David Henderson on the “clever” Mr Krugman

David Henderson starts by acknowledging how clever Paul Krugman is, and then quotes from a recent Krugman post:

When the Great Depression struck, many influential people argued that the government shouldn’t even try to limit the damage. According to Herbert Hoover, Andrew Mellon, his Treasury secretary, urged him to “Liquidate labor, liquidate stocks, liquidate the farmers. … It will purge the rottenness out of the system.” Don’t try to hasten recovery, warned the famous economist Joseph Schumpeter, because “artificial stimulus leaves part of the work of depressions undone.”
Like many economists, I used to quote these past luminaries with a certain smugness. After all, modern macroeconomics had shown how wrong they were, and we wouldn’t repeat the mistakes of the 1930s, would we?

Then David adds the following comments:

Every single sentence in the above quote is correct. So why do I say that Krugman gets Hoover wrong?

Because contrary to the impression Krugman leaves the reader, and obviously wants to leave the reader, Hoover didn’t take Mellon’s advice. See more here.

That reminded me of this golden oldie from Krugman:

Mexico’s current president, Vicente Fox, a former Coca-Cola executive, is a firm believer in free markets. But his administration is widely considered a failure.

Notice he didn’t say Mr. Fox implemented neoliberal policies, which would be the natural way to make the point.  Why not?  Because all of Mr. Fox’s attempts to implement neoliberal policy reforms were blocked by the PRI, which controlled Congress.  Of course Noah Smith believes Mexico has done very well under the 12 years of PAN rule (2000-2012), (although he recently updated the post with corrected data, which makes Mexico’s performance much less impressive.)

Today Krugman sort of took credit for the new Japanese monetary stimulus:

Let it not be said that the scribblings of academic economists have no effect. Some of us have been urging the Bank of Japan to get truly aggressive and adventurous on monetary policy “” and it’s happening!

And it only took 15 years.

Seriously, this is very good news. Japan is finally, finally making a real effort to escape from its deflation trap. We should all hope it succeeds.

I’m in the odd position of being in complete agreement with Krugman.  It’s a great start, it’s already boosted market expectations of NGDP growth, but it’s still not certain to succeed in pushing Japan out of the zero rate bound.  They might need even higher inflation.

Krugman cited a 1998 paper that was the first to provide a blueprint for this sort of policy shift.  But why not cite more recent writings?  And why not congratulate the Japanese for ignoring Keynesian Nobel prize-winning naysayers who suggested that monetary policy was ineffective at the zero bound?  People like Joe Stiglitz, and . . . well, you judge for yourself:

Hmm. I see that Scott Sumner has a post heatedly attacking the idea that Japan is stuck in a deflationary trap; he insists that Japan has deflation because that’s what the Bank of Japan prefers:

I was under the impression that the Bank of Japan was an ultra-conservative bank, and liked mild deflation. Indeed I thought that was pretty widely understood. I guess not.

He guesses right: that’s not at all the view of those who have been following Japanese monetary policy since the 1990s, and have even talked to BOJ people now and then. I’m sorry to say that the fact is that Japan is in a deflationary trap. You can argue that the BOJ should have done more “” and I would. But persistent deflation isn’t a target, it’s what has happened because conventional monetary policy has lost traction and the BOJ isn’t willing to be more adventurous.

Now of course in a sense Krugman is correct.  All they needed to do is become “more adventurous.”  And of course I was arguing that Japan is not in a liquidity trap because all they needed to do is become “more adventurous.”  Ryan Avent expressed amazement at Krugman’s logical contortions:

And…I’m genuinely mystified. The only thing I can think of that would square this circle is if Mr Krugman and I are using different definitions of the word “prefer”. As best I can tell, he has conclusively shown that Mr Sumner is right, and Japan hasn’t been in a deflationary trap. It just needs to fire all of its central bankers.

