When economists fight, there's blood on the spreadsheets...

You think economists are nerdy blokes with horn-rimmed glasses and distant faraway looks with theories to account for why the economy didn’t work out the way they said it would, right?

Well, you’re wrong.

Economists are really prizefighters who are never shy of squaring up for a streetfight in defence of their theories about the economy - even if things didn’t work out the way they said it would.

Overnight, Nomura Securities’ chief economist Richard Koo let rip against Nobel Prize-winning economist Paul Krugman, who writes an influential column in the New York Times.

The debate is about ways to get the down-and-out US economy on its legs, now that the second round of Quantitative Easing (QE2) - the policy of maintaining near-zero interest rates in the hope of reviving the economy - is about to end.

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Koo, who favours fiscal stimulus - that is, direct government spending - as opposed to monetary stimulus (tinkering with interest rates), claims with more than a touch of exaggeration that the blame for the failure of QE2 rests with Krugman.

Koo wrote in a research report:

A senior Obama administration official I spoke with last October, just before QE2 was unveiled, concurred with my view that the US was in a balance sheet recession but cited an article written by Professor Paul Krugman just before our meeting as support for his position that the situation could still be dealt with using monetary policy.

That article in the New York Review of Books, which Krugman co-authored, made the case that Koo’s argument in favour of fiscal stimulus to revive the US economy was persuasive, but that such a fiscal stimulus would be “impossible to push through” given the partisan political climate.

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Koo now laments that the US administration was persuaded by Krugman’s thoughts rather than his own - and that Fed Chairman Ben Bernanke then embarked on QE2, which has demonstrably failed to life up the US economy.

Koo points out that just as he had predicted, QE2 had failed to revive the real economy and housing prices, although it did life stock and commodity prices. Unemployment in the US is edging back up.

[caption id=“attachment_22257” align=“alignleft” width=“380” caption=“Nobel Prize-winning economist Paul Krugman(L) and financial historian Niall Ferguson(R). Image: Reuters”]  [/caption]

Krugman hits back

Koo’s attack drew a spirited response from Krugman, who wrote on his blog that Koo had misrepresented his views on the merits of monetary stimulus over fiscal stimulus.

Koo, he wrote,“seems to be attacking a straw man named ‘Paul Krugman’ who bears little resemblance to the Princeton economist of the same name.” He pointed out that in fact, his argument was that given the grim economic situation, there was room for “all players in the game” to do whatever they can. And that it would be a big mistake to count on monetary policy alone to revive the economy; and “unconventional monetary policy should go along with fiscal stimulus.”

Krugman vs Niall Ferguson

The flak that Krugman drew from Koo is just one part of it. The intellectual war of words between Krugman and financial historian Niall Ferguson is the stuff of legends.Again, their disagreement relates to whether the US now needs to spend more to prop up its economy (which is Krugman’s point) or begin go cut back on deficits (in the way the UK has begun to do, as Ferguson advocates). In other words, Stimulus vs Austerity.

Krugman argues that while long-term deficits need to be reined in, cutting back in the short term would be folly.The two have been at it since 2009, but in recent months, it’s become particularly acrimonious.

Just last week, Ferguson, writing in Newsweek, pointedly named Krugman as belonging to a club that argues that countries that run up deficits forever (the Deficits Forever Club). He wrote:

Members of the Deficits Forever club are intellectually lazy when they assert that the UK economy is growing slowly because austerity doesn’t work, implying that things would be better had the spending binge continued. Maybe. But maybe not. A responsible politician wouldn’t take the gamble because the costs of being wrong are too high. Just ask the Greeks.

The real lessons for the United States are clear. Those who run up debt in good times can borrow only so much more when a recession strikes. And heavily indebted governments postpone fiscal stabilisation at their peril. If you wait to reform until the bond market calls time, you are-to use a technical term from economics-screwed.

Krugman vs Stephen Roach

There’s evidently something about Krugman that economists love to hate. Morgan Stanley economist Stephen Roach has repeatedly challenged Krugman’s characterisation of the Chinese renminbi as grossly undervalued, and Krugman’s advocacy of US import tariffs against China.Roach argues that out that the US has a trade deficit not just with China but with 89 other countries, and traces US’ economic ailments to a poor record of saving.

Last year, when the argument got a little too hot, Roach said it was time to “take the baseball bat” to Krugman’s arguments. In Hong Kong a few months ago, Roach came out swinging. More here.

Why can’t economists seem to agree? The answer to that has proved somewhat elusive. Even in the best of times, economics isn’t an absolute science, and in these extraordinarily challenge times, when the limits of economic policies are being tested as never before, we may be in for more such wars.

Perhaps it’s time for practitioners of the Dismal Science to settle things in a sporting fashion, with boxing gloves inside a square ring, as famed economists John Maynard Keynes and Friedrich Hayek do in this bonus hip-hop video (courtesy: Econstories.tv)