How did Paul Krugman get it so Wrong?

http://faculty.chicagobooth.edu/john.cochrane/research/Papers/krugman_response.htm

by chasingsparks • 17 years ago

63 62 17 years ago

faculty.chicagobooth.edu

About two weeks ago, there was a thread on Krugman's Op-Ed http://news.ycombinator.com/item?id=803793 in the NYT. This is a response to that op-ed by a fellow economist.

madair2• 17 years ago

The fellow economist is a key figure in the school of economic thought that Krugman was attacking.

chasingsparks8• 17 years ago

Does that make his arguments less true?

jfornear3• 17 years ago

Different views on this same topic:

Martin Neil Baily: http://www.brookings.edu/opinions/2009/0908_krugman_baily.as...

Barry Eichengreen: http://www.nationalinterest.org/PrinterFriendly.aspx?id=2127...

Mankiw linked to all of these (including Cochrane) on his blog a while back: http://gregmankiw.blogspot.com/2009/09/how-did-economists-ge...

chasingsparks8• 17 years ago

I do enjoy Mankiw. I thought HN would appreciate the Cochrane article the most because IMO it was the best critique and because it resonates with PG's How To Disagree http://www.paulgraham.com/disagree.html

jfornear3• 17 years ago

I prefer Cochrane's critique as well. Krugman is one of the most overrated economists of our time IMO.

jacobolus• 17 years ago

John Quiggin: http://crookedtimber.org/2009/09/17/the-macroeconomics-wars/

hristov• 17 years ago

I don't have time to discuss the minute points of this essay so I will just point out a couple of incredibly obvious facts:

1. The chicago school economists were incredibly influential in the bush government to the exclusion of all other economists.

2. It all ended in disaster.

I think Krugman is correct in pointing out that there is something very wrong with the advice these guys were providing.

steveplace• 17 years ago

You're assuming the policy decisions of the executive branch of the US fed government was the reason for the disaster.

You're also assuming that the advice acted upon by the POTUS was based on the Chicago school.

For the former point, it leaves out FNM/FRE, housing speculation, easy credit by the fed, a weak dollar, increasing debt from foreign wars, the piss-poor rating agencies, the asset bubble driven by chinese liquidity, etc.

For the latter point, there were economic decisions made that do not align with that school of thought.

tl;dr -- Post hoc ergo propter hoc.

snewe• 17 years ago

Two strong assumptions:

1. Correlation is causation? 2. It is all the Bush adminstration's fault.

chasingsparks8• 17 years ago

Post hoc ergo propter hoc

Krugman is not offering up a hypothesis that is better at explaining observations than his opponents. He is making an argument based on an ideological position while ignoring evidence suggesting, at a minimum, that his hypothesis is not supported. This is not science.

As Cochrane notes in one of his "minute points", *Pretty much all we have been doing for 30 years is introducing flaws, frictions, and new behaviors, especially new models of attitudes to risk, and comparing the resulting models, qualitatively to data." This set of "we" includes the behaviorists and "complexity economists" (i.e. people who really enjoy massive simulations of simple agents).

natrius2• 17 years ago

Regardless of what one thinks of Krugman's positions, he clearly deals in personal attacks far too often. If he's trying to educate the public, that's not helping his cause.

jbarciauskas• 17 years ago

I'm not sure what instances you are thinking of, so perhaps I am mistaken, but from what I have read, Krugman wants to promote greater accountability. When he criticizes the decision or prognostication of an economist or politician, it's to avoid the passive voice - "Mistakes were made" and identify the party responsible for the error. I think he would expect others to hold him to the same standard.

Perceval3• 17 years ago

Do you have a citation for point one?

The author of the article discusses not just Chicago School monetarism, but also the many other strains of economic thought over the past decades, including the 'New Keynesians.' Krugman apparently also disagrees with the New Keynesians, and the rest of the economic mainstream of the past 30 years, not just the Chicago School.

What the author is getting at is that Krugman doesn't seem to be reading economics anymore, from any school of thought.

Looking at the author's CV (http://faculty.chicagobooth.edu/john.cochrane/research/Paper... [DOC]), he appears to be a libertarian. Libertarians weren't exactly well-represented in the Bush administration, and CATO were among its fiercest critics on financial and foreign policy issues.

The anger over Krugman's piece doesn't seem to be limited to Cochrane or Chicago School economists either. Cochrane's personal web page also links to a similar piece featured on Huffington Post rebutting Krugman: http://www.huffingtonpost.com/david-k-levine/an-open-letter-...

philwelch4• 17 years ago

There's a fair amount of this on the right, as well--a lot of your goldbugs and "Austrians" are, like Krugman, taking one side in a 1930's era doctrinal dispute and ignoring the last several decades of economics.

