SYNOPSIS: Claims Krugman is a Economic do-nothing, twiddling thumbs while America burns. Liberalism should be more active.
By Robert Kuttner
Published in the American Prospect, 9.96

A generation ago, mainstream economics provided intellectual support for a mixed economy. Keynesianism gave legitimacy to macroeconomic intervention and public spending generally. The regulation of leading industries was anchored in the respectable economic ideas that many industries either were "natural monopolies" or displayed positive and negative spillovers not captured in market pricing. Social insurance and redistributive taxation enjoyed wide political support, and economists could explain why a more equal income distribution was good for growth as well as equity.

Today, nearly all of the mainstream economics profession, whether nominally Republican or Democratic, has become the ally of laissez-faire conservatism. This has partly to do with the latent reverence for markets at the heart of neoclassical economics. It also reflects a professional resentment of non-economists as policy intellectuals who don't adequately appreciate markets.

The career of Paul Krugman epitomizes, if in extreme form, how the conventions of the economics profession work to block a resurgence of liberal activism. Krugman is a self-described liberal. Yet his counsel on a wide range of issues is that nothing can be done. And he is far more charitable to very conservative fellow economists (Milton Friedman, Robert Lucas, Martin Feldstein) with whom he ostensibly disagrees than to fellow liberals such as Lester Thurow, Robert Reich, and Laura Tyson, whom he dismisses as pseudo-economists and mere "policy entrepreneurs." On close examination, his disdain is often less about serious policy differences than about membership in the right disciplinary club.

As a sometime liberal, Krugman is resolutely critical of supply-siders (both as intellectual frauds and as nonmembers of the neoclassical fraternity). He has also written forcefully, including in this journal, on the widening inequality of income and wealth. But for the most part his message is that public remedy is a futile pursuit. Thus, Krugman is the conservative's ideal liberal. He ridicules some of the most effective spokesmen for liberal economic policies, and he generally ratifies the conservative view that not much is worth trying because the market economy is doing about as well as it can.

While this posture is common to other centrist Democratic economists--Charles Schultze and Alice Rivlin immediately come to mind--Krugman takes it to an idiosyncratic extreme. Some of this is temperamental or characterological. At the Massachusetts Institute of Technology, to which Krugman will return this fall after two and a half years at Stanford, he was known as an enfant terrible--in both senses of the term.

Krugman habitually baits his intellectual siblings and parents as well as wayward non-economist cousins. A Krugman signature is to casually debunk a sacred precept of economic theory, but to warn, simultaneously, that this delicate work can be entrusted only to the licensed economist.

TRADERS AND TRAITORS

Krugman first came to prominence as a critic of standard trade theory. Here he trod very carefully, since the theory of comparative advantage is among the most universally espoused tenets of standard economics. In technical papers written between 1983 and 1986, Krugman observed that the received wisdom about free trade was substantially wrong. In standard theory, countries trade to exploit natural differences of climate, skills, culture, resources, and so on. Each trading nation has a "comparative advantage" based on its set of endowments; trade allows nations to benefit from each other's natural strengths. While such natural endowments are still broadly relevant and while free trade is generally beneficial, Krugman wrote, since World War II "a large and generally growing part of world trade has come to consist of exchanges that cannot be attributed so easily to underlying advantages of the countries that export particular goods. Instead, trade seems to reflect arbitrary or temporary advantages resulting from economies of scale or shifting leads in close technological races." In some cases, Krugman added, comparative advantage can be created. By strategically intervening to capture advantage in industries with technological dynamism, nations could produce spillover benefits for their economies.

This revisionism was explosive. It came to be known as the "new view" of trade. It was, of course, not new to economic historians, to students of industrial policy, or to Japanese, Korean, French, and German mercantilist planners. But it was a highly heretical concept within mainstream American economics. Krugman had to be taken seriously, not just because he was a card-carrying neoclassical prodigy, but because he could demonstrate the proposition more with reference to elegant algebraic models than with industrial and diplomatic history.

