03 Jan 2011

Krugman Once Again Pines for the Bubbly

Economics 14 Comments

Unfazed by his 2006 (qualified) endorsement of Greenspan’s housing bubble, yesterday Krugman wrote:

I’ve noticed many people overreacting to recent good economic news…I worry that policy makers will look at a few favorable economic indicators, decide that they no longer need to promote recovery, and take steps that send us sliding right back to the bottom.

So, about that good news: various economic indicators…suggest that the great post-bubble retrenchment may finally be ending.

We’re not talking Morning in America here. Construction shows no sign of returning to bubble-era levels, nor are there any indications that debt-burdened families are going back to their old habits of spending all they earned.

I’ve isolated and put in bold the money quote for effect; by all means go look at the context if you are suspicious. But I really don’t think he is saying that with irony.

14 Responses to “Krugman Once Again Pines for the Bubbly”

  1. Dan says:

    I think Krugman is losing it. He has been talking about deflation for the past two years and now sees the data turning. He has given enough wiggle room in the past to explain the uptick and even gloat that it was all because of keynesian policies. The only thing he won’t be able to explain is the soaring prices we are going to see because of this fed induced boom. By the end of the year he will be completely discredited to all but the most loyal Krugman followers. I did see Krugman talked about “minimal” inflation and didn’t mention deflation at all. He will probably start coming up with ways to try and claim the inflation has nothing to do with printing money but he hasn’t talked about soaring prices as even a possibility yet. He can only try and come up with explanations and denials when inflation is obvious and who will take him seriously at that point.

    How long before Mish sees deflation is a fairytale?

  2. Jonathan M. F. Catalán says:

    It also goes to show that he really has absolutely no idea on what a bubble consists of—I mean, even in a Keynesian way. If high housing prices were caused by irrational exuberance, wouldn’t irrational exuberance be necessary to recreate those prices, and then wouldn’t we just be on the same boat?

  3. Daniel Kuehn says:

    Are you under the impression he wants bubble-era levels of construction? You seem to have to read an awful lot between the lines to use this against him I think. I read it as:

    “Growth is improving, but it’s not going to be as high as it was – because it was a bubble

    That’s what I get out of this – what’s wrong with saying that? I like your posting Bob – I’ve been following you regularly now. But on Krugman I really think you’re just looking for a fight

    • Daniel Kuehn says:

      In other words – he seems to be managing expectations, not pining for the bubble. I don’t see anywhere where he says it oughta be at bubble levels (do you? could you point that out?).

      • Daniel Hewitt says:

        Daniel, here is Krugman explaining why he extrapolates from bubble levels:

        Whenever I draw a chart comparing actual growth with the pre-crisis trend, as I did in my last post, I get two kinds of complaints. Some readers complain that that’s not how you do it — that you have to draw a trend through the middle of the past scatter of points, not start at a business cycle peak. Others complain that a year like 2007, or 2000, is a bad choice because output was inflated by a bubble.


        It’s standard practice to assess economic trends with peak-to-peak interpolation, because the peaks are a reasonable estimate of the economy’s capacity, while other points on the business cycle don’t convey anything like that information.

        So I measure my trends from the last business cycle peak.

        • Daniel Kuehn says:

          Keep in mind that’s GDP he’s talking about – not housing construction.

          I think there’s a big difference between saying “during the peak of economic cycles when resources are fully employed, this about approximates a full employment economy” and saying “housing construction and consumer credit should be what they were in that peak”.

          This is something that even Austrians should be able to agree on – it’s the old “malinvestment vs. overinvestment” distinction. It’s easy to claim that bad, bubble-psychology driven, malinvestments were made in the housing stock. It’s not as easy to argue that economic output overall was excessive.

          • Daniel Hewitt says:

            Daniel, that’s a good point. Krugman however, does conflate the two, because he thinks that housing is what drives GDP:

            So what happens if the housing bubble bursts? It will be the same thing all over again, unless the Fed can find something to take its place. And it’s hard to imagine what that might be. After all, the Fed’s ability to manage the economy mainly comes from its ability to create booms and busts in the housing market.


            Also, here is the link I should have pasted into my last comment:

          • Daniel Kuehn says:

            Ya – I was aware of the post you were refering to before (with drawing trend lines peak to peak).

            That is an odd statement coming from him. Certainly bubbles are always a risk, but I’m surprised that he says that’s “mainly” the source of their power. He sounds like an Austrian there, not a Keynesian.

  4. Teqzilla says:

    Daniel, Krugman is clearly noting the lack of bubbly goodness as a reason why the news is not as positive as it could be. I don’t see how you read it any differently.

    You’ve got to remember that from Krugmans perspective so long as you keep demand up then bubbles are no real problem and there is no reason why he would be phased by a return to bubble levels. As much as Krugman may hate being called a crude keynesian he really is one. For him growth is growth is growth and demand is demand is demand. $50 billion on digging holes or $50 billion on producing stuff people want? what’s the difference?

    • Daniel Kuehn says:

      I was not under the impression that was Krugman’s perspective. Perhaps it is. If it is his perspective, then it’s certainly not characteristic of others.

  5. RG says:

    I thought debt burdened families were spending more than what they had. Isn’t that the definition of debt?

  6. Jonathan M. F. Catalán says:

    I think Krugman clearly believes that you can form investment bubbles as long as they are well regulated and managed by government. He doesn’t see the bubble as the problem; he sees reckless investment as the problem.

    • John says:

      I think that there’s more to it than that. I think he doesn’t believe that a capitalist economy could ever be healthy. Economies just move from boom to bust and hopefully the government can make the booms last and the busts short. But he thinks that it is impossible for capitalism to have any stability; I think Keynesians are like Marxists in that respect.

  7. Yancey Ward says:

    Krugman is paying a price for his inconsistencies. Even his apologists get tied into knots trying to defend the contradictions.