Back to what Krug knows best... battle between him and the WSJ

When I started this blog I thought I would just do a weekly summary, but there has been so much news that I feel it’s necessary to be more active.  From what has transpired over the past couple weeks it appears we are at a tipping point when it comes to resolving the debate on how best to move forward.

WSJ has come out all guns firing with a challenge to the spend-more-now camp led by Krug.  Naturally their point of view is that the huge increase in debt during Obama is terrible and government spending must be reduced.  This couldn’t be more opposite of what Krug writes.  I must admit after reading both sides Krug’s argument holds more water.  The WSJ point of view seems simplistic:

WSJ: “every dollar of government spending has to come from somewhere, which means it is either taxed or borrowed from the private economy” – Krug has said no – not in the this current economic climate since private sector spending is reduced, who is going to spend – if the private sector isn’t then the government must or else there will be no recovery. 

WSJ: “Obama… doubled the debt to an estimated 76.6% of GDP this year” but Krug has explained it is not accurate to measure it straight against GDP – you need to measure it against potential GDP if the economy did not suffer the economic shock - and when looking at it that way debt is not high historically. 

Then there is a perplexing passage – first the Journal says “Another reason to reduce debt today is to create some breathing room if we have another recession or an emergency such as a war.” Then right in the next passage then say “Where we agree with at least some Keynesians is that the main policy goal now should be faster economic growth rather than rapid debt reduction.”   Very confusing as they just said opposite things.  Maybe it was poor editing, but it seems clear Krug has gotten the upper hand as the Journal seems flustered.

Back to his blog, Krug also has fun with a chart showing his blog is 6^th most popular blog on the web.  And he loves rubbing in the inflationistas (specifically Niall Ferguson - ) face that inflation keeps falling.

Bush is a con man and he restates why his policy prescriptions are right and have been right

Krug makes clear that while the debunked debt v growth authors may not have agreed with austerity now, but the fact that they let their work be used to support it without complaining for the past couple years means they in essence supported it.  Krug also makes clear he doesn’t believe a compromise between stimulus now and austerity later is workable in the current political climate.

Krug makes it clear that the US is not engaged in stimulus spending right now.  Compared to Europe, American spending is not quite as austerian but when looking at total spending ratio to GDP (including state and local) it is actually low historically.  Thus in Krug’s view spend, spend, spend to get the economy moving.

Krug is very mad at smart people who he feels are acting dumb and don’t bother to try and understand the austerity vs stimulus arguments.  Specifically he calls out Ken Langone (billionaire who helped start Home Depot and namesake of NYU’s business school) for saying in essence the debate is too complicated for him.  Krug takes the opportunity to restate his economic positions in clear language and continues with this in his Monday column.  My attempt at a very concise summary of his points: a) government budget is not like a family budget b) because of the financial crisis people have been forced to cut spending thus there is no actor in the economy to spend and this leads to unemployment c) this is situation is not always the case – it is rare – and during this time the government and private sector are not in competition for scare capital, the private sector is not spending so if the government doesn’t we won’t ever get out of this mess. d) proof is that his view of what has happened over the past four years have come to pass while the opposing side’s predictions have not.  Examples include continued low inflation, low interest rates, austerity policies in Europe have led to depressions e) yes the deficit must eventually be lowered but in a depressed economy now is not the time to do it.

Krug makes himself clear, money printing by the Feb can’t solve our problems – increased government spending has a more direct, lasting effect.

Krugman than goes on to explain why he is not so nice during these tough economic times.  He feels the policy decisions being taken are directly leading to people’s hardships and it does not have to be this way.  He says he woudn’t normally be this way but the times demand it.

