Krugtron the Invincible, Part 3

I have shown that Paul Krugman failed to anticipate the financial crisis and wrongly predicted that the single European currency would fall victim to it. I have exploded his claim to intellectual invincibility. Very clearly, he has made at least twice as many major mistakes in his career as the mere two he has previously admitted to.
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In my previous two articles, I have shown that Paul Krugman - revered by his acolytes as the Invincible Krugtron - failed to anticipate the financial crisis and wrongly predicted that the single European currency would fall victim to it. I have exploded his claim to intellectual invincibility. Very clearly, he has made at least twice as many major mistakes in his career as the mere two he has previously admitted to.

You may ask: Why have I taken the trouble to do this? I have three motives. The first is to illuminate the way the world really works, as opposed to the way Krugman and his beloved New Keynesian macroeconomic models say it works. The second is to assert the importance of humility and civility in public as well as academic discourse. And the third, frankly, is to teach him the meaning of the old Scottish regimental motto: nemo me impune lacessit ("No one attacks me with impunity").

I am not an economist. I am an economic historian. The economist seeks to simplify the world into mathematical models - in Krugman's case models erected upon the intellectual foundations laid by John Maynard Keynes. But to the historian, who is trained to study the world "as it actually is", the economist's model, with its smooth curves on two axes, looks like an oversimplification. The historian's world is a complex system, full of non-linear relationships, feedback loops and tipping points. There is more chaos than simple causation. There is more uncertainty than calculable risk. For that reason, there is simply no way that anyone - even Paul Krugman - can consistently make accurate predictions about the future. There is, indeed, no such thing as the future, just plausible futures, to which we can only attach rough probabilities. This is a caveat I would like ideally to attach to all forward-looking conjectural statements that I make. It is the reason I do not expect always to be right. Indeed, I expect often to be wrong. Success is about having the judgment and luck to be right more often than you are wrong.

On both Europe and the approach of the financial crisis, I would say that - unlike Paul Krugman - I was right more often than I was wrong. But so what? When investors and fund managers are right more often than they are wrong, they are rewarded - handsomely. When they are wrong more often than they are right, they lose money or clients, usually both. The world of public intellectuals is different. Using their academic credibility to pontificate about the future, professor-pundits can be wrong again and again without losing money or their tenured jobs. Many distinguished and lucrative careers have been based on just such a pattern of unpunished error. By the same token, the returns on being right are surprisingly low. A book sells because its prediction fits the mood of the moment. The author may get a bonus - in the form of additional sales - if he turns out to be right. But he doesn't have to return the royalty checks if he turns out to be dead wrong.

So we public intellectuals should not brag too loudly when we get things right. Nor should we condemn too harshly the predictions of others that are subsequently falsified by events. The most that we can do in this unpredictable world is read as widely and deeply as we can, think seriously, and then exchange ideas in a humble and respectful manner. Nobody ever seems to have explained this to Paul Krugman. There is a reason that his hero John Maynard Keynes did not go around calling his great rival Friedrich Hayek a "mendacious idiot" or a "dope".

For too long, Paul Krugman has exploited his authority as an award-winning economist and his power as a New York Times columnist to heap opprobrium on anyone who ventures to disagree with him. Along the way, he has acquired a claque of like-minded bloggers who play a sinister game of tag with him, endorsing his attacks and adding vitriol of their own. I would like to name and shame in this context Dean Baker, Josh Barro, Brad DeLong, Matthew O'Brien, Noah Smith, Matthew Yglesias and Justin Wolfers. Krugman and his acolytes evidently relish the viciousness of their attacks, priding themselves on the crassness of their language. But I should like to know what qualifies a figure like Matt O'Brien to call anyone a "disingenuous idiot"? What exactly are his credentials? 35,550 tweets? How does he essentially differ from the cranks who, before the Internet, had to vent their spleen by writing letters in green ink?

To be frank, I probably would not have bothered to write all this if I myself had not been one of the targets of Krugman's crude invective. The "Always-Wrong Club" is just the latest of many ad hominem attacks he has made on me since 2009. On one occasion he implied that I was a racist and then called me a "whiner" when I objected. On another he referred to me as a "poseur", adding for good measure that I had "choked on [my] own snark". Last year he wildly accused of making "multiple errors and misrepresentations" in article for Newsweek, only one of which he ever specified. More recently I was accused of "trying to flush [my] own past statements down the memory hole" - a characteristically crude turn of phrase - and of being "inane". Re-reading these, I can only marvel at the man's hypocrisy, for Krugman often sanctimoniously denies that he "does ad hominem" - and once had the gall to accuse Joe Scarborough of making such an attack on him when Scarborough merely quoted Krugman's own words back at him. For the record here is his own definition: "ad hominem attacks involve attacking the person in general rather than what the person has to say on a specific issue".

