Krugman has always been alert to the possibility of the extreme; perhaps it is the science-fiction fan in him. But he was also deeply influenced by what he observed in the nineties, when he was studying crises in international economics—in Japan, mostly, but also in Argentina, whose minister of the economy at the time was a man named Domingo Cavallo. Krugman knew of him—Cavallo was a star graduate student at Harvard when Krugman was at MIT—and had followed his career as he rose through the Argentine government. Cavallo liberalized the economy and drew overseas capital to Buenos Aires—“lionized by the financial press, the maestro of the Argentine miracle,” as Krugman recalls. But when the Argentine economy slowed, international investors withdrew, unemployment grew to 25 percent, and by 2003 an estimated 30,000 people in Greater Buenos Aires were surviving by scrounging for cardboard to sell to recycling plants.
If you were looking at the American economy during the eighties and nineties, you could enjoy a certain measure of serenity. Economists celebrated the Great Moderation—recessions were muted, fluctuations less pronounced—and economic science seemed sophisticated enough to permit policy-makers to predict and avoid catastrophe. “If you were domestic, the image you had was Alan Greenspan heroically fighting off all problems,” Krugman says. But if your focus was international, you saw crisis everywhere: Mexico, Asia, Russia, Brazil, Japan. And then there was Argentina, where the state stepped back just when it was needed most. If Domingo Cavallo, one of the elect, could preside over this collapse, then perhaps there but for the grace of God went Alan Greenspan. What Krugman took from Argentina—and what he thinks even liberals in Washington missed—was “a certain level of understanding,” he says, “that important people have no idea what they’re doing.”
“This is absurd,” says Larry Summers. “Excuse me, I think I’m the guy who pushed President Clinton and the IMF to commit $40 billion to Mexico—the largest piece of assistance since the Marshall Plan. I think I’m a guy who was central in concerting all the banks with respect to the Korean crisis. You can argue the merits of the choices we advocated, but the idea that somehow I’m unaware of the fact that there are international crises? Ludicrous.” Some problems, Summers says, can’t be best understood only from afar. “Tim Geithner was the U.S. Treasury’s man in Japan during the crisis in the late eighties and early nineties while Paul was doing trade theory.
“Paul hasn’t liked any president or any Treasury secretary,” Summers continues. “He always gravitates to opposition and dramatic policy because it’s much more interesting than agreement when you’re involved in commenting on rather than making policy. He savaged the early Clinton administration from the right, blistering Laura Tyson and Bob Reich, and then moved to savage the more liberal Obama administration from the left. He liked the Bush administration least of all. The only politician I remember him praising in the last sixteen years is John Edwards.”
I ask Summers what he thinks is Krugman’s underlying complaint with the Obama administration. “Paul may be the smartest and most creative applied economic thinker of this era,” he says, “but there is some element of him that is like the guy in the bleachers who always demands the fake kick, the triple-reverse, the long bomb, or the big trade.”
The two economists have known each other since the late seventies, when they were both graduate students in Cambridge, and there were moments in conversation with Krugman that I began to suspect he viewed Summers as a one-man control group for his study of himself. They each share a high assessment of the other’s intellect (“Larry’s extremely smart—ask him and he’ll tell you,” Krugman says). Krugman’s sense of humor is built upon self-deprecation, and sometimes Summers’s sense of humor is built upon deprecating Krugman, too. In the early eighties, when the two worked together in the Reagan administration, Krugman realized that Summers had a talent for effectiveness—winning meetings, organizing subordinates, convincing economic novices of his point of view—that he himself could not hope to match. Summers became the insider and Krugman the outsider.
Krugman has been arguing with Summers about policy, he says, for most of their adult lives, and their arguments have often followed the same line: “Let’s put it this way,” Krugman says. “When things go crazy, my instinct is to go radical on policy, and Larry’s is to be a little more cautious.”
Summers concedes that a bigger stimulus would have been the optimal policy in 2009. “The Obama administration asked for less than all that it recognized pure macroeconomic analysis would have called for, and it only got 75 cents on the dollar. But political constraints and practical problems with moving spending quickly constrained us. The president’s political advisers felt, and history bears them out on this since the bill only passed by a whisker, that asking for even more would have put rapid passage at risk.” But Krugman also wanted a radical government takeover of the floundering banks, and even many liberal economists now believe this was a panicked response to a moment of crisis. The banks soon recovered without it. Here, “the Obama administration’s somewhat messier confrontation with reality averted the disaster that would have come with nationalization,” Summers says.