Krug­man Apol­o­gises!

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Sorry, that was a belated April Fool’s joke. He hasn’t, of course—though there has been an apol­ogy of sorts from Nick Rowe, which is duly noted and accepted.

The best Krug­man could man­age is the fol­low­ing update to his orig­i­nal dia­tribe “Oh My, Steve Keen Edi­tion”:

Update update: Ah, so Keen didn’t mean DSGE — a term that refers only to New Key­ne­sian mod­els — when he said DSGE; he meant New Clas­si­cal, which he some­how regards as the under­ly­ing prin­ci­ples for mod­els that aren’t New Clas­si­cal at all. OK. Any­way, enough of that. I’m all for lis­ten­ing to heretics when they offer insights I can use, but I’m not find­ing that at all in this con­ver­sa­tion, just word games and con­tin­ual insis­tence that the mem­bers of the sect have insights denied to us lesser mor­tals. Time to move on.

Gee, thanks Paul. So I’m play­ing word games, am I—and you’re not? Let’s take a closer look.

Click here for this post inPDF

Marking Krugman

Paul, your com­pre­hen­sion of my piece failed on at least two counts.

Fig­ure 1: Krugman’s Last Word

Firstly, in the excerpt you quote, I refer to “under­ly­ing prin­ci­ples to the DSGE mod­els that now dom­i­nate Neo­clas­si­cal macro­eco­nom­ics”. Some­how you read that as being a state­ment about “about New Key­ne­sian mod­els”.

No it wasn’t Paul: I was refer­ring to the gen­eral class of post-IS-LM neo­clas­si­cal mod­els, which includes the “Fresh­wa­ter” New Clas­si­cal mod­els about which you have made such a song and dance in the past—contrasting their unre­al­ity and con­ser­vatism with your real­is­tic pro­gres­sive­ness. Remem­ber “Fresh­wa­ter Rage”, “How did Econ­o­mists get it so wrong?” or “Dis­agree­ment among econ­o­mists”? You might dis­like them Paul, but they’re your Neo­clas­si­cal cousins, and it was their “pure” the­ory, which forms the foun­da­tion for your NK mod­els, to which I referred in that excerpt.

Yes, I know that Mark Thoma claimed in a Tweet that New Clas­si­cal mod­els weren’t DSGE models—and that by impli­ca­tion, DSGE was reserved for NK mod­els exclu­sively and there­fore my Fail grade was wrong. I’ll get to that later.

Sec­ondly, directly below the sec­tion you quote, I con­tin­ued as fol­lows:

If that were actu­ally the real world, then not only would there not be a cri­sis now, there would never have been a Great Depres­sion either—and reces­sions would sim­ply be minor sta­tis­ti­cally unpre­dictable but inevitable events when the major­ity of shocks hit­ting the econ­omy were neg­a­tive, and they would rapidly be resolved by adjust­ments to rel­a­tive prices (wages included, of course).

So econ­o­mists like Krugman—who describe them­selves as “New Keynesians”—have tweaked the base case to derive mod­els that “ape” real-world data, with “sticky” prices rather than per­fectly flex­i­ble ones, “fric­tions” that slow down quan­tity adjust­ments, and imper­fect com­pe­ti­tion to gen­er­ate less-than-opti­mal social out­comes.

This is Ptole­maic Eco­nom­ics: take a model that is utterly unlike the real world, and which in its pure form can’t pos­si­bly fit real world data, and then add “imper­fec­tions” so that it can appear to do so.

So Paul, not only did I dis­tin­guish between NC mod­els and NK ones, I even men­tioned you by name in that sec­tion as some­one who has added imper­fect com­pe­ti­tion, sticky prices and so on to that base NC model. And yet you implied that I was a moron who didn’t even know that NK mod­els include imper­fect com­pe­ti­tion, sticky prices and so on—and you won­der why you got a Fail?

