Defending Krugman: My Problem with “Paul Krugman’s Problem”

Paul-Krugman

Bob Murphy recently posted a video on his blog called Paul Krugman’s Problem, by Skyler Lehto. As the title would suggest, it’s a very detailed video that goes over the supposed historical revisionism and disingenuous nature of Paul Krugman’s arguments. I’ll be the first to admit, the video was quite impressive and some parts of it are quite good. However, I thought that large chunks of the video either wrong or were just complete nitpicks that look far too deeply into off hand remarks. Anyway, let’s get started.

I’ve decided to split up my response based on the various topics he covers in the video, to make things easier to follow.

1. Skyler begins by pointing out two cases where Krugman partakes in historical revisionism by denigrating the legacy on F.A. Hayek and Henry Hazlitt (0:00-2:12). Krugman’s remark on Hayek is completely wrong, plain and simple. However, this attack from Skyler comes across a complete nitpick. He takes an off hand remark (that wasn’t even the point of the post) and makes some grandiose claim that doesn’t really follow for me. I could easily make the counter point that many Libertarian and Conservative economists make similar arguments about Keynes. This is starting to look like a Tu quoque, but I think it demonstrates a lack of consistency within Libertarian circles (and most political circles in general). They are willingly to rip Krugman for misrepresenting their intellectual idols, which is perfectly valid, but they often turn the other way when people within their own community denigrate opposing intellectual figures.

The point on Hazlitt by Krugman is also wrong and completely exaggerated, but in fairness to Krugman, some of Hazlitt’s writings on economics are pretty terrible. For one, it’s clear that Hazlitt didn’t understand Keynes and some of his other writings on economics aren’t very useful. What I’m trying to get at is that I would recommend a lot of other books written by other Libertarian writers, whether its a book on Austrian Economics or a basic economics text, before I would mention Hazlitt. Of course this doesn’t speak to the non-economic writings of Hazlitt.

2. Skyler then looks at a comment that Krugman made about Veronique de Rugy (2:12-2:40). This is where Skyler obscures the debate a little bit. Focusing on the context of the quote, Veronique de Rugy posted a chart claiming that in 2012 many European countries that were partaking in austerity didn’t actually cut spending by that much and that tax increases comprised much of the European austerity. For one, these charts don’t really tell us much. They don’t mention inflation, GDP growth, or any changes in the composition of government spending. But let’s disregard that for now, Rugy’s main point is this:

First, I wish we would stop being surprised by what’s happening in Europe right now. Second, I wish anti-austerity critics would start acknowledging that taxes have gone up too–in most cases more than the spending has been cut. third, I wish that we would stop assuming that gigantic “savage” cuts are the source of the EU’s problems.

But is this really a problem for the “anti-austerity crowd”? Not really. I think most Keynesians would agree, including Krugman, that badly targeted tax increases during a zero bound recession are counterproductive. Within the context of the debate, Krugman is completely right to call out Rugy, her graph only muddles the issue on European austerity. But even looking at his more general remarks about Rugy, I would still agree with him. The fact is, Rugy has mangled the data on a number of issues, so I (and many others) am extremely skeptical when she makes a claim based on her statistical analysis. Does Skyler mention any of this? No he hasn’t. He only tells one side of the story and as a result, completely misses the mark here.

3. Probably the weakest part of Skyler’s video is the bit about Krugman’s remark on Peter Schiff (from 3:10 – 4:32), specifically about Krugman’s ad hominem attacks. I think some of his conclusions are correct, especially the part about Krugman and ABCT, but amidst the good points are a number of misunderstandings. For example, Skyler uses a tiny sentence to frame Krugman in a bad light to “show” Krugman denying Peter Schiff’s prediction of the 2008-2009 financial crisis, when all Krugman was talking about was Schiff’s embarrassing predictions on inflation. Krugman then goes on to say this:

Now, the thing about Schiff and all the other Austrians predicting runaway inflation is that they were right to make this prediction given their model. If you believe that a recession is caused by a failure on the production side of the economy, the result of past malinvestment or something, you should also believe that any attempt to correct this decline by expanding credit will simply result in too much money chasing too few goods, and hence a lot of inflation.

