Just how excessively pessimistic is Paul Krugman? John Henke compiles some choice quotes.
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Staring at the stopped clock
12 Jan 2008 07:05 am
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Well, the following sound pretty prescient to me. It was obvious even in 2005 that we were experiencing a housing bubble. So, how again, is Krugman wrong?:
"If housing prices actually started falling, we'd be looking at [an economy pushed] right back into recession. That's why it's so ominous to see signs that America's housing market ... is approaching the final, feverish stages of a speculative bubble." — Paul Krugman, May 2005
"In fact, a growing number of economists are using the "R" word [i.e., "recession"] for 2006." - Paul Krugman, August 2005
"But based on what we know now, there’s an economic slowdown coming." - Paul Krugman, August 2006
"this kind of confusion about what’s going on is what typically happens when the economy is at a turning point, when an economic expansion is about to turn into a recession" - Paul Krugman, December 2006
"Right now, statistical models ... give roughly even odds that we’re about to experience a formal recession. ... [T]he odds are very good — maybe 2 to 1 — that 2007 will be a very tough year." - Paul Krugman, December 2006
I'll agree that most of the quotes support the Megan's argument, although several of them include caveats.
But the quote from May 2005 suggest Krugman is a bad person to listen to:
"If housing prices actually started falling, we'd be looking at [an economy pushed] right back into recession. That's why it's so ominous to see signs that America's housing market ... is approaching the final, feverish stages of a speculative bubble."
The first sentence appears to be an accurate forecast that is playing out now. The second is presumably the "excessively pessimistic" part. The Case Shiller home price index peaked in the summer of 2006. Approaching the final stage in May 2005, ending a year later, feels pretty accurate to me.
Compare and contrast with this recent quote from Megan, "Nor, so far, is there much evidence that the subprime problems are causing much fuss in the broader financial markets." (Yes I saw that she retracted it later).
Tom
"My first taste of the change in life that most young men were experiencing came in 1942 when I joined a predecessor organization to the Office of Price Administration, already under the opportunistic leadership of Leon Henderson. Henderson had acquired a certain fame in Washington when he had been one of the few to predict the crash of 1937. An indulgent public had forgiven or forgotten his identical but mistaken predictions in previous years. I still label the repetition of a prediction until it comes to pass the 'Henderson method.'" -- George Stigler, Memoirs of an Unregulated Economist
"Give a number or a date, but never give both." -- Anonymous, advice for stock-market forecasters
rwe,
"The tax cuts helped to encourage economic growth, and were particularly well-timed."
Can you tell us more about how you reached that conclusion? The tax cut package was designed in the boom and most economists I have seen did not think it well-designed as a stimulus. The long-term growth impact from improved incentives seems likely to be swamped by the fact the cuts were financed by borrowing.
Tom
Before knocking Krugman's judgment too much, keep the following in mind:
1) Economists don't (and shouldn't) predict recessions. Rather, they should look at trends and developments and call attention to them. Plus, economists, especially those who serve as media sources, generally have a tendency to avoid seeing recessions.
2)Krugman has been one of the only people talking about the housing bubble, which grew steadily during the first part of the decade. Whether it popped in 2006 or 2007 is a bit irrelevant. The point is that there was an unsustainable bubble, and that it would have to pop eventually, thereby causing a great deal of damage.
3) Krugman also is one of the only people to write regularly about the labor market. On a variety of indicators, the past 5-6 years have been very rough ones. In many ways, the labor market never really exited the last recession.
If "economists don't (and shouldn't) predict recessions", yet Krugman keeps predicting recessions, it would seem to follow that Krugman isn't an economist. Works for me!
"Can you tell us more about how you reached that conclusion? The tax cut package was designed in the boom and most economists I have seen did not think it well-designed as a stimulus."-TomG
I'll gladly tell you, TomG. It follows from Milton Friedman's Permanent income Hypothesis. Permanent tax reductions are much more potent than the temporary ones some Keynesian economists prefer. Keynesians had assumed that consumption is a function only of current disposable income, but that just isn't true.
