25 Sep 2013

My Final (We Hope!) Word on Paul Krugman and Inflation Predictions

Inflation, Krugman, Shameless Self-Promotion 35 Comments

In my last post, I suggested that Paul Krugman has not been entirely candid with his readers on the issue of how economists from the Keynesian versus rival camps predicted the movement of prices as the recession struck. Yes yes, the Austrian purists don’t like to even talk about this stuff, but it’s Krugman’s only real trump card–“We were right about inflation! Those idiots were wrong! If you believe in science, you have to support stimulus!”–so I want to make sure we understand just how slippery Krugman has been. Even I didn’t fully appreciate it until recently.

To make my point, let me just do the mirror image of what Krugman has done, and tell me if you think (a) it’s above board and (b) Krugman, DeLong, et al. would be fine with me saying the below:

HYPOTHETICAL MURPHY ANALYSIS: When we first entered this crisis, economists and economic pundits quickly sorted themselves out into two camps. One camp — the “hawks” — basically said, printing money will only make things worse; there’s no such thing as a liquidity-trap economy, and (price) deflation is not the threat right now. The other camp said that we were Japan, and that accelerating (price) deflation was just around the corner.

These differing views reflected fundamental differences in economic models — differences that tended to be associated with political leanings, although there are a handful of politically conservative market monetarists out there.

And history has given us as decisive a test of rival economic theories as I’ve ever seen. If past experience is any guide, however, all of this will make no difference. Deflation phobia does not, it seems, require any actual deflation to persist. And being a Keynesian — or, in general, being a left-winger — means never having to say you’re sorry.

So, what do you guys think? I imagine you’d say the above is rather self-serving, since it makes it sound as if the doves predicted (price) deflation, while the hawks merely predicted “not deflation.”

Yet as I said, that’s exactly what Krugman has been doing, in his frequent victory laps on the vindication of IS/LM compared to the “models” of his rivals. The above hypothetical quotation was adapted from this Krugman piece (from July 2013), but anyone who reads him even occasionally knows that Krugman has been trotting out this “as decisive a test of rival economic theories as I’ve ever seen” line numerous times. When that’s his purpose–namely, to say that if people like me had any integrity, we’d admit abject failure–he casts the Keynesians as merely predicting, “No soaring interest rates and no soaring price inflation.”

Yet in reality, that’s not what Krugman thought would happen when the crisis first struck. As I walk through in this post, Krugman in February 2010 warned that the US was about to become Japan–which in context, meant actual reductions in core CPI. As I show in the post, the particular metric he was using turned around about 7 months after that warning, and within about 18 months had returned to 2005 levels. Furthermore, if you think I’m putting words in his mouth, Krugman himself linked to that very post in April 2013, and said of his 2010 analysis: “(In that post, I worried about deflation, which hasn’t happened; I’ve written a lot since about why).”

Note the parenthetical aside, and the timing: Krugman in April 2013 is mentioning in parentheses to his reader that oh yes, as of February 2010 he was “worried about deflation, which hasn’t happened.” In other words, Krugman entered this crisis with a model that predicted how prices would move in response to the economic situation, and chose his policies of government stimulus accordingly. He was wrong, and yet maintains the same policy recommendations.

As a last kicker, just to show how little Krugman cares about people on his side not adjusting their model in light of the new data, here’s how Krugman praised David Romer’s class notes earlier this week (i.e. September 2013):

I’ve mentioned David Romer’s nice formulation of modern applied macro — the way people actually think, as opposed to the intertemporal maximization with whipped cream that’s respectable. David now informs me that he has a set of publicly available class notes (pdf) that have been regularly updated, covering that ground even better — with an extensive section on the liquidity trap.

Romer’s notes still imply that a protracted liquidity trap should lead to accelerating deflation, which doesn’t seem to happen; I think most of us have turned to downward nominal wage rigidity as an explanation. In any case, this is more or less the state of the practical art, and I’m delighted to learn that he’s put it together. [Bold added.]

You see that? When it comes to right-wingers who predicted accelerating price inflation, their failure–and continued recommendation of hawkish policies–is evidence that they are knaves or fools.

In contrast, when David Romer is still teaching students with notes that imply a liquidity trap leads to accelerating price deflation, Krugman shrugs it off following a semicolon, and says the analysis is “more or less the state of the practical art” and is “delighted to learn that [Romer’s] put it together.”

What’s funny is that the fans of Paul Krugman actually believe that the only reason the people he calls fools and liars get upset, is because gosh darnit he’s just always so right. Nope, that’s not it.

