From Paul Krugman’s NYT op-ed ”That Hissing Sound“:

“The economic recovery since 2001 has been disappointing in many ways, but it wouldn’t have happened at all without soaring spending on residential construction, plus a surge in consumer spending largely based on mortgage refinancing.” (our emphasis)

Krugman has staked much of his reputation as of late on the bet (hope) that the economy is not improving under the policies of the Bush administration. Since the economic indicators have been consistently strong, Krugman has been forced to switch gears and charge that while the reported numbers are positive, they are masking really bad things. But that is a short-term strategy because if the really bad things don’t materialize soon people will wonder what could be so bad. This is the conundrum that Krugman and his left-of-center economists find themselves in.

So Krugman has shifted gears and is employing yet another analytical obfuscation. This one essentially says “sure things are okay today, but the recovery is based entirely on the un-sustainable housing bubble and that bubble has just started to burst.” This is a smart tactical move on Krugman’s part because continuing positive economic indicators don’t hurt the theory, so Krugman’s nay-saying is unassailable unless and until such time as the housing bubble bursts and the economy remains strong. By that time, he’ll be on to a new theory or we’ll be in a new administration.

The only problem for Krugman is that he over-reached with his comment: “The economic recovery since 2001 has been disappointing in many ways, but it wouldn’t have happened at all without soaring spending on residential construction, plus a surge in consumer spending largely based on mortgage refinancing.“  This simply is not true. Investment continues to be the main driver of the current expansion, not consumption as Heritage Foundation reports:

Business investment (i.e., non-residential fixed investment) has grown by 9.1 percent, on average, since the passage of the 2003 tax cuts—nearly double the average rate of 4.8 percent since 1974. The 2003 tax cuts reduced the cost of capital investment and temporarily allowed businesses to write off more investment costs. These incentives encouraged business expansion over the past nine quarters. The bonus depreciation part of the 2003 tax bill expired at the end of 2004, which could slow business investment in the future. To ensure continued robust investment expansion, Congress should make permanent all of the tax cuts on capital in the 2003 tax legislation.

This is a double-strike against Krugman since not only is it business investment (not real estate gain driven consumer investment) that is a big factor in the economic expansion that we are experiencing but also that this is in part the result of a Bush economic policy designed to do exactly that. Ouch!

Update: New York Times rejects Krugman’s “no brainer” on China (Scrivener.net)

This entry was posted on Sunday, August 7th, 2005 at 9:38 pm by Insider and is filed under I knew I'd use my Econ major, Media. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.