Disagreeing with Krugman

by Brien Jackson

One thing that tends to create problems for me in sorting through issues outside of my realms of expertise is my healthier-than-most respect for the expertise of others. It’s nice when there’s a consensus, at least amongst ideological brethren, on these matters, but when peole like Paul Krugman and Brad Delong are disagreeing on something, what am I to do?

Well, for starters, boil down the disagreement to matters more on my footing, if possible. And conveniently enough, this seems to be where most of the disagreement on the Geithner bank plan is. Delong thinks the assumptions policy makers are making are probably somewhat sound, and the plan they’ve developed fairly well constructed to address the problem as they see it. Krugman, on the other hand, thinks that they’ve misconstrued the problem, so any plan made on those assumptions must be flawed. But as far as I can tell, he thus far hasn’t contended that the plan is a bad one if the assumptions are accurate, which signals to me that the difference of opinion centers on these assumptions where, alas, you’ll have to find your own way, absent making silly judgments about which experts are better than others forever and always (as I think a lot of progressive bloggers have a tendancy to do with Krugman).

What’s more, Krugman seems to be basing a lot of his analysis on his estimation of the political variable in question. And, to put it as gently as I can, it’s important to remember that political calculations are certainly not Paul Krugman’s area of expertise. Indeed, for as good as he is with economics, he tends to be eqaully bad in matters of politics. His column today, for example, is mostly based around the fear that we won’t have the political will to undertake a different course of action should the Geithner plan fail, a fear that I simply don’t see any merit to. As A.L. explains:

I wouldn’t for a second presume to take issue with Krugman’s economic analysis (I’m just a lawyer), but to the extent his opinion is based on his assessment of the current political climate, I think he’s probably wrong. Saving the financial system isn’t like enacting health care reform. With something like health care, you may only get one shot. If the public sours on your idea, they have the status quo to fall back on and the odds are that nothing will get passed. But if the Geithner plan doesn’t work, the financial system is still going to need rescuing and nobody is going to be content to do nothing. Obama would likely pay a price politically, but everyone would still be clamoring for him to do whatever it takes to save the economy. And nationalization would be the obvious next option.

I think this is mostly correct and, from a political standpoint, nationalization is a much trickier proposition than from a policy standpoint. It will certainly help that if it is seen as a true measure of last resort, and if the necessary scale is as small as possible. So, with that in mind, I’d say the best case scenario for the Geithner scenario is that it shores up some less troubled institutions, leaving them in decent shape going forward, and as such weeds out the truly bad banks that will subsequently need to be nationalized. This would both minimize the investment necessary for nationalization and demonstrate that nationalizing is truly a measure of last resort, with no other options left on the table.

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