economist interrupted

The Paul Krugman show

Paul Krugman is an American economist © David Levene
The world's most influential economist, Paul Krugman, has his fans -- and his critics.
  • Why it matters

    Why it matters

    Economist Paul Krugman is a controversial thinker but his polemical style may restrict debate.

  • Facts

    Facts

    • Paul Krugman is an economist, a professor at the City University of New York and a writer of op eds for the New York Times.
    • Mr. Krugman writes about income distribution, taxation, macroeconomics and international economics.
    • Mr. Krugman was awarded the Nobel Prize for Economics in 2008 for his trade theory work.
  • Audio

    Audio

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[This profile of Paul Krugman ran on our pages more than two years ago. To say that much has changed in the world since would be an understatement. We’ll be getting an update on Mr. Krugman’s views in an interview on Wednesday, January 31 at 7 p.m. CET, which you can follow on our twitter page. For some of the Nobel laureate’s more recent thoughts, read our interview just one month after the inauguration of Donald Trump.]

The man in the creased jacket and brown corduroys rides his bicycle past the black limousines. He stops outside the grandiose façade of Berlin’s luxury “Hotel de Rome” and climbs off the somewhat shabby bicycle, locking it with a simple combination lock. He moves slowly through the foyer, on his way to a talk on the state of the world economy, which he will give to a select audience of executives. Many of them came to the event in the limousines parked outside.

This is the unassuming, unpretentious side of Paul Krugman, the world-famous economist, Nobel Prize winner of 2008, Princeton professor and famous columnist for the New York Times. He is the most influential economist in the world.

From another angle, Professor Krugman looks somewhat different. Like a pope, his proclamations on financial and economic crises come with a claim to infallibility. Anyone daring to challenge his dogmas had better be ready to be denounced from the pulpit.

Mr. Krugman is quite a phenomenon: a great sage, a media superstar, a political activist, the enfant terrible of the economic establishment. There is no shortage of labels for this short-statured New Yorker. He is now 62 years old. By the time he was 25, he had already laid the groundwork for his Nobel Prize.

By then he had written the 10-page paper that would radically revise a key aspect of David Ricardo’s long-established theory of international trade.

Mr. Krugman’s later career is a story of self-transformation.

International trade, Mr. Krugman argued, did not primarily take place between countries with different economic structures, as had long been thought. In fact, he showed, most trade was between countries with similar economic structures. Twenty-nine years later, this insight would bring him to Stockholm to collect his Nobel Prize.

The idea is now firmly established in economic thought and is the foundation of his academic reputation.

It is his popular writing, however, that has brought him worldwide fame. Twice a week for the last 15 years, Mr. Krugman’s column, “Conscience of a Liberal,” has appeared in the New York Times, supplemented by even more frequent blog posts. From this platform on what is still the flagship of American journalism, Mr. Krugman holds forth on economics and politics.

But his reach goes wider still. He has almost one and a half million global followers on Twitter, sensational numbers for an economist. To put that in context: Dr. Hans-Werner Sinn, Germany’s best-known economist, has a Twitter following of 4,000. Mr. Krugman’s books soar effortlessly into the best-seller lists. They have sales figures many of his colleagues would kill for.

At the same time however, Mr. Krugman ranks as one of the most controversial economic thinkers of our time. Controversial, since what he argues often bears little resemblance to reality. Controversial, because of his unrivaled polemic style. And controversial, because he is quite prepared to personally attack his opponents.

Mr. Krugman described the Bush era as “years of shame” for the United States. But his criticism has extended to Bush’s successor: Barack Obama and his economics team, he has said, “lost touch with reality.” His fellow economists Kenneth Rogoff and Carmen Reinhart became the targets of his caustic mockery, simply due to a technical error he claimed to find in one of their studies.

 

Paul Krugman and George Bush jr
Paul Krugman and George W. Bush during a visit to the White House in 2008. Source: Corbis

 

His contempt has found many targets. The policies of German Chancellor Angela Merkel brought “complete capitulation and total humiliation” to Greece. In 2007, he called Peer Steinbrück, her then finance minister, “bone-headed,” because of his failure to launch a stimulus program in response to the financial crisis.

For Mr. Krugman, the entire management of the euro zone’s debt crisis is based on “fantasy economics.” Supply-side economics, a particularly strong tradition in Germany, is “more a cult than a school of thought.” The cult, he claimed, merely “justifies the prejudices of the wealthy.” This explains its influence.

The rhetoric could hardly be more polemical. The clichés and frequently arrogant turns of phrase seem far removed from the scholarly discourse of a Nobel Prize winner. But that appears not to bother him.

Why, we might wonder, does the soft-spoken Nobel laureate feel the need to be so endlessly provocative? He is hardly short of attention. He has already received the very highest accolades of the international academic elite.

