Man Without Qualities

Friday, July 25, 2003

Being Paul Krugman

Let's see. Paul Krugman's most recent column is out.

As I predicted yesterday (Thursday) - in a post that went up while he was writing the column - it is not about the dramatic and unexpected decline in jobless claims reported yesterday, although that is what a serious economist interested in politically significant developments would write about. No. The column is not about any of that because, as I also predicted, it is about the declining bond market (it's even titled "Dropping the Bonds") and how the United States is on its way to becoming the next Argentina (a country not mentioned by name, this time, but whose brooding omnipresence I take to be clearly implied by Herr Doktorprofessor's scathing reference to America's descent into debt) and, of course, that its all George Bush's fault - and especially how Alan Greenspan is the President's "accomplice" in all this economic mayhem who "has a lot to answer for."

Now the word "accomplice" has all kinds of conspiratorial connotations. And Herr Doktorprofessor ups the conspiratorial ante with: Let's not forget that back in 2001, Mr. Greenspan lent crucial political aid to the first Bush tax cut ... he tied himself in knots to find a way to give his political friends what they wanted Yes, the Fed is required by federal statute to be independent, but my goodness Herr Doktorprofessor knows a "wink, wink ... nudge, nudge" when he sees one! And then there's this: Mr. Greenspan still talks about the evils of deficits, but refuses to say the obvious! And just why would the Fed Chairman refuse to say the obvious - even under oath, even to Congress? My God, the fix is in!

OK, so it's not the juiciest set of Krugmaniacal conspiracy insinuations, but they will do to satisfy the yearning expressed in my post yesterday, in which I gave myself over to contemplation of today's Krugmania dropping: And maybe there will be a conspiracy of some sort, too. I just love Herr Doktorprofessor's conspiracy theories.

How did this happen that I predicted - that I knew - what Herr Doktorprofessor was writing even as I wrote my own post!? I confess. Behind a filing cabinet on the 7 1/2th floor, I found a small doorway. I crawled through it, and was whisked through some kind of temporal-spatial portal, ending up inside the brain of the professor Paul Krugman. Here I stayed for exactly 15 minutes, before falling from the sky next to the New Jersey Turnpike. Whoa! What an experience. My wife is pressuring me to turn it into a business, charging people to spend their 15 minutes inside Krugman!

Well, forget it, sweetheart. There's no money in that. The paying public could experience a higher class version of essentially the same thing by taking a ride through Disneyland's Space Mountain. This was a one-shot deal.

What exactly are Mr. Greenspan's sins about which Herr Doktorprofessor raves today? Well, Herr Doktorprofessor is for one thing miffed that Mr. Greenspan is optimistic about the economy, and that he was also optimistic about a year ago, and that Mr. Greenspan then said:

Although the uncertainties of earlier this year are as yet not fully resolved, the U.S. economy appears to have withstood a set of blows. Not surprisingly the depressing effects of recent events linger. Nevertheless, the fundamentals are in place for a return to sustained healthy growth,'' where Herr Doktorprofessor says there has been no return to sustained healthy growth.

But Mr. Greenspan's comments seem pretty well hedged to me, and, although he uses a different vocabulary, his comments don't seem all that different in substance from Herr Doktorprofessor's own forecast for 2003: My prediction [for 2003] would be two to three percent growth on a year-to-year basis. If you ask me if the US economy can fall back into recession, I'd say: yes, absolutely. On the other hand, can it grow by 5 percent? It is also possible.

And then there's this Krugmankvetch:

Since mid-June, however, [long-term] rates have been climbing rapidly. This week rates on 30-year mortgages hit their highest level since January. And Mr. Greenspan bears some of the responsibility. Until June, Fed officials had helped push down interest rates precisely by not being too optimistic - by indicating that they took concerns about deflation seriously, that they were not taking recovery for granted. Then they surprised markets with a small cut in the federal funds rate, a move that seemed to suggest that they were taking recovery for granted, after all.

But long term rates largely respond to inflation concerns. The bond market seems to be signaling a concern that by focusing on the possibility of deflation the Fed may be increasing the likelihood of future inflation. Mr. Greenspan may be mistaken in his evaluation of the deflation risk, but lots of people agree it's there - although it is a fear not shared by the Man Without Qualities. Indeed Herr Doktorprofessor has recently written about his own concerns of this sort. What is missing from today's column, of course, is any indication of what Herr Doktorprofessor thinks Mr. Greenspan should have done differently. For example, Herr Doktorprofessor seems annoyed that the Fed surprised markets with a small cut in the federal funds rate, a move that seemed to suggest that they were taking recovery for granted, after all. But a bigger cut would have signaled less concern about inflation - which might have driven the bond market into even deeper anxiety. Perhaps the economy will devolve into stagflation or the like, and if that happens Mr. Greenspan will be in some difficulty. But unless and until something like that happens, Herr Doktorprofessor's clarion call for Mr. Greenspan to be held to account has one problem: there's nothing to be held to account for, yet.

Herr Doktorprofessor also thinks: There is very little evidence in the data for a strong recovery ready to break out. As far as I can make out, Mr. Greenspan's optimism is entirely based on models predicting that tax cuts and low interest rates will get the economy moving. But where he has often cited recent employment statistics as evidence of economic health, here there is no mention that the number of people lodging new jobless claims plunged unexpectedly last week to the lowest level since February, which some economists think means a lot. Nor does he explain why those economists are wrong.

The fact is that there is plenty of evidence in the data for a strong recovery ready to break out. But there is also plenty of evidence in the data for concern. That is to say: there is a lot of uncertainty. It's the same kind of uncertainty that made Herr Doktorprofessor "forecast" 2003 growth in the US as somewhere between recession (say, -2%) and 5%. But it seems that Herr Doktorprofessor thinks only academic economists are entitled to that kind of spread - the Fed Chief is held to a different standard, a standard that looks a lot like vindictiveness.

The rest of the column is the same old Krugman ranting about the deficit being too big - "record" as he again puts it. But that is far from clear in the most meaningful sense - as this JOINT ECONOMIC COMMITTEE report shows. But considerations such as those explained in this report are completely ignored by Herr Doktorprofessor, also as predicted. And, in any event, even if the deficit must be brought down, it is by no means clear that taxes must or will be raised to do it. That is a political decision for the future - although Herr Doktorprofessor falsely treats it almost as the predetermined solution of an econometric equation.

UPDATE: As usual, lots of great stuff debunking this particular Krugmaniacal cat-scratch from Don Luskin's Krugman Truth Squad in NRO today.

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