The Econ world is abuzz with debate over this Krugman piece from 2002. Some argue that he was advocating a housing bubble, and others steadfastly defend his positions (and the pillars of Keynesian Econ). I’ll post excerpts from experts from both sides of the argument. This is shaping up to be a poignant real-world showdown between Keynesian Economists (represented by Nobel-prize winning economist Paul Krugman) and those from the Austrian School (like Mark Thornton from Mises.org). Ding, ding, ding:

Arguing that Krugman Advocated a Bubble:

Mark Thorton over at Mises.org highlights 3 quotes from this time period (2001-02) to demonstrate that Krugman did, in fact, appear to push for re-flating the tech bubble. This is the most damning, to me:

That is, I’ve always believed that a speculative bubble need not lead to a recession, as long as interest rates are cut quickly enough to stimulate alternative investments. But I had to face the fact that speculative bubbles usually are followed by recessions. My excuse has been that this was because the policy makers moved too slowly — that central banks were typically too slow to cut interest rates in the face of a burst bubble, giving the downturn time to build up a lot of momentum. That was why I, like many others, was frustrated at the smallish cut at the last Federal Open Market Committee meeting: I was pretty sure that Alan Greenspan had the tools to prevent a disastrous recession, but worried that he might be getting behind the curve.

However, let’s give credit where credit is due: Mr. Greenspan has cut rates since then. And while some of us may have been urging him to move even faster, the Fed’s four interest-rate cuts since the slowdown became apparent represent an unusually aggressive response by historical standards. It’s still not clear that Mr. Greenspan has caught up with the curve — let’s have at least one more rate cut, please — but the interest-rate cuts do, cross your fingers, seem to be having an effect.

Below is another strike against Krugman’s case (to the Austrian Econ crowd, at least). He made this comment in October 2001. There’s more, plus good commentary to be found at the original Mises.org piece:

In time this overhang will be worked off. Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer. But it seems inevitable that there will also be a fiscal stimulus package”

Seems like a pretty good argument that Krugman was pro-bubble back then. He was urging Greenspan to act “even faster”. He is advocating both low interest rates and financial stimus to get us out of the recession. He’s still banging the massive-stimuli war drum today. In the 2002 piece first mentioned, however, Krugman does appear to be hinting that Greenspan played a role in the tech-bubble.  How can he note this as a negative, while simultaneously pushing for interest-rate cuts and stimuli?

After reading the various arguments, it seems that Mr. Krugman was conflicted at the time. But he saw no good alternative to re-flating. Here is the opposing argument preferred by Paul Krugman himself (he linked to it in his rebuttal).

Arguing That Krugman Did Not Advocate a Housing Bubble:

Arnold King, Econ PHD from MIT, defends the 2002 piece saying:

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.

Was Krugman just being sarcastic? I guess it’s possible. But it’s important to note that Kling does not believe monetary policy are as powerful as economists like Paul Krugman do, and doesn’t blame Greenspan for the tech-bubble. So counting him as a strong supporter of Krugman’s overall argument is a stretch. But Kling is an MIT guy, with a PHD in Econ. So he’s a lot more book-smart than I will ever be. But the Austrian argument makes more sense to me, in this case.

Krugman also defended himself in this rebuttal, “I was on the Grassy Knoll, Too” today in the NY Times. His explanation is short, and he links to the Kling piece:

Guys, read it again. It wasn’t a piece of policy advocacy, it was just economic analysis. Update: A gracious, sensible explication from Arnold Kling.