I have avoided commenting lately on Krugman’s tiresome rantings because almost every column of his is limited to some combination of the following: 1) Republicans are evil; 2) The economy needs more government spending; 3) People who don’t agree with 1 or 2 are either stupid or evil (probably both).
Today’s column, though, takes his willful economic malpractice to new lows. He starts out describing how every Republican candidate is just a version of Gordon Gekko of Wall Street fame (see theme 1 above). His target then becomes focused on Mitt Romeny, particularly the activities of his former business, Bain Capital.
Bain Capital would perform leveraged buy-outs of companies, increase their value, and then sell them. Krugman’s characterization calls up not only Gordon Gekko but also Richard Gere’s Edward Louis (before he was transformed by Julia Roberts in Pretty Woman). These financiers don’t create things. They own them. And sell them. Bad people, you see.
The malpractice comes in not by noting that the leveraged buyout industry often cuts jobs from companies they take over. In fact, it is not hard to believe the direct effects of their actions cause job losses (according to Krugman, jobs are never “eliminated” or “reduced” but always “destroyed.”). But what of the indirect effects? That’s where the value-added of being trained in economics should come in handy. Schumpeter brought the idea of creative destruction to the forefront of understanding economic growth, but the kernal of that idea goes way back to Adam Smith. Of course Krugman knows this. He knows a lot of things he won’t say.
As I’ve argued before, there is no guarantee that growth will produce more jobs or better wages. As the economy is transformed again and again, the value of labor (compared to capital and technology) may fall. Most technical innovations improve the marginal productivity of labor and capital, so it is not certain that more labor will be necessarily be used as technology drives growth. But it usually does. Over a century the US and other countries went from a labor market dominated by agriculture to a manufacturing economy to an information/service economy. Even with that transformation, real earnings have risen and employment has steadily increased. During the period Romney was “destroying” jobs at Bain capital, job growth continued to escalate. The question is not whether companies subject to leverage buyouts experience net job gains or losses (I imagine it is the latter). The question is what other jobs are created as wealth in the economy is created? In short, what are the indirect effects?
The identical logic applies in the case of foreign trade. Jobs that are eliminated due to competition from foreign producers are replaced as people have more real income due to the cheaper foreign goods and, consequently, their demand for domestic and foreign goods rises, creating job growth.
The political problem with creative destruction is that creative destruction gets on the news more often than efficiency-induced job growth. Layoffs tend to come in bulk, hundreds or thousands at a time. These layoffs make for easy headlines and easy villains. But hiring usually occurs one job at a time, not en masse. And they occur in very different places. When industries are made more efficient, the job growth created will not usually be in that industry; it will be scattered across the array of industries that see higher demand because of increased wealth.
It is easy for the media to show pictures of corporate tycoons callously issuing pink slips to workers. It is the job of the demagogue to show only that image and to exploit it for political gain. It is the job of the economist to remind people that such an image tells only part of the story.
So what does that make Paul Krugman?