Arguing With Zombies: Economics, Politics, and the Fight for A Better Future

Paul Krugman, “Arguing With Zombies:  Economics, Politics, and the Fight for A Better Future,” W.W.Norton & Co., 2020, 414 pp.

Krugman is a winner of the Nobel Memorial Prize in Economic Sciences.  In this book, he gathers more than 90 articles, most from his New York Times columns, most often explaining economic issues.  Each of the 18 book sections is provided with an overview.  

Krugman takes on topics that include social security, health care, the 2008 financial crisis and its aftermath (essays that comprise more than a third of the book), the myths of austerity, Europe’s economic problems, tax cuts, trade wars, inequality, climate change, and, not least, the damage being inflicted by Donald Trump and his enablers. Many of the pieces are hard-hitting arguments against zombie ideas, “an idea that should have been killed by evidence, but refuses to die.” Zombie ideas, Krugman asserts, are put forth by “influential people” who “move in circles in which repeating” such ideas “is a badge of seriousness, an assertion of tribal identity.” Alternatively, ideas such as climate change-denial, which persist despite prolific evidence, are “better described as cockroach ideas—false claims you may think you’ve gotten rid of, but keep coming back.” There are plenty of villains in Krugman’s crosshairs: the “anti-labor” extremist Brett Kavanaugh, “flimflam man” Paul Ryan, Mitch McConnell, Bernie Madoff, George W. Bush and his “fraudulent march to war,” and Ronald Reagan, to name a few. Many essays focus on the current president. “It’s not just that Trump has assembled an administration of the worst and dimmest,” writes the author. “The truth is that the modern GOP doesn’t want to hear from serious economists, whatever their politics. It prefers charlatans and cranks, who are its kind of people.”

Krugman is an enthusiastic fan of behavioral finance.  Practitioners of this approach emphasize two things.  First many real-world investors bear little resemblance to the cool calculating investors of efficient market theory; they’re not exempt from herd behavior or bouts of irrational exuberance and unwarranted panic.  Second, even those who try to base their decisions on cool calculation often find that they can’t, ‘that problems of trust, credibility, and limited collateral force them to run with the herd.  Behavioral economics tries to account for investor’s apparent irrational behavior by linking their behavior to known biases in human cognition, like the tendency to care more about small losses than small gains or the tendency to extrapolate too readily from small samples.  Behavioral economists like Robert Schiller correctly diagnosed the 2008 crash. (Pg. 145).

My Notes:

Pg. 10:  Krugman sees Trump not as a departure from the past so much as the culmination of where movement conservatism* has been taking us for decades.
 (*Movement conservatism maintains that Government, and all their institutions and experts, is the problem; Experts are tagged as “The Deep State.”)

Pg. 30f:  Every economics textbook talks about ‘public goods’ like national defense and air traffic control that can’t be made available to anyone without being made available to everyone, and which profit-seeking firms, therefore have no incentive to provide.  Health care is another.  Yet, the American health care system, outside of Medicare and Medicaid, is unique in the extent to which it relies on the private sector, and it’s also unique in its incredible inefficiency and high costs.  We spend far more per person on health care than any other country—75 percent more than Canada or France—yet we are near the bottom among industrial countries in indicators from life expectancy to infant mortality.(p 39).

Pg. 35:  Timing was crucial in passing The Affordable Care Act.  The Democrats briefly attained unified control in 2008-‘09 that came largely from the economic catastrophe that unfolded at the end of the Bush administration.  Nancy Pelosi’s political leadership was also crucial—the same leader who defeated Bush’s attempt to privatize Social Security.  Democrats left as much as possible of the existing health care system in place to get this through, even though health-insurance tied to employment certainly handcuffs employees wanting to move to a better job.

Pg. 65:  In June 2012 the Supreme Court made one piece of the ACA law, the expansion of Medicaid to everyone up to 133 percent of the poverty line, optional for states.  Almost every state government controlled by Republicans immediately opted out. 

