Sorry, Richard, I read about 6 pages of the Krugman article, but it was just too painful to continue to read. One has to wonder who is judging the awarding of Nobel Prizes in economics?
I find it particularly disturbing for him to tell us the history of “How Did Economists Get it So Wrong?” and completely leave out his own role in all of this. Moreover, he continues to demonstrate that he still doesn’t get it. I don’t know if he doesn’t get it because he misreads history or he misreads history because he doesn’t get it.
Later, Friedman made a compelling case against any deliberate effort by government to push unemployment below its natural
level (currently thought to be about 4.8 percent in the United States): excessively expansionary policies, he predicted, would lead to a combination of inflation and high unemployment – a prediction that was borne out by the stagflation of the 1970s, which greatly advanced the credibility of the anti-Keynesian movement.
Does Krugman remember the influence of OPEC in the 70s and the holdover from the guns and butter policy of the Johnson/Nixon years during the Vietnam War? OPEC’s actions were also largely dictated by ideological issues over the Middle East (Israel and the Palestinians). Of course our decades of interference in Iranian internal politics and our dealing with the Shah after he was deposed had no impact on economics? To ignore these issues as major causes of the economic problems is what puts economists in such a bad light. The economic theories I studied in my undergraduate years always had the proviso, all other things being the same.
Well, all other things were not being the same. You have to go beyond your undergraduate school simplifications and get into the complications one ought to appreciate in graduate school on your way to getting a PhD.
And by the 1980s, finance economists, notably Michael Jensen of the Harvard Business School, were arguing that because financial markets always get prices right, the best thing corporate chieftains can do, not just for themselves but for the sake of the economy, is to maximize their stock prices.
Does Krugman forget that the corporate chieftains achieved many of their miracles by cooking the books? Has he ever heard the dictum the results you get depend on what you are measuring?
. If you only measure consistency of results from quarter to quarter than of course, by hook or by crook, you are going to get this consistency. (A lot of it by crook, by the way.)
So they were willing to deviate from the assumption of perfect markets or perfect rationality, or both, adding enough imperfections to accommodate a more or less Keynesian view of recessions.
Has Krugman forgotten that much of Keynesian economics tells us that it can happen that individual players making entirely rational decisions for themselves can in aggregate create catastrophic conditions for the economy as a whole? How can you win a Nobel Prize and forget the fundamental point that you learned in undergraduate school?
And as long as macroeconomic policy was left in the hands of the maestro Greenspan, without Keynesian-type stimulus programs, freshwater economists found little to complain about.
What does he mean without Keynesian-type stimulus programs
. The massive budget deficits during boom times that Reagan/Bush/Bush promulgated were fiscal stimulus. That is why the Fed had to work so hard to counter these policies. I saw this at the time, how come Krugman is still blind to this? It was pretty obvious at the time that the fiscal and monetary policies of the times were working at cross purposes. How rational was that?
How did they miss the bubble? To be fair, interest rates were unusually low, possibly explaining part of the price rise. It may be that Greenspan and Bernanke also wanted to celebrate the Fed’s success in pulling the economy out of the 2001 recession; conceding that much of that success rested on the creation of a monstrous bubble would have placed a damper on the festivities.
Does Krugman see that the massive fiscal stimulus of the huge budget deficits left little room for any more Keynesian stimulus? This forced the Fed to carry the entire burden. Does he also forget that after 2001, the Clinton administration was the first administration of either party since the mid 1960s that was able to bring the deficits down? Thus ending fiscal stimulus when not needed and going back to policies advocated by Keynes.
Could none of these economists see that George W. Bush’s reversal of the Clinton policy was leading us right back into the same old mess that we had spent 8 years digging out from?
Who is going to take responsibility for opening Krugman’s eyes? If Richard is such a Krugman fan, perhaps he can use his influence. First he will have to remember a little of the history that he lived through since graduation in 1965.
One cannot be any more thankful that Obama is not listening to Krugman than I am.