The start of Krugman's vendetta was a public debate we had in New York in April 2009, in which we disagreed about U.S. fiscal policy in the wake of the financial crisis. Krugman has repeatedly misrepresented what I said in that debate. Immediately afterwards, he cynically claimed on his blog that I had been arguing that high deficits would crowd out private spending. Later, in order to have a straw man for his vulgar Keynesian claim that even larger deficits would have produced a faster recovery, he started to pretend that I had predicted "soaring interest rates" and had called for immediate austerity. For example:

Niall Ferguson ... said that government borrowing would bring on the bond vigilantes and send rates soaring. ... [His] vision led to calls for austerity now now now; mine said that the overwhelming danger was that we wouldn't provide enough stimulus, and that we would pull back too soon. Sure enough, we didn't and we did. And now catastrophe looms.

But anyone who reads the transcript of our debate - even the edited version that was published - can see that this was not my position. What I said was that there was a contradiction between fiscal and monetary stimulus. My point was that, with debt soaring and growth slumping, the Fed would have to buy much larger amounts of U.S. Treasuries than anyone then anticipated. I was right in that debate to say that the Obama administration's growth forecasts were wildly over-optimistic and that therefore the federal debt would rise "in the next five or ten years to around 100 per cent of GDP" (according to the IMF, the gross federal debt passed that mark last year). I was also right that the Fed's balance sheet would "explode to up to $3 or $4 trillion". The second phase of what then became known as "quantitative easing", instituted in November 2010, was explicitly designed to keep long term interest rates artificially low. It was followed in 2012 by QE3. The Fed's balance sheet currently stands at $3.7 trillion.

On that occasion, Krugman in fact agreed with me that the "long-run solvency of the US government" was something to worry about. The ability to manage a debt as large as 100 per cent of GDP, he also agreed, "does depend upon people's belief that you will behave responsibly, and that is somewhat in question". As recent events have shown, that is a rather important caveat.

There is, of course, no way completely to refute Krugman's central claim that additional borrowing would have produced a more rapid recovery, since that claim is a counterfactual claim based solely on his models. It may be true, as he asserted last month, that a stimulus bill three times larger than the one actually passed in 2009 - i.e. a stimulus totaling $1.76 trillion - would have propelled the U.S. economy out of the liquidity trap. It may be true that the resulting increase of the federal debt would have been just "about $1 trillion", or 6% of GDP. And it may be true that this would have had no negative side effects, for example on the creditworthiness of the United States.

Then again, it may not be true. Other equally eminent economists have taken a much less sanguine view of this "vulgar Keynesianism", openly questioning his back-of-envelope calculations about a mega-stimulus. In a parallel debate about the policy options open to the United Kingdom, there seems a rather stronger argument against additional borrowing even in terms of Krugman's own "simplish IS-LM model". And, as Greg Mankiw has pointed out, in an earlier debate about the wisdom of deficit finance - when the President was a Republican, not a Democrat, and when the stimulus took the form of tax cuts and spending on war - Krugman himself took the diametrically opposite position.

In 2003, he warned, the United States was heading for "a fiscal train wreck":

The Congressional Budget Office operates under ground rules that force it to wear rose-colored lenses. If you take into account - as the C.B.O. cannot - the effects of likely changes in the alternative minimum tax, include realistic estimates of future spending and allow for the cost of war and reconstruction, it's clear that the 10-year deficit will be at least $3 trillion. ... We're looking at a fiscal crisis that will drive interest rates sky-high. ... because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest. ...

I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits. ... my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.

And as that temptation becomes obvious, interest rates will soar. ... I think that the main thing keeping long-term interest rates low right now is cognitive dissonance.

For the record: the federal debt in public hands back then was $2.8 trillion, 35% of GDP. Today it is approaching $12 trillion, more than double as a share of GDP. The projected ten-year deficit then was, as Krugman states, $3 trillion; now, the equivalent figure is more than double that. And yet today we supposedly have no "train wreck" to worry about; indeed, it would be fine if the debt were a trillion dollars bigger.

