SYNOPSIS: Wanniski scoffs at Krugman's belief that Inequality is increasing. Krugman responds.
PART ONE: WANNISKI
>Memo To: Mother Jones Backtalk
> From: Jude Wanniski
> Re: Krugman on the Spiral of Inequality >
>You ask me for my opinion on your Twentieth Anniversary issue, dated
>December 1996, specifically the article on P. 44 by Paul Krugman. Generally
>speaking, Krugman has had nothing much to say about political economy for
>the last several years other than the rich are getting richer faster than
>the poor are getting richer. He has written this story hundreds of times, in
>newspapers, magazines, and books. Unsuspecting editors continue to pay him
>for plagiarizing his own material. Because he appears in such illustrious
>publications as The New York Times Magazine and Foreign Affairs, the editors
>of Mother Jones and no doubt the Ladies Home Journal are thrilled to see his
>manuscripts flow over the transom, with yet another exciting expose about
>how the rich are getting richer faster than the poor are getting richer.
>This is a chain letter he writes to himself, his very own pyramid club, the
>most elaborate Ponzi scheme in American journalism.
> >If you would take the trouble to read the stuff you shoveled into type, you
>would find that he said absolutely nothing about economics until the second
>page of his tract, when he asserted: "What few people realize is that this
>vast gap between the affluent few and the bulk of ordinary Americans is a
>relatively new fixture on our social landscape." This is utter nonsense. A
>century ago, John D. Rockefeller had income the equivalent today of $500
>million, year after year, for a quarter century. Andrew Carnegie did almost
>as well. A handful of Americans possessed a far larger fraction of the
>national wealth than any collection of wealthy Americans possess today.
> >Krugman's childish attempts at economic analysis are able to fool Mother
>Jones editors only because you have nobody on the staff who is competent to
>assess his scribbles. Do any of you know the difference between income and
>wealth? Krugman dances from one concept to the next, and it all sounds so
>plausible, because he has made a name for himself with other editors, none
>of whom are any better fixed than you to realize that he is a charlatan.
>Here are a few simple concepts I put to you, in challenging his idea that
>the rich are getting richer faster than the poor are getting richer. I
>maintain that the central problem of the last 30 years is that the poor are
>getting richer much, much faster than the rich are getting richer.
> >1. First let us get our accounting unit squared away. To measure anything in
>the floating paper dollar will get us nowhere. We must convert all wealth
>into the measure employed by mankind for six thousand years, i.e., ounces of
>gold. On this measure, the Dow Jones Industrial Average of 6000 today is
>only 60% of the DJIA of 30 years ago, when the DJIA hit 1000. Back then,
>gold was $35 per ounce. Today it is $380-plus. This is another way of saying
>that in the last 30 years, the people who owned America have lost 40% of
>their wealth held in the form of equity. Do you understand what I am saying,
>Mother Jones? If you owned no part of corporate America 30 years ago,
>because you were poor, you lost nothing. If you owned lots of it, you lost
>your shirt in the general inflation.
> >2. This is true of the vast majority of shareholders in Main Street America.
>Not those who own a piece of the $6 trillion in the stock market -- less
>than $600 million when converted into gold at 1966 prices. I'm speaking of
>the small businessmen whose shares are not publicly traded. These poor slobs
>have been decimated by a combination of the (1) inflation and (2) federal
>tax codes. According to the best estimates any of us have, these poor slobs
>face a federal tax liability of $2 trillion on the $7 trillion of inflated
>capital gains which have accumulated in our economy, beginning in 1966 when
>President Lyndon Johnson closed our participation in the London gold pool.
>(By that, I mean he no longer promised to pay America's creditors in paper
>dollars with a fixed value in commodities, gold being the proxy.)
> >3. If you were to ask Professor Krugman to put down his coloring book for a
>moment, and put a real number on the wealth of the affluent, please do me a
>favor. Ask him if his number is net of the $2 trillion [$2,000,000,000,000]
>in federal tax liabilities these affluent people face, because Professor
>Krugman's pals refuse to index capital gains retroactively. Please do not
>dismiss this question lightly, Mother Jones. Think about it a moment or two.
>If Krugman cannot answer you to your satisfaction, promise him that his name
>will never again appear in your publication, unless he apologizes for being
> >4. Now we get to entitlements. If you own a $100,000 bond that pays 7% a
>year, you will have an annual income of $7000 for the life of the bond. If
>you are entitled to a government check to cover your Medicare bill of
>$35,000 a year, for the rest of your life, you have wealth that is the
>equivalent of $500,000. Because you are only scribes, you are not expected
>to know this stuff, Mother Jones editors. I was once in your boat, a
>reporter who never took a Ph.D. in economics from MIT or Harvard. It took me
>a long while to learn what I am conveying to you in this response to your
>letter. In this example alone, we find that the poor hold guaranteed
>entitlements on $7 trillion of unfunded tax liabilities, for their old age
>and health benefits, which can only be paid for by the rich, who are the
>nation's producers. At the same time, the rich face a 28% tax liability on
>another $7 trillion in inflated capital gains. Add up the portfolios of the
>rich and the poor, 30 years later, and you will find the poor have become
>fat and happy, the rich impoverished. This is why we are in the fix we are
>in. Everyone wants to be poor, because it has so many more advantages!
