Paul Krugman’s predictions from 1998

by on December 24, 2010 at 7:26 am in Economics, History, Political Science, Web/Tech | Permalink

David Henderson directs us to these.  David is skeptical, and so is this source (and Megan), but I think Krugman was more right than wrong, at least if you allow him some slight rewordings.  Here were his picks, noting that he offers more discussion and context at the first link:

* Productivity will drop sharply this year. Nineteen ninety-seven, which was a very good year for worker productivity, has led many pundits to conclude that the great technology-led boom has begun. They are wrong. Last year will prove to have been a blip, just like 1992.

* Inflation will be back. Wages are rising at almost 5 percent annually, and the underlying growth of productivity is probably only 1.5 percent or less. Sooner or later, companies will have to start raising prices. In 1999 inflation will probably be more than 3 percent; with only moderate bad luck–say, a drop in the dollar–it could easily top 4 percent. Sell bonds!

* Within two or three years, the current mood of American triumphalism–our belief that we have pulled economically and technologically ahead of the rest of the world–will evaporate. All it will take is a few technological setbacks or a mild recession here while Europe or Japan recovers a bit.

* The growth of the Internet will slow drastically, as the flaw in "Metcalfe's law"–which states that the number of potential connections in a network is proportional to the square of the number of participants–becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's.

* As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase information economy will sound silly.

* Sometime in the next 20 years, maybe sooner, there will be another '70s-style raw-material crunch: a disruption of oil supplies, a sharp run-up in agricultural prices, or both. And suddenly people will remember that we are still living in the material world and that natural resources matter.

I'll number them 1-6.  On #1, Krugman should not have committed to the time frame of one year, but overall, in my view, productivity hasn't done well since he wrote.  A lot of the measured per worker gains come from firing unproductive people, or overvaluing the contributions of the finance, health care, government consumption, and education sectors, not from much expanding the actual production possibilities frontier.  I'll be writing more on this, and while it involves some complex issues, overall I side with Krugman.

On #2, Krugman was wrong about inflation returning, in part because he was overly optimistic about wage growth.  #3 is debatable, and while one of the modal claims is wrong about Europe and Japan, he was not obviously wrong about the United States. 

On #4, we may soon be reaching "peak internet."  Parts of #4 and #5 may sound ridiculous, and Krugman did underestimate how much people have to say to each other, and the future of the information economy.  Nonetheless, keep in mind the information technology sector has not contributed net job growth over the last decade.  Smart, curious people consistently overestimate the economic impact of information technology, in part because it improves their own lives so much.  #6 turned out to be true.

That's a mixed record, as anyone would have, but more insightful I think than the critics are granting.

Many of Krugman's current false (modal) predictions stem from his claims that if left-wing politicians would "get tough" and take their case directly to the public, good progressive results will follow.  I view that claim as a move into a non-scientific mode of thought.  While it is sometimes true, usually it is not, and there is plenty of political science literature on how hard it is to form a winning political strategy through rhetoric.  

Without such a view, however, Krugman would have to entertain the possibility that moderate outcomes, or sometimes observed outcomes, are more likely second-, third-, or fourth-best efficient than he would like to admit.  If you took away this one rather weak prop of his worldview, he could quite readily turn into a conservative, of course in the literal rather than the right-wing partisan sense.

*daniel December 24, 2010 at 4:38 am

Those a bunch of unbelievably gracious interpretations of what looks to me to be a guy saying some stuff, being right a bit, being wrong a bit, and being ridiculous a bit.

Andrew December 24, 2010 at 4:53 am

'Information economy' does sound silly, but not the way I assume he means. The reason the internet is going to be even more transformational than even the internet pundits thought (and ironically why they were wrong about profitability) is the freedom and freeness of the information.

Bill N December 24, 2010 at 5:43 am

Consider worldwide rather than just domestic and you might determine that Internet's effect on employment has been breath taking.

Krugman is quite wrong on the "flaw" missing both the essential insight of selective attachment, and the real practical constraint. It's not that that people don't have anything worth saying, but that the individuals, nodes in this network, have limited throughput capacity. I addressed this in a teamwork context some years ago, in a CrossTalk article. http://www.crosstalkonline.org/storage/issue-archives/20...

Productivity will continue to be a challenge as employment moves from agriculture and manufacturing to a knowledge based economy. This is not a new insight, but the Process Revolution, is just beginning. http://www.sei.cmu.edu/watts/

TA December 24, 2010 at 6:17 am

Regarding productivity: Here are the BLS numbers for non-financial corporations, average annual gains, 4th quarter to 4th quarter:
1958 to 1969, 2.4%
1969 to 1082, 1.5%
1082 to1996, 1.9%
1996 to 2006, 2.8%
2006 to 2009, 2.5%
I'm wondering what you're going argue here.

thepolemarch December 24, 2010 at 6:29 am

Among your usual great posts, Tyler, this one looks flimsy and weak at best.

Bill December 24, 2010 at 6:53 am

Look at each point and place yourself in 1998.

Internet: Just before the internet bubble burst when these contrarian internet statements were made. This was an overhypped period.

Productivity: Productivity did decline. Inflation rose but there was then there was a crash, not perpetual inflation.

American Triumphalism: Took longer for American triumphalism to recede, but it has.

Resource constraints: In the next "twenty years" statement in 1998 about a crunch in resources doesn't sound off either, ala Opec, Copper, iron ore.

Internet IT economy: He missed the boat on the use of internet for social networking, but in 1998 social networking as marketing wasn't developed. We had a one to many nodal model, and not a many to many network model. Otherwise, we would have had facebook then. (In fact, if you want to go to the some of the earliest work on social networks, look up some of the early papers at Caltech around 2001. Social network analysis, by the way, became a federally well funded discipline following 9/11 as a way to track and disrupt terrorist organizations.)

The one prediction, that Germany would do better than the US, because it invested in education and training in manufacturing, unfortunately may come true.

But, to be fair, we should take some other economic and social prognosticators and see how well they did.

Mike Giberson December 24, 2010 at 7:14 am

Re: "another '70s-style raw-material crunch: a disruption of oil supplies, a sharp run-up in agricultural prices, or both."

We haven't seen a disruption of oil supplies since Krugman's predictions. High prices in 2008 were not the product of OPEC policies but rather driven primarily by demand growth and expected continuation of demand growth. Not a "70s-style" crunch.

Agricultural prices did have a "sharp run-up" in 2007/2008, much like the sharp run-up in agricultural prices that happened in 1996 and previously from time to time. Again, nothing especially 70s about it.

Nonetheless, the 2008 energy price spikes did seem to spur some greater interest in natural resources (though I'm not sure how we'd measure that shift).

k December 24, 2010 at 8:07 am

Why are Paul Krugman's predictions in 1998 important? His use of economic geography is vastly more important and insightful!

Merry christmas everybody!

Andrew Fischer Lees December 24, 2010 at 8:53 am

2 out of 6 of these are falsifiable predictions. I say that's uncommonly courageous for an academic – good work PK. I wish you did this more often

April Blossom December 24, 2010 at 9:30 am

I think PK was surprisingly right about many things. I agree with BIll (10:53) that his comments need to be placed in perspective :

i) 1998 was the height of the internet boom. He went too far in the other direction, but placed in context, the substance of his comments have turn out to be true. Yes, the world has changed, but not as radically as people expected. The Dow isn't at 30,000.

ii) He was exactly right about natural resources.

iii) Yes, 1999 was a turning point in some ways as far as the importance of the US economy on the global stage. Most of this has to do with strong growth in Asia (China, India etc.) and Brazil, perhaps less with anything happening in Western Europe.The US is still extremely important, but the world is changing in ways that are obvious to most people.

libfree December 24, 2010 at 10:16 am

In order to not find the internet claims "comically wrong" I'd have to not trust my own lying eyes. I've watched business processes become robust and efficient. The internet penetration is so great that my state is looking to sell lottery tickets on smart phones.

Bill December 24, 2010 at 11:07 am

Here is a prediction a blogging economist made in 2007:

“I think blogs are essentially replacing the op-ed and the newspaper. And I think three years from now most people who learn economics will be learning it through blogs.”

True or false?

Here's the link to the prediction: http://bayesianheresy.blogspot.com/2007/03/tyler-

Here's a hint as to the identity of the first name of the economist: "Tippecanoe and "—-" too."

