From the Vault: My Review of Krugman
By David Henderson
I was web searching this morning in the Fortune archives–I wrote a lot of articles and books reviews for Fortune between 1983 and the late 1990s–and I came across my December 31, 1990 review of Paul Krugman’s 1990 book, The Age of Diminished Expectations. Here’s how I lead off:
Who [sic] are you going to believe? Nobel laureate Paul Samuelson calls fellow MIT economist Paul Krugman ”the rising star of this century and the next.” What’s more, says Samuelson, Krugman’s The Age of Diminished Expectations (MIT Press, $17.95) is ”a tour de force.” The Wall Street Journal’s reviewer, on the other hand, trashes the book, saying his expectations were ”diminished by reading it.” Now I am a hard-core free-marketer, and in most conflicts between a liberal like Samuelson and the market-oriented Journal I naturally side with the Journal. But this time I don’t. Krugman’s book is first-rate. What has received the most attention is the weakest and, fortunately, a minor part: the author’s claim that the U.S. ”may well be the third-ranked economic power by the end of this decade.” Although he makes the statement in the preface, Krugman does not attempt to justify it until four pages from the book’s end. His reasoning turns on semantics. By treating all of Europe as one country, he gets the U.S. to second place. He then pushes it to third through the way he measures Japan’s economy — not by its GNP, which he estimates will be about 80% of America’s, but by its overseas investments and exports, which likely will exceed America’s. Bottom line: Measured by GNP, the U.S. will still be No. 1 in 2000.
Here’s another section:
Krugman points out that inequality in the U.S. increased dramatically in the 1980s. From 1979 to 1987, he reports, real income before taxes of families in the population’s top tenth rose 21%, while that of the bottom tenth fell 12%. But Krugman does not conclude that the rich got richer by exploiting the poor. Good line: ”For one thing, most of our very poor don’t work, which makes it hard to exploit them.” Krugman also notes that the rich families’ gain in income was about 12 times as large as the poor families’ loss, making it impossible for the rich to have grown richer solely at the expense of the poor. Nor does he advocate taxing the rich further to throw more money at the poor. Tax increases might reduce incentives, he argues, which would hurt productivity growth. Also refreshing is the discussion of the American job machine. Krugman points out that the U.S. economy created jobs for almost all the baby-boomers and immigrants who entered the U.S. labor force during the 1970s and 1980s. This achievement, he writes, contrasts sharply with Europe’s experience. The European economies created no new jobs between 1973 and 1985, multiplying unemployment fivefold. Nor was the boom in U.S. jobs a lucky development that just happened to coincide with the huge increase in people looking for work. The credit, writes Krugman, goes to our ”highly competitive and flexible labor markets,” which contrast sharply with their stiffly regulated European counterparts.