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The Condescension of Paul Krugman
Just to get citizens into a suitably docile condition to receive the President’s State of the Union address, Paul Krugman reminds them in a recent New York Times column that they aren’t bright enough to criticize government policy.
Americans are especially thick, apparently, about the need for deficit spending. “It’s very hard,” Dr. Krugman confides, just as he might in a faculty lounge, “to try to communicate even the most basic truths of macroeconomics, like the need to run deficits to support employment in bad times.”
Even President Obama, to Dr. Krugman’s apparent irritation, occasionally slips into the thoughtless habit of “echoing Republican rhetoric about the need for the federal government to tighten its belt…” To illuminate, Dr. Krugman offers a lesson about the Depression within the Depression of the later 1930s: “consider what happened in 1936…”
… F.D.R. had just won a smashing re-election victory, largely because of the success of his deficit-spending policies. It’s often forgotten now, but his first term was marked by rapid economic recovery and sharply falling unemployment. But the public remained wedded to economic orthodoxy: by a more than 2-to-1 majority, voters surveyed by Gallup just after the election called for a balanced budget. And F.D.R., unfortunately, listened; his attempt to balance the budget soon plunged America back into recession.
A look at what actually happened in the later 1930s, however, yields a more nuanced picture. For one thing, the government did run a deficit through the later 1930s, a fact that gets obscured in Dr. Krugman’s column. The pro-deficit interpretation of that period therefore has to argue that the deficit was simply not wide enough.
Ok. If you want to argue that money was generally too tight, you can point to other things as well. Reserve requirements for banks were effectively doubled in this period, taking money out of circulation. At some points, authorities sterilized gold inflows, producing less money, to curtail gold’s expansionary effect.
Recent research, however, has confirmed that other factors did much to bring about the double-dip of the late 1930s. The Wagner Act, a law that gave unions greater power than they enjoy today, had been passed in 1935. Unions had loyally waited through the election of 1936 before exploiting the law to its fullest extent, staging sit-down strikes and demanding (and receiving) higher wages from still-fragile firms.
Since the firms could ill-afford the increases, they rehired more slowly, even laying off workers where they could. Jobless rates moved into the high teens. A new divide arose between those with union-protected jobs and those who could not find their way into the work force. “Nice Work If You Can Get It,” a 1937 love song by George and Ira Gershwin, became a hit in part because the line resonated in a way that had nothing to do with romance; workers were shut out from everyday factory or office work. Scholars Harold Cole and Lee Ohanian have documented the negative effect of the Wagner Act, and are at work on a great new textbook that will demonstrate the damage wrought by politically inflated wages over the course of our history.
In the same period, taxes were also damaging. Income taxes were high, but they were not the sole offender. Among the creepiest levies of the period was the New Dealers’ “undistributed profits tax,” which penalized businesses that saved, on the principle that company spending would force recovery.
The greatest weight dragging down the economy of the late 1930s, however, was not individual policies but pervasive uncertainty. The entire economy hesitated, waiting to see what Democratic leaders would do with the expanded powers given to them by the 1936 Democratic landslide. If Washington backed up the sit-down strikers entirely, for example, then factory owners would no longer be sure what they could claim as their property. Washington might raise taxes yet farther, and companies feared that then they could not operate at all. They went on what, even then, was called “capital strike.” Small wonder that Ayn Rand penned her dystopian novel Anthem in 1937— the flight into the forest of her entrepreneurial character, known as Equality 7-2521, was an early version of John Galt’s capital strike.
Despite the anxiety it produced in the private sector, the authorities seemed to relish playing with power. A feud over Dr. Krugman’s favorite area, monetary policy, illustrates this.
Marriner Eccles, the new chairman of the Federal Reserve, preached looser monetary policy. Treasury Secretary Henry Morgenthau, by contrast, favored budget-tightening. The Eccles-Morgenthau row infuriated their fellow officials, as artist Paul Rivoche shows in the drawing here, a cartoon picture from our forthcoming illustrated version of my own history of the era, The Forgotten Man (Click on the photograph to see a larger version). The two officials, especially Morgenthau, were more concerned with putting each other down than with what transpired outside Washington as a result of their squabble.
The officials took this license because their boss, Franklin Roosevelt, seemed in no hurry to settle the dispute. On some days, the president worried aloud about budget deficits, like a “Dutch householder” as one journalist described him. “I have said 50 times the budget will be balanced,” Roosevelt said testily in May 1937. On other days, the moody chief executive backed new spending. His old motto, “bold, persistent experimentation,” took on a perverse meaning. The extended unpredictability of government’s direction itself terrified markets.
One of the star economists of the 1930s, Benjamin Anderson of Chase, looked back at it all just a few years later. He concluded that the Depression lasted so long because the government had decided to “play God.” Anderson abhorred deficits, not only because of their effect on the exchange rate with sterling but also because they signaled arrogance and therefore dangerous future spending. Alas, Anderson’s textbook on the 1930s, Economics and Public Welfare, has not been taught much since World War II.
