Krugman: I’m Only Keynesian to Botch 1980s Inflation Call


Krugman attempts to rewrite history…again

By Robert P Murphy @ Mises

Krugman famously admitted he doesn’t read conservative economics bloggers. Maybe he should, though, so he can stop making a fool of himself when he tries to rewrite history. Today’s example is Krugman’s recent post arguing that right-wing economists have created a myth about Keynesians and (price) inflation in the early 1980s. Here’s Krugman:

Right-wing economists like Stephen Moore and John Cochrane — it’s becoming ever harder to tell the difference — have some curious beliefs about history. One of those beliefs is that the experience of disinflation in the 1980s was a huge shock to Keynesians, refuting everything they believed. What makes this belief curious is that it’s the exact opposite of the truth. Keynesians came into the Volcker disinflation — yes, it was mainly the Fed’s doing, not Reagan’s — with a standard, indeed textbook, model of what should happen. And events matched their expectations almost precisely.

Then Krugman produces some graphs from the 1978 edition of a macro textbook by Keynesian authors, which (Krugman claims) properly shows how an adaptive-expectations Phillips Curve model perfectly anticipated the actual experience under Volcker. Krugman concludes the post with this:

So were Keynesian economists feeling amazed and dismayed by the events of the 1980s? On the contrary, they were feeling pretty smug: disinflation had played out exactly the way the models in their textbooks said it should.

Indeed, it was the other side of the macro divide that was left scrambling for answers. The models Chicago was promoting in the 1970s, based on the work of Robert Lucas and company, said that unemployment should have come down quickly, as soon as people realized that the Fed really was bringing down inflation. By a few years into the 80s it was obvious that those models were unsustainable in the face of the data. But rather than admit that their dismissal of Keynes was premature, most of those guys went into real business cycle theory — basically, denying that the Fed had anything to do with recessions. And from there they just kept digging ever deeper into the rabbit hole.

But anyway, what you need to know is that the 80s were actually a decade of Keynesian analysis triumphant.

That’s a really interesting version of history, because on September 9, 1982, Paul Krugman–in his capacity as a member of the Council of Economic Advisors–sent a memo (co-authored with Larry Summers) to Martin Feldstein and William Poole. I encourage you to click the link and read the memo in all its glory, but here are some key excerpts:

I. The Inflation Time Bomb?

We believe that it is reasonable to expect a significant reacceleration of inflation in the near future. Much of the apparent progress against inflation has resulted from the *temporary* side effects of tight money and high real interest rates. These side effects must be expected to reverse themselves as real interest rates decline and the economy expands.

…Our very rough guess is that correction of these distorted relative prices will add five percentage points to future increases in consumer prices…This estimate is conservative in that it assumes stable oil prices.

So how did Krugman do? Let’s go to the tape:



The year/year change in the CPI was 4.9 percent when Krugman sent his memo, in which he predicted a 5-point increase in “the near future.” Do you see a 10% CPI rate anytime after that? I don’t. (For the record, oil prices continued their collapse from the point of Krugman’s memo through the mid-1980s, so he was totally wrong about oil then just as in our time.)

So I see three possible explanations for Krugman’s recent post:

(1) Krugman is utterly dishonest and knows full well he is re-writing history.

(2) Krugman in 1982 was a Chicago School guy and, in light of his embarrassing error on CPI, rejected his previous hero Robert Lucas and started following the smug Keynesians who had been triumphant.

(3) Krugman honestly doesn’t remember how badly he applied the Phillips Curve back in his 1982 memo.

In case the answer is (3), it shows Krugman the virtue of reading people with whom he disagrees. Because we had THIS EXACT SAME DISCUSSION back in 2012, when Krugman said it was a myth that Keynesians had failed to predict the 1980s disinflation. At that time, a bunch of us set him straight, including (most notably) David R. Henderson who had seen the original 1982 memo because he too had worked on the Council of Economic Advisors at the time. Indeed, if you google “Krugman 1982 memo inflation” you’ll find that a bunch of right-wing bloggers have discussed the issue, including pieces at National Review and Forbes. If Krugman wants to stop leading with his chin, maybe he should occasionally glance at the work of his critics.