Zombie economics

The New York Times recently published an op-ed by columnist Paul Krugman entitled "When Zombies Win," in which the author laments that the extension of lower tax rates are a puzzling example of the triumph of "free-market fundamentalists" (as an aside, we prefer the term "free enterprise") whom, he declares, "have been wrong about everything."

He goes on to say that such ideas (like the idea that lower tax-rates encourage growth) are "zombie economics" which he defines as "doctrines the crisis should have killed but didn't."

As evidence, he offers this startling sentence: "How, after the experiences of the Clinton and Bush administrations -- the first raised taxes and presided over spectacular job growth; the second cut taxes and presided over anemic growth even before the crisis -- did we end up with bipartisan agreement on even more tax cuts?"

While Mr. Krugman's own biases are so obvious to anyone who is familiar with his writing that such statements will probably come as no surprise, we believe it is worth pointing out that in this sentence he is completely and utterly wrong on his economic history.

It's true that the (also somewhat biased) Nobel prize committee awarded Paul Krugman a Nobel prize in economics, but he seems to have missed the fact that it was only after Bill Clinton and the first GOP-controlled Congress in forty years enacted spending restraint in 1996 enroute to a capital gains tax rate cut in 1997 that economic growth took off in the latter half of the 1990s! See the chart below, showing quarterly GDP growth as a percentage, and note the presence of GDP growth above 6% (in chained 2005 US dollars). Note that the roaring GDP growth rates began after the 1996-1997 changes (first red arrow on the left side of the X-axis).

And, while we have several issues with some of the economic moves of the Bush administration, it is also true that US GDP went from around $11 trillion to over $13 trillion (in chained 2005 dollars) under the lower tax rates that George W. Bush enacted in his first term (see GDP chart in this previous post). Note also in the chart above that GDP growth of 6.9% was seen in Bush's term in 3Q2003, in conjunction with the enactment of his tax rate cuts (second red arrow on the right side of the X-axis). Growth rates of 3.0%, 3.5%, and 4.1% in 2004 and 2005, and of 5.4% in the first quarter of 2006 (which can also be seen in the chart above), can hardly be described as "anemic."

If we wanted to, we could also go back and look at growth after the JFK tax cuts (which he proposed in 1962 and which were enacted in 1964, after his death), when GDP grew at quarterly rates of 10.2% (1Q1965), then another 5.5% (2Q1965), then another 8.4% (3Q1965), then another 10.0% (4Q1965) and another 10.2% on top of all of that (1Q1966)!

Is Mr. Krugman ignorant of these simple facts of economic history, or is he trying so hard to prove that "free markets" are a failure that he can't let such trivial details get in the way of his larger argument?

We propose that it is Mr. Krugman's view of freedom as a failure that is the dead idea that should have been laid to rest long ago. Perhaps the issue was not settled yet in 1968, when the seminal zombie movie Night of the Living Dead was released, and the United States and the Soviet Union were involved in a space race to prove which economic system -- one based on free enterprise or one based on central government control -- was more viable, but four decades later it is inexcusable for an economist of Krugman's stature to pretend otherwise. We all know how the race to the moon turned out, as we wrote on the anniversary of Apollo 11 last year.

The question "Do lower tax rates and other economic policies that enhance the freedom of individuals to start businesses and employ their talents as they themselves see fit promote growth or not?" has been decisively settled by history as well -- we invite readers to view previous posts on that subject such as "Why can't we all just get along (on economic policy)?", "Growth is the answer: the primacy of human creativity," and "'Reducing taxes is the best way open to us to increase revenues."

Even better, we would recommend readers listen to another Nobel laureate economist, and one who had a much better grasp of history: Milton Friedman. For starters, we have linked to some of Milt Friedman's discussions on these important subjects in previous posts such as "A failure of government, not of private enterprise," and "The healthcare black hole."

Another excellent resource is the extensive interview of the late Professor Friedman from 1999 which was recently published on Youtube here.

It is amazing that the events of the twentieth century did not settle this issue once and for all, but as long as publications such as the New York Times continue to give a platform for the dissemination of arguments against free enterprise, the intellectual fight against zombie economics must continue.