Paul Krugman seems to have gotten a lot of negative attention lately, some by people legitimately critical who do take him seriously, and some by people who should take him a lot more seriously than they do. Sometimes he's too cavalier, sometimes he's too partisan - all of this is true. But the fact is the man is brilliant, he's one of the most important economists around today, when you say he's dumb or a hack you sound like an idiot, and it's fine to disagree with him (I do fairly often), but just know that when you do you have an excellent chance of being dead wrong. So here's a little Krugman-love in the first Assault of Thoughts I've done in a while.
- This is the column that bothered a lot of people - Krugman argues that WWII was the fiscal jolt that ended the great depression. I think this is probably true, but the empirical waters are very muddy. Millions of working age men went off to war, which is the single most challenging empirical wrinkle to get around. We also had substantial price controls, which make the picture more confusing. After the war (because Bastiat is about stocks, not flows of output - read Ropke if you're still confused on this), demand from Allied and Axis powers alike was strong (demand from war-torn enemies isn't a traditional outcome of fiscal policy). So long story short I agree that story is more complicated than Krugman makes it out to be. It's also more complicated than guys like Higgs make it out to be. Rather than simply say "there are a lot of problems in assessing this case", Higgs simply redefines what recovery means so that he can conclusively refute Krugman.
- I thought this was one of his best posts in weeks, and I was shocked to see Jonathan Catalan call it one of the worst. Krugman argues basic externality logic about infrastructure and then suggests that it might be good to... ummm... spend money on it. If we need to augment aggregate demand, a positive externality is a great place to start. Krugman makes the additional point that in these sorts of cases, spending even starts to make the crowding out worries irrelevant. Another way to think about positive externalities is that private spending crowds out public spending. As he says - this is econ 101. I come close to feeling like one of the missions of this blog has failed if the logic of externalities is actually controversial to anyone. See Jonathan's post for an exchange, though.
- I haven't read it yet, but I've heard good reviews of Krugman and Wells's new piece in the New York Review of Books on why we're still in a slump. I'm guessing it's pretty standard stuff.
- A good post on using the bond market to determine interest rate policy - and on the inconsistency in the way that the critics use it. The use of the bond market as a guide to policy is one of those cases - like talking with Jonathan about positive externalities where he claims to know from experience that Spanish agricultural roads are optimally provided - that I seriously question the dedication of some self-styled libertarians to the concept of the price mechanism. If austerity advocates can second-guess the bond market, what prevents central planning from working? If Jonathan can look at Spanish roads and determine whether they are optimal or not, what prevents central planning from working?
- And here is a fascinating post by Krugman on the asymmetry between debt-deflation and debt-inflation. Somebody is hurt and somebody is helped in either case, so why do we worry more about debt-deflation? Well, aside from the stunting of investment and economic activity caused by deflation - looking purely at real debt levels - creditors are usually less cash constrained than borrowers (that's why they're creditors, after all!). So when debt contracts experience unexpected deflation, demand takes a greater hit than when debt contracts experience unexpected inflation. This asymmetrical response to price level changes reminds me of an observation Keynes made in The General Theory. He wrote in the chapter on The Employment Function:
"There is, perhaps, something a little perplexing in the apparent asymmetry between Inflation and Deflation. For whilst a deflation of effective demand below the level required for full employment will diminish employment as well as prices, an inflation of it above this level will merely affect prices. This asymmetry is, however, merely a reflection of the fact that, whilst labour is always in a position to refuse to work on a scale involving a real wage which is less than the marginal disutility of that amount of employment, it is not in a position to insist on being offered work on a scale involving a real wage which is not greater than the marginal disutility of that amount of employment."