October 20, 2005

#194: Who does he think is spending all the money?

P. Krugman


In The Big Squeeze (10/20/05) Paul Krugman faces economic reality with his usual left-wing partisan edge. Also, as usual, he can’t quite get his square left-wing peg to fit the circle of facts. The issue he discusses in this column is globalization; it’s impact on US labor and what, if anything, should be done about what he sees as the erosion of America’s working middle class. His basic sentiments are as put this way:

“There was a time when the American economy offered lots of good jobs - jobs that didn't make workers rich but did give them middle-class incomes. The best of these good jobs were at America's great manufacturing companies, especially in the auto industry”.
And the basic problem is stated this way:
“But it has been a generation since most American workers could count on sharing in the nation's economic growth. America is a much richer country than it was 30 years ago, but since the early 1970's the hourly wage of the typical worker has barely kept up with inflation”.
The sentiment is head-in-the-sand drivel and Krugman’s statement of the basic problem is incorrect. The US economy is not stagnant; it’s dynamic and innovating. And contrary to popular belief the US is not losing it’s manufacturing base. The US share of manufacturing output (on a value added basis) remains the highest in the world and is not in decline. What has declined is manufacturing employment–we’re making more stuff with fewer workers.

Earth to Krugman: This is called progress, aka higher productivity

And the way American labor will adjust to this progress in the same manner it always has–since the invention of the lathe. Skills will be upgraded and the jobs shed by manufacturing will be shifted into higher value added enterprises. It’s happening as we speak.

Krugman would have us believe that since the 1970s inflation-adjusted National Income has tripled but the “typical” worker is no better off than 30 years ago. This is nonsense. Has he never been to a booming mall, or crowded car dealership, or waited for a table in a popular restaurant? Who does he think is spending all the money? Maybe he thinks the typical worker is a migrant farm worker or checkout clerk at Best Buy. But wait. There’s actual evidence. Here are two charts from the web site of Krugman’s buddy, Brad DeLong. The top chart shows the share of domestic income going for wages and salaries excluding employer contributions to pensions and health care; the lower chart includes these contributions. Either way, Krugman is wrong. Even a 6 percent smaller share (top chart) of a pie that’s tripled since the 70s represents substantial progress.

De Long chart

So, having conjured up a problem that does not exist and a labor market adjustment that is routinely resolving itself, how does Krugman get out of this pickle? Incredibly, he concludes by telling us that “denial is not an option” and that “something must be done.” What a guy!

[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 20, 2005 10:10 AM
Weblog by John Weidner