"Deconstructing Krugman"
KRUGMAN TRUTH SQUAD
Where Hopelessness Springs Eternal
Good economic news is everywhere. And Krugman won't admit it.
Paul Krugman's worst nightmare is coming true. As Krugman Truth Squad senior member Andrew Sullivan succinctly put it on Friday on his Daily Dish blog, "His hopes for recession seem to be receding." And, of course, the hopes of America's most dangerous liberal pundit that President George W. Bush will lose an "it's the economy, stupid" election in 2004 are receding, too.
Sullivan linked to the news Friday that durable goods orders registered the biggest increase since the beginning of the year and new-home sales climbed to the highest level on record. If Sullivan had wanted to lay it on thick, he could have just as easily have linked to Thursday's news that new jobless claims fell below the key 400,000 mark last week for the first time since early February. Or he could have linked to the announcement two weeks ago that the National Bureau of Economic Research has set an official end-date for the recession, or, I should say, the beginning-date of the present recovery, at November 2001.
There's no shortage of good economic news nowadays, except in the mind of Paul Krugman, where hopelessness springs eternal. In his New York Times column Friday, the Princeton economics professor closed his eyes to economic reality and cried, "There is very little evidence in the data for a strong recovery ready to break out."
Remember, America is becoming a "banana republic" and is in a "fiscal train wreck." Why? Because of President Bush's tax cuts, of course. But in Friday's column it wasn't Bush who got bashed, it was Federal Reserve chair Alan Greenspan, because he went along with the tax cuts (barely, as I recall).
Greenspan has often been a foil for Krugman's rants. This time Krugman began by tut-tutting, "I used to be a great admirer of Mr. Greenspan. But something has gone very wrong with the maestro." Just when was it that Krugman admired Greenspan? Was it in February 2003 when he expressed his admiration by calling Greenspan a "partisan hack"? Was it in February 2001 when he called Greenspan a "profile in cowardice"? Was it in August 2000 when he called him an "unelected monetary technocrat"?
Krugman most recently said of Greenspan that
history will remember him not as the maestro of the new economy, but as an accomplice in America's descent into debt. For his own self-esteem, he has to believe that things will somehow turn out all right. Thus his sudden, destructive outbreak of optimism.
"Destructive", Krugman said that Greenspan's July 15 congressional testimony crashed the bond market by being too upbeat on the economy. Then how come long-term Treasury yields have been rising steadily since their lows on June 13, over a month before Greenspan spoke? That's easy: Rising yields are yet another sign of economic recovery.
"Sudden", That's an odd way to put it, since Krugman began his column by claiming that Greenspan's latest view reflects the same view he took in his July testimony last year. Here's Krugman's version of Greenspan's "sudden" optimism from over a year ago:
"Although the uncertainties of earlier this year are as yet not fully resolved," [Greenspan] declared, "the U.S. economy appears to have withstood a set of blows. Not surprisingly the depressing effects of recent events linger. Nevertheless, the fundamentals are in place for a return to sustained healthy growth."
"Optimism"? Let's fact-check this quote (Lord knows, the Times still won't, even after all it's been through). As I pointed out on my blog, The Conspiracy to Keep You Poor and Stupid, here's what Greenspan really "declared." I've set in boldface the few words that Krugman pulled out of context for his column, without so much as an ellipsis to tell readers that words ? lots of important words, as it turns out ? have been eliminated.
Although the uncertainties of earlier this year are as yet not fully resolved, the U.S. economy appears to have withstood a set of blows ? major declines in equity markets, a sharp retrenchment in investment spending, and the tragic terrorist attacks of last September ? that in previous business cycles almost surely would have induced a severe contraction. The mildness and brevity of the downturn, as I indicated earlier this year, are a testament to the notable improvement in the resilience and flexibility of the U.S. economy.
But while the economy has held up remarkably well, not surprisingly the depressing effects of recent events linger. Spending will continue to adjust for some time to the declines that have occurred in equity prices. In recent weeks, those prices have fallen further on net, in part under the influence of growing concerns about corporate governance and business transparency problems that evidently accumulated during the earlier rapid runup in these markets. Considerable uncertainties ? about the progress of the adjustment of capital spending and the rebound in profitability, about the potential for additional revelations of corporate malfeasance, and about possible risks from global political events and terrorism ? still confront us.