In a revealing phrase, Mr. Krugman once described himself as a “lonely voice of truth in a sea of corruption.” Perhaps this is how he sees himself, as the last honest man, a missionary unswerving in his devotion.

Mr. Krugman’s later career is a story of self-transformation, with the publicity-shy, somewhat solitary academic turning himself into the sharp-tongued tribune of the American left.

As told by Robert Solow – Mr. Krugman’s former mentor at the elite Massachusetts Institute of Technology (MIT), and likewise a Nobel prize winner – the change seems like Jekyll and Hyde. The Mr. Krugman he knew, said Mr. Solow, was an affable and almost shy man. The newspaper column, it seems, prompted a change, with his personality aligning with his polemical persona.

If Mr. Krugman inherited his liberal outlook from his parents, the caustic vigor of his expression seems to come from his second wife, the economist Robin Wells. Their collaboration has changed over the years. At first, they co-wrote textbooks. Later, Ms. Wells began to edit Mr. Krugman’s texts. Soon, the tone became sharper, the confrontation more dramatic. The balanced academic style all but disappeared. Ms. Wells never made a secret of her leftist politics. After former U.S. President Ronald Reagan’s election victory, she temporarily emigrated to Britain in protest and disgust.

Meeting Mr. Krugman in person, it is hard to believe this shy, amiable figure, with his gray academic’s beard, could be the same man as the sharp-tongued crusader. But a flame of zealotry flickers in the dark, alert eyes.

 

Krugman with his wife source Johansen Krause
Mr. Krugman with Robin Wells, his wife. Source: Johansen Krause

 

For all that, his academic positions are anything but extreme. Mr. Krugman describes himself as a “free-market Keynesian.” Like most of his colleagues, he is a believer in capitalism. But like most of his colleagues, he also believes that capitalism needs to be held in check. This is the job of the state, using smart financial and monetary policies. Mr. Krugman is not a true believer in the market, like Milton Friedman or Friedrich Hayek. Instead, he sees himself as an investigator of how the market works.

The academic Mr. Krugman takes a neutral, sober tone, with none of the point scoring of his columns. He expresses himself in mathematical formulae for pages at a time: his virtuoso way with figures has been a large contributor to his academic reputation.

Mr. Krugman’s research and teaching has all been done at elite American universities. After Stanford, Yale and MIT, in 2000 Ben Bernanke – later the chair of the Federal Reserve – brought him to Princeton. He wrote his doctorate at MIT, under the supervision of the German economist Rüdiger Dornbusch. By the age of twenty-four, he had his first teaching job at Yale. Not bad for the son of an insurance salesman.

Early on, before his academic career really took off, Mr. Krugman was politically active. He demonstrated against the war in Vietnam and campaigned for political candidates of the Democratic party. A man of the left. It was all the more striking then when in the early 1980s he became an economic adviser to the Republican President Reagan.

By then, at the ripe old age of twenty-nine, he was the hottest young talent in American economics. His only peer as a precocious economist was Larry Summers, another convinced Keynesian. Their friendly rivalry has proved enduring: Mr. Summers, the maverick, later welcomed into the establishment, Mr. Krugman the much-feared troublemaker.

Mr. Krugman’s uncompromising and frequently harsh tone has left even Democrats wary. When Bill Clinton was elected president in 1992, he is said to have asked Mr. Krugman if he could simultaneously balance the budget and implement health-care reform. In reply, the economist told President Clinton he couldn’t. He was going to have to choose.

“That was the wrong answer,” Mr. Krugman later told the magazine Newsweek. He was not invited to join the White House team. President Obama too has kept his distance from Mr. Krugman, after the economist sharply criticized his administration for its soft-touch approach to Wall Street after the financial crisis. “He even pronounced my name wrong,” complained the Nobel Prize winner.

Mr. Krugman rose to worldwide fame as one of the harshest critics of then President George W. Bush. His columns tore into Bush’s “tax cuts for the rich,” while also railing against the ideological zeal of the neo-conservatives, the “freedom fighters” in the White House that many consider to be the architects behind the U.S. invasion of Iraq. Even his colleagues at the New York Times were made uneasy by these energetic but ill-informed forays into security policy. Mr. Krugman, a self-described “amateur historian,” seemed to want to show he could do more than just economics.

 

yellow illustration of Paul Krugman by David simmonds
Paul Krugman is one of the world’s most respected – and most feared – economists of our time. Illustration by David Simmonds

 

After the attacks of September 11, 2001, Mr. Krugman became the new hero of liberal America, willing to go against the patriotic mood music, fearlessly denouncing the mistakes of the Bush administration. With his columns a massive popular hit, he toured the country, making public appearances in crowded auditoriums.

