Asymmetrical Information

I thought you detested Krugman and all he stands for?

Krugman on politics - putrid.

Krugman on economics - worthwhile.

Dear Jane

I'll assume your description of Paul Krugman's column as excellent was meant to be sarcastic. While I understand Mr. Krugman is an eminent economist, reading Krugman's columns is an exercise in finding the holes in the arguments of liberals. Usually those holes are large enough to steer a battleship through.

Three years ago was pre-9/11, a totally different world. The fact that the U.S. economy and financial markets have sustained themselves as well as they have is a testament to the strength and resiliency of the economy.

I submit our deficits will shrink as the economy grows and the tax revenue base expands, if the Congress can stop wasteful spending.

To restore a legitimate term that the Democrats have mangled beyond recognition, the U.S. is making an "investment" in Iraq that will pay high yielding dividends in the future in the form of U.S. credibility, political stability, not to mention 20 million Iraqi's that have been liberated from the brutal regime of Saddam. This can also lead to the democratization of Iran once its people see democracy in action so close to their border.

The only ones that are worried are those that see the federal government spending over $2 trillion a year and perceive that is not enough.

Jack S. Raia
North Bellmore, NY

Jane,

I'd be interested in seeing your opinion of this response piece over at National Review:
http://nationalreview.com/nrof_luskin/truthsquad200310150951.asp

The article claims that Krugman is misusing economic indicators and misquoting the work of others.

Sorta what Jack said. I remember people predicting doom in the 1980's with Reagan's deficits. Ditto after the first Gulf war. What happened to those deficits?

And if anybody had told me in 1987 that the Berlin wall would be gone in 3 years, I would have laughed. If the same someone had said that the Soviet Union would peacefully dissolve itself in 5 years, I would have thought that person totally insane.

I don't

Sorta what Jack said. I remember people predicting doom in the 1980's with Reagan's deficits. Ditto after the first Gulf war. What happened to those deficits?

And if anybody had told me in 1987 that the Berlin wall would be gone in 3 years, I would have laughed. If the same someone had said that the Soviet Union would peacefully dissolve itself in 5 years, I would have thought that person totally insane.

As Eddie points out, Luskin really tore Krugman a new one over this column, including a damning quote from the guy who designed the Damocles test:

"Krugman can be somewhat twisted and bitter on occasion. This analytic tool was not intended to be applied to developed countries. Damocles gave him an in to write a piece he wanted to write. He's making a career out of this kind of thing."

You have to be kidding.

Krugman has only one argument here. He says the current fiscal year deficit is terrible and that we are doomed to continue having terrible deficits every year into the future (unless taxes are raised). These cumulative deficits will ruin the economy.

That's it. Not exactly "outstanding" work in my opinion. There is a huge body of economic study and past experience which disagrees with both his characterization of this deficit and the long term outlook. He doesn't address any of it.

If this constitutes "outstanding" analysis, I guess we better give Chicken Little a lot more respect as well.

Do I agree with the conclusion that we are at all likely to have a disastrous crash where the US government is unable to borrow? No. I think that the last para is somewhat weak, and perhaps I should have said so.

I also agree that Damocles isn't a good model for the US economy.

But the column is a very good look at what I consider to be a major macroeconomic weakness of the American economy: our propensity to borrow from abroad to finance our current consumption, with no clear idea where the growth is going to come from that will allow us to pay back that money without pinching. Unless we have unrealistic growth, Krugman is right: the current account must eventually correct, which means our currency must fall.

As a journalist, I'm inclined to write off the Damocles reference to the need for a "peg" -- the current news item that editors want you to link to whatever you were planning on writing about anyway, so that it seems timely.

Ultimately I think Krugman's too alarmist on likely outcomes for the economy. But it's still a very good column for people who may not have been paying attention to our billowing current-account deficit.

I don't like Krugman when he makes his partisan dislike of Bush the center of his columns, or makes disingenuous economic arguments to support his legitimate, but non-economic, policy preferences. But I love him as a writer about economics, which I've said many times.

