
How Did Paul Krugman Get It So Wrong? (2011) [pdf] - Tomte
http://faculty.chicagobooth.edu/john.cochrane/research/papers/ecaf_2077.pdf
======
caycep
From the layperson's perspective, it seems the field is a lot of University of
Chicago (and maybe George Mason U) vs. everyone else...

My impression of his NYT columns for the past two decades, are that they seem
to have predicted accurately the broad trends in the US and global economies,
far more accurately than those of his detractors

~~~
bb88
There's basically two camps. Freshwater and Saltwater economics. It's not
entirely accurate to describe economics in this way, but there are still two
distinct camps. U of Chicago is in one, Paul Krugman is in another.

[https://en.wikipedia.org/wiki/Saltwater_and_freshwater_econo...](https://en.wikipedia.org/wiki/Saltwater_and_freshwater_economics)

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hcknwscommenter
This article by Cochrane is a poorly written hit job (IMHO). Cochrane argues
that Krugman is equivalent to an HIV-AIDS disbeliever. Ridiculous. Krugman's
thesis on "what went wrong" is grounded in the GFC experience. That is,
grounded in the data. Cochrane is just being a jerk.

Tellingly, Cochrane chides Krugman for attributing a quote to him (C) that he
"did not write." In the very next sentence, we learn that the "quote" is
accurate and accurately attributed to him, just not something he "wrote." He
also argues the quote is out of context, but fails to explain exactly how.
Okay dude.

Cochrane goes on to assert that Krugman grossly distorts fresh water economics
as allegedly setting forth the inability of government spending to increase
employment. And yet, we have this
[https://faculty.chicagobooth.edu/john.cochrane/research/pape...](https://faculty.chicagobooth.edu/john.cochrane/research/papers/stimulus_rip.html)
, which clearly argues (by Cochrane himself) that the multiplier on fiscal
stimulus is precisely equal to zero. That is, according to Cochrane, every
dollar of government spending results in an equal and opposite dollar lost
somewhere else in the economy as supposedly required by Ricardian equivalence.
This is of course nonsense.

This is not an honest article.

~~~
AnimalMuppet
I could just as well say "This is not an honest comment." Much of what you
said was addressed in the article.

For example, related to the "multiplier is precisely zero" paper, Cochrane
says:

> Krugman asserts that I and others ‘believe’ ‘that an increase in government
> spending cannot, under any circumstances, increase employment’ and that we
> ‘argued that price fluctuations and shocks to demand actually had nothing to
> do with the business cycle’. These are just gross distortions,unsupported by
> any documentation or the lightest fact-checking, let alone by examination of
> any professional writing. And Krugman knows better. All economic models are
> simplified to exhibit one point; we all understand the real world is more
> complicated. Krugman’s job as a professional economist with a newspaper
> column is supposed to be to explain that to lay readers. These quotes about
> academic opponents would be rather like somebody looking up Krugman’s early
> work (which assumed away transport costs) and claiming in the Wall Street
> Journal, ‘Paul Krugman believes ocean shipping is free, how stupid’.

That is: Yes, his paper "said that", and no, that's not what his paper was
saying. And a reasonable reading of his paper would have known that. And a
thorough and charitable reading of this article would have revealed that.

------
DataGata
For context, the original article [1] was in September of 2009, a year after
the financial crisis hit its climax. The period was also a period where "salt
water economics" and "fresh water economics" had their peak conflicts (after
many decades of a peaceful truce).

The different view points are not exactly amicable because they quickly
devolve into ideological fights.

[1][https://www.nytimes.com/2009/09/06/magazine/06Economic-t.htm...](https://www.nytimes.com/2009/09/06/magazine/06Economic-t.html)

------
misiti3780
Link to piece:
[https://www.nytimes.com/2009/09/06/magazine/06Economic-t.htm...](https://www.nytimes.com/2009/09/06/magazine/06Economic-t.html)

Taleb made a career out of this: Economists use models that are don't consider
fat-tails. The rating agencies used them, LTCM used them, Fannie and Freddie
used them. Everyone thought spreading shitty risks across MBS, CDOs, CDS,
CDS^2 mitigated the risk, but it turns out i did not.

As Taleb would say, the economists use models that assume we live in
"mediocristan" but we live in "extremistan"

Krugman will probably write another article like this in 10-15 years, but
instead of it being about housing debt, it will be about student loan debt.

~~~
hcknwscommenter
"Everyone thought spreading shitty risks across MBS, CDOs, CDS, CDS^2
mitigated the risk, but it turns out i did not."

I must quibble. Yes it is true that everyone thought spreading mitigated risk.
In reality, it actually did mitigate the risk, just not to the extent expected
by many. Indeed, a colleague of mine was desperately putting together a
"recession" model for CDOs that included suitable co-variances lacking in the
standard models (e.g., if foreclosure rates rise in an area past a certain
threshold, house prices in general will be depressed ). There was no market
for such a product because it introduced significant non-linearity in the
valuation models. Nonetheless, clearly the folks at magnetar understood what
was going on.

