It’s an ill wind that blows no one any good. The financial crisis that came to a head five years ago with the failure of Lehman Brothers has been especially beneficial to the economist Paul Krugman. In his widely read New York Times column and blog, Krugman regularly boasts that he has been ‘right’ about the crisis and its consequences. As he wrote in June last year:
‘I (and those of like mind) have been right about everything.’
Those who dare to disagree with him — myself included — he denounces as members of the ‘Always-Wrong Club.‘
He wrote back in April:
‘Maybe I actually am right and maybe the other side actually does contain a remarkable number of knaves and fools. … Look at the results: again and again, people on the opposite side prove to have used bad logic, bad data, the wrong historical analogies, or all of the above. I’m Krugtron the Invincible!’
That last allusion is to the 1980s science fiction superhero, Voltron (right). The resemblance between Krugman and Voltron was suggested by one of the gaggle of bloggers who are to Krugman what Egyptian plovers are to crocodiles.
As a Princeton professor and Nobel Prize winner, Krugman is indeed widely believed to be intellectually invincible. He himself acknowledges having made only two mistakes, both predating the crisis: the impact of information technology on productivity, which he underestimated, and the significance of the federal deficits of the Bush administration, which he overestimated.
‘In the Great Recession and aftermath, however, I went with [my] models — and they worked!’
‘Let those who are without error cast the first stone,’ Krugman wrote back in 2010. Unfortunately, this is not an injunction he himself has heeded. Repeatedly, over the last five years, he has heaped opprobrium on others. His latest performance is characteristic; perhaps not quite intentionally he even refers to ‘my own unpleasantness with Ferguson’.
Let us leave — for the moment — the question of the future size of the federal debt, which I have dealt with elsewhere and shall return to in a subsequent article. My purpose here is simply to challenge Krugman’s right to behave in this way. Even if he were nearly always right, there would be no justification for his lack of civility. But he is not nearly always right. There is therefore no justification for his unshakeable certainty either.
Krugman reserves a special contempt for people who, in his words, ‘take a position and refuse to alter that position no matter how strongly the evidence refutes it, who continue to insist that they have The Truth despite being wrong again and again.’ He calls this ‘derping'” The awkward thing for Krugman is that ‘being wrong again and again’ perfectly characterizes his own commentary on what proved to be one of the crucial issues of the financial crisis: whether or not Europe’s monetary union would survive it.
To begin with, Krugman was blithely confident that Europe would weather the economic storm better than the United States. On January 11, 2008, he hailed it as ‘The Comeback Continent‘:
‘… Since 2000, employment has actually grown a bit faster in Europe than in the United States … If you think Europe is a place where lots of able-bodied adults just sit at home collecting welfare checks, think again. … Europe’s economy looks a lot better now – both in absolute terms and compared with our economy – than it did a decade ago.’
Krugman explained Europe’s comeback in terms of ‘deregulation’, a more competitive broadband market than the U.S., “strong social safety nets” and “very high taxes.” On May 19, 2008, after a visit to Berlin, he even told his faithful readers: “I have seen the future, and it works … in the heart of ‘old Europe’.” (Admittedly this column was a standard “peak oil” piece, exhorting to Americans to have German-style cars and public transport, as opposed to, say, developing new technology to unlock hitherto inaccessible domestic supplies of oil and natural gas.)
Finally, in December 2008, Krugman woke up to the fact that the “Comeback Continent” was in fact an ‘economic mess.‘ But what kind of mess? No, not the mess of excessively leveraged and effectively insolvent banks that had maxed out on CDOs, bubbly real estate and Club Med government bonds. The mess Krugman discerned was the failure of the German government to see “the need for a large, pan-European fiscal stimulus.” The main thing, he wrote in March 2009, was not to make the mistake of thinking that “big welfare states are … the cause of Europe’s current crisis. In fact … they’re actually a mitigating factor.” It was a theme he returned to when he and I debated the crisis in New York three months later, when he argued that “the human suffering [was] going to be much greater on this side of the Atlantic” because of Europe’s “strong social safety net.” Even in January 2010 he was still insisting that:
“The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works. … taking the longer view, the European economy works; it grows; it’s as dynamic, all in all, as our own.”
