Thursday, October 08, 2015

Is Paul Krugman Ever Wrong?

Kevin Drum has a post today complaining about Paul Krugman's frequent bragging about having been right (and his opponents wrong).  That led to some discussion in comments culminating in the following by yours truly.

Here's an example of Krugman being wrong, yet being intelligent enough to change his mind (following his debate with the MMT folks).  First, Krugman in 2003:
There is now a huge structural gap — that is, a gap that won't go away even if the economy recovers — between U.S. spending and revenue. For the time being, borrowing can fill that gap. But eventually there must be either a large tax increase or major cuts in popular programs. If our political system can't bring itself to choose one alternative or the other — and so far the commander in chief refuses even to admit that we have a problem — we will eventually face a nasty financial crisis. 
The crisis won't come immediately. For a few years, America will still be able to borrow freely, simply because lenders assume that things will somehow work out. 
But at a certain point we'll have a Wile E. Coyote moment. For those not familiar with the Road Runner cartoons, Mr. Coyote had a habit of running off cliffs and taking several steps on thin air before noticing that there was nothing underneath his feet. Only then would he plunge. 
What will that plunge look like? It will certainly involve a sharp fall in the dollar and a sharp rise in interest rates. In the worst-case scenario, the government's access to borrowing will be cut off, creating a cash crisis that throws the nation into chaos. 
[Paul Krugman, New York Times, 10/14/2003 http://www.pkarchive.org/column/101403.html ]

Fast forward to Krugman, again in the NY Times, on November 26, 2012:
Still, haven’t crises like the one envisioned by deficit scolds happened in the past? Actually, no. As far as I can tell, every example supposedly illustrating the dangers of debt involves either a country that, like Greece today, lacked its own currency, or a country that, like Asian economies in the 1990s, had large debts in foreign currencies. Countries with large debts in their own currency, like France after World War I, have sometimes experienced big loss-of-confidence drops in the value of their currency — but nothing like the debt-induced recession we’re being told to fear. 
So let’s step back for a minute, and consider what’s going on here. For years, deficit scolds have held Washington in thrall with warnings of an imminent debt crisis, even though investors, who continue to buy U.S. bonds, clearly believe that such a crisis won’t happen; economic analysis says that such a crisis can’t happen; and the historical record shows no examples bearing any resemblance to our current situation in which such a crisis actually did happen. 
If you ask me, it’s time for Washington to stop worrying about this phantom menace [Paul Krugman, New York Times, 11/26/2012 http://economistsview.typepad.com/economistsview/2012/11/paul-krugman-fighting-fiscal-phantoms.html ]

The latter quote could have been straight from the MMT playbook.

Mainstream Agrees Republican Congress Actively Trying to Sabotage Economy

You can't get much closer to conventional wisdom than Ben Bernanke.  He virtually defines the establishment, centrist, insider perspective.  So it's notable that Bernanke has come out with something I've been saying for years, i.e.
I also felt frustrated that fiscal policy makers, far from helping the economy, appeared to be actively working to hinder it.
This quote appears in a fine rant by Bill McBride at Calculated Risk.  McBride has been very optimistic on the economy and seems to feel that all is well, in spite of the fact the lawmakers are trying to sabotage the economy.  I find that unlikely and am consequently much more bearish regarding the economy.

Kevin Drum has more on Bernanke's disgust with Congress here.

Part of the reason that economic nuts are in control of Congress is that the old conventional wisdom, embodied in Ben Bernanke, is a bit nutty itself.  Mainstream economics is based upon these fictions:
  1. A currency-issuing government budget is just like a household or business budget.  We hear continually from the mainstream that our government should have a balanced budget, but we don't need to and we never do.
  2. The central bank can control unemployment and inflation.  In fact, the central bank has little control under present laws and conventions.  They tinker with interest rates, but amazingly (to the consensus), this has little effect on the economy. 
With the conventional wisdom so clearly incorrect and ineffective in resolving the country's economic problems, alternative explanations are in high demand.  Now that he is out of office, Bernanke can clearly state that he agrees with me -- The elected government leaders should manage the economy via fiscal policy, regulation, and other laws.