Pg. 67fff:  The Affordable Care Act (ACA) depends on a ‘three-legged-stool.  
(1)  Private insurers were barred from discriminating based on pre-existing conditions; 
(2)  individuals were required to buy insurance meeting minimum standards---the ‘individual mandate—even if they were currently healthy; 
(3)  and subsidies up to 100 percent were provided to make insurance affordable.  

All three legs are necessary or the program cannot work.  (Also, the poorest Americans are covered by Medicaid, so private premiums don’t matter).  

Twenty-seven million Americans have attained coverage through ACA.  Yet, Republicans concluded that if any leg is kicked out, down will come the edifice.  So: first, they are dead set on repealing the individual mandate; second, they’re determined to slash subsidies; finally, we have the Cruz amendment which would allow insurers to offer bare-bones plans with minimal coverage and high deductibles.  And what is the Republican plan?  None.  (John McCain cast the crucial vote against repeal of the ACA).

Pg. 71:  Under ACA many of those with higher incomes—up to 400 percent of the poverty line, or more than $95,000 for a family of four—are eligible for subsidies.  That’s 59 percent of the population, but because many of those with higher incomes get insurance through their employers, it’s 83 percent of those signing up on the exchanges. 

Pg. 83f:  In May 2005 Krugman wrote about the bursting of the 2000 stock market bubble: “…the job losses would have been much worse if the stock bubble hadn’t been quickly replaced with a housing bubble.”  “So what happens if the housing bubble bursts?  It will be the same thing all over again unless the Fed can find something to take its place.”  (So we have extraordinarily low-interest rates and a stock market boom again,).

Pg. 86:  (He wrote in ) August 8, 2005.  News that the US housing bubble is over won’t come in plunging prices; it will come in the form of falling sales and rising inventory.  The coastal housing prices have risen much faster than the national average, clearly point to a bubble. 

Pg. 132-140:  ECONOMIC HISTORY:

Pg. 132f:  It all began with Adam Smith’s “The Wealth of Nations” in 1776.  Over the next 160 years the consistent message was ‘trust the market.’  However, the Great Depression put a dent in this message and John Maynard Keynes was turned to for both an explanation of what happened and a solution to future depressions.  Keynes described his analysis in his 1936 masterwork, The General Theory of Employment Interest and Money as ‘moderately conservative in its implications.  He wanted to fix capitalism, not replace it.  He called for active government intervention—printing more money and, if necessary, spending heavily on public works—to fight unemployment during slumps.  (WWII brought us out of the Depression, inadvertently using all of Keynes recommendations—some recommendations of Keynes had been used by FDR but not enough to break the Depression).  In any event, ever since WWII the story of economics is to a large degree the story of a retreat from Keynesianism and a return to neoclassicism (very little regulation).  Milton Friedman’s attack on Keynes began with the doctrine known as monetarism.  Monetarists asserted that all that needed to be done was to keep the nation’s money supply, the sum of cash in circulation and bank deposits, growing on a steady path.  Trying to push unemployment below its natural level of 4.8 percent would lead to a combination of inflation and high unemployment—a prediction that was borne out by the stagflation of the 1970s, which greatly advanced the credibility of the anti-Keynesian movement.  Now, however, the assumption and models of economists are being challenged as they rest on the assumption of often non-existent rational behavior and the periodic failure of models to predict the financial crashes that occur with regularity.

Pg. 135:  Eugene Fama of the University of Chicago promulgated the ‘efficient market hypothesis’ which claims that markets price assets precisely at their intrinsic worth given all publicly available information.  By the 1980s, finance economists, notably Michael Jensen of the Harvard Business School, were arguing that CEOs should concentrate on shareholder value, not stakeholder value. 

In 1973-’74 stocks lost 48 percent of their values and in 1987 the Dow plunged nearly 23 percent in a day for no clear reason.

