Economics, Pethokoukis

Paul Krugman is wrong about the Fed and wrong about the impact of a Romney election

Econ pundit Paul Krugman asks the question, “Why has the slump been so protracted?” He fully embraces the Reinhart-Rogoff analysis, which he summarizes thusly:

Why is recovery from a financial crisis slow? Financial crises are preceded by credit bubbles; when those bubbles burst, many families and/or companies are left with high levels of debt, which force them to slash their spending. This slashed spending, in turn, depresses the economy as a whole.

And the usual response to recession, cutting interest rates to encourage spending, isn’t adequate. Many families simply can’t spend more, and interest rates can be cut only so far — namely, to zero but not below.

There is another side to this trade. In a paper from the Cleveland Fed, Michael Bordo and Joseph Haubrich find that, in general, “recessions associated with financial crises are generally followed by rapid recoveries.” R&R  disagree with how B&H define both financial crises and recoveries.

Now Krugman sides with R&R. Maybe because he agrees with their methodology, maybe because it kinda-sorta gets Obama off the hook for the weak recovery. Maybe both.

But also note that Krugman dismisses the idea that monetary policy has a role to play here, that it isn’t impotent just because interest rates are low. Maybe this is because Krugman disagree with market monetarism. Or maybe it’s because if he acknowledged the Fed could have done more with monetary policy, it would relieve fiscal policy of the stimulus burden — and eliminate the opportunity for politicians to “never let a crisis go to waste” in pursuing their political agenda.

One more thing: Krugman dismisses the role of confidence, or the lack thereof, in retarding the recovery:

Over the past few months advisers to the Romney campaign have mounted a furious assault on the notion that financial-crisis recessions are different. For example, in July former Senator Phil Gramm and Columbia’s R. Glenn Hubbard published an op-ed article claiming that we should be having a recovery comparable to the bounceback from the 1981-2 recession, while a white paper from Romney advisers argues that the only thing preventing a rip-roaring boom is the uncertainty created by President Obama.

The flip side of that analysis is a dismissal of the idea that a Romney election, by itself, could boost growth if it makes business and consumers more confident. A crazy idea, I know — except that former Obama economist Christy Romer argues that politicians can boost growth by boosting confidence. I blogged this earlier, but here’s the key bit from Romer in a New York Times op-ed yesterday:

Recovery measures work better when they raise confidence — as Franklin D. Roosevelt understood. His fireside chats, and his inaugural address proclaiming he would fight the Great Depression with the same resolve he would muster against a foreign foe, were aimed at reassuring Americans. Recent research suggests that New Deal programs may actually have had their primary impact on the economy by influencing consumer and business expectations of future growth and inflation.

Partly because of fierce political opposition, and partly because of ineffective communication and imperfect design, the Recovery Act generated little such rebound in confidence. As a result, it didn’t have that extra, Rooseveltian kick.

What about a Romneyian kick?

15 thoughts on “Paul Krugman is wrong about the Fed and wrong about the impact of a Romney election

  1. is there no such thing as “stagflation”? When I hear that ALL recoveries work the same way with a “V”. I’m suspicious.

    it’s like saying all tax cuts will always generate more additional revenue than the tax revenue lost when all we need to do is go back to the Bush tax cuts – which DID generate increased revenues but INSUFFICIENT to overcome a deficit.

    yet, we are told with tax-cuts the same thing that we are about recessions and recoveries – i.e. they all work the same way.


    if you actually plotted various recessions and various recoveries I know we have these) – would they confirm or contradict the theory?

    what happened in Japan?

    • You should be disappointed. For the first time in history, bad and hostile policies produced a FLACID and LIMP right leg of the “V” that looked more like a “\.”

      Obama’s years proved to be America’s “ED” years that no little blue pill could fix.

    • the Bush tax cuts – which DID generate increased revenues but INSUFFICIENT to overcome a deficit.