Having cautiously embraced this view, Krugman almost immediately (and prudently) distanced himself from its implications. His early writings warned that even though gains from industrial targeting and strategic trade policy were in principle possible, it was not at all clear that governments would act wisely in their pursuit of strategic advantage. And there was the usual risk that each nation's strategic efforts would degenerate into "beggar-my-neighbor trade policies" and even trade war.

Still, Krugman's early work was impressive for its intellectual courage and its respectful tone toward people of differing views. As the editor of a 1986 collection of papers, Strategic Trade Policy and the New International Economics, Krugman, then 33 years old, generously concluded his introduction, "I have tried to make all of these positions sound reasonable. The proponents of these views are all honorable men (more accurately, there are honorable men in each group). Let us hope that the issue will in the end be decided as it ought to be, on the basis of evidence." More accurately still, the group included honorable men and women, one of whom was Laura Tyson, with whom Krugman would later cross swords; another was Barbara Spencer, who, with co-author James Spencer, originated the "new view." Such youthful generosity, however, did not last. By the late 1980s, Krugman was railing against advocates of strategic trade and industrial policy, as dangerous opportunists and frauds.

THE CONTRARIAN

Krugman's first book written for a general audience, The Age of Diminished Expectations, published in 1990 by the Washington Post Company, is an intriguing hybrid. It is part of the Post's series of stylish briefing books, intended for busy executives and opinion leaders. For someone who requires an entertaining refresher on Economics 101, the book is a crisp tour of the horizon, explicating basic economic concepts as they apply to current topics. It is gracefully written, and it immediately put Krugman in the small group of professional economists who write clear English for a lay public. This alone won Krugman respectful reviews.

The book also displays Krugman's impish, in-your-face contrarianism on many issues. Most of what policymakers and economists worry about, Krugman declares, is no big deal. Inflation? "[A] steady inflation rate of 4 or 5 percent does very little harm. We could live very nicely with it forever." Slow growth? It is dismal, but we have learned to live with it. The trade deficit and the foreign debt? "It would remain tolerable even if we continued borrowing at current rates for the rest of the century."

Even more surprisingly, given the work that put him on the intellectual map, Krugman pooh-poohs the supposed menace of protectionism. "Even a severe trade conflict would have surprisingly modest effects," he writes. "A tariff war that cut world trade in half would do no more economic damage than a mild recession." Krugman derives this conclusion, not implausibly, by taking the fraction of national income represented by trade, and then calculating how much trade really improves economic efficiency--not all that much.

Krugman sensibly urges the reader to appreciate that three things ultimately determine general prosperity: productivity, income distribution, and unemployment. "If these things are satisfactory, not much else can go wrong, while if they are not, nothing can go right." This is broadly true, yet Krugman's subtext, as suggested by his title, is that very little can be done to improve any of them. "Diminished expectations," it turns out, refers less to the public's rising anxiety about income stagnation than to Krugman's own world-weary fatalism.

Thus, "we don't really know why productivity growth ground to a near halt. That makes it hard to answer the other question. What can we do to speed it up?" His chapter on the subject concludes, "Productivity growth is the single most important factor affecting our economic well-being. But it is not a policy issue, because we are not going to do anything about it." Krugman couples this dismal conclusion with a warning. Watch out for "popular nostrums" by people "on the left," as Krugman characterizes Robert Reich (a
"non-economist") and Lester Thurow (an "economic heretic"), as well as for supply-side schemes by the likes of Arthur Laffer, an economist but a heretic, and Jude Wanniski "(a journalist)." According to Krugman, lumping the two groups together, "They offered free lunches--a chance to invigorate the economy without pain."

How about income distribution? Again, Krugman confirms that the rich have indeed been getting richer and the poor, poorer. But he offers the same disabling combination of professional hauteur--mistrust everyone but licensed economists--and depressing modesty: We experts just don't know what to do. "The most important causes of the growth in the underclass," he avers, "like the sources of the productivity slowdown, lie more in the domain of sociology than of economics." Sociology is Krugman code for unscientific. Of course, smart sociologists like William Julius Wilson have implicated declining wages in the growth of an underclass--surely more of an economic cause than a sociological one. But for Krugman it logically follows that if his brand of economic analysis cannot find an explanation, then anyone proposing solutions is a quack. His chapter on income distribution, like the one on productivity, concludes with the same counsel of despair: "The growing gap between rich and poor was arguably the central fact of economic life in America in the 1980s. But no policy changes now under discussion seem likely to narrow this gap significantly." Nor does Krugman offer other remedies not under current discussion.

