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Krugman vs. me

Paul Krugman says I'm wrong to suggest that Europe's debt crisis interrupted the recovery:

I don’t know where Ezra got that, but it’s just not right. It’s not as if we had a solid recovery, then Greece came along. We never had the basics for self-sustaining recovery in place: aside from the stimulus and inventory bounce, demand remained weak. And financial jitters from the eurozone crisis had nothing to do with the US slowdown; growth is flagging because both the stimulus and inventory effects are fading.

And this isn’t after-the-fact rationalization; like many others, I saw this coming.

I guess what bothers me about Ezra’s remarks here is that they perpetuate the all-too-common tendency to frame everything in terms of financial market confidence. That is not the issue right now.

I'm not sure Krugman and I are as far apart as he thinks. Financial market confidence is certainly not the issue. Business confidence is. They've got a lot of money and a lot of hiring capacity, and they're not putting the two together. The reason, as Krugman says, is largely the absence of demand. So up till here, we're in agreement.

But a lot of the economists, business types and policymakers I've talked to have pinned the European debt crisis as a moment when whatever confidence various players had in the recovery collapsed. It was a whole new world moment: We hadn't just gone through one horrible, unlikely event and now we were recovering, and people should plan for a slow return to normal. The debt crisis was emphasized that there are a lot of risks out there and the world economy is vulnerable to them. The danger for businesses looking to invest wasn't just that demand could come back slowly but that everything could totally fall apart.

My guess is Krugman would dismiss that as rationalization. If government had responded to the crisis correctly and the economy was gaining more jobs and people were buying more things, businesses would be investing to meet the demand. And I agree with that. But in the absence of the correct government response, there's certainly a range of possible ways the private sector could've reacted, and I think it's plausible that their extreme caution is partly a response to seeing the world economy as vulnerable to all sorts of unpredictable shocks, which is leading them to wait for much more solid evidence of recovery than might otherwise be the case.

On the other hand, Krugman has a Nobel, and I, well, don't.

By Ezra Klein  | October 8, 2010; 2:02 PM ET
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nah, it's just that there is no demand; nobody wants to buy anything but food now.

Posted by: rjewett | October 8, 2010 2:10 PM | Report abuse

Either way it's good to explicitly discuss these issues. Not all differences are Republicans vs. Democrats.

(Hey, I realized I only posted negative comments.)

Posted by: Hopeful9 | October 8, 2010 2:44 PM | Report abuse

To get out of this crisis the United States will need to change the political economy. In short, we need sovereign public credit.

The state must set up public banks and grant credit to producers. This instead of our private/public model with private credit that lends to the housing sector.

Posted by: jjtwilliams | October 8, 2010 2:58 PM | Report abuse

Truth isn't rationed. It is seemingly true that domestic demand in the US is a pitiful weakling. It also seems true (I was certainly surprised by the euro scene events) eroded whatever hopeful confidence was growing domestically.

The housing foreclosure/fraud crisis is yet another 'black swan' event that will leave a lasting bitter taste for some unknown period of time.

Basically, Krugman is right: demand rules.
But major non-demand events can crash whatever confidence is needed to turn hoped-for demand increases into sit-on-your-money reactions.

The rapid increase in stock buy-backs is an indication that big money corps are not confident that demand or non-demand risks are worth actually doing something positive. So they are buying back their stock since that supports their stock price and they have the cash to do it (instead of investing).

Posted by: JimPortlandOR | October 8, 2010 3:02 PM | Report abuse

You got this one wrong Ezra. Just because some economists say it doesn't make it true.

Personally, I don't see what's so difficult to understand about our situation. It's not difficult to understand that people put out of work buy less than that same group when they were employed, or that businesses selling to a population that's less employed makes less stuff with less labor because unemployed people demand less stuff even if they need it. Likewise businesses can't make stuff free or for such low prices that they lose money.

We need a population that boosts demand. The way to get that is to boost demand collectively through government. Absent appropriate demand, we're going nowhere. So far the European crises have been, at most, a hiccup to the American economy.

