Jeff Madrick in Conversation with Paul Krugman

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- Good evening. I'm Janet Gornick, I'm gonna introduce our event this evening as they're getting set up. I am a political economist and professor of political science and sociology here at the Graduate Center of the City University of New York, and I'm also the director of LIS, a cross-national data center with offices in Luxembourg and here at the Graduate Center, and I'll come back to LIS in just a few moments. The format for the evening is as follows. First, Jeff Madrick will offer some remarks about his new book, Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World. Second, we'll be treated to a conversation between Jeff and Paul Krugman about the book and about whatever else they wish to discuss, their conversation will be unregulated. (audience laughter) In the spirit of the topic. And for the final part of the evening, we're gonna take questions from the audience, so we'll ask those of you who have questions to approach the microphones, which are on both sides. I will return to the stage when it's time for the questions and answers so that I can aid that, so just sit tight until then, that'll be at about 7:30. So let me just take a moment to introduce our two speakers. It's really a great treat to have these two guests with us this evening, few people anywhere have done more than either Jeff Madrick or Paul Krugman to explain contemporary economics to general audiences. Having them here together jointly assessing the state of the economics discipline is really a double treat. Jeff Madrick is an award-winning economic analyst and journalist. He's a regular contributor to the New York Review of Books, and a former economics columnist for the New York Times. He's also director of the Bernard L. Schwartz Rediscovering Government Initiative at the Century Foundation, where he's also a senior fellow, and several of his colleagues and ours from the Century Foundation are here with us this evening. Jeff is also an editor of Challenge Magazine, and he's a visiting professor of humanities at Cooper Union. Jeff is the author of many widely read and much cited books, including among them The Age of Greed, The Case for Big Government, The End of Affluence and Taking America. Jeff's books are notable for attracting diverse audiences, often receiving press from progressives and from the business press alike. This new book, Seven Bad Ideas, this is, as I think you know by now, the title hints at that, an assessment of the ways in which mainstream economics failed to anticipate, and he would argue also contributed to the economic turmoil of the last six years, and that analysis is rooted, of course, in a larger critique of the economics profession, especially in over-reliance on modeling. The book has already attracted considerable attention, much of it positive, and a surprising amount of positive response has come from economists. I, for one, heartily recommend it, and I might add that one does not have to be an economist to find the book both clarifying and delightfully readable. And to the non-economist academics in the audience, you might be pleased to know that in this book, Jeff argues that one thing that contemporary economics needs is more engagement with sociologists, anthropologists and historians. That's not an observation that one hears all that often. Paul Krugman needs little introduction here. As I think most of you know, professor Krugman is in transition now, shifting his home institution from Princeton University here to the Graduate Center of the City University of New York. In the middle of 2014, he joined the LIS Center and serves there as a distinguished scholar, and in September of 2015, he will join the Economics Faculty of the PhD program here at the Graduate Center. Paul Krugman is known for his extensive body of academic work, for which he has received an enormous array of honors, including in 2008 the big one, the Nobel Memorial Prize in Economic Sciences. He's also, of course, known to many of us for his much read biweekly column in the New York Times and for his lively blog, The Conscience of a Liberal. He contributes to other publications as well, and he attracted considerable attention last month for his article in Rolling Stone titled In Defense of Obama. We'll editorialize for a moment, I just said this to say I wonder what would've happened last week if some key Democrats had taken that article to heart. In any case, we're really delighted to have Paul with us this evening, and I'm especially grateful that he's able to join us as he is just back from a whirlwind trip to Japan, another Petri dish for curious macroeconomic thinking, and perhaps this evening he and Jeff will help us make sense of Japan after they've clarified the state of macroeconomics in the United States. Jeff and Paul, I turn the evening over to you. Welcome. (applause) - Thank you. - Thank you all very much for coming, I hope you all got seated. A special thanks to Janet Gornick, who you just heard from, who runs the Luxembourg Income Study and very generously made all of this available to us. Thanks to the Century Foundation, wherever you are, for co-sponsoring us. Thanks to Paul for giving us time. And thanks to mainstream economists for making so many mistakes. (audience laughter) As you know, I've written, now obviously, I have to place a caveat here, there are many exceptions to that mainstream, the mainstream what I would call debacle, and others may not. But I'm obviously writing a book that's critical of mainstream economics, or what I guess we could call neoclassical economics, economists would call it. More or less economics based on the market itself solving our problems with a variety of qualifications. But I got an email and it said, "Well, if you were really an anti-mainstreamer, "you would've talked about Marx in the first chapter." And I was a little bit taken aback. Well, I did talk about Duncan Foley of the New School, who is a Marxist, I sent back this email. But it occurred to me, I'm probably not an anti-mainstreamer in that sense. I'm an anti what mainstream became. If neoclassical or mainstream economists were arguing that all we need is a little jolt from fiscal policy or monetary policy, and the self-adjusting qualities of the economy would take over, well, I'm not very sympathetic to that. If efficiency is identical to prosperity, which many did argue, I'm not that sympathetic with that, efficiency meaning get rid of the obstacles in the way of a free market working. If labor is paid what it deserves, as many neoclassical or mainstream economists contend, well, I'm surely not sympathetic to that. If prices are almost always right for financial securities, should I start again, is the mic now up? I just heard it go on, okay. Floating currencies, I'm not one. If me mean we shouldn't worry about inequality, and a surprising number of mainstream economists talk about how inequality is not their concern, equality of opportunity is their concern, well, I'm not very sympathetic with that, because inequality of outcomes matters a lot. If mainstream economists mean we need only worry about the inflation rate and keeping it at 2% a year, well, I'm not very sympathetic with neoclassical or mainstream economics, if it means a low deficit is our first or second priority, as you might guess, I'm not sympathetic. If government's purpose is only to counteract, and this is important, if it's only to counteract market failures, I'm again not that sympathetic, because market failures are rampant and very hard to define. If it means public investment should be modest, and it often did in the last 30 years, again, I'm not sympathetic. If it means you can really explain growth with abstractions like technology plus savings plus human capital, I think we've gotta be a lot more specific and particular about why economies grow. What happened in economics, in mainstream economics, is not that these neoclassical tools are bad per se. I think they should be mixed with some other tools. But that they were abused, that the pendulum of economics swung to rules of thumb, ideology and especially anti-government attitudes. Economics swung with the rest of the nation. And I think I write this, but to be sure we're not gonna repeat the same mistakes, and it's not obvious to me we're not. I'm not talking about another bubble, another crash, I'm talking about the same basic assumptions that lead to bad policy. So I got very frustrated over the years since I've been out of school. We had Walter Wriston fighting Regulation Q well before Regulation Q was done, and government never stopped him. Well, to some degree, Regulation Q has kept a lid on the amount of money you could pay on interest rates to savers, so to some degree, we had to get rid of that. But we got rid of it in a very haphazard fashion. Walter Wriston lent all that euro dollar money, all that oil money to South America. Probably that should've been an international government agency doing that. He bowled over the Nixon and Ford administration and took it on his own shoulders. One consequence was repeated financial crises over Latin American debt in the subsequent years. The approbation given Paul Volcker for his shock therapy, I am just tired of that with, you can't say that without being humiliated by economists for your lack of knowledge of what was necessary at that time. We didn't need that severe, or a correction, in fact. We had rational expectationists telling us the 1982 recession would not be very steep, we could cut inflation without a severe