Political Economist

Paul Krugman, Peddling Prosperity – Economic Sense and Nonsense in the Age of Diminished Expectations, New York: WW. Norton & Company, 1994

http://www.amazon.com/exec/obidos/ASIN/0393312925/qid=1123532989/sr=2-1/ref=pd_bbs_b_2_1/002-4015594-3319237

Paul Krugman, an economics professor at Princeton University, is one of the most well-known scholars in the U.S. Unlike common sense, however, his fame is not from his journalist activities as an opinion editor of the New York Times, but from his ability to offer the most succinct and clearest explanations of current U.S economic affairs. Krugman succeeds in revealing his brilliant talent as an economist in another book, Peddling Prosperity – Economic sense and nonsense in the age of Diminished Expecations (New York: WW. Norton & Company, 1994).

This book deals with the interaction between economic ideas and politics in the U.S from 1973 to early 1990s. More specifically, the author focuses on “the interplay between economists and politicians, about how politicians try to find economists with ideas that they can package, and how economists both develop ideas and try to translate ideas into political influence.”(p.5)

In order to show this interplay, Krugman distinguishes “professional economists” doing research at universities from “economic entrepreneurs” who are ready to translate profound economic ideas into the simplistic version of policy prescriptions for politicians.

According to Krugman, the chosen period for research can be characterized by “the age of diminished economic expectations” in which economic growth and overall standard of livings of the U.S has decreased due to the continuous slowdown of labor productivity, rapid inflation and huge “twin (both trade and budget) deficits.”

In this sense, Paul Krugman’s previous book, The Age of Diminished Expectation – U.S Economic Policy in the 1990s (Cambridge, Massachusetts: The MIT Press, 1990, 1994, 1997, 1999) is a good source to understand what problems the U.S economy has faced and how the government tries to treat those issues. However, while his previous book deals mainly with economic problems and the government’s policy responses, this book focuses more on the underlying economic ideas from which certain economic policy packages have been developed.

From that year, according to Krugman, U.S academia has been influenced by conservative economic ideas such as “monetarism” and “rational expectation school” represented by Milton Friedman and Robert Lucas respectively. Krugman argues that under these conservative influences, a group of policy entrepreneurs, whom he calls “supply-siders” came to the forefront between the realm of academia and political parties as economic advisers to the President and other Republican politicians under both Reagan and Bush administrations.

But, according to Krugman, the ideas of supply-siders not only caused detrimental effects to the U.S trade deficits but also aggravated income inequality among social classes. The underlying policy prescription to the U.S slowdown of productivity and inflation was radical tax cuts and reduction of the government spending. They argue that the U.S Americans have been suffering from heavy burden of taxes, and this in turn reduced the potential source of investment. With its surplus budget, supply-siders argued, the unmonitored government wasted huge amounts of money for bureaucrats and the undeserving poor.

These policy packages were actually adopted by both Reagan and Bush administration. However, the result was a huge and widening income gap between the rich and the poor, as well as budget and trade deficits partly due to excessive military spending.

Due to these disappointing results, there emerged new liberal ideas emphasizing “imperfect market competition” and “the asymmetry of information” in the market. These liberal economists argued that the market was not exempt from turbulent business cycles even when we assumed the “rationality of economic agents.” Furthermore, every economic development has been influenced by its own institutional arrangement and past history. This “path-dependent” property of the market opens the door for the government’s active interventionist policy.

In this way, Krugman points out that the ideological pendulum swung from the prevalent attacks on Keynesian interventionist state to liberal Keynesianism. The theoretical hegemony, escaped from the hands of right-wing conservatives, once again became dominated by liberal economists.

However, there has been also another type of policy entrepreneur, one ready to offer a simplistic version of neo-Keynesianism for Democratic Party politicians. But at this time their focus is not on domestic policy but on international trade area.

Krugman names them “strategic traders” because their main argument is that the U.S government should subsidize certain corporations in value-added industry in order for them to compete with other firms abroad in the global market. In other words, they claim that it is necessary for the government to support strategic corporations in order to reduce trade deficits and raise domestic productivity.

Apart from some simple questions such as who can decide what the strategic firms are, and whether this kind of thinking is simply based on old-fashioned strategic decision making model for business corporations which boomed in the 1960-70s, in other words, whether this idea is based on simple analogy between the business firms in domestic market and national economy as a whole in global context, Krugman argues that strategic traders have the following serious problems.

Firstly, strategic traders overestimate the magnitude and the effects of international trade on the U.S economy. Even though the U.S has involved in global economy, the real percentage rate of the amount of international trade only amounts to 10% of GDP. Furthermore, even though the percentage rate of traditional manufacturing sectors measured in the GDP only accounts for 20%, strategic traders are misleading the reality and may distort the rational allocation of resources by paying exclusive attention to the significance of manufacturing sectors. Their common slogan is that the government should subsidize strategic manufacturing sector to let them win global competition.

Secondly, strategic traders unjustifiably link two unrelated points: the productivity growth and global competitiveness. Productivity growth is necessary for the overall increase in GDP and the improvement of the standard of living. But it has nothing to do with competition in global market. They argue government’s strategic support for selected corporations will bring about much more chance to win more market share in global market, and this in turn will be accompanied by domestic productivity growth. But according to Krugman it is not the case.

Finally, they also argue that strategic subsidies are necessary to develop high-value industry and secure job stability. But under what criteria can we decide which industry is better than others? Moreover, the increasing job instability stems not from aggravated global competitions but from the development of technology itself. Thus, “deindustrialization” or “industrial hollow” has nothing to do with globalization, and does not support strategic traders’ ideas.

In this way, Krugman criticizes various sheer economic non-senses advocated by policy entrepreneurs during two conservative administrations and the Clinton government. In so doing, he draws clear pictures of the history of the development of the U.S economic thinking.

On the whole, he seems to succeed in offering us how hegemonic shifts from the U.K to the U.S occur in the realm of economics. The most interesting point was that this process was not purely theoretical occurring in the ivory tower, but was also accompanied by the rise of the U.S economic hegemony after World War Ⅱ.

Considering the devastating repercussions of the Great Depression in the 1930s and the war, it was not surprising to see that both the theoretical pavement and barrier was Keynesian economics at that time. Krugman leads us to see how after-war-economists in the U.S have tried to overcome the Keynesian notion of active government policy in the name of monetarism and the rational expectation revolution since the 1970s.

He also shows us how the ideological pendulum swings from the myth of self-governing market to path-dependence approach to economic development. However, he introduces how so-called economic policy entrepreneurs have taken the place to access political power and mislead the reality in the name of self-righteous policy recommendations.

Written in plain English, Krugman’s book has strong merits with respect to its style and structure. Even ordinary readers will not find any serious difficulties in understanding the author’s main arguments. This book will be a useful guide for those who are interested in the history of U.S economic policy and real economic development process. Furthermore, readers interested in what kinds of economic policies the U.S government would likely adopt in the near future to deal with various global economic affairs will find this book a good guide.

* For those who want more information on current issues of the U.S economy, Joseph Stiglitz’s book, The Roaring Nineties – A new history of the World’s most prosperous decade will be a good supplementary material. You can compare these two famous economists’ arguments on current U.S economic affairs.

* If you are interested in the U.S financial and banking system, the book Secrets of the Temple – How the Federal Reserve runs the country will provide you with clear image of the operation and the function of the FED in the global context.