Krugman to the Rescue

It’s always impressive to see one person excel in two widely disparate activities: a first-rate mathematician who’s also a world class mountaineer, or a titan of industry who conducts symphony orchestras on the side. But sometimes I think Paul Krugman is out to top them all, by excelling in two activities that are not just disparate but diametrically opposed: economics (for which he was awarded a well-deserved Nobel Prize) and obliviousness to the lessons of economics (for which he’s been awarded a column at the New York Times).

It’s a dazzling performance. Time after time, Krugman leaves me wide-eyed with wonder at how much economics he has to forget to write those columns. But today’s, on why America should consider European-style employment protection, is his masterpiece. It opens thus:

Consider, for a moment, a tale of two countries. Both have suffered a severe recession and lost jobs as a result — but not on the same scale. In Country A, employment has fallen more than 5 percent, and the unemployment rate has more than doubled. In Country B, employment has fallen only half a percent, and unemployment is only slightly higher than it was before the crisis.

Don’t you think Country A might have something to learn from Country B?

This story isn’t hypothetical. Country A is the United States, where stocks are up, G.D.P. is rising, but the terrible employment situation just keeps getting worse. Country B is Germany, which took a hit to its G.D.P. when world trade collapsed, but has been remarkably successful at avoiding mass job losses.

Alright, let’s stop right there. Here’s a comparison of employment on both sides of the Atlantic that I wrote for Forbes just a couple of years ago:

The average American works 25 hours a week; the average Frenchman 18; the average Italian a bit over 16 and a half. Even the hardest working Europeans—the British, who put in an average of 21 and half hours—are far more laid back than their American cousins.

Compared to Europeans, Americans are more likely to be employed, work longer hours (employed Americans put in about three hours more per week than employed Frenchmen), and, most importantly, take fewer (and shorter) vacations. The average American takes off less than six weeks a year; the average Frenchman almost twelve. The world champion vacationers are the Swedes at sixteen and a half weeks per year.

Of course, Europeans pay a price for their extravagant leisure. The average Frenchman produces only 3/4 as much as the average American, even though productivity per hour is slightly higher in France.

By Krugman’s logic then, perhaps countries B, C, D, E and F have something to learn from country A. But he seems to have overlooked that implication.

And exactly which brilliant European policies does Krugman believe the U.S. should now consider with favor? Among others, labor rules that discourage firing and incentives for “short-time work schemes”, where everybody puts in fewer hours. You’ve got to admire the effort it took to get from Nobel-quality economic analysis to the sort of stuff that economics professors around the world work so hard to drill out of their less talented freshmen. Among the things that Krugman has managed to forget are these:

  • A really really really good way to get employers to stop hiring people is to tell them they can’t fire people.
  • Putting people to work is not really terribly useful unless you put them to work productively. If they’re not producing, you might as well pay them to stay home. But imposed “short-time work schemes” are designed to diminish productivity. (In those cases where they can enhance productivity, employers have already adopted them).

If you want to increase employment by making each worker less productive, there are lots of ways to do it besides short-time work schemes. Instead of making them work half-days, we could require all manufacturing workers to work with one hand tied behind their backs. Or we could really handicap them by filling their brains with nonsense. Krugman to the rescue!

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34 Responses to “Krugman to the Rescue”


  1. 1 1 Phil

    I’m curious about what economists in general think about Krugman. I already know what you think, and what a few other economist bloggers think. But, more broadly, is there a consensus view among academic economists that Krugman is just out of his gourd?

    I just don’t get it. How does he react when challenged by other prominent economists on this stuff?

  2. 2 2 Tom J D

    Twould seem that basic subtraction skills are not needed to write in Forbes ?

    “The average American works 25 hours a week”
    “the average Frenchman 18;”
    “employed Americans put in about three hours more per week than employed Frenchmen”

    last time I checked 25-18=7…

    T.

  3. 3 3 Steve Landsburg

    Tom JD: You are confusing the *average* American with the average *employed* American.

