Paul Krugman

May 1, 2012

IamA Nobel Prize-winning economist and New York Times columnist.

I’m Paul Krugman. I've been a columnist for The Times on the Op-Ed page since 1999, and I’m also a professor of economics and international affairs at Princeton University. I’ve written extensively on international trade and finance and was awarded the Nobel Memorial Prize in Economic Science in 2008 for my research on global trade patterns.

My latest book, ‘‘End This Depression Now!,’’ will be published later this month. In it I look at how we got stuck in the recession of the past four years and offer ideas for how we can free ourselves from its grip. An adaptation from the book, questioning some of the decisions made by Ben Bernanke, chairman of the Federal Reserve, was published in the New York Times Magazine on Sunday.

Here are links to my blog, The Conscience of a Liberal, and tweet verification that I am, in fact, Paul Krugman.

Update, 6:04 p.m.: Thank you, everyone, for your thoughtful questions. I'm off now for a short break and then on to Rachel Maddow's show tonight.

Dr. Krugman,

First off, thank you so much for doing this AMA. I'll get right to my questions.

Lastly, I think it's important to say that whether people agree or disagree with you, you've done some great work in the field of Economics. I always enjoy reading your articles even when I disagree.

Thanks again!

Edit: Dr. Krugman, didn't think this comment would take off like it did. What do you think of the Keynes VS Hayek rap battles?

So, hi -- I'm here and on.

Let's start with the inflation issue. What we want is "appropriately" low rates -- which in this case means negative in real terms. Excessively low rates can cause problems, but we're nowhere near there right now. And for what it's worth, I don't buy that story about the bubble at all; what went wrong in 2000-2007 was runaway unregulated banks, not too-low rates.

About the deficit: the thing you need to realize is that a weaker economy means lower tax receipts. Slashing spending now hurts the economy in the short run, offsetting a large part of the initial saving. It also hurts the economy in the long run. So when you do the full arithmetic, you probably make the debt problem worse, not better.

About partisanship: I don't think I'm being partisan, I think I'm being honest. The way many people try to seem nonpartisan is by pretending that bad ideas aren't really bad, which I won't do. It's not partisan to say, for example, that Paul Ryan's budget is a fraud. It's just the uncomfortable truth.

Thanks for doing this!

Here are my questions:


If dollar "debasement" doesn't mean a fall against other currencies, then it's just a loaded term for inflation. And the fact is that inflation in recent years hasn't been high -- it's fluctuated but on average been around 2 percent, which is low by historical standards, and in particular a lot lower than the inflation rate during Ronald Reagan's "Morning in America". So where does this heated rhetoric come from?

I actually don't defend the Fed in all cases -- see my magazine article from last Sunday! But the right critique of the Fed is that it's failing to deliver on its mandate to pursue full employment, not that it's doing something that Ron Paul may consider dangerously inflationary but actually isn't. As for auditing -- audit what? The Fed isn't a business; its job is to manage the economy, and the audit there is what's happening to unemployment and inflation.

Last, I don't actually call for deficits forever -- I was a deficit hawk during the Bush years, back when a lot of the people now ranting about deficits were just fine with unfunded tax cuts and wars. But now is not the time. And where exactly are those consequences? US borrowing costs are at historic lows; people with actual money to invest don't seem worried at all.

Here on Reddit there's a sub-reddit called "Explain like I'm Five".

I am curious whether you'd be able to articulate to me how government stimulus is supposed to help get us out of economic problems (and/or why austerity is a bad idea)?

Of course, with the assumption that i am a five year old.

In End This Depression I explain how recessions happen in terms of the true story of a baby-sitting coop; I'm not sure this can explain the issue to a 5-year old, but hey, it's about 5 (and 4, and 3 ...) year olds. And it's pretty simple. If you don't want to buy the book, I've written about it before; just Google "krugman baby sitting".

I want to ask about your perspective on increasing wealth and income disparities. There a couple camps on this issue, and it seems that mainstream economists haven't yet formed a consensus on the cause for this.

