Follow-Up on Krugman and Italy
Not surprisingly, Daniel Kuehn (and others) was not impressed by my highlighting of an apparent Krugman Kontradiction regarding Italy. To refresh your memory, in November 2009 (to take just one example) Krugman was (typically) making fun of people who were warning that the US had better get its deficit under control, lest interest rates quickly spiral up out of control and bring us to our knees.
To prove how misguided this fear was, Krugman had constructed a chart showing that the US debt-to-GDP ratio had recently risen higher than Belgium’s, but was still below Italy’s. Some people balked, and Krugman clarified:
Why, people ask, would I want to compare us to Belgium and Italy? Both countries are a mess!
Um, guys, that’s the point. Belgium is politically weak because of the linguistic divide; Italy is politically weak because it’s Italy. If these countries can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we.
So now in the comments of my post, Daniel says:
The guy that basically launched the currency crisis literature thirty years ago introduced the fact that he was concerned about the role of currencies during crises in November, 2011?
I don’t buy it Bob.
Then Daniel goes on to provide some quotations where Krugman is talking about the problems with the euro, well before 2011.
OK that’s fine, but it doesn’t change the fact that this is a Krugman Kontradiction. Let me put it to you like this:
==> If Italy had continued to be fine, Krugman would (presumably) have continued to cite Italy as proof that he is right, and the WSJ is wrong, about the dangers of high debt.
==> When it turned out Italy wasn’t fine, Krugman cited Italy as proof that he was right, and the euro-optimists had been wrong.
Isn’t that convenient? No matter how Italy turns out–whether it’s humming along nicely, or on the verge of defaulting because it’s being attacked by bond vigilantes–Krugman’s models “called it” in both cases? Reality really does have a Keynesian bias.
Let me drive home the point. Just today, Krugman wrote:
Brad DeLong sends us to a piece by Nouriel Roubini from almost six years ago, describing how Giulio Tremonti, Italy’s economy minister, threw a hissy fit when Roubini suggested that Italy might have problems with its euro membership. And no, I’m not being unfair — read Roubini’s piece. It was quite something.
What I would say is that this incident exemplified something that was going on all along the march to the eurodebacle. Serious discussion of the risks and possible downsides was simply not allowed. If you were an independent economist expressing even mild concerns about the project, you were labeled as an enemy and shut out of the discussion.
In a way, the remarkable thing is that it took until now for disaster to strike.
Does everyone see what a I-don’t-know-what Krugman is being here? If the above quote is right, that means that Paul Krugman in, say, November 2009 was sitting around thinking, “Man, I can’t believe Italy has hung on for this long, without being attacked by bond vigilantes. This is really surprising to me, but I’m so confident in my understanding of optimal currency areas that I really think disaster will strike any day now.”
And yet, when some Republicans that month said the US needs to cut spending to get our fiscal house in order, Krugman wrote, “If [Italy] can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we.”
Nobody sees a problem with that?
Well, I do. Either Krugman was flat-out wrong in November 2009, and didn’t realize Italy was on the verge of disaster. Then now, he is making up stuff when he pretends that he did realize it in November 2009.
Or, Krugman knew full well Italy was on the brink of disaster in November 2009, but went ahead and used it as a quick zinger to make fun of the austerians, because he knew nobody cares about the validity of arguments, the blogosphere is a team sport, and he’d have his useful smart guys (not useful idiots) defending him in comments across the globe.
Either way, that’s not cool.
Last complaint: Just like I don’t like the current situation in Europe being blamed on the gold standard, I also don’t like it being described as Italians wanting German central bankers, when right now the head of the ECB is Italian. I don’t care about the ethnicities, it’s just that I can only process so much Orwellianism per day.
(For the record, I get what both claims mean, and I’m just pointing out how they have a problem in that they don’t accord with the actual reality. It is truthiness as Stephen Colbert would use the term, to say Europe is suffering right now because it has a gold standard as the Italians are being dominated by German central bankers.)
Debt to GDP. What a con.
Well that’s really Borrowing to GDP. It misses off all the debts to the citizen such as pensions (social security in the US). The unstated assumption, we don’t have to pay them. It’s only the borrowing that matters. ie. Governments intend defaulting on their liabilities to their citizens.
Now the bond markets will take this into account. They know, that push comes to shove and it gets really bad, the citizen will not honour their obligation to pay for the borrowing, because the state isn’t honouring its obligation to pay out on pensions.
Next, why GDP? It’s as though I can get a mortgage from a bank, and include my neighbour’s income in the figure to get a bigger loan.
The real measure that you need is Liabilities to Tax revenues, or even better Liabilities to (Tax Revenues less core spending). Core spending being police, defence etc. Then you can tell how geared each government is. You can also look at the GDP to Tax ratio, to see what percentage is going to the government. For example, in the UK its 50%. They don’t have much leeway to get more tax. They are on the wrong side of the Laffer curve.
Its the Liabilities to Free cashflow, and taxation as a percentage of GDP that are the key ratios that reveal the truth about the mess with governments.
Italy was not on the brink of disaster in November 2009. It is now, two years later.
So, if you want to split hairs, there is no contradiction since Krugman never said Italy would never be on the brink of disaster, as far as I know.
However, Krugman made a mistake comparing the US with Italy and Belgium, because the EZ countries are trapped in a monetary arrangement equivalent to a gold standard that make them susceptible to this kind of problems.
It should also be noticed how the problem in Italy got worse after the latest rescue package to Greece was negotiated, which includes a 50% haircut on bonds held by banks.
And contagion effects might not be over if the ECB does not act to stop it.
