Essay Three Annotated Bibliography and Essay PromptFor paper th.docx

Essay Three: Annotated Bibliography and Essay Prompt
For paper three, you will be developing your own paper prompt.
You also have a choice as to which author to focus on: Hannah
Rosin. This paper gives you the most freedom in exploring
ideas. This can be great - it will make your paper more
interesting and unique. However, it can also be difficult because
you have to come up with the focus.
Assignment Objectives:
Create a paper prompt which ties to "Why Kids Sext?" By
Hannah Rosin and upload it by Friday. Word Min: 1500
What's an annotated bibliography? Basically, it's a Works Cited
page with notes. For each source, you will provide a brief (one
to two paragraph) description. You will also make a note of
whether the source is primary or secondary. See below for an
example.
Criteria for Evaluation:
· Research: You must bring in three outside sources. At least
one of these must be an additional secondary source (the other
two may be primary sources). See the PowerPoint on research
for more information on these types of sources.
· Audience: Consistent, academic tone. Appropriate amount of
contextual information, anticipating audience questions.
Addresses significant issues and makes them important to
audience.
· Grammar and Format: Errors in grammar, spelling, and usage
limited or non-existent. Correct MLA format, including proper
quotation citation.
Student
Instructor
ENC 1102
Date

Sample Annotated Bibliography
Ahlberg, Jaime, Harry Brighouse. “An Argument Against
Cloning.” Canadian Journal
of Philosophy 40.4 (2010): 539-566. Web. 28 October 2011.
This article is credible, because it is a peer reviewed
journal article. The authors address all the plausible reasons for
cloning and give arguments against those reasons. One of the
major solutions to cloning that the authors present is adoption.
They suggest infertile couples adopt, rather than cloning. If
cloning is legalized, the children who would normally be
adopted by infertile couples, will now be abandoned. The
authors argue that while the pool of parents wanting to adopt
will shrink after cloning, the pool of children needing to be
adopted will stay the same, leading to catastrophic
consequences for the world.
The authors of this article argue that parents who raise
clones may have a hard time raising a child that is a complete
clone of themselves. This journal article is a primary source.
Bottum, J. “Against Human Cloning.” Human Life Review 27.2
(2001): 121-124. Web.
28 October 2011.
This article discusses the Congressional bill to prohibit
human cloning. The author explains that banning cloning would
not mean overturning current legislation, like Roe v Wade. If
allowed, human cloning would eventually open the door for
selective cloning, which would be detrimental to society.
This analysis will aid me in discussing my views about
cloning and the need for better laws regarding this issue. This is
a secondary source. The views of the authors support my thesis.
I will use this text in conjunction with Fukuyama’s essay as the
main source of information for my essay. Human reproductive
cloning is a hot button issue in today’s society and we must
closely examine it before we allow cloning to continue. No one
has fully through through the repercussions of this scientific

process.
I will also use this essay to bring in language from the
Congressional bill. The language from the bill works more as a
primary source (and the author uses it as such in this essay) and
so I might use it in the same way if need be. Quotes from the
bill will be used to support and explain my opinions about the
importance of caution when proceeding with cloning issues.
Cohen, Cynthia. “The Ethics of Human Reproductive Cloning:
When World Views
Collide.” Accountability in Research: Policies and Quality
Assurance 11 (2004): 183-199. Web. 28 October 2011.
This article was found in a peer reviewed journal. In it, the
author discusses the effects of cloning on the resulting child.
The author argues that the cloned child will have little or no
freedom to develop, since they will always be compared to the
people that created them. It further goes into the psychological
harm clones would experience. This author discusses human
dignity and how it would be altered with the creation of human
reproductive clones.
In the article, the safety and effectiveness of cloning is
questioned. Science has yet to create a healthy clone, and the
author supposes that this is still far off. Society, the author
hypothesizes, is not ready for clones. This is a secondary
source.
Fukuyama, Francis. “Human Dignity.” Emerging. Ed. Barclay
Barrios. Boston: Bedford/St.Martin’s, 2010. 141-163. Print.
In this work, the author describes what makes humans
human. He says that human dignity is engrained in Factor X.
Something that cannot be described. With the scientific
advancements we have recently seen, that human dignity is in
danger. If clones and robots are given similar characteristics,
what prevents them from having human dignity? This author
explores the struggle humans have to balance scientific
advancements with protecting our human dignity.

This essay is from our Emerging book and will be used as
a secondary source Fukuyama’s theories will work to support
my own ideas.
Simpson, JL. “Could Cloning Become Permissible?” Ethics,
Law, and Moral Philosophy of Reproductive Biomedicine 2.1
(2007): 125-129. Web. 28 October 2011.
In this article, a doctor of obstetrics and gynecology and
professor at Baylor University, discusses the issues with human
reproductive cloning. He touches on the questionable safety of
the practice, but mainly discusses the ethical pitfalls of cloning.
I will use this in my paper to look at cloning from a medical
perspective and to help me consider all the angles of this issue.
This is a primary source.
H O W D I D P A U L K R U G M A N
G E T I T S O W R O N G ? 1 ecaf_2077 36..40
John H. Cochrane
This article is a response to Paul Krugman’s New York Times
Magazine article,
‘How Did Economists Get It So Wrong?’ Krugman’s attack on
modern economics –
and many adhominem attacks on modern economists – display a
deep and highly
politicised ignorance of what economics and finance is really all
about, and a
striking emptiness of useful ideas.
Keywords: Paul Krugman, stimulus, Keynes, efficient markets.

Many friends and colleagues have asked me
what I think of Paul Krugman’s New York
Times Magazine article, ‘How Did Economists
Get It So Wrong?’2
Most of all, it is sad. Imagine this were not
an economics article. Imagine this were a
respected scientist turned popular writer, who
says, most basically, that everything everyone
has done in his field since the mid-1960s is a
complete waste of time. Everything that fills its
academic journals, is taught in its PhD
programmes, presented at its conferences,
summarised in its graduate textbooks, and
rewarded with the accolades a profession can
bestow (including multiple Nobel Prizes) is
totally wrong. Instead, he calls for a return to
the eternal verities of a rather convoluted book
written in the 1930s, as taught to our author in
his undergraduate introductory courses. If a
scientist, he might be an AIDS-HIV disbeliever,
a creationist or a stalwart that maybe
continents do not move after all.
It gets worse. Krugman hints at dark
conspiracies, claiming ‘dissenters are
marginalised’. The list of enemies is ever-
growing and now includes ‘new Keynesians’
such as Olivier Blanchard and Greg Mankiw.
Rather than source professional writing, he
uses out-of-context second-hand quotes from
media interviews. He even implies that
economists have adopted ideas for pay, selling
out for ‘sabbaticals at the Hoover institution’
and fat ‘Wall Street paychecks’.

This approach to economic discourse is a
disservice to New York Times readers. They
depend on Krugman to read real academic
literature and digest it, and they get this
attack instead. Any astute reader knows that
personal attacks and innuendo mean the
author has run out of ideas.
Indeed, this is the biggest and saddest
news of this piece: Paul Krugman has no
interesting ideas whatsoever about what
caused the financial and economic problems
that culminated in the crash of 2008, what
policies might have prevented it, or what
might help us in the future.
But maybe he is right. Occasionally
sciences, especially social sciences, do take a
wrong turn for a decade or two. I think
Keynesian economics was such a wrong turn.
So let us take a quick look at the ideas.
Krugman’s attack has two goals. First, he
thinks financial markets are ‘inefficient’,
fundamentally due to ‘irrational’ investors,
and thus prey to excessive volatility which
needs government control. Second, he likes
the huge ‘fiscal stimulus’ provided by
multi-trillion dollar deficits.
Market efficiency
It is fun to say that we did not see the crisis
coming, but the central empirical prediction
of the efficient markets hypothesis is precisely
that nobody can tell where markets are going