Much ado about nothing?  Not quite, at the very end of the post Krugman makes an implied prediction:

Oh, and about the exchange rate: there’s this persistent delusion that central banks can easily prevent their currencies from appreciating. As a corrective, look at Switzerland, where the central bank has intervened on a truly massive scale in an attempt to keep the franc from rising against the euro “” and failed

Soon after that statement was made the Swiss decided to devalue, and then peg their exchange rate against the euro.  And it worked.

I know that the usual Krugman defenders will come over here and insist I’m teasing him simply because I’m jealous of his Nobel prize-winning success and I’m at some no-name college.  Krugman was right!  Yes, I am a loser (aren’t we all) but I’m not particularly jealous of him.  Indeed I have consistently praised him for correctly anticipating that the Fed would shy away from being “adventurous” in a zero bound trap, despite Bernanke’s “Rooseveltian resolve” comments.  I expected more, and I was wrong.  But when I consider how little “adventure” it would actually take to boost NGDP, I’m reminded of this Monty Python skit.

PS.  Two Monty Python videos in a fortnight!  Apologies to the millennials–you had to be there.



26 Responses to “David Henderson on the “clever” Mr Krugman”

  1. Gravatar of J J
    8. April 2013 at 07:23

    What happened to PS.?

  2. Gravatar of ssumner ssumner
    8. April 2013 at 07:26

    J, I corrected it. This was the only PS.

  3. Gravatar of Adam Adam
    8. April 2013 at 07:28

    Speaking only as to the first quote, I’m not sure that implication is at all necessary to what Krugman is saying about false morality tales leading people to advocate for “liquidationism.”

    But of course it does not hurt that just about everyone associates Hoover with having failed to take effective action against the Depression.

  4. Gravatar of Geoff Geoff
    8. April 2013 at 07:48

    For what it’s worth, IMO it is precisely because the Swedish central bank decided to give Krugman an award rather than you, that you are more credible than Krugman.

    And it is an award, not a Nobel Prize, by the way. It’s a make believe Nobel Prize, kind of like how the publishers of the Bourne novels written after Ludlum passed, keep using his name on the book covers.


    Geoff (in memory of Albert Einstein, Richard Feynman, Leonardo da Vinci, and Isaac Newton).

  5. Gravatar of Krzys Krzys
    8. April 2013 at 08:18

    The comedy moment in the Krugman post is when he links to an earlier post in which he argues that no amount if money printing can get Japan out of the trap. He does that, too, in a post in which he praises…money printing. The guy has become an amazing fraud.

  6. Gravatar of J.V. Dubois J.V. Dubois
    8. April 2013 at 08:37

    Nailed it. This Krugman’s “cockroach idea” that economies are in a liquidity trap and and therefore “austerians are wrong” is incredible. And for instance I do not recall any Krugman’s article condescending outrageous claim by Ed Balls that the job of the central bank in a “liquidity trap” is to keep inflation at 2%.
    Krugman’s silence on this matter is deafening. If he is really honest this should quickly came as #1 of his famous list of things that he got wrong (or at least didn’t get right – since he just always walks around it cautiosuly).

  7. Gravatar of Tyler Healey Tyler Healey
    8. April 2013 at 08:51

    Statement by President Herbert Hoover on March 8, 1932.

    “Nothing is more important than balancing the budget…”

  8. Gravatar of Jake Jake
    8. April 2013 at 09:25

    I think all of this tiptoeing Krugman does around the monetary issue stems from his desire for the US to adopt Scandinavian-type fiscal policies. His goal is for the US to adopt a top income tax rate of 70+% and Denmark levels of government spending (as a % of GDP).

    The liquidity trap is an important tool to rally support for this policy preference. If the central bank can’t achieve an increase in AD, then the only way to boost it is through more government spending. The kicker is, this spending will almost surely never be reduced after the economy picks back up, due to the ratchet of government.

    But if the liquidity trap is not real (which is almost surely the case… can anyone really conceive of a situation where it’s impossible for the central bank to inflate?), then changes in fiscal policy can be always be offset by monetary policy. You could slash government spending tomorrow with no effect on AD, as long as the Fed does its job.

