Is There a Social Security Crisis?

Economist-bashing
has long been a popular pastime among intellectuals right and left. Economists
themselves, however, are not supposed to bash back. So when I decided to
break that rule, I fully expected retribution. Surprisingly, until now
all of the really personal attacks on me have come from the right, from
the likes of Alan Reynolds and Judy Shelton (it will be news to them that
I bear a special animus toward the left). But something like Robert Kuttner's
essay in the September-October issue of The American Prospect ["Peddling
Krugman
"] was bound to appear sooner or later.

I won't try to defend my motives or the value of my academic work (or
justify in detail why, over the course of 20 years as a professional economist,
I have changed my mind about some things). Let me instead focus on the
two important questions on which Kuttner and I disagree: what it takes
to do good economics, and what it means to be a liberal.

Some people have a very narrow definition of what constitutes valid
economics. I don't. (Paul Ormerod, whose The Death of Economics
strongly criticizes the profession, described me in a recent review as
"wonderfully open-minded.") I am willing to give a hearing to
any economic argument that does not contain obvious logical holes, or ignore
readily available evidence. But I am not prepared to be indulgent toward
ideas--like the claim that wages in America have stagnated largely because
imports have eliminated high-wage jobs in manufacturing--that fail these
tests. In particular, if someone consistently produces economic arguments
that simply do not add up, or makes factual assertions that can be flatly
disproved by spending a few minutes with the Statistical Abstract of
the United States
and a hand calculator, I don't care what other virtues
he may have or positions he may hold. He may be a gifted phrasemaker and
a lion of the lecture circuit, but he is not a serious economic thinker.

To say this is, of course, to be accused of "credentialism."
There is a grain of truth to this charge. Although my criteria for an idea
worth listening to sound mild, they are not that easy to satisfy. For example,
an amazing amount of nonsense has been written about productivity and wages
by people who do not realize that real wages necessarily reflect productivity
at the national rather than the company or industry level (otherwise workers
in chip plants would by now be making a thousand times as much as nurses),
and do not know that recent growth in manufacturing productivity has not
been matched in the rest of the economy. Similarly, a lot of nonsense has
been written about the alleged achievements of Ronald Reagan by people
who do not know that there is a difference between trend growth and the
business cycle, and are unaware of that crucial regularity known as Okun's
Law. How does one come to know such things? Well, it helps to have studied
some economics.

The point is not, as Kuttner imagines, that you must use fancy math;
it's that you must be willing to listen to other people. Contrary to myth,
economists are not all dull and doctrinaire; if you have an idea about,
say, international trade, it is likely--not certain, but likely--that some
economist has been there and done that, and that your idea has already
been either greatly clarified or decisively refuted. I have repeatedly
encountered would-be economic experts who begin a conversation by saying
"The trouble with economists is that they never consider the possibility
that . . ." and refuse to believe me when I tell them that that very
possibility is treated at length in most sophomore-level textbooks--and
that their radical insight is either a well-known fallacy or, worse yet,
a familiar and standard part of the canon. You don't need to have a Ph.D.
to do good economics, but you are not likely to add value to the subject
if you try to make up your own version of economics completely from scratch.

Intellectual arrogance, you say. Maybe so--but surely my arrogance is
a puny thing compared with that of men who believe themselves able to invent
a new and improved economics from a standing start, who are prepared to
write books with titles like The Way the World Works or The Work
of Nations
without bothering to read one or two of those undergraduate
textbooks first. (And don't tell me that they do too know what is in the
textbooks. The circumstantial evidence that they do not--the simple things
misunderstood, the garbled statistics, the statement of both standard concepts
and classic fallacies as if they were revolutionary innovations--is overwhelming.)



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Some may also object that while what I say may be true, it is bad form
to point it out--that we need to put such quarrels aside and get on with
the task at hand. I might respond by noticing that there is a sort of ethics
of convenience at work here: Some of my critics have spent years denigrating
conventional liberal economists and putting their friends on pedestals,
then suddenly declare that such fights over intellectual prestige are unseemly
when those pedestals begin to crack. But the important point is that this
objection presumes that we are agreed on what must be done--which brings
me to the question of what it means to be a liberal.

To
Bob Kuttner, liberalism means supporting more government intervention in
the marketplace. Above all, it means supporting managed international trade
and deficit-financed public investment. In fact, not only does Kuttner
know what needs to be done: He knows, in advance, what the conclusions
of future cutting-edge economic theory will be. He knows that I must have
stopped being an innovator after the mid-1980s, because my work no longer
seemed to provide a rationale for neo-mercantilist trade policies; and
he knows that the remarkable revival of Keynesianism is a rarefied academic
affair of no real importance, because the new Keynesians still think that
we ought to reduce the budget deficit. (Why is it illiberal to think that
monetary rather than fiscal policy can be used to increase aggregate demand?)

