Nation of Beancounters

Paul Krugman is a disturbed and disturbing man

Posted in Uncategorized by Navin Kumar on August 1, 2011

From his column here:

The fact that Greenspan imagines that bank capital is like installing seat belts suggests that the man once revered as a demigod of finance doesn’t understand basic economics — or, more likely, that he chooses not to understand what he, amazingly, is still being paid to not understand.

Krugman tries to explain that raising reserve ratios (the ratio of deposits that banks aren’t allowed to lend out) doesn’t have any impact on output, while allowing giving us a safer system.

If this seems like a free lunch to you, it should: “basic economics” suggests that reducing the amount of money that banks can lend will increase the interest rate and reduce investment, which will reduce output, both now and in the future.

Of course, this maybe offset by fewer systemic risks, which also lower output. Possibly, the sudden crash in output and the resulting pain brought about by financial crises exceeds the pain of higher interest rates/lower credit. (For those of you who are wonkish, Tyler Cowen has a brief review here, which is better than anything I can put up).

While there is nothing wrong in believing that a safer system is more important that the opportunity costs (I believe that most people, including me, hold that opinion), what disturbs me is that Krugman completes discards the idea that there might be an opportunity cost to capital sitting in vaults (without reviewing the literature) and then insults Greenspan’s intelligence and questions his integrity for having an opinion on the macroeconomic impact of variable that Krugman doesn’t agree with. Krugman seems to believe that the opinions he holds are so obviously true that the only way that anyone can disagree with him is if they’re being paid to. This is a childish, disturbingly obvious ad hominem attack.

I started studying economics after reading Freakonomics and being seduced by the idea that one can know something for absolutely certain. I started off as a libertarian capitalist but have become a lot calmer since I’ve started studying economics properly: few long-standing, heatedly debated opinions are obviously right or wrong and most solutions are contextual. The aim of economics is (for me) to arrive at the Truth, in small, rigorous steps.

Krugman has gone the opposite way in his old age: somewhere in the early 2000s he turned into a politics junkie, ignoring flaws and contextual arguments against his own beliefs (which includes a strong belief in the relative moral and intellectual inferiority of the “Right”). He’s a brilliant writer and economist when he talks about his specialty: international trade. It’s sad he no longer does. Most of the opinions he puts into writing align too closely with the his tribe to take seriously.

Addendum: Going through the comments section, an interesting pattern emerges. People who talk about Greenspan himself seem to agree with Krugman (some people call for him to be sent to jail) but most (over 80%) of the comments that actually talk about what Greenspan wrote disagree with Krugman.


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