SYNOPSIS: Supply-Sider critique of claims. Attacks belief that professors are most reliable.

This review Paul Krugman's 1994 tirade, Peddling Prosperity, appeared, with all due respect, in International Economy (with a couple of graphs that are missing here):

Peddling Pomposity

Paul Krugman of MIT may be a very good economist, but he is a clumsy, heavy-handed polemicist. This book began, he says, as a "partisan tract," and most of it remained just that. When he found himself excluded from the Clinton elite, however, Krugman apparently decided to expand the theme into a broader assault on "policy entrepreneurs" in general, including an effective assault on the dangerous "managed trade" nonsense of Robert Reich and Laura Tyson. "This book," says Krugman, "is at least partly dedicated to the proposition that serious economists need to be taken seriously." The problem is that Krugman wants to select who is serious and who is not, and his criteria are rather arbitrary.

What defines those who Krugman denigrates as mere "policy entrepreneurs" is not simply academic snobbery but the author's contempt for nonconformity and dissent -- for failure to play by the rules of what he calls "conventional academic research." "One can have blue-chip credentials," he gripes, "and still have an outsider's mind-set." Yet Krugman is nearly as critical of academic insiders as he is of heretics. "In the academic world," he writes, "the theories that are most apt to attract a devoted following are those that best allow a clever but not very original young man to demonstrate his cleverness." Such remarks (which sound suspiciously autobiographical), make us wonder how serious these clever academic insiders really are.

How can we tell a serious professor, with an insider's mind-set, from a lowly policy entrepreneur? One clue, says Krugman, is that policy entrepreneurs rely on metaphors to illustrate their points. Yet Krugman's 1990 book, The Age of Diminished Expectations, compared exchange rates to a car's drive shaft. This book devotes a whole chapter to comparing the economy to a typewriter keyboard. Another warning sign is that policy entrepreneurs "sell books to the general public" and "appear on television." But Krugman does both of those things, and also writes articles for the general press. There is nothing wrong with all that. People who are deeply interested in public policy naturally want to communicate in effective ways. But Krugman becomes quite upset when others grab the spotlight.

Supply-side economists, he says, are "eccentric" or "renegade professors" who have "crude and silly" ideas. "Or to put in another way, the supply-siders are cranks." It is, he says, "a doctrine not even worth arguing against." Krugman also claims "there is no economist who one might call a supply-sider at any major [economics] department." If we define supply-siders as those who think marginal tax rates have very significant effects on the economy, however, there are fairly pure supply-siders at Harvard, MIT, UCLA, Colombia, Duke, Florida State, George Mason, Ohio University, the Universities of North Carolina, Indiana, Georgia, Mississippi, and Michigan, several Federal Reserve banks, the World Bank and the IMF. The fact that the author does not know who they are simply reveals that he is not up to date on the professional literature on taxes and transfers.

Robert Mundell of Colombia University, Krugman admits, "is a name to be reckoned with." But this supply-side "mascot" committed the unforgivable sin: He "veered off from conventionality." "He wears his hair long . . . dropped out of the usual academic round of seminars and conferences," and became too critical of fellow economists. Even aside from the strange critique of Bob Mundell's hair styling (which has not been long for many years), these are curious complaints coming, as they do, from someone who has been called "the bad boy" of economics (by his media fans) because of Krugman's arrogant habit of bad-mouthing everyone else.

The more substantive difference between professors and the policy entrepreneurs is that "serious" professors apparently know nothing about what improves economic growth or what causes inflation. They "don't know how to make a poor country rich, or how to bring back the magic of economic growth." "Nobody really knows why the U.S. economy could generate 3 percent annual productivity growth before 1973 but only 1 percent since." "There is still a bit of mystery why inflation accelerated as much as it did in 1978 and 1979" or "why the U.S. economy was so weak in 1990-92." "The real answer is that we don't know."

It is precisely because mainstream economists know so little that they fell into disrepute in the seventies. They had long argued that governments should stimulate demand to fix recessions, and restrain demand to fix inflations. The only argument was how best to manipulate spending. Monetarists thought the Fed was far more potent than budget deficits. Keynesians typically advised raising federal spending in recessions and raising taxes in booms, giving both sides of the budget an excuse for ratcheting upward (though Keynesian theory could just as well advise cutting tax rates in recessions and cutting government spending in booms).

When faced with inflationary recessions (stagflation), both varieties of demand management were baffled. How could the government or central bank stimulate and restrict demand at the same time? Krugman still does not realize that the key debate of the late seventies was about Mundell's policy mix. Mundell advised assigning monetary policy the task of holding demand down, while simultaneously expanding aggregate supply through tax incentives for capital and labor. Krugman dodges this central issue by making the bizarre claim that supply-siders think money does not matter at all -- that "monetary policies are completely ineffective"! Indeed, the author's main complaint with the supply siders is this straw man who thinks the Fed doesn't matter, since he concedes that "without any question, the negative effects of taxes on incentives are significant "

Krugman does attach more importance to money than most supply-siders would. He actually seems to believe that the Fed can print labor and capital. He writes that the expansion from 1982 "should be called the Volcker expansion," because Volcker didn't always keep the fed funds rate at 12-16%.

