Posted by on September 6, 2014

I am in the habit of saying that it was a great loss to the world when John Kenneth Galbraith, the Harvard economics professor, died. It was a great loss because JKG was one of the few economists with true predictive power: If you listened very carefully to whatever he said and then did exactly the opposite, you were almost certain to succeed.

From his opposition, when he was an economics proconsul in post-war Germany, to the free-market currency and price reforms that directly produced the Wunderwirtschaft (the “miracle economy”), to his promotion, when he was JFK’s ambassador to India, of the socialist policies that crippled this country until the reforms of the early 1990s, this icon of the Left was unfailingly, and usually very publicly, wrong. In fact, he was virtually the embodiment of the famous definition of insanity: “Insanity is doing the same thing over and over and expecting different results”.

I thought that we would never see his like again. But with Paul Krugman, I have hope.

I have lived in Europe for over 20 years where Krugman is not the media star that he is in America. So, Krugman is a relatively new phenomenon for me and I cannot claim that I have studied his every utterance. But I can already draw some early conclusions.

The first is that Krugman long ago ceased being an objective scholar, grounded in fact and solid theory, and is now purely a polemicist with a very clear agenda. Nobody can doubt this after his ringing endorsement of Thomas Piketty’s “magnificent, sweeping meditation on inequality”, Capital in the Twenty-First Century. I will return to this book in a later blog, but I am reasonably sure that my initial reaction – that nothing good can come from a French academic who chooses to ape Das Kapital, Marx’s minimus opus – is the correct one.

The second unavoidable conclusion flows from the first: Krugman is more than happy to play fast and loose with the facts, while accusing everyone else of doing the same. As proof of this, I offer “Wrong Way Nation“, a recent Krugman blog in the New York Times.

The object of the post is to discredit the belief that the low-tax, low-regulation policies of red states like Texas and Georgia account for their strong jobs and population performance. Krugman “refutes” this by pointing out that, in fact, wages (which imply productivity) are higher in the places that people are leaving (such as New York) and that the only reason people are moving to Texas is the lower cost of living, primarily relating to housing costs. In his words: “And this, in turn, means that the growth of the Sunbelt isn’t the kind of success story conservatives would have us believe. Yes, Americans are moving to places like Texas, but, in a fundamental sense, they’re moving the wrong way, leaving local economies where their productivity is high for destinations where it’s lower. And the way to make the country richer is to encourage them to move back, by making housing in dense, high-wage metropolitan areas more affordable.”

Where do we begin? First, it should be noted that the wages that Krugman uses in his argument are average wages. Now, I have never done the experiment myself, but I have it on very good authority that if I put my head in the oven and my feet in the freezer, on average I will be very comfortable. Likewise, I am pretty sure that using wages that average in the extraordinary incomes of Wall Street, and then comparing the results to places that don’t have a similar upward skew, is pretty meaningless. Differences at the opposite end of the income spectrum probably also distort the comparison. New York has welfare programs that are famously much more generous than those in Texas, which probably means that a lot of potentially pesky low earners in New York are sitting at home and enjoying some leisure time, instead of dragging down average wages and making it harder for Prof Krugman to “disprove” the superior economic performance of low-tax states.

It is not bad enough that Krugman uses average wages, but he then compounds the problem by using average nominal wages. One of the first things that a student learns in economics, presumably also at Krugman’s Princeton, is that economic decisions are made on the basis of real factors and not nominal ones. Which means that what an employee cares about is not his nominal wage – which is what Krugman compares – but his real standard of living. Not surprisingly, workers are attracted to the higher real standard of living offered by the low costs of Texas and they will accept a lower nominal wage in return for this. In turn, this means that the employers in Texas will continue to hire employees until the marginal productivity of a worker, which falls with each worker added in accordance with the law of declining marginal productivity, in Texas is equal to this relatively low nominal wage.

In other words, all else being equal, low living costs cause low nominal wages. But this means that judging the impact of a state’s policies on the basis of nominal wages, which is what Krugman does, is a complete economic nonsense. If you want to use average anything in making this judgment, not something that I recommend, then you are surely on safer ground if you compare real average wages, adjusted for the cost of living. But, of course, Krugman doesn’t want to do this, because it would show that Texas is actually doing very well, thank you.

But Krugman’s argument is also wrong at a deeper level. The higher housing costs in the Northeast are not due to an Act of God unrelated to government action. They are the direct result of the overly restrictive zoning policies in states, such as those in the Northeast and California, where Krugman’s friends in the Democratic Party have long held sway. To his credit, Krugman acknowledges this, saying “looser regulation in the South has kept the supply of housing elastic and the cost of living low”. To his discredit, however, Krugman seemingly never bothers to ask himself the question if there aren’t a lot of other areas where regulation is similarly dysfunctional. And that maybe, just maybe, we have more to learn from the economic successes of low-tax and low-regulation places like Texas – and Georgia, and South Dakota, and Nevada, and Hong Kong, and Singapore, and Switzerland, etc., etc., etc. – than just their housing policies?

Which brings us back to my first conclusion about Krugman. Everything that I have stated above is basic economics. It begs the question, therefore, of why Krugman writes things like this. Is it because, to use his favorite word when belittling his opponents, Krugman is “stupid”? Or is it because Krugman has long since given up a scholarly search for the truth in the interest of scoring political debating points? I will let the reader judge.

