NYT Book Review of Krugman’s New Book Gets it Mostly Wrong

June 17th, 2012 at 12:41 pm

The NYT’s Book Review today includes a review of Paul K’s new book and while the reviewer nicely summarizes the macroeconomics of the book and our historical moment–the terribly damaging dominance of austerity both here and in Europe–his critiques struck me as wrongheaded.

Complaining about Paul’s exclusive focus on demand, the reviewer conflates the structural with the cyclical:

The rise in unemployment may be largely the result of inadequate demand, but that does not mean there has been no contribution from structural changes like the substitution of cheap foreign workers and innovative technology for some jobs in rich countries.

This is just plain wrong.  Technology and trade are ongoing, structural forces that have been influencing jobs and wages and much else for decades.  Unless the reviewer is asserting that tech and trade somehow accelerated sharply in the recession, they don’t explain the change in unemployment.  And even in expansions, this type of hand-waving falls short.  In the Clinton boom, trade and tech were huge factors, yet the job market achieved full employment for the first time in decades.   Unemployment fell below 4% for a few months in 2000.  Clearly, there was a bubble in the mix—when hasn’t there been in recent years?—but the point is that strong demand offset the trade and tech impacts.  And as Paul relentlessly stresses, it’s weak demand that’s to blame today.

Next problem:

The austerians may be excessively fearful of so-called “bond vigilantes,” but that does not mean there is no need to worry about what investors think about the health of a government’s finances.

Krugman has been consistently empirical on this point.  His argument is not that investors’ sentiments don’t matter.  It’s that they’re embedded in prices and can be followed on an hourly basis.  Those numbers—the bond yields on sovereign debt—show that markets judge US debt to be safe and Spanish and Greek debt to be risky.  If you want to criticize Krugman on this count, you need to explain what’s wrong with the markets themselves—why they’re giving the wrong signals.  Otherwise, you’re into phantom-menace land, just across the way from where the confidence fairy hangs out.

He next takes a swipe at Krugman for not embacing a  Bowles-Simpson style budget plan, suggesting Paul would be taken more seriously if he had a plan not just for hitting the accelerator now by for applying the brakes later.

Meh. First, that “accelerator now, brake later” frame doesn’t work–it doesn’t make the politics any easier.  Believe me, we’ve tried it, and no one buys it, even though it’s correct–it just comes out muddled (sorry, Peter).

Second, summarizing a more detailed part of his book, Paul’s argument here is perfectly and fiscally sound: get out of the damn recession, apply more progressive tax rates like those in the Clinton years, and there’s no reason we can’t stabilize the near term debt (in the longer term, it’s all about getting health care costs under control, something Paul’s also consistently stressed).

If you want to criticize Paul’s book–and Joe Stiglitz’s excellent new book on inequality as well–it’s that they make the solutions sound easier than they are.  And I think I understand this.  These Nobelists see the solutions so very clearly that it looks easy to them.  Their logic is, in fact, air-tight and our natural experiments with austerity are turning out exactly the way they (and I, and others) predicted.  Remember, in economics, go with the guys and gals whose models best explain what’s really happening, not what you wish was happening, not what you think should be happening, but what’s actually in the numbers.

So I really wouldn’t waste time trying to prove that Paul and Joe et al are wrong about austerity, bond vigilantes, Bowles-Simpson, confidence fairies, and “very serious people.”  Instead, I’d urge them–P&J–to think more about real politics and how to get out of this mess given the stark realities of political dysfunction.

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15 comments in reply to "NYT Book Review of Krugman’s New Book Gets it Mostly Wrong"

  1. Bob Wyman says:

    We must fight for what is right even if it isn’t likely. Even if “accelerator now, brake later” won’t fly politically today, there is hope that, in time, we’ll be able to educate people to the wisdom of the policy and thus find that the next time (because there *will* be a next time), we’ll be able to do the right thing.

    There is, I find, too much talk of “if” we need stimulus or austerity or whatever and not enough talk of “when” we need these things. The non-economists who hear the daily debates end up being convinced that either stimulus or austerity is “right” when what they should be learning is that sometimes one is good and sometimes the other is good. And, they should be taught some basic rules for knowing when each is right. Given the nature of today’s debate, it isn’t surprising that some people end up seeing tax cuts as the solution to every problem at all times while others see spending as the universal solution. We haven’t given them a model for how things should work and thus empowered them to distinguish the needs of various times.

    Ideally, we’d have people saying this year: “The economy is in a slump, why aren’t we spending and borrowing more?” Then, in some future year, they should demand: “The economy has recovered! Why don’t we now have austerity so we can pay off the debt and prepare for the next downturn?” The political system will never accept counter-cyclical policies if participants aren’t given a clear, simple model to work with — a model within which to frame their policy decisions and one that can tell them what is right in each time.

    We need to spend less time talking about “if” various policies are right and spend more time talking about “when” they are right.

  2. Robert Damon says:

    In your last sentence, you write “Instead, I’d urge them–P&J–to think more about real politics and how to get out of this mess given the stark realities of political dysfunction.” As I recall, early in the Obama administration, when it became clear that the proposed stimulus was probably too small, Krugman pointed this out and predicted what would happen economically (inadequate response) and politically (opponents would conclude that stimulus doesn’t work, etc.) and was right about both the economics and the politics. So it seems to me that he was thinking more clearly about real politics at that time than most of those in the administration, or probably most journalists.
    In any case, PK is primarily an economist, and I would expect from him (and others) correct analyses of the problem, and reasonable (from an economic perspective) suggestions as to solutions. Perhaps others should be expected to work out the politics if/when we come to an agreement on what is needed.
    Otherwise, FWIW, my reaction to the Times book review was similar to yours.

