and interest rates and high unemployment over the period yours predicted the opposite (and very wrongly by the way. Disastrously wrong. Reinhart-Rogoff wrong). Your the type of guy that chases straight and flushes till your broke. Will you ever change your views after 5 years of being wrong... 10 years, ever?

  44. I think the real flaming sword is predictions that are consistent with markets.

    I mean I think Krugman is fantastic, but it doesn't take a wizard to predict low and stable inflation - it just takes a glance the TIPS spreads.

    1. EconomistDuNord4:36 PM

      That's the flipside, and probably what Krugman himself would say about some of the prescience: The other side (freemarketeers) refuses to mark to market! So how hard can it be to out-predict them.

      They're purely ideology-driven.

      Be clear: for them this is not about developing clarity with regard to the economic landscape, this is about taking money and services from poor people, full stop.

    2. EconomistDuNord9:31 AM

      Nice to see Krugman himself made precisely my argument in today's Times column.

  45. Tom Shillock2:36 PM

    ...or for insight on the Japanese experience you can read Richard C. Koo's The Holy Grail of Macroeconomics.

    1. You have anticipated a future post of mine: "Koo is the Keynes of the Great Recession." He's the guy who has come up with the one real new qualitative idea in macro since the crisis.

  46. Great post, Noah. Of course, I'm a bit younger than you so I was more of a power rangers kid. :)

    Voltron vs Megazord... thoughts anyone?

  47. But...I thought macroeconomists couldn't learn much by looking at the world empirically?

  48. Yes great post. hmm I'm just a bit older so I know the power rangers (I was a power rangers parent) and uh Ultraman.

    I think you are right that Krugman is mostly reasoning by analogy with the case of Japan in the 90s. As you note he says so. I have some boring thoughts

    Often Krugtrons Blazing Sword is more than just good reasoning based on an analogy. Some of the Robeasts assert that things which happened in Japan in the 90s can't ever happen. On this, the Robeasts you consider are not the initially scary ones who seem to have a chance against Krugtron. They are ones who make amusingly firm predictions. I'd say Krugtron v two famous Robeasts who predicted a brief recession would be nice
    a) Kugtron John Paulson Who You Gonna Bet On?
    b) Ed Prescott claiming the 2008 recession was minor and basically over in 2009

    I think that Japan Keynesianized Krugman, but it isn't the only key Keynesifying case. Of course there is also the Great Depression. But I think there is a very general pattern of error based on the idea of forward looking expectations. For example faith in the confidence fairy (which is what I thought was called the treasury view and which was very much an argument made by people at the UK treasury against Keynes). Here the case of Europe in the 80s matters (most macroeconomists and policy makers were convinced that the effect of disinflation on unemployment would be temporary, in part because of models in which it was due to forecast errors). Also the whole silly Ricardian equivalence debate.

    I assume that any argument which really relies on people not having adaptive expectations must be incorrect. This belief is not just due to the case of Japan in the 90s. It has a lot to do with arguments in the 80s that disinflation would be less costly if policy makers signalled their iron resolution.

    This is twitty, but the original IS-LM model does imply that monetary policy is ineffective etc. The original model did not include the effect of expected inflation on investment (the nominal and real interest rates were not distinguished-- that's the Mundell effect which Hicks didn't mention when modelling Keynes's implicit model). The whole argument, which is new Keynesian, about expected inflation getting us out of the liquidity trap is not there in the original IS-LM model (it sure is there in The General Theory of Employment Interest and Money). Uh expected inflation imp.

  49. Nathanael8:00 PM

    Is it just me or did the Big Lie of the 1970s hurt our economy for the next 50 years?

    The Big Lie of the 1970s was the idea that inflation in the 1970s was caused by anything, anything, anything other than real resource shortages (oil supply contraction by OPEC, plus a drought).

    Real shortages of oil, in an oil-dependent economcy, explain stagflation perfectly: why hire workers when there isn't enough oil for them to work with? But prices will keep going up as everyone bids up the oil.

    (I have explained elsewhere that the so-called inflation/unemployment tradeoff depends on *labor being the limiting factor of production*. If oil is the limiting factor of production, you should get a tradeoff where you have to choose high inflation or low oil usage. And you DO get it, and we saw that in the 1970s.)

    I wonder why the Big Lie was so popular. Obviously, the oil companies were scared to admit that oil dependency was a problem. And they purchased Ronald Reagan. But why did the Big Lie spread so successfully through the economics profession? Why did it convince Paul Vollker, who should have known better?

    1. "Is it just me or did the Big Lie of the 1970s hurt our economy for the next 50 years?

      The Big Lie of the 1970s was the idea that inflation in the 1970s was caused by anything, anything, anything other than real resource shortages (oil supply contraction by OPEC, plus a drought).

      Real shortages of oil, in an oil-dependent economcy, explain stagflation perfectly: why hire workers when there isn't enough oil for them to work with? But prices will keep going up as everyone bids up the oil."

      This is what I've thought for years now, and I feel that economists on the right don't mention much the simple fact that the basic commodity industry and the developed world depended on increased in price by a factor of 3, and became very errratic.