Somehow, though, I always thought that liberalism was about compassion
and justice, and have never understood what import quotas and budget deficits
have to do with it. You might argue that they are effective means to those
ends--but that is an empirical matter on which I disagree. The back of
my envelope says that the Clinton administration's modest expansion of
the earned income tax credit did far more to help low-wage American workers
than its support of NAFTA did to hurt them. (And what about Mexican workers?)
On the other hand, a hundred Mickey Kantors could not make up for the human
damage done by Clinton's careless promise to end welfare as we knew it.
These, it seems to me, are the issues on which we should be fighting.

When I encounter self-proclaimed liberals whose main concern seems to
be to clamp down on the market economy--as opposed to redistributing the
income that the economy generates via progressive taxes and means-tested
transfers--I am always reminded of a passage in George Orwell's The
Road to Wigan Pier
, in which he describes a certain kind of leftist
who seems driven less by concern for his fellow man than by a "hypertrophied
sense of order."

There is, of course, the political argument that liberals must emulate
the tactics of conservatives--that because supply-siders got away for a
time with claims that lower taxes would produce an economic miracle, liberals
must offer their own elixir brewed from public investment and trade restrictions.
Well, I claim no special political wisdom, but I see no evidence that the
public is willing to buy that concoction. In fact, my sense is that the
particular wing of liberalism represented by Kuttner, Jeff Faux, and so
on has been notably unsuccessful at broadening its base beyond a narrow,
self-referential circle of literary intellectuals and policy wonks.

There is, however, another way to counter the conservative program:
by pointing out that it is based on falsehoods, not only about the effect
of tax cuts but about the nature of public spending and the realities of
income distribution. Surely as a practical matter the devastating criticism
of Dole's economic plan from conventional economists has been far more
effective than the complaints of the interventionist left. To make that
kind of criticism effective, however, you need a certain kind of moral
authority--a reputation for intellectual honesty that can only be achieved
if you are willing to critique bad ideas on the left as well as the right.

I have heard from usually reliable sources that the editor of the Wall
Street Journal
has no strong feelings about Bob Kuttner, but regards
me with deep animosity. There is a reason for that contrast--and I don't
think it is just my disagreeable personality. So which of us is the better
liberal?

-Paul Krugman




My
piece offered three criticisms of Krugman's work. First, while calling
himself a liberal, Krugman is surprisingly hostile toward most forms of
government intervention. He seems to think a laissez-faire economy is close
to optimal, except when it comes to income distribution. Second, he displays
an intellectual double standard, offering gentle, indulgent criticism of
the most reactionary members of his profession, while savaging non-economist
liberals. Most irritatingly, Krugman arrogates to himself the role of scientific
expert while dismissing other scholars who write popular economics as mere
promoters and peddlers. However, in his latest role as popularizer of the
orthodoxy, Krugman has spread himself so thin that he makes incautious
generalizations, misrepresents the views of his targets, and commits plain
factual errors. The more Krugman himself becomes a promoter, the sloppier
are his attacks. Such are the perils of peddling.

Though we offered him 1,500 words for a rejoinder, Krugman does not
deign to correct any of the mistakes I cited in his work, or to rebut anything
of the substance of my essay. Instead, Krugman begins by name-calling.
In Krugman's view, outsiders who criticize the myopia and deductivism of
much standard economics are, of course, "economist-bashers,"
just as serious critics of Japan's well-documented mercantilism are Japan-bashers.
The convenience of this name calling is that it spares the need for serious
debate. With this sweeping dismissal, Krugman then suggests a more elevated
conversation about what it takes to do good economics and who is a good
liberal.

Here, he persists in the claim that what economists do is essentially
scientific and easily verified, while the non-economist or dissenting economist
critic makes elementary mistakes "that can be flatly disproved by
spending a few minutes with the Statistical Abstract of the United States
and a hand calculator." Spare me. As Krugman surely knows, the real
controversies in economics and economic policy are not about the arithmetic;
they are about the assumptions.

If it were as simple as Krugman declares, the mainstream economics profession
itself would not be riven with controversies about the natural rate of
unemployment, the true rate of inflation, the proper measure of the money
supply, not to mention deep doctrinal disputes over such dogmas as rational
expectations theory. And when policy questions--whether markets are competent
to provide health care, whether welfare benefits deter work effort, whether
tax cuts increase investment, which public services might be efficiently
privatized--are added to conceptual and methodological schisms, Krugman's
claim that nearly every noteworthy question has already been resolved in
some sophomore textbook is, well, sophomoric.