There is also a post about Bush’s legacy – basically he thinks Bush was the biggest loser President ever, he call him a ‘con man”. Mainly because he said he lied about Iraq and the tax cuts early in his Presidency and these lies and subsequent policies are having a last effect.  Now I try not to bring my view points too much into this blog – but now I cannot resist.  I could not disagree more with this post. Now I don’t believe that Bush was a super president but seriously – Bush is the reason for the downfall of America – come on.  I hate to say this but thank god for the financial crisis, as Krug says in this post he has been focused on economic matters due to necessity, if not he would have more articles like this which are not proved in fact and just rants by a political hack.  I don’t for the life of me know he demeans himself like this.  Ahh maybe because it keeps us coming back for the theater of it all…

Krugman responds to the response...

Yup – Krug didn’t waste much time rebutting the rebuttal of the debt v growth academics.  His first post today is an scathing response to their rebuttal.  Krug is NOT impressed.  Accuses them of “bask[ing] in the celebrity” when they were up but now they claim their paper should not have been used to influence austerity supporters.  Krug ends the post reaffirming that their paper should not have any influence on policy.

Krug asks "What am I doing with my life?"

Krug’s Friday column is a victory lap as he pronounces the defeat of austerity as a solution to the economic crisis.  Krug wonders however, how did it gain prominence?  He theorizes because there is an inherent belief that austerity is payback for past sins (overspending), and this is because the upper class (top 1%) feel it is necessary.  They, of course, don’t feel the pain of this policy decision like the rest of society.  Krug is hoping the recent body blows austerity has taken may be a catalyst for change and even makes it personal;  “What am I doing with my life?, he asks if he can’t help change economic thinking.

In a similar vein he also blogs that while academic articles didn’t actually lead to austerity they gave policy makers the foundation (or you could say the cover) to pursue them.

 

Also very interesting is the the authors of the debt v growth paper that has been refuted have an op-ed in today's Times defending their work.  Let's see if Krug responds - when they published a defense last week - Krug was quick with dismissal, calling their response "really, really bad", "disappointing", and "evading the critique" and its "a terrible thing when so much is at stake."

The right is wrong - I (Krug) was right

Krug is flabbergasted that an eminent economist like Samuelson (I think he wrote my college econ textbook) can write an article saying people have lost faith in macro since it couldn’t help with an economic recovery.  Krug begs to differ, what has happened is exactly what he and his Keynesians colleagues thought would happen if you didn’t follow is policy prescriptions four years ago – there should be no surprise.

Krug seems to say Allan Meltzer (big shot right-leaning economist) is a putz (my words) he call him out for being puzzled that all the money printing the Feds have done has not led to inflation.  Krug re-explains that he said four years ago it would not but Meltzer did not listen and now Meltzer said it was because economic growth was weak due to regulatory stuff and Obamacare – nuts says Krug, he was just wrong and won’t admit it.

Krug comes back with another post on how classical economic theory has held up well in the crisis and a lot of what happened (including Europe’s issues) could be explained by existing models.  He also breaks out with a couple graphs showing the current recovery in Europe is worse compared to the Great Depression.  And he squarely lays the blame for this poor recovery on bad policy.  By following long known economic models, recovery would be on its way but European policy makers refused and instead went for austerity - so the blame for all the suffering is with them.

Krug also makes clear that his success in forecasting low inflation and not recovering quickly from the economic crisis since the stimulus was lower than he wanted was due to his knowledge of the appropriate economic models and his experience is seeing what Japan went through in the ‘90’s.

Focus on Unemployment NOW!

In Krug’s Monday article he uses the debt v growth debacle as an entre to issue a clarion call for his strongest held belief – reducing unemployment.  He see this as the most pressing concern for our time and says the reason we are in this high unemployment situation is solely because policy makers have made an enormous mistake, they focused on debt reduction instead of trying to stimulate the economy.  This colossal error will now lead to years of negative ramifications as a permanent class of Americans become unemployable and won’t be able to contribute to the economy.
 
