Peddling Prosperity: Economic Sense and Nonsense in an Age of Diminished Expectations

by Paul Krugman

Newsweek hailed Paul Krugman as "a superstar among economists" and went on to praise Peddling Prosperity as "the best primer around on recent U.S. economic history." Others joined the chorus. This wonderfully received book finds him in top form, observing the years he's dubbed "the age of diminished expectations." The past twenty years have been an era of economic disappointment in the United States. They have also been a time of intense economic debate, as rival ideologies contend for policy influence. But strange things have happened to economic ideas on their way to power: they've been hijacked by policy entrepreneurs―economic snake-oil salesmen, right or left, who offer easy answers to hard problems. Supply-siders rose to power with Ronald Reagan and not only cured nothing but left behind a $3 trillion debt. Krugman finds an unhappy parallel in those who shape policy within the Clinton administration.

Genres: Economics, Nonfiction, Politics, History, Business, Time Travel, Social Science

303 pages, Paperback

First published January 1, 1992

About the author

Paul Robin Krugman is an American economist, liberal columnist and author. He is Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs, Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times. In 2008, Krugman won the Nobel Memorial Prize in Economics for his contributions to New Trade Theory and New Economic Geography.

Reviews

[Aaron Arnold · Rating 4 out of 5]

I always feel the same way after I finish one of his books: "Man, that makes total sense, how could anyone reasonably disagree that inequality is skyrocketing/we need universal health care/China needs to revalue it's currency/the Republican Party is insane/free trade rules?" Even his detractors, like the Wall Street Journal editorial crew, or the legions of bloggers who exist only to find fault with his writing, readily admit that he's been immensely successful as a popularizer of economics and as a partisan for his own views. I like him not only because he shares my views as a liberal of the New Deal/Great Society school of thought, but because he has a way of illustrating complex debates in a way that's not only clear, but that seems to me as the way I would have looked at it all along, if only I could have put it into words, and he gives me a solid framework to say why.

It's very cliche to compliment someone as "objective" because they "criticize both sides" (think of all that fawning praise for South Park back in the day) and take a pox-on-both-your-houses attitude towards big issues. I think that's dumb, not only because it assumes that there are only two sides to a debate, and that it's always somehow possible to take an average of each position and make sense (does it really make much sense to invade half of Iraq, or cut income taxes for people whose last names are A-M?), but because it rewards an unthinking "moderatism", where you don't really have to think about what people are saying, only that you want to somehow triangulate yourself and avoid doing any critical thinking. That's exactly what this book is about - criticizing both right-wing proponents of supply-side and Friedmanist monetary theories as well as left-wing proponents of strategic trade theory in a way that illustrates not only why you can't simply say "let's split the difference between these theories and call it a compromise", but also why it's vital to take the time to think clearly about what people are telling you and whether their numbers add up, and why you can't always trust people on your "side".

Peddling Prosperity is very clearly a book aimed at a popular audience, both because most (but not all) numerical exercises are relegated to the appendix and because it's structured as a narrative, of the near-mortal wounds that Keynesian economics suffered in the 70s after its triumphs in the postwar era, the rise of potential conservative alternatives, and those alternatives' eventual failures and the (seeming) Keynesian resurgence in the early 90s. It was published in 1994, so it's a bit out of date, but it's actually very interesting to see echoes of the then-cutting edge worries about Japan and transpose them 15 years to the present-day, since most of the debates about government activism, the deficit, and international competitiveness haven't aged a day. Press releases and popular discussions of issues certainly haven't gotten any more sophisticated, so it's somehow still a breath of fresh air to read explanations of trade or productivity that are aimed at a wide audience without being dumbed-down to sound bites.

