Tag: Paul Krugman

A Fiscal Train Wreck

That is the title of a 2003 New York Times column by economist Paul Krugman. The gist of his column was that the Bush tax cuts and future entitlement program liabilities would usher in calamitous deficits. Setting aside the tax cut and entitlements issue, Krugman’s comments on the dangers of deficits are interesting considering seven years later Krugman is one of the most prominent supporters of massive deficit spending to stimulate the economy.

Here are some selected Krugman quotes from the column:

With war looming, it’s time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.

Two years ago the administration promised to run large surpluses. A year ago it said the deficit was only temporary. Now it says deficits don’t matter. But we’re looking at a fiscal crisis that will drive interest rates sky-high. A leading economist recently summed up one reason why: ‘When the government reduces saving by running a budget deficit, the interest rate rises.’ Yes, that’s from a textbook by the chief administration economist, Gregory Mankiw.

But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar. It won’t happen right away. With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.

Although this shouldn’t be construed as an endorsement of George Bush’s fiscal policies, the deficit for fiscal year 2003 when Krugman wrote his column was $378 billion. The Congressional Budget Office just reported that the deficit for the first quarter of FY 2010 was $434 billion.

The following chart shows the annual deficits from fiscal years 2002 through 2010 (projected). For 2009 and 2010 the first quarter deficit is also shown. In short, the two most recent first quarter deficits have been about $100 billion higher than the average annual deficits run from 2002 to 2008.

In FY2003, the deficit was 3.4 percent of GDP – for FY2010 it’s projected to be 10.6 percent. According to the President’s optimistic FY2011 budget, annual deficits won’t fall below 3.6 percent of GDP at any point in the next ten years.

Yes, Krugman believes that large deficit spending is necessary to turn the economy around. But that doesn’t change the fact that his dire warnings about deficits in 2003 should apply to today’s even larger deficits, especially now that we’re even closer to an entitlement crisis. However, Krugman recently penned a column warning against “deficit hysteria” in which he makes comments that are more than just a little at odds with his 2003 column:

These days it’s hard to pick up a newspaper or turn on a news program without encountering stern warnings about the federal budget deficit. The deficit threatens economic recovery, we’re told; it puts American economic stability at risk; it will undermine our influence in the world. These claims generally aren’t stated as opinions, as views held by some analysts but disputed by others. Instead, they’re reported as if they were facts, plain and simple.

Yet they aren’t facts. Many economists take a much calmer view of budget deficits than anything you’ll see on TV. Nor do investors seem unduly concerned: U.S. government bonds continue to find ready buyers, even at historically low interest rates. The long-run budget outlook is problematic, but short-term deficits aren’t — and even the long-term outlook is much less frightening than the public is being led to believe.

Scratching your head?  I am too.

Krugman Don’t Know Health Insurance

When I debated Nobel Prize-winning economist Paul Krugman on health care reform, I asked him if he was familiar with the work of University of Pennsylvania economist Mark Pauly.  Pauly is a leader in the economics of health insurance.  He and his coauthors have shown that health insurance markets are way ahead of politicians – and way ahead of economists – in solving the problems that bedevil health insurance markets. I already knew the answer: only someone completely oblivious of Pauly’s work could have debated as Krugman did.  (As Krugman himself demonstrated in that debate, you never want to ask a question to which you don’t already know the answer.)

Krugman’s column in today’s New York Times tells me that he still has not read Pauly.

Krugman addresses the 39-percent premium increases that insurer Wellpoint planned to impose on its California customers:

WellPoint claims … that it has been forced to raise premiums because of “challenging economic times”: cash-strapped Californians have been dropping their policies or shifting into less-comprehensive plans. Those retaining coverage tend to be people with high current medical expenses. And the result, says the company, is a drastically worsening risk pool: in effect, a death spiral.

Krugman then argues that if Wellpoint’s explanation is accurate, then that demonstrates that free-market reforms would cause private insurance markets to collapse, and demonstrates further the need for government to impose price controls on health insurance and to force healthy people to purchase it.