Maybe economics really has gone wrong in the past 40-80 years, and there's no salvageable content in all the research since then. But a lot of economists (particularly the behavioral school) are doing real empirical science lately, and I'd bet that they're likely to be onto something.

kiba• 17 years ago

Austrians are not goldbugs. They're free market money advocates. A lot of them just happens to think gold would be the currency to emerge in a free market.

The debate being doctrinal seem to make the debate seem unimprotant especially when people don't know what it is about. The debate is about how to study the science of economics and the proper use of the scientific method. That's a pretty improtant debate that has been waging on for years.

Note: Edit to correct inaccuracy in the presentation of my comment's intention.

philwelch4• 17 years ago

The point isn't so much that Austrians are wrong, or that they are goldbugs, but rather that they don't learn--and don't value--the past several decades of economic research. The debate's been going on for years, yes, but the self-proclaimed Austrians are making 70 year old arguments against a 70 year old straw man while ignoring any points that have been made over those 70 years.

chasingsparks8• 17 years ago

Austrian's and Goldbugs not the best comparison. Instead, I would say Krugman is the left's equivalent of the right's extreme supply-siders who assert that government revenues will increase relative to T0 for all decreases in tax rates (something that no well-respected economist currently says but many partisan's love to claim).

philwelch4• 17 years ago

Probably true, but I haven't seen nearly as many Laffer curve enthusiasts trolling comment threads, loudly redefining the word "economics" to refer to their pet theory, and dismissing all the real economists who argue otherwise.

lil_cain2• 17 years ago

Cool as behavioural economics (and santa fey school economics, while we're at is) are, they're not really up to predicting macro economic change yet.

Although, it's easy to argue that neither is macroeconomics.

jerf4• 17 years ago

"There's a fair amount of this on the right, as well--a lot of your goldbugs and "Austrians" are, like Krugman, taking one side in a 1930's era doctrinal dispute and ignoring the last several decades of economics."

Can you show me a goldbug with a Nobel Prize in Economics and a column in a New York Times-class newspaper or other similar venue?

I know what you're saying, and it is literally true, I don't deny that. But Krugman should be held to a higher standard.

Personally, I find him very disappointing. A guy with a Nobel Prize in Economics ought to be making compelling arguments that are a surprise to me, and thus contain information in the information theoretic sense. (That's my favorite way of looking at information in an English context.) Instead, I can predict in advance what Krugman's position on a topic will be now with virtually 100% confidence, which should not be possible if he's actually writing with insight that someone of such stature should be bringing to topics, as I most assuredly hold a Nobel Prize in absolutely nothing. Even if he chooses doctrinaire liberal choices completely reliably, he should be able to defend them with far more interesting arguments than I actually see from him, the kind of interesting that even when you disagree you at least stop to think.

philwelch4• 17 years ago

I was writing mostly for the audience of people who already dismiss Krugman as an incorrigible liberal but might consider the opinions of self-trained Austrian economists who post on comment threads. Those of us who dismiss goldbugs on comment threads already should have been convinced by the article to give up on Krugman.

But yes, I am also disappointed in Krugman.

jshen4• 17 years ago

This article is terrible. Here are some examples of why.

"If a scientist, [krugman] might be a global-warming skeptic, an AIDS-HIV disbeliever, a creationist, a stalwart that maybe continents don’t move after all."

"Krugman wants to be Rush Limbaugh of the Left"

TomOfTTB2• 17 years ago

I wouldn't say terrible. He makes a point he just tried to enhance that point with language that I'll agree was a little too...how shall we say...colorful (ironic considering he took Krugman to task for attacking other people but what can you do)

But there is an arguably logical thought process behind the post itself

e40• 17 years ago

I think colorful is a little too generous. I think it's far beyond that.

davidmathers2• 17 years ago

Flagged. Please join me.

TomOfTTB2• 17 years ago

So Krugman is ok (you submitted this article yourself: http://news.ycombinator.com/item?id=332097) but those who disagree with him should be flagged?

davidmathers2• 17 years ago

Articles about economics are ok. This is political squabbling. If I saw the Krugman column where he called Cochrane a barbarian posted here on hacker news I would flag that also. This is full on reddit territory.

Here's a link for you: http://worthwhile.typepad.com/worthwhile_canadian_initi/2009...

marbletiles2• 17 years ago

The centerpiece of our crash was not the relatively free stock or real estate markets, it was the highly regulated commercial banks.

A Chicago school economist decides that the cause of the crash was regulation, there's a surprise. It's difficult not to ad hom him here, but the article drips with scare quotes, special pleading, straw men and appeals to authority, so what's one more fallacy?

In fact, although I imagine he wants it to be taken seriously, it reads like little more than an angry forum comment dressed in academic robes. He's obviously heated and insulted by Krugman, and given that Chicago is broadly seen as discredited by the recent crash he is also concerned for his image, and is responding in kind.

