Tag Archives: Paul Krugman

The Great Compression

In a recent newsletter, Paul Krugman referenced a 1991 economics paper in glowing terms. He said that he’s read many economics papers during his career, but very few that changed the way he sees the world.

This one, evidently, did.

Krugman began his discussion by reminiscing; as a Baby Boomer, he’d grown up at a time when extremes of wealth and poverty were far less pronounced than they are these days–a time when middle managers and better-paid blue-collar workers were more or less  financial equals. It was a time, as he reminds us, when  C.E.O.s of major companies were paid “around 20 times as much as the average worker, compared with more than 200 to 1 today.”

Although female and Black workers certainly weren’t equal, the extremes of wealth we see today–the enormous gap between the rich and the rest– were inconceivable, and the middle class was substantial. (I still remember a long-ago political science class that attributed national stability to the existence of a sizable middle-class, among other things.)

And we took it for granted. A more or less middle-class society, almost everyone assumed, was the state toward which an advanced economy naturally evolved.

Not so much, we learned as the boomers turned middle-aged. The future of inequality wasn’t what we expected it to be; America today has more or less returned to Gilded Age disparities in income and wealth.

The question, of course, is “why did this happen? Why isn’t the future of inequality what we expected?

The paper he was praising–“The Great Compression”– was written by Claudia Goldin and Robert Margo, and it showed that,  as Krugman put it,  America had gone to bed in 1939 in the Gilded Age and woke up in 1945 as the middle-class nation of his childhood, where wages were–as the paper labeled them–“compressed.”

Some of the reasons for that compression of wages are obvious:  World War II required a controlled economy. Wage increases were regulated– and the rules tended to be more generous to less well-paid workers. But those rules, and the economic controls, were lifted after the war.

Why didn’t things spring back to where they had been before once wage and price controls had been lifted?

One answer, as Krugman demonstrates, was the emergence of unions.

A strong union movement, it seems, was able to lock in the new wage norms created by the war for several decades after the war was over. And the rise of unions was clearly linked to politics: first the New Deal, then the war, created favorable environments for union organizing.

Another important element was public policy. Policy, as Krugman and many other economists can attest, can shape a fairer, flatter, more inclusive economy.

What does this tell us about the future of inequality? On one side, it’s encouraging: high inequality isn’t something unavoidable, the necessary consequence of implacable technological forces: political action can create a much less unequal society. On the other side, both the politics of the New Deal and, even more so, the policy environment of World War II, were pretty unique. Progressives are, in general, delighted with how activist the Biden administration is proving; but despite Republican cries of “socialism,” its actions are far more modest than what happened in the ’30s and ’40s.

The big question is how much of the Great Compression we can achieve through less dramatic policies, in a political environment where spending one percent of G.D.P. on infrastructure seems radical. No, I don’t know the answer.

Our ability to fashion public policies that reinvigorate and regrow that all-important, stabilizing middle class depends significantly on a widespread recognition of the economic reality that everyone does better when everyone does better.

Even the most creative entrepreneur cannot innovate and profit in the absence of a supportive physical and social infrastructure and enough people with the wherewithal to pay for his product.

An Intriguing Analysis

Paul Krugman recently had a column that–almost incidentally–amplified the findings I reported on yesterday from Democracy Corp’s focus groups.

He began by noting that Biden simply doesn’t arouse the same degree of animosity that Obama did. Krugman leaves it there, but the reason for the moderation of vituperation is pretty obvious: Biden’s a White guy. Yes, he’s a hated Democrat/Socialist/Leftie/Whatever, but at least he’s not Black.

Krugman focused on the lower level of animus and hostility aimed at Biden by Republicans, and speculated over what that “low energy” opposition might mean for the prospects of upcoming legislative proposals.

Just about every analyst I follow asserted, almost until the last moment, that $1.9 trillion was an opening bid for the rescue plan and that the eventual bill would be substantially smaller. Instead, Democrats — who, by standard media convention, are always supposed to be in “disarray” — held together and did virtually everything they had promised. How did that happen?

