Saturday, November 07, 2009

Another Krugman versus Krugman 

During Japan's seemingly never-ending recession/semi-recession starting in the early 1990s, Paul Krugman repeatedly argued and lectured that Japan should use monetary policy to stimulate its economy.

In 1998 he wrote a notable paper arguing that monetary policy would work in spite of 0% short-term interest rates (a "liquidity trap"), and criticizing Japan's wasteful government-spending "stimulus" that greatly increased its national debt...
Japan has already engaged in extensive public works spending in an unsuccessful attempt to stimulate its economy. Much of this spending has been notoriously unproductive: bridges more or less to nowhere, airports few people use, etc....
But today, regarding the US recession, Krugman has morphed into the champion of all things "spending stimulus", and into a critic of monetary policy claiming it is ineffective due to extremely low interest rates (a "liquidity trap").

However, considering his prior analysis regarding Japan, his criticism is in very carefully couched terms -- some might even say intentionally misleadingly so.

One who does say so is economist Scott Sumner, who recalls the charges recently hurled by Krugman at economist Steve "SuperFreakonomics" Levitt and his co-author Stephen Dubner over their alleged heresy regarding global warming, and concludes: pot, kettle, black -- only a lot more so. Sumner writes [emphasis in original]...
... let’s review Krugman’s criticism of Levitt and Dubner’s chapter on global warming. Recall that their chapter opened with a charming and entirely accurate anecdote about how “some” scientists had predicted global cooling in the 1970s. But then Levitt and Dubner went on to emphasize that the current science on global warming was quite solid, and therefore we needed to consider some pretty extreme policy options for dealing with this very serious problem.

Krugman argued that their opening 1 1/2 pages of this 45 page chapter were misleading, leaving the clear impression that the current consensus for global warming was suspect.

I don’t see how anyone reading the entire chapter could conclude that, but let’s say Krugman was right. Even Levitt and Dubner’s worst enemies would have to concede that they also presented lots of evidence in favor of the global warming hypothesis.

Now let’s compare that to Krugman’s post. He makes the very misleading statement that his 1998 paper shows monetary policy doesn’t work in a liquidity trap, when the paper actually ends up arguing that monetary stimulus is one of the most promising policy options for Japan.

And then he hides the relevant policy option in a parenthesis. That is far more misleading than anything Levitt and Dubner were accused of doing....

Even worse, Krugman did this when discussing one of the most important issues facing the world today. The unemployment rate hit 10.2% today....

Here’s how Krugman scolded L&D:

Levitt now says that the chapter wasn’t meant to lend credibility to global warming denial — but when you open your chapter by giving major play to the false claim that scientists used to predict global cooling, you have in effect taken the denier side...

And that’s not acceptable. This is a serious issue. We’re not talking about the ethics of sumo wrestling here; we’re talking, quite possibly, about the fate of civilization. It’s not a place to play snarky, contrarian games.

That’s how I feel about Krugman. He creates the impression that monetary stimulus can’t work, even though his own scientific writings suggest otherwise.

And a recession causing tens of millions of workers around the world to become unemployed, perhaps for many years, is also a very serious issue.
Read Sumner's entire post. Others in the conversation: The Economist, and David Beckworth, who started it all.