This is clearly the part that bugs Skyler, and with good reason. I think Krugman clearly shows his lack of understanding on ABCT and what it means to make a prediction. Just because some Austrians make wild, incoherent predictions doesn’t mean that the ABCT is wrong. In fact, in the case of Peter Schiff, it shows that some Austrians don’t understand the underlying causes of hyperinflation or the ABCT, the very theory they supposedly embrace. But to call Krugman a hypocrite is far too strong a criticism and a bit of a non sequitur. The fact is, Krugman has often admitted his mistakes and as a result, updated his priors. Despite the fact that Krugman made a wrong prediction on deflation, he looked at the evidence and found something that is perfectly consistent with his model. This is in complete contrast to what Peter Schiff and some other Austrians have done. They still continues to scream about hyperinflation. I’m also not sure how these examples prove that Krugman engages in ad hominem attacks. Does Krugman make snide remarks? Yes, but he often backs it up with a reasoned argument. As much as I wish Krugman didn’t use them, Skylar doesn’t even come close at proving what he wants to prove.

Skyler ends this segment by claiming that hyperinflation could occur if the FED doesn’t have a good exit strategy, which completely ignores the real causes of hyperinflation. Ironic considering his preceding argument, but whatever…

4. Skylar criticizes Krugman on how he “relies on many facts that are out of context and economic logic that is often superficial” (4:32-6:08). The first example Skylar uses is just bad. He attacks Krugman for not using real unemployment figures in this piece, but it comes across as super nit-picky. Krugman is using the 7.7 percent unemployment figures as a baseline, because everyone else uses it. Of course he recognizes the discouraged worker effect, he’s talked about it before. Anyone familiar with economics knows about this, and to say that he excludes this because of some nefarious motive is wrong.

The argument about Krugman ignoring structural employment is also way off the mark because Krugman has talked about this before (the funny thing is, even Scott Sumner agrees with him)! Skylar doesn’t even reference this post, ignoring the debate on this issue.

The second example Skylar gives is better. He references Krugman’s post about the “Hangover Theory”. I won’t go into too much detail here (as I pretty much agree with Skylar), but I highly recommend reading Krugman’s original post, then the response from Bob Murphy, and finally this piece by Daniel Kuehn to put the entire topic into perspective.

Skylar concludes by going back to the “structural element” of the unemployment debate, which was already addressed by Krugman. Plus the phrase about “Krugman’s assumption that any state or local budget reduction are necessarily bad” is an awful straw-man that I won’t even bother to address.

5. The final topic covered, regime uncertainty (6:08-8:49), is the weakest part of Skyler’s video. It’s really bad, as he seems to be conflating Keynesian uncertainty with regime uncertainty, two very different things. For example, he calls out Krugman for writing this bit:

Now, there are some real puzzles here. Why have profits been so strong in a weak economy? Why, with profits so high, don’t businesses find reason to invest more (equipment investment is actually fairly strong, but construction remains weak). (For the seriously wonkish, why do average and marginal q seem to be so different?)

But these seem to be real-side puzzles, not monetary/financial puzzles. I don’t see anything in the data that has the “signature” of what you’d expect if the big problem was that Ben Bernanke is flooding the market with artificial liquidity that has nowhere to go.

By asserting that Krugman “opens himself up the to the notion that policy uncertainties could be provoking businesses to hold back on investment despite their profits.” Huh!? Non-sequitur much! Krugman could be opening himself up to several notions. The first thing that comes to my mind is Keynesian uncertainty. Given that Krugman is clearly a Keynesian, he probably thinks that a “do nothing” policy which would have caused a collapse in the financial system and dramatic fall in investment would have shocked business expectations more than any sort of “regime uncertainty”. Krugman isn’t conceding anything here.

The research Skyler provids to “prove” the existence of regime uncertainty, at least to an extent that would cause major unemployment, amounted to no more that a short piece by the FED. That’s fine, but it’s far from conclusive. There’s a ton of debate of the blogosphere about this stuff and Skylar doesn’t reference any of it. My take personal take is that, although regime uncertainty is a real thing, it’s not what businesses are worried about right now. There hasn’t been any major shift in government spending policy. Tax levels aren’t excessive. Our regulatory structure hasn’t really grown at an exorbitant rate. Is Obamacare a problem? Probably, but it doesn’t explain the depth of the issues we are facing. The problem right now is a lack of demand.

Skylar’s final remarks are also bad:

“In essence, Krugman story is one of a nobel prize winner who consequently acquired an enlarged ego and a propensity to engage in ad hominem smears and historical revisionism in order to propagate is own beliefs in an ends justify the means fashion, regardless of the fact that a thorough enough analysis may reveal that many of his conclusions to be quite superficial in nature. And that’s the problem with Paul Krugman.”

Ouch! However, far from proving Krugman’s as superficial, Sklyer’s video is, in some sense, superficial itself. It constantly frames the discussion from a Libertarian and Austrian narrative, skewing the discussion and obscuring the real debates that actually occur on the blogoshere. When he’s not doing that, he’s reading way to far into some of Krugman’s statements or misinterpreting them outright.

I’m aware that individual interpretations have problems. Why would there be any reason to believe me over Skyler? Well, I tried to interpret Krugman’s statements on his terms, i.e. Keynesian terms, which is the best way to analyze his blog posts. So based on this, I believe that my take on Krugman is better and more accurate.

The video is still very well made and Skyler does make a few legitimate points. But among the good elements are a number of bad ones, and this brings down the overall quality of the analysis.

Many of the points that I brought up to defend Krugman are far from conclusive, but that’s irrelevant. The mere fact that we are having a debate on this says that these arguments, Krugman’s arguments, aren’t superficial or disingenuous. With this is mind, Skyler’s “problem with Paul Krugman” is completely unjustified.

Now, what can I say about Krugman? Do I have problems with Paul Krugman? Yes. I don’t like some of his generalizations and I don’t like when he makes rude comments. But he consistently provides good analysis on economic issues in a pithy and clear way, which is extremely rare for economists. For an amateur like me, it’s a gift.


Links:

Response 1:

More on the Disappearance of Milton Friedman

The Paradox of Flexibility

Cringeworthy: Krugman on Hayek

Did Hayek Matter?

Can One Respect Henry Hazlitt?

Zombie Criticisms of Keynes

Response 2:

Austerity, Safety Nets, and Spending

Show Me the ‘Savage’ Spending Cuts in Europe, Please

Bad Austerity Analysis: Response to Veronique de Rugy

Austerity is Austerity, No Matter How You Get There

Yes, There’s Been Austerity in Europe

The Debate over Austerity Continues

Working with De Rugy’s Data

Veronique de Rugy and Nick Gillespie need to read Bastiat

Does the US have an Unusually Progressive Tax System?

Response 3:

Varieties of Error

What about that Hyperinflation?

Explaining Hyperinflation

Understanding Hyperinflation

Deflation Risks

Why don’t we Have Deflation?

Missing Deflation

Response 4:

Our Incredible Shrinking Government

Structural Humbug

Hangover Theory at the FED

Putting Austrian Business-Cycle Theory to the Test

Robert Murphy on the Austrian School and Keynesianism

Response 5:

Too Much Talk About Liquidity

Keynesian Uncertainty

Uncertainty and the Slow Labor Market Recovery

Austrians Mangle Business Uncertainty

The Confidence Fairy

Politicians, uncertainty, and Bernanke’s dissertation

Regulatory uncertainty: A phony explanation for our jobs problem

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2 Comments

Filed under Economics

2 responses to “Defending Krugman: My Problem with “Paul Krugman’s Problem”

  1. Thanks for the post! I’ll try to offer a response that is reasonably thorough for the time available to me:

    You’re right that there is a lot to elaborate on in these economic debates. I enjoy reading the blogs of economists like Murphy, Sumner, Kuehn, Selgin, Beckworth, DeLong, Krugman, etc. My main goal was to cover what I reasonably could under nine minutes that could still be disseminated to a broader YouTube audience.

    On Veronique de Rugy, my biggest issue was the ad hominem nature of Krugman’s remark toward her (no direct citation of anything she did or got wrong). On the austerity issue as a whole, my biggest issue is that Krugman too often implies to his audience that “austerity ~ slashing spending,” when in fact he and others know that probably the majority of European austerity is via exogenous tax revenue increases.

    On Schiff, what I was getting at was the tactical wording that Krugman used to obfuscate that Schiff had accurately called the housing bubble and financial crisis. Note that Krugman did not say, “Schiff may have called the real estate plunge and financial meltdown, but he totally missed the mark on runaway inflation.” Rather, he made sure to say what he could to be technically not lying, but still maximize the smear against Schiff. Hence, “It wasn’t really true even then.” I also do not mean to suggest that hyperinflation is any likely outcome; I merely said that inflationary problems might occur if there were a failure on the part of the Fed to sop up trillions in excess liquidity.

    Clearly Krugman is an intelligent man, but I nevertheless consider myself among those who disagree with some of his key macro intuitions. When I say that his intuitions are dismissive of certain structural elements, I am not suggesting that a PhD economist is unaware of them; in fact, the “Structural Humbug” post you cited was among my original compilation of potentially usable Krugman material for the video.

    When I spoke of Krugman’s assumption about state and local government layoffs, I did not literally mean that he thinks “every” single lost job is undesirable (perhaps my wording was a bit too definitive in that regard). Rather, I meant to refer to his notion that federal stimulus should be used to plug the “gap” in government payrolls. My concern is that this ignores the proper market-guided allocations of employment; as the economy recovers on the other end of a recession, some areas will have expanded more, while a few will have contracted (assuming that there had been a structure-distorting boom). Plugging with fiscal stimulus of this sort interferes with the correction process.

    You are right that there are different kinds of uncertainty (though non-Keynesian uncertainty is still discernible into two types–policy uncertainty and regime uncertainty are not identical, as some have made that distinction). Now I do believe that what Krugman had in mind with “real-side puzzles” was quite possibly his “monopoly rents” hypothesis that he has written about before (see: “Rents and Returns…” from 06-21-2013). All I meant to point out was that this is where the policy uncertainty factor could find its place among Krugman’s ponderings, considering he realizes that some real-side factor must be at play.

    Now that I think of it, I should have tried mentioning something about Casey Mulligan’s research on the disincentive effects of extended UI, SNAP, and DI, and how that has contributed to the current employment gap. But I digress.

    Anyways, those are my thoughts upon reading your response. Thanks for the video critique!

    –Skyler

    • Thanks for the comment! I’m actually surprised you found this, but I appreciate your thoughts. The main problem with videos, in my view, is that its hard to pack in everything you want too and I think that’s what happened here. Topics can get obscured just by the nature of the medium. Don’t get me wrong, your video was extremely well made (I can’t emphasis that enough) and your critique of Krugman is a million times better than most critiques on the Internet, I just thought some things were left incomplete.

      Anyway, I’ll try and keep this short.

      1. I just thought that providing the context of the debate would provide a more complete picture of where Krugman was coming from. He should have at least made a reference to something before saying that, but I didn’t think he was totally in the wrong. Focusing on the context of that quote, Rugy’s graph doesn’t help much, as either scenario (cutting spending or raising taxes) would be considered austerity to a Keynesian and Krugman would no doubt agree with that. Was Krugman’s point a generalization? Yes, so I’ll grant that.

      2. I’m still not seeing the Peter Schiff thing and I think you’re reading into it a bit too much. Clearly Schiff was wrong about hyperinflation and I think Krugman was just focusing on that.

      3. Fair enough, I know enough about Austrians (I think?) to see their side of things. I tried to charitable in this regard. I’ve obviously disagree with Austrians on many of their claims, but we don’t go into detail on that.

      4. On the state and local government stimulus, Krugman could easily talk about idles resources and deny structural economic distortions. I think the problem here is that in many ways these two schools talk past each other and this is a problem on the blogosphere.

      5. On the uncertainty point, policy uncertainty seems to lead into regime uncertainty (or is at least a component of it), but I could be wrong in this regard. Unfortunately, many people on the internet tend to conflate the two terms, creating some confusion (I did manage to find a Robert Higgs post to clear things up for me). But I digress, I’m sure regime or policy uncertainty was the last thing on Krugman’s mind when he said “real side puzzles” so I didn’t think this criticism was fair.

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