But the Bush administration was not myopic. It was looking to improve incentives for work, save and invest, not just to stimulate aggregate demand in the short run.
And the tax cuts of 2001 and (especially) 2003 were very successful in that regard. Plenty of fine economists would agree with me about that--(the late) Milton Friedman, Robert Barro, Martin Feldstein, Ed Prescott and many more.
Indeed Nobel Laureate Ed Prescott argued that the Bush tax cuts should have been bigger . And I agree.
rwe writes: "Indeed Nobel Laureate Ed Prescott argued that the Bush tax cuts should have been bigger . And I agree."
Perhaps they should have been. But once he combined them with his dumbass, economy-draining war, he ruined whatever good he thought he might be accomplishing. Heckuva job, Dumbya. Heckuva job.
rwe,
I don't know if I would roll out the permenent income hypothesis to support tax cuts that were largely scheduled to disappear over the next few years.
From a stimulus perspective, you want to encourage spending. Tax cuts for the wealthy are the not the most effective vehicle for that. From a long-term incentive perspective, you should be interested in long-term taxation. Tax reductions that are not accompanied by spending cuts are tax shifts. Improved incentives to work today will be payed for by weakened incentives in the future when we are paying off the debt.
For your argument from authority, I would note that while a few economists may still be in Bush's camp, the profession in general turned decisively against Bush (see for example the Economist's poll of economists in the 2004 election).
Finally, the specific studies of the Bush tax cuts (that I am aware of) have not been favorable, see for example:
http://www.cbpp.org/7-27-06tax.htm
Tom
If you take Krugman's large-scale analysis of the economic trends over the past few years, he seems to have been mostly right, apart from the timing. Krugman's main line of thought is that the housing /finance bubble will burst (true,) dragging down the economy (true,) while the falling dollar (true) will counteract this trend somewhat by evenning out the trade imbalance. This seems to be what's happening, although the housing bubble did manage to grow bigger than Krugman (and most others) have believed. Krugman's other big gloomy prediction has to do with the budget deficit "bubble," (what he calls "the Wiley Coyote moment" ) but he wisely doesn't really put a date on this one.
So Krugman's main fault is that he put a date to the number. Well, predicting the near-term direction of the economic growth curve amounts to trying to "beat the market," which is impossible, as Megan has pointed out in the past. Even if you don't fully believe in the EMH, you have to admit beating the market is at least extremely difficult. Strangely enough, those same markets support an entire industry (of which Krugman is tangentially a part) that is based on making those impossible predictions. But that's another matter. It is surprising that Megan would single out Krugman rather than excoriating the practice itself, regardless of the political bend of the practitioner.
of course Krugman is not an economist in these pronouncements, but a pundit with a bias. while i think "bush derangement syndrome" is a pretty stupid idea, he is exhibit 1. he takes complete leave of his senses.
we live in a cyclical economy. keep predicting gloom and sooner or later you will be correct. then you can say i told you so.
it is like financial magazines that publish every month a list of stocks you must own and 3 years later they tout the one of 55 stock lists that actually was correct
Bob Gordon, "apart from the timing," almost every statement about the economy is true. Will we have a recession? Absolutely. Will real estate prices rise relative to other prices? Absolutely. Will they fall relative to other prices? Absolutely. Will tech stocks outperform other stocks? Absolutely. Will they underperform other stocks? Absolutely. Will the trade deficit decline, by some measure? Absolutely. Will the trade deficit rise, by some measure? Absolutely. Was the economy, at some time prior to 2005, in a recession, to which it will "fall back" at some after 2005? Absolutely. Am I now on a par, forecase-wise, with the-greatest-economist-not-to-have-won-a-Nobel-Prize? You got it.
y81,
There is a difference between predicting long- or even medium-term trends on the one hand, and short-term fluctuations on the other. The latter corresponds to "timing" the markets, meaning betting on the fluctuations. The former corresponds to investing in an index fund. Two different things.
