Believe those who are seeking the truth. Doubt those who find it. Andre Gide

Friday, September 14, 2012

Paul Krugman's Baltic Problem

Well, since I'm writing about the K-man today, I thought I'd link up to this interesting piece by Swedish economist Anders Aslund: Paul Krugman's Baltic Problem.
Seems like Krugman's little IS-LM model made a few wrong predictions too. I guess the science isn't quite a settled as he would like us all to believe.

In any case, I haven't studied the Baltic region in any great detail. If there are any experts out there that would like to weigh in here, please do. My prior is that both Krugman and Aslund have some legitimate explanations for what is driving the Baltic recovery and expansion. But maybe one side is more persuasive than the other? What is the evidence? Would be interested to hear what people have to say, especially from those who know the area well. 


  1. Please, instead of throwing rocks at Krugman, take a moment and purse what could be a useful on any or all of the following:

    1. The Hamilton view aka Reagan hypothesis---both Krugman Aslund are wrong. It is neither about debt nor austerity, it is about Leadership. Austerity has been coincidental, at least arguably, to the fact that the 3 governments in these countries have shown leadership. Roubini, Project Syndicate, "Ineffective governments with weak leadership are at the root of the problem." Is this true? Does tone and vision matter more than policies? Of what importance to an economy is vision and leadership? Can it be modeled or measured. If so, by what proxies? We all know a Carter or Obama or Cochrane when we see them, but why?

    2. Is the Krugman argument, that you get growth after austerity but your "are still far poorer than they were before the crisis" correct? IOW, if the Countries had not pursued austerity, what would be the situation today.

    3. On the micro foundation level, what level of debt did these countries have before the crisis and especially what was their level of private debt? How did that work out?

    4. How were these countries able to take advantage of their currency pegs, if at all?

    5. Most importantly, an arguement for stimulus is not an argument against other reforms such as making labor or other markets freer and more competitive. This piece is especially bad on that front. Every Keynesian I know says we should be attacking on all fronts.

    1. "Please, do not throw rocks at the rock thrower." lol

    2. my post is not a rock and it is not intended as a rock. You said you threw a rock. I offered no defense of Krugman; in fact, my first reading of his comments has been that they were superficial and that your comment was fair, not productive, perhaps, but fair.

      My first question is very fair and more than supported by Roubini's essay. Where does leadership fit into a macro model? My reading of Keynes, especially his Roosevelt letters, was that he believed his ideas would work, if at all, only when coupled with the intangible of leadership.

      Do you read him differently? Where or why?

      Now, if asking whether leadership matters is throwing rocks, well count me as a rock thrower. Respectfully, however, I believe it is a very fair question and is very pertinent to the fall elections. If it takes leadership plus fiscal or monetary action, or both, doesn't that need to be said? What if leadership alone would suffice?

      The other questions are fairly framed as well.

    3. I think you raised some good questions. I just don't know why you felt the need to chide me for throwing rocks. When I see a bully throwing rocks, I'll throw them back.

    4. I apologize. I did not intend to chide you. I intended to move you to stop engaging Krugman and to instead write and talk about the questions I tried to present.

      BTW, your reaction to Krugman is what we trial lawyers call secondary party syndrome. Secondary parties are parties who have responsibility by reason of neglect or omission of duty, which assists, aids, or encourages a wrong doer. Krugman sees most economist, himself included, as having assisted, aided, or encouraged the Lesser Depression. He is now trying to play whistle-blower, to detract attention from himself. You are reacting sans good PR counsel to a whistle blower.

      If you really where interested in making a successful persuasive attack on Krugman you would concede his is now right and instead go back and attack him for neglect and omission after he was the first person on earth to see that the Lesser Depression was coming.

      I can see the opportunism in Krugman without your writing a word, because I know that this actions and writing before the Crisis do not parallel the human suffering he now claims to have foreseen.

      Hell, the damn man should have gone on a hunger strike, lashed his body with whips, bought newspaper ads, moved to Arkansas and run for the Senate, if he was as smart in 2001 to 2007 as he now claims he was

    5. I realize that as a party with secondary liability it is hard for you to admit responsibility for the Lesser Depression. Therefore, I think it important to explain why the economic profession has responsibility, generally.

      Contrary to the wisdom of Buffett, Munger, and Soros the underlying premise of macro economics before Lehman day and hour, 1:45AM on September 15, 2008, when the firm filed for bankruptcy, was the efficient market theory.

