Krugman says Thoma’s right, except when he’s wrong

July 26, 2011

By Paul Smalera
The opinions expressed are his own.

Reuters invited leading economists to reply to Mark Thoma’s Op-Ed on the “great divide” in economics and will be publishing the responses. Below is a recap of Paul Krugman’s reply in the New York Times.   Here are responses from Roger MartinAshwin Parameswaran, James HamiltonDean Baker and Lawrence Summers.

Paul Krugman, leading economic light of the New York Times Op-Ed page, agrees with today’s Reuters Op-Ed by Mark Thoma, where Thoma suggests that economists need to behave more like doctors and less like scientists. That is, economists should make themselves relevant by applying their knowledge to “work on the patient” — the patient being the economy. He fears that too often, economists act like scientists, who do valuable research but stay above the fray when it comes time to get their hands dirty. This remove from reality is perhaps a minor contributing factor to the collapse of the housing bubble that sparked the global financial crisis.

Thoma’s argument reminds me of a Planet Money podcast about the economists who saved the Brazil from hyperinflation, among them Edmar Bacha. “Terrified,” is how Bacha described himself when Brazil’s president and finance minister asked him to use a currency scheme he had concocted — over beers with economist friends — to stabilize the national economy. (To his credit, Bacha, to borrow Thoma’s analogy,  put down his microscope and picked up his scalpel, and his plan worked.)

Yet Krugman thinks Thoma goes off the rails when he suggests it’s important to listen to practitioners rather than solely academics when it comes time to forecast what’s really happening, or going to happen, out in the real world. Krugman writes, “practitioners, who base their views on how things usually work, are almost totally useless.”

While that may be true, I have a slightly more liberal reading of Thoma’s point: I don’t think Thoma is suggesting academics accept the interpretations of practitioners like say, the National Association of Realtors’ Chief Economist Lawrence Yun, who has long been the object of Internet scorn for calling a comically premature bottom to the housing market. I think Thoma is suggesting that academic economists perform some “signals intelligence” on economic reports that originate from outside the ivory tower. That rather than write for academic audiences on academic questions, they engage with economic realities a bit more frequently. That they knock down those NAR reports when they deserve to be knocked down, rather than merely scoff over them at faculty luncheons.

Krugman, for one, rarely fears going after the wise men of economics, no matter their political leanings, if he believes their thinking to be misguided. He’s the least of Thoma’s worries. But Thoma rightly argues that too many of their academic colleagues don’t risk engaging at all — they are the ones that need to be coaxed out into the conversation, to shed some light on the dark corners of the economy before some other solid-seeming sector (technology, anyone?) implodes and nearly sinks the ship, yet again.


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I am enjoying this news coverage.

Posted by M.C.McBride | Report as abusive

Santayana: “Those who do not learn the lessons of history are condemned to repeat it.”

But not always in the same way.

If we look at the years that led up to the Great Depression, we find many aspects of economic activity that are similar to those leading up to the Great Recession. It was a period of binging (The Roaring Twenties), loose money and, largely because of loose money, a stock market’s frenzied crash. Connect the dots … ?

That’s what economists do – they try to connect the dots. That is, find references in the past that explain the present. Some call this science but it is more like doctoring. There is no linear regression showing a direct correlation between the Great Depression and the Great Recession – that would be science. There is only the notion of similarity – which is doctoring.

The Doctor of the Day, at the time, was a British economist by the name of John Maynard Keynes, who postulated (in a seminal piece of work still referred to by economists written in the early 1930s) that the best way out of an economic downturn is Stimulus Spending.

That it works is not science but an almost proven fact that has been demonstrated historically. But it is an historical fact that the Right will neither acknowledge nor pursue in the present context. They have, as a counter-excuse, said that if we reduce the deficit then business will gain confidence and start investing again, which will create jobs.

This sort of nonsense makes most Corporate Managers just laugh (but behind closed doors). It is not Business Investment that will lead us out of the Great Recession but Consumer Spending – and that won’t happen until people are no longer afraid of losing their jobs. This change of mentality will not come in the present circumstance of insufficient and unstimulated Demand.

But as a politician once reminded us, economics may be a science but politics is the art of the possible. And Stimulus Spending from LaLaLand on the Potomac is just not possible – not this year and likely not next year either.

Which is neither science nor art – but just plain dogma.

Posted by deLafayette | Report as abusive

This series of articles and commentary by noted economists is a breath of fresh air amongst the numerous tabloid articles.

Posted by seattlesh | Report as abusive

Yes Dr. Krugman is not afraid to engage and challenge, including apparently Mr. Thoma. it would be wonderful for Reuters to follow this up with a series of articles and interaction amongst these same economists as to their personal take on the economy and the clown act in Congress.

Posted by seattlesh | Report as abusive

Could Summers, Krugman and others comment on how to get the Banks reinvest the trillions of dollars in their vault into the economy. Even, when consumers are prepared to make investment, the Banks’ reluctance to make basic commonsense loan has become an impediment.

Posted by 0okm9ijn | Report as abusive

I would paraphrase Krugman’s remark by saying “Krugman, who bases his views on how things usually work, is almost totally useless.”

What the “economic light” of the NYT is saying essentially that, if the real world does not match his economic model, then it is the real world that is wrong.

Unfortunately, Krugman is not alone in this. I have seen other “economists” share that same opinion, which is nothing but “flat earth” arrogance.

These people are not scientists, and Krugman is certainly no economist.

Posted by Gordon2352 | Report as abusive

What deLafayette forgot to mention is the fact that both the Great Depression and the Great Recession had long periods of Republican presidents leading up to them, who gave little or no attention to regulating the Banks, and big businesses who were promising bright futures to everyone, and setting them and the country up for a big fall.

Posted by edgyinchina | Report as abusive

I take pleasure in, lead to I found just what I was looking for. You’ve ended my 4 day lengthy hunt! God Bless you man. Have a great day. Bye