Greg Mankiw and others seem to believe that the main cause of increasing income and wealth inequality is a changing labor market that rewards and values high-skilled laborers more and more. Consequently, he argues that attempts at addressing income inequality issues should be heavily based on education reform.

On the other hand, you've made the point that a lot of the increases in income and wealth inequality come from shifting fiscal policies and government regulation. You seem to argue that decreased taxes on the rich and more lenient policies in regards to financial industry have resulted in an economy that unduly favors certain individuals. Sorry if I'm putting words in your mouth!

I have the following two questions:

Well, if you look at the Congressional Budget Office report from last fall, it shows that about half the rise in income inequality is accounted for by the divergence of the 1 percent from everyone else. That part is NOT about education and returns to skills -- the next 19 have about as much education as the top 1, or if you prefer, hedge fund managers and high school teachers have roughly comparable education levels. So something else is driving at least half the rise in inequality, and probably more.

That doesn't mean that market forces play no role, but it says that it's nowhere close to the whole story, or even most of it -- a point that people like Mankiw refuse to acknowledge.

By all means let's expand access to higher education -- but I'd say that the biggest reason to do that it is not so much to reverse inequality as to stop the ongoing decline in social mobility. Horatio Alger has left the building; it's getting ever harder for Americans born into the lower half of the income distribution to move up. And more aid for college would help make climbing the ladder easier.

Time for a less serious matter.

In your textbooks you described some major benefits from seemingly minor innovations. For example, sticky notes or maybe the flat bottom on paper grocery bags.

What is your personal favorite "minor" innovation that has had a large impact on efficiency, and therefore, the economy?

Hmm. I'm not sure about efficiency. But how about the graciousness of life? As someone who spends too much time in airports and train stations, and has been doing that for a long time, let me say that the advent of self-flushing toilets in men's rooms has made life significantly less disgusting.

And on the more serious front: bar codes!!!

I saw your head to head with Ron Paul yesterday and one of the things he said struck me as interesting and I didn't hear your response. He said why doesn't the helicopter drop hit the homeowners on the head? I think he was suggesting that the stimulus has been dropped on the heads of the bankers, and specifically the bankers who gambled the heaviest, and yet the people who actually need help with their house payments are at the bottom of that trickle down. Another question related was in regards to how the people who save a lot of money, in my case enough to purchase a reasonably priced home outright, are being punished severely by the suppression of Treasury yields via the Fed purchasing the debt.

What is your take on this?

Let me just take on part II of this question. We normally consider it perfectly OK for the Fed to cut interest rates to fight a recession, even though this reduces yields for people who bought Federal debt. After all, the purpose of Fed policy is to stabilize the economy, not guarantee returns for consenting adults who chose to buy particular assets.

Quantitative easing -- Fed purchases of longer-term debt -- are no different in principle from the open-market operations that usually take place in short-term debt, and allow the Fed to move short-term rates. So why is this somehow an outrage?

Put it this way: if the economy is still depressed at current interest rates, this means that those rates are too high! Refusing to act to bring them down would be a de facto subsidy to bond holders, and makes no sense as a public policy.

What is the FED doing to help the Emperor Diocletian escape the zero lower bound?

We've already done it, by adopting a calendar under which his reign is in the 200s C.E., not the zeroes. I think Bennus Bernankimus, chairman of the SPQR Fed, can do whatever is necessary.

Back in the 2000s, you frequently blasted Bush for running large deficits. However in recent posts and interviews, you've said that a country with its own sovereign, un-pegged currency can't ever face bond vigilantes.

What's more, the sovereign currency issue seems to be something of a new line of thinking for you, given that initially you wondered why Italy and Japan were paying different rates given broadly similar economic conditions. Now you seem to have found peace with that question, based on the sovereign currencies issue.

Thus in light of this change of thinking, do you still stand by your comments regarding Bush's deficits?

I was clearly too worried about bond vigilantes back in 2003 -- and I've written on my blog conceding that mistake.