Recent work by Steven Davis of the University of Chicago and other scholars picks up the same theme. Davis finds a correlation in all eras between economic trouble and policy uncertainty— especially that generated by government expansion. Larger government means more capacity for damage, and larger government tends to result from greater spending. Voters may fear deficits because deficits signal larger government, which, in turn, they suspect may impede long-term growth.
It’s arrogant for anyone to assume that citizens and presidents reject spending because they are undereducated. The truth is that scholarship, some old and some new, supplies compelling reasons why voters might cringe at deficit reports, or hesitate to back endless spending or monetary expansions. The only thing those voters don’t do is spell out their logic in memos or textbooks. That intermediate work is the job of columnists. Why is it not being done?
Published in General
I so appreciate your book THE FORGOTTEN MAN — have recommended it to many. Thanks for your commentary today.
That desire to “play God” appears to be something technocrats and despots have in common. No wonder they have such a symbiotic relationship.
How ironic that their victims are the people who work to create wealth — those not asserting God-like powers, despite their abilities to actually, y’know, create something.
I would remind Mr. Krugman that Spain went bankrupt three times in the 17th century. The world’s first trans-oceanic empire had a 150 year head start on her European rivals, yet the wealth of the Americas was squandered on frivolous living. Spain would become a punching bag at the hands of more thrifty powers for the next 300 years. I’m no economist, just a poor history teacher who understands his field. I don’t have a Nobel prize for economics, but I manage to balance my checkbook every month.
Continuing with Shlaes’ “uncertainty” theme, I wonder how she would compare the economic impacts of our current president’s arbitrary and capricious administration of the law with the impacts of FDR’s similar behavior. It seems to me that the combined impact of the EPA and the ACA mischief alone would more than match the damage done by all of Roosevelt’s alphabet agencies in the ’30s, but I’d like to get Amity Shlae’s read.
I don’t think it was Spain’s overspending that left Spain behind as much as it was the paternalistic and backwards features of its political, religious, and economic culture.
That’s not to say that I disagree with The Mugwump’s rejection of deficits as essential conditions for growth.
Aren’t we just in territory that we’ve never been in before? The 30’s had Bretton Woods and then the adoption of the dollar as the reserve currency in the 70’s. Now, the Chinese and others are challenging this and Krugman has no idea what that will do coupled with our level of debt.
The “job of the columnists” is not being done because the media are owned by the Liberals who would not allow publication of such information in their pages, and who would not report on it if it were promulgated elsewhere. Conservative economists like Thomas Sowell and Walter E. Williams preach to the choir, while the wider public who really need to hear what they say are denied their wisdom.
At first I read that headline as the CONDENSATION of Paul Krugman. I just naturally assume that he’s all wet.
Aren’t we just in territory that we’ve never been in before? The 30’s had Bretton Woods and then the adoption of the dollar as the reserve currency in the 70’s. Now, the Chinese and others are challenging this and Krugman has no idea what that will do coupled with our level of debt. ·in 0 minutes
I, too, wish that Mr. Krugman would dry up.
Arrogant for anybody from the Duranty Times to mess with you .
I second Julia’s sentiment about your book.
Krugman invested his earnings from his Enron work into Walmart stock , probably why he take such big risks with the truth.
I don’t think it was Spain’s overspending that left Spain behind as much as it was the paternalistic and backwards features of its political, religious, and economic culture.
That’s not to say that I disagree with The Mugwump’s rejection of deficits as essential conditions for growth. ·45 minutes ago
I think Phillip’s gross over reach, spending the fortune from the New World on his wars, was at least as much a factor. No comment on our own spending, war or otherwise.
I have long had a theory of why economic experts like Paul Krugman (and he is an expert) support policies that make no economic sense (e.g., higher minimum wages to help the poor): There is a market for telling people what they want to hear, and the benefits of doing so increase in proportion to the power of the people to whom one caters. Politicians garner power by being able to reward their allies with tax dollars, and economists like Krugman provide politicians with plausible rationales for spending tax dollars with abandon.
For all the mockery of Glenn Beck, he did feature on his Fox show writers on economics who were rarely invited on the tube. And he gave them most of the hour (or the whole hour) to explain their critiques of the administration’s economic policies and the assertions of Paul Krugman. Now that task is often undertaken by John Stossel. But not enough people are watching.
I think Spain’s main problem was centuries of monetary inflation. The conquistadors brought tons of gold and silver from the new world, enriching a fortunate few in the country. Those few bid up the price of nearly everything, making Spanish goods expensive relative to those made in neighboring states. The result was that most products could be more cheaply purchased from abroad, causing Spanish industry to wither and die. The flood of precious metals also increased the power of the central government relative to the private sector, a power shift that had its own malign results.
Just as Spain was cursed by gold, today’s Arab states suffer similarly from an “oil curse.”
Americans are especially thick, apparently, about the need for deficit spending. “It’s very hard,” Dr. Krugman confides, just as he might in a faculty lounge, “to try to communicate even the most basic truths of macroeconomics, like the need to run deficits to support employment in bad times.”