The author defines Keynesianism as the notion that changes in the demand for or supply of money can cause or cure recessions -- a "monetarist" proposition no supply-sider ever denied. The usual supply-side complaint with monetarism is not that money doesn't matter, but that (1) the definition of money is increasingly arbitrary due to rapid innovation and global integration in financial markets; and that (2) monetary conditions can be importantly influenced by international developments. Tight money in Japan contributes to low inflation in the U.S., for example; and a falling exchange rate fosters relatively higher inflation in the weak currency country.

Krugman argues that "the fact that exchange rates are not reflected in prices is one of the best pieces of evidence for . . . Keynesianism." The fact that real and nominal exchange rates move up and down together supposedly proves that prices are sticky, so the same good can supposedly sell at different prices in different counties. Actually, it proves no such thing. A decline in the U.S. terms of trade is equivalent to a real devaluation (trading more exports for fewer imports), but that would typically be accompanied by a nominal devaluation too if the dollar is floating. A falling dollar might result in deflation in Japan rather than inflation in the U.S., but that would not prove that traded goods sell at different prices in the two countries.

Krugman doesn't really believe his own claim that exchange rates are not reflected in prices. He knows better. When grappling with the "mystery" of inflation in the late seventies, he tells us that "Rising food and energy prices were part of the story, as was a slide in the dollar." This seems to argue that the dollar price of two internationally traded commodities, oil and grain, have nothing to do with the value of the dollar, which is demonstrably absurd. In his 1990 book, however, Krugman wrote that "the eventual result of an effort to drive the dollar down will be to raise prices by roughly the same proportion as the dollar falls." That was an extreme statement of the supply-side view he now criticizes.

Is there any economist who merits Krugman's praise? He says Paul Romer is "the most influential theorist of the 1980s." Romer's summary of his own research, written with Robert Barro for the National Bureau of Economic Research, emphasized that "all economic improvement can be traced to actions taken by people who respond to incentives . . . . If government taxes or [regulatory] distortions discourage the activity that generates growth, growth will be slower." Didn't the supply-siders say something like that?

Krugman rarely quotes the people he is criticizing, which allows him to pretend that supply-siders think money doesn't matter, or whatever else suits his story. He does quote this reviewer twice, apparently from memory, but I never said or wrote what he says I did.

He claims supply-siders do not "rely on empirical evidence" (is there any other kind of evidence?), yet Krugman himself is remarkably casual with alleged facts about the economy. He ridicules supply-siders for predicting that lower marginal tax rates would increase labor force participation and real tax revenues, for example, yet conceals the fact that this is exactly what happened -- until tax rates went back up in 1990-1993. Real household net worth also rose substantially before the Iraq War (particularly before 1987, when IRAs were diluted and the capital gains tax raised), and so did business savings and the Fed's flow-of-funds measure of household savings. This indicates how meaningless Krugman's chosen "savings rate" in the national income accounts is. Personal savings" can even appear to rise -- as a percentage of after-tax income -- because real after-tax income falls even more than real savings do.

A major theme of this book is that productivity and living standards slowed to a crawl in the eighties. Yet Figure 1 [not shown on the website] shows that productivity of nonfinancial corporations grew quite briskly after 1980 (statisticians don't know how to measure productivity of financial services, so they assume it is zero). Figure 2 shows that real consumption per capita -- the best single measure of living standards -- also rose sharply in the eighties.

The chapter on income distribution is embarrassingly amateurish. Krugman repeats all the fallacies that he has been criticized for in the past, even by his alleged source --. the Congressional Budget Office -- which has written that he got the numbers all wrong. Krugman continues to claim that the fact that a rising percentage of U.S. families earned more than $50,000 represents some ominous shrinkage of the "middle class." He defines the seventies as 1973 to 1979, and the eighties as starting in either 1977 or 1980 and ending in the recession of 1990. He tells us that "half of the families who start in either the top or the bottom quintile of the income distribution are still there after a decade," and says that proves that "most poor or rich people stay that way." All it proves is that it takes more than a decade for someone who is twenty years old to turn forty. Worst of all, Krugman refers to all income gains among those with high incomes amount to "siphoning" income from others. Krugman ignores his critics in his usual way, saying "it is not worth tracking all the ins and outs of this debate."

For a self-styled serious economist, Paul Krugman is looking more and more like one of those policy entrepreneurs he loves to hate. He certainly isn't guilty of peddling prosperity, so what is he peddling? "I believe in a society," he writes, "that taxes the well-off and uses the proceeds to help the poor and the unlucky." In The Age of Diminished Expectations, though, Krugman wrote that "given that the deepest problem with the U.S. economy is slow productivity growth, it is difficult to argue for tax increases that might reduce incentives, even if some people make large sums for dubious contributions." Since 1990, Krugman's former emphasis on incentives and productivity, and on the merits of exchange rate stability, have taken a back seat to his new passion for partisan politics and income levelling, which appear to have overpowered his judgement.