Wednesday, February 10, 2010

Krugman and the Stata Center

The MIT Stata Center is the leaky and poorly laid out center for Electrical Engineering and Computer Science at MIT. It is in reality two divided towers, one for Computer Science and one for the more analytical EE studies. Of course the sides never really meet as was the intent. As they say, Function follows Form, or whatever.

Paul Krugman gave a talk there last week on economics. It was reported on in the MIT news and I comment briefly here. One is struck by the contrast of location since the Economics Department is located way across Campus and the only thing on the first floor of Stata worth the interest is the Day Care Center. One can see a great deal of symbolism in all of these items.

Now to Krugman. He states:

“In the Dark Ages, people forgot what the Greeks and Romans had learned.” It is an analogy Krugman favors these days when he thinks about his own profession. “We’re living in a dark age of macroeconomics,” Krugman said during his lecture, before an audience of several hundred students (and several of his former MIT colleagues) in the Stata Center. “Economists themselves are confused,” he added. “It’s been really amazing within the economics profession to see how much has been lost.”

One can immediately see that Krugman has limited historical knowledge. For example if one looks at the 7th Century, one sees Columbanus, the Irish scholar, founding dozens of schools, teaching Latin, Greek, Hebrew, and Aristotle and the other classics. The schools of Columbanus ranged from France, through Germany and down to northern Italy. They prospered and lasted quite a while. Further to the east we had the Library of Alexandria, which lasted until destroyed by the onslaught of the Arabs as they worked their way west to Spain. Yet even there they were again rebuilt at Cordoba and others sites. Isidore of Seville during this Dark Period drew together his great encyclopedia. There was a great deal of intellectual thought. Perhaps not what Mr Krugman would value however.

Krugman continues:

Thus Krugman believes the United States has benefited from the $787 billion federal stimulus package that was signed into law in February 2009; it consisted of a combination of spending programs on things like infrastructure, education and research, along with some state aid and tax cuts. Although unemployment has risen from 8.2 percent when the stimulus was passed to 9.7 percent today, Krugman thinks the legislation helped alleviate the recession’s effects. “We would probably have 12 percent unemployment in the U.S. if we didn’t have the stimulus,” he said. Yet the seemingly long odds against additional government spending are leading Krugman to think we may well be headed for a double-dip recession — the contemporary counterpart to the slump that occurred in 1937, just as the U.S. economy was recovering from the worst of the Great Depression.

It is not at all clear that the benefit was what he believe it was. Again as we have said monthly, the Romer data was never satisfied, we overshot on unemployment, yet did not exceed the level of the early 1980 Recession that resulted from Carter. Will there be a double dip, one thinks that given the confusion from Washington that there very well may be, and a significant one at that. The dip due to Washington's actions, or resulting confusion, rather than a dip due to Washington inaction.

He then comments on the efficient market theory, or hypothesis, as follows:

Additionally, Krugman thinks, efficient-markets ideology has allowed many misconceptions to flourish, including one he has frequently written about — the notion that government spending crowds out private investment, which Krugman believes to have been refuted long ago. “There are insights that have been hard-won, but they were hard-won 70 years ago, and were lost in the interim,” he told the MIT audience.

As to Government spending crowding our private investment, one need look no further than the current shabby state of the venture community. When the Government drives trillion dollar plus deficits one asks where does the money come from, it comes from sources which could place it in non-Government investments. Why do the investors choose that path, because of the anticipated uncertainties the Government has thrown in front of private investments, from taxes to fees to restrictions to overall market uncertainty.

Krugman goes on to say:

"By avoiding utter disaster,” Krugman said, “we’re avoiding looking at our own failings.” Referring to Ben Bernanke, chairman of the Federal Reserve, Krugman offered, “I have a high regard for my former department chair [at Princeton], but I’m not sure the fact that the world didn’t end is enough reason to make Ben Bernanke [Time magazine’s] Man of the Year.”

Perhaps he regrets that he was not man of the year! This comment has been made by him several times now and frankly it is in my opinion in poor taste, but one supposes he must say something.

Krugman ends his talk with one suspects is his form of humor:

As Krugman made clear, he does not expect that current policy stasis to change any time soon. Winding up his remarks, Krugman paused, looked down at the podium, then sized up the audience again. “I left a little [space] in my notes here that says, ‘Come up with something optimistic to say at the end,’” he remarked as the audience laughed, “but I don’t have anything.” Call it black humor for the new dark age.

The optimistic view is that we can and must reduce the debt exposure. There are many ways to do this, but simplicity and clarity of purpose are essential.

That is what seems to be lacking in Washington, and in Princeton, in my opinion.