The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward—the so-called Capital Asset Pricing Model or CAPM is wonderfully elegant.  This model tells you how to choose your portfolio and even tells you how to put a price on financial derivatives.  Some economists, Larry Summers and Robert Schiller were not sold on the model.  Larry Summers, a top Obama economist, once mocked finance professors with a parable about ‘ketchup economists’ who have shown that two-quart bottles of ketchup invariably sell for exactly twice as much as a one-quart bottle of ketchup and conclude that the ketchup market is perfectly efficient.

Pg. 142:  The Fed dealt with the recession that began in 1990 by driving short-term interest rates from 9 percent down to 3 percent; the 2001 recession by driving 6.5 percent rates to 1 percent; and the 2008 recession by moving rates from 5.25 percent to zero.  But at zero, conventional monetary policy loses all traction.  People just hoard cash.  Only Keynes’s fiscal stimulus remains as a tool at that point.

Pg. 166:  The belief that America suffers from a severe ‘skills gap’ is one of those things that everyone important knows must be true because everyone they know says it’s true.  It’s a prime example of a zombie idea—an idea that should have been killed by evidence, but refuses to die.  Workers in every major category in 2014 are doing worse than they were in 2007.  It appears the long-term unemployed problem is the very fact that they are out of work, employers are more attracted to those with a job.

Pg. 175:  The European Union arose out of the desire to end the continent’s history of war by drawing its nations together with ever-closer economic links.  In 1952 came the Coal and Steel Community which integrated French and German heavy industry.  Then, in 1959, came the Common Market which eliminated all tariffs between its members.  Then came things like harmonization of regulations, free movement of people, joint development aid to lagging regions, a common currency for most in 1998 (which may be ‘a bridge too far’), and along the way a change in name to the European Union.

Pg. 220:  There are, let’s face it, some people in our political life who pine for the days when minorities and women knew their place, gays stayed firmly in the closet, and congressmen in the ‘50s asked, “Are you now or have you ever been?”

Pg. 221f:  Article written in November 2017: The Biggest Tax Scam In History.  One thing is clear about the tax bill being rushed through Congress without hearings is that this bill will hurt most Americans.  The core of the bill is a huge redistribution of income from lower and middle-income families to corporations and business owners. 

Pg. 247f:  Under Trump we now basically have an EPA run on behalf of polluters, an Interior Department run by people who want to loot federal lands, an Education Department run by the for-profit schools industry, and so on.  (And a Center of Disease Control decimated in 2018).

Pg. 249ff:  Krugman’s NYT June 3, 2018 article dealt with Trump’s Trade War.  Beginning with FDR and his dismantling the infamous Smoot-Hawley tariff of 1930 that set-off the depression, the US has sought to make trade gradually freer, believing closer economic integration is good for peace and the free world alliance.  But the process by which trade liberalization has been sought was all about political realism rather than abstract ideals; so producer interests matter much more than consumer interests as they are better organized and understand the stakes involved.  The classic case is sugar where for many years US import quotas kept prices several times above world levels.  But FDR introduced the Reciprocal Trade Agreements Act (RTAA) in which America would agree to reduce tariffs on foreign goods if foreign governments reduced tariffs on our goods.  For this process to work, Congress had to step back and allow the executive branch to negotiate deals, then vote those deals up or down.    

Then in 1947, the US and its partners established the General Agreement on Tariffs and Trade (GATT) which allowed exceptions to rules and commitments under four conditions:

1.      Market disruption—a sudden surge of import too fast for domestic producers to adjust to;

2.      National security—making sure you’re not dependent on potential enemies for crucial goods;

3.      Unfair practices—tariffs to counter, say subsidized exports;

4.      Dumping—when foreign firms seem to be selling goods below cost in an attempt to establish market domination.

In the US it has been left to the executive branch to determine when one of these justifications applies.  Not Congress—that would just reopen the whole can of worms FDR closed in 1934.  Instead, the executive branch is supposed to follow a quasi-judicial procedure, in which investigating agencies determine whether one of these conditions is met, then the president decides whether to take action.  Now Trump has imposed tariffs using the national security argument in a context that makes no sense.  Using the National security excuse, Trump has proposed huge tariffs on Canadian aluminum.  So Trump is in effect both violating US law and throwing the world trading system under the bus.  He has basically abrogated the rule of law and replaced it with his personal whims. 

