Predictions are Hard, Especially About the Future
It is safe to say that Paul Krugman is much smarter than I am, and that he understands more economics than I do. He generates a great deal of incisive analysis about the economy, and has often had a gift for stabbing straight through to the one underlying piece of data that gives lie to an otherwise plausible economic theory.
I want to get that out of the way, because otherwise my readers (left and right) might assume that this post is a "libertarian economics blogger makes fun of liberal economist's poor reasoning skills" special, and that's not at all why I'm writing it. Paul Krugman is a brilliant and interesting analyst. He also, like everyone else, can be wrong.
There's an interesting phenomenon that often happens when I blog something critical of Paul Krugman: some of his bigger fans turn up in my comments to argue that I am not worthy to talk, because Paul Krugman is a brilliant insightful analyst who has forgotten more economics than I will ever learn--all undoubtedly true. Over and over, they say, Paul Krugman gets it right when other commentators get it wrong. And as proof of this rare perpicacity, they offer the fact that . . . Paul Krugman called the housing bubble in May 2005.
There is rich irony in the belief that Paul Krugman must be right, and I must be wrong, because he had the foresight to call the housing bubble. That's because I saw it in 2002. As you can see, I blogged quite a bit about it before Paul Krugman wrote his first column on the topic. Neither of us, as far as I can tell, understood what that meant for the financial system. But both of us saw it coming, me a little sooner.
This is not that surprising, actually. Lots of people saw it coming. You hear people asking a lot where the financial journalists were--how they could have missed the housing bubble--and the answer is that they didn't! The Economist was writing about it even before I did, thanks to Pam Woodall, the brilliant economics editor who really may have been the first commentator to identify the global phenomenon. Housing bubble stories and op-eds regularly appeared in newspapers like, well, The New York Times. But most people weren't reading the financial press (or this blog) in 2005, and so when they discover that Paul Krugman was writing about the housing bubble way back then, it seems like amazing foresight.
Meanwhile, today I stumbled across another example of Paul Krugman's "foresight", via David Henderson. Chris Alden, a co-founder of Red Herring, blogs about an article Krugman wrote for them back in the 1990s:
He went on to make some specific predictions, all of which were either mostly or completely wrong:
"Productivity will drop sharply this year.""Inflation will be back. ...In 1999 inflation will probably be more than 3 percent; with only moderate bad luck--say, a drop in the dollar--it could easily top 4 percent."Nope - that didn't happen either. Inflation in 1999 was 2.19% and hasn't gone above 4% since Krugman wrote this piece."Within two or three years, the current mood of American triumphalism--our belief that we have pulled economically and technologically ahead of the rest of the world--will evaporate."Nope -- that didn't happen, either. Though September 11th, which happened more than three years after this article, and the Lehman Brother's collapse, which happened more than 10 years after this article was written, have certainly reduced American triumphalism. Here is where I think Krugman may have been the most right, albeit it way too early."The growth of the Internet will slow drastically, as the flaw in 'Metcalfe's law'--which states that the number of potential connections in a network is proportional to the square of the number of participants--becomes apparent: most people have nothing to say to each other!By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's."Comically wrong."As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase information economy will sound silly."Ditto."Sometime in the next 20 years, maybe sooner, there will be another '70s-style raw-material crunch: a disruption of oil supplies, a sharp run-up in agricultural prices, or both."Meh. While have seen oil prices spike (although they have yet to reach the annual peak we saw in 1980), this was not due to a crunch or disruption or running out of oil) but rather growth in demand.
I'm inclined to be more charitable than Alden on a couple of these, but there's no question that Krugman got some things really, really wrong.
But it doesn't follow that Krugman is an idiot who should get no respect--any more than calling the housing bubble made him an infallible genius. Krugman remains a giant intellect who is well worth reading on virtually any economic topic. He is also capable of being badly wrong about things.
You often hear people complain that pundits or analysts aren't punished for getting things wrong. But this is why they aren't: everyone gets things wrong. The question "How can you expect us to listen to Pundit Y when he got everything wrong, and our guy called things correctly" only reveals that the person asking it has managed to forget all the blunders "our guy" made.
What pundits give you is not a perfect map of the future--the only people who succeed in that are characters in historical novels written by an author who already knows what happened. What's important is their thought process--do they point you to arguments you hadn't considered? Do they find data you ought to know about? Do they force you to challenge your own decisions?
Paul Krugman succeeds on that score, even if his crystal ball is a little cloudy.