Defending Krugman Posted by: Dale Franks
on Tuesday, December 05, 2006
I'm still not fully bounced back from the flu, but I wanted to briefly throw in a defense of Paul Krugman.
Now, I yield to no man in my contempt for Krugman as a opinion writer, and for what often seems to be perversions of economics to buttress his less than convincing political points. In this current prediction about a recession, however, he may be right.
This time.
As it happens, a few days ago, the Institute for Supply Management released the monthly ISM Index for manufacturing business, showing that the manufacturing sector of the economy registered no growth for the first time in 41 months, dropping to 49.5 in November. Readings below 50 generally indicate a contraction, while readings above 50 indicate growth.
The ISM reported that new orders to manufacturers declined by 3.4 points to 48.7, production dropped 3.4 points to 48.5, employment dropped by 1.6 points to 49.2. In addition, the ISM index has been dropping since April, when it stood at 57.3.
The non-manufacturing ISM Index, has been better, however, coming in at 58.9 for November, up from 52.9 just two months ago, although still below the years high of 63 in April.
In both cases, however, there have been declines from the April peak, and the manufacturing trend is simply looking shaky.
Let's also recognize that GDP has been declining for the last two quarters, coming in below 3% annualized in both Q2 and Q3. Housing starts have been in steady decline since January. The October manufactured goods orders were released today, showing orders down three of the last four months, dropping by 4.7% in October, and durable goods orders were down by 8.2%.
At the very least, the production of real goods looks shaky, so a recession prediction doesn't look unreasonable at this point.
Yes, it’s still possible, since, while the Fed stopped publishing M3 in March, they still publish the individual components—large CDs, eurodollars, institutional money market funds, and repurchase agreements—they just don’t aggregate them any more.
So, if you wanted, you could take the M2 figure, add in the additional components, and still get the figure for M3.
I dunno why the Fed isn’t publishing it anymore, though. They’re still publishing the individual components, so releasing the M3 figire doesn’t cost them anything. The costs arise from the compilation, which they’re still doing, not the publication.
Look: in the very broadest stroke, I don’t see how the consequences of inflation are unavoidable, and I think that a great deal of the inflation is already in the bag. I’ve thought so for years. The only mystery to me is why it’s taking so long.
Here is a notable fact: inflation only works the way that interventionists have in mind until it can be anticipated in markets.
I’ll put it this way: if I were working with money on the scale that occupies business and industry, I would be thinking seriously about another line of work, by now.
Billy, I am not sure about inflation. My view is that in the recent boomlet as well as in the later 1990’s we had too few dollars, which slowed economic growth more than it should. Inflation is an excess of money but we live in an expanding global economy which soaks up money and capital like a sponge.
My own guess is that we are in for a slowdown which will happen in the traditional months of Jan-Feb when consumer spending is at it’s lowest. At that time the much ballyhooed housing slowdown might actually reach my city. I have been waiting for it since I have money to invest.
Slowdowns and corrections are good for the economy as long as they are not too severe or prolonged. I see nothing to indicate a prolonged recession.
Paul Krugman’s record for economic prediction is as bad as anybody on the planet. Over the last 5 years alone he has predicted 10 of the last zero recessions. He was basically laughed out of a minor post in the Reagan administration in the early 1980’s by making spectacularly wrong predictions. Paul Krugman is an un-spectactular partisan political commentator, he is a spectactularly bad economist. Once known for being a champion of free trade (his only redeeming quality as an economist) he has basically repudiated his earlier work and morphed into a "fair trade" protectionist.
The US economy may or may not be heading towards recession, but not because Paul Krugman says so. Even a broken clock is right twice a day, and on the subject of the health of the US economy Paul Krugman is a broken clock. Someday he will be right.
For the record, Dale, I wasn’t criticizing his specific prediction. In fact, the economic concerns I expressed in that post very closely tracked Krugman’s. My only objection in that post was to the fact that he predicts economic trouble at least once a year, every year.
Billy, I’ve seen some M3 numbers recently. I have to run out, but I’ll try to find it when I get back.
Consumer spending is a much bigger part of the economy than manufacturing. The growth of consumer spending has been fueled by the rising price of real estate. If the real estate bubble bursts we are looking at an ugly recession. As individuals (in the aggregate) we have no savings.
Consumer confidence has been a key variable in predicting recessions since the 50’s. Right now, its pretty shakey,
BTW: Greenspan was as a private economist had a lousy forecasting record. If being wrong, more than your right was grounds for an economist being kicked out of the field then you would only need about twelve feet to line up all the econmists in the world and see if they came to a point.
BTW: Greenspan was as a private economist had a lousy forecasting record. If being wrong, more than your right was grounds for an economist being kicked out of the field then you would only need about twelve feet to line up all the econmists in the world and see if they came to a point.
I bet this is true of many economists when it comes time to predicting turning points in the economy. Usually, it is very hard to predict a turning point. Even the work of somebody like James Hamilton a top notch time series econometrician and economist would usually miss the turning point, IMO.
I agree that Krugman’s predictions, like a broken clock, may have some credence this time. Or not. He’s been telling us how lousy the economy is for years. Eventually he may be right. We’ve had a big expansion of our economy and strong job growth since 2003. Not enough data pointing to anything more than the economy taking a breather. I read that manufacturing is only 20% of the economy, so little weight should be given to our production of ’real goods’, especially with good ISM number. Regarding housing, I’d like to hear why the same people saying housing prices are in a ’bubble’, are for the most part the same people telling us the huge runnup in oil and gold prices are only the beginning of how high they will go (ie, oil, gold prices not in a bubble). Only time will tell whether housing prices, after a nice run, are taking a healthy breather before another leg up, or if recent housing weakness (weakness, only relative to it’s strength over the past 8 years) is the harbinger of something worse. Either way, Krugman is a jackass.
