Two Basks About Krugman
(For newcomers, on this blog we don’t “bleg” we “bask.”)
#1) On Krugman’s victory lap commemorating the 10th anniversary of Lehman, he wrote:
You could say that nobody could have predicted such a sustained slump. You could say that — but you would be wrong. Many people, myself included, predicted a slow recovery, because this was a different kind of recession from those of the 70s and 80s — one brought on by private-sector overreach, not inflation.
So here’s my sincere question: Is the above stance compatible with the way Krugman sighed/mocked Greg Mankiw in early 2009, when Mankiw said he doubted the rosy recovery projections of the Obama economic team? Kuehn, Harold, Transformer, prove me wrong. But I have one plea: If you are going to argue it’s compatible, can you also add whether Krugman in so doing is being deliberately misleading? I.e. I imagine someone could say, “Oh, Krugman also disagreed with the Administration forecast of recovery, and he thought Mankiw was totally right to predict a depressed economy for years to come, it’s just that the specific rationale Mankiw gave was not the one Krugman would have given.”
#2) Not in the particular reminiscences in the above article, but elsewhere recently Krugman has been reminding people of the 2010 column (which I’m finding on Bloomberg) in which a pundit contrasted Krugman’s views with fund manager John Paulson. What’s weird is that if you look up Krugman’s handling of it at the time, in the excerpt he himself provides from the article, it’s not at all obvious that Krugman won the contest (from our vantage point right now).
The problem is that there’s a paywall on the original 2010 column. If anyone feels it is ethical to do so, I would not mind being able to read that…
I can’t read any of the links as they are all behind paywalls for me, however I do enjoy the Keneysian definition of “prediction” as Krugman’s link to defend that he expected a slower than usual recover is from more than 4 years after the start of the recession, and more than 2 years after the peak in the UE rate. I guess reinventing words is easier than changing your opinion when the data changes.
“The problem is that there’s a paywall on the original 2010 column. If anyone feels it is ethical to do so, I would not mind being able to read that…”
It looks like it was reproduced on RealClearMarkets:
Krugman or Paulson: Who’s the Better Bet?
[www]https://www.realclearmarkets.com/2010/07/02/krugman_or_paulson_who039s_the_better_bet_103139.html
‘”We’re in the middle of a sustained recovery in the U.S.,” Paulson declared in London. “The risk of a double dip is less than 10 percent.” The housing market is now, he says, an attractive buying opportunity. “It’s the best time to buy a house in America,” he said. “California has been a leading indicator of the housing market, and it turned positive seven months ago. I think we’re about to turn a corner.”‘
Not quite true, the link was posted in July of 2010 and housing prices bottomed in early 2012, and prices dropped another 10% or so going by Case Shiller, but housing prices are up 40%+ since then and he beat me by a few months (we bought in late 2009 so our annualized returns a little lower).
“Here we are. ‘Peace out!’ Great Recession.
Thanks to me, as you see, we’re not in a depression
‘Recovery destiny’ if you follow my lesson.
Lord Keynes. Here I come. Line up for the procession.”
…
“Are you kidding? My cure works perfectly fine.
Have a look. The Great Recession ended back in ’09.
I deserve credit. Things would have been worse.
All the estimates prove it. I’ll quote chapter and verse.”
-“Fight of the Century”: Keynes vs. Hayek Rap Battle Round Two
Krugman said in 2009: “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.”
He did not say (in that article) when not would come back into use and did even say “if and when”. The “if” suggests that it might not. The context is ” relatively fast growth a few years from now.”
As a lay reader, I would interpret this as Krugman expecting relatively fast growth a few years from 2009 but not fully committing.
Bob, here:
“Hugo Lindgren – Krugman or Paulson: Who You Gonna Bet On?
Is the sky falling, or the sun up? The Times’ Keynesian forecasts a third depression. Paulson says humbug
History will show that the week before the nation’s 234th birthday, Paul Krugman, Nobel Laureate and professor of economics at Princeton University, went all in on Keynesian orthodoxy. To regular readers of his column in The New York Times, this was not a surprise. Since the financial crisis began, Krugman has been adamant that the federal government must fearlessly run up deficits to compensate for weak private spending and keep the U.S. economy from death-spiraling into deflation.
Now his warnings have taken on an even more dire tone. The threat is not merely the dreaded “double dip.” If the leaders of the developed world hold to pledges they made at the G-20 summit in Toronto and cut government spending, Krugman argues, we face nothing less than a “third depression”—perhaps not as singularly devastating as the Great Depression, which ripped the U.S. economy in half, but comparable to the Long Depression that followed the Panic of 1873, a grinding period of chronic social need and dissension.
