30 Jul 2015


Bryan Caplan, David R. Henderson, Krugman, Potpourri 24 Comments

==> Alex Tabarrok relays some surprising facts about apartment hunting in Stockholm.

==> Tabarrok twin spin: Here he reviews a book on more effective altruism.

==> Overstock.com CEO Patrick Byrne was the “mystery guest” (via Skype) at Mises University this year. He pointed us to this Politico article, saying this reporter was the first mainstream one to fully grasp just how revolutionary blockchain technology will be. It goes way beyond Bitcoin. (Incidentally, if you’re new here, remember that I wrote a guide to Bitcoin with Silas Barta.)

==> Tom Woods interviews Gene Epstein on how he came to libertarianism.

==> Bryan Caplan 1, John Podhoretz 0.

==> I’m glad David R. Henderson caught the non sequitur in Krugman’s analysis of Greece. Specifically, Krugman argued that the current crisis is the fault of the rigid euro system, not the Greek government’s profligacy and overregulation, because after all the Greeks had high debt and stifling regulations 10 years ago. As David points out, uh, Krugman, they were also in the same euro system 10 years ago.

Let me pivot though and focus on something that doesn’t make sense to me. People have (rightly) ridiculed Krugman for this statement, quoted in David’s post:

ZAKARIA: Ken Rogoff on last week’s show actually said that you bared [sic] some responsibility here, because you advocated that the Prime Minister of Greece voted no, supported the no proposition, the referendum he took, in a sense defying the European creditors. The result of that was that he got worse terms. Do you think that’s fair?
KRUGMAN: Well, it’s certainly true that – I assumed – it didn’t even occur to me that they would be prepared to make a stand without having done any contingency planning.

So as I said, people have been making fun of Krugman for his overconfidence in the Greek government.

But here’s what I don’t get: Suppose Krugman’s assumption had been right, and the Greek government DID have a contingency plan, when they took his advice to stand firm (originally) against the troika. Well, even so, wouldn’t Krugman have had to know what that contingency plan was in order to say whether it was a good idea to reject the original bailout terms?

I mean, suppose Krugman’s brother-in-law calls him up and says, “Hey, I just got this job offer that pays $40,000, should I take it?” And then Krugman says, “Heck no, ask them for at least $50k.” Then the guy says, “OK I took your advice, and now I’m unemployed. Can I crash on your couch?” Krugman comes back and says, “Oh wow, when I told you to reject that initial offer and ask for more money, it didn’t even occur to me that you didn’t have another company waiting in the wings to hire you.”

Does that make any sense? Wouldn’t Krugman have to know not only that his brother-in-law had another offer, but also know what it was in order to sensibly advise him on whether to take the pending offer of $40k? For example, suppose the brother-in-law’s backup plan was a job paying $12,000. In that case, gambling with the $40k is pretty risky.

You think I’ve made my cutesy point, but I’m just getting warmed up here. Let’s start over. Krugman is acting like he’s got a pretty good handle on the Greek situation; he is quite confident in telling its officials what to do, and he’s quite certain he knows what caused the trouble, and what lessons the rest of the world should take from the whole episode. In that context, then, why can’t Krugman offer a Plan B to Greek officials, when they followed his advice and it blew up in their faces?

In summary, Krugman is saying something like: “I know so little about the actual Greek economy and fiscal situation that not only can’t I offer them a recommendation of what to do right now, but two weeks ago I was so ignorant that I assumed they had hidden information that would have rendered my advice useful to them.”

Am I being too harsh on the poor guy? I don’t think so. I think (as usual) his confident prognostications blew up in his face, and (as usual) he explains that it wasn’t his fault. It’s always somebody else’s fault.

24 Responses to “Potpourri”

  1. skylien says:

    Actually Greece had a Plan B, but for whatever reason (lack of support by some 3rd party possibly) they got cold feet to execute it.


    Some interesting stuff in the article like Varoufakis as fincance minister! needed help of hackers to get info from the tax office!

      • Slappy McFee says:

        It’s not a plan B if you don’t use it when Plan A fails.

        • skylien says:

          Well, they started the whole referendum thing with having a Plan B in mind. That is not the same thing as never ever thinking about it.

          Also this ignores of course that the people of Greece really don’t want the Drachma back.

          And ironically Tsipras has already called for another referendum, this time however only within his own party.

  2. Daniel Kuehn says:

    They’re talking about criminal charges for Varifoukis because they *did* have a plan B.

    On over-regulation, I think it’s fair enough to talk about it but I’m not sure having the Euro ten years ago is the right comparison. It’s not having the Euro in and of itself that people are concerned about – it’s having the Euro during a major demand shock.

    • Bob Murphy says:

      Daniel wrote:

      They’re talking about criminal charges for Varifoukis because they *did* have a plan B.

      OK, so then Krugman is appearing on national TV to talk about Greece, and he doesn’t even read the headlines.

