Paul Krugman, and the Middle-Class Champion Myth

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In a world full of paradoxes, Princeton economics professor and New York Times columnist Paul Krugman has become rich decrying what he deems "income inequality." Only in America could an individual denounce the wealth gap while becoming the very person he denounces.

In that sense, it may be that polar opposites Karl Marx and Joseph Schumpeter were right: capitalism is seemingly its own worst enemy. In rich societies, commentators can become wealthy while trashing wealth creation.

The irony with Krugman is that when it comes to policy prescriptions meant to elevate the living standards of the lower and middle classes, much of what he proposes is inimical to their economic health. This has revealed itself most recently amid the dollar's renewed decline.

As Krugman put it in the New York Times, "The truth is that the falling dollar is good news." Krugman's reasoning here is that a weak dollar makes it easier for U.S. companies to export. A nice thought at first glance, but what Krugman ignores is that we can't export unless we're importing, and a weak dollar makes imports more expensive. Trade always balances.

Taking Krugman's illogic further, tall men could presumably become jockeys and short women models if the former expanded the length of an inch while the latter reduced it. The obvious problem in both instances is that no change in the definition of an inch or foot will blot out the visible reality that some people are tall, and some short.

The same applies to the veil that is money. The Obama Treasury can do as the Bush Treasury did and talk down the dollar, but eventually all prices must adjust. So while a weak dollar might in the near-term make U.S. goods attractive, the globalization of production means that the costs of the myriad imported inputs that go into the creation of U.S. goods will eventually have to rise. Inflation steals the benefits of devaluation, and ultimately renders the notion of "money illusion" moot.

Sadly, the harm wrought by a weak dollar extends well beyond false notions of enhanced exporting capabilities, and it in particular weakens the economic chances of the non-rich.

For one, those not wealthy frequently don't possess the ability to protect the value of the money they earn. Lacking access to esoteric currency trading techniques, or perhaps knowledge of gold's essential nature as a hedge against devaluation, the non-rich suffer inflation's ravages most acutely through lower purchasing power. This showed up most notably this decade in the rising price of gasoline.

Some of course did protect their wealth in a rising housing market aided by the dollar's decline, but economic reality eventually caught up to the money illusion there too. Depending on when the non-rich waded into housing, this historical middle class hedge against monetary debasement may not have worked so well.

Worse for those with middle and lower incomes, home ownership is presently for many a proverbial "ball-and-chain" which keeps them landlocked, and unable to seek the best job opportunities irrespective of locale. So while the weak dollar stimulated nominal home price gains and put a lot of average families into houses, the longer-term result has been that those who would benefit most from mobility during a period of limited job opportunities have found themselves unable to relocate.

Krugman of course makes the thin and easy to discredit argument that a weak dollar helps U.S. exporters, but what he ignores is the broader truth that without capital, there are no jobs and wages. He also ignores Schumpeter's tautology that entrepreneurs can't be entrepreneurs without capital.

Considering capital's role when it comes to jobs, a weak dollar does not cause inflation so much as it is inflation. When money is losing value, those with capital must factor in extra risk in committing it to job-creating concepts. Specifically, inflation erodes real investment returns, which means the average worker suffers lower wages for capital migrating toward the hard, commoditized assets least vulnerable to currency debasement over investment in the productive, wage economy.

Looking at entrepreneurs, most start up small with designs on growing large. But if money is losing value, their ability to access the funds necessary for growth is similarly compromised.

It is said that small businesses create the vast majority of jobs in the United States, but as the Wall Street Journal recently reported, "Banks are reluctant to lend, especially to companies with weak or no credit history." The same article in the Journal also found that "Venture-capital investment in U.S. companies fell 44% in the first half of 2009 from a year earlier."  President Obama is now talking up a small-business "stimulus" plan that Krugman will no doubt cheer, but what neither understand is the greater truth that the weak dollar looms large in the struggle for capital among small businesses. 

When money is treated badly, as in when it's devalued, capital hides. As evidenced by the difficulty small business and entrepreneurial concepts are having in accessing funds, this will negatively impact the job chances of those who can least afford low, or non-existent wages.

But perhaps the biggest reason Krugman's dollar opinions are inimical to the health of the lower and middle classes has to do with equity returns. Indeed, it is through saving, investing and compound interest that the phenomenon of the "Millionaire Next Door" has become a reality.

Put simply, investing is what has in modern times allowed the non-rich to join the rich. But as the last four decades have shown, periods when the dollar's been weak have coincided with low equity returns.

In the ‘70s, Presidents Nixon, Ford and Carter pursued weak dollar policies, and the result was a 17% percent S&P 500 return made negative in real terms based on the dollar's decline. Much the same has occurred this decade amid weak dollar policies sought by the Bush and Obama administrations.

Looking at the ‘80s and ‘90s, something different occurred altogether. Presidents Reagan and Clinton both felt a strong dollar was in the nation's interest, and the market result was a 121 percent S&P return under Reagan, and a 208 percent return under Clinton. Periods of currency strength correlate with powerful equity returns that lift the fortunes of what is a broad investor class largely populated by those not technically wealthy. Krugman seeks the opposite.

To some, Paul Krugman is a champion of the middle and lower classes given his desire to shrink the gap between those with and without money. But for his views on the dollar alone, it's apparent that his reputation lacks merit.

Krugman's support of weak currency policies erode the earnings of those who can afford it least, reduce the investment necessary to create jobs and wages, and drive down the very investment returns necessary to lift the fortunes of those seeking to increase their wealth. Far from a champion of the middle and lower classes, Krugman's views correlate with wealth destruction, and if implemented, his ideas will only shrink the wealth gap insofar as all of us will become worse off.



John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading ( He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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