Thursday, May 26, 2011

Book Review (#10 of 2011)

Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations by Paul Krugman (1995). This book and the previous one I reviewed were not read with an e-reader, and it's a shame because I would have liked to have highlighted passages for easy copying & pasting here as I can with a Kindle book. I have now sold just about every book I own that is available as an ebook somewhere.

Early Krugman is remarkable for his bi-partisan criticism and attempts to give his opponents some benefit of the doubt. Krugman is basically dealing with three issues in this book:
1. The Great Stagnation of productivity since 1973 (see posts below).
2. Republican economic snake oil in the 70's and 80's.
3. The experiences of conservatives in power in the U.S. and the U.K. in the 1980s (and the beginning of the European common currency).
4. New economic thinking in the realm of trade and development in the 1980s.
5. Democrat economic snake oil in the late 80's and early 90's.

Krugman makes the point that how well or badly (depending on how you look at it) the economy performed in the 1980s and early 90's had almost nothing to do with the Reagan administration. Presidents and congresses don't determine the resources, capital, and technical knowledge a society possesses, and the Fed had more to do with the fluctuations in the 80's.

Krugman is concerned "policy entrepreneurs" took sound conservative theories from Milton Friedman, Martin Feldstein, and Robert Lucas and warped them into politically potent snake oil of "supply-side" economics. Much of what Krugman wrote in 1994 could have been written in 2011 (and indeed has been repeated by him ad infinitum). He is upset at Republicans for not better policing themselves in this regard.

Krugman also blasts Robert Reich and other Democrats that he calls the "strategic traders," who advocate a sort of industrial policy toward U.S. manufacturing. He criticizes Clinton too, for Clinton was a policy wonk that was deep in the weeds on this stuff. These policy entrepreneurs took the ideas of Krugman and other trade theorists of the early 80's and warped it into some mishmash about globalization and competitiveness. Great quote:

"If you hear someone say something along the lines of 'America needs higher productivity so it can compete in today's global economy,' never mind who he is, or how plausible he sounds. He might as well be wearing a flashing neon sign that reads: 'I DON'T KNOW WHAT I'M TALKING ABOUT.'"

Krugman's data-driven analysis is great, it makes me want to re-read some of his columns to see if he's not majorly contradicting himself these days.

Krugman's remarks on the Thatcher experience are rather crass, IMO. He notes that the U.K. had a productivity jump that the U.S. didn't have, but doesn't think it was necessarily because of the privatization and de-regulation pushed by Thatcher. He's critical of how that process was handled. This is a good book to read parallel with Commanding Heights because Krugman has a different take on the Reagan/Thatcher revolution.

He also bemoans the European experiment to create a common currency. Only Krugman would claim that Finance Ministers and economists from Europe could get together and agree on a course of action when none of them know what they're talking about. (This is a common Krugman remark).

Basically, Krugman states that the Reagan Administration was responsible for three things:
1. Cutting marginal tax rates, particularly for the top income earners.
2. Increasing government spending and the debt/GDP ratio.
3. Maybe the huge increase in income inequality between top and bottom (but this was seen all over the world...)

Krugman notes that the top marginal rates were probably too high, but still criticizes the cut as a politician would -- the tax cut benefited the rich more than the poor. But when you have a 70% MTR that needs to be cut, it's politically impossible because you can't cut the MTR for the lower-income earners by the same amount--and Krugman ignores that in his critique.

Krugman also points out that the deficits/debt that the Reagan years acquired weren't a drag on the U.S. economy, probably shaving only 3% off of what GDP would have been from 1980-1990. But the way the Administration cut investment spending in response to the deficits may have had other long-term effects.

It's hard to look at the data Krugman presents and say "Reagonomics is horrible," and Krugman never makes that claim-- he's simply blasting the supply-siders who claim that "Reagonomics solves all of our problems and creates magic increases in productivity" without any evidence to back it up.

I recommend this book highly, and would use it in certain classes without hesitation. 4 stars out of 5. More international perspective/context would have been better. To see how Krugman hasn't really changed all that much, read this recent column about him in New York Magazine.

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