If that makes you want to head for the hills with your shotgun and turnip seeds, consider another view, expressed the week prior at the London School of Economics. The speaker was not a decorated academic with visions of 1873, he was a profit seeker, pure and simple: John Paulson, the hedge-fund manager on whose behalf Goldman Sachs (GS) cooked up those killer collateralized debt obligations designed to pay off handsomely in the event of a housing crash. He was right about that one, you’ll recall.
“We’re in the middle of a sustained recovery in the U.S.,” Paulson declared in London. “The risk of a double dip is less than 10 percent.” The housing market is now, he says, an attractive buying opportunity. “It’s the best time to buy a house in America,” he said. “California has been a leading indicator of the housing market, and it turned positive seven months ago. I think we’re about to turn a corner.”
No mention of a third depression.
Paulson’s bullishness is not new. Last spring, when Krugman was arguing that some major U.S. banks ought to be nationalized, wiping out equity holders, Paulson was busy building a massive stake in Bank of America. He and Krugman may not have disagreed about the fundamental health of the banking business—they just disagreed about what it meant. Paulson wasn’t buying banks because he liked their second-lien books; instead, he had grasped that the Swedish-style takeover Krugman advocated was not going to happen, and that a tacit federal backstopping of the banking industry took most of the risk out of going long.
With the American taxpayer covering his downside, investing in U.S. financial institutions was easy pickings. Paulson’s latest 13f filing with the Securities & Exchange Commission, which records his holdings as of Mar. 31, indicates nearly $2.995 billion of Bank of America common stock and $2.052 billion of Citigroup (C) common. Despite healthy advances from their spring 2009 lows, banks may have more room to run, particularly if Paulson is correct in the estimate he made to investors, according to The Wall Street Journal, that housing prices will rise as much as 10 percent next year.
Since his initial forays in banks, Paulson has ventured into riskier assets like casino stocks and vacant residential land in the utterly busted Florida and Southern California markets. As a private hedge fund manager, Paulson is not obliged to provide a complete picture of his investments; long positions could be hedged with shorts and derivatives that he does not have to divulge. But nothing in either his statements or reports about what he’s buying suggests he is anything less than upbeat about the economy right now.
Some positive currents seem to be gathering force beneath the choppy stock market. U.S. credit-rating upgrades on corporate bonds exceeded downgrades this quarter for the first time since before markets froze, according to Bloomberg News. “I do see more upgrades coming,” says Ann Benjamin, chief investment officer of leveraged asset management strategies at New York-based Neuberger Berman, where she helps oversee $7.5 billion of high-yield bonds and $5 billion of loans. “There’s plenty of good companies out there that may be misrated.”
Krugman, by contrast, sees darker forces at work. He argues that the market has already ratified his belief that fiscal tightening will smother the recovery, pointing to widening bond spreads in Greece and Ireland, where huge cuts loom. About Ireland, Krugman recently wrote on his Times blog, “All that savage austerity was supposed to bring rewards…But the reality is that nothing of the sort has taken place: virtuous, suffering Ireland is gaining nothing.” The markets have been kinder to Spain, he says, because leaders there have cut less.
The heart of the matter, for Krugman, is unemployment. As long as it remains at such elevated levels, he says, more and more people remain out of work for so long they become unfit to hold jobs.
It’s hard not to marvel at Krugman’s conviction about how all the pieces fit together, why it’s essential to mankind that Germany start spending and China let the value of its currency appreciate. If the world economy had a cockpit, Krugman exudes the confidence of a man who could climb in there, flip all the right switches, and get this sucker airborne.
Paulson has a simpler view: Americans are starting to spend again, in ways not terribly dissimilar to the ways we did before, buying suburban homes and stuffing our Social Security checks into slot machines. There are pitfalls. As we work our way back to the old normal and demand picks up, the years of superlow interest rates will come back to smack us, fueling inflation that Paulson sees possibly reaching into the double digits within a few years. That’s why, in addition to Florida property, Paulson is heavily invested in gold.
As Gregory Zuckerman described in The Greatest Trade Ever, Paulson rose from obscurity by exploiting the age-old tendency of investors in flush times to blithely assume risks they don’t understand, like buying the other side of his bespoke CDOs. Now he has flipped, betting that investors are so gun-shy they can’t quantify the potential for upside. Recent tremors in the stock market bring flashbacks of fall 2008 and the nerve-racking question: Is this the big one?
