This article discusses a simmering feud among five of the most prominent economists in the world (two of them Nobel Laureates). It was prompted by the August 8, 2013 article by Raghuram Rajan, who has just been selected to run India’s Central Bank, entitled: “The Paranoid Style in Economics.” (Note: I have deliberately “buried the lead” in my last section.)

The personalities involved have a great deal to do with the feud, but as Paul Krugman wrote on May 23, 2013, “It’s Not About You.”

I will ignore the personalities and discuss what it is about – economic policies that continue to cause devastating harm to the public all over the globe. Krugman and Joe Stiglitz are critics of the International Monetary Fund’s (IMF) imposition of austerity as a cure for severe recessions. Ken Rogoff, Carmen Reinhart, and Rajan were the leading economists at the IMF who championed the imposition of austerity.

Round One: Rogoff v. Stiglitz

The original feud was most famously between Stiglitz and Rogoff. Stiglitz, who led the movement at the World Bank to throw off its support for austerity, memorably claimed that IMF was staffed with “third rate” economists. Rogoff famously blasted Stiglitz in a July 2, 2002, “open letter” (only months after Stiglitz was made a Laureate) that, inter alia, referred to him as a “loose cannon” who had “slandered” the IMF staff, slammed him for refusing to “admit to having been even slightly wrong about a major real world problem,” suggested he was so arrogant that he doubted that Paul Volcker was “really smart,” admitted that Stiglitz had a few ideas with which the IMF would “generally agree” because most of them were “old hat,” described Stiglitz’s most recent book as “long on innuendo and short on footnotes,” derided him as pretending to see himself “as a heroic whistleblower” when he was actually peddling “snake oil,” described Stiglitz views as being most analogous to Arthur Laffer’s “voodoo economics” (cleverly and deeply insulting on multiple levels), accused Stiglitz of lacking faith in markets and having faith in increasingly democratic governments (“you betray an unrelenting belief in the pervasiveness of market failures, and a staunch conviction that governments can and will make things better”), and ended with a wonderfully nasty “compliment” that compared Stiglitz to a famous scholar who suffers from often disabling mental illness (“Like your fellow Nobel Prize winner, John Nash, you have a ‘beautiful mind.’ As a policymaker, however, you were just a bit less impressive.”) To top off this list, Rogoff told Stiglitz that he should pull his book from publication because it “slandered” a senior IMF official.

But those are only the gratuitous insults that Rogoff launched at Stiglitz. His real attack was that Stiglitz had done incalculable damage to the developing world by criticizing the IMF and by opposing austerity as “battlefield medicine” for nations thrown into severe recessions.

“In your role as chief economist at the World Bank, you decided to become what you see as a heroic whistleblower, speaking out against macroeconomic policies adopted during the 1990s Asian crisis that you believed to be misguided. You were 100% sure of yourself, 100% sure that your policies were absolutely the right ones. In the middle of a global wave of speculative attacks, that you yourself labeled a crisis of confidence, you fueled the panic by undermining confidence in the very institutions you were working for. Did it ever occur to you for a moment that your actions might have hurt the poor and indigent people in Asia that you care about so deeply? Do you ever lose a night’s sleep thinking that just maybe, Alan Greenspan, Larry Summers, Bob Rubin, and Stan Fischer had it right—and that your impulsive actions might have deepened the downturn or delayed—even for a day—the recovery we now see in Asia?”

Recall that this was written in 2002, so the hilarity of summoning the support of Greenspan, Summers, Rubin, and Fisher for one’s financial policies was not apparent to neoclassical economists. In any event, Rogoff’s claim is that the “impulsive” Stiglitz’s criticism of the IMF during the Asian crisis endangered the economic recovery essential to “indigent people in Asia” because it could have reduced “confidence” in the IMF’s policy of imposing austerity as “battlefield medicine” for Nations that were in sharp recessions.

Not content with claiming that Stiglitz had “fueled the panic” that endangered the poor; Rogoff extends his “battlefield medicine” metaphor by accusing Stiglitz of “sniping at the paramedics as they tended the wounded.” Having analogized Stiglitz to a murderous war criminal, Rogoff returns to his subthemes that Stiglitz is arrogant, a terrible economist, and personally responsible for the IMF’s failed austerity programs because Stiglitz “ignominiously sabotaged” those programs by criticizing them. Rogoff asserts that the key to economic recovery from a recession is the appearance of what many economists now refer to as the “confidence fairy” and that austerity is the sole elixir that can summon the confidence fairy. The confidence fairy only appears if one believes, really believes, in fairies so Stiglitz’s criticism of austerity was an act of sabotage that prevented the IMF from summoning the fairy. Rogoff then asks:

“Do you ever think that just maybe, Joe Stiglitz might have screwed up? That, just maybe, you were part of the problem and not part of the solution?”