Virtually every section, if you read closely, follows an A-B-C sort of script: someone is claiming A must be true, but here is data B, which actually implies C, so therefore they're wrong. This pattern shows up very frequently in his writing, and this book is no exception. Harsh, but always rigorous discussion of the history and reasoning behind various alternatives to Keynesian economics over the years are backed up by charts, graphs, and most importantly, the models behind these ideas. Part of the reason why stupid notions like endless tax cuts for rich people persist in the world, aside from the obvious self-interested aspect of wealthy donors and lobbyists, is because those notions are sold within a seemingly-plausible framework with a strong narrative: by cutting taxes for rich people, they will be able to create more jobs for people and more prosperity than if that wealth is given to other people; the more taxes you cut, the more jobs you create, and conversely, the more taxes you raise on these wealth-creators, the more jobs you destroy. By walking the reader through these implicit models, showing you the data, and giving you the reasons why they're wrong, Krugman both avoids simply throwing out ad-hominems (though there are some barbs in here) and gives you a way to think about future claims. One of the reasons why he has earned such a reputation as a strong liberal is due to his staunch opposition to the Bush tax cuts in 2001 and 2003; reading the math behind why the Reagan tax cuts failed (and, closer to home, why the recent late-2010 extension of the Bush cuts will fail utterly to bring prosperity), you become... not particularly optimistic, let's say, about people's ability to learn from their mistakes.

The subtitle coins an excellent phrase which I am surprised has not gained wider currency: the Age of Diminished Expectations. While this book was written before the Clinton-era boom had really taken off, I remember growing up in the 90s and thinking of it as a time of seemingly permanent growth. Looking from today at the numbers, though - the steady decrease in productivity growth, the increasing inequality, the growing strength of the truly awful movement conservative wing of the Republican Party - I'm amazed at how satisfied people are with such mediocre growth when compared to the global trente glorieuses after the war. It would be easy to despair at the gradual lowering of the bar, but even during his discussion of massive failures, like the monetarist experiments in Thatcher-era Britain, the emphasis is on the math and logic behind why those policies failed, which prevents the book from sounding too depressing even if the conclusions behind it are plenty depressing.

The ending section about the rise of the strategic traders in the Clinton administration is a model of analytical clarity - the presentation of subtle economic logic about how the budget of a national economy is not like that of a company's balance sheet and all the mischief that that fallacy immediately brings to mind Obama making exactly these mistakes with his Council on Competitiveness, chaired by the CEO of a company that has outsourced thousands of jobs and shuffled around billions in taxable income. So even though the endless recurrence of terrible economic ideas will not end anytime soon, the book offers invaluable perspective on their sources and how to evaluate them. The focus is always on the data, and while Krugman may not always be right (his dismissal of critics of Japan's trade surplus in the 90s sits oddly with his criticism of China's seemingly very similar trade surplus in the 00s, even given the vastly different economic circumstances), he gives you all the tools and ammunition you need to form a coherent counter-argument.

[G. Branden · Rating 4 out of 5]

Krugman's Peddling Prosperity is a lucid deconstruction of supply-side economics; a strident (and sensible, as far as I can tell) defense of Keynesian theory after its purported demolition by Milton Friedman in the 1970s; an acknowledgment of what conservative economists got right in the 1960s and 1970s; a case against the assertion that Ronald Reagan's economic policies were catastrophic, as opposed to merely harmful; a plea for economic policy to be better informed by actual economists as opposed to pop econ policy entrepreneurs, such as Robert Bartley, Arthur Laffer, and George Gilder on the Right, and Robert Reich and Ira Magaziner on the Left.

Long-standing animosity between Reich and Krugman (see p. 254ff.) probably explains why as Reich's star rose in the Clinton administration and now again in Obama's, Krugman is not allowed at the grown-ups table. That Krugman's credentials have lately been burnished with a Nobel Prize and his economic prognostications, once mocked with knee-slapping derision by the Bush-fellating Right, have proven prescient, makes me wonder just how far President Obama's conciliatory, "team of rivals" approach really extends.

*****

Favorite quotes:

An Indian-born economist once explained his personal theory of reincarnation to his graduate economics class. "If you are a good economist, a virtuous economist," he said, "you are reborn as a physicist. But if you are an evil, wicked economist, you are reborn as a sociologist." (p. xi)

***

When Keynes published his theory of the business cycle, some conservative economists argued there was no need for government policy to combat recessions because recessions would be self-correcting. Their argument went as follows: In the face of high unemployment, wages and prices will tend to fall. This fall in wages and prices will increase the real supply of money--that is, the given stock of money in circulation will have steadily rising purchasing power. And this expansion in the real supply of money will in turn lead to an economic expansion.

