
How did Paul Krugman get it so Wrong? - chasingsparks
http://faculty.chicagobooth.edu/john.cochrane/research/Papers/krugman_response.htm
======
bonaldi
_The centerpiece of our crash was not the relatively free stock or real estate
markets, it was the highly regulated commercial banks._

A Chicago school economist decides that the cause of the crash was regulation,
there's a surprise. It's difficult not to ad hom him here, but the article
drips with scare quotes, special pleading, straw men and appeals to authority,
so what's one more fallacy?

In fact, although I imagine he wants it to be taken seriously, it reads like
little more than an angry forum comment dressed in academic robes. He's
obviously heated and insulted by Krugman, and given that Chicago is broadly
seen as discredited by the recent crash he is also concerned for his image,
and is responding in kind.

The real economic lessons of the past few years are not to be found here, or
anywhere. They will emerge in years to come. The difficulty is we only have
the ability to really push through changes and learn from them _now_ , so
everyone's trying to be a part of that action. At least it's clear from both
Krugman and Cochrane that the incentives enjoyed by bankers are very badly
designed, and that's one issue we can address.

~~~
Perceval
>A Chicago school economist decides that the cause of the crash was regulation

I don't think that's the point he was making with that quote. What he was
getting at was that extensive regulation and oversight did not stop the
problem from occurring in that sector. Ergo, extensive government regulation
and oversight and intervention throughout the economy is also unlikely to
prevent major problems.

If our choices as a society are: 1) major government intervention _and_
problems, or 2) little government intervention _and_ problems, I think I'd
prefer the latter.

~~~
bonaldi
Yes, I can see your reading of it now. But I think it would be disingenuous of
him to make that claim, given the repeal of Glass-Steagall and the large
reductions in regulation that allowed the problems in banking to be
exacerbated (though this claim is itself questioned by other economists).

A position that regulation either failed or was absent from banking adds a
third choice, which isn't far from Krugman's: 3) better government
intervention and fewer problems.

~~~
jerf
Have you seen the charts of the amount of banking regulation per year, as
measured in lines of regulation? I wish I could Google it up. The repeal of
Glass-Steagall isn't even a blip in the graph, IIRC. It might be lines of
above-average importance, but net-net the Bush administration continued piling
on the regulations at pretty much the expected rate; I doubt a Democrat would
or could have done much more.

The other major problem is that it wasn't _regulation_ that failed, it was
_regulators_. Many regulations that already existed weren't enforced. Looking
at the rate of regulation increase it isn't hard to see why. How do you
propose to solve this problem with more regulations? There's a real
engineering problem here or even a computer science-style information theory
problem with information flows totally exceeding the ability of the processing
nodes to handle. Clearly, adding more processing work to be done isn't the
answer to that problem, and we probably can't afford enough processors to make
even our current set of regulations actually get enforced.

~~~
krschultz
Lines of regulation is not a good measure. A lot of banking regulation is
related to well, banking. Glass-Steagall is specifically related to investment
banking which is a whole other ball game, and to call the repeal of that act
insignificant because it isn't that "big" is patently absurd.

~~~
jerf
The repeal is not insignificant. My point was to counter the idea that banking
had some sort of massive deregulation in the Bush era. One law repealed +
massive growth in other regulations is hardly "deregulation".

~~~
btilly
Ever heard of regulatory capture? That's where a regulated group attempts to
get control over the regulators, so they can then regulate their own industry
for their own benefit. It is universal that regulated organizations will
attempt this, and usually they succeed.

After a regulated industry undergoes regulatory capture you will see is a
steady growth in the amount of regulation, and a simultaneous decrease in how
much the regulation prevents that industry from doing what it wants. The
regulations are added because they benefit the industry in some way, for
instance by creating barriers to entry for potential competitors.

That is what happened in finance. Glass-Steagall really kept companies from
doing what they wanted to do, and got dropped. But we got new "regulations"
like the optional alternative way of calculating net capital ratios introduced
in 2004 that allowed the 5 major broker dealers to double their leverage. The
result? More lines of "regulation" that reduced how much actual regulating
there was. Oh right, and a few years later a bunch of failed broker dealers.
See [http://www.nysun.com/business/ex-sec-official-blames-
agency-...](http://www.nysun.com/business/ex-sec-official-blames-agency-for-
blow-up/86130/) for verification of that.