Nevertheless, the fundamentals are in place for a return to sustained healthy growth ...
I don't think anyone who read what Greenspan really said would have found much excessive optimism in it. Yet for all Greenspan's caution (which Krugman called optimism), the National Bureau of Economic Research now tells us that the recession was over long before Greenspan spoke. Yet Krugman said in the Friday column, "Needless to say, 'healthy growth' failed to materialize. Undaunted, he said pretty much the same thing last week."
Who else has said "pretty much the same thing"? Krugman Truth Squad member Robert Musil pointed out on his Man Without Qualities blog that Krugman himself has.
Here's what Krugman said in a December 2002 interview with the German magazine Der Spiegel:
My [2003] prediction would be two to three percent growth on a year-to-year basis. If you ask me if the US economy can fall back into recession, I'd say: yes, absolutely. On the other hand, can it grow by 5 percent? It is also possible.
Krugman almost never makes optimistic economic forecasts. But I can think of one other time he did ? and it, too, was by way of arguing with Alan Greenspan. It was back on January 28, 2001, right after President Bush had taken office, and Greenspan was speaking favorably about the new president's proposed tax cuts. Grasping the straw that "Mr. Greenspan explicitly rejected the administration's argument that we must immediately cut taxes to prevent a recession," Krugman said, "new evidence suggests that manufacturing, which suffered a nasty downturn in the last few months, has already started to rebound."
Rebound? Not. According to the NBER, the last recession began in March 2001, little more than a month after Krugman had pointed to that "new evidence" of a "rebound."
But no matter ? because for Krugman, none of this really has anything to do with economic forecasting. It's all about the tax cuts to which he is permanently opposed in good times and bad. Back in 2001 Krugman was bullish on America just when we were slipping into recession because tax cuts were being talked about as recession-fighters. Now he's bearish just when recovery is becoming obvious, because he wants to portray the tax cuts as having failed to promote that recovery.
So now, with recovery beginning to blossom all around us, Krugman can do nothing but pretend ? and say "the budget is in a mess, and Mr. Greenspan is one of the main culprits." Why? Because back in 2001,
Mr. Greenspan lent crucial political aid to the first Bush tax cut ... He should have known better; it wasn't hard, even then, to figure out that those huge projected surpluses were largely fantasy.
"Largely fantasy"? That's quite an admission. As ex officio Krugman Truth Squad member Paul Banks pointed out in an e-mail, "Wasn't the main rallying point for Democratic pundits everywhere that Clintonian economic policy created real surpluses that Bush ruined?" Yep. That's precisely what the Democratic National Committee still claims. (I guess they haven't read Krugman's column.)
Strip away all the rhetorical styling about who was optimistic when and why, and Krugman's column boils down to one big lie: Today's budget deficits are a product of Bush's tax cuts. That's a lie, because Bush's tax cuts have barely had time to take effect, as Krugman well knows. In fact, he used that very fact as an argument against the 2001 tax cut:
It phases in very slowly. Most of the big tax cuts come only in the second half of the decade and, therefore, does not put money in the hands of people now, which is when we might want them to spend more.
According to an analysis last week from the Congressional Joint Economic Committee, only 18 percent of change in the 2003 deficit ? versus what had been originally forecasted in 2001 ? is attributable to the 2001 and 2003 tax cuts.
The majority of the greater-than-forecasted deficit is the result of lower-than-forecasted tax revenues, which have been caused by a weaker-than-forecasted economy. Forecast errors happen ? you remember ... "already started to rebound." And the next biggest reason is increased spending. And we all know Krugman's views on spending ? he loves it.
With a budget this sensitive to economic changes, and with the economy turning for the better, Bush is likely to get a double-win going into the 2004 election: the return of good times and lower-than-forecasted deficits. It won't be an "it's the economy, stupid" election as Krugman wants. It'll be an "it's the economy ? brilliant!" election. And no lie Krugman can invent is going to change that.
? 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. |
