It's Time To Bury Paul Krugman, A Response to His Response
From the Mises Economics Blog:
Here is Paul Krugman from his blog trying to deny that he was a persistent advocate for the housing bubble and below that are quotes from him just prior to the bubble taking off. ht Benjamin Lee
"And I was on the grassy knoll, too"
One of the funny aspects of being a somewhat, um, forceful writer is that I'm regularly accused of all sorts of villainy. I was personally responsible for the demise of Enron; my nonexistent son worked for Hillary; etc.. The latest seems to be that I called for the creation of a housing bubble.
German Interview, undated
"During phases of weak growth there are always those who say that lower interest rates will not help. They overlook the fact that low interest rates act through several channels. For instance, more housing is built, which expands the building sector. You must ask the opposite question: why in the world shouldn't you lower interest rates?"
May 2, 2001
I've always favored the let-bygones-be-bygones view over the crime-and-punishment view. That is, I've always believed that a speculative bubble need not lead to a recession, as long as interest rates are cut quickly enough to stimulate alternative investments. But I had to face the fact that speculative bubbles usually are followed by recessions. My excuse has been that this was because the policy makers moved too slowly -- that central banks were typically too slow to cut interest rates in the face of a burst bubble, giving the downturn time to build up a lot of momentum. That was why I, like many others, was frustrated at the smallish cut at the last Federal Open Market Committee meeting: I was pretty sure that Alan Greenspan had the tools to prevent a disastrous recession, but worried that he might be getting behind the curve.
However, let's give credit where credit is due: Mr. Greenspan has cut rates since then. And while some of us may have been urging him to move even faster, the Fed's four interest-rate cuts since the slowdown became apparent represent an unusually aggressive response by historical standards. It's still not clear that Mr. Greenspan has caught up with the curve -- let's have at least one more rate cut, please -- but the interest-rate cuts do, cross your fingers, seem to be having an effect.
If we succeed in avoiding recession, this will mark a big win for let- bygones-be-bygones, and a big loss for crime-and-punishment. And that will be very good news not just for this business cycle, but for business cycles to come.
July 18, 2001
"KRUGMAN: I think frankly it's got to be -- business investment is not going to be the driving force in this recovery. It has to come from things like housing, things that have not been (UNINTELLIGIBLE).
DOBBS: We see, Paul, housing at near record levels, we see automobile purchases near record levels. The consumer is still very much in this economy. Can he or she -- or I should say he and she, can they bring back this economy?
KRUGMAN: Well, as far as the arithmetic goes, yes, it is possible. Will the Fed cut interest rates enough? Will long-term rates fall enough to get the consumer, get the housing sector there in time? We don't know"
August 8, 2001
"KRUGMAN: I'm a little depressed. You know, inventories, probably that's over, the inventory slump. But you look at the things that could drive a recovery, business investment, nothing happening. Housing, long-term rates haven't fallen enough to produce a boom there. The trade balance is going to get worst before it gets better because the dollar is still very strong. It's not a happy picture."
August 14, 2001
"Consumers, who already have low savings and high debt, probably can't contribute much. But housing, which is highly sensitive to interest rates, could help lead a recovery.... But there has been a peculiar disconnect between Fed policy and the financial variables that affect housing and trade. Housing demand depends on long-term rather than short-term interest rates -- and though the Fed has cut short rates from 6.5 to 3.75 percent since the beginning of the year, the 10-year rate is slightly higher than it was on Jan. 1.... Sooner or later, of course, investors will realize that 2001 isn't 1998. When they do, mortgage rates and the dollar will come way down, and the conditions for a recovery led by housing and exports will be in place.
October 7, 2001
"Post-terror nerves aside, what mainly ails the U.S. economy is too much of a good thing. During the bubble years businesses overspent on capital equipment; the resulting overhang of excess capacity is a drag on investment, and hence a drag on the economy as a whole.
In time this overhang will be worked off. Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer. But it seems inevitable that there will also be a fiscal stimulus package"
Dec 28, 2001
"The good news about the U.S. economy is that it fell into recession, but it didn't fall off a cliff. Most of the credit probably goes to the dogged optimism of American consumers, but the Fed's dramatic interest rate cuts helped keep housing strong even as business investment plunged."
May 27, 2005
"The important point to remember is that the bursting of the stock market bubble hurt lots of people - not just those who bought stocks near their peak. By the summer of 2003, private-sector employment was three million below its 2001 peak. And the job losses would have been much worse if the stock bubble hadn't been quickly replaced with a housing bubble.
So what happens if the housing bubble bursts? It will be the same thing all over again, unless the Fed can find something to take its place. And it's hard to imagine what that might be. After all, the Fed's ability to manage the economy mainly comes from its ability to create booms and busts in the housing market. If housing enters a post-bubble slump, what's left?"
October 30, 2006
Krugman was asked: Did he [Greenspan] do the right thing — acting morally by engineering a housing boom, more as a bridge loan, until something else showed up at the horizon to shore up the economy — because he didn’t have a choice, or did he undertake a path of mere political expediency?
Krugman replied: As Paul McCulley of PIMCO remarked when the tech boom crashed, Greenspan needed to create a housing bubble to replace the technology bubble. So within limits he may have done the right thing. But by late 2004 he should have seen the danger signs and warned against what was happening; such a warning could have taken the place of rising interest rates. He didn’t, and he left a terrible mess for Ben Bernanke.
And of course, the now-infamous NYT Editorial, August 2nd, 2002 (Ya know, the editorial that had Statists all around the Internet scrambling to the defense of their beloved apparatchik last week.):
To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
Krugman Failure, Not Market Failure by Thomas Woods.So the New York Times’ Paul Krugman called the housing bubble, or so he tells us. I could have called the housing bubble, too, if like Krugman I advocated the very policies that led to it. Yesterday, for instance, I predicted that the Pepsi I put in the refrigerator would be cold when I took it out that night. I’m pretty good at this.
