On Friday evening February 25th Paul Krugman, president of the Eastern Economic Association, gave an address to a several hundred economists who were attending the organization’s annual conference in New York City. Krugman’s talk, “The profession and the crisis,” was quintessential Krugmanesque–well organized, witty, occasionally sarcastic, and full of errors, especially during the Q&A. However, it was heartening to listen to a Nobel Laureate in Economics admit, “Economists blew it,” as far as recognizing the housing bubble and the severity of the bust.
Of course, establishment economists “blew it”! They have been so focused on the minutiae of the economy, they have failed to see the “big picture”—how interventionism distorts the economy and how free markets create prosperity and promote peace and freedom.
Not surprisingly, in his presidential address Krugman did not acknowledge the Austrian economists and others who did warn about the housing bubble, except to mention Joseph Schumpeter as one economist who advocated “liquidation” of unprofitable investments during the 1930s.
Professor Krugman makes a habit of ignoring the efficacy of the Austrian School of Economics, even though it is the only school of thought that has a coherent—and correct– explanation of financial bubbles. Before his presentation Krugman should have read Walter Block’s essay documenting the dozens of analysts who predicted that the Federal Reserve and other federal government policies were inflating the housing market and that an inevitable bust would follow. His talk would have been more “scholarly”–and intellectually honest.
Professor Krugman, however, is dismissive of any criticism of central banking causing one to wonder if he is that ignorant of more than two hundred years of economic thought about the nature of business cycles, which is ironic since he recommended that economists become familiar with the history of economic thought. On the other hand, could Krugman be on the payroll of the Federal Reserve? Does that explain why he resorted to smearing any critic of easy money as a racist, like the over-the-top rant he conducted in one of his recent columns about economist and historian Tom DiLorenzo? Such a tactic is unbecoming of an economics professor of his stature, especially one who was awarded the highest honor in his profession, a Noble Prize.
College professors are supposed to have “open minds” and seek more knowledge about the world they live in. Krugman and his acolytes, however, have closed minds when it comes to explaining the financial crisis and offering solutions to the unfolding stagflation. Instead, they worship blindly at the altar of Keynesian macroeconomics, revealing an obsession with government spending as a cure all for every ailment in the economy, and wasting their time concocting “models” of the economy so they can run their regressions.
(Professor Krugman stated he is on the admissions committee at MIT, presumably for the Ph.D. Economics program, and said students are typically rejected if they do not score at least in the 99th percentile on the math portion of the Graduate Record Exams. I take his remark to mean that the economics profession has become too “mathematical” and that it needs to welcome more students who are not math whizzes.)
Professor Krugman outlined four reasons why the economics profession is in a “Dark Age of Macroeconomics.” He discussed at great length the failure of economists before and during the financial crisis.
The four failures include:
- The inability of economists to predict the housing bubble even though there were warning signs.
- A complacency by economists that all was relatively well in the economy before the crash.
- The failure of economists to learn from history. In fact, Krugman essentially scolded economists for not “knowing history.” (A gross understatement if there was ever one. MS)
- The inability of economists who have been unable to separate their political positions from professional judgments. (Yet Krugman’s unequivocal support for universal health care is not an example of a “value free technician” on the merits of socialized medicine. MS)
In short, Krugman concluded the “economics profession has suffered a setback” because of these four failures. Well, mainstream economists deserve to be excoriated, from “free market” Arthur Laffer who dismissed Peter Schiff’s prediction that the economy was headed for a steep recession well before the warning signs were visible to everyone to Ben Bernanke who said as late as 2007 that there is no housing bubble.
During the Q&A I asked Professor Krugman is it not true that the 1920-21 depression was an example of an unimpeded liquidation process that was painful but led to a relatively quick recovery in spite of Secretary of Commerce Hoover trying to get the (Harding) administration to spend to get us out of the depression?
Krugman’s answer was vintage Krugman. He said we do not have good data for this period. (We apparently need data to run those wonderful regressions, otherwise how can we possible know what really happened? MS). Besides, the depression occurred right after World War I, Krugman asserted; therefore, it is a bad example of the efficacy of the liquidationist recommendation. Apparently, the newly created Fed’s inflating had nothing to do with the malinvestments during this period. Paul Krugman read Tom Woods’ Meltdown.
I very much enjoy listening to Professor Krugman because he is an engaging speaker, never boring, and he epitomizes what is wrong with the economics profession. The members of the “club” think they know a lot about the world we live in, but they have failed miserably to educate the public about the basic principles of the discipline, especially how government intervention creates massive distortions in the economy and is a threat to our liberties.