Hey Paul Krugman

One of the many problems with Republicans (as well as Democrats) never taking ownership for the real origins of the financial crisis was that it left the Republican Party with no empirically-based story about the economy’s troubles from 2009-2015. That is, there was a perfectly good, accurate, conservative story about how the crisis was the result of government subsidies and guarantees run amok, a shortsighted immigration policy, and a lack of attention to moral hazard, along with failures in financial regulation.  The problem with this story was twofold, however:

a) The most public figure pushing these subsidies in the 2000s was George W. Bush.

b) Anyone pushing the line that the foreclosed deserved their fate would be easily tagged as heartless and likely racist. In fact, Paul Krugman often brings up that the Tea Party began with opposition to bailouts of foreclosed homeowners as a way of calling Tea Party supporters heartless and racist.

So instead, Republican politicians adopted another perspective on the origins and continuance of the crisis: runaway debt, along with Obama’s meddling with the economy, was destroying business confidence and would lead to skyrocketing inflation. This story didn’t offend as many people but had the disadvantage of being largely wrong. Debt and inflation were just not short-run worries in 2009-2012, when both interest rates and inflation were roughly zero.

Republicans won back Congress while pushing this story. But  it did lasting damage to the last vestiges of elite respect to Republican ideas, especially on economic policy. This was even more true because Republicans ran against debt while also complaining about cuts to Medicare and pushing Paul Ryan’s revenue-decreasing bills. It all just didn’t add up.

Paul Krugman’s constant self-congratulation is deeply irritating,but he was much more right than the inflationists about the basic facts of the crisis once it got started. His self-congratulation spread to the rest of the center-left, who decided that they could probably drop the “center” in their name without losing a whole lot.

Economic journalists, who once listened to Republicans (“fiscally conservative socially liberal” is basically a WSJ business reporter), stopped. And after the 2011 debt default standoff, big business decided that, whether or not they were right on taxes, GOP just wasn’t on their side. This is a big contributor to the one-sidedness of our current rainbow corporate coalition.

In the very long run, conservatives are probably right that our debt levels and public obligations are unsustainable and will hinder economic functioning. (I particularly worry about how state and local obligations will put them increasingly in hock to the federal government and destroy the weakening balance of federalist power.) But in the meantime, for conservatives worried about the failures of conservative intellectual elites, 2009-2012 economic policy was a big one.

5 thoughts on “Hey Paul Krugman

  1. At the risk of overkill, I think the only coherent explanation for the crisis was that everyone was at fault, which is useless politically. The argument about subsidies, with Barney Frank as the Fannie-Freddie bad guy, had some legs, but since no one was prepared to remove the real subsidy (tax deductions for interest), it wasn’t terribly useful either. Government spending couldn’t really be blamed because the bailouts that occurred earned the Treasury a pretty penny. The regulatory argument about the lack of diversification and forced selling is too subtle for mass consumption. Ultimately, blaming Wall Street, which everyone already knew to be true, is just too easy.

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    1. It’s like the old joke about the married couple, starving in a freezing garret. At last, fainting with hunger, the husband tells the wife that she will need to walk the streets and sell her body so that they can eat. She leaves and returns two hours later, flinging fifty dollars and a dime at his feet.
      “Who gave you the dime?” he asks. To which, she defiantly replies,
      “They all did.”

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  2. “So instead, Republican politicians adopted another perspective on the origins and continuance of the crisis: runaway debt, along with Obama’s meddling with the economy, was destroying business confidence and would lead to skyrocketing inflation.”

    A link here would be useful — I remember inflation worries (which did indeed prove wrong) but as an explanation for the origin of the financial crisis? That doesn’t make sense! Runaway debt makes more sense, but sort of begs the question — what caused all that runaway debt (which, in the case of mortgage debt, turned out to be bad)???

    I do remember Pete Wallison at the mainstream AEI pushing the idea that it was government policy (starting back with the CRA and including Freddie and Fannie) that led to the financial crisis, but I’m not sure many politicians listened to him, although I know he was invited to testify by Republican at various hearings and his opinion was an official minority view in some Congressional report about the 2008 financial crisis.

    Bottom line — I’d like a cross-section of Republican policy speeches on this subject to see what they were actually saying about what caused the crisis.

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    1. I think it’s a reasonable request, whether or not they advanced it as an explanation of the crisis, which wasn’t a question they wanted to discuss, debt and inflation were definitely the reasons they gave for economic weakness under President Obama. Here’s Mitch McConnell in 2010 (unquestionably a smart and disciplined Republican politician): “The Nation’s public debt and unemployment, combined, has risen by a shocking 40% [because of] literally trillions of dollars in additional spending under the Democrats’ stimulus, energy, and health plans.
      We had a choice when it came to the stimulus last February. We could have chosen a better policy of stimulating private-sector growth creating twice the jobs at half the price. That was the Republican plan. Instead, Democrats insisted on their government focus plan, which has produced no jobs and a mountain of debt.” And Paul Ryan, in 2010: ““There is nothing more insidious that a government can do to its people than to debase its currency,” Ryan said.
      Just as harmful, Ryan warns, is that the proliferation of newly printed dollars inevitably unleashes inflation and throws the economy out of kilter in other ways.
      “Inflation is a killer of wealth. It wipes out the middle class. It eviscerates the standard of living for people who have retired or are living on fixed incomes,” he said. “Name me a nation in history that has prospered by devaluing its currency.”

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      1. Yes, I agree that Republican politicians talked about debt and inflation a lot in response to Obama’s handling of the economy.

        As I said above, I think they were wrong about inflation (although not totally wrong about bad Fed policy, but we’d really need to get into the weeds to hash that out) but right about debt and government regulation.

        I’d recommend John Taylor (of the famous Taylor Rule) for more on what could have been done post-recession to help the economy:

        https://economicsone.com/

        I’m also a big fan of the “Grumpy Economist.” Both are vary old-fashioned types who believe in smaller government but they are whip smart and have an excellent command of theory and data. They could both take on Krugman and make him look like a fool.

        I agree with your broader point though — they should have been willing to take on Bush’s legacy and talked about previous foolish government housing policy contributing to the financial crisis.

        Liked by 1 person

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