In today’s post titled “What to Do When You’re Wrong,” Krugman explains why his intellectual opponents on Fed policy are not just wrong, but immoral. Here’s the summary of his case against them:
Barry Ritholtz reminds us that we’ve just passed the third anniversary of the debasement-and-inflation letter — the one in which a who’s who of right-wing econopundits warned that quantitative easing would have dire consequences. As Ritholtz notes, they were utterly wrong….
Ritholtz takes the wrongness as a reason not to listen to these people, and it’s certainly a warning sign. My view, however, is that you don’t just want to look at whether people have been wrong; you want to ask how they respond when events don’t go the way they predicted.
After all, if you write about current affairs and you’re never wrong, you just aren’t sticking your neck out enough. Stuff happens, and sometimes it’s not the stuff you thought would happen.
So what do you do then? Do you claim that you never said what you said? Do you lash out at your critics and play victim? Or do you try to figure out what you got wrong and why, and revise your thinking accordingly?
I’ve been wrong many times over the years, usually on minor things but sometimes on big ones. Before 1998 I didn’t think the liquidity trap was a serious concern; the example of Japan suggested that I was wrong, and I eventually concluded that it was a big concern indeed. In 2003 I thought the US was potentially vulnerable to an Asian-crisis-style loss of confidence; when it didn’t happen I rethought my models, realized that foreign-currency debt was crucial, and changed my view.
So, have any of the signatories to that 2010 letter admitted being wrong and explained why they were wrong? I mean *any* of them. Not as far as I know.
And at that point this becomes more than an intellectual issue. It becomes a test of character. [Bold added.]
Before diving into the main point of my post, I note with irony that strictly speaking, there wasn’t an outright false prediction in the letter in question; they just said there was a risk of currency debasement and (price) inflation. But that’s a quibble; certainly many of the people warning of (price) inflation–including me, of course–did not think the Fed would get away with things for so long, as it has done.
Anyway, back to Krugman’s case against the character of these scoundrels. He is upset that not only did they make a bad prediction in 2010, based on on erroneous model, but that they have the audacity to stick to their guns three years later. That’s what makes them bad characters, not merely bad economists.
Now, in contrast, Krugman says he realized he had been wrong in 2003 when he warned of a crisis hitting the US, and adjusted his views accordingly.
Here’s what Krugman presumably has in mind. He wrote in March 2003, in a column titled, “Fiscal Train Wreck”:
[L]ast week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.
From a fiscal point of view the impending war is a lose-lose proposition. If it goes badly, the resulting mess will be a disaster for the budget. If it goes well, administration officials have made it clear that they will use any bump in the polls to ram through more big tax cuts, which will also be a disaster for the budget. Either way, the tide of red ink will keep on rising.
…Two years ago the administration promised to run large surpluses. A year ago it said the deficit was only temporary. Now it says deficits don’t matter. But we’re looking at a fiscal crisis that will drive interest rates sky-high.
But what’s really scary — what makes a fixed-rate mortgage seem like such a good idea — is the looming threat to the federal government’s solvency.
Of course, Mr. Fisher isn’t allowed to draw the obvious implication: that his boss’s push for big permanent tax cuts is completely crazy. But the conclusion is inescapable. Without the Bush tax cuts, it would have been difficult to cope with the fiscal implications of an aging population. With those tax cuts, the task is simply impossible. The accident — the fiscal train wreck — is already under way.
How will the train wreck play itself out?…But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.
And as that temptation becomes obvious, interest rates will soar. It won’t happen right away. With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.
I think that the main thing keeping long-term interest rates low right now is cognitive dissonance. Even though the business community is starting to get scared — the ultra-establishment Committee for Economic Development now warns that ”a fiscal crisis threatens our future standard of living” — investors still can’t believe that the leaders of the United States are acting like the rulers of a banana republic. But I’ve done the math, and reached my own conclusions — and I’ve locked in my rate.
That could almost verbatim be something written by a Peter Schiff-type, right? But since his ire was directed at the Bush Administration and its “irresponsible” tax cuts, people nowadays point to it as an example of Krugman’s utter hypocrisy.
