It was Arnold Kling who first drew attention to the column in which Krugman wrote, “Alan Greenspan needs to create a housing bubble to replace the NASDAQ bubble.” The post was bound to cause a stir — especially considering Krugman’s clownish attempt to blame the housing bubble on “Reagan-era deregulation” a few weeks ago — and cause a stir it did. Kling wrote a follow-up post defending Krugman, and Krugman linked to it in his own defense.

Kling wrote that Krugman “was not cheerfully advocating a housing bubble, but instead he was glumly saying that the only way he could see to get out of the recession would be for such a bubble to occur.” As Kevin pointed out below, this is essentially what Krugman himself wrote — that his column was “economic analysis,” not “policy advocacy.”

But Krugman did advocate multiple interest rate cuts after the tech bubble burst, and his writing from that time demonstrates that he believed this would result in a real-estate boom, bubble, what-have-you — that it would promote spending on housing.

I asked Kling via e-mail if he had seen this post and whether it changed his mind. Kling wrote:

[Krugman] saw, correctly in my view, that employment growth was weak in 2001 and 2002. He took a textbook macro approach, which said that lower interest rates were called for.
Within this textbook mindset, lower interest rates can affect the economy through three channels: increased business investment; increased household spending on housing and durable goods; and a weaker dollar leading to an improvement in the trade balance.
For some reason, Krugman decided that of these three channels, only the increased household spending was going to take place. He also decided that the housing market was already plenty hot, so that any further boost would mean a bubble. I don’t know quite how he came to the view that investment and the trade balance would not improve–part of me thinks that he just refused to allow that anything good could occur under President Bush. As it turns out, it was housing that led the way, and it did turn into a bubble.
I am sure that if he had it to do over again he would express himself more carefully. Otherwise, I think this particular episode makes Krugman look more good than bad.

To which I replied: “Krugman did indeed call for lower interest rates… and as you write, he predicted that a housing bubble would result. Is that fair to say?” Kling wrote:

I suspect that he used “bubble” as a way of delegitimizing any economic growth that might take place under the Bush Administration, rather than as a way of saying that a housing bubble would be a great thing to have.
My guess is that if a Democrat had been President, Krugman would have used a less pejorative term than “bubble,” but he would have advocated lower interest rates to expand household spending on housing and durables.

I think the best that can be said for Krugman is that he trusted the Fed to put the brakes on at exactly the right time to prevent the bubble from growing dangerously large and unstable — kind of the same thing he’s doing now vis a vis quantitative easing and the deficit. And I think what makes conservatives and libertarians so mad — the reason Kling’s small initial blog post has turned into a story — is that Krugman now has the audacity to argue that fears of runaway inflation are not just unfounded, they are in fact a right-wing plot to undermine the government-led recovery — as if all that matters is what happens next quarter, and who cares if the national debt hits 80 percent of GDP ten years from now? — even though he got it so wrong last time. Krugman’s blog is called “The Conscience of a Liberal.” It should be called “The Blind Faith of a Liberal in the Government’s Ability to Manage a $14 Trillion Economy.”