Sunday, September 13, 2009

Krugman vs. Cochrane

. Sunday, September 13, 2009

Paul Krugman stirred up a lot of conversation in the blogosphere and in the Ivory Tower recently with his NY Times article on the state of macroeconomics. Will has done a very good job covering Krugman's piece and John Cochrane's response for this blog. I wanted to throw my unsolicited two cents out there and engage the pieces that have been written.

I agree with Will and John Cochrane that Krugman is using his recently awarded Nobel Prize, along with his tenured, endowed Princeton professorship and his NY Times blog and column to push a partisan agenda and has been quite misleading in many of his writings as of late (which Will also covered here). Many of the claims/arguments he puts forward in the NY Times article are not well informed, incoherent, at times disingenuous and some even border on personal attacks on well-intentioned economists. However, I do believe that if he wants to turn himself into a money-making political hack, that's his business. I don't see anything wrong with him using his column and Nobel fame to convince others that Keynesian economics is the answer to all of the world's problems; I just wish he was more honest as he goes about it.

Cochrane does a good job calling out Krugman for the mistakes in his article and taking him to task for personally attacking other economists. He also provides a very good defense of mathematical economics, model creation and assumption building. His arguments for using advanced mathematics as a way of checking and proving logical arguments is quite good. He's right in that there are things we can't do with prose that can be done quite well with math, economics being one of them. And I'm sure he'd also agree that there is still a need to translate these models and equations into words so that the rest of the mathematically challenged world can understand what is going on; this is what Krugman should be doing with his column as Cochrane makes clear. His explanations of the economics, especially where Keynesians and Monetarists differ were sound and enjoyable, and showed key differences in positions between the camps and where he believed Krugman was wrong.

Even with all of the good things Cochrane does in his piece, he fails in some of the same ways Krugman does. They're both deeply ideological (which is clearly evident in their writing) and obviously have an agenda that they each want to promote. They both take extreme positions, Cochrane for unfettered, free market capitalism and Krugman, an expansionary view of government's role in society and expansionary government spending. Granted Krugman does it misleadingly in a NY Times article with a veiled political agenda, but Cochrane also has his own political agenda and interests that he seeks to promote.

It's pretty clear that unfettered, free market capitalism just does not work and his attempt to put a large part of the blame for the economic collapse on government intervention is clearly misleading. Moral hazard and government promoted excessive risk-taking are definitely to blame. But denying that the idea of self-regulation of banks was a bad one, as well as believing that a lack of regulation and oversight in other markets were solely the fault of the government is misleading and wrong. He criticizes the role of the government as regulator and argues that the problem started with the over-regulation of commercial banks. He believes that government did a poor job with its regulatory responsibilities (he's correct there), but denies the role that business interests and the push for unfettered capitalism played in dismantling the regulatory structure that had previously been in place as well as the culture and ideological leanings within regulatory agencies that believed a lack of oversight was a good thing because it was in the best interest of the banks and other large financial corporations to not be overexposed and take on too much risk and that they could police themselves. He would also have us believe that the market alone, with a little bit of help from the Fed, would have pulled us back from the brink last fall. It's pretty clear that without massive government intervention one year ago this weekend, the meltdown surely would have been much, much worse, not better.

Cochrane's portrayal of Krugman as equivalent to that of a "global warming skeptic, an AIDS-HIV disbeliever, a creationist" within his field is both ignorant and wrong. There is much consensus in medicine, environmental science and evolutionary biology on those three issues. In economics, I don't believe that sort of consensus exists, nor should it at the moment. There is much within economics that is not black and white, that simply cannot be proved with the rather limited toolbox that we have as scholars and the limited data that we have at our disposal to study such convoluted and difficult problems. It is not a verifiable fact that Neo-Classical Economics holds the key to knowledge within the field of economics and I hope even Neo-Classicists can acknowledge that. In my opinion, the Keynesians and the Neo-Classicists are both well short of the truth and have a lot to learn from each other as well as from emerging fields like behavioral economics.

Both of these men have been doing great scholarly work in economics for a long time. One, Krugman, has gained vast fame and fortune as of late, is trying to disseminate his work and beliefs to the masses and entrench his position in economic lore for many years to come. The other, Cochrane, sees his life's work, his beliefs and his ideology being poo-pooed on by a Nobelist he feels is being misleading, by government officials whom he feels are making bad economic decisions and by other lay people whom he believes are blaming the wrong people for the recent economic misery. Both have their own agenda and both are trying to ensure that their view of the economic world survives to breathe another day. Be careful how much stock you put into each of their viewpoints.


Krugman vs. Cochrane




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