    This is all just speculation, of course. Only Krugman knows what his real motivations are. But I think he tends to start at a conclusion and then work backward to justify it, which is more akin to the work of a politician than an economist.

  9. Gravatar of TallDave TallDave
    8. April 2013 at 09:55

    Heh, so Krugman is basically saying “the Japanese are finally doing the thing I said was impossible. Hooray!”

    Like DeLong, Krugman generally makes a fair amount of sense if you just mentally edit out everything he says about fiscal policy and/or Republicans — basically anything with a hint of politics to it.

    I think he’s a bright guy who knows his base and plays to it — the 1990s Krugman who won the Nobel Prize wrote a lot of things that 2010s Krugman disagrees with 🙂

  10. Gravatar of ssumner ssumner
    8. April 2013 at 10:36

    JV, Yes, it’s amazing that he didn’t hammer Ed Balls. I wonder why?

    Tyler, Of course all presidents pay lip service to balanced budgets. In 1932 FDR also ran against Hoover’s big deficits, and promised to balance the budget.

  11. Gravatar of marcus nunes marcus nunes
    8. April 2013 at 10:57

    It´s mostly demographics:

  12. Gravatar of Geoff Geoff
    8. April 2013 at 11:14

    Statement made by Hoover in the fall of 1932:

    “We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action…. No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times…. For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered…. They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.”

    “Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for … “the common run of men and women.” Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom…. We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.”

  13. Gravatar of Al Al
    8. April 2013 at 12:10

    I see three different issues in the quotes you presented. First, David Henderson is wrong to assume that readers will see an implicit attribution of austerity to Hoover. Krugman specifically targets “Mellonism” in that post. The “Hooverism” is Henderson’s contribution.

    The second quote supplied by Sumner is a better example of Henderson’s point.

    The third section shows Krugman’s use of escape routes in the form of qualifications like “delusion that central banks can EASILY prevent…” That is actually good economics. But it makes for a nasty rhetorical trick when you are knowingly speaking to an audience with mixed economic education.

  14. Gravatar of nickik nickik
    8. April 2013 at 12:26

    I thought the diffintion of liquidity trap was that you can not get out of it with montary policy. It seams you and Krugman are arguing about what liquidity trap means.

    For you its a liquidity trap if you cant get out of it with montary policy. For him (and DeLong) its when the central bank is to stupid/lazy to do anything about the trap.

    Krugman and co. simply want to use the ‘old language’. Thats a typical thing intellectual (or intellectual movments) do so there roots are not wrong, you are still able to clame they where right.

    The best example is marxist who now clame that when marx said workes where stuck in poverty he was actually talking about relative poverty.

    Keynsians should simply admit it, there is no such thing as a deflationary trap.

  15. Gravatar of Steve Steve
    8. April 2013 at 12:33

    Well, on a positive note, Krugman appears to have hired Benjamin Cole to write headlines:

    “The Intellectual Contradictions of Sado-Monetarism”

  16. Gravatar of Geoff Geoff
    8. April 2013 at 12:54


    “First, David Henderson is wrong to assume that readers will see an implicit attribution of austerity to Hoover. Krugman specifically targets “Mellonism” in that post. The “Hooverism” is Henderson’s contribution.”

    No, Henderson is right that readers will see an implicit attribution of austerity Hoover:




    Krugman has for years presented Hoover as being a posterchild of austerity. If Krugman using the term Hoover or Hooveresque to describe a politician, he’s saying that politician is an austerian.

  17. Gravatar of Mike Rulle Mike Rulle
    8. April 2013 at 13:15

    Personally, I would mention PK a lot less than you do. It is distracting and it implies you care about his opinions even when they are way off base. He has chosen to be a political propagandist first and an economist second in his public writings. I further would not make self deprecating remarks about the school at which you teach. Plus, when you critique PK you are overly polite and seem anxious to point out when he is correct.

    You are way better than that.