In his blog there is ANOTHER post about the debt v growth scenario and Krug gives a great succinct viewpoint on the current economic malaise – “demand problem not a structural problem, there is no risk of crowding out, there is no risk of inflation from aggressive monetary expansion, there are large negative effects from austerity”.  He also makes an interesting point in that he DOES NOT believe inequality is holding back recovery (interesting in the fact that as a left winger you would assume he would champion it, but clearly he believes the data does not show it).  Krug also sees the Excel error (that was one reason the debt v growth paper has been debunked) as perhaps a turning point to get people not to listen to economic hardliners – and he specifically calls out who these policy makers are: Olli Rehn (European policy official who has advocated more austerity), George Osborne (UK policy official who keeps UK on a economic hard line) and Paul Ryan.  In another post he gives a rousing defense of good ol’ fashioned macroeconomics – the kind that is taught in college intro classes.  While policy makers have been jumping on new-fangled theories and then act confused when things don’t pan out, Krug is amazed that macroeconomics takes the hit since classical macro, he argues, has predicted exactly what has happened throughout this crisis.

Moving away from debt v growth – Krug is shocked that some European policy makers are mystified why the economy has not recovered.  Krug is incredulous as he as explained over and over that when you cut government spending (austerity) in a poor economy of course things are not going to get better since there is no actor in the economy who has the money to spend to move things along.

Gloating

More basking in glory from Krugman on the debunking of the paper that linked high debt to low growth.  Krugman even makes it the subject of his Friday column.  He is really upset that policy makers took the paper as gospel to change focus from trying to stimulate the economy to reducing debt.  Krugman feels that this directly lead to years more of suffering by the unemployed.  He has special ire for the Washington Post who claimed the paper represented the mainstream view of economists  even though Krugman says this was plainly not true. The WSJ even has a 2^nd article this week on how the paper has been shown to be flawed.  And now more gloating that he just reached 1M followers on Twitter…  Good to be Krugman this past week…

Fireworks

A battle has erupted between conservatives and progressives and Krugman is basking in glory. An academic paper widely cited by conservatives and the mainstream press that claimed high debt leads to lower growth (which directly contradicts the solutions Krugman puts forth) is getting a lot of bad press for errors. Previously he has written about issues with the paper so now that it is getting slammed he is doing a victory lap. There was an even a news article in the WSJ citing the controversy.

Key to Europe’s recovery is lower wages – but it is not happening and trusting money

 Krugman talks about how wages in the peripheral Euro zone (Greece, Spain, Portugal, Baltic, Ireland) have not come down.  Basically after a financial crisis and recession wages have to be reduced in order for that country to regain competitiveness (if workers in the US and Mexico or China earned the same then companies would just build plants in the US, where most the consumer market is).  But Krugman’s point is that wages are real hard to be reduced – who would accept lower wages and it legally it is difficult.  Basically the crisis countries will not get out the slump until their wages come down – but there is no evidence this happening (besides Greece) so he does not see much of a room for recovery any time soon --- thus unemployment will stay high.  This is proof that the idea of the Euro was bad from the start - if these countries had their own currency they could have started a recovery by making their national currency worth less (devalue) and thus wages would have been reduced.

In his Monday column he finds a similarity between people’s desire for gold and the new digital currency ‘bitcoins’.  He sees this as big misunderstanding of people who don’t trust government and think it is just printing money and making everyone poorer, but Krugman  He thinks it is silly to think that gold or bitcoins is any more reliable that the dollar.

Pundits are childish and see themselves as Noble and Superior - Sarcasm - Liquidity Trap - Gold

Krugman explains that the pundits (he calls them Serious people with sarcasm) are childish because while they offer mild support for Obama’s recently released budget (which cuts a bit of SS) they will backtrack in no time and denounce Obama for not showing more leadership when the Republicans won’t come to an agreement.  Krugman’s main point is that these pundits will do and say anything to be seen as centrist (he calls them noble and superior) even though he believes the center has now moved right and Obama’s current policies are now center compared to where the political spectrum was in the past.

Krugman also has a sarcastic post highlighting how a Republican has criticized Obama for his proposed to cut Social Security.  Krugman has warned something like would happen if Obama cut social security even though Republicans are the ones to say entitlement spending needs to have an adjustment.  He just can’t believe the hypocrisy.

