Yes, There Is No Growth Cliff at a 90% Debt-to-Annual-GDP. It Is an Artifact of Reinhart and Rogoff's Analysis. Why Do You Ask?
What Economists to Listen to? And Why?

Noah Smith: KrugTron the Invincible: What Is His Secret Weapon?

Noah Smith:

Noahpinion: KrugTron the Invincible: If you grew up in the 80s you probably remember Voltron. Although the show often had convoluted plotlines, it would somehow always end with Voltron (a super-powerful robot formed from five mechanical lions) facing off against a monster called a "Robeast"…. [T]o a four-year-old, it was pure gold.

In the econ blogosphere, a similar dynamic has played out over the last few years. Each week a Robeast will show up, bellowing predictions of inflation and/or soaring interest rates. And each week, Paul Krugman… I mean, KrugTron, Defender of the Blogoverse, will strike down the monster with a successful prediction of… low inflation and continued low interest rates. Goldbugs, "Austrians", New Classical economists, and harrumphing conservatives of all stripes have eagerly gone head-to-head with KrugTron in the prediction wars, and have been summarily cloven in twain…. [H]ere's a quick (partial) episode guide: Krugman vs. Peter Schiff (see also here)… Krugman vs. Ron Paul… Krugman vs. Robert Murphy… Krugman vs. Niall Ferguson (see also here)… Krugman vs. Allan Meltzer… Krugman vs. a giant hive-mind of goldbugs.

It's really kind of amazing…. So it's fair to ask: What is KrugTron's Blazing Sword? How does he keep vanquishing the Robeast of the Week?… Krugman himself will tell you that his secret weapon is simple, elementary Keynesian economics - a rough-and-ready IS-LM view of the world, backed up by sophisticated "liquidity trap" models…. But I'm not so sure…. Keynesian models didn't predict that unconventional monetary policy (QE2) would be insufficient to raise expectations of future inflation, and thus would be unable to bust us out of the liquidity trap. Nor did Keynesian models predict that private investors would be willing to ignore the possibility of a U.S. sovereign default…. But Krugman did predict both of these things.

And here's the most interesting one. Krugman's earliest prediction victory came at the expense of John Paulson, one of history's most successful investors (although unlike the Robeasts pictured above, Paulson didn't seek out a battle with Krugman; he was set up as the anti-Krugman by a writer at BusinessWeek). In 2010, Paulson predicted a strong economic recovery…. Paulson backed up his bet with billions, and rolled snake eyes. But Paulson is no mere Robeast…. In fact, he has a large group of very skilled macroeconomists working for him…. Nor does Keynesian theory, of the type used by Krugman, insist that an economy will remain mired in recession without a fiscal stimulus to prime the pump….

So how did Krugman know growth would be slow? He didn't (I hope) put his trust in Reinhart and Rogoff's assertion that growth is always slow after financial crises…. No, I think Krugman's real secret weapon is something else: Like Voltron before him, he's borrowing heavily from Japan. See, I myself am fairly agnostic about Keynesian ideas. But I've expected nothing but low growth, low interest rates, and low inflation since 2008 (though I haven't been as confident about these things as Krugman, and am thus not in his class as a super-robot). I expected these things because of one simple proposition: We are like Japan….

Meanwhile, the Robeasts have all used a different example to inform their understanding of the world: America in the 70s and early 80s…. But America 2008-present has not looked like America 1975-1985. It has looked like Japan, 1990-present….

So if you want to get into the economic prediction game, and you don't want to be sliced and diced by KrugTron's Blazing Sword, but you can't bring yourself to fully embrace Keynesianism, I have a suggestion: Take a good close look at Japan.

Meanwhile, the Austrians, goldbugs, and other assorted Robeasts will continue to provide us with our weekly entertainment.

Paul Krugman comments:

Domo Arigato, Mr. Roboto -- I Mean, Mr. Smith: Noah Smith says… my track record doesn’t come from knowing IS-LM, it comes from knowing about Japan. I think he has a point, but it’s not quite right.

First of all, many of the evil robots economic commentators I’ve sparred with clearly don’t understand IS-LM at all; in particular, they don’t understand that the effects of monetary expansion and budget deficits are different at the zero lower bound. Japan figures in this difference only to the extent that the Japanese experience demonstrated that the liquidity trap is real (pdf). Now, it’s true that my predictions have generally rested on the proposition not just that we were at the ZLB, but that we were likely to stay there for a long time. That doesn’t come out of the model. Where does it come from? Partly, indeed, from the Japanese experience…. But it also came from looking at the US experience, and noticing that recessions had changed character. Still, Smith is right that there’s a big divide between people who paid attention to Japan in the 1990s and those who didn’t.