18 Nov 2013

According to His Own Criterion, Paul Krugman Has Low Moral Character

Krugman 57 Comments

In today’s post titled “What to Do When You’re Wrong,” Krugman explains why his intellectual opponents on Fed policy are not just wrong, but immoral. Here’s the summary of his case against them:

Barry Ritholtz reminds us that we’ve just passed the third anniversary of the debasement-and-inflation letter — the one in which a who’s who of right-wing econopundits warned that quantitative easing would have dire consequences. As Ritholtz notes, they were utterly wrong….

Ritholtz takes the wrongness as a reason not to listen to these people, and it’s certainly a warning sign. My view, however, is that you don’t just want to look at whether people have been wrong; you want to ask how they respond when events don’t go the way they predicted.

After all, if you write about current affairs and you’re never wrong, you just aren’t sticking your neck out enough. Stuff happens, and sometimes it’s not the stuff you thought would happen.

So what do you do then? Do you claim that you never said what you said? Do you lash out at your critics and play victim? Or do you try to figure out what you got wrong and why, and revise your thinking accordingly?

I’ve been wrong many times over the years, usually on minor things but sometimes on big ones. Before 1998 I didn’t think the liquidity trap was a serious concern; the example of Japan suggested that I was wrong, and I eventually concluded that it was a big concern indeed. In 2003 I thought the US was potentially vulnerable to an Asian-crisis-style loss of confidence; when it didn’t happen I rethought my models, realized that foreign-currency debt was crucial, and changed my view.

So, have any of the signatories to that 2010 letter admitted being wrong and explained why they were wrong? I mean *any* of them. Not as far as I know.

And at that point this becomes more than an intellectual issue. It becomes a test of character. [Bold added.]

Before diving into the main point of my post, I note with irony that strictly speaking, there wasn’t an outright false prediction in the letter in question; they just said there was a risk of currency debasement and (price) inflation. But that’s a quibble; certainly many of the people warning of (price) inflation–including me, of course–did not think the Fed would get away with things for so long, as it has done.

Anyway, back to Krugman’s case against the character of these scoundrels. He is upset that not only did they make a bad prediction in 2010, based on on erroneous model, but that they have the audacity to stick to their guns three years later. That’s what makes them bad characters, not merely bad economists.

Now, in contrast, Krugman says he realized he had been wrong in 2003 when he warned of a crisis hitting the US, and adjusted his views accordingly.

Here’s what Krugman presumably has in mind. He wrote in March 2003, in a column titled, “Fiscal Train Wreck”:

[L]ast week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.

From a fiscal point of view the impending war is a lose-lose proposition. If it goes badly, the resulting mess will be a disaster for the budget. If it goes well, administration officials have made it clear that they will use any bump in the polls to ram through more big tax cuts, which will also be a disaster for the budget. Either way, the tide of red ink will keep on rising.

…Two years ago the administration promised to run large surpluses. A year ago it said the deficit was only temporary. Now it says deficits don’t matter. But we’re looking at a fiscal crisis that will drive interest rates sky-high.

But what’s really scary — what makes a fixed-rate mortgage seem like such a good idea — is the looming threat to the federal government’s solvency.

Of course, Mr. Fisher isn’t allowed to draw the obvious implication: that his boss’s push for big permanent tax cuts is completely crazy. But the conclusion is inescapable. Without the Bush tax cuts, it would have been difficult to cope with the fiscal implications of an aging population. With those tax cuts, the task is simply impossible. The accident — the fiscal train wreck — is already under way.

How will the train wreck play itself out?…But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.

And as that temptation becomes obvious, interest rates will soar. It won’t happen right away. With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.

I think that the main thing keeping long-term interest rates low right now is cognitive dissonance. Even though the business community is starting to get scared — the ultra-establishment Committee for Economic Development now warns that ”a fiscal crisis threatens our future standard of living” — investors still can’t believe that the leaders of the United States are acting like the rulers of a banana republic. But I’ve done the math, and reached my own conclusions — and I’ve locked in my rate.