Roger Barris, London

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Posted in: Economics

Comments

  1. Henri Alster
    September 7, 2014

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    Excellently articulated and spot on, as usual.
    The nagging question is why do so many intelligent people fall for socialist dogma?

    • Roger
      September 8, 2014

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      Thank you, Henri. The question you raise is the interesting one. Certain one of the biggest causes is that socialist orthodoxy has seized the intellectual “commanding heights” of the education system and the organs of popular opinion. They have done this, in part, by default, since people who believe in free markets and the economic system would typically rather be players than coaches. As the old saying has it, “Give me the child until he is seven, and I will give you the man”. Unfortunately, most people are not questioning enough of received wisdom and authority to make this statement untrue.

      Roger

  2. J Fred Muggs
    September 7, 2014

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    The last great economist Paul McCracken, a mentor of mine (and Sam Zell), died last year. As my great friend and Professor commented about Paul Samuelson present day economists are “fakes”.

    • Roger
      September 8, 2014

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      Thanks, Muggs. I think that one of the problems of people like Krugman is that they live in the proverbial ivory tower and they have no direct experience of how pointless, misdirected and wasteful most government regulation is. If I am being cynical, they also have a direct interest in distorting the record since it promotes their fundamental desire to be “social engineers”. In a world of social engineering, the scholastic “engineers” gain a status that would otherwise be unobtainable.

  3. steve
    September 7, 2014

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    “Now, I have never done the experiment myself, but I have it on very good authority that if I put my head in the oven and my feet in the freezer, on average I will be very comfortable.”

    Laughing out loud funny. Krugman is not funny…he is a dangerous man…he is the main reason that when they announce Nobel Prize winners (Obama is the other main reason….) I don’t read the article. From when you gave me “Atlas Shrugged” when I was 18 to today…a total lack of respect for these people.

    It is more than just scoring political debates…when people knowingly do and say things that (according to any common sense, any basic analysis) that they know will change policy for the worse, make people’s lives worse, lower the standard of living for millions and they still do it…that is called evil.

    by the way I can never read my comments or anyone else’s….I don’t know why!

    • Roger
      September 8, 2014

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      Thanks, Steve. Hopefully this comment will come through.

      I agree: there is a certain Ellsworth Toohey aspect to Krugman. And the Nobel Prize is certainly no guarantee of quality (except maybe in Physics and Medicine, but I don’t know enough to judge). Since all things remind me of movies, I am reminded of the great line in the King’s Speech when the King tells Lionel, his Australian speech coach, that he has been advised to smoke by his doctors to relax his throat and help him overcome his stutter. Lionel says “They’re idiots”. The King replies, “They have all been knighted.” Lionel reponds, “Make’s it official, then”.

  4. Dave Anderson
    September 7, 2014

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    Two thoughts — I’ve seen it argued that much of Texas’ economic success comes from the doubling of oil prices in the last 10 years (not a Rick Perry/regulation factor) combined with a large increase in volume via fracking (which does seem regulation related). It would be interesting to consider the relative contribution of these factors.

    Second, an odd regional price anecdote — we bought a house near Bozeman MT in 2005 and had Direct TV installed by the local franchisee. The owner surprised me by saying he was moving to Southern California, because he believe would earn enough more there to buy a house, which he couldn’t do in Bozeman!

    • Roger
      September 8, 2014

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      Thanks, Dave. Unfortunately, the analysis on Texas would be way beyond the scope of what I can manage with this blog. And then we would also have to analyse the equally fortuitous explosion of financial services, which distorts the NY economy at least as much as oil does Texas. One of the key aspects of the piece is that Krugman is doing none of this deep analysis, just taking cheap shots — I think that this is still valid.

      Bozeman is a very special place. I am not sure that it is an indicator of anything. But almost certainly the house prices there reflect highly restrictive zoning more than anything else. For a great book on the impact on government policy on house prices, and real estate finance in general, I recommend Edward Glaeser’s The Triumph of the City. Glaeser is cited by Krugman in his article, but this is also ingenuous, since Glaeser (trained at the University of Chicago) is no fan of the Krugman approach to policy.

  5. Anonymous
    September 8, 2014

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    Excellent, and entertaining, piece. Frustrating how some of these folks think – it is like a modern day version of “Atlas Shrugged”.

    I do find it curious how such liberal thinking (from an economic perspective) continues to survive. Living in NYC, for example, I am fascinated that the city has taken such a sharp turn to the left with election of Bill DeBlasio. While I like to think this was largely a factor of the Republican candidates not being captivating enough (or coming from a mixed marriage, like Bill), I am shocked he was elected in the first place given his “anti-Bloomberg” stance. How any politician could get elected by, or would willingly participate in, decrying pragmatic policies that had such a positive effect on the city in so many aspects is not only beyond my scope of comprehension, but it is simply frightening, as well.

    Apologies for the semi off-topic post…

    • Roger
      September 8, 2014

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      I agree with you that DeBlasio is a symptom of something not very good. I was astonished that NYC could go from someone like Bloomberg, who is 100% substance over form, to someone like DeBlasio, who is 100% form over substance. Bloomberg looked upon his job as trying to be an efficient manager of New York City, Inc., an entity with the primary purpose of delivering services for its clients/citizens. This is probably the right way to view local government and it is a pity that NYC will now suffer the consequences of electing someone who thinks his job is to delivery social justice — his version — and not clean streets.

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