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Paul Krugman's Gotcha Moment

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Politicians are well-known for saying one thing before a certain group, and the opposite when standing in front of others. For example, a Republican member of Congress may tout free markets and decry "excess government regulation" in one speech and then shamelessly call for "protection" for textile firms in his own district. Not surprisingly, thanks in part to the Internet, critics have begun a near-cottage industry that exposes these contradictions, although the information that is revealed rarely causes a politician to go down to defeat.

While Paul Krugman may not be running for office, when reading one of his recent columns, I realized that a "Gotcha" moment had manifested itself. Let me explain. On November 21, 2004, I was attending a session at the Southern Economic Association meetings in New Orleans, and Krugman was the speaker. (Professor Joseph Salerno, editor of the Quarterly Journal of Austrian Economics, sat next to me, so I have a witness to the moment I will reveal.) Some of talk actually made sense at the time, although I cannot recall exactly what he said. What I do remember clearly, however, is that during the question-and-answer time that followed, I asked the learned Princeton University professor and New York Times columnist a question that went something like this: You have been critical of the tax cuts pushed by the Bush Administration and the Reagan Administrations. Yet, before the 1981 tax cuts, the top marginal tax rates stood at 70 percent. Are you advocating a return to 70 percent rates? Krugman's reply was not exactly what I had anticipated. While not dealing with the latest round of rate cuts (from 39.6 percent to approximately 35 percent), he told me (and the others in the audience) that the 70 percent rates were "insane." He did not say what he considered a "sane" rate to be, nor did I press the issue. Furthermore, if the 70 percent rates that prevailed from 1964 to 1981 were "insane," according to Krugman, one can extrapolate that he would have considered the 90-plus percent rates that prevailed before then even more of an episode of madness. (In economic analysis, we assume that if someone prefers good A over good B, and then prefers good B over good C, we can conclude that the person therefore prefers good A over good C. Likewise, I believe it safe to assume that if Krugman believes that a 70 percent marginal tax rate is too high, then he would likewise believe that a 90 percent rate also would fall into the "too high" category.)

Given that Krugman spoke those words directly to me, I must admit to being somewhat surprised to read his column in which he called for the government to turn back the clock to the 1950s. In decrying what he calls the disappearance of the middle class, he writes:

Why is this happening? I'll have more to say on that another day, but for now let me just point out that middle-class America didn't emerge by accident. It was created by what has been called the Great Compression of incomes that took place during World War II, and sustained for a generation by social norms that favored equality, strong labor unions and progressive taxation. Since the 1970's, all of those sustaining forces have lost their power.

Indeed, Krugman's statement is part of the larger theme being promoted by the New York Times in its series of front-page editorials (masquerading as real news articles) on "class" in the United States. As George Reisman recently pointed out in his classic debunking of this series, the editorial board of the Times is pushing a theme of economic ignorance:

…the…series…may very well seem persuasive to most of its readers. It may very well serve in the obvious political agenda of the Times, incessantly pursued in its alleged news columns, to bring about the defeat of any political candidate daring to favor lower taxes on the hated rich, or practically any reduction in government interference in the economic system whatever. But this is only because of the incredible economic ignorance of the Times and most of its readership.
As a leading illustration of this ignorance, one should consider the fact that the official Times' bibliography for the series contains seventeen titles. Not one of them is by Ludwig von Mises, or any other member of the Austrian school of economics, or by anyone recognizable as possessing even the faintest glimmer of serious knowledge of economics. Yet to the Times and most of its readers the list appears authoritative and no objection of any kind registers to undertaking a series on economic inequality in total ignorance of the actual economic significance of economic inequality.
Let us consider that significance. The extremely high incomes to which the Times objects are overwhelmingly saved and invested. In this way, they bring about large-scale capital accumulation. Capital is the foundation both of the demand for labor and the supply of consumers' goods. Its continuous accumulation is the foundation of high and rising real wages and a high and rising standard of living for everyone.

It is important to remember that this "golden age" of which Krugman writes (the 1950s and 1960s) was the age of 90 percent marginal tax rates, which he says played a major role in what he says was a "relatively equal society":

Baby boomers like me grew up in a relatively equal society. In the 1960's America was a place in which very few people were extremely wealthy, many blue-collar workers earned wages that placed them comfortably in the middle class, and working families could expect steadily rising living standards and a reasonable degree of economic security.

From his statement shown earlier, it is clear that Krugman believes that the high, progressive taxation was a key element in creating his version of an economic Nirvana. Yet, when speaking in front of a group of economists, he suddenly tells us that those same high tax rates that gave us "equality" in the 1950s and 60s were "insane." Furthermore, he openly lays what he sees as the "problem" squarely at the feet of tax cuts:

Since 1980 in particular, U.S. government policies have consistently favored the wealthy at the expense of working families - and under the current administration, that favoritism has become extreme and relentless. From tax cuts that favor the rich to bankruptcy "reform" that punishes the unlucky, almost every domestic policy seems intended to accelerate our march back to the robber baron era.

