05 Aug 2010

Krugman’s “Call” Back in Early 2009

Economics, Financial Economics 5 Comments

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.

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.)

5 Responses to “Krugman’s “Call” Back in Early 2009”

  1. Daniel Hewitt says:

    Maybe I’ll add this to my repertoire of past Krugman columns to post on his blog. I’m getting a little tired of linking “A Fiscal Train Wreck” (deficits lead to disaster), “Dubya’s Double Dip” (we need a housing bubble), and “Learning From Europe” (social democracy is a superior economic system). It’s so easy to take shots at Krugman, but it will be nice to have some new material.

    Also, in case you missed it, Krugman did get caught recently contradicting himself again. As usual he denies the charges, without addressing the most damning evidence.

    For his own good, he needs to either disable commenting or heavily censor it like Brad DeLong.

  2. Marco says:

    Here’s the blog post where Krugman quotes his january “prediction”


    You got it almost… right

    “Alas, I didn’t have it wrong — except that unemployment will, if we’re lucky, peak around 10 percent, not 9.”


    • bobmurphy says:

      What would it look like if Krugman *had* gotten it wrong? Unemployment never would have peaked?

  3. Marco says:

    By definition Krugman can’t get it wrong…. it’s Paul IGNPIESTFU (*) Krugman!!

    (*) I Got the Nobel Prize In Economics So Shut The Fuck Up

  4. Gwen Harper says:

    As a taxpayer, I am not entirely against taxation and government spending. But lets decide as a group that we all want to pay now and not later. If we need to give money to government programs, I am all for that. I have many friends who are disabled and are highly appreciative of the government programs and benefits that they receive. But lets pay for all of these things up front and in cash. Don’t borrow from Peter to pay Paul.