When Krugman’s Prophesies Fail

This is from his Monday column in The New York Times:

Regular readers know that I and other economists argued from the beginning that these dire warnings of fiscal catastrophe were all wrong, that budget deficits won’t cause soaring interest rates as long as the economy is depressed — and that the biggest risk to the economy is that we might try to slash the deficit too soon. And surely that point of view has been strongly validated by events.

The key thing we need to understand, however, is that the prophets of fiscal disaster, no matter how respectable they may seem, are at this point effectively members of a doomsday cult. They are emotionally and professionally committed to the belief that fiscal crisis lurks just around the corner, and they will hold to their belief no matter how many corners we turn without encountering that crisis.

All accompanied by the usual ad hominem invectives, questioning the character and intelligence of all who have a contrary point of view. But this is what he wrote in 2003:

I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits…

How will the train wreck play itself out?…my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.

And as that temptation becomes obvious, interest rates will soar. It won’t happen right away. With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.

Thanks to Greg Mankiw for the pointer.

Comments (11)

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  1. Robert says:

    Regardless of the outcome, I find the lack of progress disheartening.

  2. EJ says:

    Krugman admitted he was wrong about this back in 2010, not sure why Mankiw is trying to stir the pot now. Good to see even someone as arrogant as Krugman can admit he’s wrong on occasion, and is willing to change is thinking based on historical events. The same can’t be said of a lot of ideologically-driven commentators.

    “…However, I wrongly believed that markets would look at it the same way, and that they would lose faith in American governance, driving up interest rates on our debt. Instead, bond investors discounted the politics, and acted as if they believed that America would eventually pull itself together and start behaving responsibly. The jury’s still out on that, but clearly my short-run prediction proved wrong.

    I learned from both these mistakes. In the 90s, I learned to take very seriously what people on the ground are saying about the economy, even if it isn’t well-argued. After 2003, I learned that there is a great deal of ruin in a nation — that markets give advanced countries a lot of benefit of the doubt.

    So yes, I’ve been wrong. Let those who are without error cast the first stone.”

  3. Ken says:

    Ah, but when Krugman admits he was wrong he forgot to say how evil and misanthropic he was when he held the same position that Pete Peterson now holds.

  4. EJ says:

    Well, but the point is that his viewpoint evolved as evidence emerged to contradict it. Pete Peterson is doing no such thing, and would probably keep rehashing his arguments irrespective of what happened in the past.

  5. Baker says:

    From Krugman… “All we can do is stop paying attention. It’s going to be difficult, because many members of the deficit cult seem highly respectable. But they’ve been hugely, absurdly wrong for years on end, and it’s time to stop taking them seriously.”

    Close you eyes, think happy thoughts, and with a little pixie dust you’ll be able to fly.

  6. steve says:

    Can we find an instance of Mankiw conceding he was wrong? Running Bush’s economic advisory, there should be lots to fess up about.


  7. Jordan says:

    Krugman is a sensationalist. He writes this way because it generates interest.

  8. Thomas says:

    It also further divides a divided nation. At times like these, he loses his credibility as an academic and takes on the voice of a demagogue.

  9. Greg Scandlen says:

    Krugman admits he was wrong only when it is politically convenient to do so. He is driven solely by politics, having nothing to do with economics.

    Meanwhile, I have yet to hear anyone of any political stripe explain how our grandchildren will pay back the money we are borrowing. To pay down $16+ trillion in debt, they will have to tax themselves enough to have $16+ trillion in surplus. Merry Christmas, little ones.

  10. Studebaker says:

    Krugman longs for a European Social Democracy where marginal tax rates approaches 50% on income above $40,000 and living expense (such as health care, education, day care, public transportation, etc.) are publically financed. Liberal elites like him also pine for a VAT tax discourages consumption, gas taxes that discourage care ownership, alcohol taxes that discourage drinking, and property taxes that discourage spacious homes. Basically, people like him want to be social engineers and collectivize society and force it to live like he prefers people to live — all the while he lives in his mansion.

    That society rewards college drop outs like Bill Gates with billions while liberal college professors have to make due on salaries of, say, $100,000 is unconscionable to these nuts.

  11. Andrew_M_Garland says:

    Frank J. Tipler is Professor of Mathematical Physics at Tulane University.
    Macroeconomics is Astrology, Not Science   [edited]
    === ===
    Our leaders are being advised by macroeconomists who haven’t got a clue where they are leading us. Their actions may lead us out of the current recession, or they may lead us into a depression as bad as the Great Depression.

    Science is about prediction and precise explanation. It is not enough to construct a different explanation about each past event. Science must produce a consistent, precise explanation for all of the relevant past events.

    Then, real science predicts the future and is testable according to those predictions. If a “science” cannot predict what will happen, then it is clear that it does not understand enough about what is going on, and of course it is of no practical use in arranging for a better life.

    Real scientists bend over backwards to make their data, methods, and results available for review and criticism. This corrects for personal bias, and allows for quickly sorting out the truth. A true scientist tries to examine all possible explanations for his results, before believing that his new analysis is correct.

    You often hear about a supposed scientist withholding data or methods. He may complain that it is beneath him to release data to people outside his field, or complain that he has no time to give information to his critics. This is an indication of a closed mind, or someone afraid that his results won’t survive review. It is the mark of a pretend scientist who cannot be trusted.
    === ===

    We don’t know what the effect of the “stimulus” was, because our government did not give details ahead of time, about what would be helped and how much. We only have the fact that Obama’s economic advisors predicted 8% unemployement and got 10%. Then, they offer the excuse that these things are hard to predict.

    It is easy to do things at random that happen to give you power, then claim the world is complicated and would be even worse without your actions. Anyone can say that at any time.

    Where is the government’s analysis and economic models for public examination? Public policy is vastly more important than the average science experiment. Public policy transfers money and changes lives. We should expect our politicians to develop sound policy and then reveal the details so that we can agree or criticise.

    Let’s see Bernanke’s and Krugman’s spreadsheets, detailed models, and quantitative predictions up front. Otherwise, they are merely gambling with our society based on guesses, not observed and predictable results.