Yet there are at least two major problems with Wellpoint’s story.

  1. Healthy people dropping coverage would not lead to across-the-board premium increases in California, because California allows markets to set premiums.  Only when the government imposes the kind of price controls that Krugman wants does an “adverse selection death spiral” follow.
  2. Krugman may be thinking, “Even with market prices, once the healthy people drop out, insurers must raise premiums to cover the future costs of the sick people who remain.” Yet Pauly and his colleagues show that insurers collect the money they need to cover those costs in advance by “front-loading” premiums.

There is still one way that Wellpoint’s story could have some validity – I’m curious to know if Krugman knows what it is – but as University of Chicago economist John Cochrane explains in this Cato study, that particular problem is due to government failure, not market failure.

In an email to me, Pauly offers a more reasonable explanation for Wellpoint’s premium hikes:

Individual insurance premiums are very volatile so you can always find some insurer jumping their premium a lot.  Consumers then usually move to the insurer that did not.  I know the … California story: Wellpoint had tried aggressively to expand its individual business by setting low premiums, and I think realized the underpricing to gain market share did not make sense in a recession, so they put premiums back up where they should be.  Maine is heavily regulated so I do not know the story there but I bet these big hikes came after several regulatory refusals to increase premiums moderately – so again we see a correction of underpriced coverage… I could be wrong but I think this is all political; you could have found this story at virtually any time in the last 10 years but it is more salient now.

The next time Krugman wants to interpret news about health insurance markets, he should do what I do: check with Mark Pauly.

Krugman also declines to consult the literature when he claims that allowing people to purchase health insurance across state lines would lead to a “race to the bottom” as states gutted their consumer protections.  (It wouldn’t.)

When they Give You “Anti-Lemons”…

On Tuesday, I criticized a new economic modeling paper (“Anti-Lemons”) purporting to show that unfettered education markets are bad and that government can fix them with the right regulations.

Andrew Gillen comes to the study’s defense, and I’m delighted that he’s taken the trouble to reflect on it rather than just saying “I like it.” But there are problems with his analysis. First, he faults me for dismissing the “Anti-Lemons” models for being based on false assumptions, citing Paul Krugman:

I am a strong believer in the importance of models, which are to our minds what spear-throwers were to stone age arms: they greatly extend the power and range of our insight. In particular, I have no sympathy for those people who criticize the unrealistic simplifications of model-builders.

Even if we put aside the fact that Paul Krugman is at times less reliable than the Daily Show website, there is an important difference between assumptions that are “unrealistically simplified” and those that are patently wrong. With the former, your model might still huck its intellectual spear somewhere in the general vicinity of the truth, with the latter, you’re just going to put your eye out.

“Anti-Lemons” is in the put-your-eye-out camp. Among other things, it assumes the productivity of all schools is equal. This is both totally false and highly germane – efficiency varies dramatically among schools, and private schools as a whole are consistently more efficient than government schools (as we will see below). Failing to recognize that reality will lead to incorrect results from the model, and this is just one of the false assumptions the paper adopts (see my previous post for others).

Second, Gillen writes that

going by Coulson’s numbers in figure 2 here, we would expect to find a positive impact of markets over government on achievement in slightly less than 2 out of 3 studies (with insignificant findings making up the majority of the others). If the case for free markets over government schools is really so clear cut (and I lean strongly in this direction), than why isn’t this 3 out of 3?

There are many plausible reasons for this result (lack of statistical power, omitted variable bias, other misspecification errors, etc.), but one is particularly worth raising here: government schools in many parts of the world spend several times as much per pupil as their private sector counterparts. This is true in most developing countries, from which a great deal of the inter-sectoral research hails. And when I looked at statewide data from Arizona in 2006 I found that government schools spend roughly 50 percent more than private schools. While it’s true that government school outcomes tend not to improve much as spending rises, the same cannot be said of private schools.

