Tuesday, June 16, 2009

Rewinding The Tape On Paul Krugman

In my last post, I should have perhaps included this revealing (given his current denial of the effects of budget deficits on interest rates) from one of his 2004 columns:

"For many years, advocates of tax cuts have insisted that the normal laws of supply and demand don't apply to the bond market, and that government borrowing — unlike borrowing by families or businesses — doesn't affect interest rates. But there's no argument among serious, nonideological economists. For example, a textbook by Gregory Mankiw, now the president's chief economist, declares — in italics — that "when the government reduces national saving by running a budget deficit, the interest rate rises."

Krugman was entirely right about that "there's no argument among serious, nonideological economists" part (Though it is incorrect to suggest that all advocates of tax cuts believe in that or that only advocates of tax cuts believe it(he himself is an example of that)). It's too bad that he has however revealed himself to be anything but [a]"serious, nonideological economist".

Via Lew Rockwell, I also see another interesting quote from Krugman, from 2002.

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

If you think the quote has been taken out of context, do read the entire article. It is clear there that the only misgiving he expresses about the strategy of creating a housing bubble is that he doubted (incorrectly, as everyone now presumably knows) that it would be possible to create the allegedly desirable housing bubble.

The now experienced effects of Krugman's 2002 policy recommendation should give you a hint of the effects of Krugman's current policy recomendations.

UPDATE: Now Krugman tries to spin his way out from the latter quote, writing:

"Guys, read it again. It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened."

That excuse is simply not plausible. Is Krugman saying that he, a man renowned for advocating Keynesian recession-fighting policies, saying that he opposed a policy he thought was needed to fight a recession? Give me a break.

While he may not have formally written "I advocate it", he didn't in any way suggest that it would be undesirable, and given his known preference of advocating policies that reduces the severity of recession in the short-term, he can't argue that he didn't advocate a policy that would do so by saying it would do so, unless he specifically argued against it.


Blogger Baconbacon said...

Today Krugman adds to the obvious obliviousness of his position. He links and derides Schumpeter and quotes the section containing this

"For the truouble is fundamentally not with money and credit, and policies of this class are particularly pt to keep up, and add to, maladjustment, and to produce additional trouble in the future."

3:24 PM  
Blogger Ben said...

German Interview, undated


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

July 18, 2001


“KRUGMAN: I think frankly it's got to be -- business investment is not going to be the driving force in this recovery. It has to come from things like housing, things that have not been (UNINTELLIGIBLE).
DOBBS: We see, Paul, housing at near record levels, we see automobile purchases near record levels. The consumer is still very much in this economy. Can he or she -- or I should say he and she, can they bring back this economy?
KRUGMAN: Well, as far as the arithmetic goes, yes, it is possible. Will the Fed cut interest rates enough? Will long-term rates fall enough to get the consumer, get the housing sector there in time? We don't know.

August 8th 2001


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

August 14, 2001


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

October 7, 2001

“Post-terror nerves aside, what mainly ails the U.S. economy is too much of a good thing. During the bubble years businesses overspent on capital equipment; the resulting overhang of excess capacity is a drag on investment, and hence a drag on the economy as a whole.
In time this overhang will be worked off. Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer. But it seems inevitable that there will also be a fiscal stimulus package.

Dec 28, 2001


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

10:20 PM  

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