Yet he’s telling us now, in today’s post, that Krugman realized he was wrong and changed his views. Okay, well when exactly? As Krugman says of the people who signed the 2010 letter, I can’t find any example of it during the Bush years. I don’t have any example of an op ed or blog post where Krugman said, “In the past I criticized the profligacy of the Bush Administration, but now I realize that this was gold-standard thinking. The US issues its own currency, and has most debts denominated in USD, so Bush’s tax cuts for the rich aren’t nearly the problem I used to think; we just owe that money to ourselves, after all.” Can someone find such a column by Krugman?
So although I found no such mea culpa, what I can find is him still warning that eventually his logic will be right. For example, in May 2005 he wrote:
Over the last few years China, for its own reasons, has acted as an enabler both of U.S. fiscal irresponsibility and of a return to Nasdaq-style speculative mania, this time in the housing market. Now the U.S. government is finally admitting that there’s a problem – but it’s asserting that the problem is China’s, not ours.
And there’s no sign that anyone in the administration has faced up to an unpleasant reality: the U.S. economy has become dependent on low-interest loans from China and other foreign governments, and it’s likely to have major problems when those loans are no longer forthcoming.
Again, Peter Schiff could have written the above. Then, in May 2006 Krugman wrote:
We shouldn’t read too much into a couple of days’ movements in stock prices. But it seems that investors are suddenly feeling uneasy about the state of the economy. They should be; the puzzle is why they haven’t been uneasy all along.
The rise in stock prices that began last fall was essentially based on the belief that the U.S. economy can defy gravity — that both individuals and the nation as a whole can spend more than their income, not on a temporary basis, but more or less indefinitely.
To be fair, for a while the data seemed to confirm that belief. In 2005, the trade deficit passed $700 billion, yet the dollar actually rose against the euro and the yen. Housing prices soared, yet houses kept selling. The price of gasoline neared $3 a gallon, yet consumers kept buying both gas and other items, even though they had to borrow to keep spending (the personal savings rate went negative for the first time since the 1930’s).
Over the last few weeks, however, gravity seems to have started reasserting itself.
And just to be clear about the issue of timing, Krugman had written in April 2006:
Forensics are in. If you turn on the TV during prime time, you’re likely to find yourself watching people sorting through clues from a crime scene, trying to figure out what really happened.
That’s more or less what’s going on right now among international finance experts. The crime in question is the U.S. trade deficit, which … reached an amazing $805 billion last year. The mystery is how we’ve been able to run huge deficits … with so few visible adverse consequences. And the future of the U.S. economy depends on which of two proposed solutions to the mystery is right.
Here’s the puzzle: the trade deficit means that America is … spending far more than it earns. … To pay for the excess of imports over exports, the United States has … borrowed more than $3 trillion just since 1999.
Why, then, doesn’t the United States seem to be paying a price for all its borrowing?
If Mr. Gros is right, the true position of the U.S. economy isn’t as bad as you think — it’s worse. The true trade deficit … isn’t $800 billion — it’s more than $900 billion. And America’s foreign debt … is at least $1 trillion bigger than the official numbers say.
Of course, optimists have a comeback: if things are really that bad, why are so many foreign investors still buying U.S. bonds? … But I have two words for those who place their faith in the judgment of investors…: Nasdaq 5,000.
Right now, forensic analysis seems to say that the U.S. trade position is worse, not better, than it looks. And the answer to the question, “Why haven’t we paid a price for our trade deficit?” is, just you wait.
Yes yes, we can get into the fine minutiae of federal budget deficits financed by domestic lender, versus international trade deficits financed by foreign lenders. Yet it seems to me pretty clear that Krugman was warning of a disaster as early as 2003, and three years later he was still warning of a disaster and saying the markets were stupid to not see it coming.
Note, I’m not disagreeing with his analysis. I think his fundamental position in the above quotes was basically OK–and that makes sense, because he “sounds like Peter Schiff” and I think Peter Schiff has a good view of economic fundamentals.
The only problem with the above quotations is that Krugman did exactly what he says–now–is evidence of a bad character. Year after year rolled by, and he didn’t change his tune; he just said that any day now the markets would vindicate his warnings. He did back then, exactly what a lot of the “inflationistas” have done since 2008.