Oh all right, yes I’ll con­sider Thoma’s argu­ment. I see that’s what you’re claim­ing in your attempt to weasel out of an apol­ogy:

so Keen didn’t mean DSGE — a term that refers only to New Key­ne­sian mod­els — when he said DSGE

Fig­ure 2: Thoma’s Tweet

So you and Thoma believe that DSGE mod­els exclu­sively refer to NK mod­els? Frankly I think that’s like a wrin­kled pea claim­ing that it’s unre­lated to a smooth one: they’re still both peas. And the Wikipedia entry on DSGE mod­els—which I’m sure has been checked over pretty care­fully by fans of Neo­clas­si­cal economics—makes no such dis­tinc­tion. In fact, it treats RBC/NC and NK as schools of DSGE mod­el­ling, pre­cisely as I do:

Schools of DSGE mod­el­ing

At present two com­pet­ing schools of thought form the bulk of DSGE mod­el­ing.[1]

Real busi­ness cycle (RBC) the­ory builds on the neo­clas­si­cal growth model, under the assump­tion of flex­i­ble prices, to study how real shocks to the econ­omy might cause busi­ness cycle fluc­tu­a­tions. The paper of Kyd­land and Prescott (1982) is often con­sid­ered the start­ing point of RBC the­ory and of DSGE mod­el­ing in gen­eral.[2] The RBC point of view is sur­veyed in Coo­ley (1995).

New-Key­ne­sian DSGE mod­els build on a struc­ture sim­i­lar to RBC mod­els, but instead assume that prices are set by monop­o­lis­ti­cally com­pet­i­tive firms, and can­not be instan­ta­neously and cost­lessly adjusted. The paper that first intro­duced this frame­work was Rotem­berg and Wood­ford (1997). Intro­duc­tory and advanced text­book pre­sen­ta­tions are given by Galí (2008) and Wood­ford (2003). Mon­e­tary pol­icy impli­ca­tions are sur­veyed byClar­idaGalí, and Gertler (1999).” (Wikipedia Entry)

So I won’t accept Thoma’s excuse for your behaviour—and nor do some of his own fol­low­ers, judg­ing by his sub­se­quent Tweets.

Fig­ure 3: Thoma’s sub­se­quent Tweets

You should also read that Wikipedia entry, by the way—it includes some crit­i­cisms of DSGE mod­el­ling by your senior Robert Solow that you clearly haven’t paid atten­tion to (Robert M. Solow, 2003, 2001, 2008). I know you don’t like read­ing what other peo­ple write—“I Don’t Care” I think you said—but that’s why you make mis­takes like the one you’ve made here. Since I know from your past form that my advice here is prob­a­bly falling on deaf ears, here’s Solow as quoted in the crit­i­cal sec­tion of the Wikipedia entry. At least read that; I’ll wait:

Con­tro­versy

The United States Con­gress hosted hear­ings on macro­eco­nomic mod­el­ing meth­ods on July 20, 2010, to inves­ti­gate why macro­econ­o­mists failed to fore­see the Finan­cial cri­sis of 2007–2010Robert Solow blasted DSGE mod­els cur­rently in use:

I do not think that the cur­rently pop­u­lar DSGE mod­els pass the smell test. They take it for granted that the whole econ­omy can be thought about as if it were a sin­gle, con­sis­tent per­son or dynasty car­ry­ing out a ratio­nally designed, long-term plan, occa­sion­ally dis­turbed by unex­pected shocks, but adapt­ing to them in a ratio­nal, con­sis­tent way… The pro­tag­o­nists of this idea make a claim to respectabil­ity by assert­ing that it is founded on what we know about micro­eco­nomic behav­ior, but I think that this claim is gen­er­ally phony. The advo­cates no doubt believe what they say, but they seem to have stopped sniff­ing or to have lost their sense of smell alto­gether.’ (Solow’s state­ment to Con­gress, July 2010)

Now stop com­plain­ing about the mark: frankly, get­ting a fail for this essay is the least of your wor­ries. You seem to have alien­ated a large part of your peer group by this behaviour—who are you going to have lunch with after this per­for­mance? Butta­fuc­cin­who (yes, his nick­name sounds rude, but at present you’re in no posi­tion to accuse some­body else of rude­ness), for exam­ple, seems unlikely to ever want to play ball with you again:

I’m cer­tainly not in a posi­tion to deter­mine who’s right and wrong, and frankly don’t really care, but did you even read Keen’s post? Two para­graphs below the part you excerpted: “So econ­o­mists like Krugman—who describe them­selves as “New Keynesians”—have tweaked the base case to derive mod­els that “ape” real-world data, with “sticky” prices rather than per­fectly flex­i­ble ones, “fric­tions” that slow down quan­tity adjust­ments, and imper­fect com­pe­ti­tion to gen­er­ate less-than-opti­mal social out­comes.”