  4. 4 4 GregS

    I’m curious about the interventionist-leaning economists in general. Clearly things like price and wage controls, required worker benefits, or quotas/limits on production have nasty consequences. My basic econ course (which used Steve’s Pricing Theory book!) demonstrated convincingly that these kinds of controls are almost always less “efficient” than the free market. Do some economists just fool themselves by looking at deceptive statistics? Do they just realize that they can get cushy government jobs or columnist gigs if they claim the ability to plan the economy? Or is there really a legitimate version of pricing theory in which intervention is more efficient than the free market? Any insight, Steve?

  5. 5 5 Patrick R. Sullivan

    ‘How does he react when challenged by other prominent economists on this stuff?’

    Usually he ignores them. If he can’t get away with that he creates a strawman out of their critiques.

  6. 6 6 Mike

    “A really really really good way to get employers to stop hiring people is to tell them they can’t fire people.”

    Nahhh, clearly the number of introductory economics students would increase if we required all who took that course to complete the entire major.

  7. 7 7 Mark

    I’ve always thought that Krugman winning the Nobel prize in economics was a lot like Michael Behe winning the most prestigious prize in evolutionary biology.

  8. 8 8 Snorri Godhi

    By a lucky coincidence, I have just read another amusing critique of Krugmannian thinking:
    http://mises.org/daily/3832

    However, to feel smug about Nobel\memorial economists, I can do no better than turn to Joe Stiglitz:
    http://dailystaregypt.com/article.aspx?ArticleID=14905

    What makes me smirk is Stiglitz’s implication that the worst effects of the housing bubble could have been avoided by restricting the housing supply.

  9. 9 9 Kevin Donoghue

    “Of course, Europeans pay a price for their extravagant leisure.”

    Well yes. We pay for groceries too. Is this contrary to the new Forbenomics? I’m afraid we’re still using the old textbooks over here. They treat leisure as a good. Quaint, innit?

    Krugman seems attached to the older reality-based literature. He hasn’t taken to the new post-modernist economics at all.

  10. 10 10 Steve Landsburg

    Kevin Donoghue: If you read my piece in Forbes, you’ll see that I went on to inquire into who’s happier and made no assumptions about whether the price Europeans pay is worth it. My point here was not that that American outcomes are better than European outcomes; it was that IF, like Krugman, you are totally focused on employment, THEN it is silly to look only at recent declines to determine who’s got it right.

  11. 11 11 Phil

    Mark -Krugman is a fierce partisan who makes some dubious arguments in his Times column as Landsburg points out in this post, but to compare him to Michael Behe is really not fair at all. Behe winning a Nobel would be like Ron Paul winning one in economics.

  12. 12 12 Chiara Brown

    Ah, give Krugman a break, won’t you? He is out there heroically defending us from all those people who believe that every cent of government spending is a waste of taxpayer money, those who simply don’t want others to have health insurance because, well, they are just bad people, and those who believe the solution to our economic problems is to have Obama seek out Rumplestiltskin so he can spin gold out of straw for us. I mean, these are pressing issues that we should be grateful to him for standing up and addressing since no one else sees fit to do so…

  13. 13 13 Jim Glass

    “IF, like Krugman, you are totally focused on employment, THEN it is silly to look only at recent declines to determine who’s got it right.”

    Did Krugman praise German employment policy for keeping unemployment down during the previous 12 years when German unemployment averaged 8.8% (higher than seen in the US since the 1982 recession) versus the US’s 5.0% … did he praise how in 2005 it kept German unemployment down to only 10.6% (higher than in the US today) while the US level was 5.1%?

    Or is he a “Paulie come lately” to the merits of German employment policy?

    As to his …

    “we could have policies that support private-sector employment. Such policies could range from labor rules that discourage firing”

    … Mein Gott in Himmel! Sacre Bleu! This is economics? When the govt makes it harder to fire people employers don’t respond by hiring fewer, for fear of getting stuck with low-quality workers or slackers exploiting the new rules, so the hire only the few they can be most sure of?