      The Bush individual income tax cuts starting in 2001 did not generate additional individual income tax revenues until 2006 on a nominal level and never as a percentage of GDP.

      • re: tax cuts, supply-side, and “spending”.

        The supply-side people clearly believed that two wars and increases to DOD could be paid for with tax cuts.

        and Ryan’s budget plan assumes the very same thing.

        so it’s the very same people who originally believed in supply-side’s ability to “fund” the budget “enough” to keep it from going into deficit.

        clearly, these folks are not only wrong, but they do not have a good way to estimate “predicted” revenues, AND they are willing to SPEND more money BEFORE they know how much the changed tax policies will actually generate THEN when the revenues are insufficient and we do go into deficit, they have no remedy other than to blame others.

        it’s an infantile mindset.

      • BUT ISN’T THAT THE POINT? For decades now, Arthur Laffer and other frauds have claimed that “lowering taxes increases revenues” but aside from the fact you can’t judge this is a vacuum- even the release of a new Apple Phone is enough to distort retail numbers- ALL YOU’RE DOING IS CUTTING BY A DOLLAR TO GET A 75 CENT “BOOST” and that explains why this policy, WITHOUT FAIL, OVER HISTORY, has produced nothing but massive deficits for the hapless successor of the grinning “SUCCESSFUL PRESIDENCY” to cure, ususally by applying some harsh medicine which makes him a most unpopular fellow.

        Coolidge did this to Hoover, Reagan did this to Bush,Sr, and Bush Jr. just played a game of “52 pickup” with the economy altogether, leaving an economically ignorant populace to wonder why we don’t have full employment by now.

        • yes… and that the tax cut advocates don’t know and don’t seem to care what happens if revenues fail to occur sufficiently to stop a deficit from forming.

          then of course, if a deficit does form, they have nothing to say about it other than “we need to cut”.

          in other words, it’s all ideology with no connection to realities.

          We have a trillion deficit now and a 16T debt because the tax cuts underperformed AT THE SAME time we committed to spending more money.

          why do the tax cut advocates view spending as an independent, unrelated issue?? someone else’s problem?

          even as many of the tax-cut advocates are exactly the same people who boosted DOD and war spending.

          this Post says that Paul Krugman was wrong.

          He’s irrelevant with respect to this idea of cutting taxes no matter what the deficit is doing.

          that’s just plain irresponsible.

          IMHO of course!

  2. Krugman, I think, is right to observe that a major financial dislocation places added burdens on the recovery. But we have had only one other such dislocation which was accompanied by massive government fiscal intervention, threats against business and big tax increases (e.g. Obamacare and the so-called fiscal cliff). That was the Great Depression of the 1930s when capital also “went on strike”. The current administration, like the Roosevelt administration, took a “financial crisis” and exacerbated it.

    The early 80s recession was also a “financial crisis”, but it was not accompanied by similar efforts to discourage renewed capital investment.
    Put yourself in the place of an investor or businessman in 1983 and one in 2010. The former was looking at an administration pledged to reducing taxes and government interference. The latter was faced with one pledged to do just the opposite. Why WOULDN’T your response by wholly different?

    • ” The current administration, like the Roosevelt administration, took a “financial crisis” and exacerbated it. ”

      How so?

      ObamaCare has largely not taken effect yet – not until 2014.

      so what has the administration done that has exasperated ?

      re: an administration and “taxes”.

      are you talking about marginal rates? Were they not higher in previous POTUS?

      are we not at the lowest point of tax revenues in a long time?

      I appreciate the theories but what I object to is coloring the current situation different than prior POTUS.

      If we had marginal rates like we had under Clinton – we’d likely not have a deficit, he had a higher rate and a surplus. what’s different?

  3. Krugman needs to go back over 100-years even before the Fed and check out the last dozen or so recessions and recoveries.

    The “V” analysis always works–it doesn’t matter if the economy is “financial.” Rebounds tend to mirror plunges. The empirical data and evidence is overwhelming–I posted where all this can be seen just a few days ago.

