August 12, 2005

#188: You don't know it's a bubble 'till afterward...

P. Krugman


In Safe as Houses (08/12/05) Paul Krugman takes another shot at the U.S. housing “bubble,” apparently forgetting that bubbles are defined after they burst, not before. The trail of “predicting bubble bursts” is littered with some pretty distinguished corpses. The most famous, perhaps, is Fed Chairman Alan Greenspan and his “irrational exuberance” speech concerning the stock market in late 1996. At the time the Dow Jones Industrial average was only 60 percent of what it is today. In another case Professor Robert Shiller of Yale University wrote a book in 2000 entitled “Irrational Exuberance.” Even though he “got it right” in the sense that the stock market bubble did burst shortly after his book appeared, people forget that this was Shiller’s third bite at the apple. He had predicted stock market bursts twice before–once in the early 90s and again in the mid 90s. Perhaps Krugman has a similar strategy. Like the stopped clock that is always right twice a day–if you just keep at it your time will come.

We have no idea if he’s right or not about a housing bubble. But if his track record on other scare stories is any guide (remember the many “deflation” and then “stagflation” columns) we doubt it.

One other thing is bugging us that Krugman mentions again today (and the NY Times editorial page recites like a mantra). They keep claiming that this recovery is deficient because the recovery data are weaker than in most other post-war recoveries. Well, of course they are! It’s because they follow the shallowest recession in the post-war period. If you want to see strong recovery data, you need a deep recession first. Is there anyone on the planet who finds this surprising?

[The Truth Squad is a group of economists who have long marveled at the writings of Paul Krugman. The Squad Reports are synopses of their discussions. ]

Posted by John Weidner at August 12, 2005 11:00 AM
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