David R. Henderson  

From the Vault: My Review of Krugman

Selfish/Self-Interested... Bond Bubble Watch...

I was web searching this morning in the Fortune archives--I wrote a lot of articles and books reviews for Fortune between 1983 and the late 1990s--and I came across my December 31, 1990 review of Paul Krugman's 1990 book, The Age of Diminished Expectations. Here's how I lead off:

Who [sic] are you going to believe? Nobel laureate Paul Samuelson calls fellow MIT economist Paul Krugman ''the rising star of this century and the next.'' What's more, says Samuelson, Krugman's The Age of Diminished Expectations (MIT Press, $17.95) is ''a tour de force.'' The Wall Street Journal's reviewer, on the other hand, trashes the book, saying his expectations were ''diminished by reading it.'' Now I am a hard-core free-marketer, and in most conflicts between a liberal like Samuelson and the market-oriented Journal I naturally side with the Journal. But this time I don't. Krugman's book is first-rate. What has received the most attention is the weakest and, fortunately, a minor part: the author's claim that the U.S. ''may well be the third-ranked economic power by the end of this decade.'' Although he makes the statement in the preface, Krugman does not attempt to justify it until four pages from the book's end. His reasoning turns on semantics. By treating all of Europe as one country, he gets the U.S. to second place. He then pushes it to third through the way he measures Japan's economy -- not by its GNP, which he estimates will be about 80% of America's, but by its overseas investments and exports, which likely will exceed America's. Bottom line: Measured by GNP, the U.S. will still be No. 1 in 2000.

Here's another section:
Krugman points out that inequality in the U.S. increased dramatically in the 1980s. From 1979 to 1987, he reports, real income before taxes of families in the population's top tenth rose 21%, while that of the bottom tenth fell 12%. But Krugman does not conclude that the rich got richer by exploiting the poor. Good line: ''For one thing, most of our very poor don't work, which makes it hard to exploit them.'' Krugman also notes that the rich families' gain in income was about 12 times as large as the poor families' loss, making it impossible for the rich to have grown richer solely at the expense of the poor. Nor does he advocate taxing the rich further to throw more money at the poor. Tax increases might reduce incentives, he argues, which would hurt productivity growth. Also refreshing is the discussion of the American job machine. Krugman points out that the U.S. economy created jobs for almost all the baby-boomers and immigrants who entered the U.S. labor force during the 1970s and 1980s. This achievement, he writes, contrasts sharply with Europe's experience. The European economies created no new jobs between 1973 and 1985, multiplying unemployment fivefold. Nor was the boom in U.S. jobs a lucky development that just happened to coincide with the huge increase in people looking for work. The credit, writes Krugman, goes to our ''highly competitive and flexible labor markets,'' which contrast sharply with their stiffly regulated European counterparts.

Comments and Sharing

COMMENTS (11 to date)
Yancey Ward writes:

I, for one, welcome our new Japanese overlords.

Andy writes:

Where did the Paul Krugman of the 2nd quoted section go?

david writes:

@Andy, one possibility:

"But he’s much better at that now, and these days she focusses on making him less dry, less abstract, angrier."

from here

Another is that Krugman finally figured out that being careful and precise during the runup to Iraq did exactly nothing. Shrill, etc.

I'd like to remind them as a trusted economic personality, I can be helpful in rounding up others to toil in their underground robotics factories.

Eric Falkenstein writes:

Lots of facts, but in the end, what's the net net?

Clearly Krugman today does not think 'flexible' markets are the key to growth, rather, more government spending and regulation. Either he changed his mind, or you read into this your interpretation.

Troy Camplin writes:

I wish that this Paul Krugman would go replace that ideological hack using his name over at the NYT.

mdc writes:

"Japan's economy... which he estimates will be about 80% of America's"

Why did people ever think this sort of thing was reasonable?

According to wiki, in 1990 Japan's pop was about 125m and America's was about 250m. For Japan to have 80% of US GDP, it would need to have a GDP/capita 60% greater than that of the US. In other words, in 2000 Japan would have had to have had a GDP/capita of $54k. That's more than any real country does today (ie. not including city and petrostates), 10 years later! Taking into account relative population change in that time only pushes this even higher.

Is this just another example of social scientists extrapolating trends way beyond their range of validity, or was there some substantive reason for people thinking this might happen?

Justin writes:

"Why did people ever think this sort of thing was reasonable?"

Japanese nominal GDP in dollar terms rose from $1,347 billion in 1985 to $3,018 billion in 1990, a 17.5% CAGR. Japan looked like an unstoppable juggernaut at the time.

In 1995, Japan's GDP totaled $5,248 billion, which was 71.5% of the US ($7,342 billion).

Granted, Japan's GDP is lower today in nominal dollar terms than it was in 1995 whereas America's GDP is twice as large, and I am in complete agreement with your analysis on a per capita basis. Just trying to suggest why people thought such a scenario plausible.

rukn al-dawla writes:

Whenever Dave posts these "blasts from the past" regarding Krugman, it's always interesting to see the resulting "I wish that this Paul Krugman would go replace that ideological hack using his name over at the NYT" comments (this one from Troy, above). When Krugman reflects on his own intellectual journey, however, he claims its the political spectrum that has shifted, not him. Further, that he simply speaks truth to power (exemplified by the attacks on him by the Clinton administration). Now, people are not always able to take a detached look at their own intellectual development. And I think its certainly safe to say that Krugman has revised his tactics (as one commenter above noted, he's found that being dry and rational doesn't work, whereas being shrill and biting gets people to listen). But I find it frustrating that most people espousing the "Krugman used to be good, but now he sucks" line, haven't attempted to strip out some of the rhetoric and show that Krugman really has abandoned his earlier self.

David C writes:

To reiterate rukn al-dawla, I'd like to point out that on taxes at least, Krugman's position hasn't changed from 1990. He still thinks the tax rates we had in 1990 were about optimal. It's just now tax rates are lower than they were in 1990, so he's advocating increasing them rather than advocating maintaining them.

Troy Camplin writes:

The person who wrote "The Self-Organizing Economy" is in fundamental disagreement with the person who writes the NYT column. Krugman shifted -- to the worse. For one, he says things that contradict things he said earlier -- entirely for political purposes. The argument that he's become shrill and irrational to get peoples' attention doesn't recommend either him or his approach. Neither does the fact that he misrepresents people who disagree with him -- when he's not accusing them of having all the worse attributes that in fact belong to him (calling Dr. Freud: project much?). I will go even further: Kurgman knows what the good is and pursposefully goes against it for political power. WHat kind of man is that?

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