Krugman writes,

"The new bull market isn't forecasting anything; it's just feeding on itself. ...In short, the current surge in stocks looks like another bubble, one that will eventually burst."

Now what, exactly, qualifies this Princeton professor to know just what the market is or isn't forecasting? It sure ain't his track record! The home page of his personal website links proudly to a February 2000 critique of Dow 36,000 by James Glassman and Kevin Hassett, creating the false impression that Krugman called the top of the bull market and the "bubble economy" when everyone else was irrationally exuberant. But read the critique! It had nothing to do with the market or the economy at all -- it's limited to questions of statistical methodology, and it adds up to little more than a chance for Krugman to take a swipe at well-known conservative economic pundits (among their other conservative bona fides, both Glassman and Hassett are contributors to National Review Online Financial).

Here's what Krugman was really saying then about the market and the economy. On January 5, 2000, just nine days before the Dow Jones Industrial Average topped out at the never-seen-again level of 11,723 Krugman wrote in his still brand new New York Times column,

"...current stock prices already have built in the expectation of economic performance that not long ago we would have considered incredible; performance that is merely terrific would be seen as a big letdown. So which will it be -- terrific or incredible? We all have our opinions -- being a pessimist by nature, I think that things will be merely terrific..."

"Merely terrific"? You can't make this stuff up. This classic top-of-the-market epiphany for Krugman came after a decade of singing in a Greek chorus of Ivy League economists who were forecasting that Japan and Europe would take over the world economy and leave American industry in the dust (see Krugman's The Age of Diminished Expectations). Several weeks later, on February 27, after the Dow had drifted lower while the NASDAQ and the S&P 500 were still climbing toward their March 2000 peaks, Krugman said to ignore the falling Dow, and offered this apologia for the economy in his Times column:

"The social and psychological hallmarks of a bubble -- like the fact that the TV in my local greasy pizza place is now tuned to CNBC, not ESPN -- are plain to see, but so is the spectacular pace of technological progress. I'm not sure that the current value of the Nasdaq is justified, but I'm not sure that it isn't. In any case, the fall in the Dow is not a verdict on the economy as a whole. As long as we have full employment and low inflation, I say let the blue chips fall where they may."

Well, we still have employment levels that, by historical standards are considered "full." And we certainly have low inflation (Krugman's more worried about deflation and a so-called "liquidity trap"). Yet how different is views are today. In Krugman's most recent Times column he writes,

"Does the collective wisdom of the investor class perceive an imminent, vigorous recovery that is invisible in the data? The market isn't always right. It wasn't right when it sent the Nasdaq to 5000; it wasn't right in the fall of 2001, the summer of 2002 or the late fall of 2002 — three would-be bull markets that fizzled."

As Peter Harrigan writes on his blog, Gammaholic,

"...the period Krugman describes is one in which the market dropped rather precipitously, and the economy was weak after the market turned down. In classic Krugman fashion, his evidence that the market can be wrong is three temporary interruptions in a bear market that anticipated the economic slowdown of late 2000 and the recession of 2001."

Now Krugman just can't imagine that the market -- which represents the aggregated opinions of all the "little people" he purports to fight for -- might be smarter than he is. In 2000 the market forecasted a recession when Krugman was forecasting "terrific." And now it's forecasting a recovery, when Krugman is forecasting "catastrophe."

Why the optimism then, and the pessimism now? Could it be that for the 2000 presidential election, it was good for Democratic mouthpieces like Krugman to pretend that everything was wonderful? And now, for the 2004 election, it's good for the Democrats to pretend that everything is horrible.

Pretending is just what it is -- the recovery the market is seeing is increasingly obvious to everyone but Krugman. Krugman admits that oil prices have fallen since before the invasion of Iraq, but he says they haven't fallen enough. He admits that consumer spending has rebounded, but he says not by enough. He says that companies are "laying off workers than buying new capital goods" when new unemployment claims are falling, and high-tech capital expenditures are recovering smartly. He waves away "a not-too-bad manufacturing survey here, a pretty good housing-starts number there" as though they don't count. He admits interest rates are low, but "interest rates have been low for a while." Stock valuations? "A few months ago, some analysts began to argue that because interest rates were so low, even today's very expensive stocks were a good buy. I don't agree, but that's a long discussion." Don't bother me, son...

And then, of course, we come to the political heart of the matter: the Bush tax cuts. Krugman writes,

"...everything that has happened since 2001 suggests that Bush-style tax cuts — which, because they are targeted on the very affluent, basically give people with plenty of cash to spare even more cash to spare — provide very little employment bang per deficit buck."

Being an unrepentant Keynesian, Krugman can't permit himself to admit that the "Bush-style tax cuts" of 2001 are very different creatures than the "Bush-style tax cuts" of 2003. The "Bush-style tax cuts" signed into law just one month ago -- by focusing on improving the incentives to make investments -- defy the Keynesian orthodoxy that tax cuts operate only by stimulating consumer demand. David Hogberg explains on his blog, Cornfield Commentary, why this error is so important right now. He says Krugman assumes, falsely, that

"...consumer spending is the prime mover of the recession and our long-overdue recovery—hence Krugman’s complaint that the tax cuts 'give people with plenty of cash to spare even more cash to spare.' But take a look at the GDP numbers. Go to this table that tracks the percent change in various portions of GDP, and change the first year to 2000. You’ll notice that personal consumption has continued to rise, even during the 2001 recession. What has taken a sizeable hit is gross private domestic investment. Tax cuts that return money to investors, it seems, would be just the ticket to get the economy moving again."

But that's not the kind of thing that the Democrats want to hear just now. So, as Robert Musil says on his blog, Man Without Qualities,

"...his column offers not a single groat of direct support for his hypothesis. ...by citing an eccentric collection of negative factors without providing any substantial reasoning as to why those factors should be determinative while dismissing other positive factor equally without reasoning, his argument is nothing more than this: I, Paul Krugman, do not think the market should be going up. Therefore, it is irrational for the market to be going up -- a bubble."

So vote Democratic, because I, Paul Krugman, say everything is going to the dogs. Ignore that economic recovery behind the curtain! (Click here to see a young and nerdly Paul Krugman playing the Wizard of Oz in a college skit). And by all means ignore the party whose policies are making it possible.

Posted by Donald L. Luskin at 4:30 PM | link