His discussion of savings, investment, growth, and government deficits is depressingly conventional and similarly pessimistic. Savings are the source of investment and investment is the source of growth, Krugman explains. If savings are low, growth will be low. He insists: "the only reliable way to raise national savings is to eliminate the budget deficit." It is of course true as an accounting identity that saving equals investment, but this is not the only possible direction of causality. Though he nominally embraces Keynes, Krugman ignores the possibility of a rather different, more Keynesian chain of cause and effect: public borrowing leading to increased investment; or higher wages leading to more demand for product, and then to more business investment in plant, equipment, and technology; and finally to a virtuous circle of higher wages, savings, investment, and growth. Again, he concludes (in this case mistakenly) on a note of hopelessness:
"For the time being [1990], at least, tax increases are politically out of bounds. That means the budget deficit will remain a more or less permanent fixture on the American economic scene. . . . It is not only possible but probable that budget deficits at more or less the current level will continue for the rest of the century."

In reality, the budget deficit for fiscal year 1991, as Krugman was composing these words, was $269.5 billion. Around the time the book appeared, President Bush agreed to a bipartisan deal reducing spending and raising taxes. Another large tax increase was successfully sponsored by the Clinton administration in 1993. Today the deficit is less than half its 1990-91 level, and of course both parties (wrongly, in my view-but that's another story) are committed to its elimination by 2002.

REICH, THUROW, AND WORSE

Three incipient Krugman trademarks were already apparent in Diminished Expectations: a stylized despair about policy activism; a penchant for debunking conventional economic wisdom; and a contempt for non-economists offering remedies. These conceits, however, are often at odds with each other, since much of the conventional economic wisdom Krugman challenges is the work of fellow economists.

The disdain for the non-economist policy advocate became more explicit in his 1994 book, Peddling Prosperity. The peddlers of Krugman's title are the unscientific policy hustlers of the left and right. Krugman describes a Manichaean world in which there are two kinds of economists--"the professors and the policy entrepreneurs." The following extract nicely conveys the smugness of the whole book:

A professor can try to play entrepreneur--after all the rewards in both money and a sense of importance can be huge. Ultimately, however, she is at a disadvantage, because she is too constrained by her obscure professorly ethics. Some professors manage to transcend these limitations, but in doing so they cease to be professors, at least in the minds of their colleagues. And in general it seems that it is easiest to become a policy entrepreneur if your mind has not been clouded by too much knowledge of economic facts or existing economic theories--only then can you be entirely sincere in telling people what they want to hear.

This conception of the sacred and the profane is more than a little disingenuous. Martin Feldstein, the quintessential economics professor, model builder and regression runner, is also among the leading policy entrepreneurs and masters of forensic theorizing. There are dozens of respected academic economists who compose op-ed articles, testify at legislative hearings, commend diverse policies, and still manage to publish in technical economics journals. Oddly though, having made this distinction, Krugman then turns around and aims much of his criticism at fellow economists who are on the professorly side of the divide.

In Peddling Prosperity, Krugman briskly debunks Friedman's monetarism, Robert Lucas's rational expectations theory, Martin Feldstein's view of taxes and growth, Murray Weiden baum's inflated calculation of the costs of regulation, as well as more extreme supply-side claims. But in his critique of conservative economists, Krugman almost obsessively differentiates fellow members of the guild, such as Friedman et al, from the likes of Wall Street Journal editorial page editor Robert Bartley and others, whom he dismisses as "cranks." He writes: "Milton Friedman has strong views, and has often clashed with majority opinion in economics; I think that he has often been wrong, and that he sometimes has been willing to cut corners to win an argument. But nobody would call him a crank. Still less could one use the term to describe Robert Lucas or Martin Feldstein."

