Paul Krugman Changed His Mind About Bond Vigilantes — One Of The Most Important Issues In The Economy Today

paul krugman

[credit provider=”Business Insider”]

There’s a weird story floating around about Obama, the Fiscal Cliff talks, and the fear of bond vigilantes.According to WSJ’s report on how the Fiscal Cliff negotiations broke down, Barack Obama told Boehner that without a comprehensive debt deal, interest rates could spike, because investors might lose faith in our debt.

Krugman was really bothered by this, because it’s nonsense. If there’s no deal, and the country goes into recession, rates will almost certainly drop (as they did after the debt ceiling/downgrade/confidence shock of summer 2011).

Anyway, economist Greg Mankiw has called out Krugman (via @dutch_book) for contradicting himself — specifically something Krugman said back in 2003, when Bush was the President, and the deficit was huge, and Krugman was warning about it.

Says Mankiw:

 I am having trouble reconciling these points of views.  Has Paul changed his mind since 2003 about how the bond market works?  Or are circumstances different now?  If anything, I would have thought that the fiscal situation is more dire now and so the logic from 2003 would apply with more force.  I am puzzled.

Anyway, there’s an answer to this question about whether Krugman has changed his mind. He has. We asked him about it in an interview earlier this year.

“My thinking has evolved,” says Krugman. “If you haven’t updated your views in the face of new experiences, you’re not doing your job.”

Specifically, coming to recognise the importance of a country having its own currency (unlike, say, Greece) is something that helped shape Krugman’s thinking. So yes, he has changed his mind, and admitted it. And furthermore, even if he hadn’t, it’s not entirely clear that the deficit situation is more dire today. The currency question aside, Krugman has argued for a while that running deficits does not cause a problem with the private sector so inclined to save, etc. In 2003 we were not in that liquidity trap, and there was no reason to be spending as much as we were.

Here’s our full discussion with Krugman on deficits.