Paul Krugman versus the austeriticians

By Babak Moussavi

“When the facts change, I change my mind. What do you do, sir?”

Scourge of the austeriticians

In George Osborne’s case, the answer to John Maynard Keynes’ question above seems to be “I stick with it”. He appears not to have taken the great economist’s advice, and continues to pledge that austerity is the only solution to Britain’s economic malaise. Two years on, however, the Chancellor’s grand plan has failed and the UK is in a double-dip recession. The changing facts don’t seem to be as important for him as saving his face.

If he isn’t going to listen to Keynes’ witty and wise comment, though, will he listen to Paul Krugman, the Nobel Prize-winning Princeton economist?

On Newsnight on Wednesday, Professor Krugman, while touring the UK to deliver a number of speeches and interviews partly to promote his new book, was Jeremy Paxman’s guest throughout the show, with numerous other guests wheeled on to hold a debate with him. These included a former Greek finance minister, Giorgos Papakonstantinou (who comically – if understandably – took offence at the beginning with Paxman’s analogy that Greece might be “vomited out of the eurozone like a bad kebab”) and Harvard economist, Ken Rogoff, who suggested darkly that the only solution to Europe’s woes is the formation of a United States of Europe. Good luck with that one.

The show is certainly worth watching, and the purpose of this post is merely to ask you to do so (you can find it here – but it is probably up on the iPlayer for a limited time, so watch it soon, otherwise I’ll try to dig it up on YouTube). Professor Krugman, delivered an articulate and convincing master class in economic debate, displaying an encyclopaedic knowledge of his subject.

His best moment (from here) is when he was placed opposite two advocates of austerity: private equity boss John Moulton, and Conservative MP, Andrea Leadsom. It makes for cringe-worthy viewing. While Krugman is in possession of an abundance of facts, figures and studies, his opponents repeat slogans of how “the state is too large” and “we need to cut debt”, without ever addressing or assessing the arguments that he has put forward over why a Keynesian solution is the only way out of what he bluntly calls a depression. Mr Moulton suggests the state’s expenditure of nearly 50% of GDP is the problem and harks back to an era of when it was 30%. But when was that? Even Thatcher failed to get state spending below 40%, and growth has actually happened since she was around, so Mr Moulton has some explaining to do.

In any case, before pointing out that Sweden has a much larger state than the UK, and is weathering the economic storm well, Professor Krugman infers from these attacks that the debate over the merits of austerity is not being conducted in good faith, and he counters with a devastating line:

“You’ve just given me evidence for something people like me tend to say, which is that none of this is actually about fiscal responsibility, it’s about exploiting the situation to pursue an ideological goal of a smaller state”

When the facts change, some people don’t change their minds. And now we know why.

  1. George said:

    Thank you very much for this important post, Mr. Moussavi. The discussion from Newsnight illustrates the shear lack of common sense that is making the rounds in politics and big business. There is no Left or Right to breaking out of this recession, for what we have found in the end is that all of us are losers. A recession of this magnitude doesn’t discriminate by political affiliation. As a matter of urgency, we need Red/Blue/Green/Whatever solutions. Unfortunately, what we have seen in the Newsnight discussion is a concise version of why the UK and Eurozone have failed miserably to turn their economies around; there is no interest in asking for advice from those who may have much to offer. And when highly reputable advice is given, it is casually washed aside as nonsense (for it has been delivered to a theatre of politics, which, at the moment, is inherently nonsensical). As Krugman alluded to in the programme, this is, quite simply, pathetic politics and a highjacking of a catastrophic situation with the aim of pushing forward reforms for the very group that had brought us to our knees in the first place. Both the tragedy and farce of this situation (as Vivek has described it), is that in the current state of affairs, no one (of the entire multicoloured political spectrum) is winning.

    For those of us outside of the UK, unable to get iPlayer, here is a nice little excerpt from BBC Newsnight:

    • Thanks for this George (and for providing a better link to the video).

      I wonder though: you say both that no-one in the multi-coloured spectrum wins from a situation like this, but also point out that there are those with vested interests who try to use the situation to pursue an ideological agenda – as Krugman argued. It may be the case then, not that “all of us are losers” but that – to borrow from Occupy – the 99% are losers, while the 1% are (still) doing very well indeed.

  2. ASW said:

    Hi Babak

    The blog seems to be blossoming nicely. Congrats.

