Consulting by RPM || Free Advice Blog

Krugman Was Against Peak-to-Trough Calculations Before He Was For Them

Here I am, in beautiful Florida minding my own business, when Krugman comes out with yet another Kontradiction screaming for a reaction. So even though I’m on vacation, and yet spending 6 hours a day on my “real work,” duty compels me to comment. On July 3 Krugman started out a blog post like this:

I’m in Madrid, doing 45 trillion interviews, so not blogging much. But I was alerted to a remarkably stupid attack on me over the subject of Iceland from the Council on Foreign Relations — and I use that term advisedly.

Whoa! I can’t dig it up right now, but I have said in the past that I don’t think Krugman is part of the global Soros conspiracy, simply because he’s too arrogant and a loose cannon; they couldn’t trust him to keep his mouth shut. (It’s possible I am not in the Inner Circle of the Vast Right Wing Conspiracy for similar reasons.) This right here is stellar confirmation of my earlier judgment. Dr. Krugman, it’s one thing to politely disagree with the CFR. But to call one of their pieces “remarkably stupid” and then to go on and actually mock their very name?! Are you mad, bro? Hillary Clinton referred to their HQ in New York as the “mother ship.” Let me put it this way, Dr. Krugman: You know how you think to yourself, “Yeah, I blew up that opponent the other day…” ? Well, the CFR guys think that too–except they’re not being metaphorical. You think this is some academic disagreement over peak vs. trough? Not so, my good doctor. You are challenging the euro project, and the globalist elite isn’t taking kindly to such criticism.

Anyway, back to Krugman’s post:

The CFR people take me to task for measuring economic performance in Iceland and the Baltics relative to the pre-crisis peak, which they suggest is some kind of scam. Why not measure relative to the post-crisis trough, under which the Baltics look better?

Oh, boy. Economists have been studying business cycles for something like 90 years, and done comparisons to previous peaks all that time; apparently these guys don’t know about any of that. So let’s try this slowly.

First of all, we think of a recession as a period in which the economy falls below its potential; the natural way to gauge a recovery is to see how much of the lost ground has been regained.

Better yet, compare two hypothetical countries — call them country I and country L. Both suffer from a severe economic setback, but country I does a better job of responding to the shock, so that output falls only 10 percent in I but 20 percent in L. Then both economies recover. In that recovery, output in L grows more from the trough than output in I — but only because the country did so badly in the first place. Yet the CFR people would have us believe that L, not I, is the success story.

Or do a bit of history. The US economy grew 10.9, yes, 10.9 percent in 1934. The New Deal triumphant! Or maybe not. Real GDP was still about 20 percent below its 1929 level.

So by comparing output to the previous peak I’m doing the obvious, natural thing; the CFR alternative makes no sense.

A few things:

(1) Krugman is, as usual, treating his opponents as 3rd graders. I’m pretty sure the author(s) of the CFR piece understand full well the general framework of how economists might look at the business cycle. Go read the article and see if the author(s) are being as dumb as Krugman implies. In particular, they are talking about his disparaging of the euro project, and that’s why they are including the data from the year 2000 onward. Yes, if Krugman pretends their point is something else, then they look stupid. That’s pretty easy to do, if you distort when somebody else’s point is.

(2) The point about the New Deal is absolutely hilarious. That type of argument is precisely what Keynesians cited when arguing over the Obama stimulus. For example, when warning us not the repeat the “mistakes of 1937,” Christina Romer wrote:

[T]he recovery in the four years after Franklin Roosevelt took office in 1933 was incredibly rapid. Annual real GDP growth averaged over 9%. Unemployment fell from 25% to 14%. The second world war aside, the United States has never experienced such sustained, rapid growth.

However, that growth was halted by a second severe downturn in 1937–38, when unemployment surged again to 19% … The fundamental cause of this second recession was an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy. [Spending cuts and tax hikes] reduced the deficit by roughly 2.5% of GDP, exerting significant contractionary pressure.

And yet, right in that same time frame, Krugman was approvingly citing her analysis in his NYT op eds. I guess the Ombudsman took out Krugman’s attacks on Romer for being “remarkably stupid” since it is impolite to say such things about a lady.

(3) Krugman should understand where the CFR people are coming from, when they specifically explain that the previous peak might not be a good measure in this case, since they had argued at the time that it was above “potential GDP.” I say that Krugman should get the general gist of this, since, in an earlier post when he was championing Iceland as the poster child for his policy recommendations, Krugman put up a chart of its GDP path over the years and commented:

GDP is still below previous peak, but I think one could argue, much more so than in say America, that a significant part of that peak involved a Ponzi financial sector that isn’t coming back.

I think I was one of the first outsiders to notice that Iceland’s heterodoxy was yielding a surprisingly not-so-terrible post-crisis outcome.

Scott Sumner busted him at the time, but in the present context we can simply say: Paul Krugman must have been remarkably stupid when he wrote that.