Keynes did not deny the logic of this so-called classical argument; he was willing to concede that in the long run economic slumps would be self-correcting. But he regarded this self-correcting process as very slow, and as he pointed out in a widely quoted but rarely understood remark, "In the long run we are all dead." What he meant was: Recessions may eventually cure themselves. But that's no more reason to ignore policies that can end them quickly than the fact of eventual mortality is a reason to give up on living. (p. 47)

***

A trade war in which countries restrict each other's exports in pursuit of some illusory advantage is not much like a real war. On one hand, nobody gets killed. On the other, unlike real wars, it is almost impossible for anyone to win, since the main losers when a country imposes barriers to trade are not foreign exporters but domestic residents. In effect, a trade war is a conflict in which each country uses most of its ammunition to shoot itself in the foot. (p. 287)

[Gill · Rating 5 out of 5]

This is a good book for those interested in economic ideas from an economic history standpoint, though it does an admirable job of explaining many economic principles and failed understandings of economic principles. I like this book because it goes beyond the trite debates we have in popularized versions of faulty economic principles: We're either Keynesian or pro-free markets... that's rubbish and one of the many politicized false dichotomies of our time. The way risks to economies and societies are managed requires a bit a both government intervention and market principle. Selective application of principles according to the problem at hand, not ideologically. This benefits corporations, communities, and individuals.

What Krugman shows in this book is:
1. How little we actually understand about the way the international economy affects our national economy.
2. How countries can't be managed BY or AS corporations.
3. HOw politicians grasp at simplified (often wrong) economic ideas that fit their ideological orientation rather than any fundamentally-sound economic theory.
4. That there is a clear difference between supply-siders in politics and economic academics that have pointed to some fundamental flaws in old and new Keynesian policies (though many of these academics have flawed assumptions about rationality, spontaneous markets, and methodological individualism).
He shows that supply-siders are basically cranks and that people like Friedman actually made some well thought out critiques, that don't necessarily need to be, should be, or can be applied within the real world.
5. The fallacy of protectionism (the strategic traders)
6. The failure of Reaganomics
7. The positive role government can play in American economic life.


This is an excellent book for the study and discussion of the 70-90s changes in politics and rise of the neoliberal movement (though not termed so in Krugman's book).

As another reviewer put it so well, it overcomes the problems of most recent (circa 1994) economic books produced for popular consumption. Books which usually revolve around three rules:

1) The market can decide best.
2) Anyone who questions rule #1 is a communist.
3) Intimidate and bore the reader with unencessary technical jargon OR simplify and sell bad ideas.

[Justin Tapp · Rating 4 out of 5]

Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations by Paul Krugman (1995). This book and the previous one I reviewed were not read with an e-reader, and it's a shame because I would have liked to have highlighted passages for easy copying & pasting here as I can with a Kindle book. I have now sold just about every book I own that is available as an ebook somewhere.

Early Krugman is remarkable for his bi-partisan criticism and attempts to give his opponents some benefit of the doubt. Krugman is basically dealing with three issues in this book:
1. The Great Stagnation of productivity since 1973 (see posts below).
2. Republican economic snake oil in the 70's and 80's.
3. The experiences of conservatives in power in the U.S. and the U.K. in the 1980s (and the beginning of the European common currency).
4. New economic thinking in the realm of trade and development in the 1980s.
5. Democrat economic snake oil in the late 80's and early 90's.

Krugman makes the point that how well or badly (depending on how you look at it) the economy performed in the 1980s and early 90's had almost nothing to do with the Reagan administration. Presidents and congresses don't determine the resources, capital, and technical knowledge a society possesses, and the Fed had more to do with the fluctuations in the 80's.

Krugman is concerned "policy entrepreneurs" took sound conservative theories from Milton Friedman, Martin Feldstein, and Robert Lucas and warped them into politically potent snake oil of "supply-side" economics. Much of what Krugman wrote in 1994 could have been written in 2011 (and indeed has been repeated by him ad infinitum). He is upset at Republicans for not better policing themselves in this regard.

