On Krugman's Epiphany




Paul Krugman is one of the leading “names” in economics today. There are reasons for his stature. He’s got a Nobel Prize, he’s an academic at a leading University, he writes for the NY Times, and not a week goes by without him being on some TV show or another. If you asked the average guy on the street to name an economist, there’s a good chance the answer would be – “Krugman”.


PK has been having a slow motion epiphany over the last month. He has posted four articles on a topic since December 8. (Link, Link, Link and Link) He has identified a “phenomenon” that is occurring in the US economy. This new, powerful force that he has stumbled upon, is keeping him awake at night. Clearly, PK is troubled by what he has uncovered. His words:


“It” has really uncomfortable implications. But I think we’d better start paying attention to those implications.


Are you worried yet?


PK drives home the point that what he has uncovered is not now in mainstream economic thinking. He admits that even he missed the signs that something was amiss in the world of modern economics:


Not enough people (me included!) have looked up to notice that things have changed.


Okay. What is it that PK has found hidden deep below the economic rocks that is causing him such fits? Grab onto your seats – this is big. PK has observed, for the first time in his economic career, the simple fact that technology has reduced the role of labor in the economy.




That’s PK’s epiphany? He just came to that conclusion in the last month? I’m thinking, “What planet has this guy been living on the past 10 years?” But then I realized PK has not been living on Mars, he’s been living in Princeton; amongst the Ivy.


Has PK not gone to a new mechanized distribution center like FedEx, UPS and Amazon have? Does he not know that it takes less printers to make the NYTs these days? Has he not been to a modern assembly plant that makes things with robots? How could he have missed the notion that technology was reducing the demand for human labor all these years? The only way that this could have been missed is if PK had his eyes covered and his head in the sand. He had this to say about his big new "find".


Mea culpa: I myself didn’t grasp this until recently. But it’s really crucial.




Forget about why PK has not connected these very important dots over many years; focus on why he's crapping in his pants over his new awareness. It’s simple math. Take two examples A) where Labor = 60% of GDP and B) Labor = 50% of GDP. If GDP = $16T, then A = 9.6T and B = 8T.


The problem is that Social Security (SS) taxes Labor at 12%. The difference between A and B ($1.6T * 12.4%) means that SS ends up with $200 Billion less in annual revenue.


PK went off and pondered his “discovery”. He did the A and B math, then he wrote:


If payrolls lag behind overall national income, this will tend to leave those programs underfunded




Then PK went on to really stir the pot by suggesting that the Congressional Budget Office (CBO) was using a rosy long-term estimate for the critical Labor/GDP percentage in its projections. PK says:


CBO could very easily be quite wrong here, and will indeed be very wrong if the rise of smart machines plays out


What’s dawning on PK is that his vision of the future does not take into proper consideration the role that technology has today, and will play in the future, on labor employment. What he's looking at is a structural change; one that can’t be altered. He’s coming to the conclusion that Social Security doesn't “work” when there are not enough workers paying into the scheme. This is a remarkable conclusion from the most liberal economist out there.


Move on a few days and PK does some more deep thinking. He now realizes that the current expectations for future revenue for SS are unrealistic. He knows that the lines will cross more quickly than is now anticipated. He understands that this is a here-and-now problem, but he also has grasped that this is also a 75-year problem. So he comes up with a plan; simple yet elegant. He wants to tax the robots.


There would be no problem, at least in economic terms, by adding revenue (to SS) from dedicated taxes on capital income.


No problem? PK thinks it’s okay to charge 12% FICA taxes on a robot. OMG!


Actually, I don’t think that PK really believes that taxing investments in manufacturing technology is a good idea. The fact is, it’s a terrible idea, and PK knows it. If you want an economy to grow, and be globally competitive, you create incentives (tax breaks) for capital investment; you don’t create disincentives. Period.



I suspect that PK is slowly recognizing that he has put himself in a box. He has come to conclude that SS, as it is currently configured, is not viable. The villain is technology that reduces the long-term demand for labor. His solution, not surprisingly, is more taxes. But there is not a chance in 100 of taxes on capital investments to support SS (nor should there be).

PK is walking a plank, he’s getting close to the edge. When he goes over, he will bring with him a bunch of other liberal economists that believe that the SS “miracle” can be sustained. In his latest missive on this topic PK promises:


I’ll be writing more about this in weeks to come


I can’t wait.





– PK is quite right that the CBO's assumptions regarding Labor’s share of future GDP are optimistic. I’m sure that the folks at the CBO read PK’s criticism. I doubt they were too happy about it. The question is, what will CBO do, now that a Nobel has challenged a basic assumption it uses? If the CBO were to re-gear its computers to reflect a lower long term role of labor in the economy, it would create a massive hole in America's entitlement programs.


– It’s going on five years now that I’ve been writing about SS and the CBO. There must be a few hundred articles of mine in the ether on these two topics. Again and again I’ve said the same thing. The assumptions are not realistic, the numbers do not add up when realistic assumptions are used, the outcome will not be what is now anticipated, and there will be a disappointment when reality sets in. Sorry PK.



Maybe I should get a Nobel, that, or maybe PK shouldn't have one…..




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