Krugman offers his readers no basis for believing his assertion that the US "now" (by which I assume he means "on W's watch") acquired a "structural" budget gap that can't be closed by economic growth. He may be correct in that assertion, but he doesn't back it up with anything other than a computer model that he (to his credit) admits does not reliably apply. His column may be summed up thus: "You may not know it, gentle reader, but trust me, this country is fast descending into a budget hell the likes of which it has never experienced, and if W weren't the feckless, irresponsible pretender I've always told you he is, he would propose either drastic cuts in popular programs or massive tax increases in an election year (wink)." You may agree that a budget hell is indeed just around the corner, Jane, but you'd have done a far better job than Krugman did of explaining why that's so. Did you praise his column as "outstanding" merely because it wasn't demonstrably false?

This is sort of a silly line:

Third world countries typically suffer from institutional weaknesses. They have poor corporate governance: you can't trust business accounting, and insiders often enrich themselves at stockholders' expense

Pardon me, but all countries have those problems. They aren't "third world problems" that today are found in the United States as well, so uh-oh-we-better-watch-out. They're inherent flaws in captalism.

And this line:

would you have believed, three years ago, that the U.S. budget would plunge so quickly from a record surplus to a record deficit? And would you have believed that, confronted with that plunge, our leaders would offer excuses rather than solutions?

It was obvious to me (as a dot-com employee), and to no shortage of economists (though perhaps not to Krugman) that the 1990s economy would eventually crash and burn. When that happened, government revenue would drop and the surplus would vanish. It was only a matter of time. Add in the fact that, even under Clinton, government spending continued to climb, and a return to deficits was inevitable.

As for making excuses for the deficit -- given that 100% of the past "leadership" of America during times of deficit spending has made excuses for it, Krugman is either being dishonest or extraordinarily ignorant when he acts "surprised" that Bush does it too.

“"Krugman can be somewhat twisted and bitter on occasion. This analytic tool was not intended to be applied to developed countries. Damocles gave him an in to write a piece he wanted to write. He's making a career out of this kind of thing."

Strong words from Jones, who told me at the same time that Krugman is not wrong, in principle, to be concerned about the U.S.'s "rapid accumulation of debt," and that indeed the U.S. scores poorly by Damocles's standards — as had been reported in The Economist. But he firmly told me, "to apply this to the U.S. is not that relevant."”

http://nationalreview.com/nrof_luskin/truthsquad200310150951.asp

Why don’t I take Paul Krugman seriously? I have the ultimate evidence to offer you: he adamantly supports the Democrat Party as our economic savior. This does not make the slightest sense. Does any rational person truly believe that the Democrats would lower government spending? Of course not!

Krugman is an immature man who wishes to curry favor with the liberal establishment. In short, he has become an intellectual slut. He wants to make damn sure that he continues to be the darling of the wine and brie cheese social set.

Krugman is supposed to be a supergenius at work (just like Wile E. Coyote) and he fails to notice that, um, the United States is not Argentina! Surely he knows there was more at issue in Argentina than just the budget deficit. We aren't Indonesia, either. Same deal, except for balance of trade.

Even Krugman admits that his supergenius economist powers could not predict the problems of those 2 nations based on those 2 indices. So if you couldn't predict it there, then why try to predict it here? Oh, right, he caveated it. It is just a sort of guilt by association argument then.

Please, if you want to make an argument that the current account situation is not healthy, then make that argument. Don't try to say Enron means we are all doomed!!!!

Well, it's true that Krugman didn't provide a cite, and it would have been helpful if he had. But as it happens, I've read the reports from the CBO from which he is presumably citing, and they do show a structural deficit on the order of $100-200 billion.

I would be interested to know what is "outstanding" about this column, aside from the irrelevant self-promotional squib that leads it off. To my eye it does and says nothing that was not already better and done - and said in a more thorough and balanced fashion and with less distortion:

By Kevin Drum: http://www.calpundit.com/archives/002396.html

By the Economist: http://www.economist.com/displaystory.cfm?story_id=2102202

By the Nation: http://www.nationmultimedia.com/page.arcview.php3?id=85095

And lots of other places. In fact, the Damocles write-up put out by Lehman is vastly better - which is why Krugman has to distort it here, even to the point of misrepresenting it as an "economic model."