Well, let me be the first. Even Nobelists can be cranks. You can be a crank in an op-ed article or in algebra. You can be a crank in a peer-reviewed journal if enough of your peers are cranks. In Krugman's world, if bizarre arguments and extreme views are dressed up in formal models, they pass muster as economic science, even if they turn out to be wildly wrong. Lucas's rational expectations theory, Friedman-style monetarism, Feldstein's unrelenting effort to demonstrate that taxes are a paramount influence on growth rates--Krugman seems to regard these as pretentious crankery, in everything but form and label.

Even more oddly, Krugman warmly invokes Keynes, claiming the great interventionist was right all along and discerning a "sophisticated revival of Keynesianism" in academic economics. As evidence, Krugman cites the work of N. Gregory Mankiw, David Romer, and kindred abstruse New Keynesians. This revival may exist in the more rarified reaches of the academy. Yet Krugman's own counsel on the deficit (cut it) and his insistence that prosperity is effectively out of reach suggest how diluted is his conception of Keynes and how far removed is this putative Keynesian revival from actual policy debate. The century's preeminent policy entrepreneur, after all, was Keynes himself--a vigorous pamphleteer as well as a high theorist of the full employment that Krugman disparages. With both parties embracing a politics of cutting public outlay, it would be salutary if the academic New Keynesians were more entrepreneurial (and more Keynesian).

ormal economics is awash in ostensible experts who disagree on the most basic questions of theory and evidence. Krugman himself, almost puckishly, makes great sport at their expense, but always with a respectful disclaimer when the malefactor is a fellow economist. If economists can't be trusted to get political economy right, then maybe other types--sociologists, lawyers, even journalists--deserve a turn. However, Krugman's deepest scorn is reserved for non-economist trespassers and he has a particular animus for those on the moderate left.

His most stinging criticism is directed at Robert Reich. First, a disclaimer of my own: It is no secret that Reich is a co-founder of this magazine, as well as a close friend. I also appear occasionally as a bit player in Krugman's rogues' gallery of non-economist pretenders. So I am not an impartial arbiter of this debate. Yet as one who has argued over the years with Reich on precisely the issues of strategic trade that Krugman addresses, I can report that Krugman egregiously misrepresents Reich's views.

Krugman is contemptuous of advocates of industrial policy and "strategic trade." Industrial policy usually refers to the targeting of certain industries or technologies for public subsidy. Strategic trade involves the use of quotas, tariffs, market-sharing deals, and similar devices aimed at capturing national advantage. But Krugman sloppily conflates these two distinct policy positions as if they were one and the same, and mischaracterizes the positions of the main protagonists. The reality is that some economists, for example Laura Tyson and Barry Bluestone, are cautious advocates of both industrial policy and strategic trade. However, there are people who support industrial and technology policies aimed at making American industry more globally competitive but oppose managing trade (Robert Solow, James Galbraith) and others who support strategic trade and are skeptical of industrial policy (James Fallows, Clyde Prestowitz). Reich, whose 1982 book with Ira Magaziner, Minding America's Business, was a vigorous plea for industrial targeting, has explicitly opposed managed trade. One of Reich's best known (and most controversial) pieces, "Who Is Us?" (Harvard Business Review, January-February 1990) is a very pointed critique of managed trade, on the ground that the national identities of multinational businesses are now so scrambled that it is no longer possible to distinguish an "American" firm from, say, a "German" one.

Reich, in the Harvard Business Review piece, in several American Prospect articles, and in his 1993 book, The Work of Nations, not only very directly criticizes managed or strategic trade. He also tempers his earlier advocacy of industrial policy, which he believes has been partly mooted by globalization. In 1992, The American Prospect published a spirited debate between Reich and Tyson on this very question. Reich's core argument is that the wealth of nations mainly reflects the skills of the workforce. "American ownership of the corporation is profoundly less relevant to America's economic future than the skills, training, and knowledge commanded by American workers--workers who are increasingly employed within the United States by foreign-owned corporations." Even the most cursory reading makes clear that Reich views education and training policy, not activist trade policy, as the long-term source of prosperity.

