(EVEN MORE) Paul Krugman Predictions Gone Wrong
Just two months ago I documented some of the economics Nobel Laureate Paul Krugman’s worst economic predictions, mostly in the Trump era. They included a prediction that the stock market’s initial drop on election night would last the entirety of the Trump presidency, that Trump would never achieve 3% growth, and various hilariously incorrect historical predictions (such as one insight from the 1990s where he predicted that the internet would contribute no more to the economy than the fax machine).
After some more research, it appears that I missed a few… to put it generously.
The Great Government Shutdown
The most recent government shutdown began near the close of December 2018 and ended on January 25th. Krugman called this a “big libertarian experiment” – even though the government shutdown didn’t impact mandatory spending (the majority of the federal budget), and only froze 25% of discretionary spending.
In an article titled “The Economy Won’t Rescue Trump,” Krugman writes that the Trump tax cuts “probably gave the economy some stimulus, temporarily raising growth. But that effect is already fading out, and the economy would have been slowing down even without the extra drag created by the Trump shutdown.”
And of course he was dead wrong:
Information from the Bureau of Economic Analysis indicates that U.S. GDP grew 3.2% in quarter one of 2019, compared to the forecasted 2.1 percent. To put it in the president’s vernacular, this is “huge,” especially when you take into account that the partial government shutdown was supposed to be a massive drag on economic growth.
But he has an explanation for that!
The Obama Economy vs. Trump Economy
When the economy clocked in that aforementioned 3.2% growth in Q1 2019, Krugman immediately began to call into question just how impressive that is. “The U.S. economy grew 3.2 percent over the past year, a growth rate we haven’t seen since . . . 2015″ he dismissively wrote.
As the National Review’s Robert Cherry rebutted:
This picks out the one year during the Obama expansion that had a growth rate over 2.5 percent while ignoring that for the entire six-year expansion period, 2010-2016, growth barely averaged 2.0 percent, and was only 1.6 percent in 2016. Thus, the Trump years have been much more robust.
Furthermore, Krugman tries to play both sides, and argue that the only reason the economy is performing as well as it is due to Keynesian style deficit spending.
While it’s great to see Krugman develop enough self-awareness to hedge his bets, he’s dead wrong here too.
Both consumer and government spending grew at slightly slower rates during the first two Trump years than during the last two Obama years. Instead, it was changes in capital investment and exports that fueled the Trump expansion.
Krugman understated the capital-spending expansion using an older study that cut off data in the third quarter of 2018. If he had used available data that included the fourth quarter, he’d have found that capital spending has remained quite robust. More generally, Krugman does not mention that, for the last two years of the Obama administration, businesses seemed to go on strike, resulting in negative growth of nonresidential spending on property and equipment. By contrast, each of such spending increased by more than 5 percent in both 2017 and 2018.
So according to Krugman, the Trump economy is either completely unimpressive – or doing OK, but only because Trump is accidentally ideologically aligned with him.
(More) Contradictory Krugman
Krugman argued the conventional wisdom among economists in his 2010 textbook Essentials of Economics, that “People respond to incentives. If unemployment becomes more attractive because of unemployment benefits, some unemployed workers may no longer try to find a job, or may not try to find one as quickly as they would without the benefit.”
His viewpoint went heterodox only thee years later, when he predicted that North Carolina would suffer tremendously as a result of reforms they made to their state unemployment insurance program. “The move to slash unemployment benefits, then, is counterproductive as well as cruel; it will swell the ranks of the unemployed even as it makes their lives ever more miserable,” wrote pundit Krugman in a claim that would excoriate textbook Krugman. But textbook Krugman was correct.
Jon Sanders read the score:
North Carolina’s policymakers not only reformed unemployment insurance, they also cut taxes, reduced regulations, and reined in spending. Meanwhile, North Carolina has enjoyed five straight years of unexpected budget surpluses.
The reforms, among other benefits, allowed SC to pay off $2.75 billion in debt accrued during the great recession to cover increased unemployment benefits by 2016 as opposed to 2020 without the changes. Every state nationally that has implemented work requires for food stamps after the financial crisis has seen massive reductions in unemployment among the able bodied.
And some extras I came across…
Over the years, Krugman:
- Praised the European economic model just weeks before the eurozone crisis began.
- Argued before Argentina’s 2014 default that the country’s economy was a “remarkable success story.”
- Called the US “just a bystander” in global energy only months before America surpassed Russia to become the world’s biggest oil and gas producer.
What will he predict next? Hopefully that I’ll lose the lottery.