From: sug6@usite-next.uchicago.edu (Patrick Sugent)
Subject: Krugman/ Rich Richer, Poor Poorer?
Organization: University of Chicago
Date: Mon, 17 Aug 1992 23:30:51 GMT

   About a week ago, I mad mention that Krugman had been involved
in heavily partisan politics and had been using particularly fuzzy economic
data to do so.  In particular, I made mention of his exploitation of the
top 1% study that has since been dropped from the Green Book.  This
WSJ article is a reference to that.  I apparently missed it earlier and was
unaware that Krugman had (to some extent) come to his senses and looked
at the bigger picture.

  At any rate, apparently the "intellectual point-man" of "the poor
got poorer" has changed his mind when presented with better, more reasonable
data and arguments.  If only the same could be said for USENET. :-)

Pat

Incomes Rx: Growth

Wall Street Journal Editorial
May 28, 1992


  "The income of a very few well off families soared.  This raised _average_
family income - but most families didn't share in the good times."

	- MIT Economist Paul Krugman
	  U.S. News & World Report
	  March 23, 1992


  ____________________________


  "The recession of 1979-82 hurt the great majority of American families, while
the long recovery benefited almost everyone."

	- MIT Economist Paul Krugman
	  U.S. News & World Report
	  June 1, 1992


  ____________________________



  Never underestimate the educational power of a spirited debate.  The
intellectual point man on the income-gap issue now agrees that during the
Reagan economic expansion, gains by "the rich" did not come at the expense
of "the poor."  Whatever may be said about widening income disparities,
it follows, they have little if anything to do with the Reagan tax policies.
Now if the foot soldiers in the assault on the "decade of greed" also catch up
with the basic facts, perhaps the debate can move on to something serious.

  Such as, for example, how to keep the economy growing instead of stumbling
into a recession.  Growth is good for everyone, but it is particularly
important for low-income families.  This is in fact the conclusion that
emerges forcefully from any serious look at the statistics on the income
of the bottom fifth of families.

  The bombardment of statistical prestidigitations we've recently suffered
typically centers on the years 1977 to 1989.  In the New York Times and
its media parrots, and in the campaign rhetoric of Bill Clinton, this 12-year
period is transmuted into "the Eighties," and the lesson is that the prosperity
is somehow hard on the poor.  Rep. Dick Armey has been shouting into the media
winds the obvious point that this lumps the quite different presidencies and
quite different economic policies of Jimmy Carter and Ronald Reagan.  The
fundamentals are captured in the accompanying chart. [The (difficult to type)
chart shows the income gains in real terms during the expansions and
declines during the recessions.]  Families in the lowest fifth were savaged
in the recession years of 1980, 1981, and 1982.  They did benefit from the
subsequent boom, but never recovered the average income they'd reached in
1979.  With the economic downturn of 1990, their real income is again falling.
The statistics support the common-sense conclusion that the poor benefit from
growth, but suffer disproportionately from recession.

  The main issue, far from whether the economy produces a distasteful
surplus of millionaires is what causes growth and what causes recession.
It's notable that Professor Krugman's latest article, while indulging his
habit of carping about his critics' motives, does start to join this
substantive issue.  He argues "both the recession and the recovery were
essentially the responsibility of Paul Volvker's Fed."  Milton Friedman
is entitled to a good chuckle over this testimony that only money matters,
coming as it does from MIT, the economics profession's foremost citadel
of Keynesian fiscal policy.  For our part, we would offer a more complex
alternative.

  To wit, the growth of the late 1970s was stoked by inflation, certain to
be unsustainable.  Starting in October of 1979, the Fed clamped down.  It took
time to find the right formula and lick the inflation.  The Reagan tax
cuts were not put into effect soon enough to damp the resulting downturn.
In 1983 they came fully into effect, and the Fed could loosen its stranglehold
on money.  Contrary to the 1982 predictions of most economists, notably
the MIT Keynesians, the result was both subsiding inflation and a record
peacetime expansion.

  In the new decade we have stumbled into a different formula, epitomized
by the 1990 budget deal increasing taxes as recession gathered.  This classic
economic blunder arose in no small part from a preoccupation with income-gap
statistics, which Senate Majority leader George Mitchell used to dominate
the negotiations with Budget Director Darman and Treasury Secretary Brady.
Indeed, the Congressional Budget Offices statistical methodology on income
"fairness" was pretty much ordered up by Mr. Mitchell to support first
his campaign to become majority leader and then his filibuster against a
cut in the capital gains tax of 1989.  In the recession, of course, the poor
will suffer most.

  Now, we have never denied that there is a serious point to be found in a
trend toward greater disparities in income.  It seems clear that the new
information economy will provide greater rewards for education, and
that the uneducated are likely to fall behind.  As an economist would
say, the widening income gap reflects higher returns to education.  It is
around this reality that one would expect liberals and conservatives to be able
to have a serious, productive debate on school choice or other proposals
to reform the primary and secondary schools.

  This is quite a different issue from the ones that have been fitting
through the debate over incomes - the suggestions that rewards should not be
bestowed by the marketplace but by Congress and MIT, that American society
and a capitalistic economy are devices that allow the rich to exploit the
poor, that the game is so rigged even a healthy economy doesn't help.  On the
simple but essential point that growth helps everyone, we're glad to
have Professor Krugman's support.



-- 
Patrick Sugent				"Cry 'Havoc!' and let slip   
sug6@usite-next.uchicago.edu		 the Hogs of Peace."
(708) 447-1771				 --P.J. O'Rourke
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