Paul Krugman's Ponzi Scheme
Jude Wanniski
November 8, 1996


Memo to: Mother Jones [The West Coast magazine for liberal eggheads]
From: Jude Wanniski
Re: Krugman on the Spiral of Inequality

You ask me for my opinion on your Twentieth Anniversary issue, dated December 1996, specifically the article on p. 44 by Paul Krugman, the MIT economist now professing at Stanford. Generally speaking, Krugman has had nothing much to say about political economy for the last several years other than the rich are getting richer faster than the poor are getting richer. He has written this story hundreds of times, in newspapers, magazines, and books. Unsuspecting editors continue to pay him for plagiarizing his own material. Because he appears in such illustrious publications as The New York Times Magazine and Foreign Affairs, the editors of* Mother Jones and no doubt the Ladies Home Journal are thrilled to see his manuscripts flow over the transom, with yet another exciting expose about how the rich are getting richer faster than the poor are getting richer. This is a chain letter he writes to himself, his very own pyramid club, the most elaborate Ponzi scheme in American journalism.

If you would take the trouble to read the stuff you shoveled into type, you would find that he said absolutely nothing about economics until the second page of his tract, when he asserted: "What few people realize is that this vast gap between the affluent few and the bulk of ordinary Americans is a relatively new fixture on our social landscape." This is utter nonsense. A century ago, John D. Rockefeller had income the equivalent today of $500 million, year after year, for a quarter century. Andrew Carnegie did almost as well. A handful of Americans possessed a far larger fraction of the national wealth than any collection of wealthy Americans possess today.

Krugman's childish attempts at economic analysis are able to fool Mother Jones editors only because you have nobody on the staff who is competent to assess his scribbles. Do any of you know the difference between income and wealth? Krugman dances from one concept to the next, and it all sounds so plausible, because he has made a name for himself with other editors, none of whom are any better fixed than you to realize that he is a charlatan. Here are a few simple concepts I put to you, in challenging his idea that the rich are getting richer faster than the poor are getting richer. I maintain that the central problem of the last 30 years is that the poor are getting richer much, much faster than the rich are getting richer.

1. First let us get our accounting unit squared away. To measure anything in the floating paper dollar will get us nowhere. We must convert all wealth into the measure employed by mankind for six thousand years, i.e., ounces of gold. On this measure, the Dow Jones Industrial Average of 6000 today is only 60% of the DJIA of 30 years ago, when the DJIA hit 1000. Back then, gold was $35 per ounce. Today it is $380-plus. This is another way of saying that in the last 30 years, the people who owned America have lost 40% of their wealth held in the form of equity. Do you understand what I am saying, Mother Jones! If you owned no part of corporate America 30 years ago, because you were poor, you lost nothing. If you owned lots of it, you lost your shirt in the general inflation.

2. This is true of the vast majority of shareholders in Main Street America. Not those who own a piece of the $6 trillion in the stock market less than $600 million when converted into gold at 1966 prices. I'm speaking of the small businessmen whose shares are not publicly traded. These poor slobs have been decimated by a combination of the (1) inflation and (2) federal tax codes. According to the best estimates any of us have, these poor slobs face a federal tax liability of $2 trillion on the $7 trillion of inflated capital gains which have accumulated in our economy, beginning in 1966 when President Lyndon Johnson closed our participation in the London gold pool. (By that, I mean he no longer promised to pay America's creditors in paper dollars with a fixed value in commodities, gold being the proxy.)

3. If you were to ask Professor Krugman to put down his coloring book for a moment, and put a real number on the wealth of the affluent, please do me a favor. Ask him if his number is net of the $2 trillion [$2,000,000,000,000] in federal tax liabilities these affluent people face, because Professor Krugman's pals refuse to index capital gains retroactively. Please do not dismiss this question lightly, Mother Jones. Think about it a moment or two. If Krugman cannot answer you to your satisfaction, promise him that his name will never again appear in your publication, unless he apologizes for being a sophomore.

4. Now we get to entitlements. If you own a $100,000 bond that pays 7% a year, you will have an annual income of $7000 for the life of the bond. If you are entitled to a government check to cover your Medicare bill of $35,000 a year, for the rest of your life, you have wealth that is the equivalent of $500,000. Because you are only scribes, you are not expected to know this stuff, Mother Jones editors. I was once in your boat, a reporter who never took a Ph.D. in economics from MIT or Harvard. It took me a long while to learn what I am conveying to you in this response to your letter. In this example alone, we find that the poor hold guaranteed entitlements on $7 trillion of unfunded tax liabilities, for their old age and health benefits, which can only be paid for by the rich, who are the nation's producers. At the same time, the rich face a 28% tax liability on another $7 trillion in inflated capital gains. Add up the portfolios of the rich and the poor, 30 years later, and you will find the poor have become fat and happy, the rich impoverished. This is why we are in the fix we are in. Everyone wants to be poor, because it has so many more advantages!

5. These are enormous numbers. You will not find any of them in Krugman's Ponzi schemes. He has either not thought about them, in which case I might believe he is dumb but honest. Or, he has thought about them, and is therefore half-smart and dishonest. I personally believe Krugman is honest, but dumb enough to believe in the assumptions he was taught in school to believe he really does know the way the world works, when he knows almost nothing at all.

6. The basic problem the liberal media have with people like Krugman is that they are careful to never make economic predictions, so they can never be brought to heel. Nobody actually pays Krugman for his economic counsel, or they would soon be bankrupt. Like you, they pay him for his political blatherings, about the rich getting richer faster than the poor are getting rich. In this case, I truly appreciate your insistence that I take time out of my life to comment on his jabberings.

7. There is only one time where our paths crossed in person. A few months back, we were on the same PBS radio program out of Boston, talking about taxes and the economy. I append the transcript, which I took the trouble of transcribing. Note that Krugman defends himself exclusively by adhominem attacks on supply-side economics the only flavor of economics that has had predictive power over the last 25 years. If Krugman had to predict to make a living, he would starve to death.