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Monday, April 8, 2013

Some Thoughts on Krugman vs. Stockman

     To hear a lot of people tell it, Stockman has basically become an embarrassment. Even Righty like the Money Illusion commentator Patrick Sullivan has no love for Stockman:

     “As I read this I’m sort of watching C-Span, and hearing the most incomprehensible gibberish this side of Prof. Irwin Corey from David Stockman.”

    “If anyone knows Stockman or his family, advise that he gets a medical exam, immediately. I’m not kidding that he appears to be on the verge of Alzheimer’s. Krugman was being kind in merely calling a cranky old man.”
      As Krugman said, while his attack on Stockman last week was one of the first he was relatively polite compared to what would follow:
     “The exchange was just the latest in a battle between the two that began last week after Stockman — who resigned from Reagan’s administration in 1985 in protest over deficit policies — published an op-ed in The NYT highlighting the themes of his new book “The Great Deformation: The Corruption Of Capitalism In America.” The controversial title argues that America’s ballooning debt as well as government monetary and fiscal policies are putting the nation in danger of another financial meltdown.”
      “Krugman criticized the op-ed, calling Stockman a “cranky old man,” and referring to the piece as “just a series of gee-whiz, context- and model-free numbers embedded in a rant — and not even an interesting rant.” Krugman wasn’t the only one to slam Stockman’s analysis, as he noted later in the week: “It turns out that I’ve actually been polite to David Stockman,” compared to other critics.”

          The main battle lines between Krugman and Stockman, of course, were about Stockman’s call for austerity:
          Paul Krugman and David Stockman battled it out Sunday morning during an appearance on “This Week with George Stephanopoulos.”
          “Though there was plenty for the two to spar over, one particularly heated exchange came during a discussion of the Federal Reserve’s policy of using super-low interest rates to boost the economy. Fed Chairman Ben Bernanke stood by the stimulus plan last month, saying that the Fed would keep interest rates at rock-bottom levels until unemployment dropped to at least 6.5 percent.”
          “The main thing we’re doing is not working, and that is the serial bubble machine coming out of the Federal Reserve,” Stockman, an ex-budget director for Ronald Reagan, said on “This Week,” arguing that the easy money policies are helping Wall Street at the expense of Main Street. “Zero interest rates are crucifying the savers of America.”
          “Krugman, a Nobel Prize-winning economist and New York Times columnist, responded by asking Stockman: “You really think we should be raising interest rates with high unemployment?”
           Interestingly, Arianna Huffingon, defended Stockman. Indeed, we seem to again see a kind of convergence between Arianna on the Left and Stockman on the Right against the Center-Krugman and Obama. She wasn’t so much agreeing with Stockman’s prescription of austerity but his description. He argued that the unemployment rate is much higher than even the rather high 7.6% if we use U-6-a point often made-and that we got here by the Fed iniating a bubble. 
           I do agree that he described accurately the pain many Americans are feeling quite well. Of course, the trouble is that while I think he accurately describes the  slow growth economy his prescription of austerity is all wrong. 
           What I found interesting about Krugman is that he argued that the housing bubble wasn’t primarily caused by easy money and low interest rates. Here’s what he wrote in a post after the show which he said helped him clarify the major points of discussion:
           “Suppose, to take the obvious example, that your claim is that loose policy by the Fed caused the housing bubble, and hence all our current woe. Well, it’s true that borrowing costs were relatively low during the bubble years. Here are mortgage rates:
      “So mortgage rates fell by about 20 percent from late-90s levels. If housing prices were the simple inverse of bond prices, this could explain something like a 25 percent rise. Realistically, you can adjust this either up or down; focusing on real rates would push the number up, realizing that there are other costs to buying a house would push it down. But one thing seems clear: on no rational calculation can the fairly modest interest rate decline shown above justify this:
     “Now, you could try to explain the doubling or more of housing prices in key markets by arguing that low interest rates were what set in motion a process of irrational exuberance, in which lenders and borrowers both got carried away; I would agree with Ben Bernanke that most of the evidence suggests otherwise, but your mileage may vary. The point, however, is that even if you want to make the Fed the villain here, you can only do that by assuming that markets are highly irrational and unstable. If they can overreact so drastically to loose money, why should you believe that they get it right in response to other shocks?”
       What we see, then, is a strange convergence of Left and Right on many things-I notice that many more Left of Center types like Yves Smith at Naked Capitalsm, are very critical of ZIRP. Austrians and MMTers are more on the same page regarding criticism of TBTF and ZIRP. Both are often critical of monetary policy the difference being that MMT advocates more fiscal stimulus.. So there’s different ways to divide up viewpoints. 
       Krumgan on the other hand sounds a lot more like Sumner-and Bernanke-on questions of ZIRP causing the boom-bust. 

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  1. Tom Brown says:

    Mike, this is very interesting. Krugman and Stockman at the same table! I think I could watch a half day of just those two going at it… Ha!

    BTW, regarding what really caused the housing bubble I saw this link today on pragcap:

    Buried in there somewhere is the idea that the their model shows that the problem was really the 0% down financing. The low interest rates made only a small marginal difference. Of course the more interesting part is the model itself: instead of using a single clairvoyant "rational actor" they actually had what sound like millions of not so rational and non-clairvoyant actors.

    Here's the pragcap bit:

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