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
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.
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... , 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.
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.
> “Theorem” means that if a bunch of assumptions, then borrowing has exactly the same effect as taxing. That doesn’t mean it’s true of the world, but it means that if you want to defend stimulus, you have to tell us which of the “ifs” you disagree with.
> So the biggest impact of Barro’s theorem is not whether it is “right” or “wrong” as a description of the world. The biggest impact is that, if you are at all intellectually honest, it forces you to deal with why it is wrong. Many proponents do not do this; they just cite one assumption they don’t like, on the basis of intuition rather than real evidence, and go back to simplistic always-and-everywhere mulitipliers.
> Can’t the facts settle this argument? Alas, not easily – and both policy and economics would be better if they acknowledged this fact.
Barro’s theorem is ivory tower economics based, like much ivory tower economics, in the assumptions of the rational choice model (which is not only possibly false, but is grounded in known-false assumptions and has repeatedly been proven to not predict real-world behavior), and, on top of that, the assumption that rational choice model works for individuals (which it doesn't) it assumes that it also does for families as effectively infinite-lifespan invididuals, and that capital markets are perfect (which they at best approximate), and that the path of government expenditures is fixed (since the path of government expenditures is determined at least in part by external economic conditions, this also makes the theorem circular since this assumption essentially includes the assumption that the different funding choice will have no externally visible economic effects that might affect future spending decisions.)
Which of those assumptions, then, are wrong when dealing with the real world?
All the ones that aren't simply begging the question are known to be false (though the one about capital markets may sometimes be a useful approximation), and the last is a sneaky assumption of what the argument is seeking to prove. Ml
And those are the overt assumptions; it also assumes distribution of funding has no effect (or is an argument that borrowing is equivalent to a tax on exactly those who would lend, which, even if it is true, isn't a compelling argument because it's very difficult to mimic the targeting of borrowing with a tax.)
I'm not arguing that the theorem is true. My point is that Cochrane is not claiming that the theorem is true to the real world (which hcknwscommenter seems to be claiming that Cochrane thinks).
Cochrane's point to me seems to be this: claims that "the multiplier is X" are even more naive and disconnected from the real world than Barro's theorem is.
> Cochrane's point to me seems to be this: claims that "the multiplier is X" are even more naive and disconnected from the real world than Barro's theorem is.
Which is, frankly, wrong. Claims that “the multiplier is X”, unlike Barro’s theorem, tend to be a posteriori arguments from analysis of real-world observations. They may be incomplete or flawed analysis and the conclusions may be wrong (as might the idea that there is a multiplier effect or, if there is, that it can be usefully summarized as a simple single multiplier), but they tend to be far more grounded in the real world than Barro’s theorem, which (aside from being circular in a subtle way) is a priori argument from premises that are both known to be false and which are based not on observation of the real world but idealized fantasies about the way the world (and particularly people) ought to work.
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.
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.
"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.
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.
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.
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.
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)
Krugman has been rallying for economic populism, particularly rust belt populism for ages. He's been skeptical of free trade and deeply sympathetic to the plight of displaced rust belt workers. [1]
To his credit, Krugman has focused on pragmatic things like worker retraining, education, etc., but he also has called for tariffs [2].
Trump attempts to be seen as someone who adopts Reagan style deregulation and tax reduction, but in reality he has grown government spending and the budget deficit tremendously in his short time in office, and has created massive corporate welfare to many industries as well as steep taxes (in the form of tariffs) on firms that import goods from China, not to mention his threats of antitrust actions against tech [3].
Combined with the additional reductions in economic freedom that his trade deal adjustments with Canada and Mexico have wrought, he's ushered in tremendous bureaucratic overhead to oversee the process of making what are essentially superficial changes (yet which require tons of work by lawyers, etc. so that firms can comply). In general, a great deal of work and oversight for virtually no substantive benefit.
All this is pretty much exactly what Krugman has been calling for his entire career as a populist economist/columnist [4].
All of the below articles are Krugman making arguments that came later to be adopted by Trump as part of his rise to power. Note that Krugman's essays since Trump took office are blatantly partisan and largely nitpick Trump's execution of his ideas.
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.
Republican Keynesianism isn't new, either -- much of the supply-sider argument (especially as formulated by Laffer in the Reagan era) is fundamentally Keynesian.
Politicians of both sides run into an incentive problem when implementing Keynesian policy because it requires what commentators denigrate as "austerity" in good times in addition to heavy recession spending. There's every incentive for politicians to keep the spending up in good times, and little (other than ideology or commitment to good governance, neither of which have proven especially important to most political actors) incentive in the other direction.
I have heard a couple of times "Keynesian economics discredited" (or just the term "discredited") thrown around, but where does this line of thought come from? My (lay) impression was that Keynesianism had resurged over the past couple of decades due to the failure of more free market and/or austerity economics, especially in Europe.
"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.
> 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).
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.
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.
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