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Paul Krugman – Will He Be Alan Greenspan Of Tomorrow?


I often read Paul Krugman’s blog. For those of you who don’t know him, he is Nobel prize winning economist. And I am not. But I disagree with him and since blogging is free, I want to write about it.

In this article, Krugman argues that the 2008 stimulus, the biggest government donation to private institutions, is not big enough. He has several times criticized bigger European economies like Germany for not handing out enough stimulus. He thinks the recent policy actions taken by German government, which focus more on controlling deficit than to create liquidity, are a step in wrong direction.

Well, that’s exactly what Alan Greenspan thought in 2001, after the dot com crash. Overly influenced by Ayn Rand’s economics views, Greenspan pushed the US Federal Reserve’s short term lending rates too low. Result? A lot of liquidity. Did it stabilize the economy? Yes, but only for the short term. It was subsidized stability. And a large amount of that liquidity was not used to make long term, fundamentally sound investments. All that extra money was used for speculation in housing. People got their happy life back before they had learned their lesson. As a result, after getting burned in stock market, they did exactly same mistake in housing market. If we bail people out cheaply, they are going to use the bailout money to drive the next bubble.

Krugman is arguing for more stimulus, while there are ample of signs that most of the money handed out has found its way to all areas except easy credit for businesses.

His argument about money in Federal Reserve vault is somewhat similar to Exxon’s argument about oil under earth. According to him, no need to worry, there is lot more under the ground. Pump it up and quickly fix what is bothering you. The future generations will sort it all out.  No matter what economic problem it is, it can be fixed by stimulus. No matter what news comes, it means we need higher stimulus. Unemployment is high? It is because not enough stimulus, so pump it more. Unemployment is low? See, stimulus must be working, so let’s do it more.

But I wonder what economists think about sustainability . Just like we need sustainable energy sources, we also need sustainable economic policy. And in times of doubt, we need to let the common sense guide the policies rather than an elaborate economic model that makes many assumptions, most of which are not tested in time. Yes, some bailout is good. But it is not a perpetual fix.

Money and wealth are abstract ideas, and you can make a strong argument that abstracts are not governed by the fundamental laws of nature. You can argue that somehow you can figure out a way to always increase prosperity. That will never be true in long run. This is the folly of linear thinking. And that is perhaps the biggest problem.

Most of the Western sciences, paradigms and philosophies are based on linear view of the world. Things showing a consistent trend. This is where my thinking differs. Coming from Eastern cultures, I am used to thinking everything will always balance out. Trends will be reversed. Universe has no apparent reason to prefer one trend over another, so it will not show any long term bias.

What surprises me is this. I am an engineer. I think about energy the same way economists think about money. It is something abstract like money, yet it drives many concrete events around us, just like money.  If I claim that I have come up with a machine which perpetually makes energy, my fellow engineers will think I have gone crazy. But if an economist comes up with a theory that proves that money (and prosperity in turn) can be increased perpetually, he/she is not only entertained, but respected in the community for figuring out something that others could not.

If I am seeing future correctly, I see it’s 2015. The latest bubble has just burst. Perhaps bonds or gold bubble. And Paul Krugman is sitting there shocked, admitting he made a major mistake. Just like Greenspan is doing today.

One Response

  1. I have few points.
    1) I dont think that Stimulus is a linear concept.Instead thinking about it in a manner you put it might be one.What you propose is that people should learn their lessons and all well be right?. But then there are situations like ‘Great Depression’ that might emerge due to polycyclicity of the situation.Situation would turn from bad to worse.Well in some conditions Stimulus might not work and it is not silver bullet for example when the unemployment is structural or the economy is on the high interest rate side.
    2) You can not compare perpetual prosperity to perpetual energy creating machine.I think in case of the economy technological changes play important role.The right analogy would be improvement in the efficiency of the energy usage so that we can maintain the desired level of the comfort.
    3)I agree to the point that gold may be the next bubble but that might not be due to the extra spending but the hedging against the weak economic expectations.
    4)If you look at the Greenspan paper on the conditions leading to the crisis,he mentions a lot of structural reasons like savings clout in emerging countries like china and India,CDS etc.It is not very evident that he feels that his ayan rand driven ideology is the reason for this recession. “And Paul Krugman is sitting there shell shocked, admitting he made a major mistake. Just like Greenspan is doing today. “so this statement looks out of place
    see http://www.bangkokpost.com/business/economics/173966/ex-fed-chief-greenspan-defends-role-in-crisis

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