Saying "the housing (or tech stock) market is a bubble" and being wrong by some years about the timing of the bursting of the bubble is different than believing that the inflated prices represent the true value of the assets (current, future, whatever,) with the caveat that this value will, of course, change some time in the future.
Your point makes as much sense as those people who think a cold winter is evidence against climate change.
Krugman was right about the bubble and the currency value. I also suspect he will be proven right about the deficit, although that one is far less certain.
Bob Gordon, as far as I'm concerned, people who believe that assets have a "true value" fall into the category of "not even wrong." More generally, essentialist conceptions that do not generate falsifiable predictions are not useful in economics, though they are useful for political posturing and moral preening.
y81,
Give me a break, I said "true value" as a shorthand. I am guessing everyone here understood that, except you.
On the other hand, where on the scale between "right" and "not even wrong" should we place your notion that every economic statement that doesn't have a specific date attached to it is true? Marx equals Keynes equals Friedman, aside from timing? "Tech market is a bubble" equals "Market to reach 100,000!!"?
Timing is everything. Even if all of Krugman's predictions come true eventually (and they will, as y81 points out), if you had based your investments on his predictions, you would be broke today.
Krugman is example #1 of BDS.
Yancey Ward, I find it peculiar that a reader of Megan's blog would hold the notion that "timing is everything." I don't want to speak for Megan, but my reading of her is closer to "timing is nothing." This is why I am disappointed in her line of argument against Krugman.
But I shouldn't expect much depth of analysis from somebody who uses the term "BDS". And I am sure your conviction that Clinton personally killed Vincent Foster with his bare hands is perfectly reasonable and well substantiated.
Bob,
Who let you in on my conspiracy theories?
Seriously, Krugman blames Bush and Republicans for just about everything going wrong in the country. He either suffers from Bush BDS, or he is deliberately playing to an audience that does.
If you are going to base your investments on economic predictions, the predictions are useless unless accurate in a specified time range. Since Krugman's usually are not, his predictions are meaningless.
The funny thing is that I expect a recession this year due to the credit deflation, but the fact that Krugman thinks so, as well, makes me question it. LOL.
Yancey Ward:
Krugman is not an investment advisor, he isn't that nut on Mad Money. Why should he be judged as though he is a stockbroker? Seriously. He has been talking about a housing bubble for some time because he is an economist and noticed a housing bubble. Christ. Where there is a bubble there is likely going to be a popped bubble, and when the bubble pops, there is likely to be a recession. It isn't Krugman's fault that the Fed didn't take away the punch bowl (something he has complained about) or that others willfully ignored the obvious.
Bob Gordon,
It's your statement that Krugman was right "apart from the timing" that's dumb. As the quotes show, he's been regularly predicting since 2002 that a recession is just around the corner.
As for the idea that Krugman was somehow prescient or insightful in writing in 2005 and 2006 that we were in a housing bubble....well, duh! Half the economists in the country were saying the same thing.
I do believe that Krugman is a talented economist and a gifted writer. He's still worth reading. But he has become consumed by his hatred of Bush and his blind partisanship. It's increasingly difficult to find something of value among all the ranting in his columns.
David,
Then he shouldn't be making specific predictions in his essays. I know he doesn't hold himself out as an investment guru, but he writes just like one, and some of his readers, no doubt, took his poor advice.
And Mixner is correct, lots of people (including myself, and I am not an economist) knew there was a housing bubble brewing by 2004, but a lot them were circumspect enough not to try to predict the timing of its demise.
Yancey,
You seem to imply Krugman's prediction of when the housing bubble would pop was way off. From the quote listed, it was in fact quite good.
From bank lending behavior, it looks pretty clear that not everyone was as wise as you or Paul Krugman. Alan Greenspan seemed dismissive of the idea of a bubble at that time.
