Should Paul Krugman Return his Nobel Prize? (BJ)


benedikt-dlPaul Krugman, Nobel Prize winner in 2008, has shown special interest in Iceland. Or should I say, he often uses Iceland as evidence that his theories are right. That would be fine if he stuck to the facts. Unfortunately, he just states that Iceland is on its way out of the woods, regardless of what is happening here.

Now if Krugman were an ordinary Nobel Prize winner, this would not matter much. I imagine most of them write articles in their scientific journals, evaluated by peers. Most likely Mr. Krugman’s academic work is of value. However, Krugman is known to the public for his column in the New York Times. I see that often his articles are very high on the most read list. Many probably think: "This guy got a Nobel Prize. He must know what he is saying."

And he probably does. That does not mean what he says is correct.

Krugman’s commented on the Icelandic economy when the banks started tumbling in the fall of 2008. He praised the government for putting up money to buy a 75% share in Glitnir bank: "Notice, by the way, that it was an equity injection rather than a purchase of bad debt; I approve.“

A few days later the deal fell through and Glitnir was the first Icelandic bank to go bankrupt.

In March 2008 Krugman asked: "Is Iceland the victim of a financial conspiracy?“

Conspiracies are good. Remember that even if you are paranoid, it doesn’t mean that you are not being followed.

On June 30 2010 Iceland is once again on the columnists mind: "Iceland is, of course, one of the great economic disaster stories of all time.“ Mr. Krugman got that right.

He goes on: "An economy that produced a decent standard of living for its people was in effect hijacked by a combination of free-market ideology and crony capitalism.“

Why would free market ideology have something to do with Iceland’s downfall? Most Icelandic politicans want to make sure the country is not as free as our neighboring countries. And they have succeeded. Blame incompetent politicians, crooked businessmen, corrupt journalists, the Central Bank of Iceland or the Financial Surveillance Authority. Not free market ideology.

Crony capitalism? Up to a point yes, especially when the banks where privatized in 2002 under Prime Minister David Oddsson. His successor, Geir H. Haarde, later apologized for the mistakes made when the banks were privatized.

But hardly any politician spoke against the sale of the two state owned banks, Landsbanki and Búnadarbanki, at the time. Even the chairman of the Left Green Party, Steingrímur J. Sigfússon, now Minister of Finance, said that he felt that "these men" (Björgólfur Gudmundsson and his son Björgólfur Thor Björgólfsson) "well deserved" the bank.

Have a bad one

In his June 30 article Krugman tried to prove that Iceland was better off than Ireland, Latvia and Estonia by looking at the GDP growth. By looking at what happened from Q4 2007, one year ahead of the October 2008 crash, Iceland seemed to be doing best. By starting in Q4 2008, Iceland and Ireland were about the same.

Krugman concluded by saying: ”The moral of the story seems to be that if you’re going to have a crisis, it’s better to have a really, really bad one. Otherwise, you’ll end up taking the advice of people who assure you that even more suffering will cure what ails you.“

This sentence is obviously made by someone who knows nothing about what has happened in Iceland after the crash.

Now, almost three years later, people are still feeling numb. It is the same feeling you (and we all) had after September 11, 2001. Except that it has lasted a long time. Unemployment is still high, inflation is rising, the government is saying we will have currency restrictions for four more years, almost all of the biggest companies needed to go through restructuring, many went bankrupt, the banks own most of the companies that survived. More on this later.

Krugman seems to think that the government of Iceland could fix the exchange rate: “Iceland devalued its currency massively and imposed capital controls.” The first part is false. In fact the Central Bank under David Oddsson tried keeping the ISK fixed in October 2008. The plan failed, since everyone wanted out of the króna. The capital controls have kept the currency value up, exactly the opposite of what Krugman says. I understand that Krugman is against free market ideology, but he must understand the theory of supply and demand.

The truth about the Icelandic economy is that because we got economic aid and advice from the IMF the economy has stopped sliding. But we are still far behind most of our neighbors with their stable currencies.

In February 2011 Krugman wrote: “Iceland has more or less resolved its crisis; Ireland, famously, has not, as shown by the CDS spread.”

How can a Nobel Prize winner say something like that?

Iceland is very far from solving its crisis. Nothing new is happening in Iceland. Exports rise only in monetary terms. The price of fish and aluminum, our two main exports, luckily is high. But we are not producing any more than before. Before the crash our króna was so strong (not by choice but by supply and demand) that our export industries suffered. Even after the crash investment is extremely low, in part thanks to our left wing government that thinks foreign money is bad. GDP went down by 3.5% in Iceland last year. The Irish economy contracted by 1.0%. Not that I would feel any better if they had done worse than we did.

The following graph shows how a number of countries have done since the crises in terme of GDP.

gdp_2008-2022Source: Statistics Iceland. Eurostat. (Click to enlarge)

Unfortunately Iceland is at the bottom. Very close to Ireland.

Krugman continues to babble about how wonderful Iceland’s recovery is. Unhappily he is wrong.

For the average Icelander the following has happened because of the economic disaster: Real salary has gone down by 15%. Debt indexed to the consumer price index has risen by 30%. Debt indexed to foreign currency has more than doubled. Luckily, the Supreme Court said that type of indexing was illegal, but instead the debt grew by only 30-40%. Pension funds lost about 25%. The stock market vanished. Less than five companies survived. Housing prices fell by more than 30% in real terms. Unemployment rose to 8%, more Icelanders are now emigrating than coming back.

Mr. Krugman said: “Although Iceland is generally considered to have experienced the worst financial crisis in history, its punishment has actually been substantially less than that of other nations.”

How much worse could the punishment get?

So Mr. Krugman if you need to invent facts about some country to support your theories, at least stop using Iceland.


Benedikt Jóhannesson - [email protected]

Benedikt Jóhannesson is the editor of Vísbending, a weekly newsletter about business and economy in Iceland.

Views expressed here are the author's own and do not necessarily reflect the opinions of Iceland Review.