Krugman also blasts Robert Reich and other Democrats that he calls the "strategic traders," who advocate a sort of industrial policy toward U.S. manufacturing. He criticizes Clinton too, for Clinton was a policy wonk that was deep in the weeds on this stuff. These policy entrepreneurs took the ideas of Krugman and other trade theorists of the early 80's and warped it into some mishmash about globalization and competitiveness. Great quote:

"If you hear someone say something along the lines of 'America needs higher productivity so it can compete in today's global economy,' never mind who he is, or how plausible he sounds. He might as well be wearing a flashing neon sign that reads: 'I DON'T KNOW WHAT I'M TALKING ABOUT.'"


Krugman's data-driven analysis is great, it makes me want to re-read some of his columns to see if he's not majorly contradicting himself these days.

Krugman's remarks on the Thatcher experience are rather crass, IMO. He notes that the U.K. had a productivity jump that the U.S. didn't have, but doesn't think it was necessarily because of the privatization and de-regulation pushed by Thatcher. He's critical of how that process was handled. This is a good book to read parallel with Commanding Heights because Krugman has a different take on the Reagan/Thatcher revolution.

He also bemoans the European experiment to create a common currency. Only Krugman would claim that Finance Ministers and economists from Europe could get together and agree on a course of action when none of them know what they're talking about. (This is a common Krugman remark).

Basically, Krugman states that the Reagan Administration was responsible for three things:
1. Cutting marginal tax rates, particularly for the top income earners.
2. Increasing government spending and the debt/GDP ratio.
3. Maybe the huge increase in income inequality between top and bottom (but this was seen all over the world...)

Krugman notes that the top marginal rates were probably too high, but still criticizes the cut as a politician would -- the tax cut benefited the rich more than the poor. But when you have a 70% MTR that needs to be cut, it's politically impossible because you can't cut the MTR for the lower-income earners by the same amount--and Krugman ignores that in his critique.

Krugman also points out that the deficits/debt that the Reagan years acquired weren't a drag on the U.S. economy, probably shaving only 3% off of what GDP would have been from 1980-1990. But the way the Administration cut investment spending in response to the deficits may have had other long-term effects.

It's hard to look at the data Krugman presents and say "Reagonomics is horrible," and Krugman never makes that claim-- he's simply blasting the supply-siders who claim that "Reagonomics solves all of our problems and creates magic increases in productivity" without any evidence to back it up.

I recommend this book highly, and would use it in certain classes without hesitation. 4 stars out of 5. More international perspective/context would have been better. To see how Krugman hasn't really changed all that much, read this recent column about him in New York Magazine.

[Ari von Nordenskjöld · Rating 4 out of 5]

What makes this book so great is its honesty. Krugman, despite being an outspoken liberal, is entirely detached in his examination of policy and concedes a vast number of points that serious conservative economists make, while attacking the snake oil of both the right and left - with the latter condemnation probably being even more severe, probably due to it being more relevant at the time that the book was written. Parts of it are no longer all that relevant, especially for European readers like myself, but it still makes for a great read and it brilliantly illustrates the kind of trouble that 'policy entrepeneurs' - that is, self-confident dilettantes with simplistic and harmful ideas - casue when allowed to influence national policy. Yet Krugman never makes any fantastic claims. While he is quite rightly frustrated with these hacks, he does indeed admit that their influence, while troublesome and somewhat harmful, is not by any measure catastrophic. It is wonderful to read Krugman, because he truly embodies an academic spirit of detachment and prudency - he explains important concepts to the reader in an honest and simple manner, but without making anything simpler than it should be.

[Lucas · Rating 4 out of 5]

Krugman has become more partisan since, but this book is balanced and reasonable. I learned a whole lot about economics from reading this account, and the fact that Krugman writes with incredible clarity is partly responsible. This book has inspired me to learn more about the subject and that is the best compliment one can give to such a work.

[Vipul Vivek M-D · Rating 3 out of 5]

What pain it was to read Krugman blow Galbraith into smithereens!

[Ville Kokko]

Sounds compelling, but I can't even rate it with my lack of background knowledge.

