Monday, February 2, 2009

The reason why Paul Krugman is not a historian....

... is that he has very a tenuous grasp of history. Or, read another way: Paul Krugman does what other policy wonks with an agenda do, which is to cherry-pick data that fits his current mantra rather than examining all the evidence.

Here's a perfect example, in a Krugman piece I've already partly engaged:

Since all of us in this discussion seem to be big-spending types of guys, a lot of our discussion has been about what comes after-- about when and whether the economy can stand on its own. There are, I think, two historical models for this. On one side, World War II put a definite end to the depression economics of the 30s. On the other, Japanese stimulus efforts helped the economy while they were on, but it's not clear that they ever provided a long-term solution.

So here's a question I haven't seen discussed (I'm sure someone has, but I haven't seen it): why did WWII "work", why did it prove the secular stagnationists wrong?

I can think of several possible reasons. In no particular order:

(1) Pent-up demand: after 16 years of Depression and war, business was starved of capital and consumers starved of durable goods. Once there was full employment, everyone had a lot of catching up to do.

(2) Baby boom: a lot of us place at least partial blame for Japan's difficulties on the negative population growth among the working-age. There was a bit of that in the 30s, too -- low births because nobody could afford them. The postwar baby boom may have helped perk up demand.

(3) Inflation: from WWII on, persistent if mild inflation was the norm, helping keep real interest rates low.

(4) Government spending: the big thing here was the Cold War, which meant that the United States persistently spent 8-10% of GDP on defense. It paid for this with taxes, but old-fashioned Keynesianism tells us that there's a "balanced budget multiplier" because some of taxes comes out of saving, not spending. Bob Reich, if I understand him, is saying that to sustain demand we need the moral -- or at least fiscal -- equivalent of a new Cold War.

Will the Obama stimulus plan set us up for a replay of the postwar success, with demand remaining high even after the stimulus is gone? I'm thinking, I'm thinking ...


OK, that's the Krugman equation for success: pent-up domestic demand, growing population, inflation, and government spending for the Cold War....

Now let's take a look at a few of the factors our Nobel laureate seems to leave out of the equation:

(1) The relatively complete devastation of all other major industrial bases on the planet, to include Japan, Russia, Germany, France, Italy, and even Great Britain, which left the US with a virtual monopoly on heavy industrial production for at least a decade, and a hegemonic position for most of another decade.

(2) The complete absence of developing world economic competition with American (and then European) markets. World War Two ends with most colonial empires in disarray, but it takes decades after formal independence for nations like India, Indonesia, Korea, or Malaysia to become competitors for low-income factory/sweat-shop work.

(3) Low oil prices caused the American/British domination of most oil supply areas and the relative lack of competition for oil products.

(4) The fact that the Federal government engaged in almost no real social spending compared to today--or even the 1960s. The absence of government social spending and the incredibly low national spending on education (especially pre-Brown v Board of Education) meant that the government could make that 8-10% investment in Cold War spending without causing taxes to go up unduly.

(5) The fact that the GI Bill not only allowed millions of white American men to go to college, but also set back most of the gains in the workplace made by women during the World War Two era by excluding them from this benefit.

(6) The fact that high union membership (and therefore the success of collective bargaining) was a byproduct of the heavy industrial model of the economy, which placed its premium on a (relatively) small number of employers who are looking for a workforce with an 8th Grade education, and possess no motivation to become better educated....

(7) The complete absence of a number of modern externalities, like environmental regulations....

Krugman also generally asserts that all this came crashing down due to movement conservatism and its racist overtones, which is, quite bluntly, crap.

This particular Krugman cherry-pick ignores the 1960s, when....

(1) The now-aging US industrial base is experiencing serious competition from Asia for the first time, and cedes whole market sectors--first, cheap electronics and then all the way to the automobile industry...

(2) The explosion of Federal spending for the Great Society and the implementation of the Brown decision, which were now placed on top of that supposedly benign 8-10% Cold War investment....

(3) The beginning of the world-wide competition for oil, with the first nationalizations by oil-producing nations, followed eventually by the formation of OPEC and increasing demands for oil in Europe and Asia...

I could go on, but the point is pretty simple: Paul Krugman and Robert Reich are not only trying to re-create the America of the 1940-1950s, they are attempting to recreate a mythic past that never existed.

To Krugman and Reich, Ron Howard's vision of Happy Days is history and not entertainment.

Academic historians, by the way, understand this process as creating a "Usable Past".

[Oh, and never mind the fact that all the Cold War spending, especially on nuclear weapons, brought our entire society and the entire world to the brink of destruction several times. We still, apparently, need another Cold War....]

There is no God but Keynes, and Krugman is his Prophet.

1 comment:

UNRR said...

This post has been linked for the HOT5 Daily 2/3/2009, at The Unreligious Right