    2. Because monetary policy under Burns really was inflationary.

  50. Anonymous8:33 PM

    Just wasted my time reading a few of those Krugman links. My first reaction was that they pretty much reinforce my view that the longer one spends in the 'Ivory Tower,' the looser their grasp on reality becomes. Also, typical pseudo-academic pablum intended to make caviar communists on the Upper West Side feel like they understand economics and confirm their intuition that more government is the solution to all our problems. Yawn.

    But then, there is always the eternal question: "Are they stupid? Or lying?"

    1. Could you please rewrite that paragraph to make sense, and to have a single point?


  51. The cult of krugman is becoming more and more idiotic, it has become the mirror image of the cult of Ron Paul.

    1. weareastrangemonkey1:02 AM

      Yeah. Or the cult of Darwinism.

    2. Anonymous1:33 PM

      more like the "ghost-dance" cult

  52. Money and Wisdom, the way out, the way home.

  53. Anonymous11:30 PM

    I am new to this site, so please forgive me for any ignorance I might display. I know very little of economics, but certain things make sense to me. If the U.S. is primarily a consumer-driven economy (which I think is an accurate premise), then how does the economy move forward when there is an ever-shrinking supply of consumers and a smaller share of disposable income in most households? Combine this with austere measures that affect even more households (lay-offs, reduced hours, furloughs of many public servants), and add in high unemployment, reductions in savings and net worth of the average family, then how can any economic policy advocating further reduction in consumer potential be valid? It seems to me that Krugman has it rather spot on. Also, just out of curiosity, why do most of the anti-Krugman posters here never offer any refutation to his ideas? All I have read seem to focus on using juvenile insults, hyperbole, and a definitive lack of evidence. Just sayin'...

  54. John S12:37 AM

    However faulty his economic analysis may be, I still admire Peter Schiff's gun nipples.

  55. weareastrangemonkey1:00 AM

    I think Noah's going all gangsta:

    "He the head, let's put it that way
    We form like Voltron, and GZA happen to be the head
    You know what I'm sayin"

    - The Method Man, Wu-Tang Clan 36 Chambers

    Krugman Clan ain't nuthin to f%#k with.

  56. Noah Smith: Why didn't you attach Richard Koo's face to some villain from Transformers or something else? Richard Koo and Paul Krugman have exchanged blows at debate before... :-P

    1. Koo is right on the substance, but I think he misread Krugman and Krugman actually agreed with him.

  57. As Space Ghost used to say, back in the mid '90s, "derivatives are multiplying the amount of apparent money in the economic system in a way that no one has ever seen. When that bubble pops it's going to take a huge government printing effort to replace all that money and keep the world from another Great Depression. But governments, since they don't understand what's happening, are not going to want to do it. And it's going to be bad."

    Zorak then replied, "Nooooo."

  58. Anonymous9:15 AM

    "But Paulson is no mere Robeast. He is no inflationista, "Austrian" econo-troll, or conservative ideologue. In fact, he has a large group of very skilled macroeconomists working for him. There is no way his team doesn't know Keynesian econ backwards and forwards."

    Do we know that for a fact? Most hedge funds do not - they use outside consulting services (like ISI).

    1. Just what I heard from some friends.

    2. Actually, it's a very good question, what exactly do the big traders do? How do they work? What information do they rely on? How do they make their decisions? This is the kind of thing that can be hard for an economist from the outside to really know well. But once you've actually worked this job from the inside, day in and day out, then you really know what’s going on, in intricate detail.

      I myself really learned this, as I was in my youth at one time an agent at a large auto insurance brokerage. I really knew the industry, and the behavior of salespeople, after that, in many important ways far better than a typical economist writing a paper about it from the outside ever would (Of course, the economist from the outside, with his training, could make some important contributions far better than the agent insider.)

      For these reasons I really liked this article that was in Mark's links two months ago from an actual trader who since left:


      The incentives are clear. If you make a bunch of money you get personally wealthy. If you lose then you just go home and look for a new job.

      Losing lots of money is hardly the career ender that outsiders imagine. If traders lose big then they will get fired, but they will now have experience. If one loses really big then one has almost a badge of honor. One could not be allowed to lose $1 billion unless one was really important.

      End Quote

      If Paulson thought there was even a 1-in-5 chance of a big turnaround, then it might have been worth it for him to make a giant strong bet. If he's right, his reward is astronomical, and he's a mythical hero. If he's wrong the penalties are not that great.

      Oh, and of course, You don't mess with the Krugtron.

    3. Here's another great quote:

      Wall Street is littered with traders who have “blown up” at multiple establishments or funds. There are enough to fill up a town about the size of, well, Westhampton.

      Here is a more conventional blueprint to personal wealth via Wall Street.

      Join a business that has an established track record. Start small, building up a few solid years of making decent profits. Do this for six or seven years. It’s called “milking the franchise.” Soon you will have respect and, most of all, expanded limits on what you can trade. Wait for a year when everyone is bullish. Then swing big. Really big. Don’t take judicious risk; take the most risk the firm will allow you. Follow the momentum, piling into trades others are doing.