All of this sheds (to say the least) interesting light on Krugman’s boast in an interview in March of this year to have been one of the few commentators who had “predicted the unfolding economic disaster in Europe.” This is by no means the only retrospective prediction Krugman has ever made, but it is surely the most shameless.
The European crisis had in fact begun in December 2009, while Krugman was still celebrating Europe’s economic success, when the newly elected Socialist government in Greece revealed the full extent of the country’s fiscal crisis. The Invincible Krugtron was on the scene in a flash — well, two months later:
“Lack of fiscal discipline isn’t the whole, or even the main, source of Europe’s troubles — not even in Greece. … The real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites …”
Wait, what about the Comeback Continent, where social democracy was the future that worked? Never mind about that, there’s a crisis and Krugtron’s help is urgently needed! And boy did he help.
The question of whether the euro was going to blow up imminently was surely the biggest call of the last few years. Fear of another Lehman-style shock froze credit markets and paralysed policymakers. Was this just an outside risk over the long term, or a disaster that was almost upon us? Faithful readers of Krugman’s New York Times column knew the answer.
BY MY RECKONING, Krugman wrote about the imminent break-up of the euro at least eleven times between April 2010 and July 2012:
1. April 29, 2010: “Is the euro itself in danger? In a word, yes. If European leaders don’t start acting much more forcefully, providing Greece with enough help to avoid the worst, a chain reaction that starts with a Greek default and ends up wreaking much wider havoc looks all too possible.”
2. May 6, 2010: “Many observers now expect the Greek tragedy to end in default; I’m increasingly convinced that they’re too optimistic, that default will be accompanied or followed by departure from the euro.”
3. September 11, 2011: “the euro is now at risk of collapse. … the common European currency itself is under existential threat.”
4. October 23, 2011: “[the] monetary system … has turned into a deadly trap. … it’s looking more and more as if the euro system is doomed.”
5. November 10, 2011: “This is the way the euro ends … Not long ago, European leaders were insisting that Greece could and should stay on the euro while paying its debts in full. Now, with Italy falling off a cliff, it’s hard to see how the euro can survive at all.”
6. March 11, 2012: “Greece and Ireland … had and have no good alternatives short of leaving the euro, an extreme step that, realistically, their leaders cannot take until all other options have failed – a state of affairs that, if you ask me, Greece is rapidly approaching.”
7. April 15, 2012: “What is the alternative? … Exit from the euro, and restoration of national currencies. You may say that this is inconceivable, and it would indeed be a hugely disruptive event both economically and politically. But continuing on the present course, imposing ever-harsher austerity on countries that are already suffering Depression-era unemployment, is what’s truly inconceivable.”
8. May 6, 2012: “One answer – an answer that makes more sense than almost anyone in Europe is willing to admit – would be to break up the euro, Europe’s common currency. Europe wouldn’t be in this fix if Greece still had its drachma, Spain its peseta, Ireland its punt, and so on, because Greece and Spain would have what they now lack: a quick way to restore cost-competitiveness and boost exports, namely devaluation.”
9. May 17, 2012: “Apocalypse Fairly Soon … Suddenly, it has become easy to see how the euro – that grand, flawed experiment in monetary union without political union – could come apart at the seams. We’re not talking about a distant prospect, either. Things could fall apart with stunning speed, in a matter of months.”
10. June 10, 2012: “utter catastrophe may be just around the corner.”
11. July 29, 2012: “Will the euro really be saved? That remains very much in doubt.”
His most recent wrong call was that it was “a real possibility” that Cyprus would be “forced off the euro in the next few days.” That was in March of this year — shortly before a new Cypriot government reached an agreement for yet another bailout that kept it in the Eurozone.
True, Krugman was rarely unequivocal in predicting a euro breakup. Especially at the beginning of the crisis, he hedged, sometimes assigning “more or less even odds” to “a breakup of the euro, with major players, not just Greece, being forced out.” That was in an interview with Playboy (seriously) back in February 2012. By May, however, he was more certain. While conceding to the Washington Post (presumably in jest) that his view of the euro’s survival “depends on my mood,” he stated: “As a matter of substantive economics? It’s doomed.” His confidence growing, he told the Belgian paper De Tijd: “I think Greece is too far-gone. I don’t see a realistic possibility of making the euro work for them now.” Radio Free Europe listeners were told that same month that a Greek exit was “probably something that will take place in months.” “Mr. Krugman, does Greece have to leave the euro zone?” he was asked by Der Spiegel. “Yes,” he replied. “I don’t see too much alternative now.” “I don’t think they can save Greece,” he told the Financial Times.
