Paul Krugman

Krugman’s ‘Gotcha’ Moment Leaves Something to Be Desired

I’ve had some fun over the years by pointing out that Paul Krugman has butchered numbers when writing about fiscal policy in nations such as FranceEstoniaGermany, and the United Kingdom.

So I shouldn’t be surprised that he wants to catch me making an error. But I’m not sure his “gotcha” moment is very persuasive. Here’s some of what he wrote for today’s New York Times.

Gov. Jerry Brown was able to push through a modestly liberal agenda of higher taxes, spending increases and a rise in the minimum wage. California also moved enthusiastically to implement Obamacare. …Needless to say, conservatives predicted doom. …Daniel J. Mitchell of the Cato Institute declared that by voting for Proposition 30, which authorized those tax increases, “the looters and moochers of the Golden State” (yes, they really do think they’re living in an Ayn Rand novel) were committing “economic suicide.”

Kudos to Krugman for having read Atlas Shrugged, or for at least knowing that Rand sometimes referred to “looters and moochers.” Though I have to subtract points because he thinks I’m a conservative rather than a libertarian.

But what about his characterization of my position? Well, he’s right, though I’m predicting slow-motion suicide. Voting for a tax hike isn’t akin to jumping off the Golden Gate bridge. Instead, by further penalizing success and expanding the burden of government, California is engaging in the economic equivalent of smoking four packs of cigarettes every day instead of three and one-half packs.

Piketty Problems: Top 1% Shares of Income and Wealth Are Nothing Like 1917- 28

Former Treasury Secretary Larry Summers’ review of Thomas Piketty’s Capital in The Twenty-First Century, claims that Mr. Piketty and Emmanuel Saez have documented, “absolutely conclusively, that the share of income and wealth going to those at the very top—the top 1 percent, .1 percent, and .01 percent of the population—has risen sharply over the last generation, marking a return to a pattern that prevailed before World War I.”  That statement is false.

Paul Krugman’s review “Why We’re in a New Gilded Age,”  claims that “since 1980 the one percent has seen its income share surge again—and in the United States it’s back to what it was a century ago.”  That statement is false.  

A Pew Research Center report on the same data was titled, “U.S. income inequality, on rise for decades, is now the highest since 1928.”  That too is false.

First of all, the Piketty and Saez estimates do not show top 1 percent income shares nearly as high as those of 1916 or 1928 once we use the same measure of total income for both prewar and postwar data.

Second, contrary to Summers, there is no data from Piketty, Saez or anyone else showing that the top 1 percent’s share of wealth “has risen sharply [if at all] over the last generation” – much less exhibited a “return to a pattern that prevailed before World War I.”

Dealing first with income, it is interesting that the first graph in Piketty’s book is about the top 10 percent – not the top 1 percent.  Saez likewise writes that “the top decile income share in 2012 is equal to 50.4%, the highest ever since 1917 when the series start.”  That is why President Obama said, “The top 10 percent no longer takes in one-third of our [sic] income – it now takes half.”  A two-earner New York City family of six with a pretax income of only $110,000 would be in this top 10 percent, and they are certainly not taking “our” income.  Regardless whether we examine the Top 10 percent or Top 1 percent, however, it is absolutely dishonest to compare the postwar estimates with prewar estimates. 

The Piketty and Saez prewar estimates express top incomes as a share of Personal Income, after subtracting 20% to account for tax avoidance.  Postwar estimates, by contrast, express top incomes as a share of only that fraction of income that happens to be reported on individual income tax returns – rather than being unreported, in tax-free savings or assets, or sheltered as retained corporate earnings.

 Transfer payments are not counted as income in either series (as though federal cash and benefits were worthless); this distinction is inconsequential for the prewar figures but increasingly important lately.  “Total income” as Piketty and Saez define it accounted for just 61.8 percent of personal income in 2012, down from 67 percent in 2000.

No, There Are NOT Three Job Seekers for Every Job Opening

Unemployment benefits could continue up to 73 weeks until this year, thanks to “emergency” federal grants, but only in states with unemployment rates above 9 percent.  That gave the long-term unemployed a perverse incentive to stay in high-unemployment states rather than move to places with more opportunities.   

Before leaving the White House recently, former Presidential adviser Gene Sperling had been pushing Congress to reenact “emergency” benefits for the long-term unemployed.  That was risky political advice for congressional Democrats, ironically, because it would significantly increase the unemployment rate before the November elections.  That may explain why congressional bills only restore extended benefits through May or June.