I wasn't wrong, however, to condemn the Bush deficits. Deficits serve a useful function when the economy is deeply depressed, and in particular when monetary policy is up against the zero lower bound. You should not gratuitously increase debt in normal times, when any fiscal stimulus can and will be offset by Fed policy.

And don't you wish now that we hadn't run those unfunded wars and tax cuts? The ratio of debt to GDP would be 20 or 25 percentage points lower, and we'd be feeling a lot more relaxed about current deficits.

I was clearly too worried about bond vigilantes back in 2003 -- and I've written on my blog conceding that mistake.

I wasn't wrong, however, to condemn the Bush deficits. Deficits serve a useful function when the economy is deeply depressed, and in particular when monetary policy is up against the zero lower bound. You should not gratuitously increase debt in normal times, when any fiscal stimulus can and will be offset by Fed policy.

And don't you wish now that we hadn't run those unfunded wars and tax cuts? The ratio of debt to GDP would be 20 or 25 percentage points lower, and we'd be feeling a lot more relaxed about current deficits.

Actually, one more point: the Bush deficits were, I though, especially likely to send a bad signal to markets for two reasons. First, they were gratuitous -- they weren't about stimulus, they were just about irresponsibility. Second, they were driven by long-term, quasi-permanent tax cuts -- which is very different from temporary stimulus spending.

As a Spaniard and therefore a citizen of the next country to fall in Europe I am still amazed at the strategies that Germany has designed to 'get Europe out of the crisis'.

Do you think there's any chance we can leave this HUGE crisis following that path? Germany knows it is impossible to do so and they are going to enter recession soon according to the latest forecasts due to a fall in exports since the rest of Europe cant buy their products. Why do they insist on doing this? Do they think they will prevail and have every european country in their hands?

Thanks for coming!

I don't see how this can work. The adjustment plan, such as it is, calls for Spain to endure years of crushing unemployment and deflation, with no end in sight.

The trouble, as far as I can tell, is that the Germans are so wedded to a view of the way things MUST be that they can't even take on board facts that conflict with this position. Economic crises must be the result of fiscal irresponsibility; tell them that Spain had low debt and a surplus on the eve of crisis and it just goes in one ear and out the other. Ask them how austerity is supposed to work and they give you a sermon on the evils of debt.

If the euro is to be saved, it will probably have to go the brink of collapse first, because until that happens, the Germans and other defenders of orthodoxy just won't listen.

Dr. Krugman:

Having been told that it is one of the hot topics in Economics, what is your opinion on Behavioral Economics? Do you see it becoming more than just a collection of empirical results into a unified theory?

I think there's a lot of very good work in behavioral econ. But I don't expect a unified theory for many, many years. There are just two many ways the assumption of perfect rationality can fail, and I don't think we have enough broader understanding to put it all in one package.

That said, we can use behavioral econ even as it is, as long as we're modest about modeling. As long as we are prepared to say "this is how people actually seem to behave" without demanding general theorems -- for example the obvious reluctance to accept nominal wage cuts -- we can go a long way toward analyzing real-world issue in a way that can guide both prediction and policy.

Do you think the Euro can still be saved?

What should have been done to avoid this?

They really shouldn't have created the euro in the first place -- it was obvious even when Maastricht was signed that Europe didn't have the right preconditions. (I used to joke that they should have signed the treaty not in Maastricht but in Arnhem; it was a bridge too far).

But now that it exists, it would be a political disaster to let it fail. Ideally we would move quickly to true fiscal union. Since that isn't likely, the next best is to raise the inflation target, which would make the process of adjustment to imbalances much easier (Spain wouldn't need deflation, it would just need to lag inflation in the core nations).

It's not an impossible task, but everything depends on whether the European elite will be willing to drop its illusions and stop making everything into a morality play -- and my views on that keep fluctuating.

What do you think is the best argument towards influencing people away from economic austerity?

Edit: By request for those reading that need a definition, wikipedia defines economic austerity as "...a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided."

I think it is to point out that if nobody is buying, nobody can sell. Austerity in a depressed economy makes the depression deeper, and that is, I believe, a point people can grasp. Of course, it's a point made easier to grasp now that the Irish and others have given us such clear examples of how bad the results of austerity can be.

