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.