By now the Invincible Krugtron was on a roll. “Something has to happen and in the end it does have to be a Greek exit,” he told a reporter from the Independent.
“I’d be astonished if they can go more than two years without leaving. I’d be astonished if they could go even one year.”
Viewers of the BBC Hard Talk were next:
Krugman: I believe Greece will and must leave the euro. I think there is no alternative.
Sarah Montague: When do you think it will happen?
Krugman: It could happen in a few weeks in the next election of Greece [which was on June 17].
On more than one occasion — on PBS in June last year for example, and in an interview the following month with Business Insider — the formulation was conditional: if the Germans did not tolerate higher inflation, “then the euro will break up.” But by September it was back to inevitable Greek exit: “I cannot see how this country can remain in the euro,” he told L’Express. “It is practically impossible.”
In all, I count a total of 22 such statements, attaching probabilities of 50 percent and above to the scenario of one or more countries leaving the euro.
Now, I happen to be rather a euro-sceptic myself. I opposed the creation of the euro and predicted at the outset that the experiment of monetary union without fiscal integration would ultimately degenerate. But today, as you may have noticed, the euro is still intact. Indeed, the Eurozone has two more members than when the crisis began and in January will acquire yet another, Latvia. That is not to say that it won’t fall apart eventually. But for the foreseeable future that remains a much lower probability scenario than its survival. I don’t know which particular model Paul Krugman was using in the summer last year, but it certainly did rather a bad job of predicting what would happen. I laughed out loud at his recent lame excuse that his model couldn’t have been expected to predict the action of the European Central Bank. What an awesome model: one that predicts everything about a monetary union except the action of the monetary authority.
Besides its wrongness, the other striking feature of Krugman’s commentary on the euro is the vitriol he has directed against those struggling to cope with the crisis. In December 2011, he called the then Italian Prime Minister Mario Monti “delusional.” In March of this year, incredibly, he appeared to
liken the Finnish Vice President of the European Commission, Olli Rehn (right), to a cockroach. Some people, I have come to realize, are intimidated by this lack of civility. But I am with Dilbert. It’s simply absurd for this man to accuse others of “derping,” a childish neologism meaning — in case you’ve forgotten — to “take a position and refuse to alter that position … despite being wrong again and again.”
“I like to think,” Krugman wrote on August 14,
“that if I had been proved … utterly wrong … I’d have had the strength of character to admit it and question my premises. But I don’t know for sure, and with some luck I’ll never find out.”
Now that I have shown Krugtron the Invincible to have been utterly and repeatedly wrong about the euro, I look forward to reading his admission of error.
To be precise, I would like to see him admit that he got the biggest call of the last several years dead wrong, again and again and again. Not only should he admit his mistake, but he should also apologize to the millions of people who have suffered as a result of it. Or does he believe that his numerous, widely-read predictions of imminent currency break-up had no impact whatever on the expectations of European investors and consumers?
KRUGMAN’S RIGHT TO CONSIGN OTHERS to the “Always-Wrong Club” , and routinely to insult anyone who dares to disagree with him, is fatally vitiated by his own embarrassingly bad record of commentary on the European phase of the financial crisis. His repeated and erroneous predictions of the European Monetary Union’s imminent collapse constitute a perfect example of what he and his cronies childishly call “derping”: to “take a position and refuse to alter that position no matter how strongly the evidence refutes it, who continue to insist that they have The Truth despite being wrong again and again”.
Regrettably, Krugman – also known to himself and his cronies as “the Invincible Krugtron” – has not found time in his busy schedule of blogging to make the apologies that I believe are due, not only for his incivility and hypocrisy, but also for his own personal contribution to the crisis of confidence that afflicted Europe in 2011 and 2012. Seldom in the history of the economics profession can one man in a crowded theater have shouted fire more often and more loudly, apparently indifferent to the real economic consequences of his actions.
Why, you may ask, did Krugman feel the need to be so bold (and so wrong) in predicting the euro’s collapse over and over again, in his column, on his blog and to every media outlet that would give him an interview? The answer is because he and his beloved economic models had so completely failed to predict the U.S. financial crisis and he did not want to repeat his mistake.