    Some random bits and bobs:

    1. I enjoyed that Newsnight enormously. For a start, when I first flicked on I thought Krugman was Ben Bernanke and that he’d gone mental. (The beards throw me off.) Had a nerdy little chuckle to myself about how disgusted both would have been to be confused with other. Most of all though, it was because he’s an absolute pleasure to listen to. You’re spot on calling it a master class.

    2. Did you go and see him talk/plug his new book at LSE on Tuesday? I couldn’t get a ticket for love nor money (and because I missed the ticket release by about a week)…

    3. I think the only real contender for speaking similarly simple, reasoned economic sense on Newsnight is Richard Koo and his ‘balance sheet recession’ concept. Loved that. But apparently him and Krugman aren’t too friendly. Disaster.

    4. Andrea Leadsom is a dirty moron. She’s done nothing. She’s an awful Eurosceptic (dirty) and she screwed over DC by voting for that referendum on Union membership (moron).

    5. Regarding that Keynes quote, it would be brilliant to see Gideon demonstrate some responsiveness, some flexibility, in the wake of his economic policy’s obvious shortcomings. He can’t though. Deficit reduction is the mainstay of this government, and it is, as Krugman touched on, inextricably tied to an ideological ambition. (I disagree that the two, economic policy and political ideology, are or have been misguidedly blended. More below.) On top of which, when governments do revoke or revise policy they get crucified in commons and in the press. Look at the pasty-tax U-turn (which was hilarious, by the way). Damned if they do, damned if they don’t.

    6. Also on adapting ideas as the facts change : Economists’ ideas are predictions and models. They operate in a strange limbo between making justifiable hypotheses and then amending them because they haven’t faithfully modeled the developments. Fair enough, I suppose. But because of it’s pseudoscientific process, economics will always be tied to ideology. In fact, confidence in one model and not another is an ideology in itself. I would like to see Krugman asked if he, a die-hard neo-Keynesian economist, can imagine, under evidence of failures in economic principles he’s staked so much on, abandoning his faith in those ideas in favour of austerity. He would, I’m sure, reel off an extensive and delicious list of reasons why that wouldn’t happen, but you see my point.

    Bit of a tome here. Sorry. Bed time.

    • Thanks for this contribution Alex.

      I think the only ones I need to respond to are 5 and 6, as the others seemed to be designed to gain a chuckle (they succeeded).

      On u-turns, you say Osborne (or Gideon) is damned if he does and damned if he doesn’t, but his own standing shouldn’t be the point. The issue is what is the best policy, not what saves his face. Since he’s a career politician he would weigh up the damage a u-turn on economic policy would do to his credibility, but at the moment, his credibility is sinking faster than the Titanic in any case. Better to do the right thing, and not stick with an unfalsifiable theory, even when “the facts change”.

      (As an aside, it is interesting to see Cameron claim that u-turns demonstrate the coalition’s “courage” as they realise their policies “hit a brick wall”. Somewhat discouraging to think they haven’t actually thought-through the policies beforehand. It does make you wonder what their policy unit is actually doing…!)

      On the point about ideology: I agree to an extent, but I think you simplify when you talk about economics being simply pseudoscientific. Krugman did show that he relies upon a weight of evidence, collected using social scientific methodologies, such as surveying companies in the US to assess their biggest concerns. It is the fact that he possessed a mass of data to support his arguments that he was convincing. His opponents, by contrast, hardly uttered a single fact between them, and relied entirely upon the pseudoscientific theorising (or, in Leadsom’s words, the “very simple mathematics”) that I think you refer to. It is this that highlights the distinction between serious study and empty ideological claims.

    • ray said:

      Actually- Krugman has responded to that point 6. about changing his mind/making mistakes:

      In case you can’t get to the article (limited number of freebies from nytimes)

      He basically says he’s made two big mistakes:
      1) US productivity growth
      2) How the markets would react to the Bush tax cut of 2003

      And then there’s a nice para explaining how he’s updated/amended his views.


      • Thanks for this Ray. I think his blog is visible to readers without subscription so most should be able to see this.

  3. Josh M said:

    I like the bleeding patient analogy. According to this silly lady apparently NOT bleeding the patient would be reckless, he might like, die or something. If the problem is your debt-GDP ratio, how would reducing your income help!?

    Krugman’s OK, but still limited by some silly ideas. Check out the debate he had with Steve Keen:

    He also misrepresents Fisher. Fisher said that the deflation caused by massive reductions in spending as everyone either tries to pay off their debts or defaults on their debts, leading to reduced investment and job losses, means that the real value of real debts increases (as debts are denominated nominally), causing more and more defaults and job losses! I.e. depression. I have no idea what Krugman’s talking about at about 2:45 when he cites Fisher ( Fisher’s theory was called the debt deflation theory of great depressions, but Krugman doesn’t mention deflation!

