Stupidest Thinktank Alive: The American Enterprise Institute
Five Economics Pieces Worth Reading: January 22, 2010

DeLong: Review of Paul Krugman, The Accidental Theorist

Review of Paul Krugman, The Accidental Theorist: Of all the books of short essays that Paul Krugman has written, I think that this is the very best: you can learn an awful lot of economics from this book, for Krugman's usual clarity and force of argument is raised to a higher power in this book.

It is a collection of twenty-seven short essays, almost all of which strike me as essentially correct and all of which are worth reading. But because the book is made up of twenty-seven different essays, it has no single theme. It does, however, have a single method: think clearly, look at the facts, and remember that people respond to incentives, that supply balances demand, and that there are a lot of politically-motivated ideologues making shabby arguments out there.

Each reader will be annoyed when some of his or her personal oxes are gored. Each will applaud when Krugman turns his scalpal in a direction they approve of. And each will--with an open mind--learn a great deal.

My favorite passages from this book include a demolition of the rhetoric of ex-Republican presidential candidate Bob Dole (from "The Lost Fig Leaf" Why the Conservative Revolution Failed":

"You now work from the first of January to May just to pay your taxes so that the party of government can satisfy its priorities with the sweat of your brow.... Somewhere, a grandmother couldn't afford to call her granddaughter, or a child went without a book, or a family couldn't afford that first home because there was just not enough money.... Why? Because some genius in the Clinton administration took the money to fund yet another theory, yet another program, and yet another bureaucracy." The words... Bob Dole's... tried to put over, one more time, the fiction that the federal government takes away your hard-earned money and spends most of it on things that only social workers want...

[But] it [is] quite easy to get a realistic picture of where your tax dollar goes.... Social Security: 21.6%. Defense: 18.9%. Interest on the debt: 13.7%. Medicare: 9.7%. Medicaid: 5.8%. Pensions for federal workers: 4.2%. Veterans' benefits: 2.6%. Transportation: 2.6%. Unemployment insurance: 2.0%. Law enforcement: 1.1%....

[This] encompasses the bulk of government spending--82.2%, to be precise. Anyone who proposes a radical downsizing of the federal government must mean to slash this list.... [And] these are programs that the public likes...."

For as Krugman correctly notes, it is not that he is telling Bob Dole anything Dole doesn't know--he is telling you things that Dole and his ilk would rather that you remained ignorant of.

They also include Krugman blasting Robert Reich's idea that growing inequality in America is the result of the middle class getting "downsized":

The people who are really doing badly are those who do not have good jobs and never did. Those with lousy jobs have seen their already-low wages slowly but steadily sink.... [T]he main victims... are not the few thousand managers who have become hamburger flippers but the tens of millions of hamburger flippers, janitors, and so on whose real wages have been declining... for the past two decades...

Krugman denouncing the old-Keynesian doctrines of his own teachers as irrelevant in normal times:

The simple Keynesian story is one in which interest rates are independent of the level of employment and output. But in reality the Federal Reserve Board actively manages interest rates.... [T]he unemployment rate... will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God.... And so all the paradoxes of thrift, widow's cruses, and so on become irrelevant.... [A]n increase in the savings rate will translate into higher investment after all, because the Fed will make sure that it does.

And Krugman trying to get people to remember that we have lived through a history, and that people whose ideas have been wrong and false in the past have no right to claim our attention without explaining just why and how their past advice was bad:

The supply side idea--which is that tax cuts have such a positive effect on the economy that one need not worry about paying for them with spending cuts--does not persist because of any actual evidence in its favor.... In 1993, after the Clinton administration had pushed through an increase in taxes on upper-income families, the very same people who have persuaded Dole to run on a tax-cut program were very sure about what would happen. Newt Gingrich confidently predicted a severe recession. Articles in Forbes magazine urged readers to get out of the stock market to avoid the inevitable crash. The Wall Street Journal editorial page had no doubts that the tax increase would shaprly increase the deficit instead of reducing it.

But my most favorite pieces of the book of all are three passages that go to the heart of Krugman's commitments--both moral and intellectual. The first is a biting denunciation of William Greider for being an "accidental" theorist: someone who does not think issues through, but who just looks at surfaces without peering into depths or thinking coherently and whose thought is thus shaped by implicit, unexamined theories of which he is not conscious:

...reducing the number of workers it takes to make [manufactures] reduces the number of jobs in the [manufactures] sector but creates an equal number in the [services] sector, and vice versa. Of course, you would never learn that from talking to [manufacturing] producers, no matter how many countries you visit; you might not even learn it from talking to [services] manufacturers. It is an insight that you can gain only... by engaging in [economic] thought experiments.

I think I know what people like Greider would answer: that while I am talking mere theory, their arguments are based on the evidence. The fact, however, is that the U.S. economy has added 45 million jobs over the past 25 years.... Greider's view, if I understand it, is that this is just a reprieve--that any day now the whole economy will start looking like a steel industry. But this is a purely theoretical prediction. And such theorizing is all the more speculative and simplistic because he is an accidental theorist, a theorist despite himself."

The second is a parable Krugman tells about just why unwarranted and unnecessary inequality is a bad thing:

consider this simple parable: There are two societies. In one, everyone makes a living at some occupation--say fishing--in which the amount people earn over the course of a year is fairly closely determined by their skill and effort. Incomes will not be equal in this society... but the range of incomes will not be that wide. And there will be a sense in which those who catch a lot of fish have earned their success. In the other society... a few find rich mother lodes and become wealthy. Others find smaller deposits, and many find themselves working hard for very little reward. The result will be a very unequal distribution of income. Some of this will still reflect effort and skill.... But there will be many skilled, industrious prospectors who do not get rich and a few who become immensely so. Surely the great majority of Americans... feel that a nation that resembles the second imaginary society is a worse place than one that resembles the first. yet there is also no question that our nation today is much less like the benign society of fishermen--and much more like the harsh society of prospectors--than it was a generation ago.

He then uses this parable as a paddle to spank Dick Armey--who is, like Bob Dole, most anxious to make sure that Americans do not understand their economy. As Krugman puts it:

Armey denies that the eighties were a period in which the rich got richer and the poor got poorer. 'The statisticians', he writes, 'break our population into five income groups, called quintiles. During the eighties they gained in average real income as follows: Lowest quintile--up 12.2 percent.... Highest--up 18.8 percent.'... [Armey] is fibbing a bit. These figures are not... for all of the eighties, but only from 1983 to 1989.... At the end of the 1983-1989 recovery, the bottom quintile was still worse off than it was in 1979

And the third is Krugman's denunciation of our market economy, coupled with a reaffirmation of it as the best social system we know how to construct:

At the heart of capitalism's inhumanity--and no sensible person will deny that the market is an amoral and often cruelly capricious master--is the fact that it treats labor as a commodity. Economics textbooks may treat the exchange of labor for money as a transaction much like the sale of a bushel of apples, but we all know that in human terms there is a huge difference.... An unsold commodity is a nuisance, an unemployed worker a tragedy; it is terribly unjust that such tragedies are created every day by new technologies, changing tastes, and the ever-shifting flows of world trade. There would be no excuse for an economic system that treats people like objects except that, as Churchill said of democracy, capitalism is the worst system known except all those others that have been tried from time to time...

Critics of Paul Krugman call him acerbic and boastful, unfair on the attack and unwilling to make concessions on the defense, certain that he is correct, and always sure that those who disagree are mendacious or foolish (or both). And I cannot deny that these criticisms are accurate. But all these are outweighed by one fact: he is almost always--not always, but almost always--right.

He is the closest thing to an heir to John Maynard Keynes we have today.