In 2006, the year before the financial crisis began, Krugman had a twice-weekly New York Times column. What a perfect opportunity, one might have thought, for the infallible Nobel laureate and author of Depression Economics to warn his readers about the gathering storm. Retrospectively, Krugman pats himself on the back.
“How did I do?” And the answer is, not too badly. … I’ve had a pretty good stretch.”
In fact, only eight of Krugman’s more than 100 columns in 2006 referred to the bubble in the U.S. housing market and the danger posed by its bursting. The key word “subprime” did not appear in his column until March 2007. Nearly everything else was a partisan rant of one sort or another against the policies of the administration of George W. Bush.
As an economist honored by the Swedish central bank for his work on trade theory, and as someone who had also cut his teeth as a commentator on the 1997-8 Asian Crisis, Krugman made the mistake of thinking the trade deficit and therefore the dollar were crucial. Here is a revealing passage from a column he wrote in February 2006:
“Sooner or later the trade deficit will have to come down … and both American consumers and the U.S. government will have to start living within their means. So how bad will it be? … A “soft landing” looks unlikely, because too many economic players have unrealistic expectations. This is true of international investors, who are still snapping up U.S. bonds at low interest rates, seemingly oblivious both to the budget deficit and to the consensus view among trade experts that the dollar will eventually have to fall 30 percent or more to eliminate the trade deficit.”
Many other economists had been making predictions like that for years. Yet this was the one thing that didn’t happen in the financial crisis. On the contrary, when the crisis struck, investors’ appetites for U.S. bonds and dollars surged.
Interestingly, in those days Krugman dismissed an argument of which he is now inordinately fond – that low bond yields signal a capacity for additional government borrowing: He wrote in April 2006,
“Of course, optimists have a comeback: if things are really that bad, why are so many foreign investors still buying U.S. bonds? And they point out that those predicting problems from the trade deficit have been wrong so far. But I have two words for those who place their faith in the judgment of investors, and believe that a few good years are enough to prove the skeptics wrong: Nasdaq 5,000.”
These days, it is Krugman who repeatedly assures his readers that low bond yields are proof that “deficit scolds” are wrong – in fact, they are an invitation to the Treasury to run a bigger deficit. I have one word for him: hypocrite.
To be sure, Krugman identified the house price bubble as a potential problem. But he failed to understand the nature of the problem. With typical “Econ 101” thinking, he predicted that house prices would fall, and that “spending will suddenly drop off as both the bond market and the housing market experience rude awakenings”. He consistently failed to understand that the subprime crisis was financial in nature. Its macroeconomic effects would be huge not because of a reverse wealth effect as falling house prices depressed consumption, but because rising defaults on subprime mortgages would drastically affect all the structured financial products that used them directly or indirectly as collateral, and that the highly leveraged holders of such products – banks, in particular – would find themselves first illiquid and then insolvent.
Back on the eve of the crisis, Krugman also blew hot and cold on inflation, which I suppose is one way of being “right about everything“. In April 2005, for example, he detected “A Whiff of Stagflation”, but by June the following year he had changed his tune. Now, inflation was a “phantom menace” and – perversely given his concerns about the housing bubble – he worried that the Fed was wrong to tighten monetary policy. A general rule of Krugman’s journalism is that monetary policy is never too loose and central bankers are always tightening too early. Another rule is that if someone erroneously anticipates higher inflation, that person is a member of the Always-Wrong Club. Who knew that he himself founded that club in 2005?
By August 2006, Krugman’s diagnosis of the risk of a coming recession was correct in only one respect: that he thought there was a risk. In every other respect he was wrong:
The forces that caused a recession five years ago never went away. Business spending hasn’t really recovered from the slump it went into after the technology bubble burst: nonresidential investment as a share of GDP, though up a bit from its low point, is still far below its levels in the late 1990’s. Also, the trade deficit has doubled since 2000, diverting a lot of demand away from goods produced in the United States. … [But] now, for the first time, problems in the housing market are starting to seriously reduce economic growth: the latest GDP data show real residential investment falling at an accelerating pace. … based on what we know now, there’s an economic slowdown coming. This slowdown might not be sharp enough to be formally declared a recession.
