11 ms·

How did Paul Krugman get it so Wrong?

63 points by chasingsparks 17y ago

chasingsparks 17y ago
About two weeks ago, there was a thread on Krugman's Op-Ed http://news.ycombinator.com/item?id=803793 http://news.ycombinator.com/item?id=803793 in the NYT. This is a response to that op-ed by a fellow economist.
- madair 17y ago
  The fellow economist is a key figure in the school of economic thought that Krugman was attacking.
  - chasingsparks 17y ago
    Does that make his arguments less true?
    - madair 17y ago
      Of course not, it's all a point of view. It's just a critical point to know in the context of fellow economists that the Chicago school is under attack, whether rightly or wrongly, for the current state of the economy.
      - chasingsparks 17y ago
        Fair.
jfornear 17y ago
Different views on this same topic: Martin Neil Baily: http://www.brookings.edu/opinions/2009/0908_krugman_baily.aspx http://www.brookings.edu/opinions/2009/0908_krugman_baily.as... Barry Eichengreen: http://www.nationalinterest.org/PrinterFriendly.aspx?id=21274 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-get-it-so-wrong.html http://gregmankiw.blogspot.com/2009/09/how-did-economists-ge...
- chasingsparks 17y 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 http://www.paulgraham.com/disagree.html
  - jfornear 17y ago
    I prefer Cochrane's critique as well. Krugman is one of the most overrated economists of our time IMO.
    - jshen 17y ago
      except for the economists who got it so wrong ;)
      - DanielBMarkham 17y ago
        You are assuming that economists operate like weather prediction. This is not the case. Your assumption is invalid. Look at it this way: if economists could predict the markets, economists would all be filthy rich. Markets are inherently chaotic. That's why they work.
        jshen 17y ago
        yet economists do make predictions, and they make them based on abstract models. Read the krugman piece for some examples of such models and their predictions. One concrete example, when the fed raises or lowers interests rates it's based on a prediction of where they believe the market is going, where they believe it's at, and a prediction of the effect of the rate change. Otherwise what is the profession doing?
        DanielBMarkham 17y ago
        The profession is still in the stage of gathering data and looking for patterns. Some theorists believe they have testable hypotheses, but this is debatable (in my opinion) The Fed makes forecasts but monetary policy is based on consensus among various schools of thought, not models. It doesn't work like NOAA. If you could reliably predict the markets you'd make a fortune -- and the markets would adjust and become unpredictable again. This is a basic feature of markets, agreed to by all comers, last I checked. IANAE, but I'm hearing over and over again that Krugman is making political points, not economic ones. That's fine, but it makes it difficult for laymen like myself to determine if we're having a political discussion or an economic one.
hristov 17y 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 17y 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 17y ago
  Two strong assumptions: 1. Correlation is causation? 2. It is all the Bush adminstration's fault.
- chasingsparks 17y 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).
- natrius 17y 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.
deleted 17y ago
[deleted]
philwelch 17y 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 17y 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.
  - philwelch 17y 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.
- chasingsparks 17y 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).
  - philwelch 17y ago
jshen 17y 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"
- TomOfTTB 17y 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 17y ago
    I think colorful is a little too generous. I think it's far beyond that.
davidmathers 17y ago
Flagged. Please join me.
- TomOfTTB 17y ago
  So Krugman is ok (you submitted this article yourself: http://news.ycombinator.com/item?id=332097 http://news.ycombinator.com/item?id=332097) but those who disagree with him should be flagged?
  - davidmathers 17y 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/2009/09/john-cochrane-paul-krugman-and-says-law-again.html http://worthwhile.typepad.com/worthwhile_canadian_initi/2009...
    - davidw 17y ago
      I joined you in flagging it (and flagged the Krugman one for good measure :-). It's virtually impossible for any article about economics to not devolve into political squabbling on internet forums. Just look at the ratio of people with degrees in economics vs people who are, as philwelch describes them, "self-trained Austrian economists who post on comment threads". And if you start posting Krugman articles, it's like waving a red flag in front of a bull for our "Austrian" (and others of their ilk) HN brethren - they're going to want to post their stuff too. I think economics is fascinating, but ultimately it serves, and is very closely related to what a society's goals and values are, which is politics.
bonaldi 17y 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.
- Perceval 17y 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.
  - bonaldi 17y 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.
MaysonL 17y ago
For some perspective on John Cochrane and his economic views: http://delong.typepad.com/sdj/2009/02/why-do-we-economists-today-know-so-much-less-than-fisher-or-wicksell-knew.html http://delong.typepad.com/sdj/2009/02/why-do-we-economists-t... http://delong.typepad.com/sdj/2009/01/time-to-bang-my-head-against-the-wall-some-more-pre-elementary-monetary-economics-department.html 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 17y ago
Prof Steve Keen FTW http://www.debtdeflation.com/blogs/2009/09/27/it%e2%80%99s-hard-being-a-bear-part-sixgood-alternative-theory/ http://www.debtdeflation.com/blogs/2009/09/27/it%e2%80%99s-h...
sandrogerbini 17y 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.