> >5. These are enormous numbers. You will not find any of them in Krugman's
>Ponzi schemes. He has either not thought about them, in which case I might
>believe he is dumb but honest. Or, he has thought about them, and is
>therefore half-smart and dishonest. I personally believe Krugman is honest,
>but dumb enough to believe in the assumptions he was taught in school to
>believe he really does know the way the world works, when he knows almost
>nothing at all.
> >6. The basic problem the liberal media have with people like Krugman is that
>they are careful to never make economic predictions, so they can never be
>brought to heel. Nobody actually pays Krugman for his economic counsel, or
>they would soon be bankrupt. Like you, they pay him for his political
>blatherings, about the rich getting richer faster than the poor are getting
>rich. In this case, I truly appreciate your insistence that I take time out
>of my life to comment on his jabberings.
> >7.There is only one time where our paths crossed in person. A few months
>back, we were on the same PBS radio program out of Boston, talking about
>taxes and the economy. I append the transcript, which I took the trouble of
>transcribing. Note that Krugman defends himself exclusively by ad hominem
>attacks on supply-side economics -- the only flavor of economics that has
>had predictive power over the last 25 years. If Krugman had to predict to
>make a living, he would starve to death. >
PART TWO: KRUGMAN
Jude Wanniski is an important figure. He was one of the founders of supply-side economics, and is currently its most celebrated guru. Moreover, he is inseparable from Jack Kemp, who may yet become President one day. It is important that the ideas and character of such an influential man be well understood. So we should be grateful that Mr. Wanniski has provided us with such a revealing self-portrait.
There are three issues to address in Wanniski's letter. First is his assertion that contrary to general opinion the last 30 years have been a terrible time to be rich and a great time to be poor. Second is his attack on my qualifications and character. Finally, there is the question of what Wanniski's letter says about him and those who rely on his wisdom.
On wealth and poverty: I knew that Wanniski believed in the gold standard. I did not know that he regards gold as the only valid measure of purchasing power, independent of what useful objects that gold can buy. Over the past 30 years the rich have become able to afford to live in much bigger houses, drive or be driven in much fancier cars, take much more lavish vacations, and hire many more servants. Nonetheless Wanniski insists that they have suffered because the Dow Jones has not kept up with the price of gold. Somehow, I have trouble feeling their pain. (Incidentally, Wanniski tries to make the case that we have not become a less equal society by reminding us of the inequalities of the Gilded Age. Yes, and Louis XIV was pretty rich too. What this has to do with my point that the middle-class society we had a generation ago is now disappearing escapes me).
Meanwhile, the poor have become "fat and happy", because they know that they will receive $35,000 in Medicare benefits each year, "paid for by the rich, who are the nation's producers". Actually, Medicare is paid for with payroll deductions, which means that most of the burden falls on the middle class. The current Medicare expenditure per retiree is less than $6,000 - where did that $35,000 number come from? And not every poor person is entitled to Medicare for the "rest of his life"; children, who are 40 percent of the poor, will have to wait a while before the checks start coming. Details, details.
About me: I have some professional advice for Wanniski. If you plan to engage in character assassination, it pays to do some homework. With modern technology, it's quite easy. All I had to do was type in "jude wanniski" and click the mouse to get all kinds of interesting information, from stories about the unrelenting efforts of Jack Kemp to give Wanniski a central role in the Dole campaign to the fact that Wanniski's consulting firm employs followers of cultist Lyndon LaRouche. Might I suggest that Wanniski type in "paul krugman" and see what he gets? He might be surprised.
Anyway, Wanniski asserts that I "plagiarize" myself, writing that the rich are getting richer and the poor poorer (actually, he can't bring himself to say it - even when quoting my alleged nonsense he says that the poor are getting richer) "hundreds of times". As my mother used to say, "I've told you a million times - don't exaggerate!" I have written a few things about growing inequality. But none of the articles in Foreign Affairs or the New York Times Magazine that he so bitterly cites were on that subject. My most recent book was on international trade, not income distribution, and it got a very favorable review in that sleazy liberal publication The Wall Street Journal. Oh, and by the way: I don't usually boast about such things, but businessmen in various parts of the world pay me reasonably large fees to talk to them about trade, economic growth, exchange rates, and monetary policy. I mention this only because Wanniski seems anxious to see me "starve to death", and I would like to warn him that the prospect is not imminent.
As I said, we should be grateful to Wanniski for writing this letter, which tells us all that we need to know about his ideas, and more than we wanted to know about his character. The interesting question is what all this says about those who trust in him - above all, about Jack Kemp.
After all, the one thing that even Kemp's opponents always say is that he is an agreeable person - that he is not one of those angry, paranoid, everyone-who-disagrees-with-me-is-an-idiot-or-corrupt, the-liberal-media-are-conspiring-against-us types. So we may well ask: what's a nice guy like Kemp doing with a guru like this?