[Jeff Keehr · Rating 3 out of 5]

Brief history of modern Economics. Why our economy is stagnate. Those two sentences are how I characterized this book when I read it in 1994. I now read Krugman's essays in The New York Times on a regular basis. He is a brilliant liberal.

[Will · Rating 4 out of 5]

Though dated, cause it was written some years ago; is still an interesting explaination of trends in lying to the public about economics.

[marcos sahade · Rating 5 out of 5]

Soy fan...

[santhosh · Rating 5 out of 5]

Highly recommended for anyone seeking to understand supply side economics.

[Jennifer · Rating 4 out of 5]

Krugman signed my copy in 2020, said "simpler times..."

[Seth Wilpan · Rating 3 out of 5]

The stated aim of this book is to demonstrate that economic policy is the product of political expediency much more than the of the wisdom of learned economists. Along the way he gives fairly detailed descriptions of the policies that were in effect, primarily during the period that brackets the years of Reagan administration. He demonstrates that when economic policy had any effect at all, it was generally not the effect that was claimed by the ascendant political proponents. The most effective means of regulating the economy is the power to regulate the supply of money, which is wielded by the Federal Reserve. Otherwise, the economy operates under its own observable but dimly understood logic. Often as not, official economic policy is mumbo-jumbo whose main purpose is to mask the discomfort of recession that occurs when the Fed tightens to money supply to ward off inflation.

It’s an even-handed account. Krugman gives no more or less credence to the supply-siders than he does to their detractors.

One of the more interesting points to me was Krugman’s debunking of the myth that the market has the wisdom to find the most efficient means of production and distribution. Historical happenstance often embeds intractable inefficiencies in the system. An example is a principle commonly known as the QWERTY theory. This states that the market does not necessarily produce and nurture the best ideas. Just as often it is carried by the momentum of earlier decisions and it is powerless to improve upon them. The example is the QWERTY layout of the keyboard, which is not the most efficient for the human hand, but was originally devised to avoid keys striking each other and getting stuck on typewriters. When this no longer was an issue, manufacturers were still constrained to produce keyboards this way because that’s how typists had learned to type. So inefficiencies and bad ideas can get reinforced by the marketplace, and the market does not have a good mechanism for overcoming such a shortcoming.

The material is a bit dated now, and the details may not be of general interest, but it’s a good evocation of the information swamp we live in. these days

[Tim · Rating 3 out of 5]

I know next to nothing about economics, so I grabbed this from my father-in-law's bookshelf (he's a professional economist) because I like Krugman's NYT columns. Krugman is excellent at sketching out the major trends in economic thought from Keynes onward, but because the book was written in 1994 he's pretty dated on a lot of current economic issues.

1994 is barely post-Clinton, but it's pre-NAFTA, pre-internet, pre-Gingrich, pre-globalization-protests, pre-Wal-Mart, pre-dot-com-bust, pre-Bush. Oddly, he spends the last section of the book very concerned that Bill Clinton (the guy who signed NAFTA) might not be as staunchly free-trade as most economists would like. He also says some inadvertently hilarious things about computers, the internet and corporate power.

Still, I was looking for a good, conversational overview of economic thought, and on that front Krugman delivers. He starts off with Keynes and the theory of the business cycle, and then goes in some detail on Friedman, Lucas, Feldstein, monetarism, rational choice and the conservative challenge to Keynesianism in the 1970s. The main thrust of the book is how those academic ideas were twisted by non-academic 'policy entrepreneurs' into Reagan's supply-side policies (which Krugman labels sheer quackery).

He closes the book with the rise of the neo-Keynesians in the 80s and 90s and explores their ideas about the fallibility of markets and quasi-rational behavior. Again he laments how academic economic ideas about free trade have been twisted by non-academics to support specific policies and politicians. (It would be interesting to see how he feels about policy entrepreneurs now that he's become NYT columnist and pundit extraordinaire.)

So anyway, now I feel like I know slightly more than nothing about economics. Hooray!

