The analyst who's rarely wrong

Financial Review

 
PUBLISHED: 02 Jun 2012

Anna Bernasek

The most influential economist in America isn’t Fed chairman Ben Bernanke, or Alan Krueger on President Barack Obama’s staff. It’s a newspaper columnist named Paul Krugman.

Writing twice weekly for The New York Times, Krugman is without peer as a popular analyst of economic and fiscal matters. It’s not luck, of course. Krugman has enviable credentials, including a prestigious chair at Princeton and a not-yet-dusty Nobel Prize. But those credentials aren’t what make him unique.

Krugman’s widespread influence comes from just how well he’s been doing his job. Since he started writing for a general readership in the 1990s, Krugman has forcefully taken each of the Clinton, Bush and Obama administrations to task on economic policy matters. And, as one observer put it, his record has been “uncannily right”.

With the release of his latest book, End This Depression Now!, Krugman has launched an all-out attack against fiscal austerity and inserted himself in the middle of a battle for the future prosperity of the US and Europe.

Typically caricatured as an “arch-liberal” by political and academic opponents, when read fairly Krugman has been a moderate but fearless critic of politicians and policymakers of all stripes. He leaped to national prominence in the run-up to the 2000 election, laying bare the intellectual void behind then candidate George W. Bush’s economic plans.

Since filing his first Times column in 2000, Krugman has hammered away at Bush’s war-mongering, tax cuts and fiscal profligacy, and more recently at President Obama’s triangulations to appease a divided electorate.

And he hasn’t been shy about criticising the Fed under Alan Greenspan or Bernanke (a friend and fellow Princetonian).

Putting his analysis above personal loyalties has earned him a reputation as a polarising figure and making him a lightning rod for public opinion. To a degree usually reserved for the politically powerful, one either loves Krugman him or hates him. There’s not much middle ground.

But to the dismay of his many critics, the columnist’s record has become pretty impressive. In 12 years of writing two columns a week plus books and blog posts, virtually everything Krugman says has been dissected and debated. In all that time mistakes and wrong calls have been few.

More important, he’s been dead right on the most critical issues. The Bush economic plan did turn out to be intellectually bankrupt; his tax cuts did turn out to be irresponsible and corrosive. And Obama’s stimulus did turn out to be too small.

It’s not unusual to hear fellow economists remark that they started out disagreeing with Krugman on one issue or another, only to grudgingly admit he was right later on.

So what is Krugman saying now?

As a specialist on global trade and currencies, his opinion on the European Union and the euro was sought from the start.

And he has not been optimistic about the future of the euro. He consistently warned that a common currency among such diverse countries, without a strong political union, would eventually self-destruct.

In Krugman’s view the only way to save the euro (he thinks it’s already too late to save Greece) is to raise inflation targets and stimulate growth through spending. And he believes Germany needs to take on a bit of inflation and spend more.

While Germany still seems a long way off accepting that proposition, international opinion seems to be shifting Krugman’s way. The IMF, some G8 leaders and the OECD have quietly dropped their austerity language and called on Europe to adopt policies promoting growth, rather than retrenchment.

In the US, Krugman argues that years of slow growth and stubbornly high unemployment are completely unnecessary. All it would take is for the government to start spending again.

He identifies several areas where spending and the boost to the economy would be quick and provide long-lasting benefits: rehire millions of teachers who have been laid off across the country, invest in road, rail and water infrastructure, and provide real relief for homeowners saddled with bloated mortgages.

The trouble Krugman runs into is that, while in the long run it’s in the interest of us all to promote growth, in the short run potent interests are determined to preserve the status quo.

Despite his persuasive arguments, there’s still a big hill to climb politically. But judging from Krugman’s record, it won’t turn out well for those who ignore him.