Krugman talks economic models in UMass lecture

  • Economist Paul Krugman delivers the 2017 UMass Amherst Gamble Memorial Lecture, Thursday, at the Mullins Center. GAZETTE STAFF/JERREY ROBERTS

  • Nobel Prize-winning economist Paul Krugman delivers the 2017 UMass Amherst Gamble Memorial Lecture, Thursday at the Mullins Center. —GAZETTE STAFF/JERREY ROBERTS

For the Gazette
Sunday, October 29, 2017

AMHERST — How economic models can serve as a guide to future financial crises — and their track record in doing so — was explored in a lecture Thursday by Nobel Prize-winning economist Paul Krugman.

Krugman has been an op-ed columnist for the New York Times since 1999 and is a professor at the City University of New York’s Graduate Center. In addition, he received the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade theory.

Despite these credentials, Krugman conceded to the crowd of some 1,500 at the University of Massachusetts’ Mullins Center, “I was never entirely sure that I wasn’t a phony until the Great Recession.”

In fact, he said, anyone paying attention to the old-fashioned macroeconomic models he learned as a student could have predicted the 2008 financial crisis, fueled by banks eager to cash in on a housing bubble. After this moment, he realized the models he learned were, in fact, useful.

“Why did we seem so ill-prepared to deal with the things that happened?” he asked.

Part of the reason, he claimed, is that economists turned their backs on the old models from the 1960s and early ’70s. New models were developed to make economic predictions based on what economists determined to be rational behavior.

However, Krugman said in a press conference before the lecture, “some old-fashioned models which were discarded, because rational people wouldn’t behave that way, actually turned out to be pretty much right.”

Economics is not always rational. Krugman suggested wage cuts as an example. Rationally, a business would want to cut wages during a recession, to save expenses. However, he said, businesses can’t realistically cut wages, because it would lessen morale. Workers get angry.

“It’s a little bit like why people get angry if you jack up the price of umbrellas when it’s raining,” Krugman said. It may seem profitable for businesses to boost prices, but angry customers won’t want to buy the umbrellas.

If economists had actually talked to businesses instead of basing models on purported rational behaviors, Krugman said, we might have been better prepared for the 2008 crisis.

“If you had learned your economics in the ’60s, or early ’70s, which, kind of, I did, you would have gotten a lot of things right,” Krugman said in the press conference.

To get things right in the future, Krugman said, economists should talk to businesses, use microdata and history to make predictions, and try not to obsess over rigorous models of rational behavior. By simply talking to people, he said, economists can obtain information that they may not have gotten from math or models. “You can be extremely precise, and precisely wrong,” he said.

Asked by a member of the press if he sees another recession on the way, Krugman said he hasn’t noticed any obvious triggers.

“There’s always something coming,” he said. “The fact that you don’t see where the next recession is coming from doesn’t mean there isn’t going to be one.”

For all of the economics students in the crowd, Krugman said, “I would urge everybody who’s interested in studying economics to keep doing it, because we need more of it and better.”

Krugman didn’t delve too far into the current economic and political climate, which disappointed some attendees. “We were expecting a different kind of talk,” said Karen Smith of Pelham. She expected “something more key to today’s politics.”

Mark Berson of Greenfield said he wished Krugman’s language was a bit more colloquial. “I appreciate the man,” he said. “(But) some of the economics was difficult to follow.”

Jonathan Pineo of Bernardston also said he wished the talk related to more current political events, and was in “layman’s terms.”

The annual Philip Gamble Memorial Lecture was established by the family of Philip Gamble, who was an economics faculty member from 1935-71, and a department chair from 1942-65. Previous speakers have included Federal Reserve Chair Janet Yellen and former Secretary of Labor Robert Reich.

Editor’s note: This story was changed on Oct. 29 to correct the attendance figure to 1,500.