Krugman's Intellectual Waterloo

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Last Monday
evening, Lew Rockwell, from a tip by someone named “Travis,” posted
this damning quote of Paul Krugman’s from a 2002 New York Times

To fight
this recession the Fed needs…soaring household spending
to offset moribund business investment. [So] Alan Greenspan
needs to create a housing bubble to replace the Nasdaq bubble.

Krugman. 2002.
Calling for a housing bubble.

What’s more,
by explicitly calling for a new bubble to replace the recently burst
one, he anticipated by 6 years the Onion’s hilarious “report
that “demand for a new investment bubble began months ago, when
the subprime mortgage bubble burst and left the business world without
a suitable source of pretend income.” Except Krugman was being serious.

The quote caught
on in the blogosphere, to such an extent that Krugman actually responded
in his New York Times blog Wednesday morning:

Guys, read
it again. It wasn’t a piece of policy advocacy, it was just
economic analysis. What I said was that the only way the Fed
could get traction would be if it could inflate a housing bubble.
And that’s just what happened.

So with a deft
little two-step, Krugman paints himself as a doctor who gave an
excellent diagnostic, and not a disastrous prescription. One of
his ditto-heads posted on his blog that saying Krugman advocated
or caused the housing bubble was “Like saying Nostradamus caused
the rise of European fascism.”

At the same
time, with his headline of “And I was on the grassy knoll, too”
he paints his critics (especially the Austrians) as conspiracy theorists,
akin to the Lone Gunmen (the Kennedy-assassination theorists from
the X-Files TV show). Just like with the matter of Jekyll Island
and the events leading up to the creation of the Fed, an obvious
conclusion from a matter of public record is portrayed
by establishment sophistry as unmoored crankiness. And once again,
it works: another ditto-head dismissively remarked “no need to reason
with those folks.”

Even economist
Arnold Kling bent
over backwards
to interpret the column in a benign light:

He was
not cheerfully advocating a housing bubble, but instead he was
glumly saying that the only way he could see to get out of the
recession would be for such a bubble to occur.

Krugman thanked
Kling for his “gracious, sensible explication.” I can just imagine
Kling running around his office in glee at having been nodded at
by a celebrity Nobel Laureate, exclaiming, “He likes me! He likes

Mark Thornton
on the Mises blog followed up with a devastating
of 2001 Krugman quotes clearly documenting
his support for inducing a housing bubble. The most damning of this
batch is the following from a 2001 interview
with Lou Dobbs:

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. [emphasis added]





How the hell
can anyone spin that as a purely academic musing, and not
a policy recommendation for artificially inducing housing spending?

Ignoring the
other quotes for a moment, and just judging from the 2002 column,
did Krugman support pumping up a housing bubble or not? Given that,
even in his recent blog defending himself, he explicitly stated
his belief that “the only way the Fed could get traction would be
if it could inflate a housing bubble,” there are only two possibilities:

  1. He did
    not support inducing a housing bubble, and wanted the
    Fed to not fight the recession.

  2. He did
    support inducing a housing bubble.

Anyone even
somewhat familiar with Krugman’s attitude toward Fed activism should
know that proposition #1, that Krugman supported a do-nothing policy,
is preposterous. So, especially after bringing back in the quotes
gathered by Mark Thornton, the case for proposition #2 is overwhelming.

And what about
his strawman
protests that he didn’t cause the housing bubble, much less the
Enron scandal or Kennedy’s assassination? The man is willfully missing
the point. What is damning about these quotes is not that
he necessarily caused anything. What is devastating
about them is that they expose the intellectual bankruptcy of his
economic principles. Those who look up to him like the second coming
of Adam Smith should realize that the neo-Keynesian principles that
lead him to advocate aggressive interest-rate cuts and mammoth public
spending now, are the very same principles that led him
to advocate inducing a housing bubble then. He would himself
affirm that his economic principles haven’t fundamentally changed
since then. So the conclusions and policy prescriptions he infers
from them are just as wildly wrong now as they were then.

23, 2009

[send him mail] is a
teacher and writer based in San Francisco. He writes about economics,
history, and philosophy at his blog Summa
. .

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