Colin December 24, 2010 at 12:15 pm

It's blatantly wrong to use that link on information jobs to say that information technology jobs shrunk over the last decade. The vast majority of IT workers do not work in the information sector. For instance, an IT consultant at IBM or accenture would not be included, nor would the in house IT department of an average company.

mulp December 24, 2010 at 4:06 pm

david triggered the telling point on fax – if you are as old as I am, you remember the "do not fax" lists and laws prohibiting invading fax privacy. Not to mention the assumption you have a fax in order to engage in any commerce in the world.

fax sped up many business transactions tremendously and reduced costs – no more need to waste two days and the expense of two overnight deliveries- fax the quote, and get back a few hours later the PO referencing the quote, and the order ships that night.

At the time, I had net access via my employer so I thought fax was really cumbersome, but commercial use of the Internet was prohibited for more than another decade.

France had teletext, with everyone in France connected, but hey, what did the French know.

Six Ounces December 24, 2010 at 5:49 pm

Oh please! I see this same drivel from National Enquirer psychics.

Make all those same predictions TODAY and you'll find a similar batting average in 5-10 years.

If his prescience is so advanced, why didn't he become fabulously wealthy on correct financial wagers. Did he put ANY money where his mouth is?
Let me hazard some predictions:

Krugman has never worked a real private sector, unsubsidized job in his entire life. He has never owned a business. He's never been unemployed, homeless, or broke for any stretch of time. He's never worked a minimum wage job. He's never lived in a predominantly ethnic minority neighborhood. No one has ever relied on him personally for investment advice or let him manage their portfolio. No company has ever relied mainly on his counsel about the economy for their investment and employment decisions.

If he's done any of those things, I'd love to see the tangible results and separate his contributions from all other factors. I sincerely doubt his MRP covers his wages, and I doubt his predictive record justifies his arrogance!

indianajim December 25, 2010 at 7:29 am

My prediction ABOUT Krugman:

Krugman will continue to spout Keynesian "solutions", interventions, and every more stimulus packages, hence becoming even more an object of derision to all those who cherish individual liberty and personal responsibility than he already has become.

Benny Lava December 25, 2010 at 9:34 am

Some of these predictions are far off the mark, and some of them close to target. Seems pretty disingenuous of McMegan to dismiss predictions like:

"Within two or three years, the current mood of American triumphalism–our belief that we have pulled economically and technologically ahead of the rest of the world–will evaporate."

"In 1999 inflation will probably be more than 3 percent; with only moderate bad luck–say, a drop in the dollar–it could easily top 4 percent."

"Sometime in the next 20 years, maybe sooner, there will be another '70s-style raw-material crunch: a disruption of oil supplies, a sharp run-up in agricultural prices, or both. And suddenly people will remember that we are still living in the material world and that natural resources matter."

And then to pat yourself on the back for being wrong about the housing market by 3 years! What a loser.

Jim December 25, 2010 at 4:23 pm

"By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's."

This might well be the most horribly wrong thing ever suggested. It needs to be printed out, bronzed, and brought up every time someone quotes Krugman approvingly.

And #6 — 'some time in the next 20 years the world will run low on something' ?? Wow, that's a brilliant forecast, right there.

Andrew December 26, 2010 at 1:00 am

You guys are comparing Paul Krugman to Glenn Beck and then concluding that it isn't a comparison?

Andrew December 26, 2010 at 1:59 am

If he re-introduces prediction #2 today he'll be closer.

If Krugman didn't predict the inability of people to repay debts, he didn't predict the only thing worth predicting.

Only after we reach 'peak internet' will the full effects be obtainable. Until then we are still building out infrastructure and the internet is primarily cost reducer. When a new tool is still cool, it's still not a tool. That's why he's wrong on this one.

Jim December 26, 2010 at 3:22 pm

y81:

Zing.

And thank you.

sipphound December 27, 2010 at 4:35 am

I'm afraid you have been "Fooled by Randomness" – I doubt Krugman knows much more than any of the readers. Allow me to suggest that you read Nassim N. Taleb's book. It will help you to look at things differently – far more valuable.

m December 27, 2010 at 12:01 pm

"I think Krugman was more right than wrong, at least if you allow him some slight rewordings."

Right, and if you allow some slight rewordings to Das Kapital, it reads like "The Wealth of Nations"…

Doc Merlin January 2, 2011 at 6:00 am

jb and y81 win the thread.

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