Simply knowing that is was a bubble was valuable information, for banks and for public policy. When the bubble would pop was less important from policy standpoint that the presence of a bubble. Those who called it correctly deserve credit for that.
Tom
Tom G., the Bush tac cuts were widely expected to be permanent when they were enacted. Certainly the probability of them being not being extended was well below one, and the permanent income hypothesis applies. And I would refer anyone who's interested in learning why temprary tax reduction are so ineffective to David Romer's Advanced Macroeconomics (Ch. 6.3, 3rd ed.)
There is a close relationship between disposable income and consumption spending. Yet to some extent this relationship arises not because current disposable income determines current spending, but becasue current income is strongly correlated with pemranent income--that is, it is highly correlated with households' expectations of their disposable incomes in the future. If policymakers attempt to reduce consumption through a tax increase that is known to be temporary, the relationship between current income and expected future income, and hence the relationship between current income and spending, will change. Again, this is not just a theoretical possibility. The United States enacted a temporary tax surcharge in 1968, and the impact on consumption was considerably smaller than was expected on the basis of the statistical relationship between disposable income and spending(see, for example, Dolde, 1979).
Sorry about the typos above, but the main point is a good one. It follows from Friedman's work and also from the famous "Lucas Critique." Too much economic discussion rests on an outmoded paleo-Keynesian framework.
It's perfectly in accord with modern mainstream macroeconomics to say that "permanent tax reductions offer a lot more stimulus than temporary ones." And there is ample empirical evidence to support the contention.
Even Paul Krugman admits that the Reagan tax cuts succeeded in stimulating aggregate demand--meanwhile anyone, economist or not, can see that the temporary measures undertaken by Japan in the 1990's to boost the economy were utter failures. They succeded in adding tremendously to Japan's debt burden without stimulating growth at all.
rwe,
You have chosen to focus on the stimulus effect of the Bush tax cuts. Would you agree though if you are looking to stimulate consumption you would be better off focusing tax cuts on the poor rather than the wealthy? Likewise if you were looking at long-term tax cuts to stimulate the economy you would not have them phase out after a few years? The construct of the cuts was dictated not by economic logic by Bush's desire to manipulate the reported size of the tax cut.
Were the tax cuts well-designed as a stimulus? I think you have to say no, which makes sense because Bush developed the proposal prior to the recession.
Tom
Granted that Krugman is a partisan pessimistic economist. However may I point out that 5 months of credit contraction have already occurred and the idea that we will have no significant effects from that and the serious deflation in housing is overly optimistic to say the least. Important parts of the economy are stalled already and unemployment figures are beginning to reflect that. I think that Krugman is finally right and that we are in for a very tough time in 2008.
I don't think many economists assumed that Greenspan would keep real rates negative for as long as he did. If he doesn't, the economy does go into recession and we don't have a housing bubble. Greenspan choose to inflate a bubble that is going to cost between 500B and 1T dollars and has caused the possiblility of systemic risk. If you think this is over, just wait. We are facing something closer to the great depression, you just don't know it yet.
The intelligent thing to do is to shut up at this point, Megan, lest in 1 year we put this post and others like it as proof of your...Hmmm.
It's funny that Krugman has been so certain about a recession since 2002, but in 2001, when we were in a recession, he couldn't see it.
Or there's this bit of prognisticating, from back in 1996. Before the Clinton boom, Krugman insisted it couldn't happen:
"But when economists declare that the economy's "speed limit" is about 2.5 percent -- not the 3.5 percent that the growth lobby believes -- they are not pulling a number out of thin air. For the last 20 years it has been reliably true that when the economy grows faster than 2.5 percent, the unemployment rate sinks. Indeed, for every point of growth beyond 2.5 percent, the unemployment rate falls by half a point. There is not the slightest hint in recent experience that this historical relationship (known as Okun's Law, for the late Arthur Okun) has changed. For example, from the middle of 1993 to the middle of 1995, the economy grew 7.5 percent. That's 2.5 percentage points of extra growth, which according to Okun's Law should have reduced unemployment by 1.3 points. Sure enough, unemployment fell from 6.9 to 5.6 percent.