I don't doubt that Greece and Ireland produced some scare for some people, but these were Bear Stearns, Lehman Brothers type cases abroad (i.e. financial disasters for banks) that could lead to uncertainty for banks and their assets which affects lending. Falloff in lending can prevent businesses from producing what is in demand. However, this doesn't really address the uncertainty and unwillingness to spend for most consumers who can't get work to produce things and provide services because there is no demand for their marginal output.

Posted by: bcbulger | October 8, 2010 3:08 PM | Report abuse

"They've got a lot of money and a lot of hiring capacity, and they're not putting the two together."

As a non-economist, may I ask a stupid question?. Could part of the explanation for the above statement involve (in part) political calculation? They're not hiring because they want it to look bad for the job-creating efforts of this administration, in the hope they can get a more business-friendly Congress in place. That is to say, they're waiting to hire until they can get some Republicans in power. It can't explain everything, but it might be a part of the calculus. Just wondering why no one asks this very nontheoretical question.

Posted by: JJenkins2 | October 8, 2010 3:16 PM | Report abuse

"On the other hand, Krugman has a Nobel, and I, well, don't."

As Obama's Nobel proves, there are Nobels and there are Nobels.

Posted by: bgmma50 | October 8, 2010 3:20 PM | Report abuse

You're both right, imho. Stimulus artificially goosed the economy, but very few people were fooled into thinking we had actually solved the underlying problems, so fear has remained high. The European debt crisis reminded them that their fear was very well founded.

Posted by: bgmma50 | October 8, 2010 3:24 PM | Report abuse

Don't discount yourself just because he has a Nobel and you don't. It's the quality of his argument vs yours that matters. You both make cogent arguments that make sense on their merits. I tend to lean toward Krugman in this case, but as another reader sead, this is an important topic to discuss. The debate is always framed between Supply-siders and Keynesians; which dismisses the fact that there can be internal debate between the camps.

It tends to bug the crap out of me, too, because I believe the debate should be about different versions of Keynesianism; seeing that 30 years of voodoo economics seem to have produced the expected voodoo results... but I digress..

Krugman's pounding of the "Confidence Farie" meme has won me over to his side, which means I take any mention of "market confidence" with a huge grain of salt. But, your agrument is much more nuanced than your average confidence farie trope, so... keep discussing. I hope Krugman responds later today.

Posted by: Sayne | October 8, 2010 3:35 PM | Report abuse

Nice run-on sentence I have there in my middle paragraph.

Sigh... Edit post button?

Posted by: Sayne | October 8, 2010 3:37 PM | Report abuse

From Krugman's point of view it's about how the chess pieces move in the game and not about how the pieces feel.

Ezra makes good points from a non-economist point of view. sounds reasonable to me. But based on past experience...Krugman probably is correct from the policy stand point.

Posted by: fausto412 | October 8, 2010 3:51 PM | Report abuse

"Could part of the explanation for the above statement involve (in part) political calculation?"

Are business leaders all getting together and deciding not to hire? No, they aren't cartoon villians.

Even incremental hiring or firing by Wal-Mart is a drop in the bucket in terms of the labor market. A given firm's decision to hire or fire makes no difference to the unemployment rate. There's no payoff to not hiring for political reasons.

An attempt to collude here would result in tons of cheating.

Posted by: justin84 | October 8, 2010 3:52 PM | Report abuse

"growth is flagging because both the stimulus and inventory effects are fading."

Krugman is wrong on the stimulus. 2010Q2 growth is estimated to have seen a 1.7% boost from stimulus, only a mild slowdown since 2010Q1 (2.0% that quarter). Yet GDP growth decelerated by 2.0% of GDP.

Of the 3.0% GDP growth over the past 4 quarters, roughly 2.0% of it has been inventory restocking.

Demand (final sales) never really bounced, even with stimulus. It was the same lousy pace as the 2001 "recession". Not *aside* from stimulus - *with* stimulus, demand was still weak.

Posted by: justin84 | October 8, 2010 3:59 PM | Report abuse

justin84: I don't think collusion is a necessary precondition for my theory to obtain. It's more of a zeitgeist thing. I think we have a lot of anecdotal evidence that employers are squeezing more (sometimes unrealistic) productivity out of the workers they have left. I personally have witnessed that with a lot of young people I know (some who are members of my family) who are putting in tons of overtime, working 60-70 hour weeks, and getting paid swell overtime for it.