    A good 25 years of unemployment in France averaging 10%, a level seen in the US only once every 27 years or so in a “great recession”, would seem to show that plainly enough.

    As far as economics goes, Krugman left the building some while ago to get a job on the political team.

  14. 14 14 Jim Glass

    Krugman versus Krugman is always fun.

    But Stiglitz versus Stiglitz is fun too.

    “However, to feel smug about Nobel\memorial economists, I can do no better than turn to Joe Stiglitz:
    http://dailystaregypt.com/article.aspx?ArticleID=14905

    “What makes me smirk is Stiglitz’s implication that the worst effects of the housing bubble could have been avoided by restricting the housing supply.”

    Well, today Stiglitz is all about the housing market was madly overbuilt.

    But back when he was pushing the good work of Fannie Mae ever onward the market couldn’t have been sounder and risk couldn’t have been smaller…

    “the risk to the government from a potential default on GSE [Fannie Mae] debt is effectively zero…the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is just $2 million.”

    http://falkenblog.blogspot.com/2009/07/selective-expert-hindsight.html

  15. 15 15 Russ Nelson

    I call him Paul “MIT wants its PhD back” Krugman.

  16. 16 16 W.E. Heasley

    Krugman lives in the: Draw-Attention-to-Myself-Universe. It’s no longer a matter of Economics, rather a matter of me, myself, and I. It’s the psychological profile of the person so desperate for attention; they begin to make outlandish and absurd statements to attract attention to themselves. They in fact do draw attention to themselves. Hence they get the desired result and therefore increase the outlandish/absurd behavior. However, the story always ends the same regarding such behavior: attention becomes ridicule.

    Moreover, Krugman is stuck in a 1975 Keynesian Economics classroom afraid to ever go out the classroom door …..as he knows just beyond that door that Milton Friedman is laying for him.

  17. 17 17 Snorri Godhi

    Well, today Stiglitz is all about the housing market was madly overbuilt.

    But back when he was pushing the good work of Fannie Mae ever onward the market couldn’t have been sounder and risk couldn’t have been smaller…

    Yes, that’s interesting, but to be fair, Fannie Mae is not a construction company: Stiglitz never advocated building more housing. When Stiglitz says that the response to rising prices should be to restrict supply, the irony is not that it contradicts Stiglitz’s earlier position: it is that it contradicts the concept of supply and demand.

    NB: I am not saying that more building would have prevented the housing bubble: what I am saying is that less building would have presumably led to a bigger bubble. Nor am I saying that there might not have been a positive side to building less; but surely the excess supply of housing should have been the last of Stiglitz’s worries when he wrote that article last year!

  18. 18 18 Snorri Godhi

    As for this Stiglitz quote:
    “the risk to the government from a potential default on GSE [Fannie Mae] debt is effectively zero”

    it fits well into my list of favorite quotes by economists:

    “That the Soviet system has made great material progress in recent years is evident both from the statistics and from the general urban scene.”
    John Kenneth Galbraith, 1984

    “The Soviet model has surely demonstrated that a command economy is capable of mobilizing resources for rapid growth.”
    Paul Samuelson, 1985

    “Today the Soviet Union is a country whose economic achievements bear comparison with those of the United States.”
    Lester Thurow, 1989

    source: http://www.aei.org/issue/8269

    (Sorry, Dr. Landsburg: with ass meat researchers out of the way, we are ganging up on economists.)

  19. 19 19 Snorri Godhi

    PS:
    “There will be no further crash in our lifetime”
    John Maynard Keynes, 1926

  20. 20 20 Stephan

    I’m very late with my comment to this thread. But I think it’s worthwhile to come to the rescue of our EU socialist economies.

