I know, I know, I should stop trying to spot Krugman Kontradictions; the antinomies in his writing merely reflect my mortal mind’s attempt to absorb the infinite.
Lately Krugman has been patting himself on the back for his skepticism about the viability of the euro. He finds it hilarious that two economists published a “duh, what idiots” article on these skeptics, basically just before the euro crisis set in. (I too found that funny; I’ll give Krugman that one.)
Now relying on the theory of “optimal currency areas,” Krugman says that we should have expected the euro-zone to be more vulnerable to crises than the United States:
What was behind those doubts? People like me and Barry Eichengreen — who did more than anyone else to turn the abstract arguments into quantitative research — thought of the euro in terms of the theory of the “optimum currency area”. This theory says that there are both benefits and costs to adopting a common currency. The benefit is reduced costs of doing business; the cost is that it’s harder to get your costs and prices back in line after “asymmetric shocks” — booms and slumps that affect some countries in a currency union but not others.
Both the benefits and the costs are hard to quantify, but there are some indicators you can look at. If the benefits of a common currency are large, you’d expect forming that currency to lead to a large increase in trade. Meanwhile, the costs of difficult adjustment depend on how much adjustment you need to make. The burden is reduced if labor is highly mobile between booming and slumping regions (Mundell’s point) and if you have fiscal integration (a point made by my colleague Peter Kenen)…
OK, now that you have the general idea, check out Krugman’s post yesterday where he compares Nevada and Ireland:
As part of a project I’ve been working on, I’ve been doing some US-Europe comparisons, and have a curious parallel: by the numbers, Ireland looks a lot like Nevada. The populations are similar; the housing bubbles were comparable in their extremity; both currently have roughly 14 percent unemployment.
The comparison also highlights some of the reasons Europe is having more trouble with a single currency than the United States. In both places, emigration is a safety valve — but even though the Irish are unusually mobile by European standards, they probably won’t leave as readily as the workers who moved to Nevada in the boom years.
To be sure, Krugman goes on to talk about other factors. But if I didn’t know any better, just reading the above, I would think that the boom period was characterized by workers flowing into Nevada, and the recovery will be speedier to the extent that those workers get the heck out of dodge and go somewhere else in the economy.
Doesn’t this sound a lot like the hangover theory that Krugman ridiculed? (Specifically, Krugman set up his target by quoting John Cochrane: “We should have a recession,” Cochrane said in November, speaking to students and investors in a conference room that looks out on Lake Michigan. “People who spend their lives pounding nails in Nevada need something else to do.”)
Couldn’t Arnold Kling have written the above, in support of his Recalculation argument?
I know, I know, there is no contradiction here. Cochrane is a moron for thinking the way to end the recession is for workers to leave Nevada, whereas Krugman is a genius for predicting that Europe’s recessions would be worse since their workers can’t move around as easily as Nevadans. Krugman Kannot Kontradict.