Paul Krugman has become an embarrassment to the economics profession. Despite his Nobel Prize and despite his previous high regard in the profession, his twice-a-week editorials in The New York Times are causing even progressive economists to treat him as somewhat of a kook.
Since 2011, the United States has followed what Krugman correctly calls a policy of “austerity.” For example, the federal budget deficit has declined from 8.4 percent of GDP in 2011 to a predicted 2.9 percent of GDP for all of 2014. All along the way Paul Krugman protested that such policies would prolong the recession and even push us into a “low-grade depression.”
In fact the opposite occurred. As Jeffrey Sachs wrote the other day:
… rather than a new recession, or an ongoing depression, the US unemployment rate has fallen from 8.6% in November 2011 to 5.8% in November 2014. Real economic growth in 2011 stood at 1.6%, and the IMF expects it to be 2.2% for 2014 as a whole… [It is likely] that aggregate growth for all of 2015 will be above 3%.
Sachs, who is every bit as left wing as Krugman, writes:
Not one of [Krugman’s] New York Times commentaries in the first half of 2013, when “austerian” deficit cutting was taking effect, forecast a major reduction in unemployment or that economic growth would recover to brisk rates. On the contrary, “the disastrous turn toward austerity has destroyed millions of jobs and ruined many lives,” he argued, with the US Congress exposing Americans to “the imminent threat of severe economic damage from short-term spending cuts.” As a result, “Full recovery still looks a very long way off,” he warned. “And I’m beginning to worry that it may never happen.”
And Sachs makes the more general point that you can believe in progressive government without buying into Krugman’s kooky economic theories:
There is nothing progressive about large budget deficits and a rising debt-to-GDP ratio. After all, large deficits have no reliable effect on reducing unemployment, and deficit reduction can be consistent with falling unemployment.
It’s one thing to be wrong. But whether right or wrong, most economists don’t attack the character intelligence and general sanity of those who disagree with them. Krugman, by contrast, writes that the leaders of the United Kingdom remind him of the Three Stooges.
Even worse, Krugman is incredibly intellectually dishonest. Does he really suppose that readers won’t remember what he wrote only a few columns back? Apparently not. He now asserts his predictions were right all along. As Sachs notes:
Krugman took a victory lap in his end-of-2014 column on “The Obama Recovery” … [making] the incredible claim … that everything has turned out just as he predicted.
University of Chicago economist John Cochrane writes that Krugman’s economic view of the world is not taught in any major economics graduate schools, is not taken seriously at academic conferences and is not considered acceptable by any professional economics journals.
Monetary economist Scott Sumner points out that there is no empirical evidence to support Krugman’s views:
… it would be useful to do a more systematic study of fiscal austerity, but the Keynesians don't seem to know how to do so. All I see are cross sectional studies that mix together countries with an independent monetary policy, with those that lack an independent monetary policy (like the Eurozone members.) Mark Sadowski did a regression with only those countries having an independent monetary policy, and found the effect went away. No correlation between austerity and growth. This objection to Krugman's graphs has been made over and over again, but he never responds.
So what is this theory that Krugman believes but most all other economists reject? More on that in Part II.