"When people argue that the economy can grow at 3.5 percent for years to come, they must either be unaware of this relationship or have a wildly unrealistic view about how low the Fed can push the unemployment rate. For example, when supply-siders call for a return to the growth rates of the "seven fat years" from 1982 to 1989, when the unemployment rate fell from 10.7 to 5.2 percent, one wonders what they are thinking. Since the current rate is only 5.6 percent, a similar growth spurt would produce a negative unemployment rate by 2003. Even Reagan never promised that.
"How large a reduction in the unemployment rate is it realistic to hope for? Perhaps none at all. Most economists believe that inflation begins to accelerate when unemployment falls below what is gracelessly known as the Nairu (for "nonaccelerating inflation rate of unemployment"). The theory of the Nairu has been highly successful in tracking inflation over the last 20 years. Alan Blinder, the departing vice chairman of the Fed, has described this as the "clean little secret of macroeconomics."
"The Nairu is usually put at 5.5 to 6 percent -- the current unemployment rate, more or less. To question whether this is too pessimistic misses the point. If the Nairu is 5 percent rather than 5.5, the economy can grow at 3.5 percent -- but for only one year. If the Nairu were 4.5 percent -- which would be utterly inconsistent with historical experience -- you would get two years of 3.5 percent growth. It's still hardly the kind of explosive growth the Fed's critics say we should aim for."
That's right. When we had a Democrat president, full employment was a 5.65 unemployment rate. With a Republican, the standards are a bit more demanding.
Thomas, this is straight economic history. I'm surprised you don't know this, but up to the mid-90's, the conventional wisdom was that if unemployment dipped below about five percent, inflation would almost surely follow. That in fact was one of the justifications for short-term interest rate policy.
But, to just about everyone's surprise, it turned out that the unemployment rate could dip below that figure and not trigger inflation. Um, here's an article you might find enlightening; it's a bit simplified, but it's a good place to start:
http://en.wikipedia.org/wiki/Phillips_curve
However, in the 1990s in the U.S., it became increasingly clear that the NAIRU did not have a unique equilibrium and could change in unpredictable ways. In the late 1990s, the actual unemployment rate fell below 4 % of the labor force, much lower than almost all estimates of the NAIRU. But inflation stayed very moderate rather than accelerating. So, just as the Phillips curve had become a subject of debate, so did the NAIRU.Further, the concept of rational expectations had become subject to much doubt when it became clear that the main assumption of models based on it was that there exists a single (unique) equilibrium in the economy that is set ahead of time, determined independent of demand conditions. The experience of the 1990s suggests that this assumption cannot be sustained.
So it's not at all surprising that the standards are different now.
As I said, I'm surprised you didn't know this already. This actually made it into the straight news, even appearing above the fold in several major publications.
Uhm, right, Scent. Krugman's article in '96 was wrong, and perfectly timed. But it served its political purpose.
Sigh. To be blunt, you're an idiot. A _willful_ idiot. Go look this stuff up, it's common knowledge and it's not hard to find. Greenspan of all people was saying the same thing. If you need keywords, go to google and type in 'phillips curve' or NAIRU. Here's something that's a bit more accurate than the wiki and not difficult to understand:
http://www.frbsf.org/publications/economics/letter/2002/el2002-29.htmlhttp://www.frbsf.org/publications/economics/letter/2002/el2002-29.html
Does anybody here disagree? Anybody on his 'side' want to set him straight?
Bob Gordon, as far as I'm concerned, people who believe that assets have a "true value" fall into the category of "not even wrong."
y81, would you say it would have been inaccurate to claim in 2000 that the price of Enron stocks did not represent a good reflection of their value? How about NASDAQ 5000?