    Reagan’s deep financial recession and recovery was characterized by near-11% unemployment, 21% interest rates and an S&L industry that was crushed. His 12 recovery quarters gave us an average of 5.7% GDP growth at an annual rate and millions of new jobs.

    In sharp contrast, the Obama recovery has generated a very moribund GDP growth that has recently slipped to just 1.3% GDP growth and ZERO more people employed than were employed when he took office. Household incomes plunged, home prices plunged, food stamps, spending surged, foreclosures surged and bankruptcies surged. Government catapulted to 25% of GDP.

    The difference was in the way we reacted to adversity–Reagan cut marginal tax rates and reversed expensive regulation. In contrast, Obama declared war against Big Business, initiated a record number of hostile and expensive regulations, spent just 15% of his stimulus on “shovel ready” jobs (that weren’t shovel ready) and hit us with a $750 billion ObamaCare tax.

    Households, consumers, investors and employers reacted very differently to these very different reactions–and that’s why we are still stuck in the Obama quagmire.

      • Why don’t you just lose the propaganda and your BS and simply look at the empirical data for the past 130 years–I posted where you can find it.

        Nobody is interested in what a blind guy says about a Picasso painting. “Where is it” is not value added.

        • ” -I posted where you can find it. ”

          what you posted is pure ideological BS

          there is no standard “V” shaped “recovery”.

          each has differences and there IS such a thing as a liquidity trap and stagflation.

          blather on…..

  4. Who would believe this pile of steaming horsecrap?

    Phil Gramm? Glenn Hubbard? These are the two chief archictects of America’s economic decline, and of course, the most obnoxious, arrogant, utterly self-unaware and unapologetic practitioners of disaster this country has ever suffered through.

    It shows you what kind of character Pethokoukis has to bring up their “points” in rebuttal to Krugman, who, disagree with him or not, has far more credibility than these hacks. Including Hubbard, who is a captive of the interests he represents and profits from.

    Here’s this POS in action:

  5. The US economy is dying a death of a thousand cuts.

    There’s going to have to be a kickstart. There will have to be a kickstart AND pro-growth policies at the same time—implying a comprehensive grand plan. Paul Krugman has only advised higher deficits which I think is reckless. No place does he mention cutting government spending and reducing government intervention in the economy.

    I think the kickstart will have to be tax cuts AND spending cuts (but MORE tax cuts than spending cuts to remain expansionary). Yes, I know taxes are low, but they’ll have to go lower for awhile. Romney’s right to focus on domestic energy to improve our net import portion of GDP and create jobs. He’s also correct in basically calling for a moratorium or roll-back of regulation imposed by EPA and recent legislation. Again he’s correct in the need for tax reform and lower marginal rates on S Corps and Corporations. High corporate tax rates here compared to the rest of the world is keeping jobs and capital overseas. Therefore to repatriate jobs back to the US from Asia, which is already a nascent trend, will require lower corporate tax rates and “cheerleading” from a business friendly administration.

    This is so complicated. Have a look at a couple of my blog entries:
    A blog entry on the need for Pro-growth policies:
    A Blog series on fixing the countries long-term problems:

    • re: pro-growth policies.

      I support them totally if they “work” with “work” being the operative word.

      When they don’t “work” we end up with a trillion dollar deficit and 16T of debt.

      what is “Plan B” is we have pro-growth tax cuts and the deficit continues to grow?

      Sorry, I’m not buying the “it worked under Reagan” as what we do if it fails. We need a substantiative approach to balancing the budget and paying down the debt
      not a bunch of wishful thinking with no back up plan and we end up with even more debt.

      When I see the people who want tax support the sequester – 100 billion in cuts for 10 years, I’ll listen more to their tax cut ideas.

      the two are entirely connected and we went down the wrong path when we cut taxes and did not cut spending at the same time.

      that’s irresponsible.

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