And contagion effects might not be over if the ECB does not act to stop it
You mean you believe the ECB should inflate and kick the can down the road, just like they did after the housing collapse which kicked the can down the road into a sovereign debt/currency crisis.
Dang, don’t you MMTers know ANYTHING about capital theory? Is “DERP! INFLATE!” the ONLY suggestion you have? Good lord.
I believe the ECB should stop this stupid sovereign debt crisis from happening and spreading because of their gold standard mentality.
Exactly – Murphy thinks Krugman has conceded a point that he doesn’t even think is true, even now.
I’m guessing Krugman would still say that Italian debt was manageable – the problem has been the ECB, not Italy (which isn’t to say that Italy couldn’t clean up its act a little – I’m sure it could – but Italy did not precipitate the crisis).
What do you mean Italy didn’t precipitate the crises? If they didn’t build up these levels of debt then they wouldn’t need the ECB to start printing like mad men. You can argue that the ECB isn’t solving the problem by buying all this sovereign debt but the problem wouldn’t even exist without the debt in the first place.
I believe the ECB should stop this stupid sovereign debt crisis from happening and spreading because of their gold standard mentality.
You mean you believe the ECB should inflate and kick the can down the road, just like they did after the housing collapse which kicked the can down the road into a sovereign debt/currency crisis.
No, I believe the ECB should stop this stupid sovereign debt crisis from happening and spreading because of their gold standard mentality.
Ha Ha Ha!! How do they do it without inflating and kicking the can down the road, , just like they did after the housing collapse which kicked the can down the road into a sovereign debt/currency crisis?
As usual, the dance of evasion is truly hilarious.
Swapping one NFA by another, which leaves the total NFAs held by the private sector unchanged.
There is no can, there is no road. Only your platitudes.
So he offers a set of explanations that are conditional in nature (i.e. – (1.) the euro is not a problem unless there is a crisis, or (2.) Spain’s finances are in order and look much better than Greece’s unless they have a housing crisis) that allow him to explain a wide variety of circumstances.
Isn’t that a good thing. You almost seem angry either because he has an answer for everything or because he can’t foresee the future on cases like Italy. The first point (that he can explain a wide range of circumstances) seems like a good thing, not a bad thing. The second issue (that he can’t foresee the future) just seems like the human condition and as far as I know we all knew Krugman was limited by this inability too.
Now, is he right? That’s a more complicated question. But I really don’t see what’s contradictory or problematic about the explanations he’d offer. I understand you’d like it if he only offered one, unconditional story that could explain only a portion of what’s happened – but I don’t see why we should take issue with Krugman for offering a more complex picture than that.
You say that Krugman couldn’t foresee the future with regards to Italy but wouldn’t Krugman disagree with you about that? He said today that it was remarkable that it took so long for disaster to strike.
Dk wrote:
So he offers a set of explanations that are conditional in nature (i.e. – (1.) the euro is not a problem unless there is a crisis…
Does anyone else think Daniel’s defense of Krugman is as funny as I do?
DK wrote:
You almost seem angry either because he has an answer for everything or because he can’t foresee the future on cases like Italy.
Hang on a second Daniel. Your defense of Krugman here–like with Romer on the Obama stimulus–is to separate out the tautologous economic model, and then couple it with a wrong conjecture about the economy.
You seem to think that Krugman made a wrong forecast about Italy, and that I’m mad at him for that, but I shouldn’t be.
Yet if that is how you are defending Krugman, then I have you. My problem isn’t that Krugman made a bad forecast. My problem is that Krugman made two forecasts, and now is patting himself on the back for his prescience.
Krugman has repeatedly said that people should trust his models and not the austerians, because his predictions have been borne out, and that people would make more money investing on Krugman’s calls than the Wall Street Journal’s.
Note, I’m not here challenging the validity of optimal currency area theory. I’m saying Krugman is being ridiculous for claiming credit for one side of a prediction in which he had totally covered himself.
“So he offers a set of explanations that are conditional in nature (i.e. – (1.) the euro is not a problem unless there is a crisis…”
That’s kind of like saying: the euro is not a problem, unless it is.
No, Jon O. He actually describes conditions under which a currency union will and won’t work. Don’t act as if he’s simply saying “sometimes it will, but sometimes it won’t” and leave it at that.
Daniel, Jon O. didn’t act as if Krugman said “sometimes it will, but sometimes it won’t.” He quoted your own paraphrase of Krugman saying “the euro is not a problem unless there is a crisis.” We could replace euro by “X” and I think every economist would sign off on the statement. And then, whenever crises emerged–be they malaria, earthquakes, teen pregnancy, what-have-you–all the economists can say, “We told you.”
It’s the financial “guru” method of econ analysis. Give predictions/analysis – explicit or implicit – rapped in a (usually complex) web of conditionals and contingencies; all completely useless, but never wrong.
As to the main issue: At first I was going to disagree with you,then DK brought me back over. Krugman can’t have it both ways: he can’t score rhetorical points showing how the vigilantes haven’t gone after Italy, and then keep those points after they do, knowing italys monetary limitations all along. It’s presenting an apples-to-oranges comparisson as apples-to-apples.
This post is Blackadder approved.
That’s a relief. Thank you.
There’s a condition called a personality disorder which has symptoms like passing the blame for one’s own mistakes onto others and pathological lying, and other additional symptoms. It’s called “dissocial personality disorder” and it’s prevalent among politicians and world leaders and I guess we should add Keynesian economists who write for the NYT.
What would you call the MMTers who bemoan the fact that Greece and Italy don’t have their own brand of diluted funny money with which they might defraud their creditors and who think that the highest form of civilization is defaulting on debt obligations by paying with diluted funny money?
You should call, any of them, eminence.