Wouldn't you say it's a matter of degree, like most things? "True value" may not be the most apposite way to put it, but "wildly overvalued" is often a meaningful thing to say. (As is "wildly undervalued", but that seems to happen less often -- there's just not quite as much room to err on the downside, partly, since prices can't really go below 0.)
Scent, while Thomas is wrong to see a conspiracy in the press's treatment of unemployment rates, I think you're arguing more than you can prove on the ecomonics. (Though I'm no economist, so I reserve the right to be completely and utterly wrong.)
NAIRU is, at its base, a statement about the limited ability of monetary policy to reduce unemployment.
Assume an inflation rate of 2% and an unemployment rate of 5%. It is possible for the Fed to lower interest rates and reduce unemployment to 4% while raising inflation to 3% (roughly).
Next year, however, the unemployment rate will be back up to 5%, while the inflation rate will continue at 3% indefinitely.
This only holds so long as structural unemployment rates remain unchanged. If they go down (as they did in the 90s), then the country can maintain a lower level of unemployment indefinitely. The 90s did not demonstrate that the Fed had gained miraculous new powers to permanently reduce unemployment. Rather, there was a fundamental shift in employment rates, for reasons that are still poorly understood.
NAIRU still exists, it is just lower than it used to be.
The Bush tax cuts may have stimulated the economy, but they also distorted it badly, for which we are now paying the price. More appropriate would have been a Reaganesque tax cut consisting of flattening rates while broadening the base (i.e., closing off loopholes). It's an old principle of conservative economics that the government ought not favor one sort of economic activity over another. Bush violated that in a major way.
Scent, you're missing the point, which is a simple one: Krugman confidently said that something couldn't happen, and then it did. He may have had good reasons for his thinking, but, then again, maybe he didn't. In either case, it's exactly the sort of prescience we saw in 2000 and 2001. Why someone would rely on this guy as a prognosticator is beyond me.
This whole board reads like standard economic mishmash from pointy heads who focus solely on selected measures like aggregate demand and Phillips curves and all the folderol and completely rob the discussion of context.
There are larger forces at play in the world than this or that minor economic policy. The end of the Cold War and the internet boom in the 90's, the war declared on the civilized world by Islamic radicals and the emergence of China and India as major economic powers in the 00's.
Tell me, are those who condemn the housing bubble today just as critical of the tech bubble in the 90's? At least with the housing bubble, there has been production of real value in the form of thousands of new homes that are now available at reduced prices to the masses. The popping of the tech bubble left us with nothing but scraps of worthless paper shares in unrealized plans for marginal improvements in the way computers process data.
Re: Tell me, are those who condemn the housing bubble today just as critical of the tech bubble in the 90's? At least with the housing bubble, there has been production of real value in the form of thousands of new homes that are now available at reduced prices to the masses. The popping of the tech bubble left us with nothing but scraps of worthless paper shares in unrealized plans for marginal improvements in the way computers process data.
The vast majority of tech spending in the 90s was productive spending, albeit the wads of cash thrown at the Y2K bug were excessive. The bubble was side effect, not really all that big (though I suppose if you sunk all your cash in some vaporware.com you will not see it that way). The very fact that we are having this debate in this forum over (presumably) high speed internet connections is exhibit A in that claim. Walk into any office, any household, any school: you will see the tangible fruit of the 90s tech boom. It was a truly transformative technogical revolution, money well spent.
brooksfoe, as I said in my reply to y81, I am guessing the only person here who didn't understand my "true value" shorthand is y81. And I am sure most folks here would agree that NASDAQ 5000 was overvalued, as was the real estate market, whose value was distorted by easy and cheap financing and speculation.
I also would like to think that most folks here would understand the difference between saying "the real estate market is overvalued and will crash" (and being wrong about the precise timing of the crash) and saying "at some time in an indefinite future, the real estate will crash." It seems a lot comments here, including Megan's post itself, rely on conflating the two assertions.
But maybe we can just blame that on KDS...