    Here’s a summary of Fisher’s theory (obviously I had simplified and explained lazily):

  4. Josh M said:

    Oh my the man is even worse! Puritan morality is not a substitute for economic analysis!

    • Josh M said:

      OK Krugman’s opponents here are both either propagandists or just plain brainwashed.

  5. Natasha said:

    Josh M said: “Check out the debate he had with Steve Keen”

    Krugman also fails to notice that Fisher’s 1933 ‘Chicago Plan’ was for a 100% DEBT FREE money supply, whereas Krugman advocates yet more privately created DEBT money to be added to the existing debt created money supply. Krugman’s analysis apart from this crucial detail is largely correct, i.e. spend not austerity. BUT like most mainstream economists, politicians of any stripe, and the media, he exposes a criminal ignorance of how money is CREATED and DESTROYED: 98% of the money supply (Sterling Dollar USA Euro, all the same) is created as private debt at interest; a bank ‘loan’ is in fact credit created out of thin air on the strength of a signature on a contract to pay the principal plus interest back later. This is what ‘spending power’ is. Did you know that if there was no debt there would be no money? A piece of paper is only worth something if someone is trying to capture it to extinguish a debt. After the debt is extinguished, the paper is only worth paper, regardless of its face value. The money supply is like a bath tub with the taps on (money is continually being created) and the plug out (debts being paid back).

    A gold standard is just as silly as the present system. I could turn a gold coin into paper if I loan it to you. It now becomes a debt instrument on a ledger. Now you’ll pay me “interest” if you’re brainwashed into a gold standard when you could be using paper and paying no one “interest”. Irving Fisher’s 1933 ‘Chicago plan’ called for 100% reserve banking where the entire money supply is created interest free. The plan proposes that public currency is issued to the public by a public bookkeeper and not a private bank, so we wouldn’t have parasites – supported by the likes of Krugman – running the planet advocating yet more private debt at interest. Insanity because interest requires exponential growth on a finite planet. Insanity. Even the IMF recently ‘revisited’ Fisher’s plan and overwhelmingly endorsed it with modern computer modeling showing even greater benefits that the original plan.

    Once the money supply itself is freely available interest free we can make progress eliminating interest entirely. Interest, which is USURY is the oldest structural ‘economic’ problem since written history began 5,000 years ago. Check David Graeber’s paradigm shifting book, 5,00 years of debt. BUT please be aware that 100% reserve banking only eliminates interest on the supply creation itself. Such a reform still leaves all the debt free money in circulation exposed to speculation and hoarding by, guess who? Yes the same bankers and wealth 0.1% who control the debt money supply created by deposit account creation i.e. credit creation now. Money must be restored to its proper and only legitimate function as a mean of exchange. A store of value function must be returned to genuine assets, whatever you choose but NOT money itself. We don’t run out of inches, the same should be true of money. Fishers 1933 plan would be the first step but the supply it creates would likely have to be stabilsed (to ensure velocity is maximised) with negative interest rates, i.e Silvio Gesell’s demurrage, i.e a tax on savings. Inflation under the Chigago plan anwithd demurrage would also be consigned to the bin of history, where rubber tape measures and bent weighing machines are rightly outlawed.

    Economists who largely agree with Fisher’s 1933 plan include Steve Keen and must read Herman Daly, who, quite correctly identifies that we have only one planet, and any economic system MUST operate within that constraint. In this respect Krugman also entirely fails (with missing the crucial role of debt created money at interest) to see the bigger picture.

    • Joshua Mellors said:

      @Natasha: Excellent. Exactly. I couldn’t have expressed it better (which is why I didnt 🙂

      Here goes Krugman the apologist again, promoting the banking myth and advocating more private debt creation:

      ‘The Fed normally responds to a weak economy by buying short-term U.S. government debt from banks. This adds to bank reserves; the banks go out and lend more; and the economy perks up.’

      Oh dear.

      • Josh, you did seem to rather misrepresent his point there when you failed to cite the paragraph that follows:

        “Unfortunately, the scale of the financial crisis, which left behind a huge overhang of consumer debt, depressed the economy so severely that the usual channels of monetary policy don’t work. The Fed can bulk up bank reserves, but the banks have little incentive to lend the money out, because short-term interest rates are near zero. So the reserves just sit there.”

        But thanks both anyway for contributing to a healthy debate about economics and the banking crisis. I’ll look into Fischer, Keen, Graeber and all the other folk you mention.

        I do wish there weren’t quite so many ad hominems though. Krugman ‘the apologist’? Josh, just no. He absolutely lays into Tim Geithner’s decisions (for one) in his latest book.

  6. Joshua Mellors said:

    Sorry you’re right there, very sloppy of me. But in fact I believe I didn’t quote the best part to make my case. I should have referred to other parts and could have much better made my point.

    Fundamentally, he says there is too much debt but doesn’t propose any sensible strategy for reducing it. In fact he is advocating an increase in debt. Why does he never mention the possibility of debt writedowns? He mentions that the Fed has purchased asset backed securities from banks, but casually in passing, as if this wasn’t a big deal. It’s a massive deal. Why is the Fed expanding its balance sheet to take on toxic ‘assets’ held by banks – packages of mortgages which can’t be repaid – instead of bailing out the underwater homeowners? Stiglitz explains that about 2-3 million Americans have lost their homes per year since 2008 due to such inaction. Krugman even has the gall to claim that ‘Potential home buyers will be encouraged by the prospect of moderately higher inflation that will make their debt easier to repay’ – which is just plain offensive.

    The low interest rates he argues will ‘let the economy rip for a while’ simply make it cheaper for banks to borrow but needn’t affect the rate at which they make their own loans – which will simply add to the stockpile of unpayable debt. They will not be made to productive business, but for bidding up asset prices, just as Krugman admits in the next bit:

    ‘corporations will be encouraged by the prospect of higher future sales; stocks will rise, increasing wealth…’

    No, stock prices will rise because credit will be available cheaply to bid them up. The prices will be bid up by speculators, in no way adding to real wealth. This is a bubble, Paul. And any increased sales will be based on increased consumer debt of the type you claim the economy is suffering from (unpayable). So however you look at it you are praising the prospect of a bubble here, which is a terrible idea and the source of this whole mess in the first place.

    ‘…and the dollar will fall, making U.S. exports more competitive.’

    So here you’ve essentially admitted that the US is currency manipulating, even though you routinely chastise China as a currency manipulator! Wow.

    I probably can’t fully explain my objections to what he’s saying too effectively in a comment, but we can discuss it when we meet, and I will try to write an article that roughly addresses the issue.

    I know the apologist comment was bound to cause offense, especially because I didn’t really back it up, but I do believe Krugman is playing the political role of apologist for figures like Obama and Bernanke at the moment rather than that of independent analyst, which is disappointing. He often acknowledges that Obama ‘could have done more’ on certain issues for example, but never really criticises his policies outright. I wish he would take a less partisan view on matters. Even this article turns into a cheap shot at Romney:

    ‘Republicans, as I said, have gone wild, with Mr. Romney joining in the craziness. His campaign issued a news release denouncing the Fed’s move as giving the economy an “artificial” boost — he later described it as a “sugar high” — and declaring that “we should be creating wealth, not printing dollars.” ‘

    That’s not crazy, that’s obviously true!

    For time efficiency, I reckon just Graeber captures all of this, as well as much, much more. Like Natasha says, Debt: the first 5,000 years is a paradigm-shifting book.

    • Graeber will be appearing on my bookshelf soon then…

      Thanks for the essay Josh. I don’t have the expertise to challenge you on the economics, given that it’s not my background. I will go and read up a bit more on the subject though. But I don’t see how his comment that inflation will make debt repayments easier is “offensive”. That’s true, isn’t it, even if it isn’t your preferred method?

      In the second half, you suggest he is an apologist for Obama’s actions, but I very much disagree that that is the case, at least politically. He has been very critical of the Obama administration. Here’s an article from a few years ago ( His critical attitude hasn’t changed too much since then (as his book shows). He is one of the many disappointed liberals in the US.

      I think you and I may be seeing him through different lenses however. From an economic perspective, he may be making many mistakes (as you show) but politically he has made an excellent contribution by not kowtowing in front of power, and offering sharp criticisms of all that deserve it. And in the American political system, it is certainly the Republicans (who would roll back the state to a pre-modern era, further concentrate wealth into the hands of the top 1%, and offer a social program that would bear uncanny resemblence to that of the Iranian regime) who deserve this criticism most. I don’t think this means he is not independent though – you just have to accept that in a polarised, two-party system like the US, it is virtually impossible to be seen as in neither ‘camp’. From a political angle, therefore, I think by going after him, you are somewhat missing the point (or at least the target) especially when, as I say in the article, there are many other people with far crazier, less compassionate, and less competent ideas around!

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