One can take respectful issue with this view--as I have. It is entirely possible that America needs both a better-trained workforce and a more strategic view of trade policy. Japanese multinational firms may be global, but (as even Krugman recognizes) they are still nationalistically Japanese. Prying open the markets of substantially closed economies, even by using temporary quantitative targets as evidence of good faith as in the case of semiconductors, is less "protectionist" than facilitative of freer trade. But this is my view--and emphatically not Reich's. Krugman's attacks on Reich are poorly informed and evidently more motivated by his caricature of Reich as non-economist policy promoter than by a careful engagement with Reich's views.

In a recent column in the new Microsoft internet magazine, Slate, Krugman excoriates Reich for pressing the issue of economic insecurity: "In the world according to Reich, even well-paid American workers have now joined the 'anxious classes.' They are liable any day to find themselves downsized out of the middle class. And even if they keep their jobs, the fear of being fired has forced them to accept stagnant or declining wages while productivity and profits soar. Like much of what Reich says, this story is clear, compelling, brilliantly packaged, and mostly wrong."

Krugman goes on to debunk the idea of pervasive downsizing, by adding up all the layoffs reported in a recent Newsweek, and calculating that they total only 1 worker in 300. He then turns around and attacks Reich for using "anecdotes rather than statistics." This is what psychologists call projection. Krugman cites as an example of a good representative of the Clinton administration--a fully credentialed one who does not play fast and loose with statistics--fellow Stanford economist Joseph Stiglitz, chair of the Council of Economic Advisors and author of a recent report that, in very delicate wording, computed that most newly created jobs were in occupations or industries that had historically paid "above median wages." This, of course, did not mean that the newly created jobs actually paid above-median wages. Stiglitz, threading his way between the administration's need to paint a rosy election-year picture and his own professional integrity, allowed as much. But Krugman blandly asserts, at least for the purposes of sandbagging Reich, that "Both the number of 'good jobs' and the pay that goes with those jobs has been steadily rising." However, in a different context, in Peddling Prosperity, Krugman himself writes, "In 1991, the typical family had a real income only 5 percent higher than its 1973 counterpart, and it achieved that income only by working longer hours; most workers were bringing in lower take-home pay than in 1973." This certainly sounds like an anxious class.

Occasionally, as part of his penchant for lobbing little grenades, Krugman capriciously offers an aside that blows away his own previous position, and makes one wonder if he is serious. Having excoriated supporters of industrial policy as economic illiterates, Krugman abruptly declares late in The Age of Diminished Expectations, almost as a throwaway line, that "The U.S. government should make a decision to frankly subsidize a few sectors, especially in the high-technology area that may plausibly be described as 'strategic.' . . . Federal expenditures of, say, $10 billion a year to support industrial R&D consortia would produce at least some benefits."

Ten billion dollars a year! Not even Ira Magaziner in the depths of statist depravity proposed an industrial policy costing ten billion dollars a year. The most eager defenders of DARPA and SEMATECH haven't asked for ten billion dollars a year. After great struggle, the Clinton administration, in 1993, got the U.S. Commerce Department's Advanced Technology Program funded at less than half a billion, and the Republicans killed most of that. Economic heretics, journalists, and lawyers are fools for proposing rather more modest industrial policies, but the Economist pronounces that a nice round ten billion a year seems about right.

A fine example of how Krugman's intuitive solidarity with fellow economists leads him to get the story backwards concerns the Clinton health plan. For Krugman, it is a travesty that non-economist industrial policy advocates such as Reich and Magaziner landed key policy positions in the Clinton administration. Thus predisposed to dislike Magaziner, Krugman recounts this anecdote:

If you had asked most people in the field to list the leading experts on the economics of health care, almost all of them would have mentioned Henry Aaron of the Brookings Institution, an economist with solid liberal credentials and a strong backer of Clinton during the election. But when the Clinton administration formed its health care task force, a huge effort involving more than five hundred people, Aaron was not involved. Why? The answer appeared to involve a kind of guilt by association. The task force was headed by Ira Magaziner, a business consultant by profession but a strategic trader by inclination. . . . Now, in the great confrontation over industrial policy in 1983 and 1984, economists from Brookings had been highly critical of strategic traders in general and Magaziner in particular. It was not too surprising that Magaziner would exclude a Brookings economist from his deliberations, or even that he would, as appeared to have been the case, have excluded virtually anyone with prior background in health care economics.