– neither benevolent government bureaucrats,
nor crafty hedge-fund managers, nor
ivory-tower academics. This is probably the
best-tested proposition in all the social
sciences. Krugman knows this, so all he can
do is rehash his dislike for a theory whose
central prediction is that nobody can be a
reliable soothsayer. It makes no sense
whatsoever to try to discredit efficient market
theory in finance because its followers didn’t
see the crash coming.
Krugman writes as if the volatility of stock
prices alone disproves market efficiency, and
believers in efficient marketers have just
Other articles
© 2011 The Authors. Economic Affairs © 2011 Institute of
Economic Affairs. Published by Blackwell Publishing, Oxford
ignored it all these years. This is a canard that Krugman
should know better than to pass on, no matter how
rhetorically convenient. There is nothing about ‘efficiency’ that
promises ‘stability’. ‘Stable’ price growth would in fact be a
major violation of efficiency as it would imply easy profits.
Data from the Great Depression have been included in
practically all the tests of efficient markets. Proponents of the
theory have not forgotten its lessons. In fact, a great puzzle in
efficient markets theory is that the large equity risk premium
suggests that, if anything, stock markets do not seem risky
enough.
It is true and very well documented that asset prices move

more than is justified by reasonable expectations of future
cashflows, discounted at a constant rate. This might be
because people are prey to bursts of irrational optimism and
pessimism. It might also be because people’s willingness to
take on risk varies over time, and is lower in bad economic
times. As Eugene Fama pointed out in 1970, these are
observationally equivalent explanations. Unless you are willing
to elaborate your theory to the point that it can quantitatively
describe how much and when risk premiums, or waves of
‘optimism’ and ‘pessimism’, can vary, you know nothing. No
theory is particularly good at that right now.
Crying ‘bubble’ is empty unless you have an operational
procedure for identifying bubbles, distinguishing them from
rationally low-risk premiums and crying wolf too many years
in a row. Krugman rightly praises Robert Shiller for his
warnings over many years that house prices might fall. But
advice that we should listen to Shiller, because he got the last
call right, is no more useful than previous advice from many
quarters to listen to Alan Greenspan because he got several
forecasts right. Following the last mystic oracle until he gets a
judgment wrong, then casting him to the wolves, is not a good
long-term strategy for identifying bubbles. Krugman likes
Shiller because he advocates behavioural finance ideas, but
that is no help either. People who say they follow behavioural
finance have just as wide a divergence of opinion as those who
do not. Are markets irrationally exuberant or irrationally
depressed today? It’s hard to tell.
This difficulty is no surprise. It is the central prediction of
free-market economics, as crystallised by F. A. Hayek, that no
academic, bureaucrat or regulator will ever be able to fully
explain market price movements. Nobody knows what
‘fundamental’ value is. If anyone could tell what the price of
tomatoes should be, let alone the price of Microsoft stock,
then communism and central planning would have worked.

More deeply, the economist’s job is not to ‘explain’ market
fluctuations after the fact or to give a pleasant story on the
evening news about why markets went up or down.
The case for free markets is not justified by
the belief that markets are ‘perfect’
But this argument takes us away from the main point. The
case for free markets never was that markets are perfect. The
case for free markets is that government control of markets,
especially asset markets, has always been much worse.
In effect, Krugman is arguing that the government should
massively intervene in financial markets and take charge of the
allocation of capital. He cannot say this explicitly, but he does
say, ‘Keynes considered it a very bad idea to let such
markets . . . dictate important business decisions’, and ‘finance
economists believed that we should put the capital
development of the nation in the hands of what Keynes had
called a “casino” ’. Well, if markets cannot be trusted to
allocate capital, it’s a fair to conclude Krugman thinks only the
government can.
To reach this conclusion, you need evidence, experience or
some realistic hope that the alternative will be better.
Remember, the US regulator, the SEC, could not even find
Bernie Madoff when he was handed to them on a silver platter.
Fannie Mae, Freddie Mac and Congress all did a dreadful job
of managing the mortgage market. Is this system going to
regulate Citigroup, guide financial markets to the right price,
replace the stock market, and tell our society which new
products are worth investment? Government regulators failed
just as abysmally as private investors and economists to see
the storm coming.

In fact, if you take it at all seriously, the behavioural view
gives us a new and stronger argument against regulation and
control. Regulators are just as human and irrational as market
participants. If bankers are, in Krugman’s words, ‘idiots’, then
so must be the typical Treasury secretary, Fed chairman and
regulatory staff. Most of them are ex-bankers! Furthermore,
regulators act alone or in committees, without the discipline of
competition, where behavioural biases are much better
documented than in market settings. They are still easily
captured by industries, and face politically distorted
incentives.
Careful behaviouralists know this, and do not quickly run
from ‘the market got it wrong’ to ‘the government can put it
all right’. Even my most behavioural colleagues Richard Thaler
and Cass Sunstein in their book Nudge go only so far as a light
libertarian paternalism, suggesting good default options on US
personal pension accounts. (And even here they’re not very
clear on how the Federal Nudging Agency is going to steer
clear of industry capture.) They do not even think of jumping
from ‘irrational’ markets, which they believe in deeply, to
government control of stock and house prices and allocation
of capital.
Stimulus
Krugman is a strong supporter of fiscal stimulus. In this quest,
he accuses us and the rest of the economics profession of
‘mistaking beauty for truth’. He is not clear on what the
‘beauty’ is that we all fell in love with, and why one should
shun it, for good reason. The first siren of beauty is simple
logical consistency. Krugman’s Keynesian economics requires
that people make logically inconsistent plans to consume
more, invest more and pay more taxes with the same income.
The second siren is plausible assumptions about how people
behave. Keynesian economics requires that the government is

able to systematically fool people again and again. It presumes
that people don’t think about the future in making decisions
today. Logical consistency and plausible foundations are
indeed ‘beautiful’ but to me they are also basic preconditions
for ‘truth’.
In economics, stimulus spending ran aground on Robert
Barro’s Ricardian equivalence theorem. This theorem says that
37iea e c o n o m i c a f f a i r s j u n e 2 0 1 1
debt-financed spending cannot have any more effect than
spending financed by raising taxes. People, seeing the higher
future taxes that must pay off the debt, will simply save more.
They will buy the new government debt and leave all spending
decisions unaltered. Is this theorem true? It is a logical
connection from a set of ‘ifs’ to a set of ‘therefores’. Not even
Krugman can object to the connection.
Therefore, we have to examine the ‘ifs’. And those ‘ifs’ are,
as usual, obviously not true. For example, the theorem assumes
lump-sum taxes, not proportional income taxes. Alas, when you
take this consideration into account, we are all made poorer by
deficit spending, so the multiplier is most likely negative. The
theorem (like most Keynesian economics) ignores the
composition of output; but surely spending money on roads
rather than cars can’t greatly affect the overall level of output.
Economists have spent a generation tossing and turning the
Ricardian equivalence theorem, assessing the likely effects of
fiscal stimulus in its light, generalising the ‘ifs’ and figuring

out
the likely ‘therefores’. This is exactly the right way to do
things.
The impact of Ricardian equivalence is not that this simple
abstract benchmark is literally true. The impact is that in its
wake, if you want to understand the effects of government
spending, you have to specify why and how it is false.
Doing so does not lead you anywhere near old-fashioned
Keynesian economics. It leads you to consider distorting taxes,
how much people care about their children, how many people
would like to borrow more to finance today’s consumption
and so on.
For example, most Keynesians think the Ricardian
equivalence theorem fails because people don’t rationally
anticipate the future taxes that must pay off today’s debt. OK,
but what’s good for the goose is good for the gander: if
sometimes people pay too little attention to future taxes, at
others they pay too much, so stimulus has a negative effect.
The latter seems at least plausible now! It is the logically
consistent conclusion from Krugman’s views. He thinks deficit
concerns are just Tea Party hysteria. OK, but if so, the voters
are overestimating future taxes, not ignoring them.
Furthermore, if ‘stimulus’ is rooted in people ignoring future
taxes, then it makes no sense whatsoever to advocate
‘stimulus’ today but loudly announce the future taxes in ‘deficit
reduction’!
Last, when you find ‘market failures’ that might justify a
multiplier, optimal-policy analysis suggests fixing the market
failures, not their exploitation by fiscal multipliers.
This is how real, thoughtful, logically consistent analysis of
fiscal stimulus proceeds. Nobody ever ‘asserted that an increase
in government spending cannot, under any circumstances,