I would contend that Nairu was not disproven by the experience of the 1990s or the 2000 oughts. Inflation in the 1990s came in the rise of financial assets- the stock market booms. In the last 7 years, the inflation started to manifest itself in housing and commodities.
However, Thomas' point stands- Krugman seem to be saying that the same rates of unemployment at two different times, and under two different administrations, were differently acceptable. This is just open partisanship.
Sigh. No, that is not open partisanship. Why did you think I posted that information about inflation vs. unemployment? Different standards are demanded on employment because our standards of what consists of 'bad' employment and 'good' employment have changed with new data. If Krugman had been saying _in 1996_ that the administration should have been targeting four or 4.5% as the desired unemployment rate, he would have been derided for not realizing that this would promote inflation. Now (or until the next bit of contrary data comes along) we know that is not the case, so of course a lower rate of unemployment is acceptable.
There is nothing 'gotcha' about the two different expectations at all, it's as if you're saying that , say Krugman criticizing Greenspan for not following monetarist policies while not criticizing Thomas McCabe for the same behavior is some sort of partisan action. Well, since McCabe was the chairman under Truman in the late forties, that's not exactly a fair accusation now, is it?
Do you _really_ not see that?
In the middle of 2003, the fed funds rate was at 1%, inflation was at 3.3% or so, so they were paying people to take money!
If this isn't proof that were had very serious economic problems in 2003 I don't know what to say to people.
Krugman said in May 2003 we were on the verge of recession. Alan Greenspan evidently agreed with him, as the only reason to place fed funds that far below inflation is because of the fear of economic slowdown. This is evidenced by being willing to pay people to borrow money. Check out this chart of the fed funds rate, and you essentially have a print out of Alan Greenspans mind.
I would go down quote by individual quote, but Matt Y. has taken Megan to the woodshed already, and don't feel the need to pile on. It is bizarre that people some how feel that these quotes are indicative of him being wrong.
Still, This one is a particular howler and I can't let it slide:
"Right now, statistical models ... give roughly even odds that we’re about to experience a formal recession. ... [T]he odds are very good — maybe 2 to 1 — that 2007 will be a very tough year." - Paul Krugman"
Note that he is not making a prediction and is just stating there are statistical models that says there might be a recession! This clown Jon Henke doesn't even notice that this is not even Pauls own prediction! And additionally, on the eve of the one of the greatest credit crisis in history, Paul Krugman is saying in December"hey we should be careful here, this housing bust is going to be a big deal", in June it freaking happens, in Sep its a huge deal with central banks intervening in the market in unprecedented ways!
I just don't see how Paul was wrong in this case, which appears to cover the last 3 or 4 quotes.
Rather, there was a fundamental shift in employment rates, for reasons that are still poorly understood.
Hard to imagine that the lowering of the non-inflationary unemployment rate isn't related to the increasing rate of corporate profitably, i.e., the decreasing ratio of wages to revenue. I.e., the decreasing propensity of workers to get higher wages when revenues grow. I.e., the collapse of unions, the globalization of the labor force, high immigration, etc. But also the anti-inflationary effects of globalizing production, i.e. cheap Chinese goods.
Though wage growth was pretty healthy through the Clinton years, so maybe not. And some people are arguing that the globalization dividend may have partly run its course, and rising Chinese wages mean ultra-low consumer goods prices won't continue forever.
Brooksfoe,
Rather, there was a fundamental shift in employment rates, for reasons that are still poorly understood.
You're right that this was an egregious oversimplification. I just thought that 12.5 pages of "on the one hand, on the other hand" speculation would sort of detract from my main point.
Also, the more I talk about economics, the clearer it becomes that I have less idea what I'm talking about than I think I do, and I'm trying to maintain my self respect.
Cheers.
Tell me, are those who condemn the housing bubble today just as critical of the tech bubble in the 90's? At least with the housing bubble, there has been production of real value in the form of thousands of new homes that are now available at reduced prices to the masses. The popping of the tech bubble left us with nothing but scraps of worthless paper shares in unrealized plans for marginal improvements in the way computers process data.