Worse, the policies that Stiglitz urged the IMF to “prescri[be]” to reduce human distress and speed recovery from a severe recession rejected austerity. Stiglitz denies that the IMF was providing “battlefield medicine” to nations in severe recessions. Recessions represent sharply inadequate demand. Economists have known for at over 75 years that austerity reduces the already inadequate demand and exacerbates the recession, as we have seen in the eurozone. This gratuitously harms tens of millions of people. Real battlefield medicine consists of stopping the bleeding and giving the patient fluids and plasma. Forcing austerity on a nation in a recession is analogous to refusing to stop the bleeding (e.g., by opposing capital controls) and bleeding the patient (via austerity). The IMF does, of course, provide some liquidity, but only if the nation it lends to agrees to bleed its economy through austerity.

Attacking Stiglitz for having such a conventional view about economics that the IMF now generally concedes is correct (IMF publications are hopelessly contradictory on this subject) required Rogoff to rely on rhetorical flourishes that sought to mock Stiglitz for opposing austerity as “battlefield medicine” for a recession. Rogoff asserted that increasing demand through government spending led to inflation rising, “often uncontrollably.” Rogoff’s logic is that austerity aids the poor because it forces millions of them into unemployment and poverty. This reduces workers’ wages by forcing them to compete with huge numbers of unemployed workers for jobs. This prevents inflation, which Rogoff asserts is the great threat to the poor.

The irony of the IMF deliberately creating the “reserve army of the unemployed” that Marx asserted was the defining dynamic of capitalism in order to suppress wages is lost on IMF economists. Whatever their other qualities (a matter hotly disputed by Rogoff and Stiglitz) IMF economists have not demonstrated introspection about the irony of the IMF’s embrace of Marx’s most famous critique of capitalism as a means to purportedly achieve a “capitalist” recovery from financial crisis. The IMF’s deliberate adoption of austerity policies it knows produce severe unemployment while bailing out the financial sector leads to severe increases in inequality of income, wealth, and political power. This is one of the reasons that Stiglitz strongly criticizes austerity.

Round Two: Neoclassical Economics v. the World

Rogoff’s criticisms of Stiglitz and his (and the IMF’s) embrace of Greenspan, Rubin, and Summers’ assaults on financial regulation produced the criminogenic environments that led to the epidemics of control fraud that drove the global financial crisis and the Great Recession. Reinhart and Rogoff (R&R) published a book claiming that government stimulus programs were counterproductive and that austerity should be the response. They asserted in policy recommendations that there was a cliff when a nation’s debt reached 90% of its GDP that led to untenable interest expense burdens that served as a long-term brake on economic growth. Their book was widely and favorably cited by proponents of austerity. The proponents were able to restrict the size of the U.S. stimulus program, remove its vital “revenue sharing” component that could have prevented so much harm to states and communities and speeded the recovery, and force much of the stimulus to be in the form of relatively ineffective tax cuts for the wealthy. The impact of R&R in the Eurozone was far worse. It led to austerity programs that forced the Eurozone into a gratuitous recession and much of the periphery into a second Great Depression that continues.

Round Three: Heterodox Economists v. Reinhart and Rogoff’s Study

There were strong, immediate criticisms of R&R’s claims about austerity and the asserted debt cliff, including those of my colleague Randy Wray that proved correct. R&R failed to distinguish between nations with fully sovereign currencies and other nations and engaged in selective data that excluded nations and years that ran counter to their claimed findings. Graduate students from two of the Nation’s few remaining heterodox economics departments (University of Massachusetts, Amherst and the University of Missouri-Kansas City) devastated the R&R book by examining its data – and the data R&R excluded. The U. Mass graduate student won deserved fame for finding that R&R had made serious data entry errors that when corrected revealed that the purported 90% cliff was fictional and greatly reduced the relationship that R&R reported between increased debt and reduced growth. Our graduate students demonstrated that if one were to infer causality from the data the direction of causality ran the opposite of what R&R claimed in their policy arguments. Recessions led to high levels of debt, not the other way around.

R&R’s errors were embarrassing and their policy advice in favor of austerity proved disastrous, but Stiglitz did not rush to recycle Rogoff’s famous attack on him and explain that rather than providing “battlefield medicine,” the IMF, the ECB, and the EU infliction of austerity on wounded economies was equivalent to bayonetting the wounded. The whole thing would have ended there, but Reinhart and Rogoff’s response to the U. Mass article led to Round Four.

Round Four: Reinhart and Rogoff v. Reinhart and Rogoff

For reasons that pass all understanding, Reinhart and Rogoff decided to claim that the U. Mass study had confirmed the R&R study that higher debt was associated with lower growth and to claim that they had never argued that there was a cliff or that high debt led to lower growth. This was a strategy that had to fail in the modern era, which retained records of their statements and statements of policy makers about the cliff and about their claim that high debt led to low growth. (Note that Rogoff’s 2002 letter lambasting Stiglitz made that same claim.)

