Krugman undone?

Since I was asked by some readers to comment on the Newsnight debate between Paul Krugman, Jon Moulton and Andrea Leadsom MP, I thought you might be interested in this debate in which, Pedro Schwartz, a Spanish economics professor, took on Paul Krugman, and in my view wiped the floor with him.

http://www.youtube.com/watch?v=EX55BH97quk&feature=player_embedded#! (35:20)

Two statements by Professor Schwartz stand out to me:  "Keynesians got us into this mess and now we have to sacrifice our principles so that they can get us out of this mess".

He also praises Krugman’s work but is serious with his criticism "Often Nobel prize winners are tempted to pontificate on matters that are outside the specialty in which they have excelled," noting "the mantle of authority whereby whatever they say - whether sensible or not - is accepted with resignation from some and enthusiasm by others."

His comments about the degree to which we are following the Japanese “cure” and the obsession of the Keynesian’s with short term fixes to demand growth at the expense of structural reform are also noteworthy.

Comments

[Chris Menon]

This was interesting. Krugman was apparently destroyed in a blog battle with economist Steve Keen, who neither agrees with Krugman nor with those who believe austerity for the masses is the solution.

This RT News broadcast details it and has an interview with Keen (after 5 mins). Then again at 15.30mins.

http://www.youtube.com/watch?v=iWEq27Ai6ZU

By the way, Isn't it shameful that the BBC economic coverage is not as detailed as that coming out of this Russian channel?

[Alcuin]

My conservative instinct wants to see Krugman beaten in a straight fight, but there is not enough hard data in yet to do that. It could be said that Japan provides this, but Krugman seemed to have answers, or at least evasions plausible enough for Stephen Sackur and Staphanie Flanders to keep citing his pearls of wisdom.

However, neither side had a clear way forward. Jonathan Sachs described how debt was forgiven every seven years in the Old Testament, and that even land was returned to its ancestral owners in the 56 year jubilee. Steve Keen seems to recommend a jubilee as the only way out.

If the creditors were rich landowners, this would work. But the creditors, certainly in Japan, are small savers and pension funds. How in any conscience can such people forgive their debtors, particularly when the debtors have been feckless - and many quite well off, while the creditors have "done the right thing" and would be destitute if their debtors were to default?

Niall Ferguson has noted that only once in history has a debt of this scale actually been paid off - the debt of the Napoleonic Wars by the booming Britain of the Industrial Revolution. All other cases have involved either default or the debt being inflated away over a long period, viz. partial default.

So the creditors will get screwed, one way or the other, and that will send a very bad message to those who want to do the right thing - save for their children's future and their own old age.

Am I missing anything?

[Andrew]

"Schwartz [...] took on Paul Krugman and in my view wiped the floor with him"

I beg to differ. In *my* view, no one wiped the floor with anyone. Generally, I found Schwartz's criticism of Krugman and his supply-side counterargument to be quite haphazard.

He starts by summarizing quite well Krugman's central thesis (a demand problem) including Krugman's explanation of the causes (private sector retrenchment) but then complains that Krugman doesn't discuss the causes! He recognizes Krugman's point that the result is idle private sector resources, forgets why they're idle (even though he just explained why in the previous sentence) and then argues that excess public sector resource usage is the problem. He doesn't provide any evidence for that but instead jumps directly to a conclusion that if we would just "free" those resources, the problem will be solved.

He didn't refute any of the arguments that Krugman made and where he attempted to they were straw men. For example, he conflates a) asset price inflation with consumer price inflation and b) Krugman's analysis of the US economy with the European economy. This results in a generic claim that "inflation caused the problem and Krugman thinks inflation will solve the problem"...which, while sounding suitably ridiculous, completely misrepresents Krugman's position. (i.e. he does *not* think the answer to Spain's problems is more Spanish inflation.)

Krugman, on the other hand, offered plenty of evidence for a demand problem...and the real world data continue to support his thesis. Schwartz didn't address any of that.

On the three points to which you've drawn attention:

1. Keynes. I don't know how one could conclude that Keynesianism got us into this mess; although I’m prepared to be corrected, if you can point me to the Keynesian text that tells us we should create excessive aggregate demand in order to inflate asset prices.

2. Nobel prizes. Firstly, Krugman has never, to my knowledge, made an "argumentum ad verecundiam": he has never suggested that people should listen to him because he has a Nobel Prize. Secondly, if his "mantle of authority" actually had the mystical powers that Schwartz implies, we wouldn't be having this discussion. On the contrary, no-one of importance seems to be paying any attention to Krugman. Thirdly, what we're talking about here is Macroeconomics 101: you don't need a Nobel to understand it or explain it so Schwartz's suggestion that Krugman shouldn't "pontificate" about it because he's not an expert is just ridiculous.

3. Long term problems vs. short term fixes. I think this reflects a fundamental difference between the Hayekian "Austerian" camp and the Keynesians. The Hayekian thinks we should only focus on the long term problem and must endure long term pain and suffering to fix that. The Keynesian says, there's actually something you can do about the short term problem without adversely affecting the long term one. So I found it interesting that Schwartz complained about Krugman just focusing on the short term: Krugman does worry about the long term but he's more worried that people like Schwartz aren't focusing on the short term *at all*. And that, in a nutshell, is the basic premise of Krugman's book.

That aside, I thought on balance it was a good debate: it was clear what the differences are between the two camps (saltwater vs. freshwater); there was nothing particularly revelatory but it was a better format than the soundbite TV debates one usually gets. I certainly didn't come away thinking Krugman was going to have to reconsider his whole worldview and that's largely because Schwartz didn't provide any evidence to support an alternative.

Undone? Notsomuch.

[RussH]

Perhaps its a technology problem not a demand or supply side problem, the jobs lost by automation in the West have not been replaced and automation is so cheap its now more economic to use robots in China rather than the low cost labour which exists in abundance there. Since technologies such as IBMs "Watson" are eroding even skilled jobs this trend is continuing at an ever increasing pace. I know the argument is that new jobs replace those lost and in the past this has happened but it does not appear to be happening now.

If a product is made by a robot, packed by a robot, driven to its destination by a robot, where does a human get the money to buy the product?. The decision to invest in the the robot was most likely made by an algorithm running on a computer.

You may say that the robot and algorithm designers get paid but only a few percent of the population are capable of doing those jobs.

You could of course tax the Corporations and spend the money on infrastructure, education and healthcare but I guess this is not the place where that is likely to get a good hearing!.

[MedievalFuture]

Krugman destroyed his own reputation with a single statement: "My spending pays my neighbours wages, his spending pays my wages" In other words, passing money hand to hand creates wealth.
If that warrants a Nobel prize in economics, then I want one too

[Andrew]

I think you'll find Krugman's reputation is quite undamaged. You may have put a bit of a dent in your own, however, because you've confused "GDP growth" with "wealth creation".

[Manny]

"Niall Ferguson has noted that only once in history has a debt of this scale actually been paid off - the debt of the Napoleonic Wars by the booming Britain of the Industrial Revolution."

If you are an atlanticist of the ferguson ilk then you will not like my comment.

But I would further add this debt repayment was more likely facilitated by the uk relationship with the "jewel in the crown"... India
Not the industrial revolution by itself.

Debts of these size never get repaid.