35 Responses to “My Final (We Hope!) Word on Paul Krugman and Inflation Predictions”

  1. Mike M says:

    “because gosh darnit he’s just always so right”
    LOL Good one! Krugman was born in the period of mankind. He would prefer to be the only person with matches in the Lower Paleolithic period so he could be worshiped as a God by the masses. Of course there would have been a high probability he would have been killed and eaten by a predator.

    • Bharat says:

      Krugman was born in the period of mankind.


      • Mike M says:

        Sorry forgot to insert “wrong” period

  2. Prateek says:

    This is actually a very good point (if one looks at the essential and not at the surplus:) I always was wondering where is the deflation if this actually was a Japanese styled situation.Krugman wasnt predicting low inflation, he was predicting deflation and wiggled out of it too easily without explaining how it was different from Japan.I guess Micheal Woodford has a better answer in his papers( that guy has something for every school of thought at this moment)

    • Matt Tanous says:

      There is no downward wage rigidity in Japan, I guess. Since that’s why there isn’t deflation, according to Krugman now.

  3. Greg Ransom says:

    You aren’t an “Austrian purist” — most Austrians don’t hold your position, eg Horwitz, White, Selgin, Hayek, etc.

    You are a Murphian — or at best a ersatz Rothbardian.

    I’d appreciate it if you stopped using the “Auistrian” label when discussing money and the trade cycle — people are confusing Murphian macroeconomics for Hayekian macroeconomics and for Austrian macroeconomics, which it is not.

    • Joe says:

      So when the mises institute hired Dr. Murphy to teach the first course on Mises academy (about the ABCT) they chose the wrong guy?

    • Dan says:

      If you’re going to act all uppity then you should at least do a better job at comprehending what you read. He didn’t call himself an Austrian purist.

    • Bob Murphy says:

      Hang on a second Greg. I do try to be clear that not all Austrians are 100% reservists, that that is a Rothbardian more than an Austrian stance.

      But what are you talking about when saying my views on the trade cycle aren’t Austrian?

      • Greg Ransom says:

        I’m just saying it’s misleading to represent any particular account of the interaction in historical time of money, credit, a central bank, leverage, etc after the turning point of an artificial boom — or what policy responses might be appropriate depending on the particulars — as “the” Austrian position.

        Eg it’s standard ‘Austrian’ view to support any variety of measures to counter a post boom secondary deflation.

        But Krugman and others seems to have gotten the view from “Austrian purists” or 2nd hand dealers in ideas that it’s utterly un-Austrian to support such counter-deflationary measures.

        Note also that pure theory found in Hayek or Mises or Horwitz etc doesn’t tell us what exactly the post-boom monetary demand situation will be like or what the banks will do with reserves eg when the Fed pays interest on reserves and is doing QE.

        But Krugman & others seem to have gotten the view from “Austrian purists” or 2nd hand dealers in ideas that Austrians must ‘predict’ that massive price inflation would have been produced already by this.

        What needs also to be avoided is to represent non-consensus interpretations of historically contingent events which haven’t yet even happened as “the” Austrian view of what is suppose to happen. Similarly, it a mistake to represent non-consensus interpretations of historical events of the past which we know and understand only very imperfectly through a glass darkly as having only one official “Austrian” causal account.

        The temptation is to say “Austrian economics is moi.”

        Well, no.

        And it lets Krugman off the hook when he is led to presume he can off-handly dismiss a powerful and successful explanatory enterprise by mistaking it for optional historical interpretations of past and future events which are in no way necessary implications of the causal science, and aren’t even widely shared by those using the explanatory mechanism.

        • Dan says:

          “But Krugman and others seems to have gotten the view from “Austrian purists” or 2nd hand dealers in ideas that it’s utterly un-Austrian to support such counter-deflationary measures.”

          Greg, you do realize that the “Austrian purists” referenced in this post were the ones who don’t like to discuss price inflation, right? So by the way he was using the term you would be one of the purists.

          • Greg Ransom says:

            Um, that makes no sense.

            • Dan says:

              He said Austrian purists don’t like to talk about this stuff. What did you think “stuff” was referring to in this context? I’m not sure how anyone could possibly interpret that first paragraph in any other way.

              I guess it is obvious to me, at least, because the issue of predicting price inflation having nothing to do with ABCT is brought anytime he posts about price inflation. Usually, he makes that caveat, as he implied in the first paragraph to this post, before anyone else has a chance to say it.