What, exactly, is the "outstanding" new contribution made by Paul Krugman to these considerations?

Until that is described to me, I'll have to class this AI post with this event: http://www.thesmokinggun.com/archive/cubfan1.html

With all due respect, I thought my column on the same topic was better:
http://www.techcentralstation.com/061903C.html

Yes, Arnold, your post was better. No go back and write something for Econlog so I can continue to slack off at work!

Arnold Kling's writings are indeed vastly better. But who ever said that the world is fair? Paul Krugman is an intellectual slut---and this is often what it takes to become well known.

Krugman's article about the dangers of high budget deficits leading to high current account deficits leading to currency crisis leading to our creditors refusing to finance us any further could have been- was often- written in the 1980's and early 1990's.

Of course, for our currency to be under pressure due, ultimately, to budget deficits, our major trading partners would have to be in better fiscal circumstances than we are- the dollar has to fall against SOMETHING, doesn't it?

Japan has been running a fiscal deficit much larger than the US' as a proportion of GDP, and France and Germany's deficits aren't much smaller than ours. Neither the Euro area or Japan is expected to have faster economic growth than the US this year or next.

So which currencies, exactly, is the dollar in danger of sliding against? The Chinese Yuan? Sure, it could happen, and the Chinese are becoming large creditors of the US. See the same articles written again and again about Japan in the 1980's.

Krugman is an ass, and a scare monger.

With due respect, I think you're right. ;-)But I still think Krugman's column is pretty good.

A structural deficit of $100 to $200 billion on an economy of roughly $10 trillion?

If debt to GDP is about 60%, and the economy grows at 2% to 3%, the national debt could remain at 60% of GDP while increasing by $120 to $180 billion per year.

Jane said
"our propensity to borrow from abroad to finance our current consumption, with no clear idea where the growth is going to come from that will allow us to pay back that money without pinching."

Well Jane, I entered the investment business in 1981 and I recall clearly the econo-pundits were wringing their hands then over the very same issue. So tell me exactly WHEN is this supposed to happen and why has it not happened yet?

"So which currencies, exactly, is the dollar in danger of sliding against? The Chinese Yuan? Sure, it could happen, and the Chinese are becoming large creditors of the US. See the same articles written again and again about Japan in the 1980's."

Yes, exactly. Isn't it pretty obvious that Damocles likely rings its alarm when one feeds it information for the US from the 1980's? It probably overpredicts. Isn't that the likely empirical reason that Damocles' authors specifically warn against using it on the US and other developed countries? Is there some excuse for Krugman not asking this question?

Arnold's column is better than Krugman's, but it doesn't deal with Damocles. That's not a criticism of Arnold's column, Damocles doesn't even seem to be all that impressive a predicting tool (its own authors point out that it omits the most important risks). What's striking about the Nation, Calpundit and Economist articles is that they all work from the same Lehman Brother press release and the same underlying Damocles write-up as the krugman column. Except that they ALL do it earlier and better than Krugman.

So, again, what's "outstanding?"

I do notice the implied demotion of the column to "pretty good." So what's even "pretty good" about a column that seemed to be a decent enough collection of news clippings (here, the Lehman Bros. Damocles release and write-up and the Nation and Economist articles) that hadn't made the mainstream media the way they perhaps should have but so heavily embroidered with allegations that Mr. Krugman was one of the lone voices of reason in a world full of lying conservatives?

Does that sound familiar?

Now, Mr Musil, you can hardly accuse me of being a shill for Paul Krugman.

I thought the column was well-written, and it's on a topic I've been thinking quite a lot about lately, as one of my current jobs is writing summary economic forecasts for the US. Again, I don't think we're going to have a meltdown, but I think our large structural deficits are something to worry about. Now, my prescribed solution isn't the same as Krugman's -- I want spending cut -- but that doesn't mean I don't agree with him on the problem.