These days it’s not particularly controversial to argue that artificially low interest rates, fostered by the Federal Reserve System since 2001, gave rise to the housing bubble and set the economy on an unsustainable path. And guess who was clamoring for those low interest rates around 2001?
I've written about Woods before. He's been a savior to many free market supporters who were overwhelmed by the "Market Failure Drones" in the past two years. Woods knows exactly who is ultimately responsible for the boom/bust cycle - The Fed - and he's not afraid to stick it in establishment's face.
New York Times refuses to review Woods' new book Meltdown
Or so Woods' publisher has revealed. Is it any wonder that the major newspapers are going down? People are waking up. Meltdown is a bestseller, a 4.5 star book with 157 reviews on Amazon, and it's Amazon sales rank is #346, including #1 in Business & Economics! Yet, the NYT won't touch it. Surprised? I'm not. The NYT is a branch of the Federal Government. Meltdown covers topics the government doesn't want you to know about: How the Federal Reserve destabilizes our economy, rewards the politically connected, exacerbates the boom/bust cycle, and perniciously robs wealth from hard working Americans.
While You're Picking Up Woods' Book, Check out Thomas DiLorenzo's How Capitalism Saved America.
And Just To Finish Him Off, Paul Krugman Thinks 9/11 Terror Attacks May Help Economy
Ghastly as it may seem to say this, the terror attack -- like the original day of infamy, which brought an end to the Great Depression -- could even do some economic good. - Paul Krugman, September 14, 2001
Volume 19, Number 12
Is Terror Good for the Economy?
by Ben Powell
Paul Krugman's September 14 column in the New York Times contained more economic fallacies and hypocrisy than usual. It is a shame that a paper, where Henry Hazlitt applied Bastiat's wisdom so well now carries a column by Krugman, who, week after week, preaches that breaking windows will bring us greater wealth.
In this particular column Krugman discussed the economic impact of the attack on the World Trade Towers. Krugman says, "the terror attack could even do some economic good." How could the death and destruction of September 11 do us some economic good?
Krugman offered three assertions.
Assertion one: "If people rush out to buy bottled water and canned goods, that will actually boost the economy." Krugman sees people spending money on one particular type of good, but he does not grasp what is unseen. If people were not spending their money on bottled water and canned goods, they would be spending it on something else or saving it. All that has changed are the particular goods that are bought, not the absolute level of economic activity. People buying bottled water and canned goods neither improved nor harmed our economic condition.
Assertion two: "The driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I've already indicated, the destruction isn't big compared with the economy, but rebuilding will generate at least some increase in business spending."
Will someone please beat this man over the head with a copy of Bastiat's Economic Sophisms! (Actually, if I were literally going to beat Krugman over the head I would probably use Rothbard's entire four volumes of Conceived in Liberty.)
Krugman is committing the broken-window fallacy on a massive scale. Since the World Trade Towers were small as a percent of our economy, and their destruction will lead to a small amount of increased business investment, and this is good for our economy, all we need to do to really improve our economy is encourage lots of business investment by this method.
So, knock down the Empire State Building and we can further increase our economic output. Of course Krugman would not want just New York City's economy to grow, so we should also knock down the Sears Tower in Chicago and the Hancock Building in Boston. If this does not revive the economy, we better start leveling entire cities; surely that will bring economic prosperity.
Krugman sees only the business investment that takes place when these buildings are rebuilt. He fails to see that the resources that are used to rebuild could be used to do other things if the World Trade Towers had not been attacked. We can never become richer by destroying resources and then replacing them. After the attack, the US economy is worse off in real terms, by two office buildings, about 12 million square feet of office space and thousands of productive people.
Assertion three: "The attack opens the door to some sensible recession-fighting measures. For the last few weeks there has been a heated debate among liberals over whether to advocate the classic Keynesian response to economic slowdown, a temporary burst of public spending."
He goes on to say, "there was also the certainty that conservatives would refuse to accept any such move unless it were tied to another round of irresponsible long-term tax cuts. Now it seems we will indeed get a quick burst of public spending."
Possibly the only thing more permanent than a "temporary" tax increase is bad economic theory. These are the same Keynesian policies that have failed everywhere they were implemented over the past seventy years.
Krugman himself has been advocating public spending to revive Japan's economy. But after eleven years of massive government spending projects that have now raised their government debt to over 100 percent of GDP and their total "off budget" debt to over 200 percent of GDP, Japan's economy has still not begun to recover.
Increasing government spending through fiscal stimulus packages can never help an economy recover. Government spending must be paid for, either by taxation, inflation, or debt issue. Regardless of how it is financed, it crowds out private spending. There is no free lunch.
Krugman also demonstrated his appalling hypocrisy at the end of this article. After making the above political policy recommendation after this tragedy, he said: "Now for the bad news. After the attacks I found myself wondering whether some politicians would try to exploit the horror to push their usual partisan agendas. It seems you can't be too cynical; sure enough, the push is already on to sell tax breaks for corporations and a cut in the capital gains tax as a response to terrorism."
He finally ended his column by stating, "This tragedy will only be magnified if it is exploited for political gain. Politicians who wrap themselves in the flag while relentlessly pursuing their usual partisan agenda are not true patriots, and history will not forgive them."
After stating that these attacks might make his political objective of increasing government spending realizable, he has the gall to morally condemn someone for using them to advocate tax cuts!
New Keynesian economists, who wrap themselves in flawed economic theories while relentlessly pursuing their socialist agenda, are not true intellectuals. Contemporary readers and history should not pay attention to them.
David in Qatar