The Accidental Theorist: And Other Dispatches from the Dismal Science and The Age of Diminished Expectations by Paul Krugman
The Age of Diminished Expectations is an engaging, easy-to-understand economics 101 for general audiences. The Accidental Theorist collects some of Paul Krugman's articles.
Mildly contrarian, Krugman, excels at explaining economics, especially monetary policy.
The author, an expert at the keen one-liner, points out that the Chairman of the Federal Reserve can create more employment or unemployment with a phone call than politicians can with attention grabbing legislative changes. The Fed—Alan Greenspan—primarily influences unemployment rates, not NAFTA. Krugman explains that downsizing improves productivity and does not reduce the overall, long-term number of jobs.
Productivity, he notes, is mostly local. Local factors—luck, norms, education, etc.—matter most. Most U.S. trade takes place within the United States, and almost all the rest takes place with other industrialized nations. Trade with poor nations is a fraction of U.S. trade. “The main thing that matters for American living standards is still our own productivity.” (The so-called global economy was more global 90 years ago.)
Like most of the world, the United States has nasty economic problems. Krugman claims the problems are solvable, but standards are ridiculously low and almost no interest exists in making the effort. Leaders hype manufactured battles while pursuing interest group greed. Today’s actions and inactions would have once been unthinkable. Americans hope others will help, believing little is doable because of the difficulties involved.
On recessions, Krugman suggests several methods to provide a short-term stimulus: (1) Decrease federal reserve rates; (2) increase short-term government spending; (3) cut short-term taxes; (4) engage in cheerleading; (5) combine the above.
Numerous methods to damage economies exist over the long-term. They include: (1) Excessive, long-term budget deficits; (2) overconfidence and too much cheerleading; (3) spirals of long-term low confidence; (4) deflation or great inflation; (5) printing too much money; (6) regressive and anti-meritarian taxation; (7) unmeritarian income distributions; (8) rampant corruption; (9) demosclerosis, dictatorsclerosis and commusclerosis; (10) weak property rights or unenforced property rights; (11) bad educations; (12) poor infrastructure; (13) weak or non-existent democracy; (14) poor norms, including rotten religions and anti-work beliefs; (15) poor contract laws, poor enforcement of contract laws; (16) bad financial and monetary institutions; (17) poor crime prevention and law enforcement, especially white collar crimes; (18) being vulnerable to aggression or conquest; (19) eating your seed.
Models matter in economics. Krugman uses a baby sitting co-op as a model for a recession. Imagine the co-op with five couples. Each couple initially owns four coupons, which they exchange for baby sitting each others' children. Things go smoothly, but then one couple begins collecting many coupons--perhaps because they enjoy baby sitting, perhaps for a future when they require much babysitting, or for thousands of other reasons. Once the couple collects many coupons, the other couples save their one or two remaining coupons for emergencies. The co-op collapses into a severe recession with no exchange of services. One way out: Start printing more coupons, but if too many coupons exist, couples may start demanding two coupons to babysit and inflation results. Krugman calls this a good model for some recessions.
Saving is good, but too much is bad, a major problem in Japan. Theorist claims the most important thing the Japanese central bank can do is print more money because the Japanese sit on their money.
One thing should not be supported: The gold standard. The gold standard creates economic and environmental catastrophes.
Krugman rails against the position that the U.S. economy can grow at four percent per year for a decade merely by pumping money in. The “four-percenters” start with an opinion, then try to support it with spurious claims. The four-percenters have no model supporting the four percent conclusion.
Arguing that three or four percent inflation is best, Krugman points to evidence that suggests attempts to reduce inflation to zero cause higher unemployment. Zero inflation impairs wage flexibility. For wage flexibility, some workers should take cuts. Workers accept zero non-constant dollar increases when inflation is three percent, but will refuse a three percent cut when inflation is zero. Ergo, if wages cannot be cut, jobs are cut. Slightly cutting wages beats massively cutting jobs.
