The Accidental Theorist: And Other Dispatches from the Dismal Science

by Paul Krugman

  The Virus Strikes Again

  Within a few days of presidential candidate Bob Dole’s announcement of an economic plan that relied on the magic of supply-side tax cuts, hundreds of articles were published explaining why the plan wouldn’t work. And there were hundreds more explaining why Dole, whose contempt for people who believe in that kind of magic is a matter of public record, nonetheless chose to accept their program—and chose one of the most prominent believers as his running mate. I have nothing to add to all of that. But it seems to me that the success of the tax cutters in taking over yet another presidential campaign requires a deeper explanation. Why does supply-side economics have such durability?

  It should go without saying that the supply-side idea—which is that tax cuts have such a positive effect on the economy that one need not worry about paying for them with spending cuts—does not persist because of any actual evidence in its favor. If you want, any nonpartisan economist can explain to you at length what really happened during the Reagan years, and why you can’t seriously claim his record as an advertisement for supply-side policies. But surely it is enough to look at the extraordinary recent record of the supply-siders as economic forecasters. In 1993, after the Clinton administration had pushed through an increase in taxes on upper-income families, the very same people who have persuaded Dole to run on a tax-cut platform were very sure about what would happen. Newt Gingrich confidently predicted a severe recession. Articles in Forbes magazine urged readers to get out of the stock market to avoid the inevitable crash. The Wall Street Journal editorial page had no doubts that the tax increase would sharply increase the deficit instead of reducing it. Sure enough, over the next few years the economy created millions of new jobs, the market started setting new records almost every day, and the deficit withered away. I’m not saying that Clinton’s policies led to that result—they accounted for only part of the good news about the deficit, and hardly any of the rest. But the point is that the supply-siders were absolutely sure that his policies would produce disaster—and indeed, if their doctrine had any truth to it, they would have.

  Nor, I would argue, do supply-side views spread because they are good politics. True, Ronald Reagan won on a supply-side platform—but one suspects he would have won on almost any platform, and that the taunts of “voodoo economics” actually cost him some votes. Today, the supply-side label is a clear liability. Even promoters of the concept shy away from the label. In 1994, Republican leaders like Gingrich and Dick Armey chose to conceal the extent of their tax-cutting fervor from the voters, who they judged would not trust an economic program based on supply-side assumptions. And the word was that even Republican focus groups—the same groups that were used to craft the Contract with America reacted scornfully to the idea of an election-year tax-cut promise. So why does the supply-side idea keep on resurfacing? Probably because of two key attributes that it shares with certain other doctrines, like belief in the gold standard: It appeals to the prejudices of extremely rich men, and it offers self-esteem to the intellectually insecure.

  The support of rich men is not a small matter. Despite its centrality to political debate, economic research is a very low-budget affair. The entire annual economics budget at the National Science Foundation is less than twenty million dollars. What this means is that even a handful of wealthy cranks can support an impressive-looking array of think tanks, research institutes, foundations, and so on devoted to promoting an economic doctrine they like. (The role of a few key funders, like the Coors and Olin foundations, in building an intellectual facade for late twentieth-century conservatism is a story that somebody needs to write.) The economists these institutions can attract are not exactly the best and the brightest. Supply-side guru Jude Wanniski has lately been reduced to employing followers of Lyndon LaRouche. But who needs brilliant, or even competent, researchers when you already know all the answers?

  The appeal to the intellectually insecure is also more important than it might seem. Because economics touches so much of life, everyone wants to have an opinion. Yet the kind of economics covered in the textbooks is a technical subject that many people find hard to follow. How reassuring, then, to be told that it is all irrelevant—that all you really need to know are a few simple ideas! Quite a few supply-siders have created for themselves a wonderful alternative intellectual history in which John Maynard Keynes was a fraud, Paul Samuelson and even Milton Friedman are fools, and the true line of deep economic thought runs from Adam Smith through obscure turn-of-the-century Austrians straight to them.

  And so it doesn’t really matter whether supply-side economics makes any sense, or even whether it goes down to a crushing electoral defeat. The supply-siders will always have a safe haven in the world of Free Enterprise Institutes and Centers for the Study of Capitalism, outlets for their views in the pages of Forbes and the Wall Street Journal, and new recruits who never tire of saying the same things again and again. When I was younger I thought that ridicule could eventually bring the whole farce to an end, but now I know better. For once the political pundits were right: Dole’s desperate ploy failed. But while that was the end of him, the supply-siders will be back.

  Biologist Richard Dawkins has argued famously that ideas spread from mind to mind much as viruses spread from host to host. It’s an exhilaratingly cynical view, because it suggests that to succeed, an idea need not be true or even useful, as long as it has what it takes to propagate itself. (A religious faith that disposes its believers to become martyrs may be quite false, and lethal to its adherents, yet persist if each martyr inspires others.) Supply-side economics, then, is like one of those African viruses that, however often it may be eradicated from the settled areas, is always out there in the bush, waiting for new victims. I had expected Bob Dole, with his worldliness and sharp wit, to have stronger immunity than most. But weakness in the polls made him vulnerable, and he will never recover.

