PEDDLING PROSPERITY
by Paul Krugman (1994)
Book review by Franklin Neubauer © 
October 1996
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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