              Dr. Murphy has been very clear that price inflation predictions has nothing to do with ABCT for the entire 6 years, or so, that I’ve been following him. He also brings up the fact that there are differing opinions when it come to free banking and anti-FRB.

              You’re really barking up the wrong tree on this one. Pretty out of line with the charge that he isn’t an Austrian, IMHO.

      • Greg Ransom says:

        The short version — not everyone who uses money & cycle science developed by Hayek, Mises & others predicted massive inflation — massive inflation in the post boom phase when shadow money and leverage are contracting massively and the economy is re-coordinating, uncertainty reigns, etc etc is not an immediate causal inevitability or Fed QE, esp while simultaneously paying interest on reserves, etc.

        It’s been misleading to say or suggest that a prediction of an immediate massive inflation is “the Austrian position” .

        But that suggestion hasn’t come out of no-where — and enough should have been said to have made it impossible for anyone, including Krugman, to have reached that conclusion, and then go on and spread the suggestion to others.

        I’m guessing that today more people on the planet “know” this one false thing about “Austrian economics” than the number of people who know anything actually true about the Austrian causal mechanism.

        • Bob Murphy says:

          Greg Ransom wrote:

          It’s been misleading to say or suggest that a prediction of an immediate massive inflation is “the Austrian position” .

          When did I say that, Greg? I didn’t in this post. The only time I used “Austrian” in this post was to say that Austrian purists don’t make predictions about price movements.

          • Dan says:

            If only you wrote a blog post where you had a section titled “III. Price Inflation Has Virtually Nothing to Do With Austrian Economics in General, and Truly Has Nothing to Do With Austrian Business Cycle Theory”


            • Bob Murphy says:

              Live and learn.

            • Greg Ransom says:

              I confess to being taken in by Paul Krugman’s Big Lie — I assume that because Krugman says it that there are “Austrians” who have been arguing that Austrian economics tells us we should have been seeing massive inflation these past years.

              And I thought Krugman must have gotten this idea from you, Bob.

              But it turns out that this is just a lie Krugman has completely fabricated to given himself another straw man to attack and to use as self-serving self vindication.

              So I’m off base in my remarks and in my assumptions.

              It’s always a mistake to believe or let your views be shaped by anything Paul Krugman says.

              • Bob Murphy says:


                I confess to being taken in by Paul Krugman’s Big Lie — I assume that because Krugman says it that there are “Austrians” who have been arguing that Austrian economics tells us we should have been seeing massive inflation these past years.

                And I thought Krugman must have gotten this idea from you, Bob.

                Greg, I can’t be 100% sure of your tone, since we don’t have body language etc. on the internet, but it sounds like you are being sincere here (not cracking a joke). So, right, I agree Krugman has tried to make it sound as if the Austrians had to predict large price inflation or else their world falls apart, but I never said that. Indeed, I would have been a heckuva lot more careful in throwing numerical predictions around, if I thought I was putting the prestige of Austrian economics on the line. On the contrary, I personally thought price inflation was going to get out of hand at the consumer level, and that’s why I bet Bryan and David. I wasn’t doing anything “Austrian” with that view, I was just thinking they were increasing the quantity of money and then speculators in the forex markets and bond markets would eventually share my belief that the Fed had painted itself into a corner.

          • Greg Ransom says:

            I didn’t get that — the context didn’t make that thought a self-evidently natural reading.

            I simply misread you.

            I still think more work needs to be done to block this idea that Austrian Econ can be reduced to a prediction of massive inflation 2008-2013, which Krugman has made the dominant understanding of Austrian economics.

    • valueprax says:

      Is that an empirical claim, Greg?

      I notice a lot of “Austrians” who go around sticking their fingers in the wind claiming “most” Austrians do or don’t do X. I think of myself as an Austrian and somehow I never got my Austrian Census Form.

    • Chris P says:

      Outside of the four you named, I’m not sure there are enough to qualify as “most”.

    • Prateek says:

      Whatya talkin’ about Greg…what are you smokin mate..

  4. joe says:

    Krugman is also correct about the impact austerity would have on the economy. Speaking of measuring austerity and inflation, it’s funny that the pundits who claim the inflation number is rigged don’t apply their inflation number when measuring govt spending. There is no inflation when they talk about govt spending. The rationale is that govt creates the inflation so it’s unjust to adjust govt spending for inflation. Very funny. Stupid, but very funny.

    • Ken P says:

      Austerity did not have that impact on the economy post WWII. It had a positive impact. Many Austrians expected the stimulus to increase unemployment and unemployment increased. Keynesians say it would have been worse without the stimulus and they might be right, but it’s hardly something to assume.

