Paul Krugman: third depression

[jimtron]

Krugman thinks we might be headed for a depression:

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.
And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

My grasp of economics is pretty weak. What do you all think of this?

 

[Emperor_Gestahl]

"Looks like I picked the wrong week to quit drinking."

-Lloyd Bridges (Airplane)


Great, 2 days after I start reading Krugman he's saying the same crap I've been worried about since August. Lucky I didn't pick this week to quit drinking.

 

[jimtron]

Guess I picked the wrong week to quit watching gladiator movies...

 

[Emperor_Gestahl]

There's no good week for having been in a Turkish prison..

 

[NoZed Avenger]

Given Krugman's historical accuracy percentages on prognostication, I actually feel a little better.

 

[Emperor_Gestahl]

I've recently learned in fact that Krugman saw the housing bubble being a problem as early as 2005, so if you're referring to a specific bad call of his I'm interested to see the link. I've just recently started paying proper attention to him.

 

[jimtron]

Given Krugman's historical accuracy percentages on prognostication, I actually feel a little better.

What are the percentages?

I've recently learned in fact that Krugman saw the housing bubble being a problem as early as 2005, so if you're referring to a specific bad call of his I'm interested to see the link. I've just recently started paying proper attention to him.

Yeah, my impression was that Krugman was well respected and sensible...but I'm curious to see any evidence of him getting things wrong (or right...)

 

[NoZed Avenger]

What are the percentages?



Yeah, my impression was that Krugman was well respected and sensible...but I'm curious to see any evidence of him getting things wrong (or right...)

I'll have to dig a bit; there was an article a while back; it may be as old as a year or so, and I don't have it to hand.

I'll see if I can locate it, but I am traveling this week so no guarantees, I am afraid.

 

[jimtron]

I'll have to dig a bit; there was an article a while back; it may be as old as a year or so, and I don't have it to hand.

I'll see if I can locate it, but I am traveling this week so no guarantees, I am afraid.

OK, and if you don't have time to find it, do you remember where it was published?

 

[Puppycow]

One thing that the field of economics has not produced so far is a reliable, consistent way to predict the economic future.

So, I believe that we truly don't know for sure, but Krugman certainly could be right. Time will tell.

If you subscribe to the Nassim Taleb school of thought, the future will be driven by major disruptive Black Swan events, which no model can predict.

 

[drkitten]

If you subscribe to the Nassim Taleb school of thought, the future will be driven by major disruptive Black Swan events, which no model can predict.

Even Taleb doesn't subscribe to that particular caricature of "thought."

The future will not be driven by Black Swan events, it will merely contain them. The whole point of Taleb's argument is to be prepared to deal with unexpected disruptive events.

.... which, oddly enough, gets us back to mainstream Keynesianism. We can't predict where or when the next bubble will arise, or where or when the bubble will turn into a recession. But we can expect that such an event will happen at some point and be prepared for it.

One of the specific examples Taleb gives is the attack on Roy Horn (of Siegfried and Roy), which shut down their long-running act at the Las Vegas Mirage and almost put the Mirage into receivership. That was a Black Swan event in that it was highly rare and extremely disruptive. But are you really going to tell me that the idea that a tiger might attack its trainer is that entirely unpredictable? His whole argument is that the Mirage should have been able to identify S&R as critical assets and come up with what-would-happen-if contingency plans.

 

[YoPopa]

Krugman could be correct about the third depression and be wrong about the causes. There are so many ways to ruin the economy and so few ways to keep it growing smoothly. Jared Diamond called it The Anna Karenina principle and applied it to the evolution of societies and technologies but it seems appropriate to economics as well.

We all tend to favor simple explanations and simple solutions, that's just how our minds work. Spend lots more or spend lots less are both simple and seductive solutions. Any clever person can come up with a long list to justify either position.

Compare this to viewing the optical illusion which shows either two faces or a vase. Imagine that society was divided into two groups. Those who insist the picture is of a vase and those who can see only two faces. Both groups would be able to explain their positions with flawless logic.

A Black Swan event could easily be the cause of the next big pull back or it could happen just because the two opposing groups can never agree and end up tearing the picture apart as a result.

I don't see any solutions coming out of my reasoning here but like Ashleigh Brilliant "I Feel Much Better, Now That I've Given Up Hope"

 

[TraneWreck]

I read Krugman every day and have since he was the lone voice in a large media outlet speaking out against the Iraq War.

As far as this Depression column goes, it needs to be understood in context. I don't think you can say that Krugman is "predicting" a Depression, he's pointing out the correlation between the current financial situation and those of the largest Depressions in the modern era.

His point, as he's been saying for two years, now, is that the wise men in charge, fearing the specter of inflation despite all economic indicators leaning towards deflation, refuse to take necessary steps to heal the world's economies. They're behaving as though this is some typical downturn where belts need to be tightened and interest rates lowered.

Interest rates, however, are at the zero bound and we're in a liquidity trap, meaning that short-term stimulus with serious restructuring (tax increases/spending cuts) to occur around 2015.

Krugman has been yelling at the top of his lungs that the actual economic problems, like crushing unemployment, are being ignored because people are terrified about problems that don't exist. This is a recipe for Depression, but again, I wouldn't say that he's predicting one. He is, however, predicting a long, slow recovery in this climate and fears a double dip.

 

[Malerin]

I read Krugman every day and have since he was the lone voice in a large media outlet speaking out against the Iraq War.

