Paul Krugman: brilliant economist != clairvoyant

Brian Beutler fights back in re: Krugman's powers of prognostication:

I'm not sure if I'm one of the liberal bloggers Megan McArdle's writing about here but I'll proceed as if I am. Distracted as I was by my out of control gloating yesterday, I never really made a point about Paul Krugman's predictive powers, but if I had, it would have been this: For literally years, Paul Krugman warned that we'd be in for some serious economic hard times when the housing bubble burst. This wasn't something he did as a game, but rather in the hope that rightly positioned people would address the problem. They didn't.

Time passed, and eventually conservative and libertarian writers--who either didn't understand what was happening, or didn't think all that highly of Krugman's liberalism, or both--began to mock him for getting his economic forecast wrong. Now, lo and behold, he wasn't wrong at all. And even if we presume that he thought a recession would come sooner than it did, the worst we can say about his economic punditry is that it took longer for him to be proven correct than he and others like him imagined it would.

This is what comes from not reading economics commentators besides Paul Krugman. Though I don't know how Brian can quote me on Krugman almost a year ago, while somehow not noticing that  I myself have been predicting that there would be economic trouble when the housing bubble popped.  Almost every commenter who is not named David Lereah both recognized that we were in a housing bubble, and expected that when the housing bubble popped, the economic results would be ugly.  My personal history with this prediction starts in 2004, when I started doing economic analyses for The Economist.  But others, such as The Economist's Pam Woodall, have been saying it even longer.

What I--and, as far as I know, Paul Krugman--did not expect was the magnitude or the direction of the problems it would cause.  We expected first, consumption contraction from a reversal of something known as the "wealth effect"--when assets appreciate, people feel richer, so they spend more; they also sometimes borrow against the current or future value of those assets.  When the asset prices fall, they contract their spending both because they feel poorer, and because they can't borrow any more money on the assets--indeed, may need to frantically start paying back the money they already borrowed.  This puts downward pressure on economic growth.

We also expected that it would hurt bank balance sheets, which would mean retrenchment and therefore a slowdown in lending to other areas.  I, and possibly Krugman--I don't really have time to comb through every column he's ever written right now--further expected that it would have deleterious effects on the government fiscal picture, especially in bubbly areas.  And, of course, we expected that the eventual decline in the construction boom would show up in GDP, since construction is a major component.

But I did not foresee how tightly coupled our financial system would prove to be.  I didn't see how far the problems would spread--I didn't even expect the magnitude of the crackdown in commercial real estate lending, much less the generalized credit freeze. Neither, AFAIK, did Paul Krugman.  And one of the areas that we were both very concerned about, the decline of the wealth effect, has proven to be relatively much less important than expected.

So the idea that Krugman has somehow won one for the team by predicting something that libertarian/conservative/free-market commentators didn't see coming is either misinformed, or lunatic.  We all saw the problems with the housing bubble; most of us thought a recession was getting pretty likely, given America's terrific overextension of its consumption, the falling housing market, rising commodity prices, and the simple fact that the longer you've gone without a recession, the more likely you are to get into one soon.

Krugman also thought we might be about to get into a recession several earlier times, when I was more skeptical; in that sense, I called it better than he did.  My care about calling a recession earlier in the year was not because I thought the economy was in fine fettle.  Rather, it was because Britain had, against all theory, dodged a recession despite a popping housing bubble even more impressive than ours.  This even though they'd gone more than a decade without one.  Having watched the British economy in my professional capacity for most of the current decade, I'd seen it declared on the verge of recession multiple times by various commenters, for what seemed like good and sound reasons; nonetheless, it never quite went there. This made me somewhat cautious about proclaiming that a recession was inevitable based on our fundamentals.

(At this point, let me point out the obvious:  a recession is, to a virtual certainty, either underway or about to hit.  But in January, we hadn't had a banking crisis yet.)

The belief that Paul Krugman is some sort of singularly talented prognosticator on matters of policy and the economy is almost entirely found among people who do not spend a lot of time reading the financial press, and also, have forgotten the many concerns he expressed that did not come to pass.  This is not to claim that Krugman makes more errors than usual, either.  He's a somewhat pessimistic columnist whose economic arguments almost always fall well within the mainstream of current debate among professionals.  That was the entire content of my crack about his having called eight of the last none recessions--for at least the last eight years, he's been dispositionally a bear.  I've made the same crack about Nouriel Roubini more than once, and I have no idea what his politics are.

Krugman is a great popularizer of economics, but his writing is not filled with unique insights that cannot be gleaned elsewhere.  He is a participant in arguments that range throughout the economics pages in more than a dozen publications, such as my old employer, the FT, the Wall Street Journal, Barrons, Bloomberg--plus economics blogs, a bunch of expensive newsletters you've probably never heard of, and the coffee machine of every economics department in the country.   I do not think it is possible to regularly read those publications and reasonably sustain the belief that Paul Krugman has been uniquely, or even especially, prescient about current conditions.  That's no slam on Krugman.  It's a slam on people who are unaware that there are really quite a lot of smart people out there writing about the economic issues of the day.

On a final note, several people who didn't read my post on Krugman's Nobel Prize seem to believe that denying Paul Krugman's ability to see the future is somehow to deny that he is a good economist.  Krugman's titanic achievements in economic work were not in the field of accurately predicting future GDP movements, which no one is (yet) very good at.  They were in developing new models to explain patterns of trade and production.  Those models would remain brilliant and useful even if every single prediction Krugman ever made about the US economy proved spectacularly wrong--just as Newtonian Physics would still be pretty cool even if Newton wasn't very good at catching baseballs.