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January 20, 2008
David Warsh, Proprietor


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The Partisan

Paul Krugman, a trade theorist of sufficient accomplishments that he is on many persons’ short list for a share of a Nobel Prize some day, surprised nearly everyone in 2000 when he quit his professorship at the Massachusetts Institute of Technology to go to work as a twice-week-columnist for The New York Times, with a teaching sinecure at Princeton’s Woodrow Wilson School on the side.

Since then, he’s surprised them again, this time by becoming one of the best economic journalists in the world.

Martin Wolf, writing in the Financial Times, provides a better narrative of international economics; the venerable Peter Bernstein, in his newsletters and books, a deeper insight into financial markets. And it’s widely recognized, I believe, that Krugman, when he makes his arguments, can’t keep him thumb off the scale, an unfortunate tendency that often undermines their force, and probably disqualifies him from consideration for a Pulitzer Prize in Commentary (that is, if his his constant spanking of the media for not seeing events through his eyes weren’t enough).

Want a fresh example? Take last Friday’s column, where Krugman describes the origins of the sub-prime crisis: “US financial markets, it turns out, were characterized less by sophistication than by sophistry, which my dictionary defines as ‘a deliberately invalid argument displaying ingenuity in reasoning in hopes of deceiving someone.’ E.g. ‘Repackaging dubious loans into collateralized debt obligations creates a lot of perfectly safe, AAA assets that will never go bad.’”

In fact, the argument for the safety of those instruments was based on a proposition that seemed sensible enough to market professionals at the time: the housing market is not national; house prices almost never go down the way more volatile asset prices do, and never everywhere at once. Loading up on diversified portfolios of mortgages thus was thought by insiders to be a clever way to get slightly higher returns with slightly lower risk, the gains to be levered up accordingly. In the end, the proposition turned out to be badly mistaken, but it was not a deliberate attempt to mislead. Two words you won’t find in Krugman’s dictionary are “exculpatory evidence.”

Nobody, however, beats Krugman for intuition; and when he draws a bead on a topic, he has been shrewder, more often, than anyone else in the arena. Over the past eight years, he has scored a series of what most of his competitors will acknowledge were in fact scoops: the gaming of the state of California by partially deregulated power companies; the vulnerability to fraud of computerized voting machines; not to mention the many angles he has successfully pursued on various inauthenticities of the administration of George W. Bush; and the recent success he has enjoyed in focusing attention to health care reform as a central issue of the campaign. This spectacular run as a controversialist has made him the Times’ most influential columnist.

That’s why it makes sense to pay extra attention to his writing about the presidential campaign. He has been right so often about other issues in which he has staked out what at first seems like an extreme position that it is only natural to wonder if he is right about the present campaign.

The answer is, I think, probably not.

Throughout the run-up to the primaries, Krugman has made clear his preference for John Edwards-style populism. In columns like “Wobbled by Wealth” and “Seeking Willie Horton,” and in a new book, The Conscience of a Liberal, he has asserted his conviction that only a strategy of maximum confrontation will serve the Democrats. Given that “movement conservatives control the Republican Party,” “the notion, beloved of political pundits, that we can make progress through bipartisan consensus is simply foolish,” the book concludes. That means he has been sounding more and more anti-Obama, for the Illinois Senator is running on a platform diametrically opposed to the one that Krugman recommends.

In “Played for a Sucker,” on November 16, Krugman wrote, “Barack Obama’s Social Security mistake was exactly what you’d expect from a candidate who promises to transcend partisanship in an age when that’s neither possible nor desirable.”

In “Mandates and Mudslinging,” on November 30, he wrote, “Barack Obama’s reluctance to stake out a clearly partisan position led him to propose a relatively weak, incomplete health care plan.”

In “The Mandate Muddle,” on December 7, he wrote, “Barack Obama is storing up trouble for health reformers by suggesting that there is something nasty about plans that ‘force every American to buy health care.’”

