Book Review of Krugman's Peddling Prosperity

Challenge, September-October 1994

Peddling Prosperity by Paul Krugman (New York: W.W. Norton, 1994, 303 pp., Hardcover $220.00)

Tom Robbins, the author of Even Cowgirls Get The Blues, writes somewhere that there are only two kinds of people in the world--those who think there are only two kinds of people in the world, and those who are smart enough to know better. Although festooned with awards attesting to his smartness, Paul Krugman, the author of Peddling Prosperity, apparently does not know better.

One of the basic assumptions Krugman makes in Peddling Prosperity is that there are only two kinds of economists: "There are two different kinds of 'economists.' We can call them professors and policy entrepreneurs....The fault line between serious economic thinking and economic patent medicine, between the professors and the policy entrepreneurs, is at least as important as the divide between left and right."

"Professors" and policymakers

Once, according to Krugman in Peddling Prosperity, there was a time when politicians listened to the "professors." Prominent academic economists like Paul Samuelson and Robert Solow were near the center of the policymaking process. Then something bad happened. Due to reasons Krugman says none of us know, productivity growth leveled off and led to a stagnation of living standards. Political pressures increased to do something about it. In response, politicians started to turn to the easy answers pushed by policy entrepreneurs, and turned away from the "professors" who understood the hard reality of the problem.

Thus, we have Krugman's complaint. Like Samuelson and Solow before him, Krugman has successfully climbed the academic ladder. But, unlike that of a generation before, the ladder no longer led to a position of influence. Peddling Prosperity is a whining account of the diminished role of the "professors" in the policymaking process.

Assault 1: Galbraith

The book's first target is John Kenneth Galbraith. To Krugman, he was the first "celebrity economist"--a pioneer policy entrepreneur. He exhibited an abundance of style that became more important than substance. The general educated public is wrong because it "thinks of Galbraith as an important economic thinker." According to Krugman, "he has never been taken seriously by his academic colleagues." He says that Galbraith was snubbed by no less than President Kennedy, who chose real "professors" as his policy advisers; but he appointed Galbraith as Ambassador to India--"as far from economic policy as possible."

But a "professor" of no less stature than Paul Samuelson says that Galbraith has had a strong influence on students (more so than has Debreu), and that Galbraith's characterization of the economy is more accurate than that of the neoclassical theory of competitive markets or rational expectations. Broader approval of Galbraith came when his academic and professional colleagues elected him as President of the American Economic Association in 1971.

Galbraith labored on economic policy for President Roose-velt and, later, the Democratic Advisory Council. He worked on the economic and social policies that later became Kennedy's New Frontier programs. Galbraith was not only a senior policy adviser to Democrats, he was also close to the Kennedys. It is more reasonable to conclude that Galbraith sought the appointment in India rather than one in the White House.

Assault 2: The Supply-siders

Next, Krugman mounts an attack on the Supply-siders. He claims that they distorted the ideas of "Professor" Martin Feldstein. (Incidentally, it was Feldstein who hired Krugman to work in Ronald Reagan's Council of Economic Advisers.) His criticism of the Supply-siders includes calling them "cranks," designating Jack Kemp an "apostle," and describing Wall Street Journal editor Robert Bartley as "neither cautious nor even-handed."

At another point, Krugman claims that another "professor," Michael Boskin (Chair of the Council of Economic Advisers for President Bush), became "a scapegoat for Bush's economic troubles." It may seem unfair to Krugman, but Boskin did publicly claim during the Bush presidency that capital-gains tax cuts would reduce the deficit and stimulate the stagnant economy. Boskin also maintained very optimistic forecasts of real economic growth through June 1990--the month before the recession started. Those forecasts were well above those of the Congressional Budget Office and the private sector blue-chip average. He then continued to deny, for months into the downturn, that there was an economic recession. As poor as his forecasts were, he was even worse as a scapegoat, because his boss George Bush took most of the blame.