Is there a four-let­ter word for some­one crit­i­cizes another per­son in a very pub­lic forum with­out read­ing what they’ve writ­ten? Or would a seven-let­ter word fit bet­ter? (Butta­fuc­cin­who)

No, that isn’t all. I believe your gang calls itself “New Key­ne­sian”, doesn’t it?

Well I am going to ban you from using that term in future: find another one.

Why? Well, for starters, the Post Key­ne­sian gang claims that you’re den­i­grat­ing their gang by claim­ing to be related to them, when you’re not. And I’ve done a bit of Tal­mu­dic research and found that they’re right: the SLIME model you use—what? Oh, sorry, yes I meant IS-LM, my apologies—anyway, the IS-LM model wasn’t devel­oped by Keynes at all.

Yes, I know you know it was devel­oped by Hicks, but it wasn’t as an inter­pre­ta­tion of Keynes—it was a “Wal­rasian” model devel­oped before Hicks had read Keynes at all. Look, Hicks says so right here:

that model was already in my mind before I wrote even the first of my papers on Keynes.’ (John Hicks, 1981, p. 140; empha­sis added)

And he also traces the model to Wal­ras, not Keynes

the idea of the IS-LM dia­gram came to me as a result of the work I had been doing on three-way exchange, con­ceived in a Wal­rasian man­ner. I had already found a way of rep­re­sent­ing three-way exchange on a two-dimen­sional dia­gram (to appear in due course in chap­ter 5 of Value and Cap­i­tal). As it appears there, it is a piece of sta­t­ics; but it was essen­tial to my approach (as already appears in “Wages and Inter­est: the Dynamic Prob­lem”) that sta­tic analy­sis of this sort could be car­ried over to “dynam­ics” by rede­f­i­n­i­tion of terms. So it was nat­ural for me to think that a sim­i­lar device could be used for the Keynes the­ory.’ (Hicks 1981, p. 141–142)

So at best,you’re a Hick­sian econ­o­mist. But actu­ally, even that won’t do, because Hicks dis­owned IS-LM in that same paper, on the basis that macro­eco­nom­ics can’t be mod­elled as an equi­lib­rium process:

I accord­ingly con­clude that the only way in which IS-LM analy­sis use­fully survives—as any­thing more than a class­room gad­get, to be super­seded, later on, by some­thing better—is in appli­ca­tion to a par­tic­u­lar kind of causal analy­sis, where the use of equi­lib­rium meth­ods, even a dras­tic use of equi­lib­rium meth­ods, is not inap­pro­pri­ate…

When one turns to ques­tions of pol­icy … the use of equi­lib­rium meth­ods is still more sus­pect. … There can be no change of pol­icy if every­thing is to go on as expected—if the econ­omy is to remain in what (how­ever approx­i­mately) may be regarded as its exist­ing equi­lib­rium. It may be hoped that, after the change in pol­icy, the econ­omy will some­how, at some time in the future, set­tle into what may be regarded, in the same sense, as a new equi­lib­rium; but there must nec­es­sar­ily be a stage before that equi­lib­rium is reached. There must always be a prob­lem of tra­verse. For the study of a tra­verse, one has to have recourse to sequen­tial meth­ods of one kind or another.’ (Hicks 1981, p. 152–153)

So I think you could call your­self some­thing like “Old Hick­sians”; that would be OK. Or maybe “New Wal­rasians” when you do that DSGE thing.

Yes, I know you don’t like either of those names. But, to coin a phrase, “I Don’t Care”.

References

Hicks, John. 1981. “Is-Lm: An Expla­na­tion.” Jour­nal of Post Key­ne­sian Eco­nom­ics, 3(2), 139–54.

