Consulting by RPM || Free Advice Blog

Krugman’s “Call” Back in Early 2009

One of the great things about this piece (which I linked earlier) is that the guy, relying on comments at Krugman’s own blog, refreshes our memory on exactly what the Nobel laureate said back when the stimulus was being discussed.

You see, if you had just been reading Krugman lately, you would have thought that he perfectly predicted how bad the economy would get with the small stimulus, and that the administration economists screwed up because they inexplicably used the wrong calculations in their own Keynesian model. (Try this self-congratulatory Krugman post, for example.)

But as commenters at Krugman’s blog apparently pointed out, here’s what he said on January 6, 2009:

Now, what we’re hearing about the Obama plan is that it calls for $775 billion over two years, with $300 billion in tax cuts and the rest in spending. Call that $150 billion per year in tax cuts, $240 billion each year in spending.
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Let’s be generous and assume that the overall multiplier on tax cuts is 1. Then the per-year effect of the plan on GDP is 150 x 1 + 240 x 1.5 = $510 billion. Since it takes $300 billion to reduce the unemployment rate by 1 percentage point, this is shaving 1.7 points off what unemployment would otherwise have been.

Finally, compare this with the economic outlook. “Full employment” clearly means an unemployment rate near 5 — the CBO says 5.2 for the NAIRU, which seems high to me. Unemployment is currently about 7 percent, and heading much higher; Obama himself says that absent stimulus it could go into double digits. Suppose that we’re looking at an economy that, absent stimulus, would have an average unemployment rate of 9 percent over the next two years; this plan would cut that to 7.3 percent, which would be a help but could easily be spun by critics as a failure.

And that gets us to politics. This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

It’s true, Krugman didn’t say, “I bet my life that unemployment won’t break 9.2% with stimulus spending,” but the point is that he has done the same category of error as the official Obama Administration economists.

What’s really funny is that I am pretty sure Krugman has quoted from this very blog post before, to show his readers, “Hey, I told you guys this would happen.” But I’m also pretty sure he just quoted the Mitch McConnell stuff, and not the part where Krugman talks (conditionally) of a 7.3% average unemployment rate in 2009-2010, or of an unemployment rate that peaks at 9%. (If someone can actually find where Krugman quotes from this January 6 blog post, that would be great.)

Bottom line: You can’t trust Krugman’s version of history, whether he’s discussing Herbert Hoover’s fiscal record or Paul Krugman’s prediction record.

(And yes I have made some bad predictions myself, but I hope I didn’t make lemons into lemonade with them a la Krugman.)