Still, it’s what we know — that ain’t so — that gets us into trouble

September 10, 2013

Yes, yes, it’s the Dunning Kruger Effect.

It’s being gullible to hoaxes.

Gullible’s travels, etc. (illustration 1)

Gullible’s travels, etc. (illustration 1) (Photo credit: UIC Digital Collections)

And it’s not really understanding politics, or economics, but assuming that we do, that gets us moving in the wrong direction.

Is it dangerous?  The entire Tea Party is misled by their own wrong assumptions.  Mistaken belief in what intelligence sources found in Iraq helped get us into the second longest war in U.S. history (and perhaps the costliest ever). Erroneous beliefs about the economy contributed to the great Crash of 2008.  False beliefs about the economy short-circuited our recovery, after Obama got action to prevent our bottoming out.

They’re still at it.

Today I had a guy tell me that Paul Krugman, the Nobel winning economist from Princeton and the New York Times, was wrong when he advocated creating a housing bubble, back in 2002.

Krugman did that?  Really?

Maybe in the land of Gullible’s Travels.

https://twitter.com/Obomination1/status/377500188710944768

Turns out the claim is based on a carefully edited-out-of-context quote from a 2002 column Krugman wrote.  It’s a hoax quote, as it appears, and as it appears to make Krugman call for a housing bubble — which he didn’t do.

This guy afraid to put his name to his claims, “Obomination1” hadn’t bothered to check the source.  Any journalist worth the newspaper ink on his hands would have had a clattering Hemingway Brand® Sh** Detector at that point. Krugman advocating a housing bubble?

Not tough to find that quote, and track it back to an opposite-editorial page piece Krugman wrote for the New York Times on August 2, 2002, “Dubya’s Double Dip?”  In it, the usual-critic of Greenspan, Krugman, worried about the failure of the economy to recover except by excessive consumer spending — which both had a finite amount of capability, Krugman argued, and did not mend the organic problems of production that caused the recession whose pain was eased by the NASDAQ bubble but not cured in any way.  Put Krugman’s quote from the photo poster into real context (I’ve highlighted the quoted part below):

A few months ago the vast majority of business economists mocked concerns about a ”double dip,” a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As I’ve repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever.

The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Judging by Mr. Greenspan’s remarkably cheerful recent testimony, he still thinks he can pull that off. But the Fed chairman’s crystal ball has been cloudy lately; remember how he urged Congress to cut taxes to head off the risk of excessive budget surpluses? And a sober look at recent data is not encouraging.

Krugman wasn’t calling for the creation of a housing bubble at all.  He was warning there were other problems that needed to be solved then.  They weren’t solved, the housing bubble collapsed and took down a great deal of the world’s financial markets with it.

So, was Krugman “a loser” as my correspondent claims?  Or is my correspondent looking the wrong way through the telescope, and being suckered by a hoaxed-context quote?

Krugman continued:

On the surface, the sharp drop in the economy’s growth, from 5 percent in the first quarter to 1 percent in the second, is disheartening. Under the surface, it’s quite a lot worse. Even in the first quarter, investment and consumer spending were sluggish; most of the growth came as businesses stopped running down their inventories. In the second quarter, inventories were the whole story: final demand actually fell. And lately straws in the wind that often give advance warning of changes in official statistics, like mall traffic, have been blowing the wrong way.

Despite the bad news, most commentators, like Mr. Greenspan, remain optimistic. Should you be reassured?

Bear in mind that business forecasters are under enormous pressure to be cheerleaders: ”I must confess to being amazed at the venom my double dip call still elicits,” Mr. Roach wrote yesterday at cbsmarketwatch.com. We should never forget that Wall Street basically represents the sell side.

Bear in mind also that government officials have a stake in accentuating the positive. The administration needs a recovery because, with deficits exploding, the only way it can justify that tax cut is by pretending that it was just what the economy needed. Mr. Greenspan needs one to avoid awkward questions about his own role in creating the stock market bubble.

But wishful thinking aside, I just don’t understand the grounds for optimism. Who, exactly, is about to start spending a lot more? At this point it’s a lot easier to tell a story about how the recovery will stall than about how it will speed up. And while I like movies with happy endings as much as the next guy, a movie isn’t realistic unless the story line makes sense.

Had only Greenspan, Bush, and a few million more people only listened to Krugman, then, we might have been spared two decades of lousy economy growth.

But they didn’t.  It wasn’t Krugman who was “the loser,” on this — though he certainly is pained by America’s failure to follow his advice.

Bertrand Russell warned us of the Obomination1/Thiessens and others.  So did Will Rogers, and Kin Hubbard, and Daniel Boorstin, as well as Drs. Dunning and Kruger.

Those who don’t listen to Russell, Rogers, Hubbard, Boorstin, the repentant Mencken, and Krugman, are the losers, and they drag the rest of us with them.

By the way, Krugman’s Nobel was awarded in 2008, after the great shock of the housing bubble’s bursting, but before all the predictions he had made were played out.  He was right.

Santayana’s Ghost dines with von Hayek’s Ghost tonight, and they both smile pityingly at those who ignore Krugman and claim to ridicule him while failing to even check out the accuracy of what they thought Krugman said.

More:

1 Comment | History | Tagged: , , , , , | Permalink
Posted by Ed Darrell