That could almost verbatim be something written by a Peter Schiff-type, right? But since his ire was directed at the Bush Administration and its “irresponsible” tax cuts, people nowadays point to it as an example of Krugman’s utter hypocrisy.

Yet he’s telling us now, in today’s post, that Krugman realized he was wrong and changed his views. Okay, well when exactly? As Krugman says of the people who signed the 2010 letter, I can’t find any example of it during the Bush years. I don’t have any example of an op ed or blog post where Krugman said, “In the past I criticized the profligacy of the Bush Administration, but now I realize that this was gold-standard thinking. The US issues its own currency, and has most debts denominated in USD, so Bush’s tax cuts for the rich aren’t nearly the problem I used to think; we just owe that money to ourselves, after all.” Can someone find such a column by Krugman?

So although I found no such mea culpa, what I can find is him still warning that eventually his logic will be right. For example, in May 2005 he wrote:

Over the last few years China, for its own reasons, has acted as an enabler both of U.S. fiscal irresponsibility and of a return to Nasdaq-style speculative mania, this time in the housing market. Now the U.S. government is finally admitting that there’s a problem – but it’s asserting that the problem is China’s, not ours.

And there’s no sign that anyone in the administration has faced up to an unpleasant reality: the U.S. economy has become dependent on low-interest loans from China and other foreign governments, and it’s likely to have major problems when those loans are no longer forthcoming.

Again, Peter Schiff could have written the above. Then, in May 2006 Krugman wrote:

We shouldn’t read too much into a couple of days’ movements in stock prices. But it seems that investors are suddenly feeling uneasy about the state of the economy. They should be; the puzzle is why they haven’t been uneasy all along.

The rise in stock prices that began last fall was essentially based on the belief that the U.S. economy can defy gravity — that both individuals and the nation as a whole can spend more than their income, not on a temporary basis, but more or less indefinitely.

To be fair, for a while the data seemed to confirm that belief. In 2005, the trade deficit passed $700 billion, yet the dollar actually rose against the euro and the yen. Housing prices soared, yet houses kept selling. The price of gasoline neared $3 a gallon, yet consumers kept buying both gas and other items, even though they had to borrow to keep spending (the personal savings rate went negative for the first time since the 1930’s).

Over the last few weeks, however, gravity seems to have started reasserting itself.

And just to be clear about the issue of timing, Krugman had written in April 2006:

Forensics are in. If you turn on the TV during prime time, you’re likely to find yourself watching people sorting through clues from a crime scene, trying to figure out what really happened.

That’s more or less what’s going on right now among international finance experts. The crime in question is the U.S. trade deficit, which … reached an amazing $805 billion last year. The mystery is how we’ve been able to run huge deficits … with so few visible adverse consequences. And the future of the U.S. economy depends on which of two proposed solutions to the mystery is right.

Here’s the puzzle: the trade deficit means that America is … spending far more than it earns. … To pay for the excess of imports over exports, the United States has … borrowed more than $3 trillion just since 1999.

Why, then, doesn’t the United States seem to be paying a price for all its borrowing?

If Mr. Gros is right, the true position of the U.S. economy isn’t as bad as you think — it’s worse. The true trade deficit … isn’t $800 billion — it’s more than $900 billion. And America’s foreign debt … is at least $1 trillion bigger than the official numbers say.

Of course, optimists have a comeback: if things are really that bad, why are so many foreign investors still buying U.S. bonds? … But I have two words for those who place their faith in the judgment of investors…: Nasdaq 5,000.

Right now, forensic analysis seems to say that the U.S. trade position is worse, not better, than it looks. And the answer to the question, “Why haven’t we paid a price for our trade deficit?” is, just you wait.

* * *

Yes yes, we can get into the fine minutiae of federal budget deficits financed by domestic lender, versus international trade deficits financed by foreign lenders. Yet it seems to me pretty clear that Krugman was warning of a disaster as early as 2003, and three years later he was still warning of a disaster and saying the markets were stupid to not see it coming.