Solow, Robert M. 2003. “Dumb and Dumber in Macro­eco­nom­ics,” Festschrift for Joe Stiglitz. Colum­bia Uni­ver­sity:

____. 2001. “From Neo­clas­si­cal Growth The­ory to New Clas­si­cal Macro­eco­nom­ics,” J. H. Drèze, Advances in Macro­eco­nomic The­ory. New York: Pal­grave,

____. 2008. “The State of Macro­eco­nom­ics.” The Jour­nal of Eco­nomic Per­spec­tives, 22(1), 243–46.

 

 

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • TruthIs­ThereIs­NoTruth

    SH — i was express­ing the poten­tially extreme view that the rel­a­tively com­fort­able exis­tence (regard­less of whether you work hard or not) of CITIZENS of the ‘west­ern world’ is on the back of the major­ity of the world’s 6 bil­lion pop­u­la­tion liv­ing in dire poverty and des­per­ate to gain employ­ment in fac­to­ries where they will spend their lives work­ing 80 hr weeks to make all the lit­tle con­sum­ables we for­get about (from shoe laces to the lit­tle wire that goes inside your light bulb…). This has been instruc­tive and has crys­talised my argu­ment to say that your citizen’s div­i­dend divided by 6,000,000,000 isn’t going to stretch very far.

  • Steve Hum­mel

    Truth,

    That doesn’t have to hap­pen at all. The waste, empha­sis waste, of export­ing so much pro­duc­tion in the pur­suit not only of profit but in actual fact prof­itabil­ity would end with a sys­tem where the domes­tic mar­ket was enough to gar­ner a fine profit. The same would apply to any national econ­omy. This is just one of the rea­sons why a Dis­trib­utist mon­e­tary system/consumer finan­cial par­a­digm is eco­log­i­cally more sound than the cur­rent sys­tem. Glob­al­iza­tion itself is incred­i­bly waste­ful of energy resources. Except for resources that a national econ­omy sim­ply does not have imports/exports become prob­a­bly unnec­es­sary. Also, self suf­fi­cient decen­tral­ized national economies with eco­nom­i­cally and sov­er­eignly free cit­i­zen­ries are ones which will not be so ready or so manip­u­la­ble into hos­til­i­ties with other nations. 

    Waste, its not only endemic its like dark matter.…its every­where and almost no one can see it. Plus the sys­tem I out­line frees tech­no­log­i­cal inno­va­tion and advance­ment to take its log­i­cal and ben­e­fi­cially effi­cient course by end­ing the false neces­sity to con­sider employ­ment in the finan­cial con­sid­er­a­tion. Let us have tech­nol­ogy as an ally instead of an antagonist.…finally.

  • RJ

    alain­ton
    April 9, 2012 at 6:28 pm | # 

    Truth and sound logic will even­tu­ally win. Whether it’s eco­nom­ics or any other sub­ject.

    And name call­ing shows one team is los­ing and the more it hap­pens los­ing badly.

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  • Jon Hhhh

    Here’s the prob­lem, you said that the under­ly­ing prin­ci­ples of DSGE mod­els that dom­i­nate mod­ern eco­nom­ics are X, Y, and Z. So any layper­son will assume from that post that mod­ern DSGE that dom­i­nates what is taught at PG etc… assumes X, Y and Z, and that these NK guys are on the fringes. This is an out­ra­geous untruth, if any DSGE dom­i­nates mod­ern macro its NK, so the truth is the absolute oppo­site, the DSGE mod­els that dom­i­nate do NOT assume per­fect com­pe­ti­tion but monop­o­lis­tic pric­ing, they DO NOT assume imme­di­ate adjust­ment of prices but slow or sticky adjust­ment of prices. 

    In oth­er­words that post was extremely mis­lead­ing.

    Fur­ther­more you keep hark­ing on about ISLM, ISLM doesn’t dom­i­nate any­thing, I haven’t seen an ISLM model since my 2nd year of under­grad, it is cer­tainly not a part of mod­ern eco­nom­ics.