If this is true, you might ask, then wouldn’t the inter-sectoral research on school efficiency be more stark than the research on achievement (that fails to take spending levels into account)? The answer is yes. In fact, if you examine the efficiency bar in the same figure 2 cited by Gillen above, you will see that every single one of the efficiency comparisons between market and monopoly schools is significant and favors the market schools.

So, not only is the “Anti-Lemons” model useless, it is worse than useless: it seems to mislead even intelligent readers into believing that there is some mystery in the literature that needs to be solved by blindly waiving a spear around.

“Anti-Lemons” is neither Camelot, as I said yesterday, nor is it Sparta as Andrew implied. It’s the kid from Christmas Story who nearly puts his eye out by the cavalier application of a potentially powerful tool.

Krugman: The Hubris of Central Planning

In the New York Times today, Paul Krugman discusses the Euro and the problem of Greece. He hastens to note that the problem is not debts, deficits, and government profligacy, which it sure might seem like to the untrained eye. But he fingers a different and deeper problem:

No, the real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites — specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment….

It’s an ugly picture. But it’s important to understand the nature of Europe’s fatal flaw. Yes, some governments were irresponsible; but the fundamental problem was hubris, the arrogant belief that Europe could make a single currency work despite strong reasons to believe that it wasn’t ready.

Now, you’ll note that Krugman says that Europe wasn’t yet “ready” for a single currency, suggesting that in some happy day it will be. Because of course the logic of history is always to move toward centralization and conformity, right? Nevertheless, it’s great to see Paul Krugman criticizing the arrogance of elites and the hubris of the centralizing impulse.

Do Democratic Presidents Create More Jobs?

Politifact.com looked into a remark from Rep. Carolyn Maloney, D-N.Y., that “Democrats have been considerably more effective at creating private-sector jobs.”

The statement was rated true, as a purely statistical matter.  Yet the poltifact researcher did a good job questioning the significance of his own figures.  He noted, correctly, that the president usually “deserves less credit for the good times – and less blame for the bad times.”  And he added that job figures can be driven by outside factors such as oil price shocks, demographic changes or soldiers coming home after World War Two.  He wryly noted “how surprised we are that Eisenhower, who presided over the ‘happy’ 1950s, managed an anemic half-percent job growth per year, while Jimmy “Malaise” Carter finished second with 3.45 percent annual job growth.”   Anyone who remembers the runaway inflation of the Carter era will realize that annual rates of job growth are not enough to describe the overall economic situation.

The author also quoted me making the point that “timing can be hugely important.”   It is so important, in fact, that we may need to add another dimension to politifact’s true-false meter to deal with political comments that are simply meaningless.

For the record, what follows is the full text of my email on this topic:

The error involved with assigning rates of job growth to Presidential terms is that six recent Presidents took office within a few months of the start of a recession: Obama (recession began December 2007), H.W. Bush (July 1990), G.W. Bush (Mar 2001), Reagan (July 1981), Nixon (Dec. 1969) and Ike (July 1953).   As it happens, four of the five were Republicans.

One might argue that recessions launched near the end of the previous administration helped get these men elected. But these recessions were clearly left over from events that began previous years.  It didn’t help that the first Pres. Bush passed a tax increase three months after the 1990 recession began, but the start of that recession is more plausibly blamed on the earlier spike in oil prices when Iraq invaded Kuwait.

Since employment is a lagging indicator (one of the last things to improve), that means average job growth among Presidents who took office near the start of recessions is bound to look bad in comparison with Presidents who took office after an expansion was well underway.  Bill Clinton took office in 1993, long after recession ended in March 1991.   The same was true of Truman, LBJ and Carter.   JFK took office a month before the 1960 recession ended.

Two-term Presidents also have more time to show good numbers, but only if they’re lucky enough to get out of office just before the next recession starts.  Clinton squeaked by (despite falling stock prices and industrial production 2000), but Nixon, Eisenhower, Carter and G.W. Bush did not.

