The Ultimate Krugman Take-Down

Tyler Durden's picture

Forget Ali - Frazier; ignore Santelli - Liesman; dismiss Yankees - Red Sox; never mind Silva - Sonnen; the new undisputed standard by which all showdowns will be judged happened in Spain over the weekend. During a debate on Europe's crisis, Pedro Schwartz (a mild-mannered Spanish 'Austrian' economics professor) took on the heavyweight Paul 'I coulda been a Fed Chair contender' Krugman, and - in our humble opinion - wiped the floor with his Keynesian philosophy. From the medicinal use of more debt to fix too much debt, to the Japanization of world economies and the demand-side bias of every- and any-thing - interested only in the short-term economic growth; the gentlemanly Spaniard notes, with regard to the European crisis, the fact that "Keynesians got us into this mess and now we have to sacrifice our principals so that they can get us out of this mess". Humble and generous in his praise - though definitively serious with his criticism - Schwartz opines: "Often Nobel prize winners are tempted to pontificate on matters that are outside the specialty in which they have excelled," noting "the mantle of authority whereby what ever they say - whether sensible or not - is accepted with resignation from some and enthusiasm by others." Krugman's red-faced anger is evident at the conclusion as he even refused to shake Schwartz's hand after the debate.

For 15 minutes of both education and entertainment - this is as good as it gets...

  • Starting from around 35:00 the Spanish professor praises and criticizes in a thoughtful and gentle tone
  • At around 39:00, he addresses the demand-side description of the world
  • Krugman's less-than-happy response (which sparks quite a rowdy argument) begins around 48:20


(h/t Jean Luis Martin of the Truman Factor)

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
GMadScientist's picture

Bravo, Senor Schwarz!

A most elegant defense of conservative Austrian principles. You may not convert an incorrigible Trot like me, but I very much admire your ability to express your position and you have certainly given me many things to think about with respect to my own principles.

I would sacrifice large amounts of my purchasing power to listen to a 3-way debate between P-Krug, Senor Schwarz, and Steve Keen.

QuietCorday's picture

I have watched the whole thing and it is pretty interesting. 

Krugman identifies the correct problem, understands the core issue is competitiveness, understands the catalyst was cheap debt, and underscores the need for wages to fall to allow Spain to recover competitiveness. He also says it is next to impossible to get labour costs to fall through austerity measures.

I would agree with this.

His solution is for Europe to bail out Europeans banks. ECB support european bonds, and to inflate to get German wages up. 

To be honest, I would say these are valid points -- from a theoretical angle.

But we do not live in a theoretical world.

What Krugman does not discuss is how on earth, from a policy perspective, you can arrest peripheral costs while inflating the currency to raise German wages.

THIS IS THE KICKER. He says himself Spain suffered inflation through the boom, caused by -- yes -- underpriced debt for its level of economic competitiveness. Who is to say that this problem will not reappear if Europe follows his prescription? The short answer to that is that it will. If Europe supports European bonds and bails out banks, this will underprice peripheral debt AGAIN (but not to the extent of the boom years, I admit), but the real problem is the nature of Europe itself.

Say you manage to spot-inflate (which is somewhat tricky from a policy perspective) in Northern Europe, and increase German wages, where exactly will that money go? It is is going to seep South. There are no capital controls in Europe, no migration controls. No country has across-the-board price or wage controls (though Cyprus now has some prices controls).

You will end up with the North buying up the South, not "investing" in the South but buying it up for "consumption". This will cause price rises in the South as Northern money chases peripheral assets and demand for certain goods increases, pushing prices above locals' affordability.

You would have the boom problem all again, and it would leave the peripherals literally priced out of their own countries -- the young would leave, taking their economic potential with them; and you would end up with social unreast and strikes. The peripherals would start to lose economic and political sovereignty in their own country by default (there coms a point when a village gets to be majority EU migrants and they start to elect fellow countrymen to political positions). The South would become a Med Disneyland and retirment village for the North, with ordinary Southerners condemned to low-paid service jobs, while the Southern rich made a killing.

The only way you could pull Krugman's prescription off would be to declare a moratorium on the founding principles of the Eurozone itself. You keep the euro, have the ECB support European bonds, inflate the currency, but you would need to install border controls again, probably have price and wage and capital controls for Southern Med countries, including serious taxes on flights, and basically attempty to run a system of monetary "federalism" between a set of isolated and protectionist states. God help you trying to pull that off.

I think what Krugman fails to understand is that Europe is not the US. It is vastly smaller; for example, I can be in Spain in less than two hours from my house in Northern England if I fly. I can drive to Poland from Britain in about 18 hours. We are not talking about the kinds of distances incurred in the US. To be honest, the only reason that stops many Europeans from moving en masse to other countries to live, work or retire is the language barrier. Unlike the uncompetitive states in the US, the peripherals are very attractive places for Northern Europeans: they are warm, pretty, laid-back, have cafe culture and warm beaches. Given half the chance, the north would buy up the south down to the last goat shed.

He mentions the cheap debt fuelled a construction boom in Spain, but he fails to understand that construction boom was fuelled by excess foreign money, inflated through cheap debt monetary expansion in those countries, a lot of it British, pouring into Spanish villas and apartments. People don't build unless they think they have buyers. Krugman's solution would create exactly the same problem again -- but this time it would be German money. 