…
What a weird (and telling) example. If you really want to illustrate the public’s economic ignorance, how about highlighting support for the minimum wage?
The reason I like reading your writing is that I not only gain a better understanding of your topic, but also manage to better understand the arguments others make.
Thank you.
“It’s arrogant for anyone to assume that citizens and presidents reject spending because they are undereducated. The truth is that scholarship, some old and some new, supplies compelling reasons why voters might cringe at deficit reports, or hesitate to back endless spending or monetary expansions. The only thing those voters don’t do is spell out their logic in memos or textbooks. That intermediate work is the job of columnists. Why is it not being done?”
It is being done, Amity – by you. But one of the rougher realities to contend with is that much of what actually occurred in the 1920’s and 1930’s is distorted or completely ignored in our education system, so that much of what’s left is “FDR ended the Depression”, which is laughable on the merits.
Krugman has an audience for this stuff, and he’s paid to do the monkey dance, saying more gov’t spending is required. If that were the case, why isn’t there a correlation between unemployment and USG spending? Why does unemployment go up when USG spending goes up? A rational answer is not “Because we’re not spending enough”, either.
Edited 16 hours ago
I can easily imagine that many of the alchemists of ancient times were themselves convinced, by dint of their own observations, that it wasn’t feasible to convert base metals into gold.
But the rich and wanna-be-rich of their times really needed the magic to be true — so I bet many skeptic alchemists lived comfortable lives conducting experiments and spinning earnest theories because… who wants to do real work?
I see the same dynamic in modern environment science — especially climatology. To call BS is to forgo big chunks of ill-gotten funding. Better to play along.
For those interested in economics from first principles and from the ancient Romans to today, I cannot recommend Money, Bank Credit, and Economic Cycles highly enough. Of course, as others have noted, Ms. Shlaes’ own The Forgotten Man is a desperately needed restorative history of the US’ Great Depression.
Finally someone who is expressing the dangers of deficits. It isn’t ability to borrow, or the cost of the debt. It is the costs imposed by government by their actions, and those costs could not be imposed if they couldn’t borrow money.
A few examples from recent events. Would the Democrats have written a law that essentially guaranteed insurance company losses that would stem from their poorly thought out and execrably executed program if they knew that they would have to raise taxes to do so? How differently would Bush have conducted the wars in the Middle East if instead of being able to borrow needed to raise a tax for the purpose?
Deficits detach the effects of government action from the ability of taxpayers to fund them. That is why politicians and political strategists from both parties love deficits.
The people who tout the benefits of government spending in hard times are working off of incomplete information – on their own economic philosophy.
The biggest problem is that they ignore a few basic issues:
1) the government should only indulge in deficit spending when they are at low debt levels, or if they have a surplus in the bank.
2) the government should run a surplus at all other times.
3) the government should never have a large amount of debt.
Of course, Keynesian economics have a lot of other, fatal flaws, but it’s telling that the people who tout it don’t even follow their own rules…
The biggest problem is that they ignore a few basic issues:
1) the government shouldonlyindulge in deficit spending when they are at low debt levels, or if they have a surplus in the bank.
2) the government should run a surplus at all other times.
3) the government shouldneverhave a large amount of debt.
A biggester problem is that those are ill-defined assertions, not issues, and they all invite the question: “why?” Otherwise Mr. Krugman’s condescension might be justified, if still really annoying. At least he can cite magic multipliers in his arguments on managing the money supply.
Meditate a minute on why Hamilton called a well-managed national debt a “blessing.” Scroll forward a little to Jackson and the elimination of the national debt for a possible hint.
Yeah, look at those monies multiply.
Never has so much been thrown at something with so little chance of doing anything. Paul Krugman: Money Meister
The biggest problem is that they ignore a few basic issues:
1) the government shouldonlyindulge in deficit spending when they are at low debt levels, or if they have a surplus in the bank.
2) the government should run a surplus at all other times.
3) the government shouldneverhave a large amount of debt.
A biggester problem is that those are ill-defined assertions, not issues, and they all invite the question: “why?” Otherwise Mr. Krugman’s condescension might be justified, if still really annoying. At least he can cite magic multipliers in his arguments on managing the money supply.
Meditate a minute on why Hamilton called a well-managed national debt a “blessing.” Scroll forward a little to Jackson and the elimination of the national debt for a possible hint. ·2 hours ago
I think it’s fair to say that fiscal conservatives would be ok if we ONLY ran deficits during recessions, but that is not the case. We run big deficits during booms and REALLY big deficits during recessions, and Krugman’s only argument is that we “need to run deficits to support employment in bad times.” I would be willing to accept that if we ran surpluses during upswings in the economy and government finances were balanced over the economic cycle.
To summarize, it’s not hard to communicate the basics truths of macroeconomics to the layman, it’s just hard to manipulate macroeconomics to advance a political agenda of ever bigger government and not have a rational layman call BS after seeing through your thinly veiled attempt to merely advance your political agenda.
Sometimes, the layman has A LOT more economic sense than the economic professors.