  • No, that is not the prob­lem. When I said “the under­ly­ing prin­ci­ples of DSGE” I was refer­ring to the “micro­foun­da­tions of macro­eco­nom­ics” from which NK even­tu­ally emanated, which are them­selves based on notions of per­fect com­pe­ti­tion, etc. I then noted that since this core per­spec­tive abjectly fails to fit the data:

    econ­o­mists like Krugman—who describe them­selves as “New Keynesians”—have tweaked the base case to derive mod­els that “ape” real-world data, with “sticky” prices rather than per­fectly flex­i­ble ones, “fric­tions” that slow down quan­tity adjust­ments, and imper­fect com­pe­ti­tion to gen­er­ate less-than-opti­mal social out­comes.”

    The gen­eral pub­lic did a very good job of read­ing my blog and real­is­ing that the ini­tial para­graphs had to be read with the sub­se­quent para­graphs to get the entire sense of my argu­ment. Only neo­clas­si­cal econ­o­mists seem to have taken umbrage at the first two para­graphs with­out read­ing the two after.

    Sec­ondly, of course IS-LM doesn’t dom­i­nate post­grad edu­ca­tion any­more. But Krug­man still defends the use of ISLM, and that’s what I was refer­ring to.

    And of course not­ing that Hicks him­self dis­owed ISLM on entirely dif­fer­ent grounds thirty years ago.

  • Jon Hhhh

    I’m not defend­ing Krug­man here, this is my own crit­i­cism. Again, I’ve read through your post and you still give the impres­sion that RBC mod­els are the ones that dom­i­nate, with the NK’s as a more fringe move­ment. And no the ‘gen­eral pub­lic’ appar­ently don’t get a real­is­tic impres­sion; they may realise that NK mod­els don’t have per­fect com­pe­ti­tion or imme­di­ate price adjust­ment, yet they seem to think that RBC mod­els are the ones that dom­i­nate. Since peo­ple keep telling me they do and then point­ing to blog posts from peo­ple like you, I must respond by show­ing them my lec­ture notes and ask­ing them to show me any RBC model.

  • Well if that’s the impres­sion I gave then it’s cer­tainly not the one I intended. Of course I know that, numer­i­cally and polit­i­cally, NK mod­el­ing dom­i­nates RBC.

    How­ever the point you don’t seem to be get­ting is that NK mod­els are per­tur­ba­tions on the RBC/NC foun­da­tions of per­fect com­pe­ti­tion and fric­tion­less adjust­ment. That was my point in say­ing the “under­ly­ing prin­ci­ples”. In that case, I see RBC/NC as the smooth pea where NK is the wrinkly ones. Neo­clas­si­cals think NK and RBC are really dif­fer­ent. I think they’re both peas.

  • Jon Hhhh

    Steve Keen, did you see this com­ment form Nick:

    I (now) under­stand you are say­ing that, but I think you have the tim­ing and rea­son­ing back­wards, for most of us. First we were doing macro with sticky prices. Next (for me in 1987) we started doing macro with monop­o­lis­tic com­pe­ti­tion. Doing those same things with a DSGE model came later (for those, unlike me, who had the math) as an extra. DSGE is the add-on “epicy­cle”, not sticky prices and imper­fect com­pe­ti­tion.”

    I think he nails it, it’s the same with my own expe­ri­ence. What we first did was look at sticky prices, we looked at data show­ing price rigid­ity, and looked at var­i­ous dif­fer­ent ways we could model price rigid­ity. Then we looked at a gen­eral equi­lib­rium model of monop­o­lis­tic com­pe­ti­tion, THEN we com­bined these two things with basic demand equa­tions to cre­ate a DSGE model. It seemed more like the DSGE was the final pol­ish­ing, to make the New Key­ne­sian intu­ition robust to the lucas cri­tique etc… rather than the other way around.

  • No I didn’t–thanks for repli­cat­ing.

    The clash I’ve had with Neo­clas­si­cals over this is akin to the “smooth pea-wrin­kled pea” anal­ogy I’ve been mak­ing. To RBC and NK econ­o­mists, there are huge dif­fer­ences between the two approaches. To my per­spec­tive, you both start from neo­clas­si­cal micro­eco­nomic foun­da­tions and you both breach, I expect with­out real­is­ing it, the Son­nen­schein-Man­tel-Debreu con­di­tions of aggre­gat­ing from the indi­vid­ual to soci­ety.