The real economic lessons of the past few years are not to be found here, or anywhere. They will emerge in years to come. The difficulty is we only have the ability to really push through changes and learn from them now, so everyone's trying to be a part of that action. At least it's clear from both Krugman and Cochrane that the incentives enjoyed by bankers are very badly designed, and that's one issue we can address.

Perceval3• 17 years ago

>A Chicago school economist decides that the cause of the crash was regulation

I don't think that's the point he was making with that quote. What he was getting at was that extensive regulation and oversight did not stop the problem from occurring in that sector. Ergo, extensive government regulation and oversight and intervention throughout the economy is also unlikely to prevent major problems.

If our choices as a society are: 1) major government intervention and problems, or 2) little government intervention and problems, I think I'd prefer the latter.

marbletiles2• 17 years ago

Yes, I can see your reading of it now. But I think it would be disingenuous of him to make that claim, given the repeal of Glass-Steagall and the large reductions in regulation that allowed the problems in banking to be exacerbated (though this claim is itself questioned by other economists).

A position that regulation either failed or was absent from banking adds a third choice, which isn't far from Krugman's: 3) better government intervention and fewer problems.

arijo• 17 years ago

"extensive government regulation and oversight and intervention throughout the economy is also unlikely to prevent major problems" - I see this recurring theme over and over again. Government vs free markets. The belief that some supernatural entity (the invisible hand on the free market) will make us all happy in the end is refuted by all human experience in the last millennia. As Karl Popper once said "Truth is not manifest". Humans will have to hack their environment continually in the face of hardship and arbitrarity - and in a democracy, the elected government is given the responsibility to execute that mission. Nature has not evolved to make humans happy, it's our task to make our world (economy) better - one hack at a time ...

silverlake• 17 years ago

There's a book out now called "This Time is Different: Eight Centuries of Financial Folly". Throughout history, in various types of governments and economies w/ varying degrees of regulation, there have always been financial disasters. There will always be financial disasters. So the issue is not more or less regulation. The issue is how to quickly recover from the next inevitable disaster. The best thing the government can do is quickly pay down the debt so that, in 10-15 yrs, it can borrow like mad during the next depression.

sandrogerbini3• 17 years ago

>if our choices as a society are: 1) major government intervention and problems, or 2) little government intervention and problems, I think I'd prefer the latter.

If this summation was accurate, I would tend to agree with your conclusion that little government intervention is preferable. However, I respectfully disagree with the premise, pointing to the success of Glass-Steagall (read 'government intervention') in maintaining a healthy separation of depository/commercial financial intermediaries and their investment bank counterparts. It was, clearly, the deregulation and removal of said safeguard that allowed for the conditions of 'too big to fail' and gave meaningful, even disastrous implications for the average citizen. Finally, the author is either misinformed or intentionally ignoring the causal relationship between deregulation embodied in the Gramm-Leach-Bliley Act and the financial meltdown.

chasingsparks8• 17 years ago

Cochrane was trying to set the context of the crisis. He even notes that the credit crises was an effective run on the banks. For more, see Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882

dsplittgerber• 17 years ago

"given that Chicago is broadly seen as discredited by the recent crash"

By whom exactly? Mostly by those who tend to propagate further government influence on the markets. There are equally valid arguments which were made that government intervention in mortgage markets, fed policy etc. caused the crisis and the crisis could have been averted by having a truly free market.

I just want to point out that you seem to be influenced by biases as well. To point out other people's biases but not to acknowledge your own seems unfair.

That is why that whole 'lessons from the crash' thing is so difficult to grasp. Because everyone's analysis is ridden with pre-conceived notions and biases, it's hard to make out the actual truth.

MaysonL• 17 years ago

For some perspective on John Cochrane and his economic views:

http://delong.typepad.com/sdj/2009/02/why-do-we-economists-t...

http://delong.typepad.com/sdj/2009/01/time-to-bang-my-head-a...

Of course, the author of those blog posts, Brad DeLong, is also known as the author (only somewhat jokingly) of the Efficient Krugman Hypothesis (Postulate 1: Paul Krugman is always right. Postulate 2: If your analysis suggests Paul Krugman is wrong, see Postulate 1.),

samh• 17 years ago

Prof Steve Keen FTW http://www.debtdeflation.com/blogs/2009/09/27/it%e2%80%99s-h...

sandrogerbini3• 17 years ago

There are some lessons to be learned from this article. Namely, John Cochrane demonstrated the type of knee jerk, incensed reaction that has landed many otherwise upstanding academics in the bad graces of their peers. His piece was much more inflammatory than it needed to be - in fact, I would argue that the tone invalidates his position. To me, the piece sounds like it is coming from a man that has simply had enough of his institution being attacked for its historical tendency towards a particular party of economic thought. Understandable, but highly disappointing in its effect.

How did Paul Krugman get it so Wrong?

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