Letter to a New Magazine Jude Wanniski July 28, 1998

Memo To:James Daly <jday.business2.com>
From: Jude Wanniski
Re: ‘Premiere Issue’ of Business2.0

Congratulations on the quality of your inaugural issue. I happened to notice a copy on the magazine shelf at WalMart (amidst a dozen others tied in one way or another to the Internet) and thought the Brain Trust feature looked interesting enough for me to shell out the $5. I also bought Yahoo!, as I own a hefty chunk of the stock and had not heard about the magazine. At home, I found the “Debate” between Carl Shapiro and Paul Krugman, which I found most interesting -- although I disagree with the reefer in your table of contents that “Krugman fries him.” In fact, Krugman did not lay a glove on Shapiro, but engaged in his usual fast-talk that passes for Olympian confidence, wisdom and insight among those who don’t know any better.

1. Krugman perpetually uses ad hominem like “the New Economy is just plain dumb” as a device to assure editors that he is smarter than anyone else. The folks at the NYTimes fall for it every time. For example, he says it is “dumb” for Shapiro to say we can have faster measured gross domestic product (GDP) growth because there is supposedly a lot of unmeasured productivity growth.” He never says why it is “dumb,” which it isn’t, of course, as your interviewer Spencer Ante comes back to suggest that perhaps the New Information Age “has many intangible assets” not measured by GDP.

2. Now that Krugman suspects the interviewer may be on Shapiro’s side, he backs off the “dumb” remark and simply asserts: “I see no reason to believe that the [GDP] is any worse a guide now than it was 50 years ago. And it isn’t failing us. It is doing a fine job; for example Okun’s Law, the relationship between GDP and unemployment, continues to work very well, which is one reason to think the New Economy theory is wrong.” In fact, 50 years ago GDP was a far better measure of national output, as GDP now includes the “chaos industry” of lawyers, accountants and government bureaucrats consume wealth instead of producing wealth.

3. After a string of assertions and an “I see no reason to believe,” Kruman wheels out Okun’s Law as a proof that the GDP is an accurate measure of national output. For one thing, Okun’s Law is not a “law,” but an assertion by the late Arthur Okun that seemed to hold up in the 1960s, but which broken down completely in the 1970s and 1980s, but now seems like it might be working again. (Such laws are obviously not laws.) The “law” argued that the economy had to grow at least at a 3% rate to prevent unemployment from rising, and had to grow faster to lower the unemployment rate.

4. Think about this a moment and you will realize Krugman is pulling a fast one, because Okun’s Law has absolutely nothing to do with productivity. It simply attempts to correlate the number of people working with the statistic (GDP) that Shapiro says incorrectly measures output to begin with. In other words, the only proof Krugman offers in support of his “dumb” quote about the “New Economy” is a “law” proven to be itself defunct, one having nothing to do with Shapiro’s point about intangible assets. If he were in my classroom, I would send him to the corner with a tall, pointy hat.

5. Finally, your Mr. Ante asks Krugman: “You’ve said that in 10 years the term ‘information economy’ will sound silly. Any historical precedents for that?” To which he replies: “Remember the ‘nuclear age?’ Or how in the 1950s we thoughtt automation would lead to mass unemployment? Or how helicopters would replace autos? Or how robots would be cleaning our houses?”

6. The “debate” ends at that point, but I trust you realize Krugman did not answer your question. When Shapiro and others talk about an “information economy” they mean one that produces nothing tangible, a U.S. economy that exists and is paid handsomely for processing information for the rest of the world. That is, we will export information processing and import cars and clothes and commodities.

7. We’re already doing this, which is why our government statistics are so useless. We’re running a perpetual “balance of trade deficit,” which according to Krugman can only mean that the rest of the world is sending us stuff for free. Economists have known for 20 years that it is easier to count imported cars and clothes and commodities than it is to count exported information. This is why when you add up all the world’s imports, they exceed all the world’s exports -- which of course demonstrates why Krugman’s defense of the GDP number is laughable.

8. The biggest reason some of the Internet stocks have achieved stupendous market capitalizations is that the market realizes the Internet belongs to our economy and it is only a matter of time before the whole world is our customer. Twenty years ago, we began to think of the billion people of China coming into the market, and how much money could be made by selling a toothbrush to each Chinese. Of course, the Chinese could make their own toothbrushes, and cars and clothes and commodities. But they can’t import “Yahoo” and “Cisco” and “Microsoft” and “learn how to make one.” The United States has a monopoly on information processing and will keep it for a long, long time.

9. When we talk about “information processing,” we must include everything that enables people to make, market, exchange and distribute cars, clothes, commodities and other “real things,” more efficiently. By this process, the United States will become the chief financial intermediary of the world, the central market for debt and equities, the central source of enterntainment, the primary source of the highest education.  By that I mean people around the planet will continue to send their kids to the grade school in the neighborhood, but when they want to learn the best of the best in any discipline, they will get it from the United States, on the Internet.

10. The only place in the world where you can now learn the purest form of “supply-side” economics, for example, is on my website: <www.polyconomics.com>. There, you will find “Supply-Side University,” which will begin its fourth semester in September. In the spring semester, I had 500 students from around the world, who learned about it via word of mouth, as there has been no free or paid publicity about it. It began when I wrote a letter to Wired in 1996, complimenting it on an article it ran on Peter Drucker. They ran the letter with my website address and a young man e-mailed me, asking if I could teach him supply-side economics on the net. And so it began.

11. One of the things the net permits me to do is bring to the attention of anyone who will click onto my website the information that Paul Krugman is a gasbag who has flummoxed a lot of snail-mail print editors with his fake erudition. Because Bill Gates hired a snail-mail journalist to run his “Slate,” Michael Kinsley, who has been flummoxed himself, Krugman is now the chief economic gasbag on the Internet. Whenever asked to engage me in debate, Krugman refuses on the grounds that I do not have credentials in economics. Please forgive me for calling him a gasbag, which may appear to be ad hominem, but in his case is not.

12. Again congratulations and good luck with Business2.0!