Once again, he was looking at the wrong dials on the dashboard, completely missing the financial implications of falling house prices.
LATER THAT SAME MONTH an increasingly nervous Krugman gave an unexpected but qualified endorsement to Nouriel Roubini of NYU
“The only well-known economist flatly predicting a housing-led recession in the coming year… While I don’t share Mr. Roubini’s certainty, I see his point.”
Krugman’s first reference to the role of “irresponsible bank lending” – and the Fed’s failure to “crack down” on the banks – came on October 30, 2006. Note, however, that as late as December 1, 2006, he was still giving “roughly even odds that we’re about to experience a formal recession”. And when Krugman tried to imagine how the crisis would play out, with a piece published in March 2007 under the dateline “Feb. 27, 2008”, his predictions were laughable. According to the man who would come to be known as the Invincible Krugtron:
1. The crisis would begin with a stock market crash … in China.
2. Then it would spread to the junk bond market.
3. Then would come the defaults on subprime mortgages.
4. But the crisis would only be really big if “large market players, hedge funds in particular, [had] taken on so much leverage – borrowing to buy risky assets – that the falling prices of those assets would set off a chain reaction of defaults and bankruptcies”.
Still capable of caution in those days, Krugman concluded the column by wimping out. He wrote:
“I’m not saying that things will actually play out this way. But if we’re going to have a crisis, here’s how.”
As we all know, the crisis still hasn’t come to China (though the Shanghai stock market fell, the macro consequences were minimal), junk bonds were not crucial, and it was the losses of banks, not hedge funds, that did the most serious damage.
As late as January 2008 – again looking myopically at trade data – he was arguing that the U.S. economy had “dodged a bullet … which is why I haven’t been as sure about a looming recession as, say, Larry Summers or Marty Feldstein, let alone Nouriel Roubini … I’m actually uncertain about where things go this year.” Nor was he “nearly as pessimistic” as Carmen Reinhart and Kenneth Rogoff, whose seminal paper on the likely huge macroeconomic impact of the subprime crisis appeared that February. It was only in March that Krugman finally grasped the financial nature of the crisis. “A lot of people”, he wrote, “saw that there was a huge housing bubble”:
“What’s going on now, however, is beyond that: the ‘financial accelerator,’ with deleveraging causing a credit crunch that forces further deleveraging, and now threatens to produce a sort of pancake collapse of the whole system, was not, I think, so widely foreseen. I don’t think many people saw how much the system itself would break down.”
No, not many economists did see the complex interrelationships between the subprime mortgage market, collateralized debt obligations, highly leveraged banks and international derivatives markets that were the key to the scale of the crisis and its macroeconomic impact. But at least one historian did (here and here and here and here and here. And here). I don’t claim to be always right. But always wrong?
One might have expected a little more humility from an economist who so clearly failed to understand the nature of the biggest financial crisis of his lifetime until after it had happened. Or at least a little less egomania: “Yes,” he wrote in January, ”
“I’ve heard about the notion that I should be Treasury Secretary. I’m flattered, but it really is a bad idea.”
Gee, Professor Krugman, why do you say that?
“It would mean taking me out of a quasi-official job that I believe I’m good at and putting me into one I’d be bad at. … An op-ed columnist at the [New York] Times … [can] have a lot more influence on national debate than, say, most senators. Does anyone doubt that the White House pays attention to what I write? … By my reckoning … an administration job, no matter how senior, would actually reduce my influence.”
Not to mention smugness:
“Obviously I’m plenty combative, and in a way still ambitious too; I do track my Twitter followers, wonder how each column will do on the most-emailed list, and all that. But there are no promotions I’m seeking, no honors I desperately desire that I don’t already have. … I’m wonderfully relaxed: no more steps to climb, no more boxes to check. I just do what I feel I should, and try to have some fun along the way. I’m a very lucky guy.”
I confess I am at a loss to understand the basis for this self-satisfaction. If Krugman was wrong about the origins of the crisis, and wrong about the fate of the euro – wrong, in short about the two biggest crises of our time – what exactly was he right about? What, besides the doubtless large number of his Twitter followers, entitles him to be so pleased with himself?
