Wednesday, April 2, 2008

Krugman the Austrian?

Alex Tabarrok of Marginal Revolution writes that he is "puzzled by the resurgence of Austrian Business Cycle theory among Sachs, Krugman, Baker and many others who you would not ordinarily associate with the theory." What's really puzzling is that Tabarrok thinks Paul Krugman has been subscribing to the Austrian Business Cycle Theory. It's true that Krugman has been quite vocal in blaming Alan Greenspan for the housing bubble. But Krugman has not blamed Greenspan for increasing the supply of money (i.e., lowering the fed funds rate), as Austrians would; he has blamed Greenspan for ignoring warnings about excessive subprime lending:

[Greenspan's rate cuts helped make the bubble possible, but I'm not sure there was any alternative. I remember the interest rate was down to 1%, and the economy was still losing jobs. What Greenspan did not do was listen to warnings about subprime. The Fed had substantial regulatory and moral-suasion power. They could have done a lot to limit the excesses. It's more what he failed to do during the boom than what he did in response to the last slump.
And again here:
I blame Greenspan for ignoring warnings about subprime and housing, but I still think keeping the Fed funds rate at 1% for a long time was justified by the economy’s weakness, which lasted until late 2003 or even beyond.
Based on the excerpt from Sachs' piece in The Guardian that Tabarrok quotes, it certainly seems like Sachs has a touch of Austrian. I don't know about Dean Baker's views, but I do know that he called the housing bubble very early, and not for purely Austrian reasons. But Krugman has quite clearly rejected the Austrian Business Cycle Theory as an explanation for the housing bubble.


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