Donald Luskin

by I Am John Galt

  Both have inferiority complexes driven by their physical inadequacy. Rand describes Toohey as “sickly,” “puny,” and “substandard.” Krugman admits, “I am just not imposing enough in person to be inspiring (if I were only a few inches taller . . .).”12 Newsweek once described Krugman (generously) as “gnomishly handsome.”13 Was this what Krugman had in mind when he complained that the Bush administration’s tax cuts were a “step on the way to a system in which only the little people pay taxes”?14

  As Freud said, “Anatomy is destiny.”15 So the physiologically inadequate but intellectually powerful Toohey and Krugman are driven to rule the world. Toohey’s self-admitted goal is to “rule . . . You. The world.” He seeks a future in which power is concentrated in “the hands of a few, a very few other men like me.” For Krugman, merely ruling the world would seem to be quite a comedown. His childhood hero, the “psychohistorian” Hari Seldon, ruled the whole galaxy.

  For both Toohey and Krugman, the means of world rule is collectivism. Toohey says, “We’ve taught men to unite. This makes one neck ready for one leash. We’ve found the magic word. Collectivism.” It turns out that Krugman’s beloved “psychohistory” is just another magic word with the same meaning. A New Yorker profile of Krugman explains that his idol Hari Seldon “couldn’t predict individual behavior—that was too hard—but it didn’t matter, because history was determined not by individuals but by . . . hidden forces.”16

  Such ends justify any means, so both Toohey and Krugman are willing to use their positions as public intellectuals to ruin reputations and lives as they see fit. Toohey’s target is Howard Roark, the individualist architect hero of The Fountainhead. And here we must shift for a moment to the first person. Because as we will see later, I have been among Krugman’s many targets for character assassination. Thankfully, like Roark, I survived the experience.

  The Economist Who Couldn’t Shoot Straight

  Before we proceed, let’s get something important out on the table. Most critiques of Krugman as a public intellectual begin with what is apparently an obligatory disclaimer, usually in the very first sentence—something to the effect that Krugman is a very accomplished and well-respected economist. After all, he won the Nobel Prize. Then comes the “But . . .” and the critique proceeds in earnest, often scathingly.

  Why concede any honor at all to Krugman?

  So what if he won the Nobel Prize? There are plenty of left-leaning political icons (Jimmy Carter, Al Gore, Barack Obama); witch doctors (Egas Moniz, the doctor who pioneered the frontal lobotomy); and even the odd terrorist (Yasser Arafat) who’ve been kissed on the forehead by the king of Sweden.

  Of what real value or distinction is Krugman’s work as an academic economist? There was a time a decade or more ago when his work on international trade and currencies was frequently cited in the economics literature, but far less so now, and some in the profession have come to regard it as rather trivial. Nowadays Krugman’s work on trade and currencies is limited to rants in his Times column directed at China, advocating protectionism that most serious economists regard as retrograde and naive if not downright dangerous.17

  The real test of Krugman’s mettle as an economist is the accuracy of his economic forecasting. The fact is that, with about two decades of evidence now in, Krugman’s track record, to use a technical term favored by economists, sucks.

  As we’ll see, he’s not always candid about this. But once, under the pressure of a televised debate with conservative talk-show host Bill O’Reilly, Krugman blurted out an understated if truthful self-evaluation: “Compare me . . . compare me, uh, with anyone else, and I think you’ll see that my forecasting record is not great.”18

  The most egregious example of “not great” is Krugman’s 1982 utterly incorrect prediction that inflation would soar. He made this prediction from no less lofty a perch than the White House, as staff member of the Council of Economic Advisers (CEA) in the first Reagan administration. Here’s how Krugman remembers that time:

  [T]he summer of 1982 was a moment of near-panic among the Reaganauts, as the recession and the debt crisis seemed to threaten catastrophe. They not only hired [Martin] Feldstein, they gave him the freedom to bring in a politically incorrect team of whiz-kids (which included Larry Summers . . .) in the hope that he could turn things around. By 1983, with a recovery well under way, the political types were back in charge.19

  In other words, according to him, the world was in crisis—but Krugman parachuted in and cleaned everything up. But according to the archives of the Reagan Presidential Library, the truth is that Krugman’s only substantive contribution at CEA was a September 9, 1982, memo co-authored with Lawrence Summers called “Inflation During the 1983 Recovery.” Krugman and Summers wrote,

  The Inflation Time Bomb?