Note that this little anecdote, rendered in complex subjunctives, is all inference and surmise, as opposed to reporting. (We journalists may not be too great at running regressions, but we do try to find out what actually took place.) In fact, the Clinton task force did include several health economists, including Professor David Cutler of Harvard. More to the point, Henry Aaron did participate in health policy discussions, both during the campaign and the transition, and made clear his preference for controlling health costs directly via a cap on hospital revenues, rather than with the "managed competition" approach of the Clinton group. Ironically, the Clinton task force was partial to a more "marketlike" approach, which built heavily on the work of the noted health economist Alain Enthoven. Aaron also recalls the notable chilling effect of his December 1992 New York Times op-ed piece, describing as "fantasy" the Clintons' claim that cost savings from managed competition would be enough to buy coverage for the uninsured. So the Clinton group and Aaron could not get together because the Clinton model was too much like textbook economics to suit Aaron, while Aaron, despite the Brookings connection, was proposing a form of direct price regulation. Krugman's little story is not just wrong, but wrong in a way that is characteristically Krugman. The only guilt by association is Krugman's own premise-reported as fact-that Magaziner would naturally "exclude a Brookings economist."

THE PEDDLER

What, finally, is Krugman up to? In Peddling Prosperity, he notes that the "policy entrepreneurs," like Reich and Thurow, in contrast to the humble academics, tended to publish "in newspapers and in semi-popular magazines like Foreign Affairs, the Harvard Business Review, and the New Republic." Well, since 1994, Krugman has published six articles in Foreign Affairs and two in the Harvard Business Review. His latest Harvard Business Review piece, "A Corporation Is Not a Country," takes essentially the same view of the global economy as Robert Reich's "Who is Us?"

In addition, Krugman somehow found the time to write articles for Foreign Policy, the Washington Monthly, Fortune, the Economist, Harper's, and U.S. News and World Report, as well as dozens of newspapers. He has also continued his prodigious scholarly output, having written or edited more than a dozen academic books and textbooks, and dozens more scholarly articles. His column, "The Dismal Scientist," will appear monthly in Slate and Krugman has begun appearing in the New York Times Sunday Magazine. He also presumably teaches classes.

His latest book, Pop Internationalism, published in March, is a collection of articles from Foreign Affairs, Science, Scientific American, the Wilson Quarterly, New Perspectives Quarterly, and the American Economic Review. In these, he continues his fondness for the contrarian view, explaining why competitiveness is "a dangerous obsession," why Asia's economic miracle is largely a myth, why it is important in economics education to "vaccinate the minds of our undergraduates against the misconceptions that are so predominant in what passes for educated discussion about international trade." In his introduction, he embellishes his theme of economic illiterates dominating economic debate, in this case on trade: "Serious discussion of world trade," he warns, has been replaced by "pop internationalism." Krugman has a remedy:

What I eventually realized was that an effective answer to pop internationalism would require a new kind of writing. I would have to write essays for non-economists that were clear, effective, and even entertaining--otherwise nobody would read them. . . . [T]he target reader was someone who might think he knew a lot about economics but had never been exposed to the real thing. . . . And finally, the essays would have to be right--no intellectual cheap shots, because after all, letting the world see what real economic analysis was like was the whole point of the exercise.

So Krugman has become the most prolific policy entrepreneur of them all. He may be peddling fatalism rather than activism, but he is no less a peddler. Alas, Krugman's earlier counsel is correct. It is very difficult to be both a conscientious academic and an effective policy entrepreneur. There aren't enough hours in the day, and you begin to make mistakes. Your own glibness becomes your worst enemy. In his high-professor role, Krugman equates "anecdote" with unscientific. This apparently leads him to conclude that when in anecdotal, policy-entrepreneur mode, you don't need to look things up. And as for intellectual cheap shots, well, you can read him yourself.

There is more than a little projection in Krugman's caricature of policy peddlers. Krugman certainly has every right to publish for a mass audience, as do Thurow, Reich, and the rest of his targets. But he has long since peddled away his right to cast stones.

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