increase employment’, any more than (I presume) Krugman
would assert that more government spending always helps
(Greece? Zimbabwe?). This statement is unsupportable by any
serious review of professional writings, and Krugman knows it.
But thinking through this sort of thing and explaining it is
much harder than just tarring your enemies with
out-of-context quotes, ethical innuendo or silly cartoons.
The ‘crash’
Krugman’s New York Times article is supposedly about how the
crash and recession changed our thinking, and what
economics has to say about it. The most amazing news in the
whole article is that Paul Krugman has absolutely no idea
about what caused the crash, what policies might have
prevented it and what policies we should adopt going forward.
He seems completely unaware of the large body of work by
economists who actually do know something about the
banking and financial system, and have been thinking about it
productively for a generation.
There was a financial crisis, a classic run on the shadow
banking system, and near collapse of the large commercial
banks. The centrepiece of our crash was not the relatively free
stock or real estate markets, it was the highly regulated banks.
A generation of economists has thought really hard about
these kinds of events: Diamond, Rajan, Gorton, Kashyap,
Stein, Duffie and so on. They have thought about why there is
so much short-term debt, why people run on banks, how
deposit insurance and credit guarantees can help to stop runs,
and how they give incentives for excessive risk-taking, why
brokerage and derivatives contracts are prone to runs, what’s
wrong with bankruptcy law and how to fix it.
If we want to think about events and policies, this seems

like more than a minor detail. The hard and central policy
debate over the last year was how to manage this financial
crisis. Now it is how to set up the incentives of banks and
other financial institutions so that another financial crisis or
sovereign-debt crisis does not happen. There is a lot of good
and subtle economics here that New York Times readers might
like to know about. But, sadly, Krugman says nothing about
these things.
Krugman does not even have anything to say about the
Federal Reserve Board (Fed). Ben Bernanke did a lot more in
2007–08 than set central bank interest rates to zero and then
go off on vacation and wait for fiscal policy to do its magic.
Leaving aside the string of bailouts, the Fed started term
lending to securities dealers. Then, rather than buy US
government bonds in exchange for reserves, it essentially sold
government bonds in exchange for private debt. Though the
funds rate was near zero, the Fed noticed huge commercial
paper and securitised-debt spreads, and intervened in those
markets. There is no such thing as ‘the’ interest rate anymore:
the Fed is attempting to manage all interest rates.
Monetary policy now has little to do with ‘money’ versus
‘bonds’ with all the latter lumped together. Monetary policy
has become wide-ranging financial policy. Does any of this
work? What are the dangers? Can the Fed stay independent in
this new role? These are the questions of our time. Paul
Krugman has nothing to say about them.
To Krugman, the crash was caused by ‘irrationality’. To
Krugman, there is one magic cure-all for all economic
problems: fiscal stimulus. It’s really a remarkably empty view
of the world.
Krugman claims a cabal of obvious crackpots bedazzled all
of macroeconomics with the beauty of their mathematics, to

the point of inducing policy paralysis. Alas, that won’t stick.
The sad fact is that few in Washington pay the slightest
attention to modern macroeconomic research, in particular to
anything with a serious intertemporal dimension. Krugman’s
simple Keynesianism has dominated policy analysis for
decades and continues to do so. Policy-makers just add up
consumer, investment and government ‘demand’ to forecast
38 h o w d i d p a u l k r u g m a n g e t i t s o w r o n g ?
output and use simple Phillips curves to think about inflation.
If a failure of ideas caused bad policy, it’s Krugman’s
simple-minded 1960s Keynesianism that failed.
The future of economics
How should economics change? Krugman argues for three
incompatible changes.
First, he argues for a future of economics that ‘recognises
flaws and frictions’, and incorporates alternative assumptions
about behaviour, especially towards risk-taking. This is what
macroeconomists have been doing for a generation.
Macroeconomists have not spent 30 years admiring the eternal
verities of Kydland and Prescott’s 1982 paper. Pretty much all
we have been doing for 30 years is introducing flaws, frictions
and new behaviours (especially new models of attitudes to risk)
and comparing the resulting models, quantitatively, to data.
The long literature on financial crises and banking which
Krugman does not mention has also been doing exactly the
same. My own research includes work on ‘habits’, a mechanism

by which people become more risk averse as values fall.
Second, Krugman argues that ‘a more or less Keynesian
view is the only plausible game in town’, and ‘Keynesian
economics remains the best framework we have for making
sense of recessions and depressions’. One thing is pretty clear
by now, that when economics incorporates flaws and frictions,
the result will not be to rehabilitate an 80-year-old book. As
Krugman bemoans, the ‘new Keynesians’ who did just what he
asks by putting Keynes-inspired price-stickiness into logically
coherent models, ended up with something that looked a lot
more like monetarism. A science that moves forward almost
never ends up back where it started: Einstein revised Newton,
but did not send us back to Aristotle.
Third, and most surprising, is Krugman’s Luddite attack
on mathematics: ‘economists as a group, mistook beauty, clad
in impressive-looking mathematics, for truth’. Models are
‘gussied up with fancy equations’. I am old enough to
remember when Krugman was young, working out the
interactions of game theory and increasing returns in
international trade for which he won the Nobel Prize. The old
guard tut-tutted ‘nice recreational mathematics, but not
real-world at all’. He once wrote eloquently about how only
mathematics keeps your ideas straight in economics. How
quickly time passes.
Again, what is the alternative? Does Krugman really think
we can make progress in economic and financial research
(understanding frictions, imperfect markets, complex human
behaviour and institutional rigidities) by reverting to a literary
style of exposition and abandoning the attempt to compare
theories quantitatively against data? Against the worldwide
tide of quantification in all fields of human endeavour is there
any real hope that this will work in economics?

The problem is that we do not have enough mathematics.
Mathematics in economics serves to keep the logic straight, to
make sure that the ‘then’ really does follow the ‘if ’, which it so
frequently does not if you just write prose. The challenge is
that it is hard to write down explicit artificial economies with
these novel ingredients and actually solve them in order to see
what makes them tick. Frictions are just hard with the
mathematical tools we have now.
The insults
The level of personal attack in the New York Times article, and
the fudging of the facts to achieve it, is simply amazing. As one
little example, take my quotation about carpenters in Nevada.
Krugman writes: ‘And Cochrane declares that high
unemployment is actually good: “We should have a recession.
People who spend their lives pounding nails in Nevada need
something else to do.” Personally, I think this is crazy. Why
should it take mass unemployment across the whole nation to
get carpenters to move out of Nevada?’
I did not write this. It is an attribution, taken out of
context, from a bloomberg.com article, written by a reporter
with whom I spent about 10 hours patiently trying to explain
some basics, and who also turned out only to be on a hunt for
embarrassing quotes. Nevertheless, I was trying to explain
how sectoral shifts contribute to unemployment. I never
asserted that ‘it takes mass unemployment across the whole
nation to get carpenters to move out of Nevada’. You cannot
even dredge up an out-of-context quote for that monstrously
made-up opinion.
What is the point in conducting debate this way? I do not
think that Krugman disagrees that sectoral shifts result in
some unemployment, so the quote actually makes sense as
economics. The only point is to make me, personally, seem

heartless – a pure, personal, calumnious attack, which has
nothing to do with economics.
It goes on. Krugman asserts that I and others ‘believe’ ‘that
an increase in government spending cannot, under any
circumstances, increase employment’ and that we ‘argued that
price fluctuations and shocks to demand actually had nothing
to do with the business cycle’. These are just gross distortions,
unsupported by any documentation or the lightest
fact-checking, let alone by examination of any professional
writing. And Krugman knows better. All economic models are
simplified to exhibit one point; we all understand the real
world is more complicated. Krugman’s job as a professional
economist with a newspaper column is supposed to be to
explain that to lay readers. These quotes about academic
opponents would be rather like somebody looking up
Krugman’s early work (which assumed away transport costs)
and claiming in the Wall Street Journal, ‘Paul Krugman believes
ocean shipping is free, how stupid’.
The idea that any of us do what we do because we are paid
off by Wall Street banks or seek cushy sabbaticals at Hoover is
ridiculous. Indeed, believing in efficient markets disqualifies
you for employment in hedge funds and many other financial
institutions. Nobody wants to hire somebody who thinks you
cannot make any money trading!
Krugman is supposed to read, explain and criticise things
economists write. This should be real professional writing: not
interviews, opeds and blog posts. At a minimum, Krugman’s
style leads to the unavoidable conclusion that he is not reading
real economics anymore.
How did Krugman get it so wrong?
So what is Krugman up to? The only explanation that makes

sense to me is that Krugman isn’t trying to be an economist:
he is trying to be a partisan, political opinion writer. This is
39iea e c o n o m i c a f f a i r s j u n e 2 0 1 1
not an insult. I read George Will, Charles Krauthnammer and
Frank Rich with equal pleasure even when I disagree with
them. Krugman wants to be the Rush Limbaugh of the Left.
To Krugman, economics is no longer a quest for
understanding, delightful in its capacity to overturn one’s
preconceptions. Economics is just a set of debating points to
argue for policies that one has adopted for partisan political
purposes. ‘Stimulus’ is just marketing to sell Congressmen and
voters a package of government spending priorities that are
wants for political reasons. It is not a proposition to be
explained, understood, taken seriously to its logical limits, or
reflective of market failures that should be addressed directly.
Why argue for a nonsensical future for economics? Well,
again, if you do not regard economics as a science; a discipline
that ought to result in quantitative matches to data; a
discipline that requires crystal-clear logical connections
between the ‘if ’ and the ‘then’; and if the point of economics is
merely to provide marketing and propaganda for
politically-motivated policy, then his writing does make sense.
It makes sense to appeal to some future economics – not yet
worked out even verbally, let alone tested in data – to disdain
quantification and comparison to data, and to appeal to the
authority of ancient books while advocating that we spend a
trillion dollars.

