October 12, 2004

# 166: The watchdog is sleeping in front of the fireplace...

P. Krugman

Paul Krugman in Checking the Facts, In Advance (10/12/04) covers the waterfront of domestic issues he thinks likely to come up in the next and final presidential debate (Wednesday, October 13). It was an easy column for him to write. Think of it as the Mother of all re-cycle jobs. Since the Squad has already commented on these subjects before in response to Krugman's earlier columns, we will try our best to say something original. But to quote the president, it's going to be "hard work."

First, on health care, the Wall Street Journal [subscription link] had an editorial today that restated many of our previous points from a fresh perspective. This makes an excellent response to Krugman's claim that the Kerry proposal would do nothing to restrict patient choice:

"On its current path, Medicare alone is projected to gobble up perhaps 35% of all federal spending by 2030 (up from about 13% now). And our readers know that companies are finding it harder to afford health insurance for employees, due both to incredible but expensive innovations and especially a third-party payment system that discourages price competition.

It doesn't help that the politically easy course is to declare health care a "right" and promise everything. But the truth -- as long Canadian wait lists attest -- is that health care is a scarce good like any other and can't escape the laws of economics. As such it will be "rationed" one way or another. The only question is whether that is done through prices and individual choice, or through the brute political force of government."

On jobs and unemployment Krugman trots out the old talking points about Bush being the first president since Herbert Hoover to preside over a payroll decline and that the recent growth in employment is not enough to keep up with population. Once again he brings up the specter of a declining labor force participation rate because, he says, job seekers are discouraged and are dropping out of the labor market. Sorry, PK, but the participation rate is too squishy a term to say much of anything about discouraged workers. There are too many other factors involved. However, the Bureau of Labor Statistics DOES track discouraged workers specifically in their household survey.

The unemployment rate including discouraged workers (blue line) and not including discouraged workers (red line) is shown in the following chart. X. The red line is the government’s official unemployment rate.

Chart, unemployment rates

The rate of discouragement is the difference between the red and blue lines and is shown by the yellow line near the bottom. Notice that while the percent of discouraged workers seems to rise and fall with the business cycle, the changes are very small (about a 10th of a percent) and little more than rounding errors. Clearly Krugman has no valid point here.
On deficits and fiscal responsibility Krugman continues to paint a bleak outlook and blames it on the Bush tax cuts and the Iraqi war. We went to the recent Congressional Budget Office (CBO) report on the outlook through 2014 and put together the chart below.

chart, projected 'worst case" deficit and GDP

This chart shows the projected GDP and projected deficits for the next 10 fiscal years under what we have called "worst case" assumptions. These are based on selected CBO assumptions that 1) the Bush tax cuts are made permanent, 2) the Alternative Minimum Tax is modified so that it collects less revenue, 3) the real growth rate in GDP falls from the current 4% to only 2.5% during in the next 10 years and 4) that the current expenditures in Iraq and Afghanistan continue at currents rates for the FULL 10 years (adding $270 billion to total spending). We put "worst case" in quotes because events can always make projections even worse, but we think these assumptions are pretty dire. In any case, under the circumstances the deficit shown in the chart is not all that scary. It stays a little over 3% of GDP over the entire period. If GDP were to continue growing at 4% we might even have a surplus at some point.
This probably explains why recent yields on the 10-year Treasury note are both low and lethargic. Recall that under the gospel of Rubinomics, the holy writ of fiscal conservatism before which born-again Democrats worship, the long bond is the all-seeing, all knowing arbiter of the economic health of the nation. “You can’t fool the bond market” is the Rubinomics watch word. Thus, if things were anywhere near as bad as Krugman has been claiming these yields should be skyrocketing and “barking” like a guard dog.

chart, yields on 10-year note

Instead the watchdog is sleeping in front of the fireplace and every time Krugman tries to rouse it with a scare story (e.g., the U.S. is headed toward banana republic-hood) the dog just yawns, rolls over and goes back to sleep. [See Squad Report # 36 for a fuller discussion of Rubinomics]
We rarely use the word "lying" in our reports, but Krugman is definitely distorting the facts for partisan purposes. Nothing new there, of course, but we thought it would be good to point it out once again.

[The Truth Squad is a group of economists who have long marveled at the writings of Paul Krugman. The Squad Reports are synopses of their discussions. ]

Posted by John Weidner at October 12, 2004 6:17 PM
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