- 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.