YOU MAY WONDER WHY I AM BOTHERING to ask these questions? I have three motives. The first is to illuminate the way the world really works, as opposed to the way Krugman and his beloved New Keynesian macroeconomic models say it works. The second is to assert the importance of humility and civility in public as well as academic discourse. And the third, frankly, is to teach him the meaning of the old Scottish regimental motto: nemo me impune lacessit (“No one attacks me with impunity”).
I am not an economist. I am an economic historian. The economist seeks to simplify the world into mathematical models – in Krugman’s case models erected upon the intellectual foundations laid by John Maynard Keynes. But to the historian, who is trained to study the world “as it actually is”, the economist’s model, with its smooth curves on two axes, looks like an oversimplification. The historian’s world is a complex system, full of non-linear relationships, feedback loops and tipping points. There is more chaos than simple causation. There is more uncertainty than calculable risk. For that reason, there is simply no way that anyone – even Paul Krugman – can consistently make accurate predictions about the future. There is, indeed, no such thing as the future, just plausible futures, to which we can only attach rough probabilities. This is a caveat I would like ideally to attach to all forward-looking conjectural statements that I make. It is the reason I do not expect always to be right. Indeed, I expect often to be wrong. Success is about having the judgment and luck to be right more often than you are wrong.
On both Europe and the approach of the financial crisis, I would say that – unlike Paul Krugman – I was right more often than I was wrong. But so what? When investors and fund managers are right more often than they are wrong, they are rewarded – handsomely. When they are wrong more often than they are right, they lose money or clients, usually both. The world of public intellectuals is different. Using their academic credibility to pontificate about the future, professor-pundits can be wrong again and again without losing money or their tenured jobs. Many distinguished and lucrative careers have been based on just such a pattern of unpunished error. By the same token, the returns on being right are surprisingly low. A book sells because its prediction fits the mood of the moment. The author may get a bonus – in the form of additional sales – if he turns out to be right. But he doesn’t have to return the royalty checks if he turns out to be dead wrong.
So we public intellectuals should not brag too loudly when we get things right. Nor should we condemn too harshly the predictions of others that are subsequently falsified by events. The most that we can do in this unpredictable world is read as widely and deeply as we can, think seriously, and then exchange ideas in a humble and respectful manner. Nobody ever seems to have explained this to Paul Krugman. There is a reason that his hero John Maynard Keynes did not go around calling his great rival Friedrich Hayek a “mendacious idiot” or a “dope”.
For too long, Paul Krugman has exploited his authority as an award-winning economist and his power as a New York Times columnist to heap opprobrium on anyone who ventures to disagree with him. Along the way, he has acquired a claque of like-minded American bloggers who play a sinister game of tag with him, endorsing his attacks and adding vitriol of their own. (I would like to name and shame in this context Dean Baker, Josh Barro, Brad DeLong, Matthew O’Brien, Noah Smith, Matthew Yglesias and Justin Wolfers.)
Krugman and his acolytes evidently relish the viciousness of their attacks, priding themselves on the crassness of their language. But I should like to know what qualifies a figure like Matt O’Brien to call anyone a “disingenuous idiot”? What exactly are his credentials? 35,650 tweets? How does he essentially differ from the cranks who, before the Internet, had to vent their spleen by writing letters in green ink?
To be frank, I probably would not have bothered to write all this if I myself had not been one of the targets of Krugman’s crude invective. The “Always-Wrong Club” is just the latest of many ad hominem attacks he has made on me since 2009. On one occasion he implied that I was a racist and then called me a “whiner” when I objected. On another he referred to me as a “poseur”, adding for good measure that I had “choked on [my] own snark”. Last year he wildly accused of making “multiple errors and misrepresentations” in article for Newsweek, only one of which he ever specified. More recently I was accused of “trying to flush [my] own past statements down the memory hole” – a characteristically crude turn of phrase – and of being “inane”. Re-reading these, I can only marvel at the man’s hypocrisy, for Krugman often sanctimoniously denies that he “does ad hominem“ . For the record, here is his own definition:
“ad hominem attacks involve attacking the person in general rather than what the person has to say on a specific issue”.