    I also see this ema­nat­ing from the Lucas cri­tique because that was the “piece de resis­tance” in the move to base macro on micro­foun­da­tions.

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  • A cor­re­spon­dent just sent me the fol­low­ing on a recorded debate between Krug­man and a Span­ish pro­fes­sor of Aus­trian per­sua­sion. I don’t have time to watch it, but if any­one here does, please let us know what you think–and whether there are any spe­cific seg­ments you think I should watch.
    —————
    Some of the phrases from Pedro Schwartz [ a very coher­ent detailed argu­ment ]
    — “Often Nobel prize win­ners are tempted to pon­tif­i­cate on mat­ters that are out­side the spe­cialty in which they have excelled”
    — ‘what inflated the bub­ble will rem­edy the blowout … home­o­pathic medecine of the worst kind”
    — “ail­ments come from exces­sive demand, exces­sive demand cures the ail­ments”

    Some of the points from Paul Krug­man [ com­pletely fails to address the points raised by Pedro ]
    — [rephrased] why do you run me down per­son­ally instead of speak­ing to my argu­ments [ Pedro very clearly spoke to the argu­ments not the man ]
    — key­ne­sian view of the world is appro­pri­ate
    — con­clu­sions sup­port­ing his argu­ments are based on expe­ri­ence on inter­est rates in US over las t3 years ( is 3 years a use­ful amount of time given the length of an eco­nomic cycle? )

    orig­i­nally seen on zero­hedge
    http://www.zerohedge.com/news/ultimate-krugman-take-down

    tran­script here [ con­tains the most inter­est­ing parts of the eng­lish dis­cus­sion but not all ]
    http://twileshare.com/pwt

    on youtube link here:
    http://www.youtube.com/watch?feature=player_embedded&v=EX55BH97quk
    at 10m Krug­man talks about his book and the prob­lems of the euro econ­omy. noth­ing new in here, some coher­ent dis­cus­sion of euro prob­lem in terms of bank prob­lem layer, fis­cal layer, com­pet­i­tive­ness layer.. if a solu­tion for the bank layer makes the fis­cal layer worse then it doesnt help over­all. aus­ter­ity doesnt restore com­pet­i­tive­ness, only infla­tion can restore com­pet­i­tive­ness (wages are proxy for com­pet­i­tive­ness it seems)
    Start­ing from around 35:00 the Span­ish pro­fes­sor cri­tiques under­ly­ing prin­ci­ples of Krug­mans analy­sis in a con­struc­tive, coher­ent way
    Krugman’s less-than-happy response (which sparks quite a rowdy argu­ment) begins around 48:20
    At 1h06 Krug­man dis­cusses that keynes was for govt counter cycli­cal inter­ven­tion.. cur­rent us prob­lems are because us didnt fol­low key­ne­sian logic because of other influ­ences
    at 1h09 Schwartz talks about money sup­ply (money expan­sion.. i didnt under­stand this argu­ment tbh)
    at 1h14 Krug­man says fis­cal stim­u­lus is impos­si­ble for spain but aus­ter­ity will not help. on top of the cur­rent prob­lems aus­ter­ity custs will not make a dif­fer­ence. (in gen­eral i find there’s not much dis­cus­sion of the impli­ca­tions of no aus­ter­ity when mar­kets wont finance a govt deficit..)
    at 1h16m20 Schwartz says the argu­ment is not for aus­ter­ity but to make spain an econ­omy that can per­form in the future. Krug­man says that this point is hijack­ing the argu­ment

    - Less inter­est­ing stuff
    Pre­vi­ous span­ish finance min­is­ter Manuel Con­the mainly in favour of Krug­man [ eng­lish starts at 55 mins ]
    orig­i­nal moti­va­tion for the euro (achieve low inter­est rates, caused span­ish real estate bub­ble)
    ‘inter­nal deval­u­a­tion’ — think he means reduc­ing costs by means such as blankey % wage reduc­tions
    1h14 — Manuel Con­the speaks of polit­i­cal cost of anti-cycli­cal action

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