This is the only reason I can come up with to understand
why Krugman wants to write personal attacks on those who
disagree with him. I like it when people disagree with me, and
take time to read my work and criticise it. At worst I learn how
to position it better. At best, I discover I was wrong and learn
something. I send a polite thank-you note.
Krugman wants people to swallow his arguments whole
from his authority, without demanding logic, or evidence.
Those who disagree with him, alas, are pretty smart and have
pretty good arguments if you bother to read them. So, he tries
to discredit them with personal attacks.
This is the political sphere, not the intellectual one: do not
argue with opponents, swift-boat them. Sadly, this approach
has nothing to do with economics, or discovering the truth
about how the world works or could be made a better place.
1. This article is an edited version of an earlier article, available
at http://
faculty.chicagobooth.edu/john.cochrane/research/Papers/
krugman_response.htm.
2. Available at http://www.nytimes.com/2009/09/06/magazine/
06Economic-t.html?_r=1 (published 2 September 2009).
References
Kydland, F. and E. Prescott (1982) ‘Time to build and aggregate
fluctuations’, Econometrica, 50, 6, 1345–1370.
Thaler, R. H. and C. R. Sunstein (2008) Nudge: Improving
Decisions
About Health, Wealth, and Happiness, New Haven, CT: Yale

University Press.
John H. Cochrane is the AQR Capital Management Professor of
Finance at the University of Chicago Booth School of Business
([email protected]). You can find further writings on
stimulus, monetary policy, inflation and financial markets on
his
webpage, http://faculty.chicagobooth.edu/john.cochrane/
research/Papers/.
40 h o w d i d p a u l k r u g m a n g e t i t s o w r o n g ?
Challenge, 58(2):112–134, 2015
Copyright © Taylor & Francis Group, LLC
ISSN: 0577-5132 print/1558-1489 online
DOI: 10.1080/05775132.2015.1003503
What’s Wrong with Economics: A Discussion
Between Paul Krugman and Jeff Madrick
Jeff Madrick raised several criticisms of mainstream economics
in
his book, Seven Bad Ideas: How Mainstream Economists Have
Damaged America and the World. The Nobelist and New York
Times columnist Paul Krugman sat down at the City University
of New York Graduate Center to discuss the issues last
November.
A lightly edited transcript follows. Janet Gornick, a director of
the Luxembourg Income Study, where Paul Krugman also does
research, moderated the event.

MODERATOR: Good evening, I’m Janet Gornick. 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
Luxembourg
Income Study Center, with offices in Luxembourg and here at
the Graduate
Center. The format for the evening is as follows: First, Jeff
Madrick will offer
some remarks about his new book, Seven Bad Ideas, which talks
about 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 we wish to discuss. Their
conversation
will be unregulated, in the spirit of the topic. And, for the final
part of the
evening, we’re going to take questions from the audience.
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 any-
where 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, includ-
ing Age of Greed, The Case for Big Government, End of
Affluence, and Taking
America. Jeff’s books are notable for attracting diverse
audiences, often
112
http://dx.doi.org/10.1080/05775132.2015.1003503
receiving praise from progressives and the business press alike.
This new
book, Seven Bad Ideas is, as I think you know by now, 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 an overreliance 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 rec-
ommend it, and I might add that one does not have to be an
economist to
find the book both clarifying and delightfully readable. 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 Prin-
ceton University to here at the Graduate Center of the City
University of
New York. In the middle of 2014 he joined the List Center and
serves there
as a distinguished scholar, and in September 2015 he will join
the economics
faculty at 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 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 have this to
say, I wonder what would have 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.
JEFF: Thank you all very much for coming. A special thanks to
Janet
Gornick, who you just heard from, who runs the Luxembourg
Income Study
Center and very generously made all of this available to us.
Thanks to the
Century Foundation for cosponsoring this. Thanks to Paul for
giving his time,
and thanks to mainstream economists for making so many
mistakes.
Now obviously I have to place a caveat in here. There are many
excep-
tions to the conventional mainstream thinking that I criticize in
my book, 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 e-mail that said, if
you were really
What’s Wrong with Economics 113
an anti-mainstreamer, you would have talked about Marx in the
first chapter.
And I was a little bit taken aback. I did talk about Duncan Foley
of the New
School, who is a Marxist. But it occurred to me I’m probably
not an anti-
mainstreamer in that sense. I’m surely anti–what mainstream
became. If neo-
classical 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
sympathetic with
that. If it just means to get rid of the obstacles in the way of a
free market work-
ing; if labor is getting paid what it deserves, as many
neoclassical or main-
stream economists contend, I am not sympathetic to this
contention. If it
means we shouldn’t worry about inequality—and a surprising
number of
mainstream economists talk about how inequality is not their

concern, equal-
ity 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
percent a year,
well, I’m not very sympathetic to 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 sympathetic
because market failures are rampant and very hard to define. If
it means pub-
lic investment should be modest, and it often did in the last
thirty years, again
I’m not sympathetic. If it means you really can reduce the
sources of growth
to abstractions like technology plus savings plus human capital,
I think we’ve
got to be a lot more specific and particular about why
economies grow.
What happened in mainstream economics is not that these
neoclassical
classical tools are bad per se, but that they were abused and
they are at their
core oversimplified. The pendulum of economics swung to rule-
of-thumb
ideology and especially antigovernment attitudes. Economics
swung with
the rest of the nation. And I think I wrote this to be sure that
we’re not going

to repeat the same mistake, but it’s not obvious to me we’re not.
I’m not talk-
ing 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 eliminated.
To some degree Regulation Q had kept a lid on the amount of
money you can
pay on interest rates to savers. 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 oil money
to South America. Probably it should have been an international
government
agency doing that. He bowled over the Nixon and Ford
administrations and
took it on his own shoulders. One consequence was repeated
financial crises
over Latin American debt in the subsequent years. The
approbation given to
Paul Volcker for his shock therapy, I am just tired of that, but
you can’t say that
without being humiliated by economists for your lack of
knowledge of what
114 Krugman and Madrick
was necessary at that time. We didn’t need that severe a
correction. We had
rational expectations theorists telling us in 1982 that the

recession would not
be very steep, we could cut inflation without a severe recession.
They’re still
around, they still are prestigious. We had an astounding S&L,
savings and loan,
deregulation. I didn’t hear that much from dissenting
economists in that per-
iod. 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 the surplus revenue into
reducing debt,
directly or indirectly based on a Say’s law argument. We
accepted that the
Fed could solve just about any problem, we had financial
deregulation under
Clinton, we had a Boskin Commission, which is too complicated
to go into, but
it 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.
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 want to make
two observa-
tions very clear. Where the 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
another. The
invisible hand in a narrow sense and the invisible hand as an

explanation
of the entire economy. Now you may think, “Well, economists
know better
than that,” 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 econ-
omist 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 econ-
omy was stable. GDP, our national income, didn’t fluctuate that
much. It fluc-
tuated 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 that if
we had stab-
ility, then the market would basically work well and solve our
problems, so
stability became an objective in itself. Consider what happened
over this per-
iod of the great moderation—high levels of debt, soaring
inequality, stagnat-
ing wages, and one financial crisis after another—I’m going to