Much of the post-stimulus commentary emphasizes the lessons Democrats learned from the Obama years, when softening policies in an attempt to win bipartisan support achieved nothing but a weaker-than-needed economic recovery. But my sense is that this is only part of the story. There has also been a change on the other side of the aisle: namely, Republicans have lost their knack for demonizing progressive policies.

Krugman is careful to note that the decrease in demonization applies to policies (after all, lots of Republicans still believe that Democrats managed to steal a federal election at the same time they were sexually exploiting and then feasting on small children…) But as he notes, there’s been an absence of “bloodcurdling warnings about runaway inflation and currency debasement, not to mention death panels.”

True, every once in a while some G.O.P. legislator mumbles one of the usual catchphrases — “job-killing left-wing policies,” “budget-busting,” “socialism.” But there has been no concerted effort to get the message out. In fact, the partisan policy critique has been so muted that almost a third of the Republican rank and file believe that the party supports the plan, even though it didn’t receive a single Republican vote in Congress.

Krugman notes a number of possible explanations: the obvious hypocrisy of screaming about deficits under Obama and then incurring huge ones via tax cuts for the rich; the fact that none of their past, dire warnings of inflation under Obama–or their rosy predictions of a boom under Trump–materialized (although, as he points out ” inconvenient facts haven’t bothered them much in the past.”)

Or perhaps Republicans no longer know how to govern. They are trapped in a culture war of their own creation. As Krugman notes, while the Democrats were fashioning legislation and hammering out policy compromises, Republicans were screaming about Dr. Seuss and Mr. Potato Head.

In short, the prospects for a big spend-and-tax bill are quite good, because Democrats know what they want to achieve and are willing to put in the work to make it happen — while Republicans don’t and aren’t.

I have been extremely happy with what the Biden Administration has done–and failed to do–thus far. This is a highly competent operation. What is undoubtedly true, however, is that one reason the path has been smoother for Joe Biden is simply because his skin is white.

And that is an incredibly sad commentary on the current state of America.

 

Impeachment And The Economy

In a recent column, Paul Krugman opined that–among other benefits that some of us see (like potentially ridding ourselves of a severely mentally-ill President who has the launch codes)–the Impeachment inquiry launched by Democrats in the House will be good for the economy.

This seemed counterintuitive, since we have always heard that the markets respond negatively to uncertainty–and as we are seeing, Trump’s behavior when he is cornered is nothing if not unpredictable.

Krugman’s column anticipated Pelosi’s announcement, but applauded Impeachment’s probable effect on the economy.

If there’s one thing the tweeter in chief believes, it is that what’s good for Donald Trump is good for America. A little over a month ago (although it seems like much longer) he told a rally that “you have no choice but to vote for me,” because his electoral defeat would lead to a market crash.

But a funny thing has happened over the course of Trump’s latest terrible, horrible, very bad, no good two weeks. Suddenly, impeachment (though not removal from office) has gone from highly unlikely to highly likely. In fact, given the explosive nature of the now-revealed whistle-blower complaint, I don’t really understand how he can not be impeached.

And the financial markets have basically shrugged.

As Krugman notes, on the surface, this is strange. No matter what the outcome of the Impeachment proceedings, while they are going on, they are pretty much the only game in town: little or nothing else will happen. The administration’s legislative agenda will come to a screeching halt. Why doesn’t this worry investors?

The answer is, “What legislative agenda?”

Even when Trump’s party controlled both houses of Congress, he had only two major legislative initiatives. One was a big tax cut for corporations and the wealthy that will generate trillions in deficits but doesn’t seem to have done much for the economy. The other was an attempt to take away health insurance from around 30 million Americans, which didn’t pass.

