Paul Krugman Gets It Half Right On What's Wrong With America's Economy

Paul Krugman


Even a stopped clock is right twice a day; Paul Krugman was almost this lucky in his recent New York Times column: Degrees and Dollars.It’s an important column and should be required reading even for people who stopped reading him a long time ago.

Krugman’s take on what’s wrong with the American economy and what to do about it shows a powerful intellect grappling honestly with some of the biggest problems we face.

And Krugman’s column also illustrates the point I made in The Crisis of the American Intellectual: that many of the smartest and best educated people in this country are so blinkered and blinded by the assumptions and values of the blue social model that they simply cannot think outside the box.

First, here’s what Krugman gets right: the hopes of our intellectuals that shoveling ever more money into our faltering higher educational system will raise American living standards are delusional.  Citing the recent New York Times article on the devastating consequences of automation for the future employment of American lawyers, Krugman points out that many high-pay white collar occupations are vulnerable to automation.

He also gets something else: that many professional jobs are vulnerable to outsourcing.  Citing research from fellow Princeton profs, Krugman tells us (again, correctly in my view) that in the next stage globalization is going to be slicing into job opportunities and wages at the high end of the labour market.

Krugman’s column is part of a much broader trend: the intellectual and economic underpinnings of the blue social model are in a process of accelerating and serial collapse.  I posted last week that the truly deadly threats to the public sector unions, the threats that doom them to long term decline, aren’t coming from people like Wisconsin governor Scott Walker; they are coming from blue state governors in places like New York and Vermont who recognise that their states simply cannot afford to give public unions anything like what they want.  The New York Times editorial board, one of the bluest groups in the United States, published an editorial the day before Krugman’s piece appeared that argued for deep changes in the way state workers are rewarded and managed.  Sez the Times:

At a time when public school students are being forced into ever more crowded classrooms, and poor families will lose state medical benefits, New York State is paying 10 times more for state employees’ pensions than it did just a decade ago.

And why is this?  Well, continues the grey Lady, there are several reasons, including this:

[M]ost state employees pay only 3 per cent of their salaries to their pensions, half the level of most state employees elsewhere. Their health insurance payments are about half those in the private sector.

And where does this leave us?

In all, the salaries and benefits of state employees add up to $18.5 billion, or a fifth of New York’s operating budget. Unless those costs are reined in, New York will find itself unable to provide even essential services.

The problem goes beyond wages and pensions.  It also involves work rules — like seniority and tenure.  An editorial that appeared on the same day as the Krugman piece argued for revising New York state law to make it easier to fire bad teachers — and to make layoffs performance-based rather than firing young teachers while protecting time-serving hacks through the seniority system.

The Times, it hastens to assure us, is not (God forbid) anti-union.  It merely believes that the state must set wages, pensions and work rules based on the financial facts of life rather than on union wish lists.  And the state must elect politicians who will stand up to union demands and, presumably, crush union strikes aimed at resisting the wage and pension cuts, layoffs and work rule changes that the Times believes are a matter of life and death for New York State.  If workers want to go on paying dues to organisations that cannot bargain effectively over anything important, the Times is fine with that.  (If that is what the most reliably liberal major news source in the country thinks, it isn’t hard to see where the debate on public unions is heading.)

This post originally appeared at The American Interest.



Krugman and the Times editorial board are both examples of something important in American life today: left-liberal intellectuals are increasingly able to understand that individual supports of the blue social model are crumbling.  But they are still so captivated by the blue model, so profoundly convinced that the Progressive movement’s solutions to America’s social ills in 1910 are still valid today, that they cannot yet look beyond the blue model to imagine a different and brighter future for the United States.

Here, for example, is the solution Krugman proposes to the problems that automation and outsourcing have caused for both blue and white collar workers in the US:

So if we want a society of broadly shared prosperity, education isn’t the answer — we’ll have to go about building that society directly. We need to restore the bargaining power that labour has lost over the last 30 years, so that ordinary workers as well as superstars have the power to bargain for good wages. We need to guarantee the essentials, above all health care, to every citizen.

