Defending what Paul Krugman Wrote
By Arnold Kling
In 2002, he passed along a joke that the economy needed a housing bubble. Krugman is controversial, so the post generated comments on this blog and elsewhere, some of which are overly “gotcha” in character.
Some points I would make:
1. Krugman was mainly expressing pessimism. He was not cheerfully advocating a housing bubble, but instead he was glumly saying that the only way he could see to get out of the recession would be for such a bubble to occur.
2. In the event, we had a housing bubble and we got out of the recession. To me, this raises the question of whether a distorted recovery is better than an undistorted recession. That question might be asked in the context of fiscal stimulus as well–at what point do the distortions of the stimulus outweigh getting out of a recession?
3. I personally do not think that Greenspan caused the housing bubble. I do not believe that monetary policy and short-term interest rates are as all-powerful as many economists do. What I was writing in August of 2002 was this.
4. Paul Krugman and Brad DeLong thought that Greenspan kept rates too high in 2002. This makes them poorly positioned to criticize Greenspan now for keeping rates too low. I am pretty sure that Brad is guilty of this hypocrisy. I believe that Paul is not.
[UPDATE: Brad denies committing this hypocrisy, and he is right. He has stood by his views that interest rates in 2001 and 2002 were, if anything, too high. I stand corrected.]
5. The main reason I put Paul’s quote on my blog was because I am compiling a history of the events that caused financial crisis. I have a paragraph that says:
the current crisis led to a sharp recession that could not be mitigated with monetary expansion. This suggests that in hindsight more should have been done to prevent the housing bubble from expanding as much as it did. This in turn suggests that the monetary easing that took place from 2001-2003 was excessive. However, at the time, the sluggish growth in employment (the 2001-2003 period was commonly referred to as a “jobless recovery”) was thought to justify the monetary expansion and low levels of interest rates.
The Krugman quote can help to support that paragraph. I can pick other quotes, obviously, but the one about needing a housing bubble is particularly poignant.