As you know, Paul, ever since I decided to force my 700 Econ 1 students to read Milton and Rose Director Friedman's "Free to Choose", I have been trying to understand why those who claim to be Friedman's intellectual disciples--especially those who hold appointments at the Becker-Friedman Institute--have not been aggressively out there condemning Bush, Bernanke, and Obama for insufficient policy activism. The natural generalization of virtually all of Friedman's work to the current situation is that the task of the government is to Stabilize the Growth Path of Nominal GDP by Any Means Necessary--which means issuing cash and buying stuff that is not a perfect substitute for cash with it until nominal GDP is on its previous growth path.

Yet the ranks of Friedman disciples appear to be limited to Scott Sumner and (perhaps) David Glasner.

And in this morning's FT I read my guru Martin Wolf writing about how for central banks "The immediate task is to manage an exit from the interventions." He does go on to say that "A far greater danger exists of premature retrenchment than of excessive delay..." but the initial sound bit makes me wince. And his colleague the highly-intelligent and usually reliable Gideon Rachman denounces you for shrillness and warns us that "the assumption of unlimited Dutch and German creditworthiness" to support fiscal expansion "is unconvincing".

It seems to me that we have lost not just those professional Ph.D. economists who became addicted to DSGE and RBC models and lost touch with reality, but have also lost a good many who either want to retain contact with reality or who ought to be willing to worship Milton Friedman as their guru. And I am still not sure why, or how...


Brad DeLong

Hi Brad

My best theory here is that it's political and sociological: conservative-leaning economists who should know better are driven by peer pressure to suppress their better instincts.

Think about Greg Mankiw and inflation. Early on in the Lesser Depression Greg came out for inflation -- fairly high inflation! -- as the solution, to give us negative real interest rates. But he encountered a firestorm of criticism from his political allies -- and went silent.

The point is that even among academics with tenure and established reputations, there is apparently enough leverage in the hands of the enforcers of right-wing orthodoxy that they end up bowing to the reign of error.

As for Rachman: I think this is a subtler form of peer pressure. And for what it's worth, Ryan Avent has already written the devastating reply to Rachman I haven't had time for because I'm on Reddit!

In March 1925 Lord Beaverbrook held a dinner with Churchill, then Chancellor, Keynes and a number of pro-gold standard Treasury men. The debate centered on whether a return to gold would:

Either i) “prevent life in a fool’s paradise of false prosperity” ii) “improve the terms of trade by overall cost reductions” and iii) “mean parity with Germany and the United States”.

Or i) mean “unemployment, downward wage adjustment, prolonged strikes” ii) “favor the special interests of finance at the expense of production” iii) “lead to a permanent contraction of production”.

Keynes spoke of the “paradox of unemployment amidst dearth”, when an economy can not clear wages and prices and falls into a liquidity funk. But the Treasury position prevailed and reluctantly Churchill went along. One month later, Britain restored the gold standard. It lasted seven, lean years. Everything Churchill and Keynes feared came true. Not one of the alleged benefits materialized. Churchill called it the worst decision of his career.

How close are we to repeating this?

All around Europe's periphery they're doing it as we speak, er, type. The euro has served as the functional equivalent of the gold standard.

The difference for, say, Spain is that since they don't have their own currency, it's much harder to change course than it would have been for Britain under gold. But if you look at, say, Latvia, they're doing the full Churchill -- and being hailed as a role model even as they enforce a devastating slump on themselves.

Hi Dr. Krugman. How do you feel about NGDP targeting, and do you think there'll be a QE3 anytime soon?

I don't share the view that there's some fundamental reason why NGDP is better than other ways to make the Fed take its dual mandate seriously; price level targeting, or just a symmetric treatment of unemployment and inflation, could be better in principle.

But I do see the point that nominal GDP targeting (for those who have no idea what this is about) could be a way to de facto raise the inflation target without saying so. So I'm OK with it as an idea.

About QE3: God knows. Logically, the Fed should do it. But logically the Fed should be doing lots of stuff it isn't.