Therefore a steadily increasing number of lines of regulation is not evidence
that there wasn't major deregulation in the same time period.

~~~
jerf
How do you propose to solve regulatory capture with more regulations? Or more
regulators? Given the obvious failure of regulation, why is the only answer
that anyone can conceive of "more regulations"? Like trying to quench a fire
by adding more fuel, oxygen, and heat.

And in light of the inability of regulators to enforce the regulations and the
plain failure of them to do so, who cares what the regulations actually said
anyhow?

~~~
btilly
I don't have a way to solve it long term. However I believe that it can be
worthwhile to have a regulation that temporarily makes things better even if
it eventually fails. For example I think that Glass-Steagall was a good thing
for a very long time.

------
MaysonL
For some perspective on John Cochrane and his economic views:

[http://delong.typepad.com/sdj/2009/02/why-do-we-
economists-t...](http://delong.typepad.com/sdj/2009/02/why-do-we-economists-
today-know-so-much-less-than-fisher-or-wicksell-knew.html)

[http://delong.typepad.com/sdj/2009/01/time-to-bang-my-
head-a...](http://delong.typepad.com/sdj/2009/01/time-to-bang-my-head-against-
the-wall-some-more-pre-elementary-monetary-economics-department.html)

Of course, the author of those blog posts, Brad DeLong, is also known as the
author (only somewhat jokingly) of the Efficient Krugman Hypothesis (Postulate
1: Paul Krugman is always right. Postulate 2: If your analysis suggests Paul
Krugman is wrong, see Postulate 1.),

------
philwelch
There's a fair amount of this on the right, as well--a lot of your goldbugs
and "Austrians" are, like Krugman, taking one side in a 1930's era doctrinal
dispute and ignoring the last several decades of economics.

Maybe economics really has gone wrong in the past 40-80 years, and there's no
salvageable content in all the research since then. But a lot of economists
(particularly the behavioral school) are doing real empirical science lately,
and I'd bet that they're likely to be onto something.

~~~
jerf
"There's a fair amount of this on the right, as well--a lot of your goldbugs
and "Austrians" are, like Krugman, taking one side in a 1930's era doctrinal
dispute and ignoring the last several decades of economics."

Can you show me a goldbug with a Nobel Prize in Economics and a column in a
New York Times-class newspaper or other similar venue?

I know what you're saying, and it is literally true, I don't deny that. But
Krugman should be held to a higher standard.

Personally, I find him very disappointing. A guy with a Nobel Prize in
Economics ought to be making compelling arguments that are a surprise to me,
and thus contain information in the information theoretic sense. (That's my
favorite way of looking at information in an English context.) Instead, I can
predict _in advance_ what Krugman's position on a topic will be now with
virtually 100% confidence, which should not be possible if he's actually
writing with insight that someone of such stature should be bringing to
topics, as I most assuredly hold a Nobel Prize in absolutely nothing. Even if
he chooses doctrinaire liberal choices completely reliably, he should be able
to defend them with far more interesting arguments than I actually see from
him, the kind of interesting that even when you disagree you at least stop to
think.

~~~
philwelch
I was writing mostly for the audience of people who already dismiss Krugman as
an incorrigible liberal but might consider the opinions of self-trained
Austrian economists who post on comment threads. Those of us who dismiss
goldbugs on comment threads already should have been convinced by the article
to give up on Krugman.

But yes, I am also disappointed in Krugman.

------
jfornear
Different views on this same topic:

Martin Neil Baily:
[http://www.brookings.edu/opinions/2009/0908_krugman_baily.as...](http://www.brookings.edu/opinions/2009/0908_krugman_baily.aspx)

Barry Eichengreen:
[http://www.nationalinterest.org/PrinterFriendly.aspx?id=2127...](http://www.nationalinterest.org/PrinterFriendly.aspx?id=21274)

Mankiw linked to all of these (including Cochrane) on his blog a while back:
[http://gregmankiw.blogspot.com/2009/09/how-did-economists-
ge...](http://gregmankiw.blogspot.com/2009/09/how-did-economists-get-it-so-
wrong.html)

~~~
chasingsparks
I do enjoy Mankiw. I thought HN would appreciate the Cochrane article the most
because IMO it was the best critique and because it resonates with PG's How To
Disagree <http://www.paulgraham.com/disagree.html>

~~~
jfornear
I prefer Cochrane's critique as well. Krugman is one of the most overrated
economists of our time IMO.

~~~
lil_cain
Depends. Krugman's actual economics has been brilliant, for the most part. The
problem is no one knows him for his economics. People know him for his New
York Times column, and the two are only very tangentially related.