Some of Krugman's sweeping assertions, such as his claim that the whole
income stagnation problem mostly boils down to "skill-biased technological
change" are in fact highly controversial within the economics profession.
Krugman's colleague at MIT, Jörn-Steffen Pischke, begins a technical
paper on how technology has affected the wage structure by using a characteristic
Krugman overgeneralization as a straw man. Another recent paper, by Harvard's
Jeffrey Sachs and Howard Schatz, observes that Krugman's discussions of
the relationship of trade and wages are all over the intellectual map.

Krugman is a genuine expert on trade policy. While he attacks other
popularizers, he uses this expertise as license to declare what is scientifically
sound on a wide range of policy questions on which he is not expert. For
example, he does not publish articles in refereed journals on labor markets;
however he parades himself as an instant expert in this and other fields
where his original work is minimal. As brilliant as he is, the back of
his envelope is no substitute for real research.

Krugman's own ample work slaughtering (selected) sacred cows of economic
theory gives the lie to his claim that some economic theorist has invariably
been there, done that, and resolved the issue for all time. What is truly
obnoxious is the way Krugman blandly demolishes some theorem or other,
then warns, "Don't try this at home, kids." Either economics
is normal science, or it isn't. Either economists deserve special credibility
as experts, or they don't. But Krugman is on both sides of this question.

Some non-economists, such as Krugman's bête noire Robert Reich,
have contributed useful insights to public debate on how to wrestle with
the dilemmas of trade, technological change, and living standards. If Krugman
did not have such a burr in his behind about Reich's status as a non-economist,
he might appreciate that Reich's view--that the main asset of a nation
is its human capital--is old-fashioned comparative advantage applied to
a high-tech society. Of course a nation's average wages reflect its national
productivity, but that average productivity is built on the several productivities
of individual domestic industries.

Krugman's dig at Reich's title, The Work of Nations, is a characteristic
cheap shot. I thought the title was a rather felicitous play on The
Wealth of Nations
, nicely signaling Reich's thesis that human capital
is the new source of wealth. Is Krugman's Age of Diminished Expectations
any less presumptuous?

Krugman continues to misrepresent the concerns of critics such as Jeff
Faux and me. The problem is not that trade (or technology) is causing the
loss of domestic industrial jobs and the decline of industrial wages. It
is rather that the increased marketization of economic life, in a global
marketplace, undermines the century-old project of devising a regulated
or social-democratic form of capitalism. This is the real divide between
those who believe in laissez-faire plus a bit of tweaking, and those who
advocate what Paul Samuelson termed a mixed economy. Krugman ought to have
the decency to recognize this as a principled debate.

This
brings me to politics. Krugman insists that people like me are suspect
because we practice economics without a license. Yet Krugman thinks nothing
of practicing political science without a license (not to mention practicing
journalism without reporting). There is a good reason why economics used
be called political economy. Nearly all the difficult economic issues are
not just questions of the efficient allocation of scarce resources by the
price system in an institutional vacuum, but profoundly political issues
involving property rights, ground rules, and strategies to deal with market
failures that can only be settled by recourse to values and to politics.

Here Krugman's political naivete is breathtaking. He declares blandly
that the best remedy is not to "clamp down on the market economy"
but to redistribute "the income that the [market] economy generates
via progressive taxes and means-tested transfers." Splendid. Except
just whose invisible hand shall do the redistributing? It doesn't seem
to occur to Krugman that when unleashed market forces produce gross concentrations
of income and wealth, the owners of that wealth organize politically to
resist its redistribution. The more prestige that liberals like Krugman
accord the market, the harder it is politically to overturn its verdicts.
Being a trade expert rather than a serious student of social policy, Krugman
also slides over the well-known political and structural problems of means-tested,
as opposed to universal, programs. They create poverty traps; they tend
to lack political support. It helps to study the particulars.

Economists of Krugman's persuasion know a lot, but they are not expert
in everything. A little modesty would go a long way here.

The lamest assertion of all is Krugman's attempt at innocence-by-association:
The Wall Street Journal hates him more than they hate me; ergo,
that certifies him as a liberal. I could not match him, Journal attack
for Journal attack, but this is an idiotic litmus test. Robert Bartley
already has far too much influence, and he's wrong about nearly everything.
Let's not empower the Journal as a reverse indicator of who's the
better liberal.

-Robert Kuttner



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