Posted by: JJenkins2 | October 8, 2010 4:16 PM | Report abuse

I think Krugman's more right than you, Ezra, but on the other hand, YOUR BLOG IS READ BY PAUL FREAKIN KRUGMAN!

Posted by: Jasper999 | October 8, 2010 5:05 PM | Report abuse

"But in the absence of the correct government response"

The crucial line.

Krugman is concerned that this be an excuse to continue with the absence of a correct government response.

Posted by: RichardHSerlin | October 8, 2010 5:05 PM | Report abuse

Confidence is a euphemism for "propensity to spend".

Business spends when business has demand.

The financial crisis collapsed business demand that was based on unsustainable levels of consumer credit- Housing and auto among others. Demand cannot return from unsustainable zombies. Demand must come from a different source. The only source big enough to have an effect is the BigG.

Posted by: bakho | October 8, 2010 5:42 PM | Report abuse

You are right. The fact that CDS exposure of US Banks was a complete unknown made a potential Greek default very scary? What commercial banks or investment banks would be left holding the risk when the music stopped?

Posted by: _Sam | October 8, 2010 7:37 PM | Report abuse

"justin84: I don't think collusion is a necessary precondition for my theory to obtain. It's more of a zeitgeist thing. I think we have a lot of anecdotal evidence that employers are squeezing more (sometimes unrealistic) productivity out of the workers they have left. I personally have witnessed that with a lot of young people I know (some who are members of my family) who are putting in tons of overtime, working 60-70 hour weeks, and getting paid swell overtime for it."

I'm sure employers are trying to squeeze as much productivity out of workers as possible, but the motivation is dollars, not politics.

I doubt there are any businesses out there that have good reason to expand but are waiting because they believe they might have some tiny impact on the election.

No single employer could make any impact by itself, so collusion would be necessary if the motivation were political. Collusion of course is difficult to enforce (never mind the potential political rewards from being the firm that outed the collusion to the authorities).

Posted by: justin84 | October 8, 2010 8:01 PM | Report abuse

I did think indeed Europe messed things for us. Ezra is right here.

True, PK has Nobel. But we all know it is for a specific area of Economics research (already a dismal science if at all one is ready to accept it as a Science, which most are not) where probability of PK being right is high. So this means the field is open equally to anyone who is ready to put forward a rational argument.

Lack of Demand is true. But to the extent Business Investment based on some confidence would have created jobs and to the extent those jobs would have been critical to push total demand over a threshold; we indeed missed an opportunity of experiencing U shaped recovery instead of the current L shaped recovery.

Posted by: umesh409 | October 8, 2010 8:27 PM | Report abuse

The Euro financial crisis almost certainly has had consequences for trade flows with the decline in the value of the Euro relative to the USD and Canadian Dollar (e.g. as the U.S.'s largest trading partner Canada's economic performance has consequences for the U.S. economy).

I haven't quantified the impact of the dollar appreciation, but I'd guess it's probably shaved some fraction of a percent off of U.S. growth rates over the last couple quarters. Not a major factor, but a factor.

As far as business confidence goes, economic fundamentals strike me as more important than attitudes. If business spending and hiring was more robust based on the expectation of a recovery it might help in the short-run, but it likely wouldn't be sufficient to generate a robust self-sustaining recovery on its own. There's still the issue of consumer debt burdens and constrained demand.

Posted by: JPRS | October 8, 2010 8:33 PM | Report abuse

I've lost faith in all economists. It certainly looked like everything was turning around until Europe made markets unstable. Krugman absolutely hates being questioned about anything. I appreciate his contribution, but none of the economists are absolutely, 100% correct about anything. Very painful, plus confusing to watch all of their theories colliding the past 20 months. I prefer DeLong's temperament. Of course, as a liberal, love reading Bartlett admit Reagan's economic team was wrong! Finally, math is acknowledged.

Posted by: carolerae48 | October 9, 2010 12:34 AM | Report abuse

You ended your response to Krugman on a graceful note, Ezra, so there's that.

But previously you displayed mushy thinking, extremely rare for you.

First you stated the obvious, which is that U.S. business people are not hiring, and that "the reason, as Krugman says, is largely the absence of demand." (Weasel-word alert: "largely.")