      The first time I heard that inflation numbers were rigged, it was from Democrats when Reagan was in office. I totally bought into that. Now I understand that core inflation serves a purpose, but at the same time it obscures overall inflation. It’s the whole “looking for your keys under the light because that’s the only place you can see” thing. It’s common sense that price inflation would occur in housing under recent Fed and govt policies.

      None of this even matters for Bob’s argument. He is not trying to claim victory like Krugman does, but instead pointing out that Krugman predicted deflation, while he (Bob) predicted inflation and they were both wrong, but Krugman arrogantly ran victory laps while Bob humbly paid off his lost bet.

      Price inflation in isn’t so funny for poor people. The more assets you own the better protected you are. Poor people are being clobbered by the price inflation that has occurred in housing costs.

  5. Major_Freedom says:

    Back in 2009 I predicted high inflation, but Krugman’s treatment of Krugman would suggest that I need not abandon my theory, because I could always point to “state of the practical art” excuses for why it didn’t occur, such as “nominal reserve rigidity”.

    But Krugman’s treatment of not-Krugman would have me kneeling at the feet of DeLong.

  6. Staci T. Stein says:

    Anon,I think you are confusing Hayek’s position. Hayek didn’t regard price deflation as dangerous. He saw monetary deflation, or a decrease in the supply of money, as dangerous (which can also cause price deflation, because there is of course less money in circulation).On the other hand, Hayek saw price deflation as a result of an increase in productivity as a good thing (as do all Austrian economists).I agree that there isn’t really consensus, although I think both Mises and Hayek saw falls in the volume of money as harmful. But, both Hayek and Mises would agree that a fall in the supply of money was a consequence of the previous boom (as the rate of defaults increase).In any case, I am writing an article on exactly this topic.

  7. Dr. Hayek says:

    Aggregates,sums, averages which statistics offer you are no substitute for the detailed knowledge of every single price and their relations to each other which really guide economic activity…. that is a mistaken attempt to overcome our limited knowledge.

  8. Dr. Hayek says:

    Much you have to learn little Murphy, but I see that you are facing the right direction, now all you have to do is keep walking.

    • Major_Freedom says:

      Worst. Novelty Account. Ever.

  9. Dr. Hayek says:

    BTW I take back the little murphy comment back if it is hurting people’s sensibilities..Bob has a known sense of humor..and he I am sure doesnt mind a few jokes..

  10. Innocent says:

    I must admit I still believe CPI will rise at some point because of the increase in debt with the inability to pay it back along with a more robust economic outlook which will cause increased aggregate demand. I believe the Fed can not as easily adjust its holdings when this occurs and this is going to cause major issues at that point ( for the Fed ).

    I still believe there is a large amount of Asset inflation that has occurred ( and heck perhaps I am wrong ) which cannot translate to CPI as the monies are in many ways in separate lock boxes. Monies competing for stocks are not in the same pile of monies competing for goods.

    This is why the Fed Actions in attempting to create robust employment is in my mind a futile attempt at best. Rather I view it as a way to fund the Central Bank and give hush money to Government ( okay maybe a little extreme there ) But hey I am not an economist so odds of this being correct is pretty low.

    If the money fro the stock market and monies from the Fed hand outs ever get into the main stream economy I figure things will get fairly hectic. I am still surprised that the world economy has any real faith in the Dollar as a reserve currency. I think that more than anything helped keep inflation tame. Along with consistent low demand due to a flailing economy. I mean lets face it low demand means lower prices to attempt to draw purchases. ( this is of course not an absolute )

    • Tel says:

      … cannot translate to CPI as the monies are in many ways in separate lock boxes. Monies competing for stocks are not in the same pile of monies competing for goods.

      That’s an interesting way of looking at it, but stands in defiance of Say’s Law. For a short time you can keep promising people that if they work hard now they will get more goods in the future (eg at retirement, when they cash in their plan, etc) but there comes a time when that promise must be kept. People will say, “you promised me, and now I want my goods!”

      If the public as a whole sees the promise broken in more than a few cases, they will no longer accept the same deal. Maybe that’s already happened.

  11. Dr. Hayek says:

    I believe the CPI bet is a dangerous bet as it does not take into account so many other goods and services like cost of a new housing or increase in your education loan etc.. they are just cherry picking a few goods. So many times the fed has played truant by citing CPI or Long term interest rates. Post 2001 bubble the CPI did not rise higher in 18-30 months of Fed printing exorbitant amounts of money and low interest rates however houses and stocks had started going ballistic.

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