    • hapa says:

      much agree w/ robert damon. would suggest that labor-sympathetic economic nobelists have a SPECIAL (due to credentials) responsibility to map out best practices before working on compromises.

  3. marc sobel says:

    Your comments are correct but what seemed to be most on the reviewers mind was how Shrill and Polemic the Shrill One is. Apparently if you say someone is wrong (usually with supporting data) and especially if you say that based on their previous positions or experience, they know they are wrong, it is called Bashing.

    I always thought Bashing was when you said someone was a liar, not when you say a particular set of statements by them is a lie. Also bashing often involves fruit and tomatoes.

    Of course by being shrill, “Krugman seems to have given up on directly influencing policy makers and mainstream economists, opting instead to appeal over their heads to “an informed public.”” Yes, if he were nicer we wouldn’t be in this depression.

  4. Nick Batzdorf says:

    A book review is not supposed to be a forum for the reviewer’s opinions, show off how much he knows, or anything else along those lines. It’s supposed to give the reader enough information to know whether it’s worth opening his wallet to read the book.

    That is all.

    • Bearpaw says:

      I think there’s a fine balance. If the review is knowledgable the subject matter, I think it’s reasonable to touch on any areas of disagreement. The review in this case — as Mr. Berstein points out — seems to be wrong on some counts, and making some illogical objections, but there’s nothing wrong per se with the angle of criticism. If I’m interested in a non-fiction book, it’s helpful to get some perspective on whether the information being presented is correct, as long as I remember that the reviewer isn’t necessarily right about what information they think is wrong.

      • fausto412 says:

        I disagree with Bearpaw. Think about this…if the reviewer is an idiot and does a bad review that could keep the general public away from the book when the books logic and facts are sound and solid.

        I’ve been reading everything Krugman since 2008 and I can see the flaws in that review. The reviewer himself is a Very Serious Person…he writes about the VSP view as if it has been correct thoughtout this crisis…and if the mainstream VSP view is on the same level of the view that a Krugman, Berstein, Delong, Stiglitz, Peter Diamond…and other big name economists who understand what is happening.

        “To this Moderately Serious Reviewer, Krugman’s habit of bashing anyone who does not share his conclusions is not merely stylistically irritating; it is flawed in substance.”
        This is one of the most irritating things to me. Somehow calling bs on bs is now the wrong thing to do. Krugman addresses this many times over the last 4 years. Notice too the reviewer used the faux VSP title MSR?

        • Nick Batzdorf says:

          The review is supposed to be about the book, not the reviewer. There’s always a subjective element, but the idea is to report facts as much as possible, with opinions qualified as opinions.

          (I’ve been a magazine editor and writer about music and audio technology for years, and readers have always appreciated that approach to reviews.)

  5. Understudy says:

    “His argument is not that investors’ sentiments don’t matter. It’s that they’re embedded in prices and can be followed on an hourly basis.”

    Sure, except in the US, the Fed is buying bonds hand over first, while the ECB is constrained in doing that. So, the US can fund a deficit greater than 9% of GDP, while Italy with 3% is “on the edge”.

    • Ted Kaminski says:

      Italy’s problem is that it does not have its own sovereign currency to protect from currency speculators. The US sells treasury notes at around 1.5% because the bond “vigilantes?” see the US as a safe place to park savings. The price vigilantes will pay is their expectation of future inflation.

      At 1.5% the expectation of inflation ain’t real high.

  6. EC says:

    Technology and trade tends over several decades contributed significantly to retarding consumer income growth; credit compensated until the financial crisis knocked it out as a feed to demand, whereupon the building, up to that point latent, demand failure rapidly asserted itself.

    This isn t, consequently, just Keynes’s liquidity crisis: fiscal stimulus can help, but if it’s not augmented by some approach to the structural problems of tech and trade and income inequality, it will fall short of restoring a post-war pre-Reagan-like economy. Krugman’s Keynesianism is naive and short sighted.

  7. EC says:

    END THIS DEPRESSION NOW! was also also reviewed, BTW, alongside Timothy Noah’s GREAT DIVERGENCE, by Reuters’ blogger Felix Salmon, earlier in the weekly NY Times:

  8. Jonathan says:

    The best book reviews (reviews of fiction excluded) are actually essays on the subject of the book, putting the book’s contribution into context while informing the reader on the general subject.
    This type of review is hard to find. It suffers from two problems: 1) by nature it will be long, longer than most outlets will publish, and 2) the writer needs to be knowledgeable about the subject in his own right. Ideally, the reviewer is someone who could have written the book himself.
    My best source for this type of review is the New York Review of Books. That’s why I value the NYRB more highly than almost all of the many things I read.

  9. Misaki says:

    >Complaining about Paul’s exclusive focus on demand, the reviewer conflates the structural with the cyclical:

    Was not the housing bubble the result of the government’s (or the Fed’s) desire to, well… increase house prices? And encourage borrowing to spend on consumption and so on. (As opposed to say, borrowing for leverage in investing in financial markets.)

    If not for whatever happened during that time period, maybe inflation would have been “structurally” higher from 2001~2008.

    Job creation without higher government spending, inflation, or trade barriers: