New York Times columnist Paul Krugman is an angry man. If he were a cartoon character, he would probably look like Donald Duck during one of his famous tirades, with steam pouring out of his ears every time he hears someone say “tax cuts” or “George W. Bush” or “supply-side economics.” All these things seem to set him off so much that he becomes just apoplectic, which he pours into twice-weekly columns that have become must reading for those on the left-wing fringe.
Now Krugman, who moonlights as a professor of economics at Princeton, has turned some of his more inflammatory columns into a book, The Great Unraveling. He hopes to cash-in on the seemingly unlimited appetite that left-wingers have for books that bash Bush, Republicans, and anyone who has ever said a nice word about them. They have already put Al Franken’s Lies and the Lying Liars Who Tell Them, Michael Moore’s Stupid White Men, and other books like them on the best-seller list. Now Krugman wants his millions too.
To promote his book, Krugman has taken off the semester from Princeton, although unfortunately he is still writing his column. In order to aid sales and further enrich the already wealthy Krugman, the New York Times Magazine was kind enough to publish an excerpt from his new book on Sept. 14. If it is representative of the quality of the rest of the book, those who pay for it are being short-changed.
In the excerpt, Krugman is seriously bent out of shape by supply-side economics. What seems to bother him most is that it is a school of economic thought that didn’t come out of the universities, like monetarism or Keynesianism. Rather, “it emerged in the pages of political magazines, not professional economics journals.”
This is basically correct. The reason is that university economics departments were (and still are) overwhelmingly populated by Keynesians who thought that deficits were good, saving was bad, and inflation didn’t matter very much. The burden of taxation was an issue of little importance to their analyses. They also didn’t think that the money supply had any effect on anything. The result of government policies based on this thinking is what gave us double-digit inflation and interest rates in the 1970s. The Keynesian answer to these problems was to deliberately raise the unemployment rate to fight inflation, impose price controls and devalue the dollar.
Supply-siders thought this was nuts. They saw stagflation as mainly resulting from an excessively easy Federal Reserve policy and a tax system that was not indexed to inflation. As a consequence, workers were being pushed up into higher tax brackets every time they got a cost-of-living pay raise, and investors saw their savings virtually confiscated by a capital-gains tax that did not differentiate between real gains and those arising solely from inflation. It just didn’t pay either to work or invest.
Under the circumstances, there was no time to write articles for obscure academic journals that might take years to get into print, organize scholarly conferences, and do all the things necessary to get the grudging respect of people like Paul Krugman. Supply-siders went directly to policymakers and the media with their ideas, bypassing the academics the same way Gen. Douglas MacArthur went around Japanese strongholds in the Pacific, leaving them isolated and ineffective.
In any event, it wasn’t as though supply-side economics was made up or that it lacked academic supporters. It was based firmly on neoclassical economics. Krugman even concedes this point: “The starting point of supply-side economics is an assertion that no economist would dispute: taxes reduce the incentive to work, save and invest.”
The problem is that in the 1970s, many economists did dispute this point. They argued that the only economic impact of taxation was on disposable income; marginal tax rates were of no importance whatsoever. Mainstream economists also argued that when taxes went up, this actually encouraged people to work harder, not less. Because people had a target level of after-tax income, they said, a reduction of that income due to higher taxes would force people to try and raise their before-tax income in order to reach their target level of after-tax income. Economists call this the “income effect.”
In effect, Krugman, for all his hatred of supply-side economics, has learned from it. Had his simple statement about incentives been made in 1977 instead of 2003, he would have been attacked by mainstream economists in the New York Times, praised by the Wall Street Journal editorial page, and lumped in with the very supply-siders he now hates. In effect, Krugman wants it both ways: to concede the truth about supply-side economics without giving supply-siders any credit.