Matt Yglesias

Did Paul Krugman Cause the Financial Crisis?

Is Paul Krugman history's greatest monster? (Wikimedia)

The man himself alludes to this, but both Arnold Kling and Megan McArdle seem to think that Paul Krugman should feel deeply embarrassed to have written the following in August 2002:

The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

If you read the read the entire column, Krugman was actually expressing skepticism that the Fed’s policies would have this result. He was saying that people were understating the odds of a “double dip” recession. But he didn’t say a double dip recession was inevitable. He said that if a double dip recession were to be avoided, the most likely mechanism would be the inflation of a housing bubble. As it happens, we didn’t get a double dip recession. Instead, we got soaring household spending driven by a housing bubble that replaced the NASDAQ bubble. The column, in other words, was completely correct. And it’s not as if Krugman never revisited the housing the bubble question between 2002 and the fall of 2008. It was precisely because he recognized, as early as 2002, that policy was aimed at producing a new round of bubble-led growth that he was able to see before most that there were major bubble-related risks to the economy.

Stiglitz Calls Geithner Plan “Robbery of the American People”

I think Joe Stiglitz is being a bit unfair here:

The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said.

“Quite frankly, this amounts to robbery of the American people. I don’t think it’s going to work because I think there’ll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer.”

It’s a bit more subtle than that. The government is guaranteeing private investors against downside risks but has secured for itself a fair share of the upside. In other words, you have a situation where the private investors are taking a chance of a small loss in exchange for the opportunity at a big win. The government is taking a chance of a large loss in exchange for the opportunity of a big win and giving up all the autonomy and decision-making power in the meantime. In one scenario, taxpayers and investors alike make a bunch of money. In another scenario, taxpayers lose a ton of money—many hundreds of billions—and investors lose a small amount. It’s a bet that looks fair if (a) you think the win-win scenario is much more likely than lose-lose, or (b) you think the social gains from creating recapitalized banks exceed the fiscal cost to the taxpayers of suffering through lose-lose. Option (a) seems like wishful thinking, but option (b) is perfectly reasonable. The unreasonable thing here is that the Geithner Plan seems to allocate an unreasonable large share of the social gains of recovery back to the financier class. So I think Stiglitz is only being slightly unfair.

Meanwhile, I actually think the most distressing thing about the criticism from folks like Krugman and Stiglitz is what you can infer reading between the lines from how ferocious it is. They, and other leading critics, are acting like people who’ve been totally shut out of the consultation/communication loop. And it’s distressing to see people of their stature and expertise getting shut out while the administration works harder on kissing Wall Street’s ass to try to persuade the finance class to avoid deliberately sabotaging the economy.

The Obama administration seems to respond to criticism from the right by turning the other cheek and becoming more solicitous, while responding to criticism from the left by putting its fingers in its ears.

Rahm Emanuel Suggests He Agrees Stimulus Package Wasn’t Big Enough

Here’s an intriguing swathe of Ryan Lizza’s profile of Rahm Emanuel:

“They have never worked the legislative process,” Emanuel said of critics like the Times columnist Paul Krugman, who argued that Obama’s concessions to Senate Republicans—in particular, the tax cuts, which will do little to stimulate the economy—produced a package that wasn’t large enough to respond to the magnitude of the recession. “How many bills has he passed?” [...] “Now, my view is that Krugman as an economist is not wrong. But in the art of the possible, of the deal, he is wrong. He couldn’t get his legislation.”

Whether or not you think Emanuel is right about the legislative politics, it seems to significant for the White House Chief of Staff to concede that Krugman is correct about the economics and the legislation President Obama signed into law may, in virtue of its concessions to conservatives, be too small to rescue the economy.

I also always find this particular form of ping-pong to be a big odd:

1. Practical Politician A offers Proposal X.
2. Outside Commenter B says that X is too moderate on the merits.
3. Practical Politician A angrily retorts that better legislation on the merits would have been impossible to secure.

I think the right way to understand the (1)/(2) dynamic here is that the criticism in step (2) makes it easier to secure the passage of legislation. If you propose something, and every single progressive in all the land immediately lauds it as the greatest bill ever written, then your legislation is now an extreme left proposal and it’s doomed. If you’re going to make concessions to political reality then you need to weather a bit of criticism from your left—that’s what establishes the proposal as moderate and sensible. Things like “some liberal economists such as Paul Krugman say the proposal is too small” is a helpful piece of context-setting that prevents the proposal from appearing too radical.

Brink Lindsey Accuses Progressives of Peddling “Nostalgianomics”

Cato’s Brink Lindsey has an informative, but ultimately pretty strange, new research paper out titled “Paul Krugman’s Nostalgianomics: Economic Policies, Social Norms, and Income Inequality”. You could almost think of it as two papers, in fact. One an informative discussion titled “Economic Policies, Social Norms, and Income Inequality” looking at the transition from the low-inequality equilibrium of postwar America to the high-inequality equilibrium of the present day. And the other a kind of silly attack on Paul Krugman that accuses him of being a proponent of misguided “nostalgianomics.”