  Supply-Side’s Silly Season

  Sometimes you have to give points for sheer chutzpah. I can’t help admiring the fortitude of veteran supply-sider Paul Craig Roberts—who recently declared in his BusinessWeek column that the prosperity of the American economy under Bill Clinton proves the validity of, yes, supply-side economics. After all, back in 1993 Roberts, in lockstep with other supply-siders, predicted nothing but disaster from Clintonomics: “a bigger deficit, higher unemployment, rising inflation, and a currency crisis to boot.” Faced with the reality of a Dow near 8,000, the lowest unemployment rate in a generation, and the smallest deficit since, well, Ronald Reagan’s first budget, some people would have tried to change the subject. Roberts, however, is made of sterner stuff.

  But then, what choice did he have? The standard (and true) riposte to Clintonian triumphalism is that Clinton presides over a prosperity he did not create, that the credit for the good news belongs partly to Alan Greenspan but mainly to the resilience and flexibility of America’s private sector. This escape route is not, however, available to supply-siders. If they concede that six years and counting of noninflationary growth in the nineties have had little if anything to do with the policies of Bill Clinton, they can hardly avoid the implication that seven years of expansion during the eighties may have had equally little to do with the policies of Ronald Reagan. And the legend of Reaganomics—which is gradually losing its magic anyway as “morning in America” recedes ever further into the mists, while the debts Reagan left us remain—is about all the supply-siders have left.

  What is supply-side economics? It is not, as some of its apologists would have it, simply the recognition that the supply side of the economy matters; one would be hard-pressed to find a card-carrying economist who disagrees with that proposition. Nor is there anything distinctive about the recognition that high marginal tax rates can hurt economic growth—this, too, is an utterly conventional insight. For example, the effect of taxes on savings, investment, and growth was a central preoccupation of the youthful research of Deputy Treasury Secretary Lawrence Summers. Yet S
ummers is not now and has never been a supply-sider—because he has always thought that other things matter, too.

  What defines supply-side economics, in other words, is not what it includes but what it excludes. Supply-siders believe that only the supply side matters. You may think that a recession has something to do with inadequate demand, and that the Fed can help jump-start a recovery by cutting interest rates; but supply-siders, at least when they are being consistent, do not (although in practice they have been known to blame the Fed when things go wrong). And they believe not only that taxes affect growth, but that virtually all bad things that happen to the economy are the result of tax increases, all good things the result of tax reductions. The implication of these views, of course, is that supply-siders think that tax cuts are always a good idea—whatever the state of the economy or the government’s budget outlook.

  This may sound too good to be true, and it is. But for many years now supply-siders have had a stock answer for skeptics: the economic recovery that followed Reagan’s tax cuts, which supposedly proved conventional economics wrong and supply-side economics right.

  This was always a disingenuous claim, since the events of the 1980s played out according to a thoroughly conventional script. Try, for example, checking out the scenario for disinflation presented in the best-selling mainstream macroeconomics textbook of the late 1970s, by Rudiger Dornbusch and Stanley Fischer: It shows an initial sharp rise in unemployment, followed by a prolonged period of growth during which inflation and unemployment decline together. In other words, the scenario looks pretty much like the actual path of the U.S. economy from 1979 to 1990. But most people have only a vague idea of what conventional economics actually says, and anyway it is hard to argue with success; so for a long time the supply-side movement was able to get away with a misrepresentation both of what actually happened in the eighties and of what it said about the way the world works.

  To deny that the experience of the last few years represents a debacle for supply-side ideas, however, requires a heroic act of selective memory. The truth is that supply-siders went very far out on a limb, and that limb came crashing down. Never mind politics: Suppose that you had managed your personal finances based on what you heard four years ago from Newt Gingrich, read in Forbes, or for that matter saw on this very page. You would have sold all your stocks, and probably put your money into gold. If the supply-siders were fund managers, not only would you have fired them, you would have sued them for lack of due diligence.

  Indeed, you have to turn to Marxism to find a forecasting fiasco on the same scale. Economists often make bad predictions. But it is one thing to fail to predict something hardly anyone else predicts: Most economists didn’t see the stagflation of the 1970s coming, but who did? It is something quite different to make a firm prediction, deeply rooted in your ideology—a prediction that is totally at odds with what mainstream economists say, and accompanied by frequent denunciations of those who disagree with you as knaves and fools—and then to get it completely wrong while the mainstream gets it mostly right. That, one might expect, would make it hard for people to take you seriously ever again. Supply-siders said that Clinton’s tax increase would cause disaster; conventional economists said it wouldn’t. What do you think happened?