[H. Ryan · Rating 4 out of 5]

Although erudite at times, I appreciated when Krugman refused to boil down some concepts of economics beyond the point where they still have meaning, instead presenting them in their necessary complexity. One important thing I learned from this book was that although the President is often judged by the performance of the economy during his regime, he (or she) really doesn't have nearly as much of an effect on it as general business trends and the actions of the Fed. Many times a natural upswing in the economy will occur as unemployed workers get jobs--which doesn't really effect the capacity of the economy--will be seen as a win for a political machine that didn't do anything to bring it about and when it shouldn't be celebrated anyway. To summarize: very informative (although I need to dig deeper into economics), and definitely good things to keep in mind before election time.

[trivialchemy · Rating 5 out of 5]

This is a fine example of brilliant scholarship available to the layman. Krugman carefully explains the gap between academic economics and policymakers, and demonstrates the historical incompetency of the latter. Most of the book is dedicated to debunking the myth of so-called "Reaganomics" or, supply-side economic theory; however, it would be impossible to call this a partisan effort, as it just as fluently pokes holes in the competitive internationalist paradigms of Clinton and later Democrats.

[BC · Rating 4 out of 5]

It speaks volumes that Krugman attempts to make complexity simple, but not simplistic. He does not try to boil down complex ideas into campaign slogans, or easy ways to fix the economy. Instead, he presents the history of the easy fixes presented by both the left and right in the US over the past several decades. This book isn't the most recent, and thus would benefit from an addendum discussing the Bush and Obama Presidencies. I have a feeling that Krugman wouldn't be kind to either of them!

[Christina · Rating 4 out of 5]

An interesting overview on economic policy from the 70's to the early 90's, from the perspective of a Keynesian economist. Although Krugman pointed out the deficiencies of classical economics and real business cycle theory, he emphasized that the greatest issue is "policy entrepreneurs" who claim economist credentials and sell policy recommendations that have no support in academia to politicians looking for easy answers. These policy entrepreneurs are all too common, and their misguided "theories" can have hugely negative consequences for US economic policy.

[Mohammad Rahman · Rating 5 out of 5]

An amazingly knowledgeable insight into Economic successes/ failures of our time. Although Economics is not my concentration & the boo, was published when Bill Clinton had just assumed office, I found Professor Paul Krugman's observations especially relevant keeping in mind Donald Trump's recent election win on a wave of nationalist sentiment & a possible return to Republican supply-side / strategic trade policies.

[Chris · Rating 4 out of 5]

Krugman gives an overview of the most influential economists of the past few generations (Keynes, Friedman, Lucas etc) and then explains how policy makers have exploited these ideas for their own idealogical gains (criticizing the supply-siders on the right and the strategic traders on the left). While his contempt for all ideas not born in academia gets a little old, his writing about difficult concepts is clear and concise -- even for people with no background in economics.

[Sebastian Uribe Díaz · Rating 3 out of 5]

Krugman se luce en estos libros como uno de los economistas mas brillante de la epoca, no solo por su capacidad de explicar cuestiones que parecen complejas al publico en general, sino por adelantarse a los problemas que acontecieron en los 90 y la primera decada del siglo 21. Brillante y sin pelos en la lengua para señalar los males y dar posibles soluciones, este es un manual que todo economista de pregrado o funcionario publico deberia leer

[Danielle · Rating 5 out of 5]

I read this book for a class in public policy and will forever be grateful to the prof for assigning it. I fell in love with Krugman, and my eyes were opened to how informative economic analysis can be - as long as it's written in a way that the average person can understand.

[Allisonperkel · Rating 5 out of 5]

Ideally anyone who wants to get an overview of economic policy in the 70s, 80s and early 90s should read this book. Krugman does an amazing job of describing supply side, strategic trading and general trends over that 30 year period - and he does it in a very fair, readable and humorous way.

[Jim Fetzer · Rating 5 out of 5]

Krugman does a great job placing the debates of economic policy in 80's and early 90's into perspective.

[Mark Chaisson · Rating 2 out of 5]

Boring!

[Margaux · Rating 4 out of 5]

Oh Krugman, enough said...

[Prashant · Rating 5 out of 5]

classic krugman

[Joshua · Rating 4 out of 5]

Great book by a great economist.

[Trevor · Rating 3 out of 5]

Good but mostly stuff I had read / picked up before.