Book review by Franklin Neubauer ©
October 1996
SYNOPSIS: Celebrates Krugman's iconoclasm, and summarizes rise of inequality.
There is no better time than election season to read a book about the
relationship between economics and politics. As Clinton, Dole, and other
contenders try to sell voters on the merits of their economic plans, making
sense of politicians' proposals is a challenge. MIT economist Paul Krugman's
bestseller Peddling Prosperity - Economic Sense and Nonsense in the Age of
Diminished Expectations, offers clarity and candor to confused voters, and
scathing words for hucksters of economic snake-oil. Besides debunking old claims
made by political partisans, this book summarizes U.S. postwar economic
performance up to 1994.
Krugman's style is lively and captivating,
unlike the typical economics text. He introduces the distinction between
academic economists, who write mainly for other economists, and "policy
entrepreneurs" who write on policy proposals for the broader public and for
politicians. The entrepreneurs preach simplistic solutions to perceived,
sometimes non-existent problems. This distinction ruffles feathers at some think
tanks like Stanford's Hoover Institute, but the distinction is very helpful in
understanding how economics evolved since Milton Friedman first promoted
monetarism.
Krugman takes aim at nonsense from both conservative and
liberal policy entrepreneurs. His main targets are supply-side economics and
strategic trade doctrine (as opposed to free trade). What makes Krugman so
convincing is that he presents, in a reasonably complete and unbiased manner,
the arguments put forward by each group of policy entrepreneurs, and proceeds to
rebut their claims. Krugman reviews the economic track record of Republican
Presidents Reagan and Bush. Democrat Bill Clinton had less success at passing
his economic proposals through the Congress, so there is less of a track record
to criticize.
Often blasting policy advocates who deviate from orthodox,
neoclassical economic analysis, Krugman is sometimes seen as an enfant
terrible who is motivated by spite. However, Professor Krugman deserves high
marks for intellectual honesty. Though a liberal, he praises the achievements of
conservative economists like Milton Friedman and Martin Feldstein. He derides
proposals by liberal "policy entrepreneurs" Robert Reich, current Labor
Secretary, and Lester Thurow, an MIT colleague. Krugman is among a group of
economists who call themselves New Keynesians, and his specialties are
international trade and finance. As a conscientious academic, he admits what
economic science does not know, and points out tradeoffs in economic policy too
often ignored by policy entrepreneurs of the right and left.
With
Krugman's presentation on the supply-side movement and its legacy, you wonder
how supply-side tax cuts could be repackaged in another campaign. In 1980,
candidate George Bush labeled it "voodoo economics", though Bush embraced
supply-side programs soon afterwards. Similarly, Bob Dole has reversed his
former stance as a deficit hawk.
In a nutshell, here is Krugman's
account of the ascent and record of supply-side economics. Except for a few
renegade professors like Arthur Laffer, supply-siders come from outside the
economics profession. They come from journalism (Wall St. Journal columnists,
Jude Wanniski, George Gilder), political staffs and think tanks. They convinced
key Republicans that the cause for slowing U.S. economic growth was high
taxation and excessive regulation. Supply-siders asserted big government was the
problem. The cure required tax cuts, which would 1) bring back growth, 2) raise
investment, and 3) enable deficit reduction. Disregarding sophisticated
conservative economists like Martin Feldstein, politicians seized on the cruder,
easy to peddle supply-side message that the economy would benefit from tax cuts
- without concern for offsetting spending cuts.
The track record of
early 1980's tax changes can now be gauged from economic history regarding the
three supposed benefits. Krugman presents and discusses the evidence summarized
below.
1) The U.S. long-term rate of economic growth was not changed
by supply-side tax cuts or by anything else since 1973. Productivity growth in
the 80's was 0.8% on an annual basis, compared to 2.8% in the prosperous period
after World War II until 1973.
2) "By any measure, over any time period,
investment fell" in the U.S. during the 1980's, a result contrary to
supply-side claims. As one example, net national savings was only 3.4% of GDP in
the 1980's, compared with 8% in the 1970's.
3) In the absence of high
economic growth or deep spending cuts, the deficit ballooned - to 4.9% of GDP in
1992 compared with 2.7% in 1981 when Ronald Reagan became President. The
resulting debt will burden taxpayers for decades to come.
Finally, the
1980's saw a dramatic rise in income inequality between rich and poor, but this
is only partly due to government policies. In the wake of this evidence, many
policy entrepreneurs who promoted supply-side policies have become spin doctors,
frequently playing games with economic statistics to portray favorable results.
Krugman documents this wonderfully, and reveals misleading figures used by
partisans of the left and right.
Just as Ronald Reagan claimed credit
for favorable economic developments in 1984, Bill Clinton is now claiming credit
for a favorable economy in 1996. Much of this credit and blame dished out in
Presidential elections is undeserved. Though critical of some Clinton advisors,
Krugman recently assessed administration economic policy as pretty sensible
overall. In his book, he identifies the key player influencing recessions and
the current expansion as the Federal Reserve Bank. Americans can be grateful
this institution continues to operate in an independent and non-partisan manner.
Except for a few policy entrepreneurs, Peddling Prosperity has
been very well received and is used in university courses on macroeconomics.
Professional economists, who have the background to appreciate Krugman's
accomplishment, will like this work from a likely future Nobel laureate.
Read about financial markets and whether they are efficient. See the book
review of Robert Haugen's The New
Finance.
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