I fail to see the significance of a $400 billion deficit in a $2 trillion dollar budget. Is there something I'm missing?

As for the *projected* surplus that used to 'exist', is there anyone who truly believes that Congress would have failed to find ways to spend it all plus some?

Jane,

I would never dream of accusing you of being a shill for Paul Krugman - although I do think you would do a better job filling out his column space at the Times than he does.

I also agree that these large deficits are to be watched. I think everybody does. That's not a Krugman contribution, which makes sense because Krugman hasn't contributed anything new to the discussion. Further, I am in agreement with the Damocles authors that it is an error to start an analysis of the US with Damocles (as opposed to the 3rd World countries for which it was designed) - where Arnold's effort, for example, is a good place to start.

Even Krugman's basic image of the US "imbalances" as being a Sword of Damocles - and its name is probably the only reason why he chose to write about Damocles in the first place - is as much a cartoon as any Roadrunner episode. The United States ran big trade deficits in the 1970's, 80's and 90's (Oops! can't ask about how Damocles treats those years - might show some cards!). A main consequence was cheap goods for US consumers and the development of Japan and much of Asia. Hundreds of millions of people have been helped, many lifted out of poverty. It is true that those countries have engaged in too much industrial policy, to the disadvantage of their own people and the world at large - but they have also been nudged along towards freer markets and more wealth. Where in Krugman's Damocles approach is there an appreciation of the huge benefits the US has experienced from its past deficits? The whole Damocles image is deliberately designed to deny such benefits exist. But that's not how Becker, Lazear & Murphy see things, at least with respect to the tax cuts: http://www.musil.blogspot.com/2003_10_12_musil_archive.html#106598586651460905

hi all,
i have enjoyed listening to the conversation. the intersting thing is that the majority of economists think the way that krugman does--in the absence of a policy shift such as regean did in the 80s, the us economy is in for some very "interesting" (chinese meaning) times.

i am impressed by the calm way that megan has patiently explained why krugman is on target in the speculation stakes (even if a little "shrill"), and the vitriol that has come back at the mere mention of his name! krugman doesn't even mention the social security issue, keeping it in terms of a balance of trade-capital accounts/forex/seignorage argument! out of curiosity, for all those who disagree with krugman, do you believe that interest rates will be relatively steady over the next ten years, or do you think they will significantly rise? if they are not to rise, what eco trends do you see leading to this result? and if they rise significantly, what do you think this might mean for such a debt-rich environment as the one that we now have?

Back in line, Jane! Remember, ideology, not evidence!

I'll give you a real good reason why it's an outstanding piece--we're talking about it. Lots of people are talking about it.

Maybe it's our responsibility to try to open the discusssion up to include free market solutions to this potential problem instead of allowing the Krugman shills to beat us over the head with his latest barely veiled political attack piece.

Why does anyone pay any attention to Krugman? Hasn't he lost any shred of credibility? If a right-wing nut case had written that Bill Clinton was part of an evil conspiracy to take over the country and render elections meaningless, we would all have dismissed him as the nut case he was.

Krugman has been foaming at the mouth with this same kind of wacko conspiracy theories for a long time. How much rabid madness does he have to spew before his credibility is completely shot? He should be dismissed as the left wing nut case that he is.

He hates Bush with an intense passion that has totally consumed him. He desperately wants the economy to fail so that Bush will be defeated. He is a poster child for bias. Given this bias, why would anyone be foolish enough to take seriously his pronouncements on the economy. Do you really think he is capable of a reasonable, dispassionate judgment? After all the vicious slanders he spews?

Krugman is little else than a partisan hack.

He freely admitted, "taxes reduce the incentive to work, save and invest"

We are in a recovery the likes of Reagan's & JFK's.

The whole COUNTRY needs to cozy up to the Laffer Curve. Supply side DOES work, and any and all tax cuts to the maximum extent possible are needed and DO increase revenues from the increased income created by the increased income, which is greater than that lost due to the lower tax rates. Unfortunately, too many in our Country have never been self employed and don't have a clue to what it takes to grow an economy, much less a small business. And the ever expanding public sector employee enjoys a pay & benefits package on average 30% higher than equivalent private sector jobs at the expense of taxpayers.
Not to mention the productivity chasm between public and private workers.

