Paul Krugman and the Crisis

Krugman’s ‘Cri de Coeur’

In a (failed) attempt to make a clever play on words, a recent Businessweek article informs us that “Paul Krugman Won the Crisis—and Lost the Argument”.

Right. What is 'he won the crisis' supposed to mean? It turns out he actually does personally make some hay from it, but that is probably not what the author meant to imply. Below are a few excerpts from the article, with our comments interspersed.

“A lot of people were tired of thinking about the financial crisis by 2012. Not Paul Krugman, the liberal Princeton University economist with a Nobel Prize and a New York Times op-ed column. That April he published a full-on cri de coeur called “End This Depression Now!”

In May his attention-getting taunts of conservatives led the New York Post to call him “the nation’s most dangerous economist.” Then in June he got into a Twitter war over austerity with the president of Estonia that was so entertaining it was made into a short opera.

The Lehman crisis was a moment made for Krugman. It prompted policymakers to swallow their pride and take a second look at John Maynard Keynes, the late British theorist whose influence in academia had been fading for decades. The bearded, gnome-like Krugman, as the most famous expositor of traditional Keynesianism, rose to the occasion. As of 2013, End This Depression Now! has been translated into 25 languages. “Paul is a rock star overseas,” says Drake McFeely, president of W.W. Norton, his U.S. publisher.

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Krugman didn't merely publish a 'cri de coeur', he published a book, and judging from the above, it is selling depressingly well. Let us briefly examine the ludicrous claim that 'John Maynard Keynes' influence in academia has been fading for decades' and that the crisis, ready-made for his proponent Krugman, 'prompted policy-makers to take a second look' at Keynes.

One immediately wonders whether the author hails from some sort of parallel universe. When exactly did Keynes' influence 'fade'? There was a brief moment when it appeared he might be pushed of his pedestal by the monetarists in the 1970s, but to argue that there is little left of his influence in academia is baffling, to say the least. With regards to policy-makers, they had become Keynesians even before Keynes published his 'General Theory'. The book is basically an unoriginal, and rather muddled rehashing of underconsumption theories that were already held to be discredited long before Keynes entered the scene, complete with inflationist and interventionist 'solutions' that essentially gave politicians the 'scientific' fig leaf for doing what they wanted to do anyway.

The modus operandi suggested by Keynes and his followers has never been changed again: every recession since then has been 'battled' with massive deficit spending and inflation.

As regards Krugman's book, when he says 'end this depression now!', he is really saying: 'entrust the same people who have been instrumental in creating the boom and bust to do the same all over again, preferably by adopting my plan, which is sure to be even more extreme than anything they are contemplating'. In Krugman's view, the crash was a 'market failure'- of course he has to say that, since he explicitly recommended in 2002 that 'Fed chairman Greenspan should create a housing bubble' (in fact, it was another arch-Keynesian, Paul McCulley, who originally made the recommendation – Krugman merely embraced it enthusiastically).

Here are his exact words:

“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.”

If you needed proof that he really is the 'world's most dangerous economist', the above is a first pointer that it is a fair assessment. We wouldn't take advice from this man if he were the last economist on the planet. That he is considered a 'rock star overseas' is sad testament to how much economic ignorance it out there in the world.

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