This is blindness so brilliant it would dazzle a bat.  If, as Krugman posits, demand for US workers will be falling in both manufacturing and the professions, how exactly will labour unions get higher wages for their members?  Factories will be closing in Krugman’s world and law firms will be turning more and more work over to computers or shipping it overseas.  Perhaps stronger unions could make it harder for companies to do this for a while, but ultimately facts speak.  Stronger unions making tougher wage demands will not exactly persuade American (and foreign) investors to create new jobs in this country — or to slow down their efforts to reduce their US workforce by outsourcing and automation.  When human workers receive rising wages, become harder to fire, and are governed by ever more convoluted and expensive work rules, replacing them with computers becomes more attractive, not less.

Unions tend to flourish when demand for workers is rising (as in China today); they do not and cannot protect the situation of workers as a whole against a background of falling long-term demand for their work.

The problem isn’t that this or that piece of the blue social model is breaking down and needs to be fixed so that the rest of the model can go on working well.  It’s not that the university system is broken and that if we fix that the model still works.  Ditto the public sector unions or the situation of the labour movement as a whole. Mandating an expensive new set of health care entitlements at a time of looming insolvency won’t help either.


The problem with the blue social model today is systemic.  It’s not a problem with one piece or another.  The pieces are all falling down and breaking apart at once.  It is what happened to the “One Hoss Shay” in Oliver Wendell Holmes’ poem about, they used to teach us back in Pundit High, the breakdown of Calvinist religion in New England.

The shay in Holmes’ poem had been built in 1755 by a clever parson determined to make sure that every part was equally well-made and that the whole system worked harmoniously.  For 100 years the wonderful shay rolled on smoothly, with none of its parts ever needing repair or replacement.  But nothing lasts forever and 100 years to the day after it was assembled, there was a sudden jerk and the driver fell ingloriously to the ground.

What do you think the parson found,
When he got up and stared around?
The poor old chaise in a heap or mound,
As if it had been to the mill and ground!
You see, of course, if you ‘re not a dunce,
How it went to pieces all at once,
All at once, and nothing first,
Just as bubbles do when they burst.
Logic is logic. That’s all I say.
“End of the wonderful one-hoss-shay.”

Faced with this catastrophe, the Progressive mind can only echo Samuel Gompers’ cry for “More!”  But the cry is doomed to be fruitless.  The only thing that will help is more subsidies: aid to universities and to students to allow the unsustainable education bubbles to continue to rise; aid to states and local governments to pay spiraling wage and pension bills; aid to home buyers to stave off price collapses; and most crucially, massive aid to both health care providers and consumers.

Wrong.  We need to reduce the ‘friction’ in American society: the costs of our legal, health, educational and other government services.  Some of this will come through the use of exactly those abilities of the computer that Paul Krugman dreads: their ability to replace human beings for much routine office work. 

Making government (and private sector) bureaucratic payrolls massively smaller is what the general interest requires.

In the medium term this process, aided by ever-improving software and the continuing rapid increase in computing power, can go much, much farther than many people imagine.  Robot judges assessing claims filed by robot plaintiff and defence attorneys?  It may be coming into view.  This post (thanks, Instapundit, for the link, and for much, much else besides!) explores some of the possibilities.

In other cases, the changes have to do with smarter practices rather than automation.  And this is not about a knee-jerk preference for right wing solutions over left wing ones: finding cheaper (and more humane, less destructive) ways than prison to deal with non-violent criminal offenders is one example.

Or look at education.  Moving from “time-served” processes of certification (four year BA degrees, three years in law or divinity school) to certification based on achievement can make education dramatically cheaper.  It is sheer madness that most students spend 12 years in school, and another four in college. 

Why exactly should all kids the same age be in the same grade? One size does not fit all; why shouldn’t high school kids go free when they can pass the equivalent of a GED? And for that matter, shouldn’t school districts encourage and reward teachers and schools that are able to graduate students faster?  Among other things, this would allow some of the resources not spent on babysitting high-achieving kids to go to kids who really need the help. How “right wing” is that?

