Here's my column from today's Roll Call about what Lehman et al mean for the federal budget.
Lehman a Year Later: Some Budget Lessons Learned, Others Yet to Sink In
Sept. 15, 2009
It was just about a year ago that I returned from a blissful trip in Yosemite National Park to find that the financial world had completely changed. While my friends and I were primarily focused on breathing and blisters and I was doing everything possible to avoid the news (I even covered my eyes as I walked past the boxes that displayed front pages), Fannie Mae and Freddie Mac were seized, Lehman Brothers failed, and credit markets froze.
Last week, I offered some reactions to Paul Krugman's New York Times magazine article. One of the economists coming in for direct criticism as a representative of the Chicago School was John Cochrane. Through the magic of the internet, he responds. One of my favorite passages:
If you believe the Keynesian argument for stimulus, you should think Bernie Madoff is a hero. Seriously. He took money from people who were saving it, and gave it to people who most assuredly were going to spend it. Each dollar so transferred, in Krugman’s world, generates an additional dollar and a half of national income. The analogy is even closer. Madoff didn’t just take money from his savers, he really borrowed it from them, giving them phony accounts with promises of great profits to come. This looks a lot like government debt.
Read the whole thing.
I'm coming a little late to this party, but only fashionably so.
This all started last Sunday with Paul Krugman's thought-provoking/anger-inducing article in The New York Times Magazine, "How Did Economists Get It So Wrong." The following day, Andrew challenged some of Krugman's basic assertions in a post that got Pete exercised the day after. Yesterday, possibly just to embarass me for being late to class, Bruce expressed a few thoughts as well. And earlier today, Andrew added some fuel to the fire with this.
Gentlemen...I admire and respect you all but thou doth protest too much me thinks. Economists are not the problem.
Paul Krugman's essay in yesterday's New York Times magazine has me puzzled. Specifically, I think the longstanding divide between the "freshwater" (i.e. Chicago and Minnesota) and "saltwater" (e.g., Harvard, MIT, Princeton, Stanford and other coastal universities) schools of macroeconomics is of little relevance to an explanation of "How Did Economists Get It So Wrong?" Here is what Krugman claims that economists got wrong:
The Bureau of Economic Analysis released the advance estimate of third quarter GDP this morning. The headline is:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.3 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.8 percent.
The decrease in real GDP in the third quarter primarily reflected negative contributions from personal consumption expenditures (PCE), residential fixed investment, and equipment and software
that were largely offset by positive contributions from federal government spending, exports, private inventory investment, nonresidential structures, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.