recession. They're still around, they still are prestigious. We had astounding S&L, savings and loan deregulation. I didn't hear that much from economists in that period. We had Democrats railing against deficits under Reagan, using Say's law, which I'm sure Paul and I will talk about a little bit. And we had the Clinton administration placing basically all its surplus revenue into reducing debt, directly or indirectly, based on a Say's law argument, we accepted that the Fed can solve just about any problem. We had financial deregulation under Clinton. We had a Boskin Commission, which, well, too complicated to go into. But overstated the understatement of inflation due to quality increases in products. A political operation, if there ever was one. And then we had the phenomenon of Alan Greenspan, the legend, I'll leave it at that. I'm not gonna do my whole, that was the preamble of my long speech and probably, if I had a little more time, I could clarify all those points. But I do wanna make two observations very clear. Where the source of this ideology does damage, the ideology is basically about a free market that solves our problems through the invisible hand, which probably almost everybody here studied at one time or other. The invisible hand in a narrow sense, the invisible hand as an explanation of the entire economy. Now, you may think, well, economists know better than that, they know there are lots of exceptions to the invisible hand and to laissez-faire policy. But let me take two cases where a broad spectrum of mainstream neoclassical economists agree. One was something called the Great Moderation. The Great Moderation was hailed by economists like Ben Bernanke, the former chairman of the Fed and a very respected and very bright economist from Princeton, and Olivier Blanchard, a former MIT economist with an equal reputation, and now head of the Economics Department of the International Monetary Fund. They said the Great Moderation was proof we knew how to control the economy, the Great Moderation meant the economy was stable. GDP, our national income, didn't fluctuate that much. Fluctuated a lot less than it used to. Stability was a goal in itself, well, stability is useful, for example, we don't want periodic bouts of high unemployment, sure, stability matters. But the underlying argument was, if we have stability, the market will basically work well and solve our problems, so stability becomes an objective in itself. Consider what happened over this period of the Great Moderation. High levels of debt, soaring inequality, stagnating wages. One financial crisis after another, I'm gonna name the years just for fun. 82, 87, 90, 94, 97, 98, 2000, and 2008, financial crises under this ideal period of the Great Moderation. That's number one, based on an ideology that the market would solve the problems as long as the economy was stable. But number two, and the one that worries me most, is inflation targeting. Soft inflation targets, hard inflation targets. How did we come to an idea that 2% inflation was the maximum inflation rate this economy could tolerate? Again, it was based on an ideological notion that if we keep inflation low and very stable, we will remove the uncertainties from the economy that are obstacles to the true functioning of a market, of general equilibrium as it's known. That idea still prevails, we do not need a 2% lid on inflation, but we get it and it's determining Fed policy to this day, even under Janet Yellen, who I admire a lot. So my point is this, ideology is still determining policy in America, there has been a shift, there have been mea culpas, especially with the 2008 crisis. Many of these ideas set the stage for the 2008 crisis, and they permeated the public consciousness and the consciousness of Washington policy makers, some of that's been reversed, but my argument is that basic ideology is still with us and we've gotta be aware of it or we're gonna make the same mistakes over again, and the best example of that is a 2% inflation rate. I'm sure Paul has a couple of things to say about this, and then he and I are gonna have a little conversation, okay. - All right. So let me... I'm actually gonna do this a little differently. 'Cause one thing I want to say is I do think it's important, there's a possible takeaway that, something people might take away from the kind of thing that you're saying, which would be even worse than where we are now, which is to say okay, so economists don't know anything, they're useless, so we're gonna turn to, I actually just got some correspondents saying what we really need is for this economy to be put in the hands of smart, successful businessmen like Mitt Romney, right. (audience laughter) What you really don't want is to think that, well, all this economic analysis is useless, and in fact, actually, so there are several scripts that people have in mind, one is so we're gonna show that economics is useless, and therefore, we're gonna turn to practical business people who will, and that's one script. Another one is so the end of this story has to be that we go back to Marx, which is what you ran into. I don't think either of those is a direction we really wanna go. The fact is that, actually, I wrote a column about this recently, business people are actually really really lousy macroeconomists on average, they extrapolate from what it's like to run a business, which is nothing like running an economy. And you know, Marx, no particular reason why a fresh thinking about these issues should lead you there. But what is true is that economists, economics let us down really badly. Which was revealed a lot in the crisis. And I think I want to make a distinction between two kinds of sins here, both of which happened. One is the intellectual sin of basically getting how the economy works wrong in the models, in the analysis, and having the wrong structure of thought, which is a lot of what you're talking about. And the other is the actual policy, when the moment comes, when something has to be done, of choking even on what your own analysis does say, and going instead for conventional wisdom, going instead for something that feels plausible to politicians, to the political process. Let me, I'm sure we'll come back to that, but I really would like to talk about the way I see what happened. So something I really got from your book. I hadn't quite about this clearly, is that we actually had a mammoth kind of unintended case of bait and switch in a way that economic analysis was done. So in economics, we have lots of models, I'm a big believer in models, you have to do, models are how you discipline your thought, models are how you tell yourself what the story is, but they're always, you should always think of them as being metaphors, guidance, not truth. And there's one overarching model that economists like a lot because it's such an overarching story, which is the story of competitive markets, rational behavior, general equilibrium, it all fits together in this wonderful story, and it's a great story, it tells you a lot of stuff. As soon as you start to look at the real world, you say wait, but people don't actually maximize and markets are not competitive and so there's lots of details here that are not right. There's an answer you talked about at some length, which is Milton Friedman, he said that the precise truth of the model is not critical, you need to look at does it fit reality, does the behavior seem to be what seems to happen. Which is okay, we all do that some. But then, having done that, having said, "Well, "these models are okay because we can make some use of them, "even if they're not precisely right," you then turn around and say, "Well, and this is the model, "and therefore all the policy decisions "must be based upon this model." I guess the way to say it is you have, so I say or you say, "I've got this model of maximization and perfect markets, "and the market gets it exactly right." And I say, "But people don't actually behave that way "and lots of details," and you say "That's okay "because it's a good enough prediction." And then I say, "Well, we have this phenomenon out here, "which is that clearly, unemployment "is not self-correcting." And they say, "That's can't be true "because maximization and equilibrium. "The model says that can't be true." You've said reality lets me ignore the fact that the assumptions are not true, and then well, but the assumptions must be true and therefore you have to ignore reality, and it's a very, actually, I call it bait and switch in my review, I call it maybe the Chicago two step. (audience laughter) In this context, and played a very big role in desensitizing economists to the flaws in their view, which were really very severe. Let me talk just for a second, and then we can, I could go on at length about every one of these points, let me talk about. Let me talk about 2% inflation. Which I actually, I actually put in some work on that, 'cause I'm one of those people who's arguing that we need to actually loosen that up on the up side. And I spent a while, I had a paper for the European Central Bank Conference this past summer. Which by the way, if you wanna, people are not that closed minded, you know, the European Central Bank, not what you would think of as the most wildly radical thought institution, but they were certainly willing to let people like me come in, present papers saying you're doing it all wrong, so at least they're willing to hear this stuff. I spent some time on the trail, where did that come from? How do we get 2% inflation? It turns out to be remarkably unscientific. It turns