As far as this Depression column goes, it needs to be understood in context. I don't think you can say that Krugman is "predicting" a Depression, he's pointing out the correlation between the current financial situation and those of the largest Depressions in the modern era.

His point, as he's been saying for two years, now, is that the wise men in charge, fearing the specter of inflation despite all economic indicators leaning towards deflation, refuse to take necessary steps to heal the world's economies. They're behaving as though this is some typical downturn where belts need to be tightened and interest rates lowered.

Interest rates, however, are at the zero bound and we're in a liquidity trap, meaning that short-term stimulus with serious restructuring (tax increases/spending cuts) to occur around 2015.

Krugman has been yelling at the top of his lungs that the actual economic problems, like crushing unemployment, are being ignored because people are terrified about problems that don't exist. This is a recipe for Depression, but again, I wouldn't say that he's predicting one. He is, however, predicting a long, slow recovery in this climate and fears a double dip.

How did you reach that conclusion? By Krugman's own words:

We are now, I fear, in the early stages of a third depression

I think that precludes a "long, slow recovery".

 

[TraneWreck]

How did you reach that conclusion? By Krugman's own words:

We are now, I fear, in the early stages of a third depression

I think that precludes a "long, slow recovery".

I read him as saying, "I'm really worried that we're in the early stages of a Depression."

Which is different than saying, "I am predicting that there will be a Depression."

A climate scientist could say, "This year, I fear, might be a bad year for hurricanes." vs. "There will be giant hurricanes this year."

What Krugman agues consistetly is that given the behavior of the governments of the world, these tough economic times could easily become a full-blown Depression. Maybe we're already there, depending on how you want to define "Depression."

I also think Krugman is ramping up the rhetoric because of this:

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

From the link in the OP.

My only point is that Krugman's column shouldn't be read as a normal Jim Cramer sort of prediction, "We're entering a Depression, sell, Sell, SELL!"

If people mean "prediction" as something less specific than the normal kinds of economic predictions we see on television, then I won't argue with than. It's a contingent sort of prognostication, "If we keep behaving as though unemployment and deflation are less worrysome than imaginary inflation, we could enter a Depression."

 

[Malerin]

I read him as saying, "I'm really worried that we're in the early stages of a Depression."
Which is different than saying, "I am predicting that there will be a Depression."

A climate scientist could say, "This year, I fear, might be a bad year for hurricanes." vs. "There will be giant hurricanes this year."

What Krugman agues consistetly is that given the behavior of the governments of the world, these tough economic times could easily become a full-blown Depression. Maybe we're already there, depending on how you want to define "Depression."

I also think Krugman is ramping up the rhetoric because of this:


From the link in the OP.
My only point is that Krugman's column shouldn't be read as a normal Jim Cramer sort of prediction, "We're entering a Depression, sell, Sell, SELL!"

If people mean "prediction" as something less specific than the normal kinds of economic predictions we see on television, then I won't argue with than. It's a contingent sort of prognostication, "If we keep behaving as though unemployment and deflation are less worrysome than imaginary inflation, we could enter a Depression."

Yeah, I guess you're right. It seems to be a moot point now. We couldn't even pass an unemployment extension bill. A massive infrastructure bill is out of the question.

 

[Brainster]

Krugman in 2002:

A few months ago the vast majority of business economists mocked concerns about a ''double dip,'' a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As I've repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever.

Krugman's predicted double-dip recession did not emerge back then.

 

[drkitten]

Krugman in 2002:

Krugman's predicted double-dip recession did not emerge back then.

And for exactly the reason that he cited would be the path to avoid it:

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Judging by Mr. Greenspan's remarkably cheerful recent testimony, he still thinks he can pull that off.

History suggests that Mr. Greenspan did manage to pull off the creation of a housing bubble.

I'd say that particular column is a good example of the accuracy, not the inaccuracy, of Krugman's ability to do economic analysis.

 

[TraneWreck]

Krugman in 2002:



Krugman's predicted double-dip recession did not emerge back then.

That's an interesting article to choose. Notice that the economist quoted by Krugman thought Greenspan needed to create a housing bubble to avoid the double dip.

This is why the "prediction" framing is a bit of a canard. That article, like the one in the OP, is focused on potential economic problems. Unless certain action is taken, some negative result is plausible. That's not "predicting" like we talk about in the paranormal forum with regard to psychics.

Krugman writes an article in 2002 saying a double dip is "more plausible" based on economic indicators unless a housing bubble sustains the economy. That's almost exactly what happened, making it odd that you chose this as proof of a prediction gone wrong.

But in economics there's no sample to test. We can't evaluate the world without a housing bubble to see if Krugman was right. We have to act on the best evidence available with the best tactics available. We aren't doing that right now.

ETA: The good doctor beat me to it.

 

[drkitten]

That's an interesting article to choose. Notice that the economist quoted by Krugman thought Greenspan needed to create a housing bubble to avoid the double dip.

This is why the "prediction" framing is a bit of a canard. That article, like the one in the OP, is focused on potential economic problems. Unless certain action is taken, some negative result is plausible. That's not "predicting" like we talk about in the paranormal forum with regard to psychics.

Yeah. Generally, if my mechanic says "hmm; it looks like you're getting a lot of wear on your brakes, and if you don't get a new set of brake shoes put in, they're likely to fail altogether," I consider that to be a good sign in my mechanic.

I don't hold it against him that when I take his advice and replace the shoes, my brakes didn't fail after all.