name the years
just for fun: ’82, ’87, ’90, ’94 and ’97, ’98, 2000, and 2008
financial crises under
this ideal period of the great moderation based on an ideology
that the market
would solve the problems as long as the economy was stable.
But number one, and the one that worries me most, is inflation
targeting.
Both soft inflation targets and hard inflation targets, we’ve
come to an idea
that 2 percent 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 the market, or a general
equilibrium,
as it’s known. That idea still prevails. We do not need a 2
percent 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 the basic
ideology is
still with us, and we’ve got to be aware of it or we’re going to
make the same
mistakes over again, and the best example of that is a 2 percent
inflation
target. I’m sure Paul has a couple of things to say about this,
and then he
and I are going to have a good conversation.
PAUL: So I’m actually going to do this a little differently.
Because one thing
I want to say is that there’s a possible takeaway that many
people might get
from the kinds of things that you’re saying, which would be
worse descriptions
of economics than they should be, is to conclude, “Okay, so
economists don’t
know anything, they’re useless, so we’ve got to turn to smart,
successful
businessmen like Mitt Romney.” What you really don’t want is
to think that
all this economic analysis is useless. There are several scripts
that people have
in mind. One is, oh, so we’re going to show that economics is
useless and
therefore we’re going to turn to practical business people.
That’s one script.
Another one is that the end of the story has to be that we go
back to Marx,
which is what you ran into, and I don’t think either of those is a
direction
we really want to go. The fact is that business people are
actually really lousy

macroeconomists on average. They extrapolate from what it’s
like to run a
business, which is nothing like running an economy, and when
it comes to
Marx, there’s no particularly fresh thinking about these issues
that should lead
you there. But what is true is that 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 the economy wrong in the models and in the
analysis and
having the wrong structure of thought, which is a lot of what
you’re talking
about. The other risk is the actual policy, when the moment
comes, when
something has to be done, choking on what your own analysis
says and going
instead for conventional wisdom, something that feels plausible
to politicians
and the political process. I really would like to talk about the
way I see what
happened.
So something I really got from your book, which I hadn’t
thought about
that clearly, is that we actually had an unintended case of bait
and switch in
the way that economic analysis was done. In economic analysis
we use lots
of models, and I’m a big believer in models. You have to use
models to

discipline your thought. Models are how you tell yourself what
the story is, but
you should always think of them as being metaphors, guidance,
and not truth.
There’s one model that economists like a lot because it’s such
an overarching story,
the story of competitive markets, rational behavior, and 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
realize, wait,
people don’t actually maximize and markets are not competitive
and so
there’re lots of details here that are not right. There’s an answer
to this charge
you talk about at some length, which is when Milton Friedman
said that the
precise truth of the model is not critical, you need to look at
whether or not
it fits reality. Does the behavior seem to be what seems to
happen, which is
OK, we all do that some? But then having done that, having
said, “Well, these
models are OK because we can make some use of them even if
they’re not
precisely right,” you then turn around and say, “This is the
model, and there-
fore all policy decisions must be based on this model.” For
example, you say,
“I’ve got this model of maximization and perfect markets and
the market is
exactly right,” and I say, “But people don’t actually behave that

way,” and
you say, “That’s OK, because it’s a good enough prediction,”
and then I
say, “Well, we have this phenomenon out here which is that
clearly unem-
ployment does not self-correct,” and they say, “That can’t be
true because
of maximization and equilibrium—the model says that can’t be
true.” You’ve
said, reality lets me ignore the fact that the assumption is not
true. Well, but the
assumptions must be true, and therefore you have to ignore
reality, and
actually I call it bait and switch in my review. I call it the
Chicago two-step
in this context. And it has 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 I hate to go on at length on
one of these
points— but let me talk about 2 percent inflation. I actually put
in some work
on that, because I’m one of those people who’re arguing that we
need to
loosen that up on the upside. I did a paper for a European
Central Bank con-
ference this past summer—which, by the way, even though the
European
Central Bank is not what you would think of as the most wildly
radical thought
institution, they were certainly willing to let people like me
come in and
present papers saying you’re doing it all wrong, so at least
they’re willing to
hear the criticism. Anyway, I spent some time on the trail:

where did that 2
percent inflation come from? How did we get 2 percent
inflation? It turns
out to be remarkably unscientific. It turns out that it’s not a
case of people
who 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
said that we should have stable prices, zero inflation, that has to
be right thing,
and at least there was enough good sense among a number of
economists to
say, 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 adverse
shock, you would
be into deflation, and you couldn’t cut interest rates below zero,
so what do
you do? So you need some leeway, and some historical episodes
suggested
that if you have 2 percent inflation, that would give you enough
room to
usually deal with that. So that was kind of one strand. Also,
there are always
changes— some people’s wages go up relative to other people,
some go
down, and it’s very hard to cut wages. So there were some
calculations that
suggested that 2 percent inflation would give you enough
leeway that you

could make the necessary wage adjustments without actually
having to have
a lot of wage cuts. And finally, there were the people claiming
that inflation is
actually overstated because of quality improvement, and it’s
possible to argue
that 2 percent inflation is actually zero it. That was the
Greenspan argument,
and these things all converged on 2 percent, which was a
number that could
make a number of people happy, but then it solidified into a
dogma. Everyone
was targeting 2 percent inflation so we better target 2 percent
inflation, too,
and it became respectable to advocate 2 percent and
disrespectable to advo-
cate anything higher than that. Now it turns out that everything
what people
thought is wrong. The idea that 2 percent 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 of the Fed
having had
interest rates of zero, 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
adjustments
is not going to be a big deal, I mean, look at what’s going on in
Europe where
we’re experiencing year after year of nightmarish
unemployment in Spain and
Portugal as they try to get their wages down relative to
Germany. That minor
wage turns out not to be true. But the 2 percent target that
emerged from this

process sits there now as an unbreachable icon. I’ve tried to talk
to people at
the Fed, and they will admit sort of in principle that the case for
2 percent that
we used to make is not as good, but we can’t change the target
because that
would hurt our credibility.
JEFF: To me that’s the classic example of what’s gone on, and
as you
know, there’s no serious empirical evidence that an economy
running
inflation at 3 or 4 percent will grow more slowly than an
economy running
at 2 percent.
PAUL: Sure.
JEFF: In fact, even at 6 and 8 percent there’s no significant
empirical evi-
dence. To say that would be a problem, and yet we stick to this
2 percent rate,
and it becomes inviolable, and we have people like economists
on the FOMC,
such as Jeffrey Lacker, who (even though we haven’t reached 2
percent
inflation) are 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 going up, which is the main cost-push element of inflation,
but wages are
a lagging indicator, so we better get ahead of that. Of course,
I’ve written and
Paul has written that these guys had been wrong time and again.
Richard

Fisher, a great proponent of this idea, wanted to raise interest
rates in the mid-
dle of 2008 when we were collapsing into the worst economy
since the Great
Depression. This kind of mythology makes you wonder at these
claims that
economics is a science when, so easily, 2 percent becomes
embedded in a
way of thinking and it cannot be violated. The reason people
want zero
percent inflation is that they believe fully in this perfect market
idea, that if
you remove all uncertainty so that all participants in the market
can make
rational decisions, then the market will work itself out, work
out our prob-
lems, and maximize prosperity.
PAUL: But maybe this is the question— where do we draw the
line
between economics as a discipline and economics as practiced
as policy?
It’s not the case that papers being published in the Quarterly
Journal of
Economics make the case that 2 percent is a sacred target.
That’s not it at
all, in fact, if you take the papers that people write on new
Keynesian macro-
economics, they 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, targets should be higher than that. It’s
in the practice
of economics at the central banks that it has become this
magical target, so is
that a problem with mainstream economics, or is it a problem of
the sociology
of central banking? I think we may be crossing categories here.
JEFF: But it seems only in the last couple of years that some
mainstream
economists like Blanchard and Larry Ball are talking about
raising the inflation
rate, and it’s always put in terms of not violating the lower,
zero bound.
PAUL: Yeah.
JEFF: 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.
George Ackerloff, who is a Nobel Prize winner, has talked
about this a little
bit. Not only would a 3 percent or even 4 percent target help us
avoid 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.
PAUL: No, actually that is an argument that’s out there. We
took this
notion that government policy, 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 percent to 13 percent
is probably not
going to buy you anything on employment, but that an inflation
rate of 4 as
opposed to 2 might very well buy you something on
unemployment. That
is actually not being rejected by the mainstream. By the way,
one thing to
say is that the people that you’re criticizing are all on the good
side. I mean
Olivier Blanchard and Janet Yellen are good guys in all the
current policy
debates, they are people who are well to the left or to the
activist side of
the spectrum, so you have to give some credit, even if you
would like to
see them be more.
JEFF: I’ll always give credit to Janet Yellen, but 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 England’s David Cameron. The fact
that they
reversed their point of view on austerity sometime after the
2008 crash was
pretty common across the board and the slightly left-of-center
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
extraordi-
nary, and very rarely was finance ever part of macroeconomic
models,
and Hyman Minsky, who became the man of the moment, I
remember
was pretty highly ridiculed. At one ADA conference, there was
a memorial
for Minsky sponsored by the Levy Institute, where he worked,
and he was
just scoffed at.
So, because some economists got religion after 2008 I don’t
think totally
exonerates them for the damage done until 2008. In fact, in
Larry Ball’s stuff I
haven’t seen much about if you champion 3 percent or 4 percent
inflation
targets on the Phillips curve basis—that is, to get
unemployment down—it
would work.
PAUL: OK, maybe I’m a little too close to it, but I’ve certainly
been mak-
ing that argument and not getting a lot of pushback, which is
kind of inter-
esting. I mean, not getting a lot of pushback analytically. The
policy thing is
another thing. 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, but of course we can’t actually
implement that.
But that’s a little bit less a question of the intellectual structure
of economics
and more the weird things that happen in policy formation.
Actually, I wanted to talk more about the great moderation—
since I’ve
been traveling, I can actually bring it in. So people don’t notice,
there were
papers by, I think it was actually Ben Bernanke, you may have
heard of
him, and certainly Olivier Blanchard, chief economist of the
IMF, who we’ve
mentioned here.
So what Blanchard and others had done was show that, in fact,
the wig-
gles had gotten smaller, that after around 1985 the U.S.
economy had seemed
to be much more steadily growing than it had been previously,
and Ben
Bernanke coined a phrase for it, the great moderation, 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
U.S. was
more stable, there is a rest of the world out there.
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, that’s the second
edition. But

that was not coming out of nowhere, that was coming out of the
fact that Asia
had had severe financial crises—it seemed like the end of the
world to us then,
although it was trivial compared to what came later—and Japan
slid into a
prolonged stagnation, and it was amazing to me that people did
not take that
as a lesson, did not take that as an indication that we do not
have this thing
under control. It’s not a problem exactly that the models didn’t
allow for it,
because we had the model even before Japan, but it was this
weird sense that
won’t happen here in the U.S.
JEFF: Well, I do quote Milton Friedman telling Charlie Rose in
2005 that
the American economy has never been more stable and isn’t that
great. It
was something of a charade, and I think what’s mostly
aggravating to me
about it is that economists manufactured their own criterion of
success, so
inflation targeting thus worked, and it was sort of the single
policy lever that
was adopted. Keynesian as a fiscal policy was by and large
shoved aside and
put in the back seat of the car. There was a single policy lever,
which they said
worked like magic, and in this period, which you do call

bizarre, we have all
kinds of things going on, and it happens that the Fed got us out
of serious
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; I think mainstream
economists said
the Fed could by and large always save the day. There was
worry about the so-
called Greenspan Put or moral hazard, but there was no great
uprising by
economists, and I think there could have been. I would call it
two kinds of
errors but somewhat different than yours. One is errors of
commission, and
one was errors of omission. Economists who made errors of
omission failed
to analyze and be up in arms about Wall Street, because there
were conflicts
of interest, there seemed to be monopoly profits like crazy,
there was manipu-
lation of markets, and there was no transparency of information
in derivatives
whatsoever. Economists weren’t up in arms. One can say, well,
what power
do economists have, but, my gosh, they have power in free trade
arguments.
They certainly were up in arms about that. So where were they
about these
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
later, but only
a couple.

PAUL: Now actually this is an interesting thing, because there
were cer-
tainly studies. I mean, I’m not going to try and do biographical
stuff here,
but I remember back around 2000 we were already getting some
papers that
were looking at the way hedge fund managers are
compensated—2 percent
commission and 20 percent of profits, which you don’t have to
give back if
then everything goes to hell, and pointing out that all the
incentives were
there to basically leverage up, borrow as much money as
possible, take big
risks, and then it’s heads, you win, and tails, your investors
lose. The incen-
tives were clearly there for unproductive, risk-increasing
behavior. So there
were papers out there, and the question is, why didn’t people
make this a
cause? Why were people so willing to accept that the market
was working?
Partly it’s don’t rock the boat, it’s very hard to argue with
success. I think these
things are actually interactive. The notion that we had it all
under control—
what’s really amazing, how could we have gotten all the way to
2008, and then
suddenly said, oh, we have a problem with finance, because
there was actually
a terrifying crisis in ‘98, the Asian crisis, which was very much
a prefiguring of

what happened 10 years later. But there was also Long-Term
Capital
Management, and I happen to have been in a briefing by a
senior Fed official,
right after Long-Term Management went under, and they were
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. 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 saying that we have this thing under control, that
should have
been a 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 what does it take to get
people’s attention.
JEFF: Well, I wrote a piece that if we saved Lehman Brothers,
what would
have happened? There’s a good chance we would have had a
less serious
recession, but we probably would not have gotten Dodd-Frank.
We had
had a vicious crisis with Long-Term Capital Management.
Greenspan and
the 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 the cred-
itors, and stop the run. But no financial regulation came out of
that episode
because we got out of it. The same thing probably would have
happened if
we saved Lehman Brothers this time around, we might not have
gotten any-
thing like Dodd-Frank, we may have pushed catastrophe back
that much far-
ther, and I think it’s something about the sloppy thinking, or at
least the failure
to address public issues, or the reality of the economics
profession, or their
duty to inform people that there’s something wrong here. It is a
bloodless pro-
fession, and it lacks red corpuscles, and the methodology allows
economists
to distance themselves from the problems. There was a lot of
work about
corruption, but it 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
allegedly good economists out there.
PAUL: I’m introspecting a little bit here because even though I
had written
about Depression economics, and even though I invented the
academic litera-
ture of currency crises, I was caught completely by surprise by
the severity of
the financial crises. How did that happen? Partly was that I just
wasn’t paying
attention. I had no idea that more than half of our banking

system were no
longer banks and therefore had none of the safety nets, none of
the regula-
tions. Part of the problem, I think, is that the world is a big,
complicated place,
and nobody is going to keep track of it. There were people for
whom financial
markets were their specialty, and there is where I think you get
into issues of
cooptation, and in some cases corruption.
JEFF: We should talk a little bit about that, because there is an
ethics
issue here.
PAUL: Yeah, there was no question of that. By and large,
people who
were actually doing finance or actually studying what Wall
Street did also
tended to be, and continue to be, rather close to Wall Street.
There are various
levels—I mean, there are some actual plain hired guns—but
there’s also a
broader thing, which is if you’re studying financial economics
and you’re busy
saying the end is nigh and this is a corrupt field, then you’re
probably not
going to get a whole lot of invitations to Wall Street–sponsored
conferences.
You’re not going to get a lot of consulting gigs for sure, so
there is probably

something going on there. And people who did not have stake in
that—good
macroeconomists—would have been pretty much unaware
because it’s
somebody else’s subfield and they 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.
JEFF: The scarier thing, I think, is that it seemed like the New
York Fed had
too little an idea, and they didn’t look under the hood of
collateralized debt
obligations, for example. They didn’t try to, they didn’t begin
to understand
what was going on until the market started coming apart. Now
how could this
be anything except an ideological attitude? Maybe I
oversimplify here, but I
don’t think so. There’s the idea 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, and if something is priced too low, some smart person will
buy it, and the
correct prices will be reached. That became an underlying
assumption, cer-
tainly of Greenspan, who became a kind of ideologue, I’d say,
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.

PAUL: Could we actually have had for a long time mainstream
economic
models that tell you that an unregulated financial system can be
highly fragile?
As soon as Lehman fell and everything, you could wander
around the corri-
dors of Princeton, and there were people muttering because we
had that
model. As soon as you said, oh wait, these are banks, even
though they aren’t
banks, but they don’t have capital requirements, then
immediately it’s slotted
in, so the analytics were there, but no one who knew enough to
know what
was actually going on was willing to apply those analytics. So
some of it is
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 the banks
need to be regu-
lated—right, one of the places where he really takes steps away
from laissez-
faire in the Wealth of Nations is when he says banks need to be
regulated and
that you may say this is an unwarranted intrusion on freedom,
but it is no more
so than requiring firewalls in housing, so something else is
going on. It’s not
the inherent model, it is maybe libertarian ideology, which is
not mainstream
economics but affects Greenspan. He’s not an economist, he’s
an Ayn Rand
follower, and I would say mostly it’s soft corruption, but
sometimes not so soft.