“Mr. Krugman is coming!” announced the posters in front of the “92nd St Y,” Manhattan’s famous Jewish cultural center. “He called out Bush’s lies before anybody else,” said James Lewis, one of about three hundred people in the audience that night. In some ways, Mr. Krugman’s public appearances were quite un-American: no great performance, no entertainment, no political slogans. Here too he spoke in measured tones. At times he seemed to doubt whether all these people could really have come to listen to him.

Mr. Krugman is famously quick on his feet in debate. He can also be witty. At one point, it came out that he had been hired as a consultant by Enron, a corporation later to collapse in scandal and bankruptcy. His fee, $37,000 for three days work, provoked particular outrage. Wasn’t this an excessive amount, he was asked. Mr. Krugman used his column to respond. Not at all, he wrote, at the time his fee for a one-hour talk was $20,000. Enron had gotten quite a deal.

He was once asked if he thought the terms of U.S. trade with China – then, as now, accused of currency manipulation – could be regarded as fair. “Yes,” he replied, “it is all fair and balanced – the Chinese send us toxic toys, and we send them toxic securities in return.”

But there’s no funny side when it comes to his favorite topic, the fight against austerity. Here the passion seems more suited to a religious war than a scholarly debate.

 

Euro Zone Debt Crisis-01

 

His quarrel with the economic historian Niall Ferguson is legendary. Their dispute dates back to April 2009, at a discussion panel at New York’s Metropolitan Museum of Art. Relations seemed cordial at first, with the two men discussing the right approach to the financial crisis. But as the debate went on, the bitter animosity between the star historian and the star economist became ever clearer.

The dispute hinged on whether the state should intervene by running deficits to alleviate the effects of a crisis on the real economy. Mr. Ferguson cast doubt on the effectiveness of any debt-financed stimulus package, which he claimed might force up interest rates and undermine market confidence. Mr. Krugman argued passionately that the state should invest to compensate for falling demand. Both agreed that even the wealthy United States could not run up debt indefinitely without risking a solvency crisis. But they fought doggedly over the details. By the time Mr. Ferguson, in his rather smug way, questioned Mr. Krugman’s mathematical ability, the economist seemed set to explode, wriggling in his chair.

Mr. Ferguson’s judgment also came in a three-part take-down of Mr. Krugman in the Huffington Post. Not only was Mr. Krugman flat wrong, he was a ridiculous figure, and a bully who poisoned public debate. The series title, “Krugton the Invincible,” made satirical use of a name Mr. Krugman had given himself, riffing on a comic book hero of the 1980s. Hitting back in caustic blog posts, Mr. Krugman accused Professor Ferguson of lacking even the most basic understanding of economics.

Mr. Krugman has his sights on bigger targets than just his colleagues. Since the onset of the 19-nation euro-zone’s debt crisis in 2010, his principal enemy has been clear: Germany’s Chancellor Angela Merkel.

Mr. Krugman sees in Ms. Merkel a spiritual daughter of Heinrich Brüning, the German leader whose rigid financial policies “sealed the downfall of the Weimar Republic.” The austerity prescribed by Ms. Merkel for Greece and Europe as a whole is “an act of monstrous folly,” driven by “pure vindictiveness.”

Mr. Krugman profoundly believes that cutbacks in state spending are utterly misguided as a response to the crises of our time. The state should take exactly the opposite approach, using fiscal policy to pump massive stimulus into the economy. He bases this on the theories developed by John Maynard Keynes and Irving Fisher in response to the Great Depression of the 1930s.

Private households and the financial sector, Mr. Krugman claims, are still paying down the debts incurred in the housing bubble before the 2008 financial crisis. As long as this economic phase persists, their spending will be at a reduced level. This brings in turn a sharp fall in demand and price deflation. Debt burdens thus grow larger in real terms. Given this, the state can and must react, especially if interest rates have already been cut to zero.

Mr. Krugman is not alone in thinking this. In fact, he is the most prominent representative of a whole movement, which he refers to as the “MIT gang.”

 

Krugman MIT corbis
Mr. Krugman values his fellow economists who are also associated with MIT. Source: Corbis.

 

The “gang” is the counterpart to the famous “Chicago Boys.” Its members include Ben Bernanke, Mario Draghi, Oliver Blanchard, Maurice Obstfeld and Stanley Fischer, to name only the most prominent examples. In writing about the gang, Mr. Krugman went on to add: “M.I.T.-trained economists, especially Ph.D.s from the 1970s, play an outsized role at policy institutions and in policy discussion across the Western world. And yes, I’m part of the same gang.”

By contrast, the Chicago Boys, followers of Milton Friedman, had thrown Keynes into the trash can. But on MIT’s Cambridge campus, the English economist remained very much in favor. Through the work of the “gang,” Keynes now has greater political significance in the United States than ever before. Mr. Bernanke ran the Federal Reserve.  Mr. Draghi is head of the European Central Bank. Mr. Obstfeld has succeeded Mr. Blanchard as chief economist of the International Monetary Fund. Mr. Fischer, highly influential as the teacher of the “gang,” went on to become vice-chair of the Fed.