How do you maintain such a lovely beard?

Shave around it every day, and get your wife to clip it fairly often.

Do you think the permanent downward pressure on wages that young adults entering the labor force during a recession face is a failure of policy or an inescapable reality? How can it be mitigated?

To coin a phrase, End This Depression Now! Further instructions in the book.

Is there an accurate first order calculation that can describe the impact of increasing/cutting government outlays on jobs? I've always used a very basic assumption (mostly for mathematical ease) to assess the impact at $100k of spending per a result, my best estimate for assessing the impact of balancing the budget through spending cuts alone would cost our country ~15M jobs (assuming our deficit is $1.5T) accurate/inaccurate would you characterize this analysis?

Accurate I don't know. But a rule of thumb would run something like this: multiplier of around 1.5, based on a growing body of empirical work. So $100 billion in spending cuts would reduce GDP by $150 billion or one percent. Christy Romer says that's about a million jobs. So, one million jobs for each $100 billion of spending cuts.

But wait, that's not the whole story: because spending cuts shrink the economy, they reduce revenue, so $100 billion of spending cuts probably reduces the deficit only something like $65 billion.

Now, the deficit is more like $1.2 trillion (I think -- won't check now) than $1.5 trillion. But even so, by my calculation this says that trying to eliminate the deficit with spending cuts would lead to the loss of around 18 million jobs.

Unless, that is, the confidence fairy makes it all better.

Hello Dr. Krugman, thank you for doing this. I have a broad question that deals with how you feel about the scientific process in economics and the impact this has on determining the best fiscal policy.

It seems extremely difficult to determine the best economic policy for a country when economics appears unable to test the veracity of macroeconomic claims empirically using experiments designed to verify causality and effect size. This leaves the door open to a vast amount of debate about what the “best practices” are in macroeconomics, as individuals can make use of a massive amount of data (correlation and regressions, historical examples, etc.) to support what they see as the proper role of the government in setting economic policy.

If there is so much data, which can be interpreted post-hoc in many different ways, and is incapable of being experimentally tested, how do we determine what is not only good science, but “best practices” in macroeconomics?

Thank you!

Well, not being able to do experiments is a problem, but not as bad as all that. We do have statistical techniques for trying to sort out what's going on, although I'm skeptical about their power. But mainly we can look for "natural experiments", which often tell you a lot. In End This Depression I talk about how wars provide a natural experiment on fiscal policy; right now forced austerity in Europe is providing another set of natural experiments.

You may ask whether both sides in every debate won't nonetheless find ways to support their positions. My answer here is that this is not, in fact, happening. On the question of whether austerity is expansionary or contractionary, we had some alleged evidence for expansionary effects, but it was quickly shot down by the normal process of scholarly discussion. In any normal scientific debate, this would now be a settled issue.

I guess that what I'm saying here is that while the non-experimental nature of economics is an issue, the apparent inability to resolve differences that you see right now is about politics, not the inherent problems of the discipline.

What's your take on the seeming increase in anti-Fed/goldbuggery stuff among some young people?

My sense is that young people feel, rightly, that the establishment -- or if you like, the Very Serious People -- have let them down, and betrayed a trust. Given that, they're looking for alternatives, and the goldbug types have a well-established sales pitch backed by a lot of stuff that looks scholarly if you aren't already sophisticated in such matters.

I would add that Ron Paul's anti-war stance has given him some credibility among people who might otherwise have passed him by; you have to look hard to realize that his reasons for opposing Iraq were very different from, say, mine.

Professor, do you believe that Keynesian economics can still be applied today if you take in consideration that businesses and countries now deal with resources as finite?

Resources have always been finite -- they're just a bit more finite now. The basic rules haven't changed; Keynesianism has, if you asked me, worked spectacularly well as a tool of analysis these past three years.

[No question]

Thanks for all the questions, all. It was fun.

This interview was transcribed from an "ask me anything" question and answer session with Paul Krugman conducted on Reddit on 2012-05-01. The Reddit AMA can be found here.