Krugman back in 2009 on the downturn

Bob Murphy thinks I defend Krugman no matter what no matter how many times I end up disagreeing with Krugman on his blog, so he's going to think this is a predictable post. But oh well. I think it's right.

Recently Bob claimed that Krugman is "rewriting" his stimulus history. The issue at hand is the old unit roots debate between Krugman, DeLong, and Mankiw. Now DeLong actually said that he trusted the CEA forecast at the time (more on that a little later), but Krugman didn't. His post stuck pretty closely simply to what we think about the properties of different time series with respect to unit roots. It's not even like he left his view about the possibility of extended crisis unstated - he said that we can expect output to grow "if and when" slack capacity was used again. "When", sure - but "if and when"!?!?! This is not the writing of a guy that thinks there's no realistic possibility that we're not going to bounce right back!

And anyone that follows Krugman closely (and I always thought Bob was one of those guys) should know why Krugman said "if and when". From the beginning he has been bearish on the administration's forecasts.

He was talking about getting into a deflationary trap where we can't get out of slow growth two months before the unit root flap, when the initial administration forecasts came out:

"So tell me why we aren’t looking at a very large risk of getting into a deflationary trap, in which falling prices make consumers and businesses even less willing to spend."

But macro is hard and maybe a deflationary trap doesn't explicitly say, to Bob's standards, whether the administration forecasts are too optimistic and that there is a chance of a much worse crisis. Bob thinks Krugman is changing his tune and that:

"Now all of a sudden, Krugman is claiming that he was skeptical of the CEA’s early-2009 optimism about the recovery from the deep slump!"

How could anyone seriously think Krugman thought the administration was too optimistic??? Maybe from this (also two months before the unit roots debate):

"One more point: the estimate of what would happen to the economy in the absence of a stimulus plan seems kind of optimistic. The chart above has unemployment ex-stimulus peaking at 9 percent in the first quarter of 2010 and coming down through the year; the CBO estimates an average unemployment rate of 9 percent for 2010, so the Obama people are more optimistic than the CBO, and a lot more optimistic than I am."

MAYBE we got the idea that Krugman thought the administration was too optimistic because of that time early on when Krugman was saying it was too optimistic while everyone else was saying he was being too bearish. Or perhaps I'm just some hack that will defend Krugman on anything.

Look, even the readers of Newsweek got it. The readers of Newsweek. Why is Bob acting like it's absurd to say that Krugman thought the administration was wildly optimistic?:

This was Krugman's 2009 (much less fun than his 2008!): liquidity trap diagrams and being bearish relative to the powers that be.

So the unit root debate, to me, was about unit roots. Not about how bad the crisis was. Because Krugman was pretty clear on what he thought about how bad the crisis was and particularly how we could be stuck in it for a long time, and nothing in his unit root post overturned any of those arguments.

Which brings us to Brad DeLong. I also admire Brad a great deal, but he did say back in March 2009 that the safe way to bet was with the administration forecasts.

Here's the thing, guys. He readily admits that early on in the crisis he did not see all this coming. Bob often frets over Brad's rebuke to him that he should mark his beliefs to market and sit "at the feet of Paul Krguman, chanting 'om mani padme hum' until I achieve enlightenment." But here's why Brad says that - because that's where he had to drag himself when things finally set in about this crisis. It's where a lot of us on "Krugman's side" had to drag ourselves. I think because Brad is so brash (or I suppose "shrill" is the word of choice) in his blogging a lot of people miss how unbelievably humble he is. He regularly blogs about what he got wrong and how he is changing his views to mark them to market. And anyone that follows Brad knows that this issue of the severity of the crisis was a very important case where Brad used to be not-so-bearish and has changed his views.

Here is a particularly thoughtful and detailed admission of wrongness from Brad in 2011:

"Although I worked for three years in the Clinton Treasury Department, and am a card-carrying member of the economist guild, I predicted none of this. Like most of my peers, I was wrong. Yet the most interesting thing is that I could have -- should have -- been right. I had read economist John Hicks; I just didn’t quite believe him. 

Hicks, one of the clever young Brits dotting i’s and crossing t’s in the writings of John Maynard Keynes in the 1930s, was responsible for the workhorse formulation of Keynesian economics -- the IS-LM model -- that has been the bane of many an intermediate macroeconomics student. It was his version of the IS-LM model that formalized and elevated a key insight: that interest rates paid by creditworthy governments would remain low after a financial crisis. This formulation holds even in the face of enormous budget deficits that greatly expand the supply of government bonds. 

A financial crisis initiates a sudden flight to safety among bondholders -- widening interest-rate spreads, diminishing the private sector’s desire to sell bonds to raise capital and encouraging individuals to save more and consume less as they, too, hunker down. Thus bond prices rise, and interest rates drop. As rates fall, firms see that they can get capital on attractive terms and so issue more bonds; households see the low interest rate earned on their savings and lose some of their desire to save. The market heads toward equilibrium... 

I had read Hicks. I even knew Hicks. But I thought that his era, the Great Depression, had passed. Sitting in my first graduate economics class in 1980, I listened to Marty Feldstein and Olivier Blanchard -- two of the smartest humans I am ever likely to see -- assure me that Hicks’s liquidity trap was a very special case, into which the economy was unlikely to wedge itself again. Yet it did. 

On my shelf is a slim, turn-of-the-millennium volume by Paul Krugman titled “The Return of Depression Economics.” In it he argued that we mainstream economists had been too quick to ditch the insights of Hicks -- and of economists Walter Bagehot and Hyman Minsky. Krugman warned that their analysis was still relevant, and that if we dismissed it we would be sorry. 

I am sorry." 

 So please - let's drop this.

You might be able to squeeze a blog post or an Econ Journal Watch article out of this, but nobody that follows Paul and Brad is buying it.