out that it's not a case of people sat down and really figured out what is the optimal inflation rate. There were several converging strands. There was one strand of people who were aware that, sorry, sorry, there were some people who said, "Well, we should have stable prices, zero inflation, "that has to be the right thing." And at least there was enough reality sensitive number of economists who said, "That can't be, "that could get us into big trouble." They were afraid that if you started from zero inflation, and then there was an adverse shock, you'd be into deflation, you couldn't cut interest rates below zero, what do you do? So you need some leeway. And some historical episodes suggested that, if you had 2% inflation, that would give you enough room to usually deal with that. So they, that was kind of one trend. Also, constant, there's always changes, some people's wages go up relative to other people's, some go down, very hard to cut wages. If you're at all reality based, you know that. There were some calculations that suggested that 2% inflation would give you enough leeway that you could make the necessary wage adjustments without actually having to have lots of wage cuts. And finally, there was the people claiming inflation is actually overstated because quality improvement, and it was possible to argue to those people, well, 2% measured inflation is actually zero. It was actually. - [Jeff] That was the Greenspan argument. - That was the Greenspan argument, and these things all converged on 2% was a number that could make a number of people happy. But then it solidified into a dogma. It was really, everyone was targeting 2% inflation, so we'd better target 2% inflation too, it became respectable to advocate 2% and unrespectable to advocate anything higher. And that, now, it turns out everything that people thought was wrong. The idea that 2% would be enough of a cushion that you would rarely have episodes when cutting interest rates to zero was not enough. We've now passed the sixth anniversary, the Fed has had interest rates at zero for six years, and it's not been enough, so the idea that that would be a rare phenomenon is clearly not true. The idea that the wage adjustment is not gonna be a big deal, look at what's going on in Europe where we're having year after year of nightmarish unemployment in Spain and Portugal as they try and get their wages down relative to Germany. That turns out not to be true. But the 2% target which emerged from this process sits there now as an unbreachable icon. And I've tried, I've talked to people at the Fed, and they will admit sort of in principle that, well, yeah, the case for 2% that we used to make is not as good, but we can't change the target because that would hurt our credibility. And so there we are. - To me, that's the classic example of what's gone on. As you know, there's no serious empirical evidence that an economy running inflation at 3 or 4% will grow more slowly than an economy running at 2%. In fact, even 6 and 8%, there's no significant empirical evidence that says that would be a problem. And yet we stick to this 2% rate, and it becomes inviolable, and we have people on the, some of them economists on the FOMC, like, I keep forgetting his name, Jeffrey Lacker has an economics degree. Who argue, and you know, we haven't reached 2% inflation, by the way, according to the target that the Fed looks at, yet they're still worried that they're stepping on the gas too hard. But people like Lacker would argue well, it's coming any minute now, and yet wages are not growing up, which is the main cost push element of inflation. But wages are lagging indicators, so we better get ahead of that. And of course, I've written, and I know Paul has written, that these guys have been wrong time and again. Richard Fisher, a great proponent of this idea, wanted to raise interest rates in the middle of 2008, when we were collapsing into the worst economy since the Great Depression. So this kind of mythology, you have to wonder at these claims that economics is a science when so easily, 2% becomes embedded in a way of thinking, and it cannot be violated. And it was Greenspan who argued, and people should understand what, again, I tried to say it earlier on. The reason some people want 0% inflation is because they believe fully in this perfect market idea, you remove all uncertainty. So all participants in the market can make rational decisions, and if they can make rational decisions, the market will work out, basically, by and large, work out our problems and maximize prosperity. - But now, maybe this is the question. Where do we draw the line between economics as a discipline, economics as practiced as policy? Because it's not the case that there are papers being published in the Quarterly Journal of Economics that make the case that 2% is a sacred target. That's not at all, in fact, if you take the papers, Mike Woodford, you take the papers that people write on at least New Keynesian macroeconomics, which they actually definitely don't say that there's anything sacred about that number, and in fact, if you take the theoretical models seriously, which maybe you shouldn't, but if you take them seriously, they would suggest that given what we've seen, that the target should be higher than that, it's in the practice of economics at the central banks that becomes this magical target. So is that a problem with mainstream economics, is it a problem of the sociology of central banking? I think we may be crossing categories here. - And you know, it seems only in the last couple of years have some mainstream economists like Blanchard and Larry Ball been talking about, doing work talking about raising the inflation rate, and you yourself, it's always put in terms of not violating the lower zero bound. And to me, I wondered about your opinion about this. I would like to see, here's heresy for you. Something like the Phillips curve come back. With the suggestion, and I think Akerlof, George Akerlof, he's a Nobel Prize winner, has talked about this a little bit. Not only would a 3% or even 4% target help us avoid the lower bound, the zero lower bound, so we could cut interest rates to stimulate the economy again, but it might get the unemployment rate down on a more consistent basis and create jobs. - That actually is an argument that's out there. Larry Ball actually has made it and I had made it. No, I mean, a lot of things, we took this notion that the government policy can't permanently lower or demand side policy can't permanently lower the unemployment rate. And there's a lot of reason to believe that that's true that raising the inflation rate from 8% to 13% is probably not gonna buy you anything on unemployment. But that an inflation rate of four as opposed to two might very well buy yourself something on unemployment. That is actually not being rejected by the mainstream. A little more credit there, I think, for... And by the way, one thing to say is that the people that you're criticizing are all on the... I mean, Olivier Blanchard is a good guy in all the current policy debates, Janet Yellen is a good guy, these are people who are well to the left or the activist side of the spectrum. So you have to be a little, give some credit for them, even you would like to see them do more. - I'll always give credit to Janet Yellen, I'm a little more hesitant about Blanchard after all the IMF, I don't know if he was there at the time. Was pretty supportive of say, Cameron's, I don't remember if he was-- - He was, and that was-- - Austerity policy. A lot of these guys got, you know, the fact that they've reversed their point of view after the 2008 crash, which was pretty common across the board on the slightly left of center, let's call it, mainstream economic community. They weren't that beforehand, and Blanchard admits it, he says with some shock, "We never thought that "financial regulation was part of macroeconomic policy." Well, that's quite extraordinary to not, and as you well know, being a man who's done a lot of models, very rarely was finance ever part of a macroeconomic model. And Minsky, who became the man of the moment, I remember was pretty highly ridiculed, I remember one AEA conference, there was a memorial for Minsky sponsored by the Levy Institute where he worked after the Washington University. And you know, he was just scoffed at, basically. Because some economists got religion after 2008 I don't think totally exonerates them for the damage done until 2008. And in fact, and Larry Ball said, I haven't seen much of it. I hope you champion more this idea of a 3 or 4% inflation rate on a Phillips curve basis, 'cause I really don't see much of that. - Okay, maybe I'm a little too close to it, but I've been certainly making that argument and not getting a lot of pushback. It was kind of interesting. I mean, not getting a lot of pushback analytically. The policy thing is another thing, so you can go, actually, you can go and talk to European Central Bank senior people, and they'll say, "That's an interesting case," and the Fed people will certainly say that, but then they'll say, "Well, of course, we can't actually implement that." And that's interesting, but that's a little bit less the question of the intellectual structure of economics and more the weird things that happen in policy formation. Actually, I want to take the, since I've been traveling, I can actually bring it in. The Great Moderation. So people don't know this, there was a, there were papers and they were, I think it was actually Ben Bernanke, certainly Olivier, I think it was actually a lot of work