Paul Krugman is living his worst nightmare. Last week, the world poured out its admiration for Ronald Reagan and his extraordinary economic record — forcing Krugman to attempt to explain away Reagan’s success. But how to do so? According to the economic theories Krugman teaches at Princeton, Reagan’s achievement should not have been possible. So dismissing Reaganomics in terms of science won’t work. How about professing economics as a cargo cult?
In his Friday column for the New York Times — the second of two Krugman attacks on Reagan last week — the best Krugman can do is desperately speak of the “secret” of the Reagan boom. He admonishes us that Reagan’s achievement was not “magical.” And he contrasts it with the “miracle” that occurred under Bill Clinton. This is unusual language for a scientist often said to be on the short list for the Nobel Prize in economics. But then again, we can’t be too surprised. As new ex-officio Krugman Truth Squad member Joe Veranth pointed out to me in an e-mail, Krugman once wrote: “my economic theories have no doubt been influenced by my relationship with my cats.”
If there is any theory at all put forward in Krugman’s latest column, it is that poverty creates wealth. You see, according to Krugman, Reagan was simply lucky to have become president when “the U.S. economy was deeply depressed, with the worst unemployment rate since the Great Depression. So there was plenty of room to grow.”
Reagan, it seems, deserves no credit for the courage, insight, and political skill he used to pull America out of a deadly tailspin. The tailspin itself deserves all the credit. Human action counts for nothing. Presidents are but twigs floating on the tides of economic fate.
Unfortunately for Krugman, this mystical interpretation of economic history has several inconvenient corollaries. We’d have to use it to discredit the economic achievement of Krugman’s idols Franklin D. Roosevelt and John Maynard Keynes. After all, in the Great Depression there was “plenty of room to grow.” And, of course, we’d have to let Krugman’s bête noir George W. Bush off the hook for the recession and jobless recovery that Krugman is always ranting about. After the Clinton “miracle” there just wasn’t “plenty of room to grow.”
True, Krugman’s fatalism should make the economy as easy to predict as when the moon is in the second house and Jupiter aligns with Mars. Indeed, in Friday’s column Krugman claims a victory for his favorite flavor of economic astrology. He writes that “it all played out just as ‘left-wing Keynesian economics’ predicted.”
But to anyone who knows even the slightest thing about the history of economics, this statement is a laughable lie. The truth is that the “stagflation” of the 1970s — the combination of high inflation and low economic growth — utterly confounded the Keynesian orthodoxy, which would have predicted that such a combination was utterly impossible. Then in the 1980s the Keynesian model predicted that the combination of falling interest rates and Reagan’s tax cuts should have created a massive stimulus to aggregate demand that would send inflation even higher. Yet inflation fell dramatically over the 1990s.
Honorary Krugman Truth Squad member Caroline Baum pointed me to a classic smoking-gun memo that tells us exactly what Krugman’s “‘left-wing Keynesian economics’ predicted.” In November 1982, when Krugman was a staff economist in Reagan’s Council of Economic Advisors, he co-authored with Larry Summers (later to be Clinton’s Treasury secretary) a memo warning of a coming “inflation time bomb.” Krugman and Summers wrote, “It is reasonable to expect a significant reacceleration of inflation in the near future … A significant portion of the slowing of consumer price inflation since 1980 does not represent a reduction in the underlying rate.”
At that point inflation had fallen from a maximum of 14.6 percent in March 1980 to 4.5 percent. Its average for the rest of Reagan’s presidency was 3.5 percent. The “inflation time bomb” Krugman predicted didn’t go off. It still hasn’t.
With less-than-stellar predictions like that — based on “left-wing Keynesian economics” — Krugman didn’t last long at the Counsel of Economic Advisors. But did he fall, or was he pushed? All we know is that he has written of his time in Washington that “many powerful people prefer to take advice from those who make them feel comfortable rather than from those who will force them to think hard. … so I was not tempted to stay on in Washington.”
In Friday’s column Krugman not only lies about his own incorrect predictions — he lies about his ideological opponent’s entirely correct ones. He says that Reagan’s “supply-side advisers … promised, but failed to deliver, a sustained acceleration in economic growth.”
Let’s just look at the record. Using official National Bureau of Economic Research business-cycle dates (and not making up our own to flatter our case like Krugman does), the Reagan boom that began in November 1982 lasted 92 months — making it the second-longest expansion on record. But it didn’t stop there. After pausing for a brief recession of eight months, the economy took off again on an expansion that ended up lasting 120 months — an all-time record.
One way to see it is that Reagan set in motion a period of prosperity that lasted 220 months with only an eight-month break in the middle. Or you could even say it’s still going on. After another eight-month hiatus, the boom is back — inspired by the same combination of falling inflation and tax-cutting that marked the Reagan years (and that still utterly befuddles the precepts and predictions of “left-wing Keynesian economics”).
But in Friday’s column, Krugman specifically dismisses the idea that Reagan’s economic policies could have possibly contributed anything to the “Clinton-era miracle.” He didn’t say whether or not they contributed to the present Bush boom — because that’s a subject Krugman doesn’t like to draw attention to (although he admitted en passant in an article last week in the New York Times Magazine that “the recovery has finally started to look like the real thing”).
Considering that Krugman can only conceive of the prosperity during the Clinton administration as a causeless “miracle” — he even admitted in a television interview earlier this year that it occurred “for reasons we’re not clear about” — it seems illogical to be so sure that Reagan had nothing to do with it. A more scientific approach would be to quote Isaac Newton, the father of modern science, who said, “If I have seen further it is by standing upon the shoulders of giants.”
I’m certain Ronald Reagan would not have been hesitant to say that the era of tax-cutting began with the 1964 “Kennedy tax cuts,” which reduced the top individual income-tax rate from 91 percent to 70 percent and accelerated a boom that lasted even longer than the one ignited by Reagan’s tax cuts. So why would an honest liberal be hesitant to admit that Clinton not only built his period of prosperity on the foundation that Kennedy and Reagan had laid, but indeed borrowed their methods when it suited him? Yes, Clinton raised income taxes in 1993. But he cut taxes with the Tax Relief Act of 1997, including a sharp cut in the capital-gains tax. In his Friday column Krugman notes that Clinton’s “miracle” didn’t happen “until Bill Clinton’s second term,” yet he misses the obvious connection.
With Reagan’s accomplishments now more widely honored than ever, Bush’s economy booming, and Bush himself rising in the polls, Krugman is being revealed for what he really is: A frightened man unable to explain the phenomena in the world around him except as “magic” and “miracle”; a man now stripped even of his usual pretense of economic pseudo-science.
– Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm. He welcomes your comments at don@trendmacro.com.