Paul Krugman bemoans that policymakers don’t listen to his prescriptions for how to fix the economy in his latest column. Trouble is, following his prescriptions is exactly what got us into this mess in the first place. But Krugman will never admit that. Under the headline “The Big Fail”, he writes:
It’s tempting to argue that the economic failures of recent years prove that economists don’t have the answers. But the truth is actually worse: in reality, standard economics offered good answers, but political leaders — and all too many economists — chose to forget or ignore what they should have known.
The story, at this point, is fairly straightforward. The financial crisis led, through several channels, to a sharp fall in private spending: residential investment plunged as the housing bubble burst; consumers began saving more as the illusory wealth created by the bubble vanished, while the mortgage debt remained. And this fall in private spending led, inevitably, to a global recession.
…So what can be done? A smaller financial shock, like the dot-com bust at the end of the 1990s, can be met by cutting interest rates. But the crisis of 2008 was far bigger, and even cutting rates all the way to zero wasn’t nearly enough.
…The truth is that we’ve just experienced a colossal failure of economic policy — and far too many of those responsible for that failure both retain power and refuse to learn from experience.
So, according to Krugman, “standard economics” (read “Keynesian economics”) has offered good prescriptions for what to do about the economy, but the trouble is that policy makers just don’t listen to what Keynesian economists like Paul Krugman have been proposing.
But is that accurate? Let’s look at his “straightforward” explanation. He talks about how the financial crisis caused people to stop spending and start saving instead, which, in his view, is a bad thing. So when people defer consumption instead of spending, saving their money and creating capital to be invested in advancing means of production so as to be able to provide higher quality goods to consumers at a lower cost so that there is an overall increase in society’s standard of living, that is part of the problem, in Krugman’s view.
Then notice how he describes the recession as a consequence of this lack of spending, which is the problem. But at the same time, the lack of spending was a consequence of the financial crisis. So what caused the financial crisis? Krugman doesn’t seem the least bit interested in that question. This same kind of myopia is illustrated in his statement that “the illusory wealth created by the bubble”. This is a meaningless, nonsensical statement, like saying “the torrential downpour was created by the rain”. A bubble is illusory wealth characterized by economic “growth” that is really unsustainable. Krugman might as well write about “the bubble created by the bubble” or “the illusory wealth created by the illusory wealth”, which would be just as meaningful. Krugman is again just begging the question of what caused the bubble?
Krugman next says that the problem of a bust from the bursting of the dot-com bubble can be solved by lowering interest rates. But the bust from the bursting of the housing bubble is much worse, so that isn’t enough. His point is that we need more government spending, but that’s tangential to the point I want to make here.
Once again, remember, Krugman is essentially saying that he has had all the answers, but the problem is that policymakers just won’t listen to the kinds of prescriptions he has proposed. So let’s go back to the dot-com bubble and review his record…
- In June 1999, Krugman noted that Americans were consuming so much that personal savings had “disappeared almost completely”. He questioned whether this might not be “imprudent” while at the same time hailing the excessive spending as being good for the economy: “those rates racing in their cages”, he wrote, “are what have kept the wheels of commerce turning” during “America’s consumer-led boom”.
- In January 2000, Krugman puzzled over the cause of the sudden dive in stock prices, but he assured his readers that the economy was fundamentally sound and that this dip was merely a signal of a “merely terrific” rather than “incredible” economy and that it had no place to go but up.
- In February 2000, he was “not entirely convinced” that the NASDAQ was in a bubble, once again suggesting that the economy had nowhere to go but up. Even as the dot-com bubble burst and the NASDAQ began to plummet, Krugman could still write that “the U.S. economy has cheerfully broken all the old limits” with “almost every fresh economic statistic” being “a cause for celebration.” He said that “growth will have to slow”, but it would continue.
- In December 2000, Krugman dismissed concerns that the U.S. was heading into a recession. “But even if we do have a recession,” he remarked, “so what?” A “brief recession” would be no big deal, he reassured, because it would not “reflect any fundamental problems in the economy.”