by Olivier. - Blanchard. - So these people, by the way, so you should know. - (speaks in foreign language) - Yeah, so yeah, so Olivier Blanchard, chief economist at the IMF, very influential macroeconomist, Ben Bernanke, may have heard of him. Everybody, by the way, is more or less a classmate of mine in grad school, so you should know that we're all... - And now we know the source of the trouble. - Right. (audience laughter) What Blanchard and others had done was show that, in fact, the wiggles have gotten smaller. That after around 1985, the US economy had seemed to be much more steadily growing than it had previously. And Ben Bernanke coined a phrase for it, which was the Great Moderation or popularized the phrase, I think it's a little unclear. And this was attributed to superior management by central banks. That has always seemed to me to be a really bizarre episode. Because although it was true that the US was less stable, there is the rest of the world out there. What was actually, so I wrote I book-- - It was more stable, yeah. - I wrote a book in 1999 called The Return of Depression Economics. Which was a little ahead of the curve, but then I was able to write The Return of Depression Economics and the Crisis of 2008 as the second edition. But that was not coming out of nowhere, that was coming out of the fact that Asia had had severe financial crisis, seemed like the end of the world to us then, although it was trivial compared with what came later. And Japan slid into a prolonged stagnation slump, very much like, of course, we are all Japanese now. And it's, that was amazing to me that people did not take that as a lesson. They did not take that as an indication of we do not have this thing under control. It's not a problem exactly that the models didn't allow for it, 'cause we had the models, people were trying to model Japan, but this weird sense that that won't happen here. - Well, you know, I do quote Milton Friedman telling Charlie Rose in 2005, "The American economy "has never been more stable." It was a charade, and I think what's most aggravating to me about it is economists manufactured their own criterion of success. So inflation targeting worked, it was sort of the single policy lever that was adopted. Keynesianism was, fiscal policy was by an large shunned to decide, put in the back seat of the car. A single policy lever. And they said it worked like magic. And then this period, which you do call bizarre, we had all kinds of things going on. And it happened that the Fed got us out of trouble in 97 and 98, and in 2000 and 2001 again, only to lead to the 2008 debacle. People took it as a kind of law, and I think mainstream economists did it, the Fed could, by and large, always save the day. There was worry about the so-called Greenspan put, and moral hazard, but it never came down, it seemed to me there was no great uprising by economists, and I think there could've been. I would call it two kinds of errors, but somewhat different than yours. One is where error is of commission, and one where error is of omission. - That too. - So where economists made errors of omission was the failure to analyze, and in my view, be up in arms about Wall Street. Because by even the most conservative lights, Wall Street, there were conflicts of interests. There seemed to be monopoly profits like crazy, there was manipulation in markets. There was no transparency of information and derivatives whatsoever, and economists weren't up in arms. One can say, "Well, what power do economists have?" But my gosh, they had power in free trade arguments. They certainly were up in arms about that. So where were they in this simple violation of the most basic conservative, even Milton Friedman, well, I shouldn't go that far. But basic conservative invisible hand violations of the market. Where were economists at that point? We hardly even saw studies, maybe you know more than I, studies about what Wall Street did. They began to come out, Philippon and a couple of people, but not much. - No, there was, I actually, this is an interesting thing, 'cause there were certainly studies. I'm not gonna try and do bibliographical stuff here. But I remember back around 2000, we were already getting some papers that were taking, well, taking the way hedge fund managers are compensated, too entwined, you get a commission, but you also get a share of profits, which you don't have to give back if then everything goes to hell. And pointing out that there was, all the incentives were there for, if you were managing the way, hedge fund's private equity, all the incentives were to basically leverage up, borrow as much money as possible, take big risks, and then it's heads, you win, and then it's tails, your investors lose. And that the incentives were clearly there for unproductive, risk increasing behavior. So there were papers out there, the question is why didn't people make this a cause, why were people so willing to accept that the market was working? And there that's, I think you need to, probably it's very don't rock the boat there, hard to argue with success. I think these things were actually interactive. The notion that we had it all under control. What's really amazing, how could we have gotten to 2008 and then said, "Oh, we have a problem with finance," because 1998, I don't know. It's a pretty young audience here, but I don't know if people remember, there was an absolutely terrifying crisis in 98, which was very much a pre-figuring of what happened 10 years later, it was the Asian crisis, Japan, but there was also Long-Term Capital Management. And I was, I happened to have been in a briefing by a senior Fed official just after Long-Term Capital Management went under. Describing the collapse of transactions, essentially, the financial markets had just frozen. And after this pretty grim description, somebody asked, "So what do we do?" And this senior official said, "Pray." (audience laughter) And what actually happened was that Alan Greenspan and Robert Rubin gave a press conference and sounded very confident. And magically, the markets thawed out. But that should not have been a lesson that said we have this thing under control, that should've said my god, we don't know how we pulled out of that one. And yet it was ignored. And I think that's a very big story. It's not exactly a problem with economic doctrine, it's a problem of something. What does it take to get people's attention? - I wrote a piece about what if we saved Lehman Brothers? What would've happened? There's a good chance we would've had less of, a very good chance, less of a steep financial crisis. Less serious recession. But we probably would not have gotten Dodd-Frank. The good example of that is just what you're referring to. We had a vicious crisis with Long-Term Capital Management. Greenspan and folks rounded up the banks and basically forced them to put capital into Long-Term Capital Management to keep it afloat or at least pay off their creditors and stop the run. No financial regulations came out of that episode because we got out of it. The same thing probably would've happened if we've saved Lehman Brothers this time around, we might not have gotten anything like Dodd-Frank, we may have pushed catastrophe back that much further. And I think, and I'm not sure you would agree with this, I think it's something about the sloppy thinking, or at least the failure to address public issues, or reality, for that matter, of the economics profession, or to think it's their duty to inform people that there's something wrong here. It becomes a kind of, frankly, you know, this does not apply to you, I'm not trying to flatter you, it is a bloodless profession and it lacks red corpuscles. The methodology allows economists to distance themselves from the problems. There was so little to, you know, there's lots of work about corruption. But didn't really get to the heart of the matter. And I just don't understand how people like Greenspan got away with so much with so many good economists out there. - Actually, I'm introspecting a little bit here and trying to think about it. 'Cause I was caught, even though I'd written about the depression economics, and even though I actually, currency crises, I invented currency crises, not the thing itself but the academic literature many many decades ago. And yet I was caught completely by surprise by the severity of the financial crisis. And how did that happen? And partly it was, I just wasn't paying attention. I was not, I had no idea that more than half of our banking system was no longer banks and therefore had none of the safety net, none of the regulations. Part of the problem, I think, is that the world is a complicated big place and nobody is gonna keep track of it. There were people for whom financial markets were the specialty, and there's where I think you get into the issues of coaptation. In some cases-- - We should talk a little bit about that. Because there is an ethics issue here. - Yeah. There was no question that the people, by and large, people who were actually doing finance or actually studying what Wall Street did also tended to be awfully and continue to be rather close to Wall Street. There are various levels. I mean, there are some actual real just plain out, these are hired guns. But there's also I think a broader thing, which is well, if you are studying financial economics and you're busy saying the end is nigh and this is a corrupt field, you're probably not gonna get a whole lot of invitations to Wall Street sponsored conferences. - Or a grant. - Certainly not gonna get a lot of, and you're not gonna get