Krugman reviews Madrick

Here are the first two paragraphs of Paul Krugman’s review of a new book by NYT writer Jeff Madrick:

The economics profession has not, to say the least, covered itself in glory these past six years. Hardly any economists predicted the 2008 crisis “” and the handful who did tended to be people who also predicted crises that didn’t happen. More significant, many and arguably most economists were claiming, right up to the moment of collapse, that nothing like this could even happen.

Furthermore, once crisis struck economists seemed unable to agree on a response. They’d had 75 years since the Great Depression to figure out what to do if something similar happened again, but the profession was utterly divided when the moment of truth arrived.

Well said.  That’s why Krugman earns the big bucks and I merely earn the upper middle class bucks.  I actually don’t think we should be blamed for not predicting the crisis (and I think Krugman would agree.)  And while I never claimed it was impossible, I plead guilty to believing it was very unlikely.  Krugman was ahead of me on that point.  On the second paragraph I think he’s actually being too kind.  It’s not just that economists are “utterly divided,” even where they agree they are often wrong.  Thus I’m pretty sure that Joe Stiglitz and John Cochrane both believed Fed policy was expansionary in late 2008, and both were wrong, as were almost all other economists.  I am pretty sure they both believe the Fed was out of ammunition by the end of 2008, and if so they were wrong on that point as well.  So it’s not just that economists were divided on many issues, even where they agreed they were often wrong.  Krugman continues:

In “Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World,” Jeff Madrick “” a contributing editor at Harper’s Magazine and a frequent writer on matters economic “” argues that the professional failures since 2008 didn’t come out of the blue but were rooted in decades of intellectual malfeasance.

As a practicing and, I’d claim, mainstream economist myself, I’m tempted to quibble. How “mainstream,” really, are the bad ideas he attacks? How much of the problem is bad economic ideas per se as opposed to economists who have proved all too ready to drop their own models “” in effect, reject their own ideas “” when their models conflict with their political leanings? And was it the ideas of economists or the prejudices of politicians that led to so much bad policy?

I haven’t read Madrick’s book, but as Krugman describes his views I’m pretty sure I would disagree with Madrick on virtually everything.  But I am puzzled by the mysterious accusation in the next paragraph.  Who might Krugman be referring to?  Are there any famous economists who had conventional neoliberal policy views in the 1990s, but then suddenly seemed to adopt policy views that were very different in the 2000s?  Is there someone who developed a model of the liquidity trap for Japan, and argued (in the 1990s) that it showed that Japan should rely on monetary stimulus, not fiscal stimulus, who then switched to supporting fiscal stimulus in the 2000s—using the same model?  Someone who moved sharply to the left, from being a moderate neoliberal who favored free trade, to one that now expresses doubt?  Someone who used to claim unemployment compensation reduces employment, and no longer does?  Can anyone help me out?

HT:  Cyril Morong



22 Responses to “Krugman reviews Madrick”

  1. Gravatar of TallDave TallDave
    30. September 2014 at 08:42

    It’s worse than that, even now relatively few economists seem to have learned anything from the crisis, and many continue to demand more of “the same policies that got us in this mess” to quote Obama, because they don’t recognize what those policies were, monetarily or fiscally.

    In other Krugman-related news, nice turn of phrase here:

    “The 3 million highest-paying jobs in America paid a lot more in 2005 than did the 3 million highest-paying jobs in 1995″ is a very different and considerably less dramatic claim than “The top 1 percent of earners in 1995 saw their household incomes go up radically by 2005.” But the former claim is true and the latter is not.

    Rather, they treat “inequality” as though it were an active roaming malice on the economic landscape, and argue that incomes are stagnant at the lower end of the range because too great a “share of national income” “” and there’s a whole Burkina Faso’s worth of illiteracy in that phrase “” went to earners at the top. It simply is not the case that if Lloyd Blankfein makes a hundred grand less next year, then there’s $100,000 sitting on shelf somewhere waiting to become part of some unemployed guy in Toledo’s “share of the national income.” Income isn’t a bag of jellybeans that gets passed around.

  2. Gravatar of Christian List Christian List
    30. September 2014 at 08:43

    You could really think that in the last paragraphs Krugman writes about himself. But as always his unparalleled arrogance and overconfidence prevents him from seeing it. The only thing missing in the last paragraphs is him calling some guy a cockroach.

  3. Gravatar of foosion foosion
    30. September 2014 at 08:49

    FWIW, Dean Baker did well on the housing bubble and its effects. He did expect problems would begin earlier than they did. He isn’t one of those who always predict crises.

    Presumably your last paragraph is a reference to Krugman.

    Free trade tends to be good for the economy as a whole, but there are distributional issues which are often ignored. In addition, current trade agreements tend to be more about protection for intellectual property, limits on consumer and environmental protection, etc. than increased trade. Krugman’s views on unemployment appear driven by facts and circumstances. You know that old line about what to do when the facts change? If it were up to me, I’d go for both fiscal and monetary stimulus. If nothing else, it’s better to repair infrastructure when it’s cheap (borrowing costs, available labor) than when it’s more expensive.

  4. Gravatar of mikef mikef
    30. September 2014 at 09:01

    If I was the cynical type, I would say that when he got a job at the NYTimes, he severed his consultancy with Enron and his views suddenly took a turn to the left. I guess the NYT pays more. You need to stir the pot if you want readership. It is funny how he had the audacity to claim that Bush and Giuliani were “cashing in” on 9/11. If anyone has cashed in on politics, it is that guy… the left love him and so do the Times..their subscriptions are up…

  5. Gravatar of Brian Donohue Brian Donohue
    30. September 2014 at 09:42

    @foosion, you wrote:

    “If it were up to me, I’d go for both fiscal and monetary stimulus.”

    Five years into the recovery, and the gederal government deficit is only now down to $550 billion this year (debt poised to push above $18 trillion.) We have not had a hiatus from fiscal stimulus this century.

  6. Gravatar of bill bill
    30. September 2014 at 09:46

    Nice snark!! Thx.

  7. Gravatar of Jason Smith Jason Smith
    30. September 2014 at 09:50


    I believe Krugman is referring to the OECD as he used the same language in this post:

    “It’s almost exactly three years since the Paris-based OECD gave what may have been the worst advice of any major international organization “” worse than the European Commission, worse than the ECB. Not only did it join in the demand for fiscal austerity, it also demanded that the US start raising interest rates rapidly, so as to head off the threat of inflation “” even though its own models showed no such threat.”

  8. Gravatar of TravisV TravisV
    30. September 2014 at 10:03

    How concerned should macroeconomists be about the recent fall in inflation expectations?

  9. Gravatar of ssumner ssumner
    30. September 2014 at 10:36

    foosion, What facts in Japan caused Krugman to change his views on fiscal policy? The only new facts I see is that massive budget deficits in Japan extended over many years lead to the worst NGDP performance of any developed country in world history. What am I missing?

    Travis, What’s happened to NGDP growth expectations? Check out my new Econlog post for an “answer” (or not)

  10. Gravatar of mpowell mpowell
    30. September 2014 at 10:45

    TallDave – I agree with that first paragraph you quote and it’s an important point, but that second quoted paragraph (and most of the article) is nonsense, in my opinion. First, it’s not possible to pretend that government policy has no impact on wage distributions, second even aside from that redistribution through tax-and-spend can definitely move consumption around and third, if you want to argue that median wage growth will be better with current policy (and resulting income inequality), then stick with that argument.

  11. Gravatar of TallDave TallDave
    30. September 2014 at 12:20

    mpowell — The article does not claim that “government policy has no impact on wage distributions” or dispute that “even aside from that redistribution through tax-and-spend can definitely move consumption around” (indeed it explicitly states the exact opposite).

    As the author says: “You can make the straightforward case for property seizure, though Democrats generally are not all that comfortable doing so around election time, or you can ritually chant the 1,001 names of the ancient demon Inequality.”

    The article DOES make the fairly obvious point that treating income distributions as “shares” is economically illiterate (our incomes are not distributed from a giant fixed “jellybean bag”) and also notes that “current policy” (which includes lots and lots of moving consumption around and intervening in wage distributions) has produced little median wage growth.

  12. Gravatar of TravisV TravisV
    30. September 2014 at 13:45

    “Treasury Curve Roundtrips To Flattest Since S&P’s “666” Intraday Lows”

    Highest-quality analysis ever posted at Zero Hedge?

  13. Gravatar of benjamin cole benjamin cole
    30. September 2014 at 16:20

    Excellent blogging. The modern economics profession simply cannot bring itself to utter the simple words: Print more money.
    Milton Friedman could say “print more money.”
    Cochrane? Taylor? Meltzer? Anybody?

  14. Gravatar of Rajat Rajat
    30. September 2014 at 16:28

    “Are there any famous economists who…”
    “Is there someone who…”
    “Someone who moved sharply to the…”
    “Someone who used to claim…”
    “Can anyone help me out?”

    Scott, you duffer – you had it in the second sentence after the first quote: “That’s why Krugman earns the big bucks and I merely earn the upper middle class bucks.”

  15. Gravatar of TravisV TravisV
    30. September 2014 at 21:04

    Prof. Sumner,

    Do you have any thoughts on this data highlighted by Yglesias?

    “The most important chart about the American economy you’ll see this year”

  16. Gravatar of ssumner ssumner
    1. October 2014 at 05:59

    Travis, I already responded to that! It’s a meaningless graph, why would anyone care only about the expansion years?

  17. Gravatar of Nick Nick
    1. October 2014 at 06:31

    The chart is bad. But I can think of a reason to only include expansions:
    If a large group is seeing rising real living standards during recession and a small share of the gains during expansion, it might lead over time to some problematic political outcomes. We might even be able to imagine a constituency forming for consistently tightening too much too early in the cycle.
    But of course I know it’s the evil / stupid rich who are the real villains demanding tight money.

  18. Gravatar of ssumner ssumner
    2. October 2014 at 05:10

    Tom, You said:

    “The Economist in 2003 highlighted the housing boom “” too early, much like “irrational exuberance” in late ’96, too early.”

    I did several posts on this. The Economist made very specific predictions in 2003. They were WRONG, WRONG, WRONG, WRONG, WRONG AND right.

    That’s a horrible record. And yet later The Economist had the gall to brag about these predictions in an ad for the magazine. That’s embarrassing, when they don’t even know that their predictions were wrong. And they weren’t even approximately right, they were spectacularly wrong. In the majority of countries housing prices were higher in 2009 than 2003.

    As far as housing prices bubbles under NGDPLT, yes that’s possible. But we know that bubbles don’t matter with good monetary policy—1987 is a good example. Or Australia in the past 10 years.

    So I guess we disagree. But thanks for the kind comments anyway.

  19. Gravatar of ssumner ssumner
    2. October 2014 at 05:12

    Tom, someone my response showed up before your comment–not sure how.

  20. Gravatar of Tom Tom
    2. October 2014 at 06:51

    Hi Scott, mostly great post but I disagree here:
    >> I actually don’t think we should be blamed for not predicting the crisis (and I think Krugman would agree.)<<

    The biggest value of any science, in practice, is minimizing the maximum problem. Thru engineering for space exploration and testing of tiny components.

    The Economist in 2003 highlighted the housing boom — too early, much like "irrational exuberance" in late '96, too early. Japan in the 80s had a big property based boom until
    their '89 crash, and failure to really recover since then (2.4 decades "lost").

    Housing equity is more than 50% of net wealth for most workers, and a big hit is a big deal.

    You continually state that the '06 house price bubble pop was followed by 2 years of continued total growth and therefore was NOT the big cause of of the '08 crisis and stagnation since then. I'm sure you're wrong on this, but not sure how to "prove" it.

    However, continuing to blame you, Krugman, Bernake, and all paid-economists, for failure to predict the obviously predictable (Economist, like me too early in 2003, did predict it), seems more reasonable than accepting your own self-serving blame avoidance.

    And while I strongly support your NGDP targeting as optimal Fed/ CB policy, I'm also pretty sure there will be sometime a CB with NGDP targets that goes thru a property price bubble again in the next 30 years. (And all economists of that time who don't warn about the house price bubble should then be blamed for that, too.)

    Your blog remains a great read, too.

  21. Gravatar of maynardGkeynes maynardGkeynes
    3. October 2014 at 12:02

    I actually don’t think we should be blamed for not predicting the crisis (and I think Krugman would agree.)

    How about enabling it?

  22. Gravatar of ssumner ssumner
    4. October 2014 at 13:41

    Tom, You said:

    “Economist, like me too early in 2003, did predict it”

    Look, the Economist made some very specific predictions in 2003, and they were very wrong. There is simply no way to sugar coat it. If you think they were right, then you did not pay close enough attention to the specific prediction they made, which was totally off base. Their predictions were of no benefit to policymakers. A government in Sweden just lost an election because the central bank was wrongly worried about a housing bubble.

    As an analogy, Galbraith predicted a stock market crash in January 1987. There was a huge stock market crash in October 1987. But if you look closely, stocks crashed back to January levels, hence his forecast was useless to both investors and policymakers.

    I agree that it SEEMS like the housing crash caused the recession. But in economics things are often not as they seem.

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