It’s pretty obvious that, between watching Fox News and tweeting, Trump has had very little time for legislating, or for that matter, governing. (He has also given us ample reason to believe he has absolutely no idea how government works or how legislation is passed, which may explain his disinterest in both.)

To be fair, legislation isn’t the only way presidents can make policy, and the prospect of impeachment will probably exert a chilling effect on Trump’s ability to pursue policy through executive fiat. But here’s the thing: Since most of what Trump is trying to do is bad for America, whatever paralysis impeachment may induce is all to the good.

For Trump has, in effect, been waging a war on competence.

We’ve noticed.

In Trump’s vision of government, career diplomats who do actual diplomacy, experienced regulators who actually try to enforce regulations, researchers who produce objective data — up to and including weather forecasters whose predictions he doesn’t like — are all part of a deep state that’s out to get him. So Trump officials have been engaged in a systematic campaign to degrade America’s Civil Service, driving out people who know what they’re doing and replacing them with political hacks.

I’ve encountered a few members of Trump’s base, and their justifications for supporting him are consistent with Krugman’s description. Only “elitists” believe that people in government actually need to know something about governing, or  have experience or expertise in the subject-matter with which they are engaged. Any businessperson–well, any white businessman— can run  government.

Hell, you don’t need no fancy-shmancy degrees or experience. Just look at all those “best people” that Trump’s installed who are getting rid of all those silly rules and regulations that just get in the way of making a profit.

As Krugman says,

An impeachment inquiry will surely have a chilling effect on the Trumpian project of government degradation. It may not come to a dead halt, but Trump’s team of cronies will be distracted; they will be less brazen; they will be worrying about more potential whistle-blowers going public about what they’re doing.

In short, paralysis can be a very good thing. I’m rooting for it.

 

 

Those Tax Cuts: Take Two

Reactions to the Trump/GOP tax bill have mostly focused on the domestic consequences of that fiscal abomination: the steeply rising deficits and national debt; the “no show”  economic boost; the unconscionable further enrichment of the already obscenely rich; and Mitch McConnell’s stated intent to address that newly massive national debt by cutting programs that benefit the poor and elderly, notably Medicare and Social Security.

What hasn’t been widely reported is what Paul Krugman calls “foreign aid.”

Donald Trump often complains that the media don’t give him credit for his achievements. And I can think of at least one case where that’s true. As far I can tell, almost nobody is reporting that he has presided over a huge — but hidden — increase in foreign aid, the money America gives to foreigners. In fact, the hidden Trump program, currently running at around $40 billion a year, is probably the biggest giveaway to other nations since the Marshall Plan.

Unfortunately, the aid isn’t going either to poor countries or to America’s allies. Instead, it’s going to wealthy foreign investors.

The 2017 Tax Cut and Jobs Act–which, as Krugman reminds us, is the only major legislation Trump can claim thus far– cut taxes on corporations. Significantly. As credible economists predicted, it led to a drastic reduction in tax revenues. Krugman pegs the shortfall at $140 billion just the past year.

Supporters of the bill claimed that the benefits would be passed on to workers in the form of higher wages, and they made a big deal over a flurry of corporate bonus announcements in early 2018. But those bonuses weren’t actually very big, and they didn’t continue.

In fact, at this point it’s clear that the bonus surge, such as it was, was all about tax avoidance: By moving up payments they were going to make anyway, corporations got to deduct the expense at the old, higher tax rate. Now that this option has expired, bonuses have dropped back to their normal level, or even a bit lower.

Job creation? Investments in the business? Nah.

The benefits of the tax cut have gone almost entirely to corporate shareholders, in the form of increased dividends and capital gains from corporations using their windfall to buy back their own stocks.

And a big share of these gains to shareholders has gone to foreigners.

Over all, foreigners own about 35 percent of the equity in corporations subject to U.S. taxes. And as a result, foreign investors have received around 35 percent of the benefitsof the tax cut. As I said, that’s more than $40 billion a year.