a lot of consulting gigs for sure. There is probably something going on there. And people who did not have a stake in that. Good macroeconomists, people I think have been helpful, would've been pretty much unaware because it's, well, it's somebody else's subfield and just didn't know. Again, I'm being self-justifying to some extent, but also I just had no idea. I had no idea what the financial system as of 2008 looked like until it came crashing down. - But the scarier thing I think is it seemed like the New York Fed had, if not no idea, too little idea. They didn't look into, as far as I know, they never looked under the hood of collateralized debt obligations. They didn't try to find, they didn't begin to understand what was going on until the market started coming apart. How could this be except an ideological attitude, and maybe I oversimplify here, but I don't think so, that things can't get too out of hand if a market is operating well. If something is priced too high, some smart person will sell it, if something is priced too low, some smart person will buy it. And the correct prices will be reached. And that became an underlying assumption certainly of Greenspan. Who became a kind of caricature ideologue, I think, as he gained more and more confidence in himself. But I think it existed in many regulatory agencies manned by good economists or at least well-trained economists. - 'Cause we actually have, have had for a long time, mainstream economic models that tell you that an unregulated financial system can be highly fragile. So you know, as soon as Lehman fell and everything, you could wander around the corridors of Princeton and there were people muttering diamond divic, diamond divic, 'cause you know, we had that model. It was, as soon as you said, "Oh wait, "these are banks even though they aren't called banks, "but they don't have capital requirements," then immediately it's slotted in. The analytics were there. But no one who knew enough to know what was actually going on was willing to apply those analytics. Some of it is, in fact, maybe free market ideology, but applied in a place where standard economics itself says free market ideology is not right, standard textbook economics says that banks need to be regulated. Adam Smith said that banks need to be regulated, right, one of the places where he really steps away from laissez-faire and the wealth of nations is he says banks need to be regulated, and he says, "You may say this is an unwarranted intrusion on freedom, "but it is no more so than requiring firewalls in houses." Something else is going on, it's not the inherent model, it is maybe libertarian ideology, which is not mainstream economics, but affects things, Greenspan is not a mainstream economist, he's an Ayn Rand follower. And then also the power and influence and I'd say mostly soft corruption, but sometimes not so soft. - Yeah, soft corruption can go, lead to, lead us down the wrong road. - Specific problem with finance, I just want to say, is if you, bigger even that other stuff. I think, if you're dealing with, you know, oil industry, whatever, then there's lots of money and the corruption. The thing about Wall Street is that they tend to be smart, impressive people. You're gonna have a hard time arguing down these Wall Street guys, they come into a room, they act like they know what they're talking about, they seem like they know what they're talking about. They're rich, they have great tailors, they're funny often. So they're impressive, and it's very hard to get past that, especially if, you know, you're... - I don't see why that would bother a scientist though. (laughs) But let me bring up an example of where I think you may be giving the profession too much credit, efficient markets theory. It's a very good example, it's one of my seven bad ideas. That was valuable when it started, because it taught us that you really couldn't, money managers had a very hard time beating the market. Now, that was extrapolated into claiming the market was so efficient that the actual stock price was right. It reflected the future value of the company. And therefore, speculative bubbles could happen, but they would be temporary and not very dangerous, and you could motivate CEOs by giving them stock options. Their performance would be rationally rewarded by a rising stock price, 'cause it would reflect the value of the company. But when Bob Shiller tried to upset the apple cart created mostly by Chicago but also MIT economists, he had a hard time making his argument heard by these people, he showed pretty clearly that there were serious stock market bubbles, that the stock price wasn't right over time, and he had to beat down, and in fact, if you look at Shiller's stuff over time, which I think he's forgotten, I admire him a lot but he's forgotten, he was a little more tentative in the early years because he was knocking on such a solid, he was knocking on a door that was so solidly closed to him. And pretty soon his ideas prevailed, but they mostly prevailed after stock market crashes, not before. So that was an example of an efficient markets, free market theory, that got carried away ideologically. - A couple of stories on that one. 'Cause of the things that, by the way, you're over-optimistic now. You think that Shiller has won. Not a chance. (Jeff laughs) I was actually, a friend of mine got me to be on a panel at the International Finance Association meeting, I guess this was two years ago, and they had several eminent finance theorists. The question was, has the financial crisis led you to think that we need to revise anything? And no, no, no, there's no problem. These are people who've advocated for efficient markets theory, and they saw no reason to change their views. They were waving it off, and there was other stuff, and maybe it's all Obamacare did, or something, anyway. For the audience. What Shiller did was way back, I think it's 1982, something like this, it's something like several decades ago. He basically calculated a maximum estimate of how much fluctuation in stock prices could be accounted for by fundamentals. It was clearly too much. It was if you had known everything that was going to happen and show that the actual fluctuation of stock prices is much greater than that, which says there has to be herd behavior bubbles going on. Compelling, overwhelming demonstration, mostly rejected by people. Now, the interesting thing is, one person who took this kind of argument very seriously wrote some very strong caustic condemnations of efficient markets, was a guy by the name of Larry Summers. So Larry Summers in the 80s wrote some, and he had, there's the ketchup paper. Larry took on the question that a lot of alleged demonstrations that markets are efficient involve looking for sort of are there arbitrage strategies that will work, and Larry compared that, he says, like looking at the market for ketchup and finding that two quart bottles of ketchup always sell for twice the price of one quart bottles of ketchup, and concluding from that that the price of ketchup is therefore always right. (audience laughter) Now, what's interesting is, this same person becomes a senior Clinton administration official and is a strong advocate of financial deregulation. I think this is where we-- - He's my representative character, actually, in my book, because he was a shape shifter given the times. - Well but essentially, in his analytical work, never. His analytical work has always been critical of efficient markets and so on, but in positions of influence, he's often been part of the ongoing policy consensus, which doesn't necessarily have very much to do with what the economics literature says. - Well, he certainly utilized his reputation as a man who knew economics, to wage his influence there. But I think, you know, Stiglitz also did work on efficient markets, but it's interesting that those guys didn't prevail in that argument for quite a while. - Well, I would say still have not. I mean, the reality is that there's been far less. I would single out, actually, the finance piece of the profession as being the part that perhaps performed worst and has reformed least. It's quite amazing when you talk to the people there. - There's nothing I would fear more than being called an optimist, but we are getting capital requirements out of this to some degree. I think, which is a recognition that there are speculative bubbles, we are getting people talking about it at the IMF and the OECD and then the Fed and Janet, this is an important issue, Janet Yellen. For a while, people thought the only lever to control bubbles would be interest rates, in the Greenspan period. And Janet Yellen is talking about capital requirements, capital controls, actual regulation like what I would call the good old days. So I think that's some progress, in the academic field, it's so easy to rationalize this efficient markets theory, there's always an alternative explanation that the bubble was actually rational. - Yeah. Some of it, well, certainly, some of the people start yelling at you if you even use the word bubble. - Right. - There are no bubbles, it's-- - It's the title, by the way, of one of my chapters, there are no speculative bubbles. One thing I'd like to tell the audience about a little bit, but I'd love to hear your thought about it, is economics attitudes towards government. Because the best in mainstream economics, I think, calls for government to intervene when there are market failures. And I tend to find the definition, not tend to, I find the definition of market failures way too ambiguous, and that