Sixty-seven, and Smarter than Paul Krugman

Whenever a public intellectual makes pronouncements on two subjects as diverse as science and economics in a single sentence it is probably prudent to check out his bona-fides. So who is this Paul Krugman, and is he really as smart as he thinks he is?

According to Wikipedia, Krugman (56) is an economist, columnist, intellectual, author, professor, Nobel Prize winner in Economics and op-ed columnist for The New York Times. Krugman says he was drawn to economics after reading Asimov's Foundation novels, in which the social scientists of the future use "psychohistory" in an attempt to save civilization.

According to the Nobel committee, Krugman “integrated economies of scale into explicit general equilibrium models.” The fact that consumers prefer a diverse choice of brands but that production favors economies of scale explains why Germany is successful at selling BMWs in Sweden while Sweden is successful in selling Volvos in Germany. This modeling of economic trade has come to be called “New Trade Theory.” Very impressive!

On the scientific side Krugman once wrote an essay called 'The Theory of Interstellar Trade' on computing interest rates on goods in transit near the speed of light. In it he considers the shipment of goods from Earth to the planet Trantor in a distant star system and the problem of evaluating capital costs on the goods when the time to ship them depends on the observer’s reference frame. [Gratuitous math example: If n is the number of years to ship the goods in the Earth-Trantor inertial reference frame, then the years aboard the space ship will be n times the square root of {1 – (v/c)2 } where v is the speed of the star ship and c is the speed of light.]

Thus, when Krugman proclaims on science and economics in The New York Times, most of us listen up: “So it is important to understand that just as denials that climate change is happening are junk science, predictions of economic disaster if we try to do anything about climate change are junk economics.” (5/1/09)

There are just a few things wrong with this pregnant sentence. In the first place, no one is denying that climate change is happening; it happens all the time. Most scientists even agree that global warming is happening, although is seems to have stopped for the last decade. The scientific debate is over the causes of the warming, and how much of it is anthropomorphic, that is, caused by Al Gore. The economic debate is over what to do about it, if anything. And those who warn of the economic dangers of doing too much are anything but junk economists.

Pete DuPont (Wall Street Journal, “Sapping America’s Energy”) warns that global-warming legislation sponsored by Democrats Henry Waxman of California and Edward Markey of Massachusetts would drive up the cost of everything. Myron Ebell of the Competitive Enterprise Institute notes that “Waxman-Markey would put big government in charge of how much energy people can use. It would be the biggest government intervention in people's lives since the second world war, which was the last time people had to have rationing coupons in order to buy a gallon of gas.”Through the mechanisms of cap-and-trade-and-tax, the legislation intends to make energy much more expensive and less available to consumers. Obama, himself, admitted that “cap and trade will cause electricity rates to skyrocket.” (http://www.youtube.com/watch?v=5xOxwW4Toio )

On the regulatory front, the Obama administration declared last Friday that carbon dioxide threatens the planet. The Environmental Protection Agency found that the emissions endanger “the health and welfare of current and future generations.” EPA Administrator Lisa Jackson wrote in a memo to her staff that it is "the first formal recognition by the U.S. government of the threats posed by climate change.” No longer are we regulating lead and nitrous oxide and sulfur hexafluoride as deleterious to the environment – now the EPA is allowed to regulate the very gas we exhale with every breath. (See PalosVerdesBlog, April 29, 2009).

But Krugman sees a green lining in all of this government intervention. If only we threaten to begin the emissions-tightening mandates two or three years from now, then businesses will be incentivized now to make massive investments in the green alternatives to fossil fuels. Unfortunately, our economist fails to connect the dots: who, pray tell, will pay for the massive investments? Who, who, who? Well you and I, of course, the consumers.

Yesterday, on my sixty-seventh birthday, Krugman struck again. “Wages are falling all across America” and those who are voluntarily accepting wage cuts in order to keep their jobs are just making things worse. Krugman explains that “the answer lies in one of the paradoxes that plague our economy.” When workers across the economy accept lower wages, “the result is higher unemployment.” Hmm??? He explains that if workers at every company earn less, then no company gains a competitive advantage, and there is no benefit to the economy.

But since when are lower wages the sole source of competitive advantage? What about BMW and Volvo and the advantages of their superior products, and the advantages produced by innovation and superior service and efficiency? It is as if Krugman is unaware of the competitive advantage that lowering corporate taxes on American firms would give them in the global marketplace.

We’ve seen in the past few months what FDR learned the hard way during the Great Depression - that stimulating a moribund economy by government spending is difficult and risky. Yet there is a sure fire way to increase wages, employment, innovation, business expansion and greatly improve the retirement funds of grandma as well as the grandkids. Simply reduce the corporate tax rate (“zero” being the ideal rate) thereby giving American businesses the competitive advantage that is the key to the benefits program. Instead, yesterday the President announced that he was closing tax loopholes for corporations and the New York Times applauded (while expressing concern that it “could put American companies at a competitive disadvantage… and “could even impede job creation in the United States.” Ya think?)

But, then, that must be ECO 101 material, not the stuff of Nobel Prizes or voyages to Trantor, or even psychohistory.