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Financial Literacy

An Evening With the Anointed: What I Learned About Paul Krugman

  • Paul Krugman is a big name in the world of financial economics and is known for the New York Times columns and multiple books that he has published.
  • Today, Nicholas Vardy discusses the insights he took away from Krugman’s talk in London.

“So, did you just come from the Krugman lecture? Did you get him to sign it?” a woman who’d sat down beside me on the London Tube asked excitedly.

I was reading Paul Krugman’s recently published Arguing with Zombies: Economics, Politics, and the Fight for a Better Future on my way home.

Krugman has come a long way since I first started reading him.

I had been a fan of Krugman’s writing long before his now 20-year stint as a New York Times columnist. I still remember telling my colleagues in the late 1990s about Krugman.

Reading academic literature is often like stirring concrete with your eyelashes… But here was a guy who drew out the essence of complex economic issues crisply and cleanly.

Krugman’s “The Myth of Asia’s Miracle” remains one of my favorite pieces of writing by an economist.

Fast-forward 20 years, and my feelings about Krugman have changed.

Krugman is a brilliant guy. And I am jealous of his ability to make complicated economic insights accessible to readers.

But today, I agree with little of what Krugman says – and just as importantly, how he says it.

Here are three insights I took away from Krugman’s talk in London.

Krugman’s Mental Models

Love him or hate him, Krugman is a smart cookie.

At the same age that Krugman was well on his way to making significant contributions to international trade theory, I was slogging through my first year at Harvard Law School.

In his essay “How I Work,” Krugman credits his success to a specific approach to thinking about problems. (I have called these “mental models.”)

Using this approach, Krugman began by examining existing economic models and their assumptions. Then, starting from first principles, he built far simpler models from the ground up.

This allowed Krugman “to look at things from a slightly different angle, and in so doing to reveal the obvious, things that had been right under our noses all the time.”

This approach forced him to simplify and distill complex issues to their very essence. This reductionism is Krugman’s intellectual superpower.

At the same time, it is his kryptonite.

It allows him to shoehorn a complex reality into a model that explains everything. But apply this approach outside of economics, and it leads to a teenager-like hubris.

The implicit message becomes if you don’t understand why you should hold my opinion, well, you’re frankly just not very smart.

Try that approach with your spouse, and see how it works out for you.

Krugman Is One of the “Anointed”

Around the time I first came across Krugman in the 1990s, I also read The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy, a book by economist Thomas Sowell published in 1995.

Sowell calls those who promote an idealized worldview concocted out of fantasy “the anointed.” They tend to congregate at elite universities and media outlets.

Impervious to any real-world considerations, the anointed seal themselves off from any differing viewpoints. Any feedback from reality that contradicts this vision is ignored, suppressed or discredited.

This leads to an echo chamber of self-congratulation: a holier-than-thou, “wink-wink, nudge-nudge” smugness, liberally peppered with insults directed at the great unwashed.

This pretty much summarized the atmosphere at Krugman’s talk in London.

Over an hour and a half, Krugman…

  • Denigrated all conservative think tanks as propaganda mills funded by business interests
  • Dismissed anyone associated with them as “political hacks”
  • Called the right “both clever and evil,” unfettered greed explaining all their behavior.

The right were dummies, hostages to “zombie ideas” – long-dead creatures you can’t kill off. This included everyone from members of the Flat Earth Society to believers in the Laffer curve.

Krugman Would Be a Terrible Investor

I’ve written before how the very best investors readily admit their mistakes. That alone would make Krugman a lousy investor.

That’s because Krugman has been wrong. A lot. Yet he never admits it.

Krugman’s misfired predictions have become the stuff of legends.

Shortly after the election of Donald Trump, Krugman wrote, “So we are very probably looking at a global recession, with no end in sight.”

He repeated that sentiment on February 11, 2019, when he again predicted a global recession, warning, “We don’t have an effective response.”

Throughout 2019, Krugman also wrote multiple misdirected pieces aimed at Trump’s economy:

(Conveniently, none of these pieces made it into Arguing with Zombies.)

Krugman also cites academic studies from Thomas Piketty and Janet Yellen that say the highest marginal rate of income tax should be around 80%.

Yet Krugman ignores the exodus of tax refugees out of high-tax states like New York and California in favor of Florida and Texas.

Just last week, an economist friend of mine who teaches in California decamped across the border to Nevada. His marginal income tax rate was far lower than 80%.

The Bottom Line

Krugman has had remarkable professional success. He has won a Nobel Prize in economics. He has a penetrating intellect matched by an engaging writing style. He enjoys an influential public platform at The New York Times.

But today’s Krugman is unnecessarily sarcastic, abrasive and small-minded for a man of his age and intellectual stature.

Contrast Krugman with equally famous and important public intellectual Steven Pinker, a Harvard psychologist.

Pinker’s gentle manner is far less rhetorical yet no less compelling.

And I predict Pinker’s work will stand the test of time much better than Krugman’s polemics – or even his Nobel Prize-winning work in economics.

I remain a great admirer of Krugman’s work before his descent into political punditry.

But I have come to a reluctant conclusion…

Yes, Krugman may be brilliant. But he is far from wise.

Good investing,

Nicholas


Interested in hearing more from Nicholas? Follow @NickVardy on Twitter.


About

An accomplished investment advisor and widely recognized expert on quantitative investing, global investing and exchange-traded funds, Nicholas has been a regular commentator on CNN International and Fox Business Network. He has also been cited in The Wall Street JournalFinancial TimesNewsweek, Fox Business News, CBS, MarketWatch, Yahoo Finance and MSN Money Central. Nicholas holds a bachelor’s and a master’s from Stanford University and a J.D. from Harvard Law School. It’s no wonder his groundbreaking content is published regularly in the free daily e-letter Liberty Through Wealth.

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