way too narrow a definition of what government should do, and I think that's harmed us a lot. And it's by and large the best there is, maybe intervention on asymmetric information. Sometimes behavioral economics, but I don't think that's gotten far enough given that we know how irrational people can be. I wondered if you thought a little bit about that, 'cause I think government is a sideshow in mainstream economics, and government's not a sideshow in the economy or in our economic history. - Yeah. That's an interesting... I was thinking about that a bit. Part of the, I think, the problem. Here's how you do it. And it's the way that textbooks do it, even the very best textbooks like mine. (audience laughter) As you start with this beautiful model of the perfectly efficient free market economy. And then you say, "Okay, now we're gonna talk "about deviations from that model." And the deviations actually have two kinds, one is that the deviation that markets may not work right for a variety of reasons. Pollution, externalities, asymmetric information. If buyers don't know as much as sellers do, whatever. So that's one kind of source for government intervention. And the other is that, at least if you do it right, you say, "Look, the market outcome "has no moral significance, and there's no reason to believe "that it's fair or acceptable, "that if we wanted to help the poor, "we can certainly have a valid role of public policy "in helping the unfortunate or unlucky." But you're always starting from the baseline of efficient, the baseline position is that the economy gets it all right, that the market gets it right, and then we're working at the edges. And you can certainly argue that that's really wrong. That markets are full of market failure, are full of ways in which they don't actually fit that model. And actually, that real economies, real modern economies have big governments. It's funny how the textbook approach is one in which the government is kind of a marginal factor therein, yet even in the United States, 30+% of the economy passes though the government and in other advanced countries, it's closer to 50. And government obviously regulates a lot of stuff. Now, the question is though, how do you do that? We don't have, so when I, Jamie Galbraith and I have this conversation fairly often, he says, "We should start from a paradigm which is not to market "as the perfect market as the baseline," and I say, "Okay, but how do I do it? "I don't actually, I don't know how to teach it that way, "I don't even know how to make the argument." I don't know the answer to that. I mean, if the trouble is that a reality-based starting point is not an easy one, yeah, but I guess I believe that you're always gonna be doing models that are somewhat abstracting from reality. I'm waiting for somebody to come up with a way to do this. - This is a key point, I think And one of the key points I make in the book. Because it's hard to do, we often don't do it. And that just doesn't cut it. What you get is a propensity, and Paul has written about this in other context, a propensity to do what I would call clean economics in a very dirty world. In my view, there are ways to think about economics, at least in policy terms, that deal with the specific problems of the time in context, as opposed to shoehorning in rule of thumb answers to all policy questions, and I think there's been a strong tendency in mainstream economics to shoe in these rule of thumb policy answers. And I think economists have to deal with that, even though it becomes a sloppy, dirty profession as a consequence. - I'm trying to think about... See, I would've thought of, it's the drunkard and the lamp, street lamp, there's the old joke about a drunkard is looking for his lost keys under the street lamp, and they say, "Did you drop them here?" And he says, "No, but I can see here 'cause there's light." But I think actually this situation is more like, you're not actually sure where you dropped the keys. And so you look under the light hoping that you dropped them there. - Right. This is a rather, you know, this is a big issue, I think, that has to be first. - Yeah. But at the very least, let's put it this way, my advice to a young mainstream economist would be not throw it all out and, if only for your personal career. - And that's the issue. - But always be aware. I mean, at the very least, you should be aware that there is this strong bias in the way we tend to do economics that is pushing you towards understating the possible role of government, overstating how well markets work. At least remember that that is just a model. And it's not a model that has actually been born out by lots of real world experience. - Well, let me challenge you as a textbook writer. And I do this, to some degree, in the book as well. Why not tell people how the invisible hand works and then, kids, freshmen, and then immediately tell them it doesn't work and here are the problems with it? It's increasingly happening, I think, in textbooks. - Yeah, we try, but there is, actually, there is also, I have to say that the equivalent, maybe this is soft corruption, is you do want the textbook to be used. (audience laughter) So you have to, and that partly means, actually, that some really over-stretched person teaching six sections of a course at a community college has to have a book that is not too different from the way her notes look. It's gonna be something that can't be adopted. So there is shading, but I guess the point is always you have to fight the easy path, which doesn't meant, I think doesn't mean jumping completely away from the way everyone does it, but means pushing the envelope a little bit. - Probably Janet wants to allow you all to ask some questions, but I just wanna say one last thing,' because my own platform for America, my own agenda would be far more public investment than these deficit fears allow. A significantly higher inflation target, and a lot more fiscal stimulus. I think to some degree, Paul agrees with that. My view is mainstream economics inhibits that, especially the role of government as always defined by the amount of borrowing you can do, the deficit. - Yeah. - Okay. - All right. I'm coming in, the regulator. Okay. We wanna invite questions from the audience, there are microphones on both sides, so let me urge you to come up, I'm gonna ask two things, one is that you tell us who you are and where you're from, and the second is if your question is for one of the other of them, let them know. And please keep your questions short, if your question exceeds three minutes, there are nets that drop down from the ceiling and we will use them. - Thank you, this has been very interesting. My name is Hugh McGuire, and I have a degree from this place. - [Janet] Can you step a little closer to the microphone? - Like there? What bothers me is, within the last, I guess more or less 50 years, with the decline of labor unions and decline of other institutions, there were no institutions to push back on prevailing establishment ideas about economics. We've lived with a stagnating economy where kids are graduating from, getting undergraduate degrees and carrying debt floating at 100,000 dollars, and they end up back stocking shelves in a supermarket. And nobody sees that as a crisis. I don't understand how that can be allowed to happen. I'd appreciate your comments. - Probably both of us. I think a lot of people think of it now as a crisis. There's some disagreement about what to do about it. I think, on this stage, we both agree that there's a lot more room for fiscal stimulus to get economic growth going, and economic growth in itself would raise wages and create more jobs. There may be, on top of that, a globalization issue, of course. My view, and actually, I may disagree a little bit with Paul on this, people are talking about secular stagnation at a time when we really haven't used the tools at our disposal to get our growth rate going again. Maybe there's some historical secular stagnation. But I think people are very concerned, I don't think it's fair to say they're not concerned. There's disagreement about what to do. And I think the Republicans did so well in this election because they had a very simple and very wrong answer. You get growth by cutting back government spending and government regulation, and getting business motivated again, and that's not what's missing in this economy. - Secular stagnation, by the way. This is an interesting, again, it's being, it's an old idea that has come back 'cause it was rejected as being all wrong because markets get it right. But it's coming back, and again, the leading proponent is Larry Summers. But actually, what secular stagnation says is that there are times, there are environments in which the economy, in a way, wants to be depressed. And it requires much more activist government policies to fight it. So it's not actually a contradiction, what we're saying is that actually that we're in an environment where just having the Fed do its normal thing is not enough to produce consistent full employment, where we need higher inflation targets, public investment. So it's not actually a contradiction here. Now, the thing is, you say it's always the political, how do we get people to do this stuff? What the great frustration I think I've had, as people who read me know, is that actually, the pro-government spending, anti-tight money forces have won every argument, they've won on the facts, have made the other side look ridiculous again and again, and nothing changes in the political sphere, nothing changes in the policy. I