MIT, with its gang, has pushed aside Chicago as the incubator of modern economic thought. The market fundamentalism and small-state theory of the “Chicago Boys” may have dominated the 1970s and 1980s, underpinning the radicalism of the Thatcher and Reagan revolution in the United Kingdom and the United States. But their influence is rapidly waning in this most capitalist of all countries, the United States.

This is the truly astonishing development in today’s economics. And Paul Krugman has played a large role in it. No one has attacked neo-classical, Friedmanite dogmas with quite the same ferocity. No one is tougher in attacking politicians – Ms. Merkel above all – who want countries to tighten their belts in response to the ballooning debt burden.

Somehow Mr. Krugman’s fury keeps on growing. The source of this anger may be the man’s greatest enigma, since in fact worldwide there has never been as much Keynesian intervention as there is today.

Mr. Krugman will not admit that there are situations when there is no real alternative to austerity.

Since the crisis began, the largest central banks have flooded the world economy with liquidity, and brought their base rates close to zero. The governments of the industrialized world, with the exception of Germany, are still running huge budget deficits. They have put together enormous rescue packages, partly to rescue the banks, partly to bail out bankrupt states, partly to invest in infrastructure.

In the euro zone, government deficits are running at an average 1.4 percent of gross domestic product (GDP), which is low compared to some of the big-spending years since the debt crisis. Since the beginning of the crisis, overall euro zone state indebtedness has gone from around 70 to 114 percent of GDP.

The state is bigger and more important than ever. But apparently governments should now run up even more debt. That, at any rate, is what Mr. Krugman preaches to his ill-informed congregation.

Few economists – not even a conservative like Mr. Rogoff – would question that austerity can be dangerous under some circumstances. But Mr. Krugman will not admit that there are situations when there is no real alternative to austerity – as when a country like Greece runs up so much debt that it can no longer access capital markets.  Or when indebtedness spirals so fast that a finance minister cannot risk the slightest spending increase, for fear of what the markets might do.

 

Tsipras, Krugman, corbis
Mr. Krugman with Greek Prime Minister Alexis Tsipras. Source: Corbis

 

Mr. Krugman makes another shaky claim: that the leaders of the euro zone forced Greece’s left-wing government into capitulation, brutally imposing a regime of austerity.

“The severity of the austerity measure is entirely due to the fact that Greece’s budget deficit had grown to almost 10 percent,” said Mr. Rogoff, adding that the IMF’s program for Greece was “one of the most generous ever put together by the institution.”

“Debt reduction! Debt reduction!” demands Mr. Krugman, and fails to see that Greece’s partner countries have cut the interest rates on its loan repayments to a level which other highly indebted countries can only dream of. And the Greek debt burden has been restructured on such generous terms that the billions to be repaid have disappeared into the distant future.

Mr. Krugman is a master at evading cognitive dissonance. Like the fact that Ireland and Spain, and to a lesser extent Portugal, have recovered in spite of an allegedly suicidal course of moderate deficit reduction. In fact they’ve recovered because of it.

“Since he is fighting austerity policies in the United States, he can’t conceive that they might work elsewhere,” said Jacob Kirkegaard, expert on Europe at the Peterson Institute for International Economics in Washington DC.

 

Deficits and Debts-01

 

The world is far more complicated than it appears to Mr. Krugman. And its complex contours should not be forced into the dumbed-down slogans of a provocateur.

Neo-classical economists do not argue that the state should never intervene in the economy, smooth out economic cycles or even try to stabilize the market. But unlike Mr. Krugman, they recognize that these tasks are infinitely difficult and perhaps ultimately impossible. The Nobel laureate appears to believe that crises are straightforward things, which happen when politicians somehow turn the wrong dial.

In fact, economists have been trying for decades to give government leaders, finance ministers and central bank presidents the tools and instructions to properly guide capitalism. They have not always gotten it right, as the last twenty years can show. But this, not least, is because human behavior, as Keynes put it, is governed by “animal spirits.” Human beings, in other words, do not always behave rationally. We can’t always calculate what they are going to do.

No one knows this better than Paul Krugman himself, but he refuses to draw the obvious conclusions. When it comes to the economy, his can-do spirit is unshakable. His great hero Keynes once famously said, “When the facts change, I change my mind.” Mr. Krugman apparently does not agree.

And that may ultimately be his downfall.

 

Jens Münchrath, Torsten Riecke and Frank Wiebe cover economics and finance for Handelsblatt out of Düsseldorf and New York. Astrid Dörner and Moritz Koch  in the United States also contributed to this article. To contact the authors: muenchrath@handelsblatt.com, riecke@handelsblatt.com, wiebe@handelsblatt.com 

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