Sperling argued in January that, “Most of the people are desperately looking for jobs. You know, our economy still has three people looking for every job (opening).”  PolitiFact declared that statement true.  But it is not true. 

The “Job Openings and Labor Turnover Survey” (JOLTS) from the Bureau of Labor Statistics does not begin to measure “every job (opening).”  JOLTS asks 16,000 businesses how many new jobs they are actively advertising outside the firm.  That is comparable to the Conference Board’s index of help wanted advertising, which found almost 5.2 million jobs advertised online in February.  

With nearly 10.5 million unemployed, and 5.2 million jobs ads, one might conclude that our economy has two people looking for every job (opening)” rather than three.  But that would also be false, because no estimate of advertised jobs can possibly gauge all available jobs.

Consider this: The latest JOLTS survey says “there were 4.0 million job openings in January,” but “there were 4.5 million hires in January.”  If there were only 4.0 million job openings, how were 4.5 million hired?   Because the estimated measure of “job openings” was ridiculously low. It always is.

Imaginary Squabbles Part 5: Comparing Krugman’s 2005 Housing Bubble Forecasts to Mine

New York Times columnist Paul Krugman has recycled another phony argument about something I wrote many years ago. 

He begins by citing Matt O’Brien who found that Fed governor Janet Yellen in October 2005 was predicting there would be no great impact on the economy “were the house-price bubble to deflate.” O’Brien concludes that, “Back in 2005, she didn’t appreciate how much shadow banks relied on AAA-rated mortgage-backed-securities (MBS) as collateral to fund their day-to-day operations—or how much even this supposedly high-quality collateral could go bust if housing did.” But that is “What Janet Yellen and Everyone Else Got Wrong,” as Krugman’s column is rightly titiled. Nobody in 2005 grasped what a precarious house-of-cards was being built, worldwide, on U.S. mortgage-backed securities. 

O’Brien found another quote suggesting Yellen did get it right by December 2007. Yet the recession had already started by then, and blogger Bill McBride and others were worrying that rising unemployment would cause mass foreclosures (not the other way around).

“We had a monstrous housing bubble,” writes Krugman, “and Janet Yellen recognized it in real time [December 2007]…. It’s important to notice that just being willing to see the obvious here puts Janet Yellen way ahead of a lot of people who still presume to give us advice on the economy.”   

He links to a 2008 list of 28 people who were supposedly way behind Yellen in “being willing to see” that house prices had fallen 21.6 percent by December 2007, even though nearly all of those 28 references were from 2003–2005. My name is at the top of that list, of course. But why am I on it while Krugman and Yellen are not?

The “Unofficial List of Pundits/Experts Who Were Wrong on the Housing Bubble,” was compiled by a finance lawyer who blogs as “Economics of Contempt.” He worked as a legislative aide to a House Democrat and dealt with derivatives at Lehman Brothers. The list of 28 could find no investment bankers who got it wrong, even at Lehman or Bear Stearns, but it did find a lot of conservatives and libertartians.   

California Officials Deliberately Mislead Public on Obamacare Rate Shock

Ever since Obamacare became law, I have been counseling states not to establish the law’s health insurance “exchanges,” in part because:

to create an Exchange is to create a taxpayer-funded lobbying group dedicated to fighting repeal. An Exchange’s employees would owe their power and their paychecks to this law. Naturally, they would aid the fight to preserve the law.

California was the first state both to reject my advice and to prove my point.

Officials operating California’s exchange–which the marketing gurus dubbed “Covered California“–recently and deliberately misled the entire nation about the cost of health insurance under Obamacare.

They claimed that health plans offered through Covered California in 2014 will cost the same or less than health insurance costs today. “The rates submitted to Covered California for the 2014 individual market,” they wrote, “ranged from two percent above to 29 percent below the 2013 average premium for small employer plans in California’s most populous regions.”

See? No rate shock. California’s top Obamacare bureaucrat, Peter Lee, declared his agency had hit “a home run for consumers.” Awesome!

Unfortunately, anyone who knows anything about health insurance or Obamacare knew instantly that this claim was bogus, for three reasons.