  18. Gravatar of Al Al
    8. April 2013 at 13:40

    “Krugman has for years presented Hoover as being a posterchild of austerity. If Krugman using the term Hoover or Hooveresque to describe a politician, he’s saying that politician is an austerian.”

    Geoff, Henderson linked to a specific article and imputed an argument about Hoover that didn’t exist. Three separate articles referring to Hoover do not support his point, unless you assume that readers of an article carry along references to every previous article. If you read the article that Henderson linked, “Hoover” referenced the person, and it was not used as an adjective. That name-adjective usage was reserved for “Mellonism”. You may feel that the other articles to which you linked are incomplete pictures, but it would be clearer to attack those arguments, rather than to manufacture a straw man, as Henderson did, to attack some hazy Hoover austerity/non-austerity label.

  19. Gravatar of Becky Hargrove Becky Hargrove
    8. April 2013 at 13:46

    Mike Rulle,
    While I agree that PK gets mentioned “more than necessary”, I would wager that Scott is quite proud of his school, and used that phrase to characterize a position some may use against him to belittle his knowledge. That position isn’t really fair, given the quality of so many universities in the U.S.

  20. Gravatar of ssumner ssumner
    8. April 2013 at 15:40

    Marcus, Good post.

    Al, Regarding your first point, I assume you are joking.

    Regarding the third, I think we can assume Krugman knows how readers are interpreting his message. If he doesn’t, he’s nowhere near as smart as we’ve all assumed.

    nickik, “Trap” is certainly a strange term for something that isn’t a trap.

    Steve, Yes, and did you notice the ideas had nothing to do with monetarism? (either the Milton Friedman type or market monetarism.) I wonder if Krugman understood what he was doing by attaching the label “monetarist” to neanderthal ideas.

  21. Gravatar of Ben J Ben J
    9. April 2013 at 03:08


    I can almost hear you grasping at straws. Reduced to reminding everyone that the Nobel prize in economics isn’t a *real* Nobel prize?

    Soon you’ll be whipping out the old crowd favourite, ‘economists know the price of everything, and the value of nothing’. I know right?!? They’re so silly!!!

  22. Gravatar of Saturos Saturos
    9. April 2013 at 05:01

    Here’s the NYT on the yen: http://www.nytimes.com/2013/04/09/business/global/yen-slides-close-to-level-of-100-to-the-dollar.html?src=recg

  23. Gravatar of ssumner ssumner
    9. April 2013 at 07:27

    Saturos, The NYT never would have printed that story in 2009, when I first started blogging. Good to see they’ve dropped the silly “liquidity trap” worldview.

  24. Gravatar of GMC GMC
    9. April 2013 at 08:14

    Krugman is trapped. His views on Japan are pretty clear, and basically agree with yours. However, taking those views seriously requires admitting that fiscal stimulus is not necessary. Ever.

    So he is required to not take his own views on monetary economics seriously in order to preserve a fig leaf of respectability for his own views on fiscal stimulus, which unfortunately he has stumped for unnecessarily for years.

  25. Gravatar of Geoff Geoff
    9. April 2013 at 16:51


    “Three separate articles referring to Hoover do not support his point, unless you assume that readers of an article carry along references to every previous article.”

    That doesn’t need to be only assumed. It’s what Krugman is portraying Hoover as being. A Mellonist liquidationist.

    Ben J:

    No sure what you’re trying to say, Ben J. Grasping at straws? That would imply I am at this moment backed into some corner. But I am not in any corner, not now anyway. I was just responding to Dr. Sumner’s worry over getting attacked as being jealous of Krugman’s Swedish central bank “In Memory of Alfred Nobel” award.

    How is that “grasping at straws”? I am not even in any debate right now. You’re a strange cat.

  26. Gravatar of B. H. Soetoro B. H. Soetoro
    11. April 2013 at 07:20

    Japan is toast. NOTHING can save Japan. What will Krugman’s excuse be when inflation ravages Japan and JGB’s default?

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