~~~
misiti3780
i agree my statement is not correct. thanks!

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hirundo
The facts that (1) Paul Krugman is prone to immoderate statements and (2) he
may have the biggest megaphone of any living economist are closely related.
His voice stands out even among Nobel Prize winners. Right or wrong, if he
were not given to exaggeration, alarmism, tribalism and ad hominem, it
wouldn't.

~~~
cryptonector
Now tell us whether "exaggeration, alarmism, tribalism and ad hominem" is good
or bad :/

------
spyspy
Needs a 2011 tag. The article in question is from 2009.

[https://www.nytimes.com/2009/09/06/magazine/06Economic-t.htm...](https://www.nytimes.com/2009/09/06/magazine/06Economic-t.html)

------
HillaryBriss
I'm not sure there's anything new in this article. It sort of sounds like a
rehash of one side's arguments as contrasted with Paul Krugman's rehash of his
side's arguments. It's a long-standing debate.

But there are some entertaining quotations:

 _Any astute reader knows that personal attacks and innuendo mean the author
has run out of ideas._

 _Following the last mystic oracle until he gets a judgment wrong, then
casting him to the wolves, is not a good long-term strategy for identifying
bubbles._

 _Krugman wants to be the Rush Limbaugh of the Left._

 _The case for free markets never was that markets are perfect. The case for
free markets is that government control of markets, especially asset markets,
has always been much worse._

------
resters
Paul Krugman has fortunately been largely discredited since this article was
published, but we should not forget the role he played in laying the
foundation for the fallacious economic ideology that got Donald Trump into
office and has led to a broad decrease in concern for the Federal budget.

~~~
thomasjudge
Do you have any references to substantiate both of your claims?

~~~
popeye77
He was very non-specific, so his claims hold water, albeit in a very loose
way. But let's not kid ourselves, Paul Krugman never met a central bank he
didn't love, and believes that there's no limit to the bankroll for a
credit/debt centrally managed economy. There's zero debate to that. The only
debate going on is between republicans and democrats on HOW that gravy is
spent. Republican leadership want war, and want the potholes fixed in the red
districts. Democrat leadership want war, and the potholes fixed in the blue
districts.

Most citizens are caught up heavily, or lightly, in some (distracting) cause
or another. But virtually no one questions whether the entire system is
really, and truly able to keep up the charade.

The insanely wealthy have built up their warchests for the next big ass
whipping to the global economy, but amongst the peasants, people are like
"meh". When they should really be building a bit of bankroll for themselves,
for the rainy day.

"...first by inflation, then by deflation, the government, the banks, and the
corporations, will grow up around them and deprive the people of prosperity
until their children wake up homeless ..." \--no one famous said (but it's
still true)

~~~
resters
See my reply with citations.

------
voldacar
You could probably make a lot of money investing in stuff Paul Krugman doesn't
like

------
AnimalMuppet
"... a deep and highly politicized ignorance". I found that phrase
fascinating.

------
addicted
I just want to point out that Keynesian economics, which apparently have been
discredited, is literally what Donald Trump and the Republican Party, which
were apparently anti-Keynesian economics are practicing. So if Krugman got it
wrong, he got it wrong in a way that convinced everyone in the US political
spectrum that it was the right thing to do.

Further, Krugman was very clear thst it was important for the government to
spend heavily in a recession, when government spending wouldn’t crowd out
private spending, and specially st the time (and even now) the US has a vast
requirement for infrastructure maintenance, which thanks to the crash could
have been gotten done on the cheap. It wasn’t an unconditional endorsement of
government spending.

I didn’t read too much further into this article, because I was heavily
involved in this particular aspect of the response to the financial crisis due
to a project in class, and was well aware of what different commentators,
including Krugman were saying, and this article mischaracterises the part that
I do remember.

~~~
hcknwscommenter
"Keynesian economics, which apparently have been discredited"

Uhh. Nope.

"literally what Donald Trump and the Republican Party, which were apparently
anti-Keynesian economics are practicing."

Uhhh. Nope. I'll be wrong in my oversimplification, but at least more right
than the above. Keynes' central argument was that in times of depressed
aggregate demand and high unemployment, the government can play a massively
positive role in stimulating aggregate demand. Keynes never argued in favor of
stimulus at times like these.

~~~
AnimalMuppet
> Keynes never argued in favor of stimulus at times like these.

Further: He argued for _austerity_ at times like these, so that the budget
would balance over the whole cycle. _That_ idea has far more restraint and
fiscal conservatism in it than either party has shown in decades.

One could argue that, with interest rates this low, borrowing to work on
infrastructure makes sense. That may be a reasonable thing to do, but it's not
a Keynesian policy (because we're at the wrong point in the business cycle).

------
jvagner
I stopped following Paul Krugman on Twitter _only_ because Twitter was
constantly pushing anti-Paul-Krugman trending threads at me, most of which I
couldn't find much affinity with.

------
resters
So this article got flagged because it connects the dots between Krugman's
life's work and the themes that Trump rode to power. It's economic and
cultural, not political. Mods, please unflag this.