Krugman compares Trump’s gift to foreign investors with the amounts we expend on foreign aid.

In 2017, the U.S. spent $51 billion on “international affairs,” but much of that was either the cost of operating embassies or military assistance. The Trump tax break for overseas investors is considerably bigger than the total amount we spend on foreign aid proper.

Now, the U.S. economy is almost inconceivably huge, producing more than $20 trillion worth of goods and services every year. We’re also a country that investors trust to honor its debts, so the tax cut, irresponsible as it is, isn’t causing any immediate fiscal stress.

So Trump’s giveaway to foreign investors isn’t going to make or break us, although it’s probably enough to ensure that the tax cut will be, over all, a net drain on economic growth: Even if the tax cut has some positive effect on the total income generated here (which is doubtful), this will probably be more than offset by the increased share of that income accruing to foreigners rather than U.S. citizens.

Still, even in America, $40 billion here, $40 billion there, and eventually you’re talking about real money. Furthermore, it does seem worth pointing out that even as Trump boasts about taking money away from foreigners, his actual policies are doing exactly the opposite.

I seriously doubt that Trump understands any of this. After all, it’s abundantly clear that he hasn’t the foggiest notion how tariffs work (or don’t). Or how government works, for that matter.

We shouldn’t be shocked to discover that the President is an economic ignoramus.

The Great Gatsby Curve

There’s nothing like being lectured about work by a “princess.”

Recently, Ivanka Trump responded to the introduction of the Green New Deal’s provision for a government jobs guarantee with a dismissive remark to the effect that Americans prefer to work for what they get, and want to live in a country with the potential for social mobility.

Paul Krugman was on the case.

O.K., this was world-class lack of self-awareness: It doesn’t get much better than being lectured on self-reliance by an heiress whose business strategy involves trading on her father’s name. But let’s go beyond the personal here. We know a lot about upward mobility in different countries, and the facts are not what Republicans want to hear.

The key observation, based on a growing body of research, is that when it comes to upward social mobility, the U.S. is truly exceptional — that is, it performs exceptionally badly. Americans whose parents have low incomes are more likely to have low incomes themselves, and less likely to make it into the middle or upper class, than their counterparts in other advanced countries. And those who are born affluent are, correspondingly, more likely to keep their status.

As Krugman notes, Americans like to believe that we “made it on our own,” that we “pulled ourselves up by our bootstraps” (a phrase that tends to infuriate me, since it entirely ignores the fact that large portions of the American public don’t have anything that could remotely be considered “bootstraps.”)

Then he provides the data.

Among advanced countries, there is a strong negative correlation between inequality and mobility, sometimes referred to as the “Great Gatsby curve.” This makes sense. After all, huge disparities in parents’ income tend to translate into large disparities in children’s opportunities.

And people do, by the way, seem to understand this point. Many Americans don’t realize how unequal our society really is; when given facts about income inequality, they become more likely to believe that coming from a wealthy family plays a big role in personal success.

I had never run across the “Great Gatsby curve,” but it makes sense. Everyone who raises children implicitly understands that those children’s prospects are tied to the quality of the education we provide for them, very much including the enrichment that comes with their extra-curricular experiences. That’s why homes in districts with good schools sell at a premium, why parents shell out eye-popping amounts for summer camps, music lessons and sports equipment.

The “princess” may be unaware that large numbers of Americans simply cannot afford those things–and when they can’t, social mobility suffers accordingly.

Back to the “potential for upward mobility”: Where do people from poor or modest backgrounds have the best chance of getting ahead? The answer is that Scandinavia leads the rankings, although Canada also does well. And here’s the thing: The Nordic countries don’t just have low inequality, they also have much bigger governments, much more extensive social safety nets, than we do. In other words, they have what Republicans denounce as “socialism” (it really isn’t, but never mind).

To put it in terms even a clueless Princess might understand, a generous social safety net provides the bootstraps that allow people to pull themselves up.