  But of course supply-side economics will not vanish in a puff of smoke. Economic fallacies never die—at best, they slowly fade away. Human nature being what it is, it is too much to expect someone whose career or sense of self-worth is based on his identification with some doctrine to abandon that doctrine merely because it has been falsified by events. Moreover, any ideology whose main policy prescription is lower taxes on the rich is likely to have extra staying power: Those who preach it are not going to have trouble putting bread on the table. The supply-siders will be with us for a long time to come.

  It may be that the spectacular failure of their predictions has contributed to the eccentricity of some recent supply-side pronouncements. It seemed strange when Jack Kemp claimed (during his debate with Al Gore) that he could double the economy’s size in fifteen years—that is, achieve fifteen years of 5 percent growth, starting from near-full employment. He must think that Ronald Reagan, who started with double-digit unemployment yet managed only seven years at less than 4 percent, was an economic wimp. It seems even stranger that Jude Wanniski, who can lay as good a claim as anyone to being the doctrine’s creator—and remains inseparable from Kemp—insists that despite all appearances the rich have actually become impoverished. Stock prices, you see, are still lower than they were thirty years ago—if you measure them in gold.

  But we should never be surprised when prominent people say foolish things about economics. The history of economic doctrines teaches us that the influence of an idea may have nothing to do with its quality—that an ideology can attract a devoted following, even come to control the corridors of power, without a shred of logic or evidence in its favor. Supply-side economics may have had a meteoric career in the world of politics, but it never did make any sense. And failure may have brought out the silly streak in some supply-siders, but they have not suddenly become cranks. They always were.

  An Unequal Exchange

  To a naive reader, Edward N. Wolff’s Top Heavy: A Study of the Increasing Inequality of Wealth in America might seem unlikely to provoke strong emotional reactions. Wolff, a professor of economics at New York University, provides a rather dry, matter-of-fact summary of trends in wealth distribution, followed by a low-key case for a modest wealth tax. Although Wolff has done a commendable technical job in combining data from a number of sources to produce a fuller picture—in particular, his book tells us more about both long-term trends and international comparisons than has previously been available—the rough outlines of this story have been familiar and uncontroversial among economists for at least the past five years.

  And yet Wolff’s book was the target of an astonishing barrage of conservative attacks: multiple op-eds in the Wall Street Journal, hostile book reviews, and so on. Why should such a mild-mannered little volume provoke such rage?

  The answer is that this is a subject on which many conservatives are unable to hold a rational discussion. Make a mere statement of fact—say, for example, that the top 20 percent of households in the United States own 85 percent of the marketable wealth—and conservatives will insist that you rephrase it as “20 percent of the households have created 85 percent of the wealth.” Try to assess long-term trends in income distribution using the standard, apolitical device of comparing incomes at the same stage of successive business cycles, such as 1973 and 1989, and you will be accused of an outrageous attempt to distort Ronald Reagan’s record by mixing in the Carter years.

  Conservatives are wrong about wealth inequality, but they are not irrational. There is a method and political purpose to their maddened reaction—a determination to deny the facts that is dramatically illustrated by House majority leader Richard Armey’s new book, The Freedom Revolution. Put simply, conservatives don’t want the public to know too much because they fear it would hurt them politically.

  To understand the significance of Wolff’s book, consider this simple parable: There are two societies. In one, everyone makes a living at some occupation—say, fishing—in which the amount people earn over the course of a year is fairly closely determined by their skill and effort. Incomes will not be equal in this society—some people are better at fishing than others, some people are willing to work harder than others—but the range of incomes will not be that wide. And there will be a sense that those who catch a lot of fish have earned their success.

  In the other society, the main source of income is gold prospecting. A few find rich mother lodes and become wealthy. Others find smaller deposits, and many find themselves working hard for very little reward. The result will be a very unequal distribution of income. Some of this will still reflect effort and skill: Those who are especially alert to signs of gold, or willing to put in longer hours prospecting, will on
average do better than those who are not. But there will be many skilled, industrious prospectors who do not get rich and a few who become immensely so.

  Surely the great majority of Americans, no matter how conservative, instinctively feel that a nation that resembles the second imaginary society is a worse place than one that resembles the first. Yet there is also no question that our nation today is much less like the benign society of fishermen—and much more like the harsh society of prospectors—than it was a generation ago. The evidence is overwhelming, and it comes from many sources—from government agencies like the Bureau of the Census, from Fortune’s annual survey of executive compensation, and so on. And, of course, there’s the evidence that confronts anyone with open eyes. Tom Wolfe is neither an economist nor a liberal, but he is an acute observer. When he wanted to portray what was happening in American society he came up with the world of The Bonfire of the Vanities.

  Here’s a rough (and reasonably certain) picture of what has happened: The standard of living of the poorest 10 percent of American families is significantly lower today than it was a generation ago. Families in the middle are, at best, slightly better off. Only the wealthiest 20 percent of Americans have achieved income growth at anything like the rates nearly everyone experienced between the forties and early seventies. Meanwhile, the income of families high in the distribution has risen dramatically, with something like a doubling of the real incomes of the top 1 percent.