RIDDLE ME THIS??
What is the approximate TOTAL compounded National oportunity cost of all the massive spending programs i.e.: New Deal, Great Society and JFK's allowing all public workers to unionize?? I am looking for a educated WAG (wildassedguess) here.

The other half of the problem, is of course, spending to buy votes. The growth rate of spending should in all cases be some percentage of the inflation rate for effectively reducing the deficit.

The current deficit is attributable to:

50% - The recession handed GWB. Remember Clinton's last qtr in office had falling GDP growth & revenues, exacerbated by 90's corporate fraud (where was Janet??)/ market bubble, the largest tax hike in history and a huge new public workers programs.

25% - September 11 & terrorism

25% - GWB tax cuts.

Last question.
How is it the Democrat party, the self professed champions of equality and equal protection under the Constitution, choose but one metric with which to discriminate against taxpayers, that being ones' earnings level, and which is as unconstitutional as any other form of discrimination??

And how is it Terry McAulife got out of Global Crossing pocketing millions just in time before the collapse???

Might it have the slightest thing to do with McAulife setting up a DC office for Winnick and arranging for him a golfing date with Clinton and intros to other DC swells??

Winnick and McAwful both cashed in big time $734mil & $4.3mil respectively.

If you can't smell theese 'Rats you never will.

dear glenn,
i most respectfully disagree with you re laffer curve analysis. good luck on this faith based economic position. you will get your recovery, (short-lived) because of a whole confluence of events--lower exchange rate, massive gov't spending, large tax cuts (even if poorly targeted) low interest rates. the scary thing has been that it has not kicked in sooner. this piper will have to be paid--that is the point of krugman's (and many other economists') articles.

and i will take a stab:

"RIDDLE ME THIS??
What is the approximate TOTAL compounded National oportunity cost of all the massive spending programs i.e.: New Deal, Great Society and JFK's allowing all public workers to unionize?? I am looking for a educated WAG (wildassedguess) here."

a "libertarian paradise," but at the possible cost of: political instability, widescale immiseration, wealth distribution worse than what we already have, possible second american revolution much bloodier than the first...

cheers

"Well Jane, I entered the investment business in 1981 and I recall clearly the econo-pundits were wringing their hands then over the very same issue. So tell me exactly WHEN is this supposed to happen and why has it not happened yet?"

Ken,
This reminds me a little of villagers and volcanoes. The Volcano rumbles often, geologists worry, but wise and experienced men of great maturity say "Not to fear! Those worrywarts were saying the volcano would erupt when I was young too and it hasn't happened yet." and all the good villagers calm down and go about their business. Which works out pretty well for the community up to the moment the volcano erupts...

One reason that nations decline is that when a problem is long term enough everybody grows up with it as a part of their background and treat as a "fact of life" rather than as a soluble problem but the problem is still a problem. And the way that debt can be bad for nations is a particularly well documented problem.

If you want think of it as a stock market that plays out over centuries rather than over years. Just as an investor has several chances to pull out of a bad stock before its too late or buy into a good stock as its on the rise so it is that nations have several opportunities to fix a longterm problem of this sort before its too late. As far as naming precisely *when* we should expect it to happen I will say that's a bit like asking a physician to name the precise date a patient will die of pnuemonia if the patient doesn't take some antibiotics before it's too late. There's plenty of other factors in the patient's life besides the pnuemonia and the the antibiotics so while the physician might make a shrewd guess it would still be just a guess. If the physician could genuinely name time and place he'd be a deviner rather than a physician. But that inability to name time and place doesn't mean that the physician is wrong on the subject of pnuemonia and antibiotics and the patient would be well advised to take his diagnosis and advice before it's too late.

A Public Debt that has grown too large is a government's equivalent of pnuemonia. ^_^;

Sincerely yours,
S.P.M.

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