JEFF: Yeah, soft corruption can lead us down the wrong road,
too.
PAUL: The specific problem with finance, I just want to say, is
bigger even
than other stuff, like if you’re dealing with the oil industry, for
example, there
is lots of money and corruption. The thing about Wall Street is
that they tend to
be smart, impressive people. You’re going to have a hard time
arguing down
these Wall Street guys, they come in to a room, they act like
they know what
they’re talking about, and they seem like they know what
they’re talking
about. They’re rich, they have great tailors, they’re often funny
so they’re
impressive, and it’s very hard to get past that.
JEFF: I don’t see why that would bother a scientist, though. Let
me bring
up an example 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 many
managers had a very hard time beating the market. Now, that
was extrapo-
lated into claiming the market was so efficient that the actual

stock price
was right, it reflected the future value of the company, and
therefore speculat-
ive bubbles could happen, but they would be temporary and not
very danger-
ous, and you could motivate CEOs by giving them stock options
and their
performance would be rationally rewarded by rising stock price
because it
would reflect the value of the company. But when Bob Schiller
tried to upset
the capital 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, but
the stock price
wasn’t right over time, and he had to beat them. I admire him a
lot, but he’s
forgotten. He was a little more tentative in the early years of his
work gives,
because he was knocking on a door that was so solidly closed to
him, and
pretty soon his ideas prevailed, at least to some degree in the
profession,
but they mostly prevailed after stock market crashes, not before.
So that
was an example of efficient markets—free market theory that
got carried away
ideologically.
PAUL: A couple of stories on that, because one of the things
you’re overly
optimistic about is that you think that Schiller has won. Not a
chance. 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, and the question was “Has the financial crisis led you
to think that
we need to revise anything?” and the answer was no, no
problem. These
are people who have advocated for efficient market theory, and
they saw
no reason to change their views, so they were waving it off,
saying that it
was other stuff and maybe it’s all Obamacare or something.
For the sake of clarification, what Schiller did was, several
decades ago
was to calculate a maximum estimate of how much fluctuation
in stock prices
could be accounted for by fundamentals, like the growth of
dividends and
earnings. It was clear the fluctuations in stock prices were too
great, it was
as if even if you had known everything that was going to
happen, he showed
that the actual fluctuation of stock prices was much greater than
that. That
says, there have to be herd-behavior bubbles going on.
Compelling over-
whelming demonstration, mostly rejected by people. But now
the interesting
thing is, one person took this kind of argument very seriously
and wrote some

very strong, caustic condemnations of efficient markets— Larry
Summers. So
Larry Summers in the eighties wrote the ketchup paper. Larry
took on the
alleged demonstrations that the markets are efficient by using
arbitrage strate-
gies that will work. Larry said that it’s like looking at the
market for ketchup
and finding that two quart bottles of ketchup always sell for
twice the price
of one quart bottle of ketchup and concluding from that that the
price of
ketchup is therefore always right. Now what’s interesting is this
same person
becomes a senior administration official and is a strong
advocate of financial
deregulation, that financial markets do set the right price.
JEFF: But he’s my representative character, actually, in my
book because
he was a shape shifter, given his past.
PAUL: But it’s interesting, in his analytical work, never. His
analytical work
has always been critical of efficient markets and so on, but in
positions of influ-
ence, 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.
JEFF: Well, he certainly utilized his reputation as a man who
knew eco-
nomics to wage his influence there. But I did work on efficient
markets in
school, but it’s interesting that those in the Shiller camp and

perhaps includ-
ing Summers didn’t prevail at all in that argument for quite a
while.
PAUL: I would say still have not. I would single out actually
the financial
piece of the profession as being the part that performed worst
and had
reformed least, and it’s quite amazing when you talk to people
there.
JEFF: There’s nothing I would fear more than being called an
optimist,
but we are getting government capital requirements out of this
to some
degree, which is recognition that there are bubbles. We are
getting people
talking about it, at the IMF, the OECD, the Fed, and this is an
important issue.
For a while people thought the only lever to control bubbles
would be inter-
est rates, and then Greenspan appeared, and Janet Yellen is
talking about
capital requirements, capital controls, and actual regulation like
what I would
call the good ol’ days. So I think that’s some progress, and in
the academic
field it’s so easy to rationalize the efficient markets theory.
There’s always
an alternative explanation that the bubble is actually rational.
PAUL: Yes, that’s the…, well, certainly some of the people
start yelling at
you if you even use the word bubble.
JEFF: Right.

PAUL: There are no bubbles.
JEFF: It’s a title, by the way, of one of my chapters. One thing I
would like
to tell the audience about a little bit, and I would love to hear
your thoughts
about, is economists’ attitudes toward government, because the
best main-
stream economics calls for government to intervene only when
there are mar-
ket failures, and I find the definition of market failures way too
ambiguous. It
narrows the definition of what government should do and I think
that’s
harmed us a lot. It’s by and large the best there is—maybe
interventions for
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, because I think
government
is the sideshow in mainstream economics, and government is
not a sideshow,
in the economy or in our economic history.
PAUL: Yeah, I was thinking about that a bit. I think the
problem here is to
show how you do it, and it’s the way that textbooks do it, even
the very best
textbooks like mine. You start with this beautiful model of the

perfectly
efficient free market economy and then you say OK, now we’re
going to talk
about deviations from that model, and you actually have two
kinds of devia-
tions. One is 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. The other is that, at least if you say the market
outcome has
no moral significance and there is reason to believe that it’s fair
or acceptable,
if you wanted to help the poor, we could certainly have a valid
role of public
policy in helping the unfortunate or unlucky. But you’re always
starting from
the baseline position that the economy gets it all right, the
market gets it right,
and we’re working at the edges. And you can certainly argue
that that’s really
wrong, that markets are full of market failure, full of ways in
which they don’t
actually fit that model. Actually real economies have big
governments, and it’s
funny how the textbook approach is one in which the
government is kind of
a marginal factor there. Yet even in the United States, 30þ
percent of the econ-
omy passes through the government, and in other advanced
countries it’s clo-
ser to 50, and government obviously regulates a lot of stuff.
Now the question
is, “So how do you do that?” Jamie Galbraith and I have this

conversation fairly
often. He says we should start from a paradigm which doesn’t
have perfect
market as the baseline, and I said OK, but how do I actually
teach it that
way? I don’t even know how to make the argument. I mean, the
trouble is that
starting reality-based is not easy. I guess I believe that you’re
always going to
be doing models that are somewhat abstracting from reality, so
I’m waiting for
somebody to come up with a way to do this.
JEFF: 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 contexts,
a propensity to do what I would call clean economics in a very
dirty world.
And 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.
I think
there’s been a strong tendency in mainstream economics to
shoehorn in these
rule-of-thumb policy answers, and I think that economists have
to deal with
that even though it becomes a sloppy, dirty profession as a
consequence.
PAUL: I’m [thinking] of an old joke about the drunkard looking
for his lost

keys under the streetlamp, and they say, did you actually drop
them here,
and he says no, but I can see here, there’s light. But I think
actually the
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.
JEFF: This is a big issue that I think has to be first.
PAUL: Yeah, let’s put it this way: my advice to a young
mainstream econ-
omist would be not throw it all out, if only for your personal
career, but to…
JEFF: … and not always.
PAUL: … always be aware. 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 toward understating the possible role of government,
overstating how
well markets work; and at least remember that that is just a
model, and it’s
not a model that has actually been borne out by lots of real-
world experience.
JEFF: 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—freshman in college—and then immediately tell
them it doesn’t
work, and here are the problems with it. It’s increasingly
happening, I think,
in textbooks, but not nearly enough to be valid.
PAUL: Yeah, we try. But actually there is also, I have to say
this, the equiva-
lent—maybe this is soft corruption—you do want the textbook
to be used, and
that partly means that some really overstretched 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, and it’s going to be something that
can be
adopted. So there is some shading, but I guess the point is
always you have
to fight the easy path, which doesn’t mean jumping completely
away from
the way everybody does it, but means pushing the environment
a little bit.
JEFF: Probably Janet wants to allow you all to ask some
questions. But I
just want to say one last thing because my own platform for
America, my
own agenda, would be far more public investment than this
deficit, these
deficit fears, allow; a significantly higher inflation target; and a
lot more fiscal
stimulus. I think to some degree Paul agrees with that.
PAUL: Yeah.
JEFF: My view is that mainstream economics inhibits especially