INEQUALITY

Pg. 259:  Around 1980, CEOs of major corporations were paid about twenty times as much as the average worker—now, 2018, it is more than three hundred, while the wages of ordinary workers, adjusted for inflation, have grown modestly or not at all for the past four decades.  A Harvard study just concluded that the concentration of wealth in the US reached a trough in the late 1970s at a level not seen since the nineteenth century, then surged rapidly back to the 1920s levels.  Current wealth numbers confirm the general picture of a dramatic and rapid increase in economic inequality in the US. (P. 279).

Pg. 286f:  (although Charles Murray’s book “Coming Apart” accurately describes what we see when we examine US society, Krugman has some pertinent comments on matters not covered by Murray).  There has been a dramatic plunge in teenage pregnancies among all racial groups since 1990 and a 60 percent decline in violent crime since the mid-nineties.  Yet, something is clearly happening to the traditional working-class family.  The obvious answer is a drastic reduction in the work opportunities available to less-educated men. For lower-education working men, however, it has been all negative.  Adjusted for inflation, entry-level wages of male high school graduates have fallen 23 percent since 1973.  In 1980, 65 percent of recent high-school graduates working in the private sector had health benefits, but by 2009, that was down to 29 percent.  Traditional values aren’t as crucial as social conservatives would have you believe—and, in any case, the social changes taking place in America’s working class are overwhelmingly the consequence of sharply rising inequality.   (These statistics are not mentioned in Murray’s book, a book I reported on some months ago.)

Pg. 292:  Enrico Moretti’s 2012 book “The New Geography of Jobs” argues that structural changes in the economy have favored industries that employ highly educated workers—and that these industries do best in locations where there are already a lot of these workers.  As a result, these regions are experiencing a virtuous circle of growth: Their knowledge-intensive industries prosper, drawing in even more educated workers, which reinforces their advantage.

Most of the numbers you see regarding income trends in America focus on households rather than individuals, which makes sense for some purposes.   But when you see a modest rise in incomes for the lower tiers of the income distribution, you have to realize that all of this comes from the women, both because more women are in the paid labor force and because women’s wages aren’t as much below male wages as they used to be.

Pg. 323:  Many Progressives are labeling themselves as socialists and a significant number of voters, including a majority under thirty, say they approve of socialism.  What these Americans who support ‘socialism’ actually want is what the rest of the world calls social democracy: a market economy, but with extreme hardship limited by a strong social safety net and extreme inequality limited by progressive taxation.  They want us to look like Denmark or Norway, not Venezuela.  These social democracies have high levels of entrepreneurship—because people are more willing to take the risk of starting a business when they know they won’t lose their health care or plunge into abject poverty if they fail.

Pg. 339:  The majority of US greenhouse gas emissions come from electricity generation and transportation.  We would cut generation-related emissions by two-thirds or more simply by ending the use of coal and making more use of renewables without requiring that Americans consume less power.

 Pg. 408:  Conservatives have generally always tended to view the assertion that government has any useful role in the economy as the thin edge of a socialist wedge.    

CRYPTO CURRENCY

Pg. 411ff:  Krugman has two main problems with cryptocurrencies: Transaction costs and tethers.  People historically have shifted away from cash transactions, first toward payments by check, then to credit and debit cards and other digital methods.  Cryptocurrencies are going exactly in the opposite of the long-run trend.  Instead of near-frictionless transactions, we have high costs of doing business, because transferring a Bitcoin requires providing a complete history of past transactions.  Instead of money created by the click of a mouse, we have money that must be mined—created through resource intensive computations.  In other words, cryptocurrency enthusiasts are effectively celebrating the use of cutting-edge technology to set the monetary system back three hundred years.  Also, Cryptocurrencies have no tether to reality.  A total collapse is a real possibility and this reality is more likely than not.  Just what problem does cryptocurrency solve other than tax evasion and illegal businesses?