    “Are Europeans lazy and Americans crazy?” That was the opening of an OECD official on the topic of working hour difference between Europe and the US. OECD findings are, that most of the difference stems from the under-utilization of women labor in Europe. That’s all and a lot more vacations.

    It’s a philosophical problem. Work for a living or live for working? I’m very happy to give up some GDP points in favor of the US while having plenty of leisure time instead of toiling like crazy. And as far as I can remember reading “Armchair Economist” years ago time is also a valuable asset?

    Now in regard to Krugman and Germany. First “Short Work Program” is a temporary measure. Second it’s left to right pocket for the government. Every unemployed worker would receive benefits from the government anyhow. Much better to subsidize him at work instead to subsidize desperate lingering in front of the PC looking for jobs to no avail. Also subsidized training on the job is more efficient.

    Krugman should have put his argument in context of the German welfare state. Of course that would have raised another bigger Brouhaha from Krugman bashers. Now he’s arguing for socialism!

  21. 21 21 Rick Weber

    Just because country A’s unemployment doubled, doesn’t mean that country B is doing any better. If B’s unemployment goes from 15% to 15.5%, they have been less impacted by the recession, but more impacted by lousy institutions.

  22. 22 22 Al

    “The average American works 25 hours a week; the average Frenchman 18; the average Italian a bit over 16 and a half. Even the hardest working Europeans—the British, who put in an average of 21 and half hours—are far more laid back than their American cousins.”

    I’m curious as to how you arrived at these figures? This makes it sounds as if everyone has an abundance of leisure time, are you including part-time workers, the unemployed, pensioners and students to calculate these averages?

  23. 23 23 baconbacon

    “It’s a philosophical problem. Work for a living or live for working? I’m very happy to give up some GDP points in favor of the US while having plenty of leisure time instead of toiling like crazy. And as far as I can remember reading “Armchair Economist” years ago time is also a valuable asset?”

    Its only a philosophical problem if individuals are allowed to choose between one or the other. For those who love to read, garden or other relatively inexpensive activities extra leisure time is much more of a bonus than for those who love to travel and soak up rays on a tropical beach. For the 2nd group working more hours to earn more pay to take those vacations can be worth much more than 3 hours a week of free time with no extra pay.

    If you have a “system” that allows individuals to choose then you can start making arguments as to which is more desirable by comparing the decisions made- but you can’t reason the value of free time logically.

  24. 24 24 Tim Keese

    Steve, you’re taking a pretty cheap shot at Paul.

    Stephan above puts Paul’s comments into context. Sure, Paul should have done it himself, but he is limited to a certain number of words for his column and putting his comments into context would have required a longer essay.

    But you as an educated and, I assume, a well travelled man should know the context of Paul’s comments and realized that your comments are out of line and not helpful in any debate.

  25. 25 25 Douglas Bennett

    The critique was of Krugman’s assertion that restrictions on firing employees would be a good idea. The context provided by Stephan, while informative, was nearly irrelevant to what Landsburg had brought up and is by no means an indication that Krugman has been criticized unfairly.

    On a side note, much of the reason for the under-utilization of women in the European workforce and the higher vacation time has to do with the tax structure and other institutional differences between the two countries, not differences in preferences. This is also something that is covered in beginning economics courses. The differences in hours worked between the US and Europe can be entirely demonstrated by differences in the constraints imposed by tax and regulatory structures, even when assuming identical preferences between the members of each region.

  26. 26 26 Tim Keese

    Douglas, I guess my point is that countries – societies – are different, and what is considered norm and acceptable in one country is sometimes abhorrent for another.

    That doesn’t mean that the one can’t learn from another and adapt the policy to the local circumstances. Europeans find the American hire and fire system horrifying and the Americans feel much the same about the European system.

    But these views don’t fairly represent realities, which are much more complex.

    Paul was suggesting America take that part of what has been successful in Germany and adapt and apply it to US circumstances.