In addition to the rebuttal someone has already posted, it's worth noting that both bubbles are actually very similar in this respect: both produced a massive oversupply of [x] based on expectations that never materialized. In the case of the tech bubble, [x] was computer systems and information networks (primarily fiber). In the case of this bubble, [x] is housing. In both cases, the end of the bubble means a shock because things come to a sudden halt, rather than transitionig gracefully with the rate of sustained real demand for the service or product in question.
Sure, somebody is going to get a cheap house, the same way somebody got a cheap Aeron office chair in a dot-com asset auction. Doesn't mean either one is a good way to get a cheap asset, because somebody else paid for it and will distribute their own losses as widely as possible -- and that means the areas where the development was strongest may suffer prolonged economic lag. In the case of the Rocky Mountain front range region, primarily Colorado, it took about five years for things to start significantly picking up again after the 2001 crash because most of the development during the bubble years had been in high-tech and information industries.
'The vast majority of tech spending in the 90s was productive spending.'
Can't. Stop. Laughing. Obviously, you weren't in the thick of it.
Re: 'The vast majority of tech spending in the 90s was productive spending.'
Can't. Stop. Laughing. Obviously, you weren't in the thick of it.
Um, I happen to be an IT professional. Of course I am talking long-term here. And I did admit there was a fair amount of money wasted, especially on Y2K hysteria.
But I stand by my point: the tech revolution of the 90s transformed the entire society, mainly for the better. A whole lot of things got easier to do in life, and some things even got cheaper: travel arrangements for example. Or long distance phone calls. Are you living in a cave in Afghanistan where you are not aware of these things? Or are you a Luddite and despise these changes? If so what the heck are you doing on line?
By an odd coincidence, I was an IT person back in the day. I worked for a company called DataStorm (bought out by Quarterdeck) writing shell script for their Aspect progamming language to make their dial-up software, Procomm, do interesting things.
And as I recall it, yes, there was a lot of tech spending, in fact, as you say, the majority of it was money well spent. I'm guessing that Reid doesn't differentiate between money thrown away on dotcom ventures, and real tech spending.
And yes, a lot of money was blown of those dotcom startups, and I wouldn't be the slightest bit surprised if the majority of it was very poorly spent.
But dotcoms!=tech, and anybody who confuses the two probably doesn't know a mux from an EPROM.
I'm guessing that Reid doesn't differentiate between money thrown away on dotcom ventures, and real tech spending.
I worked for a dot-com that didn't produce anything of lasting value, and some of the spending really was kind of ridiculous. But it was very, very hard to tell at the time what was going to work, and what wasn't. I don't think Reid would say that money drug companies spend researching molecules that don't turn out to work is a ludicrous waste of money. A lot of people actually thought that Govworks.com (cf. "Startup.com") was going to be able to centralize online a lot of the routine functions of government in ways that would save hundreds of millions of dollars a year, and there wasn't any obvious reason why you would have known in 1999 that this was false. I'm still not entirely sure why it was false, though it clearly was.
Thanks for very interesting article. btw. I really enjoyed reading all of your posts. It’s interesting to read ideas, and observations from someone else’s point of view… makes you think more.
So please keep up the great work. Greetings.
Thanks for very interesting article. btw. I really enjoyed reading all of your posts. It’s interesting to read ideas, and observations from someone else’s point of view… makes you think more.
So please keep up the great work. Greetings.
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That series of bad predictions is very amusing. It's obvious to anyone with sense what's happened to Krugman. His animus toward Bush has distorted his judgment.
In truth, President Bush has a mixed economic record. The tax cuts helped to encourage economic growth, and were particularly well-timed. But since he allowed spending to grow rapidly, Bush also worsened our long term fiscal situation.
Krugman hates the man, though, and is incapable of admitting that anything he has done is good.
Posted by rwe | January 12, 2008 8:47 AM