      Daniel, this seems to happen a lot. Krugman offers an excuse for his failed prediction that makes no sense, I point out it makes no sense, and then you implicitly argue, “Bob, you can’t really object on the grounds of that excuse, because it was patently absurd. If *I* were defending Krugman’s failed prediction, this is how I’d do it, and so I ask you to please evaluate his failed prediction on the basis of my excuse, which at least is coherent.”

      • Daniel Kuehn says:

        Headlines came after his appearance.

        I’m not sure he offers an excuse does he? What is the excuse? It seems to me all he’s saying is that he made a wrong assumption which doesn’t seem to be making an excuse it seems to be the exact opposite of an excuse!

        Now with the information that just broke yesterday (or the day before?) that there was an exit plan he turns out to be not so wrong after all. But I’m not sure what you’re imagining the excuse is (unless there’s something I’m missing that hasn’t been shared here).

        • Tel says:

          Headlines came after his appearance.

          No, the plan has been out in the open for at least a year. If Krugman never reads this stuff, he is just plain lazy:

          The question is: Is there something that the peripheral countries can do to give themselves a chance to breathe better and to act as a bargaining chip that will make Berlin, Frankfurt and Brussels take notice?

          The answer is yes: They can create their own payment system backed by future taxes and denominated in euros. Moreover, they could use a Bitcoin-like algorithm in order to make the system transparent, efficient and transactions-cost-free. Let’s call this system FT-coin; with FT standing for… Future Taxes.

          FT-coin could work as follows:

          * You pay, say, €1000 to buy 1 FT-coin from a national Treasury’s website (Spain, Italy, Ireland etc. would run their separate FT-coin markets) under a contract that binds the national Treasury: (a) to redeem your FT-coin for €1000 at any time or (b) to accept your FT-coin two years after it was issued as payment that extinguishes, say, €1500 worth of taxes.

          * Each FT-coin is time stamped i.e. in its code the date of issue is contained and can be used to check that it is not used to extinguish taxes before two years have passed.

          * Every year (after the system has been operating for at least two years) the Treasury issues a new batch of FT-coins to replace the ones that have been extinguished (as taxpayers use them, two years after the system’s inauguration, to pay their taxes) on the understanding that the nominal value of the total number of FT-coins in circulation does not exceed a certain percentage of GDP (e.g. 10% of nominal GDP so that there is no danger that, if all FT-coins are redeemed simultaneously, the government will end up, during that year, with no taxes).


          Lots of other people have discussed the viability of such a plan. We could go into that… but ultimately the Greek executive decided not to go for it. Their choice of course, but the plan was right there.

          • Daniel Kuehn says:

            Tel, the question isn’t “did anyone talk about a new currency system a year ago”. It was whether there was an actual plan drawn up – not a blog post.

            • Anonymous says:

              Odd the way the financial pundits will discover untold meaning from whether Janet Yellen used the word “patient” this week or not; but reading the Greek Fin-Min describing his own plan on his own blog in plain English is something we should all ignore… after all, what would some blogger know?

              Here’s an idea:


              Poor old Red Ed, even with the giant letters carved in stone no one believed him. He should have spent a few bucks more and got the nice gold lettering on black basalt… cheap bastard!

              • Daniel Kuehn says:

                “is something we should all ignore”

                Jeez guys. Who said this? Who? Come on if you’re going to dispute me at least stick to what I’ve said.

              • Tel says:

                Hmmm, the Anon post was me, I swear I don’t know why it was anon.

                Anyhow your comment was this:

                It was whether there was an actual plan drawn up – not a blog post.

                That does sound pretty dismissive of Varifoukis for no other reason than because he was posting on a blog.

                I mean if Varifoukis has written the exact same thing in the front page of the New York Times would you still be saying “not some newspaper article” ?

  3. Capt. J Parker says:

    Ireland, Spain and Portugal had the Euro and the demand shock like Greece. Only Greece’s economic problems continue to grab headlines. So, it seems to me a stretch to conclude that the fundamental cause of Greece’s inability to solve its problems is the Euro or the demand shock or the two in combination. The fundamental causes are big debt and continuing deficits and an inefficient economy. I’m not claiming that Greece wouldn’t have an easier time with its own monetary policy but I think the important lesson in the Greek crisis is that it was brought on by bad decisions of Greek leaders, specifically the decision to lie about their deficits and the myriad decisions to “perfect’ the market economy.

    • Daniel Kuehn says:

      re: “So, it seems to me a stretch to conclude that the fundamental cause of Greece’s inability to solve its problems is the Euro or the demand shock or the two in combination. The fundamental causes are big debt and continuing deficits and an inefficient economy.”

      Good point. As we all know Ireland, Spain and Portugal HAVE the Euro and a demand shock, but don’t have deficits and an inefficient economy.

      When I think “economic efficiency” I *definitely* think “Spain”.