  We believe that it is reasonable to expect a significant reacceleration of inflation in the near future. Much of the apparent progress against inflation has resulted from the temporary side effects of tight money and high real interest rates. These side effects must be expected to reverse themselves as real interest rates decline and the economy expands. . . . Our very rough guess is that correction of . . . distorted relative prices will add at least 5 percentage points to future increases in consumer prices. . . . This estimate is conservative.20

  When Krugman wrote this, the U.S. consumer price index inflation rate was 4.9 percent—high by recent standards, but down significantly from its catastrophic peak at 14.59 percent 18 months before. In that environment, for the self-described “whiz-kid” who found himself in the White House, this was a very bold prediction.

  It also turned out to be hilariously, side-splittingly, knee-slappingly, rolling-on-the-floor wrong. Except for a tiny uptick the very next month, inflation didn’t rise; it fell. Four years later, it had fallen to 1.18 percent, a rate so low as to border on deflation. It didn’t even get back up to the same level at which Krugman had originally warned of a “time bomb” for about seven years. The highest inflation ever got from then through this writing was 6.37 percent, less than a percentage point and a half higher than when Krugman wrote his memo.

  In other words, the entire inflation rate wasn’t much more than Krugman predicted the increase in the inflation rate would be.

  What does Krugman himself say of this prediction? He simply lies about it. In a June 2004 Times column revealingly titled “An Economic Legend,” he had the temerity to write, “Inflation did come down sharply on Mr. Reagan’s watch . . . it all played out just as ‘left-wing Keynesian economics’ predicted.”21 Considering that Krugman is a left-wing Keynesian economist, and considering that it all played out exactly the opposite of what he had predicted, this claim would appear to be a lie—unless he’s talking about all the other left-wing Keynesian economists (admittedly, there are lots of them).

  And then there was the time in late February 2000, two weeks before the peak of the dot-com stock bubble at Nasdaq 5,000. Krugman wrote in his Times column that the Dow Jones Industrial Average was overvalued, saying, “let the blue chips fall where they may.”22 As for the Nasdaq—which at that point had almost doubled over the prior year, and more than tripled over the prior three years—Krugman said soothingly, “I’m not sure that the current value of the Nasdaq is justified, but I’m not sure that it isn’t.”

  We all know what happened. As of this writing, the Dow is about 20 percent higher than when Krugman wrote those words—and that’s not including a decade of dividends. The Nasdaq is about 42 percent lower. It hit bottom in October 2002 a 75.7 percent loss from where Krugman said not to worry about it. After something of a recovery, stocks fell again. They put in a real bottom—from which the Nasdaq would ultimately more than double—in March 2003. That is, about a week after Krugman wrote a Times column asking the rhetorical question, “Is there any relief in sight?” His tragically wrong answer: “No.”23

  Perfect bookends—he missed the top, and then exactly three years later, he missed the bottom. But then
he outdid himself. In June 2003, with the Nasdaq up 20 percent since Krugman’s “No,” did he recognize his error and reverse course? Again: “No.” Krugman wrote that “the current surge in stocks looks like another bubble.”24 From there the Nasdaq was to rally another 75 percent.

