Paul Krugman

Paul Krugman

Paul Krugman is an American economist and Nobel laureate. He is also an op-ed columnist and blogger for the New York Times. Krugman is well known for believing in the theories of John Maynard Keynes and continually advocates for more inflation and government intervention in the economy. Krugman's blog posts repeatedly display his opinion that inflation is a measurement of prices and not the quantity of money. For these and other views is Krugman frequently criticized by Austrian economists.^{[citation needed]} A blog created by William L. Anderson is devoted to "Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics."

In October 2010, Krugman was challenged to a debate over Austrian vs. Keynesian business cycle theory by economist Robert Murphy. As of mid-November 2010 Krugman has not responded.

Broken window fallacy

The broken-window fallacy was seen in a column by Princeton University professor Paul Krugman after the terrorist attack on the World Trade Center: "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."

In 1998, Krugman said: "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?" To the question "...because that would only promote inflation instead of growth?" he responded "There is no danger of that!"

In June, 2011, Paul Krugman declared that a new war would solve the nation’s looming economic problems: "If we suddenly had a threat of war and a military build up, you’d be amazed how fast the economy would recover."

Krugman on Austrian Economics

In 1998, Krugman wrote that he regarded the "Austrian theory" of the business cycle "about as worthy of serious study as the phlogiston theory of fire". In 2011, he conceded that (in his understanding of) the Austrian explanation both is theoretically possible and actually happens in the real world:

So what is the essence of this Austrian story? Basically, it says that what we call an economic boom is actually something like China's disastrous Great Leap Forward, which led to a temporary surge in consumption but only at the expense of degradation of the country's underlying productive capacity. And the unemployment that follows is a result of that degradation: there's simply nothing useful for the unemployed workers to do. I like this story, and there are probably other cases besides China 1958–1961 to which it applies. But what reason do we have to think that it has anything to do with the business cycles we actually see in market economies?

Krugman in Support of the 2000’s US Housing Bubble

Recommending the Federal Reserve lower interest rates to create a housing bubble:

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?”

2001-05-02:

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.

2001-07-18:

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"

2001-08-14:

Still, as former Treasury Secretary Larry Summers says, you don't have to refill a flat tire through the puncture. To reflate the economy, the Fed doesn't have to restore business investment; any kind of increase in demand will do. How might demand increase? 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.

2001-08-22:

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."

2001-10-07:

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.

2001-12-28:

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.

2002-08-02:

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. 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.

Opposing the Federal Reserve raising interest rates:

2008-03-03:

One argument I’ve been hearing a lot lately runs as follows: “Low interest rates got us into this mess, so it’s crazy to think that low interest rates are the solution.”

Now, I don’t actually buy the first premise: I blame Greenspan for ignoring warnings about subprime and housing, but I still think keeping the Fed funds rate at 1% for a long time was justified by the economy’s weakness, which lasted until late 2003 or even beyond. But it’s true that we had an orgy of over-borrowing in the housing market. So the question remains: does an effort to encourage even more borrowing make sense?

Yes.

2004-08-10:

Oh, and on a nonpolitical note: even before Friday's grim report on jobs, I was puzzled by Mr. Greenspan's eagerness to start raising interest rates. Now I don't understand his policy at all.

Crediting the housing bubble for the mid-2000’s economic recovery:

2008-02-19:

In fact, I’d say that the sources of the economy’s expansion from 2003 to 2007 were, in order, the housing bubble, the war, and — very much in third place — tax cuts.

2005-05-27:

As Mr. McCulley predicted, interest rate cuts led to soaring home prices, which led in turn not just to a construction boom but to high consumer spending, because homeowners used mortgage refinancing to go deeper into debt. All of this created jobs to make up for those lost when the stock bubble burst. Now the question is what can replace the housing bubble.

Links

• Consumers Don't Cause Recessions by Robert P. Murphy, November 2008, about 'demand-side' economics
• Paul Krugman on Wikipedia
• "Paul Krugman Columnist Page - The New York Times"
• "pkarchive - The Unofficial Paul Krugman Archive"
• Caught: Krugman's Shifting Arguments by Robert P. Murphy, March 2011
• The Good Krugman by James E. Miller, May 2011