Round Five: Krugman v. Reinhart and Rogoff

Reinhart and Rogoff’s disingenuous response to the revelation of their many errors prompted Krugman to call them out on their claims. Note that Reinhart and Rogoff’s response (immediately above) did not complain of Krugman’s (quite mild) comments one week before they wrote their April 26, 2013 response.

Krugman cited Brad DeLong’s graphical demonstration of the disingenuous nature of R&R’s description of their findings.

Round Six: Reinhart and Rogoff v. Krugman: Reprising Rogoff's 2002 Attack on Stiglitz

Reinhart and Rogoff reprised some of the tactics of Rogoff’s 2002 open letter attacking Stiglitz with an open letter (May 25, 2013) attacking Krugman for criticizing R&R. The famous line in this iteration was: “it has been with deep disappointment that we have experienced your spectacularly uncivil behavior the past few weeks. You have attacked us in very personal terms, virtually non-stop….”

Round Seven: The IMF Clan Closes Ranks to Attack Krugman

Just when one might have hoped that R&R’s flawed study, their disastrous support for austerity, and the feud would become a bit of arcane economic history, Rajan, on the way to India to lead its central bank, decided to rally around his IMF colleagues and to (by innuendo) accuse Krugman of being “paranoid.” The title of Rajan’s article is: “The Paranoid Style in Economics” and his first two sentences are:

“Why do high-profile economic tussles turn so quickly to ad hominem attacks? Perhaps the most well-known recent example has been the Nobel laureate Paul Krugman’s campaign against the economists Carmen Reinhart and Kenneth Rogoff….”

There are three obvious things to say in response to Rajan’s title and claim. First, having read Rogoff’s open letter to Stiglitz, if Rajan wants to criticize a “paranoid,” “spectacularly uncivil” style of discourse containing myriad ad hominem attacks he has aimed his pen at the wrong economist.

Second, Krugman did not make ad hominem attacks on Rajan’s IMF colleagues. Krugman made substantive criticisms of Reinhart and Rogoff’s arguments and practices. One can debate the accuracy of his criticisms, but they were addressed to the merits of their research.

Third, Rajan makes an ad hominem attack on Krugman in this article. Worse, he does it by innuendo, implying that Krugman is “paranoid.” Rajan and Rogoff have reason to be personally upset with Krugman. Krugman wrote a June 9, 2011 column that explained that Rajan and Rogoff gave spectacularly bad advice not only in favor of fiscal austerity, but raising interest rates, at a time when doing so would have been disastrous and was unsupported by any economic model. Krugman quoted Keynes’ famous passage in which he noted that many economists viewed the willingness to inflict misery on others as the hallmark of a real economist.

Round Eight: We Must Focus on Rajan's Admissions

Readers will likely ignore Rajan’s column because they will consider his attack on Krugman as an understandable, but disingenuous, payback for Krugman criticisms of the three former IMF economists. That would be a shame, for Rajan’s article contains two enormously important admissions that my colleagues who specialize in macroeconomics have long emphasized.

“In the run-up to the 2008 financial crisis, macroeconomists tended to assume away the financial sector in their models of advanced economies. With no significant financial crisis since the Great Depression, it was convenient to take for granted that the financial plumbing worked in the background….”

As Krugman wrote, our focus needs to be on the economics rather than the personalities. Orthodox economics is broken, and Rajan’s admissions are what matters in his article.

Theoclassical economists did not simply assume away finance and money. By assuming finance and money away they implicitly assumed away fraud and the essential regulatory cops on the beat. Theoclassical economists pushed to eviscerate the institutional protections such as effective financial regulation and regulators that had helped ensure “that the financial plumbing worked in the background” and created the criminogenic environments that led to the epidemics of control fraud that drive our recurrent, intensifying crises. Economists ignored the warnings and the policies recommended by another Laureate, George Akerlof. Akerlof and Paul Romer wrote a classic article in 1993 entitled “Looting: The Economic Underworld of Bankruptcy for Profit.” They made this passage the conclusion of their paper in order to give the message special emphasis.

“The S&L crisis, however, was also caused by misunderstanding. Neither the public nor economists foresaw that the regulations of the 1980s were bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself” (Akerlof & Romer 1993: 60).

Neoclassical economists overwhelmingly continue to ignore Akerlof, Romer, and their former colleague Jim Pierce’s findings about control fraud and the findings of criminologists. Rajan’s book about the crisis, for example, asserts that fraud played no material role in the crisis and describes a hypothetical scam that he says illustrates the (lawful) causes of the crisis. The scam, however, requires two felonies and would fail as a scam. Rajan does not understand the law or fraud. The accounting control fraud “recipe,” by contrast, works and has great explanatory power.