      If you win, since you followed the herd, Wall Street will be flush with cash and you will get paid well, tens of millions well. If you lose you may get fired, but since everyone lost they will understand.

      This strategy is certainly not in the long-term interest of the firm, but it’s the smartest strategy to benefit the trader.

    4. I was thinking about this further in the gym. You could envision a scenario where Paulson and Krugman came to the exact same conclusion about the situation, the exact same analysis, the exact same forecast, say a 1/5 chance that the monetary and economic stimuli are strong enough that there's a strong recovery that busts us through the liquidity trap, and a 4/5 chance that the economy remains depressed or extremely depressed for many years to come.

      But because their incentives are so different they react completely differently to that same analysis and forecast – Paulsen takes huge bets that the economy will take off, because if he wins he wins astronomically and becomes a mythical hero, but if he loses he might not lose that much relatively speaking, with others taking the bulk of the loss (see my quotes above). Krugman, by contrast, has very different incentives, he actually cares about the great suffering of millions of Americans, and people worldwide, rather than only rapacious unbridled greed and being master of the universe, so he comes out as hard as he can warning of the great risk of us having much too little stimulus. And of course, once Paulson makes his bets, he has a strong incentive to sell and justify them.

  59. Noah, one spat is missing: the one with Steve Keen on banking where Krugtron was crushed.

    1. What concrete predictions were made by the two opposing sides in that contest?

  60. What about Krugman v Mankiw? Seems as if he lost rather handily to Mankiw when it came to forecasting the bounce back.

    1. I think Krugman said we could bounce back if we did stimulus, not that we would bounce back automatically.

    2. It's fascinating that from the entire body of pessimistic things he has posted, people are reading a statement that was proceeded by "if and when" as though it was a prediction of events that were going to happen in the short or medium term. Never mind that reading it that way is wildly inconsistent with everything else the man was saying.

      Sumner, however, has a more plausible interpretation, viewing it as an implied prediction that unemployment would decline only in conjunction is faster than normal recovery growth. Read that way, perhaps KrugTron was wrong.

      Although I'm not sure that KrugTron would be as enthusiastic as Sumner seems to be about the current state of recovery.

      And I'm not sure that Sumner's reading is particularly fair to the context, in which Krugman was defending the notion of assuming faster than average growth in longer term budget projections, not making predictions about what was going to happen to either unemployment or GDP growth.

  61. "Well, Krugman himself will tell you that his secret weapon is simple, elementary Keynesian economics - a rough-and-ready IS-LM view of the world"


    Besides MMT, Steve Keen has far and away been the one to listen to.

    Krugman should stick to "new" economic geography, where he is still a novice
    Martin, Ron. 1999. The ‘New Economic Geography’: Challenge or Irrelevance?
    Transactions Institute of British Geographers 24: 387-391.

    Martin, Ron and Peter Sunley. 1996. Paul Krugman’s Geographical Economics and
    Its Implications for Regional Development Theory: A Critical Assessment.
    Economic Geography, 72: 259-292.


      Craziest idea: That anyone is listening

      Special attack: Anger

      Secret weakness: the fear that Paul Krugman has said everything they've thought of, but better

  62. How about an example of Krugman pile-driving Amity Schlaes? She's like a distortion nerf cannon.

    Her latest, on Marketplace today, here:

  63. Anonymous8:07 PM

    Japan it is...the balance sheet recession, coined by Richard Koo. Read his book. When there is a private sector surplus (savings INXS of investment), government has to plug the gap with giant deficit spending or face Depression.

    Or we could have the Fed pay off the household debt that is causing the private sector surplus. Would solve the problem a lot quicker.

  64. Noah,
    you are always worth reading.

    I hope you get more readers downunder.

    Keep it up

  65. John S12:29 AM

    Noah, when are you going to do a post on Anders Borg and the tax-cutting success of Sweden? Obv photoshop possibilities, too.

    "Since becoming Sweden’s finance minister, Borg's mission has been to pare back government. His ‘stimulus’ was a permanent tax cut. To critics, this was fiscal lunacy — the so-called ‘punk tax cutting’ agenda.

    Three years on, it’s pretty clear who was right. ‘Look at Spain, Portugal or the UK, whose governments were arguing for large temporary stimulus,’ he says. ‘Well, we can see that very little of the stimulus went to the economy. But they are stuck with the debt.’ Tax-cutting Sweden, by contrast, had the fastest growth in Europe last year, when it also celebrated the abolition of its deficit."

    1. Thanks!

      Really, I love anyone with the name "Borg"...

    2. But this Borg loves austerity in recessionary times...

    3. Just 10 years ago stimulus meant "more spending OR tax cuts". In fact G.W.Bush sold his tax cuts as stimulus to counter the jobless recoveries and most of the 2009 stimulus was in fact tax cuts.

    4. Dimitar2:26 PM

      Also not mentioned - Sweden let its currency devalue - the historically proven method to get away from deep and long recessions.

  66. Anonymous1:22 PM

    So Krugman is the economic equivalent to a comic book...hmmm...O.K.?!