Yes, I know, that was then and this is now; this time is different, we're in a liquidity trap, and all that. But what about 2008, the year the crisis began? For some strange reason, at that time Krugman vehemently opposed the presidential candidate arguing for - as he himself acknowledged - the larger fiscal stimulus. His name was John McCain - "McCain the Destroyer", as Krugman crudely called him. Four years later, Krugman explicitly acknowledged that Mitt Romney's (admittedly vague) fiscal plans would "blow up the deficit" and - shamelessly using an argument he had previously derided - compared the United States in such a high-deficit scenario with Greece.

In short, if Paul Krugman truly has won "a stunning victory" in "an epic intellectual debate" - as he recently claimed - it appears to have been over ... Paul Krugman.

The question is why, in the light of these numerous contradictions, anyone should be expected to share Krugman's certainty that a bigger stimulus would have worked. He was equally certain that there would be a dollar crisis - before the financial crisis produced the opposite effect. He was even more certain that the euro would break up - until it survived. Leave aside the glaring issue of ideological bias. Even if Krugman were not viscerally partisan, the point is that in the realm of macroeconomic prediction, self-confidence can only ever be a bluff. Judging by their past performance, Krugman's models are less reliable than tossing a coin.

Not being convinced of my own infallibility, I had no difficulty admitting that I had been wrong about the trajectory of U.S. interest rates back in 2009 and he had been right. Yet somehow this was not enough for Krugman, who could not bring himself to give me a proper apology for alleging falsely that I had never acknowledged my mistake. Instead, he has gone on claiming ad nauseam that I have "derped" (repeatedly said something wrong) on the question of inflation. In fact I wrote one column on this subject, in May 2011, and this was how it concluded:

Maybe in June, when the Fed stops quantitative easing ... inflation will recede. Maybe high fuel prices will, as Goldman Sachs predicts, slow the economy and revive the specter of deflation. Maybe. Or maybe inflation expectations [have] started shifting ...

(Admittedly, something of a Krugman hedge, that conclusion. But hardly a confident prediction of higher inflation. And I certainly did not repeat it the way Krugman repeated his predictions of euro collapse.) Meanwhile, applying his signature double standard, he himself has admitted elsewhere that "the only big thing I got wrong ... was in underestimating the stickiness of wages, and hence inflation, and therefore overestimating the risks of actual deflation".

When Paul Krugman first began his attacks against me, he made it clear - as if almost proud of the fact - that he had read none of my books. (Quote: "I'm told that some of his straight historical work is very good.") This was a mistake on his part. I have read his books. If he had read mine, he would perhaps have thought twice about seeking to discredit me on the basis of a few articles and interviews.

Krugman's unabashed ignorance of my academic work raises the question of what, in fact, he does read, apart from posts by the other liberal bloggers who are his zealous followers. There is a ratio that really would be good to have as a metric of the seriousness of a public intellectual. It is the ratio of words read to words written. Ideally, I would say, that ratio should be between 100 and 1000 to 1. But in the case of the Invincible Krugtron, I begin to suspect it has now fallen below unity. (When he does read a book, he mentions it in his blog as if it's a special holiday treat.)

In the past few days, I have pointed out that he has no right at all to castigate me or anyone else for real or imagined mistakes of prognostication. But the fact that Paul Krugman is often wrong is not the most important thing. It is his utter disregard for the norms of civility that is crucial here. I am not alone in being dismayed by Krugman's "spectacularly uncivil behavior". It is "my duty, as I see it, is to make my case as best I honestly can," Krugman has written, "not [to] put on a decorous show of civilized discussion." Well, I am here to tell him that "civilized discussion" matters. It matters because vitriolic language of the sort he uses is a key part of what is wrong with America today. As an eminent economist said to me last week, people are afraid of Krugman. More "decorous" but perhaps equally intelligent academics simply elect not to enter a public sphere that he and his parasitical online pals are intent on poisoning. I agree with Raghuram Rajan, one of the few economists who authentically anticipated the financial crisis: Krugman's is "the paranoid style in economics":

All too often, the path to easy influence is to impugn the other side's motives and methods ... Instead of fostering public dialogue and educating the public, the public is often left in the dark. And it discourages younger, less credentialed economists from entering the public discourse.

Where I come from, however, we do not fear bullies. We despise them. And we do so because we understand that what motivates their bullying is a deep sense of insecurity. Unfortunately for Krugtron the Invincible, his ultimate nightmare has just become a reality. By applying the methods of the historian - by quoting and contextualizing his own published words - I believe I have now made him what he richly deserves to be: a figure of fun, whose predictions (and proscriptions) no one should ever again take seriously.

Niall Ferguson's latest book is The Great Degeneration (Penguin Press).

© Niall Ferguson 2013

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