The start of Krugman’s vendetta was a public debate we had in New York in April 2009, in which we disagreed about U.S. fiscal policy in the wake of the financial crisis. Krugman has repeatedly misrepresented what I said in that debate. Immediately afterwards, he cynically claimed on his blog that I had been arguing that high deficits would crowd out private spending. Later, in order to have a straw man for his vulgar Keynesian claim that even larger deficits would have produced a faster recovery, he started to pretend that I had predicted “soaring interest rates” and had called for immediate austerity. For example:
“Niall Ferguson … said that government borrowing would bring on the bond vigilantes and send rates soaring. … [His] vision led to calls for austerity now now now; mine said that the overwhelming danger was that we wouldn’t provide enough stimulus, and that we would pull back too soon. Sure enough, we didn’t and we did. And now catastrophe looms.”
But anyone who reads the transcript of our debate – even the edited version that was published – can see that this was not my position. What I said was that there was a contradiction between fiscal and monetary stimulus. My point was that, with debt soaring and growth slumping, the Fed would have to buy much larger amounts of U.S. Treasuries than anyone then anticipated. I was right in that debate to say that the Obama administration’s growth forecasts were wildly over-optimistic and that therefore the federal debt would rise “in the next five or ten years to around 100 per cent of GDP” (according to the IMF, the gross federal debt passed that mark last year).
I was also right that the Fed’s balance sheet would “explode to up to $3 or $4 trillion”. The second phase of what then became known as “quantitative easing”, instituted in November 2010, was explicitly designed to keep long term interest rates artificially low. It was followed in 2012 by QE3. The Fed’s balance sheet currently stands at $3.7 trillion (see below).
On that occasion, Krugman in fact agreed with me that the “long-run solvency of the US government” was something to worry about. The ability to manage a debt as large as 100 per cent of GDP, he also agreed, “does depend upon people’s belief that you will behave responsibly, and that is somewhat in question”. As recent events have shown, that is a rather important caveat.
There is, of course, no way completely to refute Krugman’s central claim that additional borrowing would have produced a more rapid recovery, since that claim is a counterfactual claim based solely on his models. It may be true, as he asserted last month, that a stimulus bill three times larger than the one actually passed in 2009 – i.e. a stimulus totaling $1.76 trillion – would have propelled the U.S. economy out of the liquidity trap. It may be true that the resulting increase of the federal debt would have been just “about $1 trillion”, or 6% of GDP. And it may be true that this would have had no negative side effects, for example on the creditworthiness of the United States.
Then again, it may not be true. Other equally eminent economists have taken a much less sanguine view of this “vulgar Keynesianism”, openly questioning his back-of-envelope calculations about a mega-stimulus. In a parallel debate about the policy options open to the United Kingdom, there seems a rather stronger argument against additional borrowing even in terms of Krugman’s own “simplish IS-LM model”. And, as Greg Mankiw has pointed out, in an earlier debate about the wisdom of deficit finance – when the President was a Republican, not a Democrat, and when the stimulus took the form of tax cuts and spending on war – Krugman himself took the diametrically opposite position.
In 2003, he warned, the United States was heading for “a fiscal train wreck”:
“The Congressional Budget Office operates under ground rules that force it to wear rose-colored lenses. If you take into account – as the C.B.O. cannot – the effects of likely changes in the alternative minimum tax, include realistic estimates of future spending and allow for the cost of war and reconstruction, it’s clear that the 10-year deficit will be at least $3 trillion. … We’re looking at a fiscal crisis that will drive interest rates sky-high. … because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest. …
“I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits. … 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. … I think that the main thing keeping long-term interest rates low right now is cognitive dissonance.”
The federal debt in public hands back then was $2.8 trillion, 35% of GDP. Today it is approaching $12 trillion, more than double as a share of GDP. The projected ten-year deficit then was, as Krugman states, $3 trillion; now, the equivalent figure is more than double that. And yet today we supposedly have no “train wreck” to worry about; indeed, it would be fine if the debt were a trillion dollars bigger.
Yes, I know, that was then and this is now; this time is different, we’re in a liquidity trap, and all that. But what about 2008, the year the crisis began? For some strange reason, at that time Krugman vehemently opposed the presidential candidate arguing for – as he himself acknowledged – the larger fiscal stimulus. His name was John McCain – “McCain the Destroyer”, as Krugman crudely called him. Four years later, Krugman explicitly acknowledged that Mitt Romney’s (admittedly vague) fiscal plans would “blow up the deficit” and – shamelessly using an argument he had previously derided – compared the United States in such a high-deficit scenario with Greece.