To his credit, Krugman’s macroeconomics is macroeconomics. He talks about trillion dollar matters. Is most federal government spending on items citizens oppose? No, he argues at least 75 percent of federal spending is for items the public supports—defense, Medicare, Social Security, and interest on the debt. (Are those spending priorities best? No.)
Reviewing The Great Wave, Krugman finds its comparisons of modern economies to events hundreds of years ago preposterous. The Great Wave alleges that the business cycle is dead and gone--no more recessions. Krugman argues the business cycle remains because so many curve balls screw up economies. Too many diabolical politicians, interest groups and Fed chairpersons do greedy, destructive actions. It takes careful policy maneuvering to avoid or leave recessions.
Krugman points out that the super-rich (the top 0.25 percent) became much, much richer. Talking about the economic trends of the top twenty percent does not illuminate. The top quintile ranges from $60,000 a year managers to the richest American. (Imagine if incomes of the bottom 99 percent doubled over the past generation and the incomes of much of the top one percent declined? The conservative establishments would be calling it a catastrophe.) Krugman offers the parable of the fisher folks and the gold prospectors. Though parables offer no evidence, they do sometimes help with understanding. He says society shifted from the former to the latter. In a society of fishers, reward approximates effort. In a prospector society, it takes effort plus huge amounts of luck.
Krugman attacks supply siders, and I do mean attacks. Krugman has a flair for ad hominem attacks.
Tax cuts for the rich when their taxes are already low, probably do not increase long-term growth or tax revenue. Major causes of increased revenue from the rich despite lower taxes include: (1) The sky-rocketing income of the rich due to other causes; (2) elimination of some tax shelters; (3) increases in population. If the population increases 20 percent, the size of the top one percent increases about 20 percent; (4) increases in productivity.
Increased productivity probably results from a variety of reasons, including:
· Improvements in non-computer technologies.
· More flexible labor markets.
· Reduced union power.
Krugman ridicules the French for their inanity—their mistaken belief they can reduce unemployment by shrinking the workweek and by eliminating self-serve gas pumps. And the French European unification strategy will not help unemployment either.
The three most important matters for an economy, writes Krugman, are productivity, unemployment and income distribution. Screw those up, and it does not matter what else you do right. I would argue that productivity, total employment, and the mixture of income distribution and retribution makes a better threesome.
Krugman creates fantastic, understandable prose, yet his arguments on difficult issues are less than thorough. He recommends old ideas and status quo ideas that do not work now and did not work then. Like ultraconservatives and their top quintile, Krugman divides the world into nice, neat income quintiles, never mind that individuals in the same quintile differ greatly and make much different contributions. Like most economists, he fails to notice families with children. A family of four with an income of $30,000 is in very different economic shape than a single person with an income of $30,000. Distinctions beyond quintiles, apparently, tax brains too much.
Krugman excoriates free-lunch conservatism, yet much herein is free lunch liberalism. Krugman thinks spending upwards of 30 percent of GDP on health care would be swell—forget the resulting costs and opportunity losses. The consequences of implementing the Krugman worldview would include an economy with too much wealth divided among the rich, the unionized, and the corporment.
Theorist contains two of the worst essays Krugman ever wrote, one a false dichotomy essay defending sweatshops. Other alternatives exist besides no jobs or micro- wages.
The second: “[The Boskin inflation measurement commission] may be right or wrong, but one argument by his critics is clearly wrong. They say: Suppose it’s true that inflation has been less than the official increase in the CPI over the past few decades. If you assume a lower inflation rate and recalculate real incomes back to—say, 1950—you reach what seems to be a crazy conclusion: that in the early 1950s, the era of postwar affluence, most Americans were living below what we now regard as the poverty line. Some critics of the Boskin report regard this as a decisive blow to its credibility.”