  1. Obamacare or no Obamacare, health insurance premiums rise from year to year, and almost always by more than 2 percent. So right off the bat, the fact that Covered California claimed that premiums would generally fall means they’re hiding something. 
  2. Obamacare’s requirement that insurers cover all “essential health benefits” will force most people who purchase coverage on the “individual” market (read: directly from health insurance companies) to purchase more coverage than they purchase today. This will increase premiums for most everyone in that market.
  3. Obamacare’s community-rating price controls (also known as its “pre-existing conditions” provisions) will increase premiums for some consumers (i.e., the healthy) and reduce premiums for others (i.e., the sick). So it is misleading for Covered California to focus on averages because averages can hide some pretty drastic premium increases and decreases.

Imaginary Squabbles Part 4: Krugman and DeLong on the Top 1 Percent

In End This Depression Now! (pages 77-78) Paul Krugman offers the strangest arguments I have seen.   The story opens with familiar fulminations about the “top 1 percent” (those earning more than $366,623 in 2011).  As he put it in a 2011 column, “income inequality in America really is about oligarchs versus everyone else.”

“Incomes of the rich,” his book claims, “are at the heart of what has been happening to America’s economy and society.”  Yet it apparently requires great bravery to even dare to mention “the rising incomes” of the top 1 percent or top 0.1 percent:

Merely to raise the issue was to enter a political war zone: income distribution at the top is one of those areas where anyone who raises his head above the parapet will encounter fierce attacks from what amount to hired guns protecting the interests of the wealthy.  For example, a few years ago Thomas Piketty and Emmanuel Saez … found themselves under fire from Alan Reynolds of the Cato Institute, who has spent decades arguing that inequality hasn’t really increased; every time one of his arguments is thoroughly debunked, he pops up with another.

To be called a “hired gun” of the wealthy might be insulting if it was not so ridiculous.  First of all, no employer has ever tried to influence what I write.  Second, I have been a very successful investor and live quite comfortably from realized capital gains plus mandatory distributions from IRA, Keogh and 403(b) accounts that President Obama would regard as much too large.  I negotiated a token salary from Cato (smaller than my Social Security check) but return at least 40 percent of it as a charitable donation.  I am usually in the top 1 percent, at least when stocks are up, and thus not easily bribed.  I would be flabbergasted if Krugman is not also a member of that demonized bunch of oligarchs.

Krugman complains that some of my arguments changed (new ones popped up) over decades, but arguments should change after decades of new data.  I must have made a couple of mistakes since 1992, but mistakes (including Krugman’s) are not evidence of deliberate deception or corruption.

Imaginary Squabbles Part 3: Krugman and DeLong’s Changing Theories and Missing Facts

Responding to a student question after a recent Kansas State debate with Brad DeLong I posed a conceptual puzzle.  I asked students to ponder why textbooks treat Treasury sales of government bonds as a “stimulus” to demand (nominal GDP) in the same sense as Federal Reserve purchases of such bonds.  “Those are very different polices,” I noted; “Why should they have the same effect?”  

The remark was intended to encourage students to probe more deeply into what such metaphors as “stimulating” or “jump starting” really mean, not to accept as dogma that fiscal and monetary policy are equally effective or that economists are certain just how they work.

DeLong’s misinterpretation of my question led him to lecture me that, “if you really do think that monetary expansion undoes fiscal expansion because monetary expansion buys bonds and fiscal expansion sells bonds, you need to educate yourself.” Citing that wholly imaginary rewriting of my question, Paul Krugman wrote, “My heart goes out to Brad DeLong, who debated Alan Reynolds and discovered that his opponent really doesn’t understand at all how either fiscal or monetary policy work.”

Did I really say that “monetary expansion undoes fiscal expansion”?  Of course not.  If that had been my question, I would have answered myself by saying that piling more debt on the backs of taxpayers is unlikely to stimulate private spending (much less encourage more or better labor and capital) unless the added debt is “monetized” by the Fed and regulators allow banks to lend more to private borrowers.  DeLong made much the same point by saying, “Expansionary monetary policy makes it a sure thing that expansionary fiscal policy is effective by removing the channels for interest-rate and tax crowding out.” 

The Fed’s current bond-buying spree is bound to have some effect, if only to facilitate cheap corporate buybacks of shares and speculative day trading of such stocks on margin.   But selling more government bonds per se (if the Fed won’t buy more) would be just as much an added burden for taxpayers as it would be a benefit to whoever receives the resulting government transfers, contracts or subsidies. 

This make-believe squabble about monetary expansion undoing fiscal expansion exists only in DeLong’s imagination, like my non-prediction of mammoth inflation or Krugman’s non-facts about Ireland’s fiscal frugality.

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