To add, it is interesting that he never mentions the need to close off parasitical leaks in the economic system in  order to increase competitiveness.

Doug_Canada's picture

I don't see that Eurpoe is not the US? Does the wealth and power of the economies of California and New York not make it impossible for Missisippi to make an export market? Or has it been going on so long in the US that we don't notice? Just a side note. Otherwise think your views are very interesting.

juujuuuujj's picture

Krugman's view that "the stimulus programs expired too soon" is ridiculous. Aid to banks at the expense of people's purchasing power has never stopped since 2008. Who said only car companies count as part of the "stimulus"?

TraitorsHang's picture

Watched it twice. Worth it both times.

Frederick N. Chase's picture

Actually, I suspect that Krugman "won" that interaction, in the minds of more than half the attendees.


I visited another of my favorite sites today, Michael Hudson's, which I like almost as much as ZeroHedge.

That site changes much rapidly and the articles are longer.

I happened to find what I'd say is a better and more comprehensive, if less dramatic, put-down of Krugman.


May 14, 2012  Paul Krugman’s Economic Blinders




Acton27's picture

Very sad that Krugman has to use this opportunity -- on foreign soil-- to show how little he understands about the US Constitution, the sovereignty of the U.S. states, and he history of the U.S.  We are much less integrated that the EU, and under no set of circumstances will the federal government be responsible for the debts of California.  But Krugman seems to think that the EU problems will go away if the EU were more like the US, and by that he means a central government.  How can a guy who is so clueless as to legal rights and remedies have a Nobel prize? 


salsabob's picture

I find it funny that what an econ blog finds as a "take down" is Schwartz's ad hominem attack on Krugman's credentials.  I guess that's what's left when one realizes there is no there there with Pedro's 10-minute diatribe.


Schwartz basic point is that govt holding rates low resulted in the financial bubble that eventually popped; his focus is pre-2008. On the other hand, Krugman’s response is about what has since happened after the bubbled popped; his focus post-2008. They essentially talked past one another with the only nexus between the two being Schwartz’s compounded conjecture of low interest rates being the cause of pre-2008 bubble cannot now be appropriate solution for the post-2008 popping and resulting economic contractions.


By bringing up the facts of what has happened since 2008 (i.e. “the experiment”), Krugman does destroy other Austerian notions of: federal deficit spending leading to “crowding out” private sector borrowing and higher interest rates; increased monetary base leading to price inflation; and public sector spending cut (i.e., austerity) leading to economic growth. However, he does not address Schwartz’s conjecture that it was low interest rates that caused the pre-2008 bubble and eventual financial meltdown. On the other hand, Schwartz never provided an argument for his govt-manipulated-low-rates-caused pre-2008-bubble conjecture.  And no, I’m not interested in being directed to go read Austrian; I’m just pointing out that, unlike Krugman, Schwartz did not put any meat on the bone of his basic conjecture - there is no there there (and thus, this econ blog is left to tout Pedro’s ad hominem as a "take down")


It would have actually been much more interesting if Krugman had addressed and Schwartz defend the latter’s primary conjecture of evil low interest rates. But, Krugman did not. It may be that Krugman wanted to keep the conversation within the realm of the forum’s intended topic of where do we go from here rather than looking back pre-2008. Who knows? But what we do know is Krugman destroyed the Austerian viewpoint with pointing out the facts of “the experiment” noted above.


Further, Krugman got Schwartz to state what he has gotten so many of these austerian sociopaths to come clean on – Pedro isn’t really about returning to economic growth or even about reducing public deficits; what Pedro, if honest, wants is to change the structure of state welfare systems and Krugman calls him out on his “hijacking” (see starting at 1:16).


Of course,  both Krugman and Schwartz live in the mythical world of fractional reserve bank lending, where banks’ lending is constrained by their reserves and interest rates signal savings just waiting for investment (or mal-investment) – it’s a world of magic ponies that often makes Krugman wrong and Austrians an anachronism.  But, I do understand that at least your magic ponies can poop gold nuggets.


Fiat Money's picture

lol.  Thanks for that (linked from "Krugman and the NEW AUSTERITY - GET USED TO IT" 7-23-2012)

  The problem is that Krugman IS NO LONGER A KEYNSIAN, he is NO LONGER a "liberal" - he is now a govt/elitist HIRELING, he is a PAID APOLOGIST for the Fed and the failed, corrupt, bankrupt, bailouts-soaking private bankers who are his real (NY based) constituents.  

   This is the core of the Obama co. Manchurian candidate  BAIT & SWITCH - tell us that giving billions (upon trillions)

of dollars of taxpayer extorted "bailouts" dollars (or license for the Bernanke Fed to spin up the printing presses)  to failed, corrupt, con-gress bribing banksters is "STIMULUS," when it really is nothing more than pure graft, corruption, extortion, and theft.  

  EVERYTHING the  Citi-, GS & jpm  financiers running the obama presidency do, is DESIGNED to FUNNEL MORE  taxpayer extorted monies, to them and their pals on Wall st. 

  Paul krugman is now AN APOLOGIST for radical right-wing "EXTORT THE PEONS" financiers - that makes him a radical right-wing loan-shark propagandist