Since Bush 2nd began and ended office in recession, averages over 8 years outweigh 4 reasonably good years.  This unprecedented bad timing is exaggerated by Paul Krugman’s comparison of “decades” [and President Obama’s recent reference to “the lost decade” of 1999-2009] which relies on starting and ending each decade in boomy 1959 rather than slumping 1960, ditto 1969 rather than 1970, 1979 rather than 1980, 1989 rather than 1990, and 1999 rather than 2000.

In short, statistics about employment growth over Presidential terms are dominated by the timing of the “business cycle” (including Federal Reserve policy), and have no apparent connection to economic policies attributed to the White House (as opposed to Congress).

Vikings and Pirates and Taxes, Oh My!

Today’s episode of “Hagar the Horrible” could be an epigraph for the new Fall 2009 issue of Cato Journal.

Hagar_The_HorribleThis issue includes Greek economists Michael Mitsopoulos and Theodore Pelagidis on “Vikings in Greece: Kleptocratic Interest Groups in a Closed, Rent-Seeking Economy” as well as Peter Leeson, author of The Invisible Hook: The Hidden Economics of Pirates, writing (with David Skarbek) on the effects of foreign aid. As for taxes, well, editor Jim Dorn has assembled a number of useful papers:

  • Andrew T. Young on taxing, spending, and “fiscal illusion”
  • Michael J. New on the “starve the beast” hypothesis
  • Alan Reynolds on Paul Krugman’s misunderstanding of the monetary and fiscal lessons of the Great Depression and Japan’s lost decade

And on the general rapaciousness of the state, don’t miss Jason Kuznicki’s careful review of government racial discrimination from the end of Reconstruction until the civil rights movement.

Paul Krugman vs. The Daily Show

In a recent New York Times column (“The Uneducated American”), Paul Krugman writes that, “for the past 30 years our political scene has been dominated by the view that any and all government spending is a waste of taxpayer dollars.” As a result, Krugman continues, U.S. education has been “neglected” and “has inevitably suffered.”

Readers who put their trust in Krugman might thus conclude that per pupil spending has stagnated or declined. In reality, as the chart below reveals, it has more than doubled since 1970, after adjusting for inflation.

Paul Krugman may not be an “uneducated American,” but he’s certainly a badly misinformed one.

andrew coulson cato education spending

Much more troubling is the fact that Krugman and the Times are spreading this misinformation on a grand scale. And that got me thinking about Jon Stewart. When Time magazine recently asked Americans to name their most trusted newscaster, the comic and Daily Show host won in a landslide.  Many pundits have taken this as a sign of the Apocalypse, worrying that so many Americans are getting their facts from a presumptively unreliable source. But is the Daily Show really less reliable than Paul Krugman and the New York Times?

To find out how they stack up on this particular question, I Googled the Daily Show’s website for any discussion of education spending. The most relevant hit was an exchange in the show’s on-line forum. In it, a commenter claims that spending per pupil has risen by a factor of 10 since 1945, after adjusting for inflation. That’s not too far off the mark. The actual multiple is just under 8. So folks who get their facts from the Daily Show’s website will be better informed on this subject than those who trust the Nobel Prize winning New York Times economist.

Not only is Krugman wrong to claim that public schools have been financially “neglected,” he is wrong to imagine that higher public school spending spurs economic growth – which is the central point of his column. Better academic achievement does help the economy – but, as the chart above illustrates and many scholarly studies have demonstrated, higher public school spending does not improve achievement. And by raising taxes without improving achievement, it may actually slow economic growth.

Media elites have been wringing their hands over the collapse in public demand for their products, over the two thirds of Americans who now doubt their credibility, and over the fact that more people now get their information from the Daily Show’s website than the New York Times’s.

Perhaps the media might attract more readers and rebuild trust if they were to stop publishing material less reliable than the blog discussions on a comedy show’s website. Just a thought.