Besides the over-the-top rhetoric and his dishonest answer to me, there are a couple of other problems I have with what Krugman does in this column. The first is ethical and the second is analytical. When I was a newspaper reporter almost 30 years ago, our paper annually published a "progress edition" in which businesses that purchased advertising for the edition would have a puff piece on that enterprise appear there, the reporters providing the fluff. To put it another way, the businesses could purchase favorable coverage.

I am not sure of the ethics of this endeavor – for the most part, we reporters did as we were told – but I am sure that most people at the New York Times would condemn it. However, I find it interesting that as the Times publishes its series on "class," there suddenly has been a spate of editorial page columns on …class. I do not think this is a coincidence, in that the columnists and editorial writers suddenly decided at the same time to concentrate on the same subject. Keep in mind that the Times has advertised its series as an exercise in objective reporting. (I must admit that some of the series is interesting and well-written.)

However, having observed the performance of the "Newspaper of Record" in the past several weeks, I have concluded that this endeavor is nothing less than an orchestrated effort by the Times to push a political (and virulently anti-capitalist) point of view in the name of journalism. The late William E. Simon, who was U.S. Secretary of the Treasury during the Gerald Ford Administration, when New York's fiscal crisis of 1975 occurred, wrote about his experience with the Times in his book, A Time for Truth:

The most shocking instance of conscious bias was that of Leonard Silk, a member of the editorial board of the New York Times. Before the opening of an NBA Meet the Press show on which Silk was a panelist, he said to me, "If you lay off New York, we'll lay off you." This threat was not personal. It was an expression of the same ideological malice that later showed up in Silk's "scholarly" book The Economists, where he subjected Milton Friedman to invective and ad hominem attacks. Economist Edwin G. Dolan of Dartmouth College said in a review of this book, "Silk sees capitalism as ugly and obscene." In his coverage of me for the New York Times, Silk was simply engaged in his usual practice; he was fighting capitalism and calling it journalism. (p. 170)

I need be careful when I say that Krugman is guilty of unethical conduct. Yes, he is free to preach his statism, and no doubt, Princeton and the New York Times pay him very well to do so. However, when Krugman tries to tell economists that high marginal tax rates are "insane" (his term) and then tries to tell the rest of the country that those same 90-plus marginal rates were responsible for creating a prosperous society with economic security, that borders on being dishonest. Furthermore, as a fellow academic, I think he should be held to higher standards than politicians. There also is the matter of the truthfulness of his analysis. Were the 1950s and 60s really a golden age? Certainly, much larger numbers of people lived in poverty during that era than is the case today. Almost all goods took a much larger share of family income than is the case today.

On the subject of "inequality," Reisman's article explodes that particular myth. From what I can tell, Krugman is asking us to believe that high progressive taxes somehow create economic security for everyone else, but he never gives any causal chain in how that occurs. In Krugmanspeak, it just happens. As one who came of age during that time, I recall that the main complaint by the Krugmans of that day was that the rich were not paying their "fair share" of taxes. Buoyed by testimony from the head of the IRS, Congress in 1969 passed the "Alternative Minimum Tax" because a relatively small number of millionaires had not paid federal income taxes, due to available tax shelters of that era. In his 1976 presidential campaign, Jimmy Carter declared the tax system to be a "disgrace" and promised to reform it in order to make higher-income pay their "fair share" of taxes. Sen. Edward Kennedy in his 1980 speech at the Democratic National Convention declared to a wildly cheering crowd that instead of tax cuts (as Ronald Reagan was proposing), "there should be no tax shelters." In other words, what Krugman claims was an engine of equality actually a real source of discontent, at least where politicians were concerned. Moreover, that period of time was hardly one of economic security, and it was marked by a much greater number of violent strikes than is the case today.

Although Krugman is a favorite of people on the left, there really is no evidence that America was on the whole a "more equal" country 40 years ago, except to say that most of us were more equally poor than we are today. (I suspect that if one of us were to travel back into the early 1960s, we would be surprised at what we saw concerning the relatively low standard of living for most people.) Granted, things like illegitimate births and divorces were lower in numbers and percentages then, but their increase is not due to the fact that the top marginal tax rates today stand at about 35 percent instead of 90 percent. Krugman, then, is guilty of doing a number of things. First, he tries to convince us that the 50s and 60s were a golden economic age when they were not; second, he tells us that prosperity was due to high tax rates and labor unions, which makes no economic sense. Third, he tries to play both sides of the fence by telling economists that he does not favor 70-90 percent tax rates, then claiming in his column that those very rates created prosperity.

In a previous article on Krugman, I said that he was not an economist, but rather just another political operative. I would like to add that by simultaneously taking both sides on the subject of "insane" tax rates, he now has been graduated to the position of politician. After all, only the political classes can do such a thing – and not lose any credibility.

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