Assault 3: Clinton

Finally, Krugman sets upon the policymakers in the Clinton Administration. He describes them as strategic trade-policy advocates. To deal with them, Krugman pursues the textbook rhetorical tactic of setting up a straw man, then knocks it down. He then adds his own twist by standing over the prone straw man, putting his foot on its chest, and reading it "the facts"--according to the Heckscher-Ohlin model of free trade.

Krugman takes the helm

In the epilogue of the book, Krugman tries his own hand at policy analysis. He states that the only real problems are productivity and poverty, and that these cannot really be solved by policy! Nevertheless, he offers the following recommendations: In order to raise productivity, he advocates reducing the deficit. This is to be done by raising taxes, cutting agricultural subsidies, reforming health care to lessen the burden of rising costs, taxing pollution and congestion, and ending private use of federal land for mining and grazing at minimal fees. In order to reduce poverty, he advocates spending more on poor children, poor families with children, and distressed school districts.

The problem is that these measures have long been proposed by Democrats in Congress and, more recently, by the Clinton Administration. Some of them have already passed into law, and others are in the process of becoming law. Taxes have already been raised to reduce the deficit; farm subsidies have been cut; taxes on gas and fuel have been increased; spending has been increased for food stamps, WIC, Head Start, and immunizations. Higher grazing fees passed the House of Representatives years ago, and the Clinton Administration is now about to announce still higher fees. Health care reform has been brought to the front of the agenda and been given a lot of attention. It should be clear that policymakers do not need a "Monday Morning Quarterback."

One problem the "professors" have is that their policy recommendations are too often derived from the distillation of firm policy conclusions based on highly simplified models. Another problem is that their research is often too abstract or based on assumptions so strong that their advice fails to be relevant--for example, the Hecksher-Ohlin theory of comparative advantage. It assumes that the world consists of only two countries, two goods, two factors, and convex sets of taste and technology. It further assumes that labor markets are always in equilibrium (so that the two economies are always at full employment) and that there is no money, no exchange rates and, thus, no real exchange rate effects.

But such issues as employment and exchange-rate movements (which international trade theorists assume away) are precisely the issues that policymakers have to address. Policymakers know that the economy does not return quickly and automatically to full employment. Therefore, policies that eliminate jobs as part of an adjustment process have a lasting, adverse impact on people's lives. They know that, when the value of the dollar is pushed up or down by monetary policy, it has an impact on the trade balance, jobs in the traded-goods sectors, and living standards. But Krugman writes in his condescending way that this is just not so. Why should policymakers listen to that?

Another reason that "professors" are ignored is that they are often ignorant of or misunderstand the basic facts (not to mention the details) surrounding a policy, as well as the parameters of the debate. Krugman's book is an example. He also confuses the structure of the Federal Reserve Board with that of the Federal Open Market Committee. His lack of understanding of the relationship between Congress and the Congressional Budget Office can be seen in his discussion of their study of income distribution. For example, he confuses (to his own advantage) the difference between the gross debt of the federal government and that held by the public (which should be further adjusted for debt held by the Federal Reserve. When he discusses the timing of business cycles, he uses annual data which smooth out cycles that are dated monthly.

Krugman's complaint is that the "professors" have lost their influence. Ironically, Krugman identifies the problem correctly: "The problem that the politicians have with the professors is not one of failure to communicate; it is one of failure to say what politicians want (need) to hear." But he interprets it wrongly. Politics is the art of the possible; it is the world, not of Greece, but of Rome. Politicians are policymakers who want and need to hear realistic, relevant, factually based advice. Krugman's work suffers from being too simple and abstract to be realistic. His ignorance of the basic parameters of the policy debate makes his advice irrelevant. The errors of omission and fact make his advice dangerous to accept.

In this light, one might conclude that it has not been so much the policymakers, but the economics "professors," who have moved up the ladder.

RANDALL DODD is a Senior Economist for the Democratic Study Group, U.S. House of Representatives. This article was written on the author's own time. The opinions stated here are his and not those of the organization.