From time to time I have been critical of Professor Paul Krugman, the Nobel Laurette from Princeton University and the New York Times. Recently I criticized his use of the babysitter model of the economy. However, Robert Blumen brought to my attention that I had unfairly criticized Krugman in my paper on the deflation phobia, Apoplithorismosphobia. I wrote: “Krugman falls into the gibber-jabber of sophomoric circular reasoning” and then quoted Krugman:
“If you think about this a bit, the story gets even worse. After all, prices are falling because the economy is depressed; now we’ve just learned that the economy is depressed because prices are falling. That sets the stage for the return of another monster we haven’t seen since the 1930’s, a “deflationary spiral,’’ in which falling prices and a slumping economy feed on each other, plunging the economy into the abyss. It’s pretty scary stuff, not just for Japan but for the rest of us. If Japan slides into the abyss, that will have a direct adverse effect on our economy dwarfing anything the terrorists did.” (Krugman 2002d)
Robert Blumen correctly points out that Krugman is discussing a circular process, but he is not using “circular reasoning.” Krugman is actually using reasoning based on a positive feedback cycle. His analysis is still wrong, but for my mistake I fully apologize to Professor Krugman.
In fact he is so wrong that I also wish to apologize to sophomores everywhere. Their errors on economics exams are to be expected and are not harmful. Krugman’s errors cannot be forgiven and are truly dangerous.