Note, I’m not disagreeing with his analysis. I think his fundamental position in the above quotes was basically OK–and that makes sense, because he “sounds like Peter Schiff” and I think Peter Schiff has a good view of economic fundamentals.

The only problem with the above quotations is that Krugman did exactly what he says–now–is evidence of a bad character. Year after year rolled by, and he didn’t change his tune; he just said that any day now the markets would vindicate his warnings. He did back then, exactly what a lot of the “inflationistas” have done since 2008.

57 Responses to “According to His Own Criterion, Paul Krugman Has Low Moral Character”

  1. @ZeevKidron says:

    Increases in the money supply will be translated to price inflation provided there is actual increase in the money supply in the public’s hands.

    The last few years almost all the increases in money supply have been reflected in an almost equal increase in bank’s excess deposits with the FED. Plus, the economy grew and some inflation does exist which absorbed some of the excess liquidity.

    So basically, what the FED has done for 5 years is create new money, circulate it through the Federal Government and financial institutions and absorb it again (at a cost=interest on deposits) through the banks. Massive handout.

    Hence, no inflation.

    Please tell me why I’m wrong? Telling me I’m an ass doesn’t count…please explain in simple words I can understand.

    In the unlikely event I’m not wrong, what events can cause the mountain of money deposited at the FED to start flowing into the economy and creating massive price inflation?

    • peter says:

      Well, they can stop paying interest on those deposits, for one.

      • @ZeevKidron says:

        I’m not so sure that alone will do it. They pay so little (0.25%) that it might not make a lot f difference.

        • Michael says:

          I know I saw Dr. Murphy give a talk that had to do with this a while ago. His theory being that QE is intentionally aimed at recapitalizing the banks through this mechanism.

          If this is the correct way of explaining the lack of inflation, then someone in the Austrian camp needs to release something going over it explicitly and clearly.

          interesting stuff

          • Charles Hayden says:

            Dr. Murphy should know better about QE.

            And what ‘saved’ the banks was regulatory forbearance. And the banks did ‘fail’ as evidenced by their stock prices, etc.

            QE is like a tax on top of the low interest rates, itself a tax on savers.

            So what some people over here might call “money printing,” MMT’ers recognize QE as just marking down savings accounts at the FED in the form of government securities + agency debt and marking up checking accounts at the FED. Gov’t securities are interest earning dollars. QE removes interest income from the banking system.
            It’s obviously a tax. And the FED has been turning annual profits of $70 billion+ over to the Treasury for the past few years. Last time I checked gov’t taking income away from the private sector is not considered expansionary.

            How can a tax possibly work to recapitalize banks?

            How does stepping on the brakes make the car go faster?

            • Bob Murphy says:

              Charles, anyone who sells Treasuries to the Fed does so voluntarily, right? So how can it possibly be that when the Fed offers to buy Treasuries, it makes the sellers poorer?

              • Charles Hayden says:

                Yes, the sale is voluntary, and you don’t know its the FED on the other side of the trade until you see it on the FED’s balance sheet.

                And yes, as a whole, the loss in interest income makes the seller’s poorer, as that’s the opportunity cost of holding $ in checking accounts.

              • Bob Murphy says:

                And yes, as a whole, the loss in interest income makes the seller’s poorer, as that’s the opportunity cost of holding $ in checking accounts.

                So why don’t you email them and point this out, so they can stop losing money?

              • Keshav Srinivasan says:

                Charles, are you saying that there’s an externality involved?

          • skylien says:

            Recaping banks with QE is orwellian for bailing banks out with tax payer money.

            • Major_Freedom says:

              Technically the majority of the bank bailout was from newly created money, which is not taxpayer money.

              There is still a loss incurred by those who are taxpayers however, namely those whose incomes increase last.

              • skylien says:

                I meant it including the inflation tax, else it wouldn’t work with QE. Howere it is a bit poorly worded, you are right with that.

              • skylien says:


        • skylien says:


          In a ZIRP environment 0.25 is a lot, especially if it carries Zero Risk. It might. I am sure though Yellen is not very keen on finding it out.

          • peter says:

            Leveragrd 60 times, .25 becomes 15.

