Krugman Up to His Old Tricks
Jude Wanniski
October 22, 2002


Memo To: Glenn Hubbard, Chairman of the President’s CEA
From: Jude Wanniski
Re: “Income Distribution”

If you caught my memo yesterday, Glenn, you will note in 1998 I had already listed Professor Paul Krugman as one of the Most Dangerous Men in the world. Here is how I put it back then:

5. Paul Krugman: Another MIT academic economist, Krugman remains high on our list by virtue of his influence among Democratic policymakers and opinion leaders who assume he must be a genius because he makes fun of all his competitors. A favorite at the editorial page of The New York Times and its Sunday Magazine, Krugman is a prolific, rapidly moving target, who gets away with writing an unusual mixture of neo-Keynesian and monetarist gibberish because he does so with supreme confidence. His current shtick is arguing that any economic recession can be cured anywhere by flooding the economy with money. A determined foe of supply-side arguments on taxes and gold.

Since then, the Times hired him outright, to write a twice-weekly column while permitting him to profess his trade at Princeton. In recent years he has been less a danger because Democrats have figured out that he loves to bash the economic policies of Republicans, he never commits himself to alternatives. He is shrewd enough to know that if he did and it failed, he would follow Lester (Zero Sum) Thurow into the dustbin of history. This is mainly why Democrats don’t have any ideas at all as they try to wrest power from the GOP in House and Senate races. They are of course correct that the stock market and employment were much higher when President Clinton left office, but they don’t know why they are lower, and Krugman has not been helping them.

He is now, though, up to his old tricks. In The New York Times Magazine this past Sunday, the editors gave him the cover story, "The End of Middle-Class America" promising this is only “Part I” of a series on “The Class Wars.” In it he argues that the rich are getting richer and the poor are getting poorer and the Middle Class is shrinking. This is the theme that Krugman used back in the late 1980's to win the affections of the Times editors, who are not easily fooled by most issues, but are helpless when it comes to economic sleight-of-hand. They could not resist taking one sentence out of his piece and blowing it up in a sub-headline: “The 13,000 richest families in America now have almost as much income as the 20 million poorest. And those 13,000 families have incomes 300 times that of average families.”

If President Bush read the article, he may have asked you about it, Glenn, but even if he didn’t, you can see this is where the Times is headed. As usual, Krugman does not offer any advice on how to close the “gap” between the really rich and the middle class. The exercise is simply intended to make people mad enough to vote a straight Democratic ticket, which is what “class wars” are all about. Still, the numbers are surely accurate, having been plucked from the 1999 income tax returns, the latest available.

The first thing Krugman does is to interchange “income” and “wealth” from one hand to the next, hoping you never notice. A “rich” family, after all, is one that has “wealth,” but not necessarily a steady income. Microsoft’s Bill Gates is worth hundreds of billions of dollars and since 1999 has lost more money on the stock market by himself than ALL the poorest people in the United States lost put together. His “income” is different than his wealth, though, and his gross income is different than his net income. I personally know several billionaires who gave far more of their wealth to charities or the arts and sciences in 1999 than they received in income.

The 13,000 people whose “average income” in 1999 was 300 times greater than the “average family” is almost entirely composed of average, older middle-class people who cashed in capital gains in 1999 from the sale of properties they had been tending all their lives. The farm family that had been reporting $30,000 income and had to declare a capital gain of $1 million and pay tax on mostly inflated gains is counted by Krugman as one of the disappearing middle class that has morphed into plutocracy.

Picking 1999 as the snapshot year is another Krugman trick, when the value of equities swelled because of the boom and there were great surges in “incomes” of entrepreneurs and their financiers who of course paid their tax liabilities with “bubble” shares that also made them plutocrats for a year. Because they had not held their shares long enough to qualify for preferential treatment of capital gains when they filed their tax returns in early 2000, they had to sell shares that had already dropped in value. Krugman probably does not meet that many plutocrats, although he did earn some fancy fees as a “consultant” to Enron, but of he did, he would know that many of them who were “rich” in 1999 are now busted, and still owing inflated tax liabilities.

Instead of making any kind of effort to see who is in the snapshot of the 13,000 “richest” families, Krugman simply reaches out and reminds us about General Electric’s Jack Welch and Tyco’s Dennis Kozlowski, who have been in the news lately with stories about their fabulous incomes as chief executive officers. Even if you add up all the ceo’s and the sports celebrities and movie stars who actually have incomes high enough to qualify for the 13,000, which Krugman says was $3.7 million, with an “average” of $17 million, you are probably left with 12,500 families who sold assets from accumulated wealth and had almost no regular income. Probably the majority of those were rich widows. But a year later, surely almost all the 13,000 “richest” families were different families altogether.

So far, all we have gotten from the trickster is statistical. Now we get to Krugman’s "economics": “Although America has higher per capita income than other advanced countries, it turns out that that’s mainly because our rich are much richer. And here’s a radical thought: if the rich get more, that leaves less for everybody else.”

This is surely a carefully planned ploy for a Nobel Prize in economics, of special attraction to the folks in Sweden who decide such matters. If Krugman took the trouble to understand supply-side economics – maybe even attend a few courses at our online “Supply-Side University,” he would know that the rich only get richer at the top of the mountain if the mountain grows underneath them. And the people at the bottom know that if they are ever going to have a chance at getting rich, they have to have the same opportunities as did those who are now at the top. Krugman’s bald assertion that if the rich get richer, there is “less left for everybody else” translates into another radical thought: If the government takes from the rich, there will be more for everybody else.

The reason you have to be up on all this, Glenn, in case the President asks you about it, is that he may be susceptible to this static reasoning. His one-term father certainly went all wobbly when advised he had to raise taxes. There are times when raising taxes are necessary for the good of the nation. But they should never be raised to close a phony gap between the rich and the poor. If you do, you make everyone poorer. A great part of the “wealth” of the American people is in the Social Security/Medicare system, which Krugman conveniently leaves out of his equations. Joe Schmoe gets $25K a year in benefits at age 65 if he has paid the max in his working years, and so does Bill Gates. The discounted present value of Joe Schmoe’s income from this source is in the high six digits. It is the same as Bill Gates’. The Middle Class knows this is part of its wealth.

If you would like to know how to close the statistical gap between the Krugman poor and the Krugman rich, I will tell you how, in case President Bush really wants to play this game. Krugman will not like the recommendations.