Krugman vs. Ferguson: The Next Round

Jeremy Warner Daily Telegraph July 21, 2010

Wednesday 21 July 2010 | Blog Feed | All feeds

By Jeremy Warner Economics Last updated: July 20th, 2010

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Paul Krugman won the Nobel Prize for Economics

Not since Ken Rogoff’s famous attack on Joe Stiglitz has the dismal science of economics provoked such pompous, self-important, personalised squabbling. Professors Paul Krugman and Niall Ferguson, of course, have form; they’ve been at it on and off for nearly a year now over the efficacy of deficit spending in fighting the downturn, and today they return to the fray.

The occassion was another piece that Ferguson, an eminent economic historian, has penned for the Financial Times on the dangers of attempting to spend your way to economic recovery. Foolishly – or perhaps deliberately, for it is sometimes possible to imagine that the two have secretly agreed to slag each other off for the publicity – he mentions Krugman by name. “Those economists, like New York Times columnist Paul Krugman”, he writes, “who liken confidence to an imaginary "fairy" have failed to learn from decades of economic research on expectations. They also seem not to have noticed that the big academic winners of this crisis have been the proponents of behavioural finance, in which the ups and downs of human psychology are the key”.

Quick as flash, Krugman has risen to the bait. On his New York Times blog, he writes “Brad DeLong does the necessary on Niall Ferguson; no need for me to pile on”. But then he attempts to do precisely that, and with a ladle too. The detail of the argument need not bother us here. You can follow it by clicking on the links.

But it has to be said that as an encore, it is not nearly as entertaining as the first round, where Krugman ended up accusing Ferguson of being a racist on account of his reference to “Felix the black cat”, and of not being qualified to comment on economics since Ferguson is a “mere” historian of finance. Krugman, by contrast, is a Nobel prize winner. The last time they quarrelled, Krugman wrote:

For the record, I don't think that Professor Ferguson is a racist. I think he's a poseur. I'm told that some of his straight historical work is very good. When it comes to economics, however, he hasn't bothered to understand the basics, relying on snide comments and surface cleverness to convey the impression of wisdom. It's all style, no comprehension of substance. And this time he ended up choking on his own snark.

Surface cleverness? Never let it be said that Krugman might be guilty of the same. I see very little serious economic analysis on his daily blogs; what I see instead is well and consistently argued political polemic, peppered with selective use of graphs and statistics to give the veneer of dedicated research. The debate over deficit spending has always been more political than economic.

The reality is that nobody knows what cutting the deficit into a weak economic recovery is going to do to output and jobs. We won’t know until it is tried, and even if there is a double dip, it will be impossible to say whether it was the deficit reduction wot did it. The way things are at the moment, the US economy may well slip back into recession without any deficit cutting at all. As far as I can see, much of the stimulus has just been money down the drain.

And as for citing the historical evidence of the Depression, where apparently premature fiscal tightening caused the economy to dip back down again, the precise mechanisms by which this occurred are again highly debatable. Whacking up business taxes as a way of cutting the deficit not unnaturally killed the investment recovery stone dead.

What we do know about US Federal spending is that it is unsustainable at present levels, and unless something is done about it soon, America can kiss goodbye to its world leadership role. But don’t take it from me. This is what Krugman said about it in early 2006, when the deficit was not nearly as bad as it is today:

It’s a sign of our degraded fiscal state that the Bush administration actually boasted about a 2005 budget deficit of more than $300 billion, because it was a bit lower than the 2004 deficit. It all sounds unsustainable. And it is… [Debt] denial takes a more systematic form within the federal government, where Dick Cheney is doing to budget analysis what he did to intelligence on Iraq. Last week Mr Cheney announced that a newly created division within the Treasury Department would show that tax cuts increase, not reduce, federal revenue. That’s the Bush-Cheney way: decide on your conclusions first, then demand that analysts produce evidence supporting those conclusions. But serious analysts know that America’s borrowing binge is unsustainable. Sooner or later the trade deficit will have to come down, the housing boom will have to end, and both American consumers and the US government will have to start living within their means.

Krugman was right, of course. But curiously, he now seems to buy the Cheney argument, which is that by cutting taxes and spending more, you can stimulate growth and therefore reduce the deficit. First decide on your conclusions, and then find the supporting evidence. That’s about the sum of it.

Tags: deficit reduction, deficit spending, Felix the cat, Financial Times, Joe Stiglitz, ken rogoff, New York Times, Niall Ferguson, paul krugman

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