Krugman's a partisan hack, pure & simple.....
Krugmanomics
The QandO Blog
Posted by: Dale Franks
Monday, April 18, 2005
Paul Krugman today proves, once again that every silver lining has a cloud, when it comes to the Bush Administration's economic policy.
Mr. Krugman's big concern today: Stagflation.
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Last week fears of a return to stagflation sent stock prices to a five-month low. What few seem to have noticed, however, is that a mild form of stagflation - rising inflation in an economy still well short of full employment - has already arrived.
True, measured unemployment isn't bad by historical standards, and inflation is in the low single digits. But inflation is creeping up, and it's doing so despite a labor market that is in worse shape than the official unemployment rate suggests.
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Well, that sounds nasty. "Stagflation" is a term that was coined in the 1970s, to describe the US economy which had very low rates of GDP growth and high inflation. If we are really going to see stagflation again, can Superfly collars and Angel Flight bell-bottomed mens slacks be far behind? The horror, the horror!
So, what evidence does Mr. Krugman marshal for his concern?
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Let's start with the jobs picture. The official unemployment rate is 5.2 percent - roughly equal to the average for the Clinton years.
But unemployment statistics only count those who are actively looking for jobs. Every other indicator shows a situation much less favorable to workers than that of the 1990's. A lower fraction of the adult population is employed; the average duration of unemployment - a rough indicator of how long it takes laid-off workers to find new jobs - is much higher than it was in the 1990's.
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Three problems come to mind here.
First, he's using the 1990s as a basis for comparison. There's serious question, though, about whether the 1990s is a good benchmark to use. One wonders if, maybe, the 1990s economy was overheated with the DotCom boom. If so, expectations for the same level of labor force performance might simply be overblown.
For instance, take a look at the historical data from the Bureau of Labor Statistics. Right now, 62.3% of the adult population is employed. That's certainly lower than the 64.4% of the labor force in the peak year of 2000. But it's also exactly the same as the labor force participation rate in 1988, a year that I think hardly anyone would have characterized as having a weak labor market at the time. Indeed, prior to 1985, the civilian labor force participation rate had never been higher than 60%. "Weak compared to the 1990s" and "historically weak" appear to be two quite different terms.
The second point that comes to mind is that the direction of the trends are all down. Since February of last year, the average duration of unemployment has declined from 20.2 weeks to 19.5 weeks. The unemployment rate is trending down from a high of 6.1% down to 5.2%. If the labor market is weak, then at least we can say with confidence that it's getting stronger.
Third, and perhaps most importantly, Mr. Krugman simply isn't making an apples to apples comparison. He's comparing where we are now, on the rising side of the business cycle—coming out of a recession—to the peak of the previous business cycle in the 1990s. In point of fact, the proper comparison between the current point of the business cycle would be a comparison to 1994 or so, when we were similarly in the second year of an economic expansion. In May of that year, the average duration of unemployment was—-you guessed it—19.5 weeks.
Moreover, economic growth has been ticking away nicely, with GDP growth above 3.5%. Stagflation implies stagnant economic growth, which is hardly the current picture.
Yeah, some inflation is poking through, but it's hardly the stagflation situation that Mr. Krugman presents. And., he seems to realize it, too, by throwing in such caveats as:
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We shouldn't overstate the case: we're not back to the economic misery of the 1970's.
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Which leads me to ask Mr. Krugman. "OK, then. So your point would be...?"
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