the role
of government as always defined by the amount of borrowing it
can do,
the deficit.
PAUL: Yeah.
[Questions from the audience]
TIM McGUIRE: Thank you, this has been very interesting. My
name is Tim
McGuire and I have a degree from this place. What bothers me
is that within
the last fifty years, with the decline of labor unions and 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
with debt between $40,000 and $100,000 and 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.
JEFF: I think a lot of people think of it now as a crisis. There is
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 could start to raise wages and

create more jobs.
There may be a globalization issue on top of that, of course,
but—and 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. So 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
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. That’s not
what’s missing in this economy.
PAUL: Secular stagnation is an old idea that has come back. It
was rejected
as being wrong because markets get it right, but it’s coming
back. And, again,
the leading proponent is Larry Summers. What secular
stagnation states says is
that there are environments in which the economy 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 we’re
actually in an environ-
ment where just having the Fed do its normal thing is not
enough to produce
consistent, full employment, where we need higher inflation

targets and pub-
lic investment. So there’s not actually a contradiction here. Now
the thing is,
it’s always political, so how do we get people to do this stuff?
The great frus-
tration I’ve had is that the pro–government spending, anti–tight
money forces
have won every argument. They have won on the facts and have
made the
other side look ridiculous again and again, yet nothing changes
in the political
sphere, nothing changes in the policy, and that, I guess, is not a
problem with
mainstream economics exactly, but a problem with life, the
universe, and
everything.
JEFF: I just want to say this about secular stagnation, because
it’s come up
repeatedly in economic history, especially after the Great
Depression. A lot of
people claim that technological advancement just runs out of
gas.
PAUL: That’s a different story. That’s not what I mean by that,
and it’s not
what Larry means by referring to that.
JEFF: Anyway, we should move on.
DAVID LEMPER: My name is David Lemper, 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 an especially 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. Six years while working full time, it was rough. My
question has to
do with the critique of inflation targeting, that sort of religion
of a 2 percent
inflation targeting. Obviously I was in graduate school during
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 percent
inflation targeting?
What is 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.
PAUL: The first point is if we had had 4 percent inflation
instead of 2 per-
cent coming in, then interest rates probably would have been
about 2 percent-
age points higher to start with, so there would have 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 have 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 going to be inflation, you can

convince people
that borrowing more is not a bad thing and that sitting on cash
is a bad thing.
What the Japanese are trying to do right now is to create a self-
fulfilling proph-
ecy that inflation will end, they will do whatever it takes.
Unfortunately,
they’re saying to get it up to 2 percent when it really should be
4 percent.
So the point is, yeah, the inflation target has not been a
constraint, but we
would have 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, would—
even though
it wouldn’t be operational for a few years—help us bootstrap
ourselves out of
where we are. Now if the Fed were to announce that we’ve
decided that 2 per-
cent was too low a target and we’re going to move it up to 3
percent, that
would be a tremendously shocking announcement, which is a
good thing.
We want people to be shocked and to change their expectations.
JEFF: It’s remarkable to read the minutes of the FOMC about
this because
they do hold 2 percent as inviolable, and even people who might
agree with
this argument that it should be 3 or 4 percent have to work
within the con-
straint of that. I think they’ve talked a little bit about going
above 2 percent.
A couple of the gentlemen who run the Boston Fed talk about

going over 2
percent, so I’m sure deep down, Janet Yellen feels we should be
above 2 per-
cent. But when you read the arguments and the FOMC minutes,
especially
when they come out five years later, it’s disheartening to say
the least, and
it’s ideologically biased. I mean, the same people who have said
inflation is
coming back every year in a big way for five years are saying it
again and mak-
ing public speeches about it, which the media, who are not
uncomplicit—to
coin a word—in all this, pick up as if there’s some special
knowledge these
people have.
SEYMOUR AMMON: My name is Seymour Ammon. I’m a
retired 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 U.S. it’s somewhere between 15 and 25 percent)
have little or
no discretionary income—how can we possibly have a thriving
or growing
economy, and why do most economists ignore this problem?
JEFF: Well, I think fewer economists are ignoring that problem,

and 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 wide, broader
number of
economists. It used to be that even Bernanke would make
comments that
inequality didn’t matter, but more people are claiming that
inequality does mat-
ter because low-wage people tend to spend more, and they’re
spending less.
It’s not obvious that America is saving too much if you look at
the big numbers.
PAUL: Yeah.
JEFF: I think this is a point you make, Paul. But I, for one,
think that higher
wages are stimulative. That’s another thing you don’t talk much
about in main-
stream economics. In mainstream economics, for the most part,
higher wages
have been a cost that reduces profits and may even increase
inflation, the
bugaboo of 2 percent inflation. So I think you’re right, an
economy that
doesn’t have strong wages is in trouble. An economy that
doesn’t have dom-
estic demand that’s not dependent on huge bubbles and
consumer borrow-
ing, which was the case obviously in the 2000s with the
mortgage boom, is
an economy in trouble. So I think with the Washington policy
establishment
that sits on government spending and apparently will continue
to do so no

matter what, low wages are not rising, and if they are, it’ll take
some time
for them to come back—and we’ve got a central and tragic
problem.
PAUL: It’s not quite as simple as the story that the middle class
and below
doesn’t have enough income and therefore we don’t have
enough consumer
demand. In fact, consumer spending as a share of GDP has been
relatively
high all throughout all of this stuff, by historical standards.
What is more argu-
able is that the extremely skewed income distribution has been
sustained by
rising debt, which then leads you to a crisis, but that’s not as
solid, the evi-
dence for that is not as strong as I’d like. I would say that
inequality is a prob-
lem for a number of reasons, and this is maybe not the most
important of
them. And if you ask what the problem is with the world
economy as a whole,
what’s actually is the case right now is that investment is low;
it’s not actually
that consumer demand is low. Right now what’s holding us back
is that invest-
ment is low, and some of that is residential investment, which
still has not
recovered, but also that corporations are sitting on cash which
they don’t
see much reason to spend because growth is slow. It’s kind of a
self-fulfilling
pessimism here. Additionally, I think if you try to ask what you
need to do, the
answer would be that 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.
Borrow money
to build infrastructure considering that inflation (index bonds)
has essentially
zero percentage, so it doesn’t actually cost anything. Print some
money, that’s
supposed to be fun, right? But what happens is that we can’t,
the political sys-
tem stands in the way of doing all of the stuff that’s supposed to
be an irresist-
ible temptation and turns out to actually be impossible to get
happening.
JEFF: OK.
IRENE COPLEY: My name is Irene Copley. I’m retired from
several activi-
ties. And what I’m going to say is really bigger than economics,
and I’m taking
the opportunity 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 every-

thing about everything, but I understand that you can’t. And
then you mention
ideologies, and I was reading Erwin Chemerinsky’s book, The
Case Against
the Supreme Court, which you talked about in today’s column,
Paul Krugman.
And if they are corrupt and if people in government are corrupt
and Repub-
licans talk about climate hoax, and the NRA, and the path to
oligarchy that we
are in—and when we talk about 2 percent inflation, that seems
to be an itty-
bitty question, because what it all depends on is who is in
charge. Now
Republicans have taken over 2014. If they win the presidency,
where am I
going to move to? I’m scared.
JEFF: One issue we’ve addressed to some degree, but maybe not
enough,
is this issue of capture and ethics and revolving doors in
Washington, or
people 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 and
it’s the health
industry. We can argue that to some degree there’s a similar
ethics problem in
economics. People want to get grants, they want to 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, but it’s hard to regulate. I’m a fan of regulation, but
it’s hard when
people stop believing in the rule of law or think that the way
you make money
or the way to get ahead in life is to find the loopholes. There’s
an argument
especially prevalent among economists that says, no matter how
you regulate,
Wall Street is going to find the loophole, but 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 and not just find a way to
get around
the meaning and spirit of that law, and I think that we’ve lost
that to some
degree. In fact, I think one reason why we’ve lost it is this
emphasis on the
idea that when the market is working, everything is right with
the world
and the market works best with minimal government
interference. Govern-
ment 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 eliminating it, or certainly minimizing it. We face a
serious uphill
battle both morally and in economic theory and practice.
PAUL: I would say if you’re not frightened by some of these
things, then
you’re not paying attention, and of course it’s scary. Now all
you can say is that
there have been dark moments in U.S. history and world history,
worse

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