    Steve knows that Paul wasn’t suggesting to take the entire German employment system and force it on the US. That’s why it’s a cheap shot to suggest that he was, when in fact he just didn’t have the space to explain things in detail.

  27. 27 27 Cedric

    Steven seems to have forgotten the ultimate goal: it’s not to “work more hours”. It’s the pursuit of happiness, starting with a comfortable wage, basically.

    Should we really considered someone making minimum wage in America as “employed”? Or “working poor” ?

    If his figures are right (that is a big “if”, because to get this average number of hours he mixes employed, unemployed and “working poor”), according to him, Americans have to work 7 hours more per week than Frenchmen, but the French are guaranteed decent wages (high minimum guaranteed, less disparity between highest and lowest salaries).

    This policy is encouraging businesses the to hire better people. Protection of the employee and longer-term contracts are also an important purveyor of stability and peace of mind. A valuable component of happiness.

    Of course, shortening the week is exactly the opposite of what he says: less hours by definition enhance productivity.

    A lot of economists are trying to attract attention to themselves by criticizing another economist, rather than developing their own theory. Krugman did not “forget” about economics, he’s simply stating his preferences and choices. Political Economy is not an exact science. It’s dealing with political choices, philosophical preferences and options. As one respondent put it, Keynes vs Friedman… You may not agree with Keynesian economics, but at least give him credit for not being the stupidest analyst.

    By the way, when old tactics obviously failed, a look at fresh tactics should be welcome. To think outside the box, look at other countries. The neoliberal school has its limits too, and it seems obvious to all now that some intervention from the State is not all bad.

  28. 28 28 Anna

    Cedric, why do you think anyone is trying to “attract attention to themselves” by criticizing Paul Krugman? Could they perhaps be criticizing him simply because they believe he is wrong? I sure think he is and I don’t have an agenda.

    I don’t care who he is or what prizes he has for whatever he did 30 years ago. Most of Paul Krugman’s columns in the NY Times would hardly get a passing grade in econ undergrad programs because his statements simply cannot be followed to a logical end, no matter what model you use. It has nothing to do with what models you “like”, it has to do with logic. Also, anyone who has to resort to snide remarks about their colleagues must be running out of valid arguments.

    There are plenty of prominent economists who have criticized Krugman. I happen to like this particular piece: http://faculty.chicagobooth.edu/john.cochrane/research/Papers/krugman_response.htm

    You can also read about Krugman’s (sometimes intentional) misuse of data in the book Econospinning.

  29. 29 29 Cedric

    Anna,

    When you say that Krugman’s statements cannot be followed to a logical end, which ones are you talking about exactly ? It’s hard to guess whether you cannot follow his logic or there is just no logic in them, if you don’t provide an example…

    Let’s be precise, and specific. Let’s see the example at hand.

    Peremptory statement from Mr. Landsburg (and you): Krugman is oblivious to the lessons of economics that any undergrad “knows”. Which lesson exactly in this instance ? Which universal law of a hypothetical exact science called “Economics”? He does not say. Neither do you.

    Consider the opening statement criticised by Mr. Landsburg. Krugman compares how countries B & C REACTED to the recession. Now consider the incredibly fuzzy “rebuttal” written by the same Landsburg 2 years ago (before recession), comparing not reactions but a static “average hours worked”. Clearly, he did not understand the point.

    Second, it’d be good to tell us from where he gets those average working hours, mixing employed and unemployed people, with different scales for each country.

    Third, another blunt assumption: “economics professors around the world (sic) work hard to drill out of their freshmen” … “labor rules that discourage firing and incentives for “short-time work schemes”” Wrong. Absolutely wrong. This is a policy debate, hence by definition a matter of choice. There is no universal rule that says this policy is bad, which is why countries have debated and adopted it.