63 points by chasingsparks 17y ago

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

madair 17y ago
The fellow economist is a key figure in the school of economic thought that Krugman was attacking.
- chasingsparks 17y ago
  Does that make his arguments less true?
  - madair 17y ago
    Of course not, it's all a point of view. It's just a critical point to know in the context of fellow economists that the Chicago school is under attack, whether rightly or wrongly, for the current state of the economy.
    - chasingsparks 17y ago
      Fair.

jfornear 17y ago

Different views on this same topic: Martin Neil Baily: http://www.brookings.edu/opinions/2009/0908_krugman_baily.aspx http://www.brookings.edu/opinions/2009/0908_krugman_baily.as... Barry Eichengreen: http://www.nationalinterest.org/PrinterFriendly.aspx?id=21274 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-get-it-so-wrong.html http://gregmankiw.blogspot.com/2009/09/how-did-economists-ge...

chasingsparks 17y 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 http://www.paulgraham.com/disagree.html
- jfornear 17y ago
  I prefer Cochrane's critique as well. Krugman is one of the most overrated economists of our time IMO.
  - jshen 17y ago
    except for the economists who got it so wrong ;)
    - DanielBMarkham 17y ago
      You are assuming that economists operate like weather prediction. This is not the case. Your assumption is invalid. Look at it this way: if economists could predict the markets, economists would all be filthy rich. Markets are inherently chaotic. That's why they work.
      - jshen 17y ago
        yet economists do make predictions, and they make them based on abstract models. Read the krugman piece for some examples of such models and their predictions. One concrete example, when the fed raises or lowers interests rates it's based on a prediction of where they believe the market is going, where they believe it's at, and a prediction of the effect of the rate change. Otherwise what is the profession doing?
        DanielBMarkham 17y ago
        The profession is still in the stage of gathering data and looking for patterns. Some theorists believe they have testable hypotheses, but this is debatable (in my opinion) The Fed makes forecasts but monetary policy is based on consensus among various schools of thought, not models. It doesn't work like NOAA. If you could reliably predict the markets you'd make a fortune -- and the markets would adjust and become unpredictable again. This is a basic feature of markets, agreed to by all comers, last I checked. IANAE, but I'm hearing over and over again that Krugman is making political points, not economic ones. That's fine, but it makes it difficult for laymen like myself to determine if we're having a political discussion or an economic one.

hristov 17y 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 17y 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 17y ago
Two strong assumptions: 1. Correlation is causation? 2. It is all the Bush adminstration's fault.
chasingsparks 17y 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).
natrius 17y 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.

deleted 17y ago

[deleted]

philwelch 17y 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 17y 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.
- philwelch 17y 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.
chasingsparks 17y 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).
- philwelch 17y ago

jshen 17y 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"

TomOfTTB 17y 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 17y ago
  I think colorful is a little too generous. I think it's far beyond that.

davidmathers 17y ago

Flagged. Please join me.

TomOfTTB 17y ago
So Krugman is ok (you submitted this article yourself: http://news.ycombinator.com/item?id=332097 http://news.ycombinator.com/item?id=332097) but those who disagree with him should be flagged?
- davidmathers 17y 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/2009/09/john-cochrane-paul-krugman-and-says-law-again.html http://worthwhile.typepad.com/worthwhile_canadian_initi/2009...
  - davidw 17y ago
    I joined you in flagging it (and flagged the Krugman one for good measure :-). It's virtually impossible for any article about economics to not devolve into political squabbling on internet forums. Just look at the ratio of people with degrees in economics vs people who are, as philwelch describes them, "self-trained Austrian economists who post on comment threads". And if you start posting Krugman articles, it's like waving a red flag in front of a bull for our "Austrian" (and others of their ilk) HN brethren - they're going to want to post their stuff too. I think economics is fascinating, but ultimately it serves, and is very closely related to what a society's goals and values are, which is politics.

bonaldi 17y 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.

Perceval 17y 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.
- bonaldi 17y 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.

MaysonL 17y ago

For some perspective on John Cochrane and his economic views: http://delong.typepad.com/sdj/2009/02/why-do-we-economists-today-know-so-much-less-than-fisher-or-wicksell-knew.html http://delong.typepad.com/sdj/2009/02/why-do-we-economists-t... http://delong.typepad.com/sdj/2009/01/time-to-bang-my-head-against-the-wall-some-more-pre-elementary-monetary-economics-department.html 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 17y ago

Prof Steve Keen FTW http://www.debtdeflation.com/blogs/2009/09/27/it%e2%80%99s-hard-being-a-bear-part-sixgood-alternative-theory/ http://www.debtdeflation.com/blogs/2009/09/27/it%e2%80%99s-h...

sandrogerbini 17y 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.