Krugman’s Faux History

by Don Boudreaux on October 13, 2009

in Great Depression, History, Monetary Policy, Myths and Fallacies

Here’s a letter that I sent yesterday to the New York Times:

Paul Krugman’s history of the Great Depression and his interpretation of today’s intellectual debate over that episode are untrustworthy (“Misguided Monetary Mentalities,” Oct. 12).

For example, contrary to Mr. Krugman’s astonishingly uninformed assertion, government spending was not “slashed” during the early years of the Great Depression.  As economist Randall Holcombe has documented, under President Herbert Hoover (1929-1933) real per-capita federal spending rose by 82 percent – larger than the 74 percent rise in real per-capita federal spending from 1933-1940.

Also contrary to Mr. Krugman’s implication, no serious economist today endorses a repeat of the early 1930s money-supply contraction.  For Mr. Krugman to suggest that arguments for monetary stability – arguments against further increases in the supply of money – are one with proposals for active deflationary monetary policy is ludicrous and unworthy of a Nobel laureate.

Donald J. Boudreaux

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juandos October 13, 2009 at 12:00 pm

Wow! Good letter and great link…

Thank you very much for yet another educational posting…

Chris Meisenzahl October 13, 2009 at 12:43 pm

Well-done! Krugman, imho, long ago ceased to be an economist and is now little more than a statist shill.

Anonymous October 13, 2009 at 12:56 pm

By the Taylor Rule interest rates are still too high. I don’t understand how raising rates right now is not a contractionary policy. As another deserving Nobel laureate once said:

“After the US experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.”

Anonymous October 13, 2009 at 1:24 pm

Krugman predicted the disaster we have before us while Cafe Hayek was denying the problem as late as October of 2007. The factors which he pointed to as responsible for the impending disaster (frozen wages and trade imbalance) are not even real issues to Cafe Hayek even to this day. Any criticism from Cafe Hayek towards Krugman takes a lot of bravado considering the transcripts of this great blogosphere showing who said what and when. You literally have no right to criticizes anything he says… well you have a right but not a legitimate one.

Should we repost Cafe Hayek’s past post on home ownership trends?

Just do a site search using “Krugman” and go back and read some of the articles circa 2005 to 2007. And some of the comments are pretty funny in retrospect as well.

Here’s Krugman (author of Depression Era Economics from 1999) writing and predicting the crash in August of 2005.

“If Mr. Greenspan had said two years ago what he’s saying now, people might have borrowed less and bought more wisely. But he didn’t, and now it’s too late. There are signs that the housing market either has peaked already or soon will. And it will be up to Mr. Greenspan’s successor to manage the bubble’s aftermath.

How bad will that aftermath be? The U.S. economy is currently suffering from twin imbalances. On one side, domestic spending is swollen by the housing bubble, which has led both to a huge surge in construction and to high consumer spending, as people extract equity from their homes. On the other side, we have a huge trade deficit, which we cover by selling bonds to foreigners. As I like to say, these days Americans make a living by selling each other houses, paid for with money borrowed from China.

One way or another, the economy will eventually eliminate both imbalances. But if the process doesn’t go smoothly – if, in particular, the housing bubble bursts before the trade deficit shrinks – we’re going to have an economic slowdown, and possibly a recession. In fact, a growing number of economists are using the “R” word for 2006.

Name October 13, 2009 at 3:01 pm

I’m confused – what does this have to do with the great depression?

Anonymous October 13, 2009 at 5:37 pm

Well I think I’d put more stock in people who predicted this depression and the historical account of the Great depression over those who totally missed this call and who are obviouslt intent on re-wrting the history of the Great Depression. Note that their history always starts with Oct 1929. Never any mention of the policies the preceding presidents pushed leading up to 1929.

That time like this time for Cafe Hayek and their ilk it is all about what a bad job everyone else did cleaning up their totally catastrophic failure.

Jonathan Catalán October 13, 2009 at 7:23 pm

I’m not sure what you’re referring to. If there are any economists which looked at policies prior to 1929 it’s the Austrians (i.e. Murray Rothbard in his book “America’s Great Depression”).

sandre October 13, 2009 at 11:33 pm

Note that their history always starts with Oct 1929. Never any mention of the policies the preceding presidents pushed leading up to 1929.

Hey scumbag, If there is any group of economists that looks @ the cause of the crisis rather than pushing some “G” button or “M” button, it is the Austrians. Since you look at all sides of the argument, can you write a chapter by chapter refutation of “America’s Great Depression” tomorrow. Provide a link to it tomorrow. Dumbass!

Jonathan Catalán October 13, 2009 at 3:04 pm

To be fair, Austrian economists at had predicted the recession since Greenspan first started to re-inflate the money supply in 2001.

Anonymous October 13, 2009 at 4:04 pm

The money supply as Austrians are worried about it has been inflated since 1913. It’s not an issue of “reinflating” in 2001. They always predict Fed-driven recession or depression. I fault (after the fact of course) the Fed as well for it’s rates after 2001, but the fact that a broken clock ( is always right twice a day isn’t really that impressive.

Anonymous October 13, 2009 at 6:04 pm

thats totally incorrect. mises (and other austrians) are well aware than the initial stages of inflation are not only deceitfully harmless,it even gives an impression of allround prosperity -the so called great moderation of the 90s. there is no broken clock.if you look at the clock only 2 times of the day at a 12 hour gap,it may seem like a broken clock to you.

Anonymous October 13, 2009 at 6:07 pm

Probably somewhat of a caricature, you’re right. Take it as an “if the shoe fits” sentiment.

Jonathan Catalán October 13, 2009 at 7:22 pm

In all fairness, the Austrians did more than just expect a recession because of an increase in the money supply. And the “re-inflation” I was referring to was simply Greenspan’s acceleration of the expansion after the “dot com” bust of 2001.

Anonymous October 13, 2009 at 6:23 pm

if, in particular, the housing bubble bursts before the trade deficit shrinks – we’re going to have an economic slowdown, and possibly a recession. In fact, a growing number of economists are using the “R”

Pretty weak but then it is difficult to predict these things. Many, many people including me made predictions like Krugman’s which was obvious but did not predict the banks failing and that is the key. I predicted a 20% decline in home prices and a long slow housing market after that but I did not make much money on this episode because I did not predict the banks failing.

Anyway the 2 guys that I think called things best were Warren Buffet and Jim Rogers. Both stopped buying stocks ~1999. Rogers went into commodities and Buffet bought safe bonds.

Methinks October 13, 2009 at 1:29 pm

Maybe he got the Nobel Prize for promising to be an economist some time in the future.

Anonymous October 13, 2009 at 2:49 pm

“…unworthy of a Nobel laureate”

Not sure how this would play. After all, you can now get a Nobel Prize just for being Liberal and voting “present”.

Anonymous October 13, 2009 at 4:18 pm


mesaeconoguy October 13, 2009 at 11:27 pm

Krugman is the Trent Dilfer of economists:

Got a Super Bowl ring (or Nobel Prize), but still sucks -

TDS 113
INT 129
YDS 20,518
RTG 70.2

Anonymous October 13, 2009 at 7:20 pm

Not just somewhat of one.

Anyway, even if it were as you described, that would place the Austrian school light years ahead of nearly everyone else, because nearly everyone else are never right even twice a day.

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