Tuesday, July 6, 2010

Krugman’s Baffling Certainty

David Brooks thinks that we ought to be mindful of, and make some sensible hedges against, the uncertainty that surrounds our understanding of our current economic predicament. So like a lot of us, although he’s duly impressed by the argument for another round of economic stimulus made by Paul Krugman and others, he can’t bring himself to forget the number of highly credentialed dissenters:
“[M]any prize-festooned economists do not support another stimulus. Most European leaders and central bankers think it’s time to begin reducing debt, not increasing it — as do many economists at the international economic institutions. Are you sure your theorists are right and theirs are wrong?”
That’s not a rhetorical question for non-economists. Brooks is responding to the same impulse that moves us not to go ahead with the surgery prescribed by our doctor until we've gotten a concurring second opinion from another credentialed diagnostician. When it comes to evaluating expert opinion on a subject as to which we lack expertise ourselves, we normally treat unanimity among credentialed experts as evidence that their shared opinion is correct, and disagreement as evidence against the correctness of any single opinion.

That’s not Paul Krugman’s style. From all appearance, he finds it unfathomable that other economists disagree with him. That’s understandable in one respect since, being an economist himself, he doesn’t need to defer to other economists’ expertise. But it’s a little strange that, from all appearances, he’s utterly unimpressed by the fact that so many of his professional peers disagree with him so emphatically.  Here’s Krugman’s answer to Brooks’s question about being sure that he’s right and other accomplished economists are wrong about fiscal policy (my emphasis):
“Yes, I am. It’s called looking at the evidence. I’ve looked hard at the arguments the Pain Caucus is making, the evidence that supposedly supports their case — and there’s no there there.

"And you just have to wonder how it’s possible to have lived through the last ten years and still imagine that because a lot of Serious People believe something, you should believe it too. Iraq? Housing bubble? Inflation?”
Who are we non-economists to disagree? So let’s stipulate that, when he stands at a macro-economics convention, Krugman is surrounded by pygmies. If we could only appreciate how much smarter and better informed Krugman is than other economists, we’d already know enough to take him at his word when he tells assures us that his diagnosis of our current macro-economic situation is the best available, and his prescription for more public spending is therefore the best way out of our troubles.

But knowing that his diagnosis/prescription is more likely to be correct than any competing diagnosis/prescription, doesn’t tell you how likely it is to be correct, or even that it’s more likely to be correct than to be incorrect. Indeed, from what we know about the history of macro-economics, there’s a substantial, if immeasurable, chance that it’s incorrect in the only sense that matters. Even the best models of complicated economic situations invariably leave something out that complicates, and might even negate, the model’s implications under a wide range of circumstances, perhaps even under the circumstances for which it was designed. No person with a finite intelligence, even an intelligence as capacious as Paul Krugman’s, can be sure that he’s thought of everything that matters about anything with real-world complications.

So there’s no getting around the fact that, in choosing a fiscal policy, we’re obliged to contend not just with measurable risks, but with uncertainty. When they’re obliged to make important decisions under conditions of uncertainty, reasonable people submit to a little self-examination. They have to decide where they belong on the spectrum of people ranging, at one extreme, from those who swing for the fences by choosing the course of action that presents them with the most gratifying best-case scenario, and those, at the other, who timidly choose the course of action that presents the least onerous worst-case scenario. Most of us belong somewhere between these extremes, but we're conservative enough to be more impressed by the badness of worst-case scenarios than the goodness of best-case scenarios.

That helps explains why, to his evident astonishment, Krugman’s losing the political argument over more stimulus. He’s telling us that, if we don’t take his advice, we'll end up like Japan, experiencing a lost decade of low-growth, tight credit and high unemployment. That’s a dismal future, but not nearly as frightening as the worst-case scenario presented by the advocates of austerity, viz., that if we keep borrowing at this rate we’ll end up at the point of social disintegration facing Greece when people finally find a better place to park their money.

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