- In January 2001, Krugman described the soaring NASDAQ as “a classic bubble” — which raises the question of why he had failed to recognize it at the time. He was by this time no longer reassuring his readers that the economy would continue to grow, albeit at a slower pace. Rather, with the NASDAQ plummeting, he acknowledged the increasing possibility of a recession, although he continued to express uncertainty that it would occur. He praised the Fed for cutting interest rates, saying that “the Fed’s move has already made a noticeable difference, stemming the rout in the NASDAQ and producing a striking recovery in the corporate bond market. Another few shots in the arm like that and talk of recession might well evaporate.”
- In February 2001, Krugman continued to downplay fears of a recession with the argument that “The Fed can easily and quickly cut interest rates as much as necessary, as long as zero is low enough.”
- In March 2001, he criticized the Fed for not cutting rates enough.
- In July 2001, he said that the problem was “too little spending” and argued that “recovery depends on persuading the public to start spending again.” He criticized the Fed again for not cutting interest rates enough to spur investment in “things like housing”.
- In August 2001, Krugman noted how the Fed had “cut again and again”, but there were nevertheless “few signs that a turnaround is imminent”, so his proposal was to cut interest rates even more. He wrote that consumers were already lacking savings and laden with debt, but that “housing” was “highly sensitive to interest rates”, and so the Fed should cut long-term as well as short-term interest rates. He complained that he was “a little depressed” because “long-term rates haven’t fallen enough to produce a boom” in the housing sector. He commented that the Fed “keeps on cutting rates, hoping that it will finally accomplish something”.
- In September 2001, he repeated that “the odds are still that rate cuts will eventually work.” This would encourage borrowing and spending, he argued. “Housing was doing better,” he said, “thanks to low interest rates”. But the Fed should be “willing to abandon conventional notions of prudence” and buy long-term government debt in addition to short-term Treasury securities.
- In October 2001, he repeated that “Low interest rates, which promote spending on housing and other durable goods, are the main answer.”
- In December 2001, Krugman bemoaned that “the Fed has now cut interest rates 11 times this year, and has yet to see any results” and once again suggested that the Fed should cut long-term rates as well to “conjure up another dramatic boom”. While criticizing the Fed for not cutting rates enough, he praised it for its “dramatic interest rate cuts” that had “helped keep housing strong”.
- In July 2002, Krugman described the economic outlook as “definitely iffy” and asked, “shouldn’t Mr. Greenspan be thinking seriously about another interest rate cut?”
- In August 2002, Krugman wrote that what the Fed needed to do was “to create a housing bubble to replace the NASDAQ bubble”. He responded to concerns that there might already be a housing bubble by suggesting that the Fed cut interest rates even further and “throw money at the economy”, and again criticized the Fed for not cutting rates enough.
- In October 2002, Krugman wrote that the U.S. was now in a “classic overinvestment slump” and that “such slumps have always been hard to fight simply by cutting interest rates.” The problem was that “the Fed hasn’t done enough” and “should cut rates further”.
- In December 2002, he noted that the Fed had cut so much that it “has almost run out of room to cut interest rates.” It could still cut long-term rates, but “will be reluctant to try exotic, untested policies unless the economy is clearly facing deflation.”
- In May 2003, he again observed that the Fed had “cut rates early and often” and “had almost run out of room to cut”, but still “the economy remains weak.”
- In July 2003, he complained that “the boost from low interest rates seems to be evaporating.” He noted that mortgage rates had fallen “to historic lows, extending the home-buying and refinancing boom” that he considered good for the economy, but the Fed wasn’t doing enough to fuel the housing boom.
Okay, so you get the picture. His record speaks for itself. The Fed followed his prescription of cutting interest rates, which fueled the housing bubble that precipitated the financial crisis and recession, and Krugman’s only criticisms at the time were that the Fed wasn’t cutting interest rates enough.
So, now, what was that about the problem being that policymakers just don’t listen to him enough? What was that about those responsible for the economic troubles the U.S. finds itself in refusing to learn from experience?
“The Big Fail” indeed. But the epic failure here is Paul Krugman’s own. For more on his abysmal record, see my book Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis.