Posted by: Rick | Friday, April 3, 2009

Krugman Vs. Obama

Paul Krugman is the only indispensable pundit of the last decade, but he’s still an economist.  Now I’m no expert, but isn’t it true that things are often a bit . . . unsettled. . . in his field? I read almost everything he writes, and while I occasionally come across impressive looking passages like this

. . .Effective demand for each country’s good, which determines real output, is a function of its own output (via consumer demand), foreign output, the real exchange rate, and the interest rate:

y = A(y, y*, EP*/P, i)

y* = A*(y*,y, EP*/P, i*)

I assume interest arbitrage:

i = i*

In each country there is a demand for money:

M/P = L(y,i)

M*/P* = L*(y*,i*)

Now, assume prices fixed in the short run (Eichengreen and Sachs, more realistically for the 30s, had upward-sloping AS curves, but it doesn’t matter for current purposes). . . .

— I’m still left with the impression that nothing that any economist predicts is set in stone. There are too many human variables, as Mr. Krugman would surely agree.

Krugman’s problem with the Obama recovery plan seems to have five main components:

1) Inelegance: The plan is surely very messy looking.  It has lots of moving parts — TARP, TALF, Bernanke, the FDIC, the stimulus, ad infinitum — and most of them have to work.  Krugman admits he’s not a detail man.  Swedish nationalization would be much prettier.

2) Residual Obama Animus: Speaking as a fervent Hillary Clinton supporter, trust me when I say that last year, Paul Krugman was in the same big foxhole as the rest of us Clinonites.  He didn’t like Obama’s “post-partisan” approach any more than we did, and he’s still not ready to cut him much slack.

3) Fatal Toxicity: Krugman seems to think the “troubled assets” are essentially worthless.  Great polemicist that he is — and I mean that as a compliment — you can almost feel the scorn dripping from his keyboard as he types phrases like toxic sludge.  I think he’s unduly pessimistic.

4) Personality and World View: Speaking of pessimism, take a look at the Newsweek profile.  While containing its share of  “Nutty Professor” tropes, it also paints a picture of a man extemely reluctant to be wrong on the downside.

5) Justice: Krugman is very angry that the people who caused this crisis aren’t getting a well-deserved  and total beatdown right now. What’s worse, their victims are footing the bill for their misconduct.  My response would be that in order to mitigate the people’s suffering,  we have to fix the credit markets now.  And it’s not as if Krugman-style nationalization would be cheap.

I don’t see Geithner as quite the Wall Street stooge that Krugman sees.  I think we’re going to get out of this mess in one (smaller) piece,  thanks largely to the Fed.  But who knows?

I’ll get back to you in a year.



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