In short, if Paul Krugman truly has won “a stunning victory” in “an epic intellectual debate” – as he recently claimed – it appears to have been over … Paul Krugman.
The question is why, in the light of these numerous contradictions, anyone should be expected to share Krugman’s certainty that a bigger stimulus would have worked. He was equally certain that there would be a dollar crisis – before the financial crisis produced the opposite effect. He was even more certain that the euro would break up – until it survived. Leave aside the glaring issue of ideological bias. Even if Krugman were not viscerally partisan, the point is that in the realm of macroeconomic prediction, self-confidence can only ever be a bluff. Judging by their past performance, Krugman’s models are less reliable than tossing a coin.
Not being convinced of my own infallibility, I had no difficulty admitting that I had been wrong about the trajectory of U.S. interest rates back in 2009 and he had been right. Yet somehow this was not enough for Krugman, who could not bring himself to give me a proper apology for alleging falsely that I had never acknowledged my mistake. Instead, he has gone on claiming ad nauseam that I have “derped” (repeatedly said something wrong) on the question of inflation. In fact I wrote one column on this subject, in May 2011, and this was how it concluded:
Maybe in June, when the Fed stops quantitative easing … inflation will recede. Maybe high fuel prices will, as Goldman Sachs predicts, slow the economy and revive the specter of deflation. Maybe. Or maybe inflation expectations [have] started shifting …
(Admittedly, something of a Krugman hedge, that conclusion. But hardly a confident prediction of higher inflation. And I certainly did not repeat it the way Krugman repeated his predictions of euro collapse.)
Meanwhile, applying his signature double standard, he himself has admitted elsewhere that “the only big thing I got wrong … was in underestimating the stickiness of wages, and hence inflation, and therefore overestimating the risks of actual deflation”.
When Paul Krugman first began his attacks against me, he made it clear – as if almost proud of the fact – that he had read none of my books. (Quote: “I’m told that some of his straight historical work is very good.”) This was a mistake on his part. I have read his books. If he had read mine, he would perhaps have thought twice about seeking to discredit me on the basis of a few articles and interviews.
Krugman’s unabashed ignorance of my academic work raises the question of what, in fact, he does read, apart from posts by the other left-wing bloggers who are his zealous followers. There is a ratio that really would be good to have as a metric of the seriousness of a public intellectual. It is the ratio of words read to words written. Ideally, I would say, that ratio should be between 100 and 1000 to 1. But in the case of the Invincible Krugtron, I begin to suspect it has now fallen below unity. (When he does read a book, he mentions it in his blog as if it’s a special holiday treat.)
In the past few days, I have pointed out that he has no right at all to castigate me or anyone else for real or imagined mistakes of prognostication. But the fact that Paul Krugman is often wrong is not the most important thing. It is his utter disregard for the norms of civility that is crucial here.
I AM NOT ALONE in being dismayed by Krugman’s “spectacularly uncivil behavior”. He has written of his:
“duty, as I see it, is to make my case as best I honestly can… not [to] put on a decorous show of civilised discussion.”
Well, I am here to tell him that “civilised discussion” matters. It matters because vitriolic language of the sort he uses is a key part of what is wrong with America today. As an eminent economist said to me last week, people are afraid of Krugman. More “decorous” but perhaps equally intelligent academics simply elect not to enter a public sphere that he and his parasitical online pals are intent on poisoning. I agree with Raghuram Rajan, one of the few economists who authentically anticipated the financial crisis: Krugman’s is “the paranoid style in economics”:
“All too often, the path to easy influence is to impugn the other side’s motives and methods … Instead of fostering public dialogue and educating the public, the public is often left in the dark. And it discourages younger, less credentialed economists from entering the public discourse.”
Where I come from, however, we do not fear bullies. We despise them. And we do so because we understand that what motivates their bullying is a deep sense of insecurity. Unfortunately for Krugtron the Invincible, his ultimate nightmare has just become a reality. By applying the methods of the historian – by quoting and contextualising his own published words – I believe I have now made him what he richly deserves to be: a figure of fun, whose predictions (and proscriptions) no one should ever again take seriously.
This is an edited version of Prof Ferguson’s Krugtron the Invincible for Huffington Post.
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