    • Tel says:

      Ireland, Spain and Portugal had the Euro and the demand shock like Greece. Only Greece’s economic problems continue to grab headlines. So, it seems to me a stretch to conclude that the fundamental cause of Greece’s inability to solve its problems is the Euro or the demand shock or the two in combination.

      Paul Krugman did indeed predict that all of those would fail.

      “When Austerity Fails” MAY 22, 2011:

      What to do? European leaders offered emergency loans to nations in crisis, but only in exchange for promises to impose savage austerity programs, mainly consisting of huge spending cuts. Objections that these programs would be self-defeating — not only would they impose large direct pain, but they also would, by worsening the economic slump, reduce revenues — were waved away. Austerity would actually be expansionary, it was claimed, because it would improve confidence.

      Nobody bought into the doctrine of expansionary austerity more thoroughly than Jean-Claude Trichet, the president of the European Central Bank, or E.C.B. Under his leadership the bank began preaching austerity as a universal economic elixir that should be imposed immediately everywhere, including in countries like Britain and the United States that still have high unemployment and aren’t facing any pressure from the financial markets.

      But as I said, the confidence fairy hasn’t shown up. Europe’s troubled debtor nations are, as we should have expected, suffering further economic decline thanks to those austerity programs, and confidence is plunging instead of rising. It’s now clear that Greece, Ireland and Portugal can’t and won’t repay their debts in full, although Spain might manage to tough it out.

      But Ireland is paying their debts, at this stage Ireland is well on the way to recovery, and actually there were no “huge spending cuts” for Ireland when Krugman was writing this in 2011. If you check the facts, Irish government spending to GDP ratio rapidly ramped UP from 2007 to a peak in 2011, and then ramped down again as employment picked up. Krugman hates it, he keeps rubbishing the Irish recovery, saying it’s too slow, not good enough, but Ireland has NOT failed like Krugman predicted nor has it gone the same way as Greece, where Krugman was putting it pretty much into the same bucket as Greece.

      We could argue about whether it was a good idea for the Irish government to bail out their banks, but that’s all done now, fact is they did choose to spend government money doing just that. Maybe they would be better off if they spent the same money elsewhere, no one can prove the counter factual.

      We could argue (one again) about the one true definition of “Austerity” given that I’ve been trying to nail jelly to the wall on that topic for years now, I don’t expect any answer that anyone will stick to. However Krugman did specifically say “mainly consisting of huge spending cuts” and in the case of Ireland 2011 that’s Just Plain Wrong (TM).

      As for Spain and Portugal, those are quite different stories… different cultures, different people, different policies.

  4. Bob Roddis says:

    Regarding that Bryan Caplan bet, I’ll bet $20 that within 10 years the US or Israel incinerates by drone the mixed Iranian ski team while they are having their pictures taken in bathing suits for a fund-raising calendar. The President will then visit our ally Saudi Arabia soon after more people have been beheaded with swords (requiring at least 3 whacks) for witchcraft and reading the Bible and she will give an impassioned speech on how American intervention is essential for the protection of freedom around the world.

    I’ll bet another $30 that no American will care unless the drone strike kills a large cat.


    • Tel says:

      I’m guessing you don’t expect twenty bucks to buy a whole lot in 10 years time?

  5. Bob Roddis says:

    New Years Eve 12/31/59, I was staying at my grandma’s house when she found an old 78 record called “Two Black Crows – Moran and Mack” in the attic. They were discussing demand shocks. Moran says to Mack: “You ain’t got no mo’ money than a snake has hips”.

  6. Yancey Ward says:

    Krugman is a fool- that much has been clear for years. However, Greece did have a Plan B-get a better offer from the Germans- the only problem was that the Germans made it clear after the referendum they wanted the Greeks to voluntarily exit; that desire on the part of the Germans is why the new offer was more harsh than the one the Greeks turned down. I don’t the think the Germans expected Tsipras to accept the new offer.

    I think Tsipras, given the circumstances, decided that it would be better to make one last attempt to extract even a minimally larger amount of money out of the EU- perhaps some more ELA assistance, perhaps some more loans from the ESM/EFSF that might be spent by the Greek government itself rather than being directly used to rollover the old loans from the same institutions. That is battle now- the Germans will try hard to make sure no new money gets spent in Greece itself.

  7. Tel says:

    Hey, avoiding the topics covered above and moving right on to “altruism” and why it doesn’t exist. Here’s that pumping diagram:


    Let’s suppose the playground merry go round at (1) is replaced by a perfectly normal hand pump. Can anyone see a fundamental issue? I mean an economic issue, related to incentives.

    I must admit, there might be some merit in the idea with careful design, if the merry go round operates in some non-linear manner (i.e. free spins at low revolutions and then pumps water in order to slow down).

    Also, I’m not opposed to people TRYING an idea, because if you don’t try, you don’t know what works. Pointing out a failure of one idea does not imply the free market itself has failed… there should be winners and losers, that’s the only way we can improve our situation.

  8. Tel says:

    I’m guessing that this might be interesting in terms of the who minimum wage saga.


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