There is an in-depth discussion of the liquidity trap (see my ‘about’ section for a synopsis of a liquid trap) and what is transpiring in Japan. Basically the western world is in one, but Japan has promised to keep printing money into the foreseeable future (credibly irresponsible in Krugspeak) – Krugman believes this is the only way to get out from the liquidity trap and to get the economy to recover. He is quite excited about this development.

In Krugman’s regular column he glories in the fact that gold has lost double digits percentage points since its most recent peak.  This plays right into his model that inflation is not a danger – since if it was then gold would be up recently not down.  He also uses gold as an example of why people still listen to Fox and right wing ‘goldbugs’ and wonders if they will lose their credibility? He believes they won’t since the gold mania plays right into people’s political viewpoints even if it causes them financial loss.

Thatcher, Analysis, and Deficit

Krugman argues that the data shows the rebound in the UK happened starting in the mid-90’s well after Thatcher implemented her reforms – so she should not get the credit.  In a recent post he also explains how Thatcher generally scrapped progressive taxes for regressive taxes and this was her downfall as her support of a poll tax let to her ouster.  He then compares to her Jindal (darling of the GOP governor of Louisiana) who also supports a regressive sales tax and goes on to show how this is costing Jindal support.

Krugman also posts that it is not critical to know a lot of math to do good economics – the most important thing is intuition and analysis and not get caught up in slogans.

Also there is another post on where he highlights some work being presented that shows deficit/debt is not the end of the world.  This provides him an opportunity to say “I told you so” as he reveals over the fact that he has been yelling about this for a while and now he is starting to see it more widely disseminated.

This Week - Krugman v. Stockman

Stockman v. Krugman was a good show on This Week.  Mostly it came down to Stockman talking about how the debt needs to be reduced now because the US is headed for ruin and Krugman countering back by asking do you really want to raise interest rates in a depressed economy.  Stockman never directly answered.  What is interesting is that Krugman does believe the debt is a problem that should be solved - its just that he doesn't believe that is the biggest issue right now - high unemployment and its suffering is what should be addressed in the short term.  He has said he advocates paying down debt when the economy is at full capacity.

Bad Unemployment, Obama giving in

Krugman is woeful since the unemployment report is not good, seems he was thinking things should be better but as he explains there is actually austerity happening right now that he hurting the economy (rise in payroll tax).  He then explains how sad it is that all talk in DC is about deficit reduction.  Then segues into his concern about how Obama gave into the Republicans on Social Security and reducing benefits.  Should be interesting later today when he mano to mano against Stockman...

More Stockman!

Wow, Stockman must have been getting a lot of attention, for something Krugman mentions earlier in the week that he isn’t going to pay too much attention to now becomes the focus for his Friday column.  Basically it is a good summary of his overall viewpoint --- all the concern we have about debt and deficit is overplayed and the government should be spending more not less to get unemployment down.  People who argue against this idea are just moralistic and puritanical.  Krugman provides examples to prove the predictions of the other side have not come to pass - inflation has not increased and interest rates have remained low. To respond to the other’s side claim of hysteria about living beyond our means he answers that the vast majority of debt is just owned from one American to another so there is no net effect on national wealth.

Krugman vs Stockman

For a couple days now Krugman has been railing against Stockman (Reagan’s budget director who has reputation as an outsider). Stockman feels that the US is greatly in debt and basically there is no hope – we are destined for 3^rd world status. Krugman doesn’t have so much of an issue with this itself – more with the fact that Stockman’s thesis implies that the US must stop going into debt. This is counter to Krugman’s belief that the government has to borrow more and spend more to reduce unemployment so the people will spend more to get the economy growing faster.

At first Krugman thought Stockman’s article wasn’t worth that much effort to respond too since Stockman was so off his rocker – but in the past day Krugman has responded a couple times to Stockman since it seems Stockman’s article is getting a lot of play. It’s been fun reading how he calls Stockman and his article an ‘unfortunate rant’, ‘pathetic and embarrassing’, ‘hasn’t done his homework’, ‘cranky old man’, ‘sad’…