The debate over the economy can be thought of as a trade—Paulson taking one side, Krugman the other. Paulson’s got real money on the table, but for both men, the main risk is reputational. Is Paulson another Wall Street one-hit wonder? Is Krugman another too-smart-for-his-own-good academic with no feel for animal spirits? Paulson may have an edge because he is just playing the market. Krugman is playing history, which is quite a bit trickier.
Lindgren is an Executive Editor for Bloomberg Businessweek.”
I’ll skip over the basics of the Roots of Evil debacle as well documented. Here’s my take – it’s what you call a “Krugman kontradiction,” in that it’s not quite a contradiction if you read Krugman charitably, but it would have been really hard to know that at the time.
1) Krugman was more or less on record prior to his Roots of Evil post that he didn’t think there would be sharp recoveries going forward. See his “Postmodern Recessions” post.
2) When he finally responded to Mankiw, Krugman claimed (IMHO accurately) that he had always been pessimistic about the Obama recovery projections that were in dispute between Mankiw and DeLong.
From that, I infer that:
a) Krugman was critical that Mankiw is open to the unit root hypothesis and was “sigh”-ing at that, not at Mankiw’s final conclusion that Obama’s growth projections were likely to be high.
b) Given that Krugman rejects the unit root hypothesis but believes that recoveries are likely to take longer than in recent decades, I further infer that he thinks that the economy will eventually return to a pre-recession trend, but that it will take longer than it did in the 70s and 80s.
Whoops, Bob – I missed your follow up question about whether Krugman was being deliberately misleading.
I was certainly misled – I was reading that debate at the time and honestly believed that Krugman was agreeing with DeLong that the Obama growth projections were the way to bet – and I can’t see into Krugman’s heart, but I personally believe that Krugman was just being sloppy.
I think he was so eager to pile on to the unit root hypothesis and be nasty to Mankiw that he never thought about the underlying debate. I’m not an economist, so I’m not qualified to speak about it, but if the URH is sufficiently absurd, that might even be reasonable.
2 quotes from Krugman:
March 2009: ‘And yes, we can expect fast growth if and when that capacity comes back into use.’
January 2012: ‘this gives me an occasion to talk about why the sluggish recovery was predictable — and predicted. This is not an after-the-fact rationalization, I was explaining very early on that this wasn’t going to be like the 1981-2 recession.’
Technically the 2009 quote falls short of unconditionally predicting fast growth – but you would have to be very charitable to Krugman indeed to see this statement as compatible with a view that a ‘sluggish recovery was predictable’.
I call this one for Bob.
August 2009:
“And the current situation is no better — actually, worse — that I thought it would be when arguing that the Obama economic plan was inadequate. Read this, and bear in mind that the unemployment rate is now 9.4%.
The stimulus has helped, and the conventional recession is over. But the economy is not recovering in the most crucial area, job creation, and the stimulus won’t be enough to restore prosperity.”
February 2014:
“What about positive evidence for the benefits of stimulus? That’s trickier, because it’s hard to disentangle the effects of the Recovery Act from all the other things that were going on at the time. Nonetheless, most careful studies have found evidence of strong positive effects on employment and output.”
Krugman has been all over the place on this. For a question that comes down to basically “Yes it worked” or “No it failed” Krugman seems to have found multiple different positions to stake out simultaneously.
https://en.wikipedia.org/wiki/Fortunately,_Unfortunately
That’s the only explanation I can find to fit all the available information.
I read all the Krugman quotes and conclude Krugman’s position was. 1) it will take a while for unused capacity to come back into use. 2) Once it does come back into use there will be faster than usual growth. These two positions are internally consistent. The argument with Mankiw was about the second position. Krugman was dead wrong about the second position and has never acknowledged that AFAIK. To the extent that Krugman didn’t carefully define the conditions and time frame in which faster growth will occur is a little misleading. But, I believe that Krugman is fully cognizant of his fast growth position contra Mankiw and his repeated claims of having predicted a long time for recovery to occur and he would see no inconsistency in those positions and hence have need to attempt obscure one position or the other.
hence have NO need to attempt obscure one position or the other.
It really is a shame that this guy is high-profile enough to warrant a response. If he weren’t in the NYT, his articles wouldn’t even be worthy of discussion. This seems like another one of those cases that you frequently point out in the podcast. His prediction is sufficiently vague such that he can claim to have predicted any possible outcome. If the slump were brief and the recovery fast, we would be seeing the same amount of “I called it!” from Krugman that we see in our present reality.