    Fourth: “A really really really good way to get employers to stop hiring people is to tell them they can’t fire people” ? … Where to begin ? First, if there is no choice and business is down, companies will not only fire people, they will stop hiring anyways. Logic. And, well, a really really good way to create more unemployement is to … encourage firing people and create job instability. That is logic. In Landsburg neoliberal dogma, jobs should be an adjustment variable, including for companies that are immensely profitable but want to simply lay off people at will, forgetting the human cost and the loss of productive power. As I said, it’s a matter of choice. Who should benefit from policy choices ? Shareholders or employees? There’s no right or wrong, just choices.

    And last: putting people to work is not terribly useful if you’re not going to pay them a decent salary and they have to cumulate two, three or more jobs to make ends meet, thus raising the “average number of hours worked by an American”, that embodiment of modern capitalist success with a mortgage.

    Best,

    Cedric

  30. 30 30 Cedric

    PS I looked at the article you sent. The author is, thank god, quite more precise than Landsburg. But it’s funny and not surprising that it comes from the University of Chicago, this high temple of neoliberal capitalism. Again: choices, not science.

    Their politics are diametrically opposed to Krugman’s. For those who don’t know, Chicago school = neoliberals/neoclassics/ capitalist dogmas that lead us to the recession, increased disparity of the distribution of wealth (“the rich get richer, the poor get poorer, etc. check http://en.wikipedia.org/wiki/Neoliberalism#Chicago_School

  31. 31 31 LaurencePassmore

    I wonder if the author or any of the commenters actually read the article in question.

    Dr. Krugman offers two suggestions for boosting employment, and neither involves telling employers that they can’t fire people. So Landsburg’s first point (offered after two paragraphs of cheap shots) is a straw man.

    As to Landsburg’s second point, Krugman explains in his article why -in extraordinary circumstances such as the one we find ourselves- boosting employment may be desirable even without concomitant gains in productivity. Landsburg may disagree with his logic, but it would be nice if he actually addressed it instead of offering knee-jerk dogma as argument.

  32. 32 32 Snorri Godhi

    Laurence Passmore:
    Dr. Krugman offers two suggestions for boosting employment, and neither involves telling employers that they can’t fire people

    Paul Krugman:
    Alternatively, or in addition, we could have policies that support private-sector employment. Such policies could range from labor rules that discourage firing to financial incentives for companies that either add workers or reduce hours to avoid layoffs.

    And that’s what the Germans have done. Germany came into the Great Recession with strong employment protection legislation.

  33. 33 33 LaurencePassmore

    Snorri Godhi:

    The Germans have indeed enacted policies that make firing more difficult, but Krugman doesn’t recommend the same:

    “So it’s time to try something different.

    Just to be clear, I believe that a large enough conventional stimulus would do the trick. But since that doesn’t seem to be in the cards, we need to talk about cheaper alternatives that address the job problem directly. Should we introduce an employment tax credit, like the one proposed by the Economic Policy Institute? Should we introduce the German-style job-sharing subsidy proposed by the Center for Economic Policy Research? Both are worthy of consideration.”

    I’ll grant that Krugman speaks approvingly of what the Germans have done in this area. Still, it seems to me that Landsburg should address the recommendations actually offered by Krugman, and do so in a way that doesn’t completely sidestep the argument made for them.

  34. 34 34 Snorri Godhi

    Laurence: it is true that the paragraph you quote does not recommend passing laws against firing people; but, after writing the paragraph that I quoted, Krugman needed to do better than that: he needed to explicitly say that that is NOT an aspect of the German model that he recommends.

    Let me explain this by analogy: people do not need to say explicitly that they do not approve of the collectivization of agriculture, but after saying that the “Soviet model has surely demonstrated that a command economy is capable of mobilizing resources for rapid growth”, Paul Samuelson could be presumed to approve of the collectivization of agriculture unless he specified otherwise.

    A less extreme example: when he recommends the German model, Krugman might have meant keeping the stimulus as small as possible, as the Germans have done; but he has explicitly recommended a stimulus as big as possible, so that interpretation of his words is no longer possible. He has not dissociated himself from laws against firing people, though.

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