  At around the same time, afraid of what he called a “fiscal train wreck” that would lead to disastrously high interest rates, he announced in the lead paragraph of a March 2003 Times column: “So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.”25

  Rates didn’t rise, even when budget deficits skyrocketed beyond anything he could have imagined then, driven by government “stimulus” spending that he himself urged. He has acknowledged that error, confessing, “I wrongly believed that markets would look at it the same way.”26

  The Little Man Lives Large

  For Krugman, “wrongly believed” may just be a fancy way of saying, “I lost money on that one.” Perhaps lots of money, because Krugman probably has a great deal of mortgage debt. That’s because he’s being hypocritical when decries what he calls the “lifestyles of the rich and tasteless” and the mansions of “plutocrats.”27 His own home in Princeton is a custom-built 6,000-square-foot compound, which according to records of the Township28 sports a four-car garage, music room, library, and greenhouse, and a fire-pit where he and his faculty friends burn effigies of prominent conservative politicians.29 He also has a vacation home in St. Croix and a $1.7 million co-op in New York City.30

  In this one way, Krugman is very unlike Ellsworth Toohey. Toohey is an honest socialist, if such a thing is possible. At least he’s an ascetic, living in a “monk’s cell” of an apartment, “scornful of material display.” But Krugman lives large. How does he afford it? Clearly, he’s not making the big bucks as a speculator as Keynes did (unless in his personal trading account he’s deliberately doing the opposite of what he advises his readers to do). There are speaking fees, no doubt. All public intellectuals feed from that trough. And they get to meet the most interesting people there.

  For instance, there’s the time in 1999 when Krugman was in Kuala Lumpur, Malaysia, speaking at a business conference.31 While he just happened to be in town, he just happened to spend a day with Malaysia’s prime minister, Mahathir Mohamad, including, according to Krugman, a “staged ‘dialogue’—which was played out in semi-public, in front of a disturbingly obsequious audience of a hundred or so businessmen.”32

  Mahathir is a rabid anti-Semite, who has demonized Jews for causing Malaysia’s economic problems. Krugman shrugged that off, sighing that he knew Mahathir “would try to use me politically—to provide a veneer of respectability. . . . But sometimes an economist has to do what an economist has to do.”33 Like what, exactly, in this case? What duty was discharged by Krugman’s appearance with the loathsome anti-Semite Mahathir, other than enjoying a day as the center of attention “at the Palace of the Golden Horses, a vaguely Las Vegas–style resort outside Kuala Lumpur”?

  In a Times column in late 2003, he defended Mahathir’s anti-Semitism, rationalizing it as a realpolitik response to the U.S. invasion of Iraq.34 Apparently in Krugman’s mind, however bad anti-Semitism is, George W. Bush’s policies are worse. The Times column ran with the subhead, “Anti-Semitism with a purpose.” The Anti-Defamation League was not amused, slamming Krugman for being tolerant of anti-Semitism because of “his obsession with criticizing U.S. policy.”35

  In the ensuing controversy, Krugman claimed, “I have never received any money from Mahathir.”36 But that’s not a claim he can make with respect to some of the other bad actors he’s gotten himself involved with.

  Adding Consult to Injury

  One of Krugman’s worst predictions—and quite an honor it is to earn that designation, considering how much competition there is for it—was not an economic one, but a sociological one. No doubt thinking of some of Keynes’s farsighted observations, Krugman prophesied in a January 2002 Times column, when the ashes were still warm at Ground Zero in lower Manhattan, “I predict that in the years ahead Enron, not Sept. 11, will come to be seen as the greater turning point in U.S. society.”37

  Lunacy, to be sure. U.S. history books a century from now will feature pictures of the World Trade Center aflame. Who, even now, remembers much about Enron? Oh yeah—it was that company that cooked the books. A couple of its executives went to jail, didn’t they?

  Yep, that’s the one. But Krugman will never forget Enron, even if the rest of us already have. That’s because at the time it was quite le scandale, and it turned out that Krugman was caught right in the middle of it, with his hand in Enron’s cookie jar.