“The idea that most Americans were poor in 1950 is indeed absurd, but not because of Boskin’s numbers. After all, even if you use an unadjusted CPI, the standard of living of the median family (50th percentile) in 1950 America appears startlingly low by current standards. In that year, median-family income in 1994 dollars was only about $18,000. That’s about the 20th percentile today. Families at the 20th percentile—that is, poorer than 80 percent of the population—may not be legally poor (only about 12 percent of families are officially below the poverty line), but they are likely to regard themselves as very disadvantaged and unsuccessful. So even using the old numbers, most families in 1950 had a material standard of living no better than that of today’s poor or near-poor.”
Maybe Krugman attended the Cox and Alm school of counterarguments that are not counterarguments. If the Boskin inflation measurements lead to the absurd conclusion that the Boskinites grossly overstate inflation and the old “official” inflation measurements also lead to the absurd conclusion that the oldsters also overstate inflation, it is no argument that the Boskinites are right. If one person looks at a football field and estimates that there are 15 players out there and someone else estimates that there are 19 players, it does not make either of them right when there are in fact 22 players out there.
“We can confirm this with measures of the way people lived. In 1950 some 35 percent of dwellings lacked full indoor plumbing. Many families still did not have telephones or cars. And of course very few people had televisions. A modern American family at the 12th percentile (that is, right at the poverty line) surely has a flushing toilet, a working shower, and a telephone with direct-dial long-distance service; probably has a color television; and may well even have a car. Take into account improvements in the quality of many other products, and it does not seem at all absurd to say that the material standard of living of that poverty-level family in 1996 is as good as or better than that of the median family in 1950.” No, you cannot. Plumbing is a small sample. It may reflect the high price of metals then compared to other products. Hard as it is to believe now, people used to save rusty nails. Plumbing is not a one-year deal. It may reflect the fact that incomes were so low earlier in the century. If people enjoyed 1950 level incomes from 1900 to 1949, plumbing may have been near universal. From 1942 to 1945, very few consumer goods were produced, especially metal products. I believe some event was going on from 1939 to 1945. Major household improvements add up over a lifetime. If incomes in Mexico soared over the next couple years, indoor plumbing would not quickly become near universal in Mexico for many years.
You do not need to go back to the 1950s to suggest the Boskin arguments are preposterous. I know someone who in 1973, a time of near universal U.S. indoor plumbing, earned about the median hourly wage. This individual had health insurance, a beautiful Dutch colonial home, a stay-at-home wife, three young children, two weeks of annual paid vacations, and a brand new station wagon he paid for in cash. If the Boskin commission is correct, an individual currently earning about nine dollars per hour replicates that standard of living.
In my city, landlords have minimum income requirements. They will not rent you an ugly, alienating, puke colored, one room studio apartment if you earn nine dollars per hour. Oh… but you can buy super terrific techno-junk that previous generations could only dream of (or consider too asinine to dream of): Nintendo, talking greeting cards, and calculators that calculate the natural log of 68 to 12 decimal places. Whopee!
Why are harmful products like television considered inflation reducers? Why is television regarded as better than a hula hoop? The Boskinites simply ignored all products that worsen with time in their statistics. For example, penicillin does not work as well as it once did.
The consumer price index, even if accurate, measures mean averages. Various individuals are affected in different ways. Individuals buying lots of education, health care, housing, and childcare face extremely high inflation because these services and products have high inflation rates. The CPI does not even include house prices. People who buy lots of toys suffer much less inflation.
Oh, then there’s this: A Senate Commitee that wanted to allege inflation was overstated appointed The Boskin Commission. The Commission was composed entirely of individuals who believed beforehand that inflation was overstated and probably would have concluded that it was overstated no matter what the evidence was. How often have you heard of a conservative economist who changes conclusions to fit the evidence? When conservative economists are right, it is usually because the facts happened to coincidently match power market ideology, not because conservative economists are engaging in an ethical, fact-finding journey.
The quality of both these works is similar, mediocre but worth reading. The Age of Diminished Expectations is the more dated of the two.
—Book review article by J.T. Fournier, last updated July 12, 2009.