guess that's not a problem with mainstream economics, exactly, that's a problem with life, the universe and everything. - I just want to say this about secular stagnation, 'cause it's come up repeatedly in economic history, especially after the Great Depression. A lot of people claim that technological advance just runs out of gas. - Well, that's a different story. That's not what I mean by, that's not what I-- - I thought that Larry Summers referred to that. Also, (mumbles) recording said, anyway, we shouldn't quibble. - [Janet] Go ahead, tell us who you are too. - Hi, my name is David Lempert, and I'm a senior international economist at the IRS, and a 2014 graduate of the Economics Program here at the Graduate Center. I'm very glad to be able to ask a question, I'm especially a big fan of Krugman, I've read all your books, and I'm sorry I'm missing you joining the department, but I'm glad to be done. (audience laughter) Six years while working full time, it was rough. My question has to do with the critique of the inflation targeting, that sort of religion of a 2% inflation targeting. Obviously, I was in graduate school in an economic environment of financial crisis and very weak demand, and we have interest rates at zero, so how relevant is the religion of the 2% inflation targeting and your critique of it in the current environment, where they don't have to really worry so much about inflation targeting, if anything, we really need to pump the economy by keeping interest rates as low as possible? - Okay, so. Let me go ahead, the first point is, if we had had 4% inflation instead of 2% coming in, then probably interest rates would've been about two percentage points higher to start with, so there would've been an extra 200 basis points of interest rate to cut. So the point is that, if we had not been so good at achieving price stability, we would've had more room to deal with this crisis as it happened. And then to some extent, looking forward, if you can convince people that there's gonna be inflation, you can convince people that borrowing more is not a bad thing, that sitting on cash is a bad thing. I mean, what the Japanese are trying to do right now is they're trying to create a self-fulfilling prophecy that deflation will end, we will do whatever it takes to get inflation. Unfortunately, they're saying to get it up to 2%. It really should be four, not two. The point is. Yeah, the inflation target has not been a constraint. But we would've been in much better shape had we had a higher inflation target in the past, and arguably, getting out of where we are now, convincing people that we were, in fact, raising the inflation target, even though it wouldn't be operational for a few years, would help us bootstrap ourselves out of where we are. I have to say, one thing is, if the Fed were to announce, actually, we decided that two was too low a target and we're gonna move it up to three, that would be a tremendously shocking announcement, which is a good thing, we want people to be shocked and change their expectations. - Yeah, it's remarkable to read the minutes of the FOMC about this, because they do hold 2% inviolable. And even people who might agree with this argument, that it should be 3 or 4%, have to work within the constraint of that, that we're not really hitting that 2%. I think they've talked a little bit about going above 2%, a couple of the gentlemen who run the Boston Fed talk about going over 2%. I'm sure deep down Janet Yellen feels we should be above the 2%. But you read the strained arguments, and the FOMC especially when they come out five years later. And it's disheartening, to say the least. And it's ideologically biased, I mean, the same people who had said inflation is coming back every year in a big way for five years are saying it again, and making public speeches about it, which the media, who are not uncomplicit in all this, to coin a word, pick up, as if there's some special knowledge these people have. - [Janet] Go ahead, sir. - My name is Seymour Emwon. I'm a retied television executive. Full disclosure, I'm a neighbor of Dr. Krugman's. My question is addressed to both of you. Given that we live in a global market economy fueled by consumer demand, when a large proportion of households, I would estimate in the US it's somewhere between 15 and 25%, have little or no discretionary income, how can we possibly have a thriving or growing economy, and why do most economists ignore this problem? - Well, I think fewer economists are ignoring that problem, I think it's getting more attention. Part of it is this new attitude about inequality that's receiving more and more attention among a wider and broader number of economists. Used to be that even Bernanke would make comments that inequality didn't matter, but more people are claiming that inequality does matter because low wage people tend to spend more and they're spending less. I think it's not obvious that America is saving too much, if you look at the big numbers, I think this is a point you make. I think, you know, I for one, I think higher wages are stimulative. That's another thing you don't talk much about in mainstream economics, in mainstream economics, for the most part, higher wages has been a cost that reduces profits and may even increase inflation, the Bugaboo of 2% inflation. I think you're right. An economy that doesn't have strong wages is in trouble. I think an economy that doesn't have domestic demand that's not dependent on huge bubbles and consumer borrowing, which was the case obviously in the 2000s with the mortgage boom, is an economy in trouble. I think with the Washington policy establishment that sits on government spending and apparently will continue to do so no matter what, and low wages that aren't coming back or coming back, they're not coming back. And if they're coming back, it'll take some time for them to come back. We've got a central, and perhaps tragic problem. - Yeah. I would not... I mean, it's not quite as simple as the story, oh, middle class and below doesn't have enough income and therefore we don't have enough consumer demand, because in fact, consumer spending as a share of GDP has been relatively high all through all of this stuff by historical standards. What is, I think, more arguable, is that because of the extremely skewed income distribution that has been sustained by rising debt, which then leads you to a crisis, that's not as solid, the evidence for that is not as strong as I'd like. I mean, it's a story, I wouldn't say that, I would say that inequality is a problem for a number of reasons, with this maybe not the most important of them. And if you ask what the problem was with the world economy as a whole, what's actually right now is the case is that investment is low. It's not actually that consumer demand is low, right now, what's holding us back is that investment is low. And some of that is residential investment, which has still not recovered, but also corporations sitting on cash which they don't see much reason to spend on, because growth is slow, it's kind of a self-fulfilling pessimism here. And also, well, I think if you try to ask what do you need to do, the answer would be there are multiple reasons for wanting to raise wages, there are multiple reasons for wanting to do what you can to reduce income inequality, and there's a huge case for more public investment as well. The thing is, none of this is actually particularly hard or mysterious, it's one of the amazing things about the world we're living in right now is that the stuff that should be, borrow money to build infrastructure, considering that inflation index bonds have essentially 0% interest, so it doesn't actually cost anything. Print some money, that's supposed to be fun, right? But what happens is we can't, the political system stands in the way of doing all of the stuff that's supposed to be an irresistible temptation, and turns out to actually be impossible to get happening. - Yeah, okay. - Yeah. (audience laughter) - [Janet] You have a question here? - My name's Irene Copley. I'm retired from several activities. And what I'm gonna say is really bigger than economics and I'm taking the opportunity to ask you or to discuss this with you because I'm scared. Just plain scared. Paul Krugman, I have the highest regard for you, when I hear you say you had no idea that there were organizations acting as banks, but they weren't banks, you had no idea, and I have this innocent notion that economists know everything about everything, but I understand you can't. And then you mentioned ideologies, and I was reading Chemerinsky's book, The Case Against the Supreme Court, which you talk about in today's column, Paul Krugman. And if they are corrupt, and if people in government are corrupt, and Republicans talk about climate hoax, and the NRA and the path to oligarchy that we are in, and while we talk about 2% inflation, there seems to be an itty-bitty question, because what's gonna happen is who is in charge now? Republicans have taken over 2014, if they win the presidency, where am I gonna move to? (audience laughter) You know, I'm scared. - You know, one issue we addressed to some degree, but maybe not enough, is this issue of capture and ethics and revolving doors in Washington. People getting, going to Washington as a means to get a better job elsewhere in the economy. It's not only Wall Street, it's the defense industry, it's the health industry. You know, I agree that there's this, you know, and if we can argue that, to some degree, to similar degree, there's an ethics problem in economics even, which I would