Mr. Tabarrok agrees with the Commission that there is some truth in Krugman's piece that the Commission has been blogging about over the past few days... but like the commission, he finds some pretty fair sized holes in his hypothesis...
It's a good story--not the least because there is some truth to it--but there are also many omissions which cast doubt on the thesis. Hardly anyone wants to recall today, for example, that it was Alan Greenspan who popularized the term "irrational exuberance," in a speech in December of 1996. At the time, Greenspan's remarks were covered around the world and they created a sell off in stocks. In a NYTimes article titled Irrational Exuberance, Louis Uchitelle wrote:
That sort of optimism cannot last; stocks that are too highly priced will inevitably fall, perhaps over a long period, as they did in the mid-1970's. Mr. Greenspan, who is 71, lived through that painful downturn as a top economic adviser in the Ford Administration.
This time, a falling stock market might have a broader impact. Many more Americans own stocks today than in the past, and a downturn could cut deeply into their sense of well-being. The result could be a severe cutback in spending, hurting the economy. For that reason, the stock market has become increasingly important in the deliberations of the Federal Reserve over interest rates -- whether to raise them to slow the economy or lower them to encourage spending and growth.
Greenspan in Uchitelle's piece is the one raising questions about market prices. Furthermore, no economist in Uchitelle's piece says that prices are always correct or that markets are perfectly efficient or that bubbles are impossible--the mainstream view according to Krugman. Robert Shiller is quoted not Eugene Fama. And, of course, it was Robert Shiller who would later author two bestsellers warning of bubbles, another discomforting fact for those who argue that dissenting economists were marginalized.
The Commission suggests that the key is to remember that despite his well-deserved Noble prize, Mr. Krugman is still human, and subject to the same internal biases and political assumptions as the rest of us... The Commission is certain that in his heart and mind, Mr. Krugman understands this, we just wish that he would acknowledge it in his writing once in a while...
As always, the comments below Mr. Tabarrok's piece are worth reading -- Marginal Revolution's regular readers are remarkably well informed, and even when disagreeing with each other, offer great information.