- The Washington Times - Sunday, February 18, 2001

Economics is a discipline notable for heated disputes over mutually exclusive policy options. To the extent these options will affect the long-term growth rate of the American economy, whatever policies are adopted will clearly have major, real-life consequences for the entire nation, even the world. It is, therefore, hardly surprising that economists argue their points-of-view so aggressively.

In a field where the stakes are so big, Paul Krugman, the in-your-face Princeton economist who moonlights as a twice-weekly New York Times op-ed columnist, may well be America's most impetuous economist. And the most condescending. Last month, for example, he attacked Lawrence Lindsey, the director of the National Economic Council in the Bush White House, for Mr. Lindsey's "remarkable display of bogus economic analysis." On Wednesday, he described Fed Chairman Alan Greenspan's congressional testimony as "a profile in cowardice." Just what economic heresy have Messrs. Lindsey and Greenspan committed? Both have endorsed a major tax cut, when the federal government is otherwise expected to generate $5.6 trillion in cumulative budget surpluses.

Given the amount of abuse likely to be heaped on Mr. Bush's economic team in the years to come from liberal economists like Mr. Krugman just as scorn was heaped upon the Reagan tax cut for decades it is worth examining Mr. Krugman's arguments. As it happens his own record on economic predictions is dismal.

Precisely five years ago this month, Mr. Krugman wrote an essay for the New York Times Sunday Magazine ("Stay on Their Backs," Feb. 4, 1996). In that essay, he contemptuously lectured the likes of "neo-Reaganite candidate" Steve Forbes and Wall Street Journal Editor Robert Bartley for foolishly believing that the economy could grow at 3.5 percent per year, a full percentage point higher than the 2.5 percent "speed limit," which Mr. Krugman argued was the long-term growth rate of the economy. As it happens, pretty much from the moment Mr. Krugman's article appeared through the end of last year the annual economic growth rate for the U.S. economy averaged 4.32 percent, substantially higher than the 3.5 percent rate Mr. Krugman mocked Messrs. Forbes and Bartley for believing possible and nearly 75 percent higher than his "speed limit."

"A delightful fairy tale has taken hold lately in some economic policy circles. After decades of inflation, slow growth and stagnant wages, the story goes, a restructured United States economy is poised for a glorious burst of sustained, 60s-style growth without inflation," Mr. Krugman began his article. "It is indeed a delightful tale. If only it were true." For the record, economic growth averaged 4.42 percent per year throughout the 1960s, or a mere 0.1 percentage point higher than the past five years. From 1996 through 2000, moreover, annual inflation, as measured by the Consumer Price Index, averaged only 2.5 percent.

"In fact, the so-called revolutions in management, information technology and globalization are vastly overrated by their acolytes," Mr. Krugman asserted. "It has become a cliche in the business world that in the last few years tighter management and sophisticated technology have led to a 'productivity revolution.' " In fact, the lesson of the last five years is that there has been a productivity revolution. The productivity growth rate, which averaged less than 1.5 percent a year during the previous 10 years, more than doubled during the last five years, averaging 3.0 percent.

Mr. Krugman lectured Messrs. Forbes and Bartley about the seeming immutability of Okun's Law. According to Okun's Law, for every point of growth above 2.5 percent, the unemployment rate falls by half a point. "There is not the slightest hint in recent experience that this historical relationship has changed," Mr. Krugman asserted, adding, "When people argue that the economy can grow at 3.5 percent for years to come, they must either be unaware of [Okun's Law] or have a wildly unrealistic view about how low the Fed can push the unemployment rate." In fact, after five years of annual economic growth averaging more than 4.3 percent, the unemployment rate fell below 4 percent without igniting inflation. According to Mr. Krugman, such a development was impossible.

All these predictions proved to be as wrong as they were dogmatic: "If the past 15 or 20 years teach us one overwhelming lesson in political economy," Mr. Krugman declared five years ago, "it is this: Just because an economic doctrine is patently false, that does not mean it can safely be ignored, especially when that doctrine tells people what they want to hear." In fact, the only "overwhelming lesson in political economy" that one can draw from Mr. Krugman's 1996 essay is that the economic doctrine he was pushing then proved to be "patently false" to borrow an expression.



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