suggest there may well be. If people want to get grants, they wanna rise in their universities, they want consulting jobs, they want to get a government post so they can get a better university position, and then more consulting jobs, it's become a career, a very lucrative career, for some economists. We do have a serious issue here, and it's hard to regulate. I'm a fan of regulation, but when people stop believing in the rule of law or think that really, the way you make money or they way you get ahead in life is to find the loopholes, there's some argument especially prevalent among economists, I think, that say no matter how you regulate, Wall Street's gonna find a loophole. As if, I'm not sure this was always the case. I think there was once a kind of attitude, a sensibility that to some degree, you have to abide by the law, not just find a way to get around the meaning and spirit of that law, and I think we've lost that, to some degree. And in fact, I think one reason we've lost it is this emphasis on some idea that, when the market is working, everything is right with the world, and the market works best with minimal government interference. Government as a moral force has been minimized in America. And I think that affected this campaign. Those who run for office talk about it as a moral force only in terms of basically eliminating it, or certainly minimizing it. That to me, you know, we face a very serious uphill battle morally and in terms of, getting back to our subject, economic theory and economic practice. - I mean, I would say, if you're not frightened by some of these things, then you're not paying attention. Of course it's scary. Now, all you can say is that there had been dark moments in US history and world history, wars. And some of them have turned out right in the end, or at least something was worked out. On the specific issue of financial regulation, I don't believe that Wall Street can find its way around anything, and in fact, Wall Street doesn't believe or they wouldn't have campaigned so furiously against Dodd-Frank. Or firms that are being designated as strategically important and therefore subject to extra regulation wouldn't be fighting so bitterly not to get that designation, so these things matter. Other issues. Sure, climate is a very scary thing. The fact that the head of the Senate Environment Committee is likely to be James Inhofe, who thinks that there's this vast conspiracy of scientists to perpetrate a hoax about the climate, that's pretty scary stuff. But you keep on plugging. Just my personal, I've been writing the column for the Times now for, Jesus, 14 years. In 2004, it was all over, it was going to be, liberalism was dead, conservative domination of everything forever. In 2008, it was, Democrats had won, and it was gonna be, it was the end of conservatism. In 2010, no way Obama can be reelected after this. So you know, nothing is permanent except mass extinction, which we may be working on. (audience laughter) I think the point's you just keep on plugging. And you have to work, you can't only work on the big issues. It's true, I mean, in some sense, climate change swamps everything. But you can't, meanwhile, you do have to worry about inflation targets. - Well, I think one reason to be a little more pessimistic (audience laughter) is that money talks ever louder now in politics. So I don't think it's a matter of cyclical history anymore. Arthur Schlesinger Jr. talked about that all the time, as the cycle swings back and forth. I hope that's right, and you know-- - Well, and yet. Strange fact, the most expensive presidential election as a share of GDP was 1896. So you know, it's not as if we haven't had previous years when money talked. - Yeah, we needed quite a revolution to come out of the mess of that period though. - My name is Aris Christodoulou, I'm a retired executive. This question is primarily to professor Paul. Professor, you mentioned that large systems, large complex systems, sorry, are inherently fragile. And by extension, this also means large economic complex systems, financial complex systems. Now, there's a new book, Fragile by Design, by professor Charles Calomiris and another gentleman from Columbia. Now, in fairness to the book, only one piece of it is what I wanted to focus on, which is really the reason for the 2008 crisis, as being due primarily to the Fanny Mae and Freddy Mac problem, lending, in effect, giving subprime mortgages to the wrong people, namely, the poor that couldn't pay them back. Now, I wanted to ask you if you, professor Krugman, agree with this, because there is the counterargument, of course, from the other side, that is called the big lie, calls this the big lie. And if you don't agree with it, it seems amazing to me that six years after the crisis, if science is the basis for economics, that the tools don't exist to put this question to rest once and for all and not have a high level disagreement by a person like Charles Calomiris and the other side arguing about such a basic point about what caused the crisis, thank you. - Okay. The answer is it is a big lie. And the tools do exist, and it has been totally refuted. I mean, the vast bulk of bad loans were made by private lenders, not by Fannie Mae and Freddy Mac, and in any case, Fannie Mae and Freddy Mac, you know, they did not collapse, they were not part of the financial crisis. There is, the attempt to claim that they were involved in lots of subprime lending was based upon actually sleazy, subprime and other high risk category, and it turns out, you look at what they were doing, it wasn't actually high risk, it was... You know, this stuff has been by any standard of normal evidence, this whole story that said the government did it has been completely refuted. Among other things, there's this claim that all of this was happening because, you often hear, you know, Barney Frank was forcing the government to make all of these, or forcing banks to make all of these bad loans, at a time when Republicans controlled the House of Representatives. You know, how was this supposed to have happened? So it really doesn't... Now, the question you have to ask, why would some well-known economists buy into this after, and this is, you know, this is a large, there's a lot of work on this, an extended debate. Why then would well-known economists endorse this thoroughly refuted theory? Well, we've been talking about some of the incentives going on there, but this is, it's astonishing. There was one review of that book that said that it is a tour de force, and I mean that in the worst way. (audience laughter) It's incredible that they would go with that lie. It just makes no sense at all given everything we know. - This is a highly, you know, highly ideological debate supported by vested interests that support specific think tanks. We could go into that in greater detail. - It's like the proposition that tax cuts for wealthy people yield enormous economic growth. Why haven't we been able to put that away? Well, the answer is that wealthy people who want tax cuts finance an unquenchable faith in that view, no matter what the evidence is. - It is my grave duty to bring the evening to a close, but before we do, let me just ask Jeff and Paul if each would like to make a final comment before we send our guests out into the night. - Well, I think this is an uphill battle. I hope economists engage more faithfully and, maybe I shouldn't use the word intelligently, but more sincerely in this battle. I think economics has become to some a subject of careerism. Economics has been simplified in order to make career advancement easier. And it's, I think, time to recognize that it's an academic discipline full of the difficulties and dirtiness of the real world, and it's time to make it less antiseptic, make it less distanced from reality, and make it flow with red blood again. - Not sure about the sanguinary metaphors, but the-- (audience laughter) Right, you know, I would just say that there's lots to be upset and depressed about the state of economics. But good work continues to be done. Particularly, there are younger people in the field, when I was at a dinner over with a mix of Wall Street economists, good guys, actually, there are some, and academics, we've had some of the younger macro people there, and I came away enormously encouraged. That there is still, and particularly, there's a lot of, the new thing now is let's grapple with reality, let's grapple with what actually happens and not be too constrained by what was supposed to happen. So will we see complete redemption? Will we see anybody who got it wrong admitting that they got it wrong? Probably not. But you don't give up hope, I mean, it's the same thing, all of these things, I think the answer is not to, we're not going to burn down the whole structure and start over. So you work on what you can work on, and books like this are helpful. If they make people feel guilty, if they make people in the profession feel worried, that's the first step towards redemption. - [Jeff] I hope so. (audience laughter) - [Janet] On that note. (applause) Buy some books on your way out. - [Jeff] Hey, Paul, thanks a lot. - [Paul] Okay, thanks a lot. - [Jeff] Good to see you. - Take care. - Speak to you soon.
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Channel: The Graduate Center, CUNY
Views: 9,635
Rating: 4.8064518 out of 5
Keywords: Paul Krugman (Academic), Jeff Madrick, The Grauduate Center, CUNY
Id: F34YdEU7zZg
Channel Id: undefined
Length: 90min 41sec (5441 seconds)
Published: Fri Dec 12 2014
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