Absence of demand, you said, not absence of confidence. Why didn't you stop there and agree with Krugman that you erred by introducing Greece into the situation? Instead, you meander, asserting business people could have reacted to "the absence of the correct government response" – which is to say, the creation of sufficient demand for a solid recovery – in "a range of possible ways." You're debating yourself. Having agreed with Krugman that the absence of demand is causing the lack of private-sector hiring, you then suggest there might have been other responses to the absence of demand. Huh?

What would those have been? The question answers itself – none, no other responses. For authority, I refer you to . . . you ("The reason [for the lack of hiring] is largely the absence of demand."

So having made cause-and-effect clear, why do you go on to assert "it's plausible" the lack of hiring is "partly a response to seeing the world economy as vulnerable"? That suggests that U.S. business people are allowing U.S. demand to go unfulfilled because they fear the world economy is weak. Where's the evidence for that?

Posted by: fredbrack | October 9, 2010 3:57 AM | Report abuse

"there's certainly a range of possible ways the private sector could've reacted, and I think it's plausible that their extreme caution is partly a response to seeing the world economy as vulnerable to all sorts of unpredictable shocks"

So you're saying that if businesses had customers wanting to buy their products and services, they'd hold back and not want to sell them because seeing what happened in Greece and elsewhere made them nervous.

It's really not that complicated, and the above is just silly. If businesses were "nervous" about whether there is demand or not, the presence of demand would pretty much cure that.

The right wingers have gotten a lot of people convinced that things like what happened in Greece are a reason for pulling back and being afraid, but those people are pundits like you, not businesses. If businesses see eager customers, no conservative myths will stop them trying to sell to them.

I really don't see it so much as someone who has a Nobel Prize versus someone who doesn't. I see it more as the fact that Paul Krugman deals with the real world, whereas most people in DC engage mostly with fantasy dreamed up by conservatives.

Posted by: BillEPilgrim | October 9, 2010 8:07 AM | Report abuse

The crisis in confidence that you cite, Ezra, did not start with the Greek debt crisis in May; it started a few weeks earlier in April when that unpronounceable volcano in Iceland blew its top.

If you recall, within days of the eruption, grounded air traffic throughout northern Europe seized up much of the economy there, which made major European nations suddently realize just how interconnected and vulnerable they were to all the other minor nations in Europe. THAT's when the economies of the PIIGS became a critical issue.

The northern Europeans are afraid that they just might need the southern European economies to be sound when that Iceland volcano's twin, Katla, erupts even more powerfully in the next few months which history suggests always happens.

Posted by: Jimdotz | October 9, 2010 8:11 AM | Report abuse


You are usually a very clear and concise analyst. In this case though, you are being influenced by political propaganda.

I'm a small business owner. I make things and sell them. The only ting that influences how and where I do invest is whether I think I can sell the stuff I make or not. In my case, I look at my customers and local market, but I am sure this is where every entrepreneur first focuses before committing any money to "investing".

This means that I would first try to do more with the people and equipment I now have, before I ever think about hiring any more people or "investing" in any more equipment.... I'm not gong to just go broke on some "confidence" that everything will be OK.... I need proof first that what I think is correct....

Like most businessmen and women, I probably have more people than I need still working because a) they are good people and they have families and need a job, b) I can still afford them even as my profits are disappearing, c) I'm hopping business pick up soon and I will need them. Oh, and I could make many more things with the equipment I already have...

So, what happens in Europe is the last thing I think about when deciding to let somebody go or hire a new person. If what I'm trying to sell is not moving, I'm not making any more of it....

I don't need to hear any bs about how much I would "invest" to create jobs if my taxes were any lower, nor if the "private" sector vs government where the ones creating jobs or spending money... I need people who want to buy my stuff and I don't care where their money or motivation comes from.

Posted by: casin | October 9, 2010 11:24 AM | Report abuse

--*I'm not sure Krugman and I are as far apart as he thinks.*--

Well, send him some flowers and a little note that reassures him that you'll keep pushing the same propaganda that he is, but that it's hard without Journolist to keep it all as coordinated as you used to.

Posted by: msoja | October 10, 2010 12:01 AM | Report abuse

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