The basic shape of things, however, goes like this. For a long time, a lot of people just kind of shrugged off increasing levels of inequality as the inevitable result of broad impersonal forces—the terms “skill-biased technological change” and “superstar effect” came into play a lot here. More recently, a group of social science researchers and a group of progressive media figures have called attention to the substantial evidence that SBTC and superstar effects can’t account for the whole thing. Krugman is both a very prominent social scientist and a very prominent progressive media figure, so he’s played an important role in calling attention to this stuff. In his paper, Lindsey takes the unusual-for-a-libertarian tack of agreeing with Krugman (and others) that public policy changes have played an important role. But he argues that the changes have mostly been changes that, on net, are positive. So it’s wrong of Krugman to espouse nostalgianomics and support a return to the policies of the 1950s. Which is fine, except I read almost every Krugman column and I’ve read Conscience of a Liberal (and, indeed, other works of Krugmanania such as Pop Internationalism and Peddling Prosperity) and it’s not as if the book ends with a call for the return of comprehensive regulation of airline fares or the re-establishment of the AT&T monopoly. To observe that the growth of inequality has policy roots isn’t to say that the right response to it is to methodically reverse every policy change of the past thirty years. It’s simply to deny the previous conventional wisdom—that it would be impossible to reverse the growing inequality of our society.

Indeed, I think that in a lot of ways the most interesting recent research on inequality turns out to be about skill-biased technological change after all. Specifically, Claudia Goldin and Lawrence Katz argue in The Race Between Education and Technology that we shouldn’t look at SBTC as something that just comes along and causes inequality. Rather, it causes inequality when society fails to respond to SBTC by expanding the quantity of educated citizens. Seen in this light, the SBTC component of growing inequality is, indeed, a policy failure.

But more broadly, the generic “progressive” idea is that we should have a more progressive tax code that spends more money on egalitarian social welfare programs. That’s not a return to the 1950s. It’s an effort to ensure that the gains of the past 30 years worth of policy shifts are spread more equitably. More liberal immigration policy, for example, is good for immigrants and on net good for the economy, but it’s bad for low-wage native born workers. But it really is on net good for the economy. In principle, the pie could be redistributed (through tax-and-transfer or tax-and-service) such that everyone winds up with more pie than they had before (and the immigrants end up with much more pie) rather than giving huge additional pie slices to the richest people. And the same goes for most of this over stuff. That’s what I’m for, and I’m pretty sure it’s what Krugman’s for. Conscience ends with a call for universal health care, not with a call for a return of the ban on interstate banking.

Obama to Krugman: Show Me The Workable Ideas!

Like everyone in the blogosphere, I’ve been following Paul Krugman’s concerns that the Obama stimulus plan isn’t big enough. Today, Obama said he’s willing to listen to any ideas Krugman has about good projects on which to spend money:

Look, there’s some people who have said that it’s not big enough, there are others who say it’s too big. Well, the — as I said before, Democrats or Republicans, we welcome good ideas. And so the challenge for all of us, I think, is to identify good ideas, good spending plans, that deliver on my commitment to create or save 3 million jobs. I want this to work. This is not an intellectual exercise, and there is no pride of authorship. If members of Congress have good ideas, if they can identify a project for me that will create jobs in an efficient way, that does not hamper our ability to — over the long term — get control of our deficit, that is good for the economy, then I’m going to accept it.

If Paul Krugman has a good idea, in terms of how to spend money efficiently and effectively to jump-start the economy, then we’re going to do it. If somebody has an idea for a tax cut that is better than a tax cut we’ve proposed, we will embrace it. So, you know, one of the things that I think I’m trying to communicate in this process is for everybody to get past the habit that sometimes occurs in Washington of whose idea is it, what ideological corner does it come from. Just show me. If you can show me that something is going to work, I will welcome it.

Maybe Krugman will reply on his blog. Either that or maybe Secretary of State Hillary Clinton can broker some kind of sit-down.

Krugman on Gupta

Paul Krugman reminds us of Sanjay Gupta’s unfair and inaccurate attacks on Michael Moore and Sicko. It’s a fair point, but if this is the worst thing you can say about Gupta it’s honestly not so bad. The plus side is that it means you’ll have as Surgeon General a guy who’s genuinely excellent at going on television and talking about medical issues. That’s potentially a very useful asset in a debate over health care reform, and even leaving that aside just means a guy who can do the Surgeon General’s basic public health and health education functions with an unusual degree of effectiveness.

But the Sicko thing really should remind us that we do exist in a pretty demented political culture, and one that reaches its peak of derangement on cable television broadcasts.

Hardball: Krugman on the Need for Stimulus

Paul Krugman talks to Chris Matthews about deflationary conditions and the need for expansionary fiscal policy:

Here’s the CAP stimulus plan from Will Straw and Michael Ettlinger.