            • skylien says:

              I doubt they can leverage their reserves. They would need some means to borrow money at less than 0.25%. The Fed’s discount rate is 0.75%, and no other bank will be willing to lend reserves for less than 0.25% obviously.

              This means the only way to get this risk free 0.25% is to sell any crap to the Fed, avoiding sure losses this way, getting an additional profit from the sale, und then getting risk free 0.25% on the reserve account.

              • peter says:

                Thanks. Shows how much I know about banking. How about using the magic of FRB?

              • skylien says:

                FRB isn’t an issue with the Fed itself. Only private banks use it since they cannot print reserve money. Any money the Fed hands out is base (reserve) money. And therefore any money on an account at the Fed is “backed” fully by reserve money since it is reserve money by definition and the Fed can always print it.

    • Dyspeptic says:

      I wouldn’t go so far as to say there has been no inflation since we should be experiencing price deflation instead of moderate inflation in retail prices. Maybe the Masters of the Universe over at the Marriner Eccles building have figured out a way to confine hyperinflation to those sectors of the economy they want to re-inflate for political reasons. Lets see how long they can keep all of the flaming bowling pins in the air before that whole scheme falls apart.

    • Gamble says:

      @ZeeKidron wrote: “Please tell me why I’m wrong?”

      1. That money did touch human hands and these humans spent some of that money, even if proportionally small. These dollars competed against your dollars. You felt the pain even if you did not know it.

      2. That money propped up previous largess and distortions that was well on its way to correction. You feel the pain even if you don’t know it.

      3. That interest is the kicker. Somebody has to pay for Bens helicopter.

      “what events can cause the mountain of money deposited at the FED to start flowing into the economy and creating massive price inflation?”

      Nothing. No events. That mountain of money should have never been there in the first place. We are not lab monkeys who cannot stop themselves from pushing the more cocaine button. Stop thinking of us as lab monkeys and you will find your answer.

      Also why are a few idle resources such a crime? Have you never stacked firewood?

      Only slave drivers hate idle resources.

      • Bob Roddis says:

        Narcissistic obsessive compulsive slave drivers? See below:


        it’s the attraction of a system (other people) the Keynesian can deliberately control down to the most minute detail, which is “fascinating” to the Keynesian.

        • Gamble says:

          I am a Bible thumper here is my version, but it all does come down to power and control.

          Ephesians 6:12

          New International Version (NIV)
          12 For our struggle is not against flesh and blood, but against the rulers, against the authorities, against the powers of this dark world and against the spiritual forces of evil in the heavenly realms.

    • Innocent says:

      Well, If you should have price deflation, and instead have low inflation, how is that any better in terms of monetary policy. Additionally I would suggest that when inflation does hit ( aggregate demand increases ) how can you possibly reign it in?

      I am interested to see what happens with this experiment. I see many pitfalls.

      More than anything I see what the Fed is doing as a side show. The real question is what can people do to make money. That is more of a regulatory issue. Devaluation of the currency only gets felt as time moves forward and changes investment behavior.

  2. peter says:

    JM Keynes: when the facts change, I change my mind.
    P Krugman: when the party in power changes , I change my mind.

  3. Major_Freedom says:

    Notice how everything Krugman says he got wrong, conveniently happens to have the implication of more government intervention as the cure, or at least no less of it.

    • Dyspeptic says:

      Yes, I noticed that too. He is basically saying that every time he is wrong it is because he didn’t have enough faith in government intervention. He just needs to get all of that free market stuff out of his head and he will be omniscient.

      • Ken B says:

        What though if the is a SuperKrugman of which Krugman is unaware …

        • Major_Freedom says:

          Some guy names Ken told me that I don’t have to answer that question because the real question is whether or not there is proof that Krugman exists as concluded in a peer reviewed academic journal.

          • Bala says:


            • Gamble says:

              Bala I have been meaning to ask you.

              Were you ever part of a thread that involved begging the question straw men and other tricks? I remember reading an online thread when I was researching objectivism and some guy named Bala was simply shredding the other debaters. I imagined this little Indian guy, more robot than human, replying with divine precision stamina.

              Was that you?

              • Bala says:

                It must have been me given the topic and context you mention. It would help if you give the link.

              • Anonymous says:

                I will try, it has been a few years. I was researching Objectivism, ContraAynRandBlog, Mozart was a Red etc.

                I will try to find the link, doubtful though. It was great work on the part of Bala.

  4. Andrew_FL says:

    I’ve said it before and I’ll say it again; I think any reasonable person ought to be able to tell a serious analyst from a partisan hack and I think it is obvious which of those Krugman is.

  5. Lucy in the sky w Dimon says:

    As long as no one convinces Mr Krugman that GDP growth is not the same thing as wealth-creation, and often times they are antithetical, he will continue to be in favour of any policy that boosts GDP. Hayek failed with Keynes. Perhaps Bob will succeed w Paul?

    Once one sees Paul’s writings through his cognitive lens/economic model, it all becomes clear (I think).

    – For example, for his view of money, this is instructive: http://www.pkarchive.org/theory/baby.html. As opposed to the right view, this (Misesian ++): http://unqualified-reservations.blogspot.sg/2009/07/urs-crash-course-in-sound-economics.html

    – 2ndly, Paul does not have the correct theory of capital and treats it like a lump. So, in that model, boosting spending will obv always be good if there are idle resources lying around or people are unemployed.

    – 3rdly, Paul San does not seem to actually, de-facto, understand balance sheets, and that private economic actors require a possibility of profit before they will act using their precious funds.

    Having said all that, I also note that Paul seems genuinely concerned about unemployment and its bad effects. Good intentions clearly, but not-so-good economic theory.

  6. Martin says:

    Bob, if you look at the claim the authors made, namely

    “The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.”

    then they were not only not wrong, but they were also right. The employment-population ratio did not budge since 2010. As Krugman would say

    “Oh boy, somebody is accusing me of making a wrong prediction, but if you look carefully at what I said back in 2010, then it is pretty clear that I said that Fed Policy will have no impact on employment as you can see in the graph here below:


    And while inflation did increase we were spared the worst of it. The risk was high is all that I said, we were lucky to get away with it as we did.”

  7. Bob Roddis says:


    If the market wants a strongly negative real interest rate, we’ll have persistent problems until we find a way to deliver such a rate.

    One way to get there would be to reconstruct our whole monetary system – say, eliminate paper money and pay negative interest rates on deposits. Another way would be to take advantage of the next boom – whether it’s a bubble or driven by expansionary fiscal policy – to push inflation substantially higher, and keep it there. Or maybe, possibly, we could go the Krugman 1998/Abe 2013 route of pushing up inflation through the sheer power of self-fulfilling expectations.

    Any such suggestions are, of course, met with outrage. How dare anyone suggest that virtuous individuals, people who are prudent and save for the future, face expropriation? How can you suggest steadily eroding their savings either through inflation or through negative interest rates? It’s tyranny!


    Krugman would rather die… I mean …..kill us all than think about the fact we are suffering from a funny money-induced mis-pricing problem.

  8. Bob Roddis says:


    As I like to put it, virtue becomes vice and prudence becomes folly. Saving hurts the economy – it even hurts investment, thanks to the paradox of thrift. Fixating on debt and deficits deepens the depression. And so on down the line.

    This is the kind of environment in which Keynes’s hypothetical policy of burying currency in coalmines and letting the private sector dig it up – or my version, which involves faking a threat from nonexistent space aliens – becomes a good thing; spending is good, and while productive spending is best, unproductive spending is still better than nothing.

    Larry also indirectly states an important corollary: this isn’t just true of public spending. Private spending that is wholly or partially wasteful is also a good thing, unless it somehow stores up trouble for the future.

  9. Bob Roddis says:


    OK, this is still mostly standard, although a lot of people hate, just hate, this kind of logic – they want economics to be a morality play, and they don’t care how many people have to suffer in the process.


    But as Larry [Summers] emphasizes, there’s a big problem with the claim that monetary policy has been too loose: where’s the inflation? Where has the overheated economy been visible?

    So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest. And this hasn’t just been true since the 2008 financial crisis; it has arguably been true, although perhaps with increasing severity, since the 1980s.


    In other words, you can argue that our economy has been trying to get into the liquidity trap for a number of years, and that it only avoided the trap for a while thanks to successive bubbles.

    is there really a debate on whether or not Krugman has “low moral character”?

    • Tel says:

      Moral judgement coming from the person who regularly insists, “Economics is not a morality play,” is sufficient justification for confiscating people’s life savings.

      What would he know about judging character?

  10. Gamble says:

    Hypocrite is an often misunderstood word. By definition, a hypocrite knows not what he does. If you know, you are not a hypocrite, just a weasel.

    I applaud Bob Murphy’s effort to cure the disease of hypocrisy and also rid the world of weasels.

    • skylien says:

      Hmm. According to Webster:
      a person who claims or pretends to have certain beliefs about what is right but who behaves in a way that disagrees with those beliefs”

      Without the intentional part the word loses all its force.

      • skylien says:

        Without the intentional part the word *would* lose all its force.

      • Gamble says:

        Webster’s does not say anything about intent or understanding.

        You have to research the word hypocrite. It really means actor.

        Never the less, Krugman is either a hypocrite or weasel, maybe both.

        • skylien says:


          • Gamble says:


            • skylien says:

              *pretends* is in the Webster definition, therefore according to Webster intent is clearly a part of it.

    • Bob Roddis says:

      Isn’t a consistent Keynesian more dangerous than an inconsistent one?

      Haven’t we always known that Keynesianism is just a little ad hoc?


      • Gamble says:

        Keynes knew what he was up to, his cult members may not?

        Thanks for the video.

    • Bob Roddis says:

      George Will:

      “Dr. von Hayek, capitalism and particularly American capitalism would seem to have a good record at giving people a rising standard of living. Why are so many intellectuals, and particularly so many economists, skeptical about and even hostile to capitalism?”

      Dr. Von Hayek:

      “Well, I’ve been puzzling about it for a long time, particularly about the economists who ought to understand better. It’s very difficult to know why they don’t. I think it’s the intellectual attraction of a system you can deliberately control, which is fascinating to the intellectual.”


      • Major_Freedom says:

        “I think it’s the intellectual attraction of a system you can deliberately control, which is fascinating to the intellectual.”

        I think that’s partly true, but more so as a consequence of already being involved in controlling the economy via advisory of the state.

        I think the most important driver however is more fundamental, more metaphysical and epistemological.

        Economics underwent a methodological revolution, where instead of researching logical structure of mind and action, and telling human stories based on that, economists started to use the positivist method, which invariably treats humans as mechanistic, or, if you will, unfeeling and unthinking robots.

        So “the economy” started to be viewed as a sort of machine, operating according to constant causality.

        Economists found themselves wanting to find ways to best control that machine. But somewhere along the line they forgot that this “machine” actually consists of individual actors who think and feel for themselves. They pay lip service to this fact, but they don’t constrain their beliefs to this fact in their method, which is tantamount to contradicting it.

        • Bob Roddis says:

          And they sure as heck do not want to think about or be reminded of that.

  11. @ZeevKidron says:

    It just hit me reading the comments:

    “If the market wants a strongly negative real interest rate, we’ll have persistent problems until we find a way to deliver such a rate.”

    If interest rates are the price of money Isn’t that like saying

    “If people want free stuff we better give it to them or we’ll have trouble” ?

    Now the only thing to figure out, and it’s not too difficult, is who will have to give the “stuff” up and who will get the “stuff”. And no, I don’t believe magical helicopters can fly for long. Fact is the FED keeps those deposits tightly held. I would bet there is no way they won’t take to avoid those reserves leaving. Including “emergency” measures and force.

  12. Yet More Incontrovertible Evidence That Krugman Believes the Fed Can Create Bubbles says:

    […] with his warnings about skyrocketing interest rates, Krugman’s op ed above could (almost) have been written by Peter Schiff. It’s yet […]

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