      Munger's 1995 speech explained why it was wrong.

      Due to social proof, etc., main stream economists, including yourself and Krugman would not admit such nor would they admit what was obvious to any observer from high altitude: as soon as there was a financial crisis, all the known flaws and errors in macro would be exposed, along with their omission and neglect for staying with a science everyone knew was wrong.

      Caplan recently summed it all up with this statement about Hayek and Austrians, but it applies to the mainstream as well:

      [Hayak/Austrians] ignores the existence of a massive intellectual movement that spent the last forty years developing these insights: behavioral economics.[8] If you really want to learn about human’s “beliefs about the world,” the “limits of our knowledge,” or our “ability to optimize,” read Daniel Kahneman’s magnum opus Thinking, Fast and Slow. Kahneman elegantly and carefully explains dozens of major discoveries about how people think. Compared to this fountain of knowledge, Austrian talk about subjectivism is empty generalities.

      In a nutshell, Modern Macro, which I contend is empty generalities not advanced past Keynes, bet that a financial crisis would never happen but it did.

      If macro had advanced past Keynes would we not being the same arguments, today, that took place 70 years ago.

      Take just one simple problem. All the people who believe that QE3 threatens inflation. When it suits there purpose, these same people will ride micro foundation arguments for a career. But, ask them for the micro foundation explanation about how QE3 will cause inflation---how will the "hot" money get from the banks to consumers---and you get a silent filibuster or a "Micro foundation, never heard of that . . ." Williamson and Cochrane are the worst.

  2. Nothing about the Baltic countries have disproved Krugman's critique. I will focus on Latvia specifically, but I think the others are about the same: The miscommunication seems to be about the 24% decline in output that Latvia experienced during the recession. People like Aslund are assuming that to be a completely exogenous shock that would have happened no matter what, and then look at the modestly above average growth rates after the trough as evidence that the policies worked to help the economy. But what Krugman keeps pointing out is that a majority of the austerity measures and spending cuts came before that 24% decline, meaning that it made an already bad recession way worse than it would otherwise have been.

    As for the issue of finances, it is true that despite massive failures on the output and jobs fronts, these countries have been successful in avoiding the sovereign debt crisis that southern Europe faces. Krugman's point is not that austerity won't help lower sovereign risk premia, but that there is no need to impose that kind of economic sacrifice when monetary policy could easily solve the debt crisis without the need for a 24% contraction in GDP.

    That said, the notion that the Baltic countries didn't need as much in bailouts is misleading, since they normally get significant funding (as much as a third of their total revenues) in grants from the European Union even when the economy is doing fine.

    1. Matthew, thank you for this. Can you link me up to some evidence that supports what you say in your 1st and 3rd paragraphs?

  3. This dude Aslund is persistent.

    At Peterson he has an essay, "Lessons from Slovenia’s Curiously Unexpected Financial Crisis"

    Aslund asserts, "First, after parliamentary elections in September 2008, a four-party center-left government came to power and, unlike the departing center-right government, it favored a fiscal stimulus. In 2011, that government slowly disintegrated, which naturally undermined its fiscal discipline. Yet a good fiscal policy should be able to withstand such calamities. In early elections in December 2011, the left was routed In February 2012, a five-party center-right coalition took over, adopting an austerity program."

    Contrary to Aslund's expectations---with austerity should come access to the bond markets is what I infer---"Unexpectedly, Slovenia is going through a financial crisis despite a record of sound behavior on many fronts. Its government bond yields surged above 7 percent in August, and the country is having trouble maintaining access to international financial markets"

    Now, is the lesson, Don't elect Romney, for when his extreme right wing regime imposes austerity, the bond market is going to freeze?

    The guy seems to have cause and effect problems. He rails against stimulus but reports that the bond markets frozen once austerity policies were adopted.

    I know now why you picked his comment. He is one of these guys to whom the facts don't matter

    1. Very brave, Anonymous. And now tell why Foreign Policy magazine chose to publish his article.

    2. Sales, same reason you use Krugman

  4. I used to like reading Krugman, back when he would write about economics. Most of his posts these days are just the same-old boring rants villifying Republicans. Maybe post-November he will get back to his regular gig and he'll be worth reading again.

  5. These are small, hence open, countries, that trade a lot with their fast growing neighbors (Scandinavian plus Poland), look at these guys growth rates and you know why the Baltics are growing the way they are. Krugman should be more careful, so should his antagonists.