~~~
jfornear
I mean, I took an international trade theory class that was dedicated to
Krugman's work... I know he is only popular because of his NYT blog, which,
for the most part, seems to only exist to bolster liberal political
initiatives, and, to clarify, that is why I think he is overrated.

------
chasingsparks
About two weeks ago, there was a thread on Krugman's Op-Ed
<http://news.ycombinator.com/item?id=803793> in the NYT. This is a response to
that op-ed by a fellow economist.

~~~
madair
The _fellow economist_ is a key figure in the school of economic thought that
Krugman was attacking.

~~~
chasingsparks
Does that make his arguments less true?

~~~
madair
Of course not, it's all a point of view. It's just a critical point to know in
the context of _fellow economists_ that the Chicago school is under attack,
whether rightly or wrongly, for the current state of the economy.

~~~
chasingsparks
Fair.

------
jshen
This article is terrible. Here are some examples of why.

"If a scientist, [krugman] might be a global-warming skeptic, an AIDS-HIV
disbeliever, a creationist, a stalwart that maybe continents don’t move after
all."

"Krugman wants to be Rush Limbaugh of the Left"

~~~
TomOfTTB
I wouldn't say terrible. He makes a point he just tried to enhance that point
with language that I'll agree was a little too...how shall we say...colorful
(ironic considering he took Krugman to task for attacking other people but
what can you do)

But there is an arguably logical thought process behind the post itself

~~~
e40
I think colorful is a little too generous. I think it's far beyond that.

------
sandrogerbini
There are some lessons to be learned from this article. Namely, John Cochrane
demonstrated the type of knee jerk, incensed reaction that has landed many
otherwise upstanding academics in the bad graces of their peers. His piece was
much more inflammatory than it needed to be - in fact, I would argue that the
tone invalidates his position. To me, the piece sounds like it is coming from
a man that has simply had enough of his institution being attacked for its
historical tendency towards a particular party of economic thought.
Understandable, but highly disappointing in its effect.

------
hristov
I don't have time to discuss the minute points of this essay so I will just
point out a couple of incredibly obvious facts:

1\. The chicago school economists were incredibly influential in the bush
government to the exclusion of all other economists.

2\. It all ended in disaster.

I think Krugman is correct in pointing out that there is something very wrong
with the advice these guys were providing.

~~~
natrius
Regardless of what one thinks of Krugman's positions, he clearly deals in
personal attacks far too often. If he's trying to educate the public, that's
not helping his cause.

~~~
jbarciauskas
I'm not sure what instances you are thinking of, so perhaps I am mistaken, but
from what I have read, Krugman wants to promote greater accountability. When
he criticizes the decision or prognostication of an economist or politician,
it's to avoid the passive voice - "Mistakes were made" and identify the party
responsible for the error. I think he would expect others to hold him to the
same standard.

~~~
natrius
Here's one example: [http://krugman.blogs.nytimes.com/2009/03/03/roots-of-
evil-wo...](http://krugman.blogs.nytimes.com/2009/03/03/roots-of-evil-
wonkish/)

Accusing people of "deliberate obtuseness" is no way to have an argument.

------
samh
Prof Steve Keen FTW
[http://www.debtdeflation.com/blogs/2009/09/27/it%e2%80%99s-h...](http://www.debtdeflation.com/blogs/2009/09/27/it%e2%80%99s-hard-
being-a-bear-part-sixgood-alternative-theory/)

------
davidmathers
Flagged. Please join me.

~~~
TomOfTTB
So Krugman is ok (you submitted this article yourself:
<http://news.ycombinator.com/item?id=332097>) but those who disagree with him
should be flagged?

~~~
davidmathers
Articles about economics are ok. This is political squabbling. If I saw the
Krugman column where he called Cochrane a barbarian posted here on hacker news
I would flag that also. This is full on reddit territory.

Here's a link for you:
[http://worthwhile.typepad.com/worthwhile_canadian_initi/2009...](http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/09/john-
cochrane-paul-krugman-and-says-law-again.html)

~~~
davidw
I joined you in flagging it (and flagged the Krugman one for good measure :-).
It's virtually impossible for _any_ article about economics to not devolve
into political squabbling on internet forums. Just look at the ratio of people
with degrees in economics vs people who are, as philwelch describes them,
"self-trained Austrian economists who post on comment threads". And if you
start posting Krugman articles, it's like waving a red flag in front of a bull
for our "Austrian" (and others of their ilk) HN brethren - they're going to
want to post their stuff too.

I think economics is fascinating, but ultimately it serves, and is very
closely related to what a society's goals and values are, which is politics.