The same goes for college.  Oxford and Cambridge graduate their students in three years — yet few people think British college grads are less accomplished than their American peers.  What is sacred about the four year BA?  Wouldn’t a shift to an exam based system (students who make qualifying scores on the appropriate exams would be certified as graduates) allow more people to advance farther at less cost?  And there’s an element of social justice here: the kid from a no-name school who scores high on the exam will have an edge on the Ivy League kid who partied through college and just scraped by.

I don’t claim to have all the answers to how America’s professions should be restructured.  Those answers will be discovered bit by bit as millions of people work to do things faster, cheaper, smarter.  But the aggressive use of computers and innovation to increase the productivity and reduce the costs of “frictional” activities like government, the legal system, the financial system, health care and education will allow Americans to pay less in taxes and fees for services that they truly need even as the quality of government services improves.  That is what productivity is all about.

For many people this sounds like a systemic assault on the few good jobs left in the United States.  But this process of creative destruction is not a Scrooge-like endeavour to squeeze the honest workers for the benefit of fat cats.  It is clearing the field for new enterprises and new professions.  If education, government and other important services become cheaper and better in quality, and as inflation in other sectors like health care is better controlled, it will be easier and cheaper than ever to start new businesses.

What will the brave new American economy look like?  Nobody knows.  But maybe you will have (or be) a kind of geek-on-call who, for a fixed rate, handles anything that goes wrong with all your electronic and media equipment, who handles those three hour tech support calls for you, and who also figures out what cable, direct TV, online or other service providers work best for you.  Maybe you will use or run services that shuttle kids around the suburbs to their various classes and sport events.  Maybe all of us, instead of a handful of upper middle class and upper class people, will have access to serious personalised guidance and educational counseling for our kids.  Maybe you will have a personal nutritionist who is also your shopper. Health care will be more individually tailored, and instead of seeing a doctor every time you are sick, you may spend time with a person who helps you navigate the health system and who makes house calls (with a “smart box” that give better diagnoses with more up to date knowledge than 90% of human doctors) and sets up a treatment carefully calibrated to work best for you.

You will be able to pay for these services because computers make them cheap to deliver, and also because many of the bills you dread now will go down.  As higher education becomes more skill-based (and the liberal arts portion is increasingly delivered in smarter ways), it is likely to become much, much cheaper — the modern college lecture is using a teaching technique invented in Greco-Roman times when students listened as teachers read scrolls, and not much has changed since. So you won’t have to save up for a generation to send your kids to college — and they won’t have to spend a generation paying off the loans to cover the rest.  Your taxes will be lower in proportion to your income — both because as governments become more efficiently managed they can balance their budgets and because with balanced budgets they will retire the old debt. Should you need legal assistance, in most routine cases it will become much easier and cheaper to get — just as tax software programs now give many consumers the kind of help it once took trained accountants to deliver.

This is the essence of progress: as we move forward less of our society’s time and energy goes into just staying alive; more of it goes into living better.  The key to that now is to move as quickly as possible to reshape these critical professions with the full power of information technology.

Nobody has a blueprint for the post-industrial world, and the pessimists and doomsayers will always be with us.  The porters’ union probably once fought the wheel and predicted mass unemployment and falling living standards if those crazy things ever caught on. How would honest porters earn a living if everybody used those new-fangled wheelbarrows?  And if the porters are out of work, what about all the shopkeepers and tavern owners who depend on the porters as customers?  Alas, oh woe and alackaday!

Ban the wheel!

We have our naysayers and prophets of doom in the US, and many of our intellectuals are so caught up in and so well paid by the blue social model that they literally cannot conceive that the radical changes shaking their world should be embraced rather than resisted.  But one of the great secrets of America’s historical success is that the voices of nostalgia are weaker here than in other places.

Krugman and many of his colleagues at the Times are, I think, blinded by how good things once were.  This is understandable; I felt that way for many years myself and it was only slowly and painfully that I gave up on the blue social model that once looked so good.  But the country and the times we live in demand more than angry and ultimately despairing nostalgia from our thinkers and opinion leaders.  Let us hope that it comes.

This post originally appeared at The American Interest.

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