  In 1999 Krugman wrote an article for Fortune magazine.38 It was unexceptional for that heady time, basically a puff piece about the wonders of the so-called new economy driven by technological and managerial breakthroughs. What was exceptional about it was that the company that served as the centerpiece of the article, the paradigm of “The Ascent of E-Man,” was Enron.

  Krugman was totally taken in. He even rhapsodically described the company’s “pride and joy”—its trading room—which later was exposed as a fake set up to fool Wall Street analysts.39 You’d think he would have known better, because by the time he’d written that article he’d become an Enron insider.

  He mentioned in the text of the article that he had “recently joined the advisory board at Enron”—and then went on to praise the company, and to aid and abet its projection of a fraudulent facade. But he didn’t mention the fact that the pay for a year on the advisory board was $50,000.40 Maybe that’s what kept him from seeing the truth about Enron, even though from his position he was able to look at the company up close and personal.

  Once Enron was exposed as a fraud—by others, by people who were not on the take from the company—Krugman wrote about it frequently in his Times columns. The specific idea was to link the Texas-based company to Texan George W. Bush, and the more general idea was to attack private business and use Enron as an excuse for more government regulation. For all the thunderbolts Krugman hurled at Enron from the Olympus of the New York Times, he disclosed his involvement with the company only once, at the very beginning.

  In a January 2001 column, Krugman said he’d “signed on” to the advisory board—bracketing this confession fore (“this newspaper’s conflict-of-interest rules required me to resign”) and aft (calling the board “a hatchery for future Bush administration officials”).41 But that was it as far as disclosure was concerned—though he was to write about Enron many, many times, accusing the Bush administration of “crony capitalism” without mentioning that he himself was one of the cronies.42

  The low point in Krugman’s Enron hypocrisy was surely reached with a Times column in December 2001, where he heaped scorn on its “vision thing: it would create markets in everything, and make money by trading in those markets.”43 He blasted “business gurus” and “consultants” who acted as though Enron’s critics “just didn’t get it.”

  Not one word about the fact that he himself was one of those business gurus who, just two years before, had praised Enron’s “vision thing”—right down to the (fake) trading room where they would “create markets in everything.” And not one word about the fact that he was a consultant to Enron itself, and at the same time as he’d helped Fortune magazine’s readers to “get it.”

  Let’s see if we “get it” now. How did Krugman use the consulting fees he was paid from Enron—and, for that matter, the payment we assume he got from Fortune for helping its readers lose 100 cents on the dollar invested in Enron? Was that the down payment on the vacation home in the Caribbean? Or did it pay for that fire-pit for effigy-burning?

  The Krugman Truth Squad

  The plot of The Fountainhead revolves around the conflict between Ellsworth Toohey, the villainous collectivist, and Howard Roark, the her
oic individualist. Toohey is an active antagonist in the conflict, constantly scheming to thwart Roark’s brilliant career. But Roark is passive; he defeats Toohey by eventually outlasting him, and in the meantime not wasting his time on him.

  In one of the book’s most memorable scenes, Roark and Toohey encounter each other by chance, at a point where Toohey has very nearly ruined Roark’s career. Ever the second-hander, needing to define himself through others, Toohey asks Roark to tell him honestly what he thinks of him. Roark, the man who lives entirely by his own opinion of himself, simply says, “But I don’t think of you.”

  Maybe I should have followed Roark’s example, but I didn’t. I spent years thinking about Paul Krugman. That makes this an anomalous chapter in a book created to help people emulate the success of Ayn Rand’s heroes. But my story with Paul Krugman shows that real-life Rand villains can be defeated. If it serves your values to oppose them, it can be done.

  I don’t remember now exactly how it started. But in 2002, I decided to write a book. It was going to be called The Conspiracy to Keep You Poor and Stupid. The idea was to explain how big government, big business, big media, and big academia block your road to financial freedom—and tell you it’s for your own good. In October of that year I started a blog by the same name to help me write the book. The blog took on a life of its own, thanks to Krugman, and ended up consuming so much of my time that I never wrote the book.