In “Big Table Fantasies,” on December 17, he wrote, “There are large differences among the serious contenders for the Democratic nomination in their beliefs about what it will take to turn a progressive agenda into reality.”

And last week, in “Responding to Recession:” he actually compared the Obama campaign to that of George W. Bush. “Recent statements by the presidential candidates and their surrogates about the economy are quite revealing,” he wrote.

[Y]ou have to say that Mrs. Clinton seems comfortable with and knowledgeable about economic policy. I’m sure the Hillary-haters will find some reason that’s a bad thing, but there’s something to be said for presidents who know what they’re talking about.The Obama campaign’s initial response to the latest wave of bad economic news was, I’m sorry to say, disreputable: Mr. Obama’s top economic adviser claimed that the long-term tax-cut plan the candidate announced months ago is just what we need to keep the slump from “morphing into a drastic decline in consumer spending.” Hmm: claiming that the candidate is all-seeing, and that a tax cut originally proposed for other reasons is also a recession-fighting measure — doesn’t that sound familiar? Anyway, on Sunday Mr. Obama came out with a real stimulus plan. As was the case with his health care plan, which fell short of universal coverage, his stimulus proposal is similar to those of the other Democratic candidates, but tilted to the right.It is true that Krugman has offered a rationale for insisting that candidates commit themselves to concrete positions on important policies well in advance of the election. “One of the lessons journalists should have learned from the 2000 election campaign is that what a candidate says about policy isn’t just a guide to his or her thinking about a specific issue — it’s the best way to get a true sense of the candidate’s character,” he wrote last spring.

“Do you remember all the up-close-and-personals about George W. Bush, and what a likeable guy he was? Well, reporters would have had a much better fix on who he was and how he would govern if they had ignored all that, and focused on the raw dishonesty and irresponsibility of his policy proposals. That’s why I’m not interested in what sports the candidates play or speculation about their marriages. I want to hear about their health care plans — not just for the substance, but to get a sense of what kind of president each would be. Would they hesitate and triangulate, or would they push hard for real change?”

Still, the relevant episode in this case, at least as a cautionary tale, seems to me to be what happened in Little Rock, Arkansas, in December 1992. That was when President-elect Bill Clinton convened a week-long “town-meeting” of his 150 or so closest would-be advisers. Krugman attended and raised ire by criticizing Clinton’s selection of Laura D’Andrea Tyson to be Chairman of his Council of Economic Advisers. (Here is a restrained account of the fracas that Louis Uchitelle wrote not long after the affair.) The episode was embarrassing to Krugman, who was suspected of having wanted the job himself, especially after the Clinton team of Lloyd Benson, Robert Rubin and Lawrence Summers compiled a stellar record at the Treasury Department.

My hunch is that, as sharp as Paul Krugman is about economics, he understands politics far less well. “If you try to find common ground where none exists – which is the case for many issues today – you end up being played for a fool,” he has written. But creating common ground where there was none before is precisely what successful politics is all about.

Compare Krugman’s startling mis-reading of the nature of Ronald Reagan’s successful 1980 campaign for the presidency — he thinks it began with a sly appeal to Southern racism – with Obama’s interpretation of the same phenomenon. “I think Ronald Reagan changed the trajectory of America, in a way that Richard Nixon did not, and in a way that Bill Clinton did not,” Obama told a Nevada newspaper last week. “He put us on a fundamentally different path because the country was ready for it. I think they felt like with all the excesses of the 1960s and 1970s and government had grown and grown but there wasn’t much sense of accountability in terms of how it was operating…. He just tapped into what people were already feeling, which was, ‘We want clarity, we want optimism.’”

It is too early to reach a conclusion about these matters, of course. We’ll have to wait for 2008 election, and see what happens after that. But at least the issue is joined.

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Arguments about the plausible virtues of employee ownership aren’t going to sway my old friend Allan Sloan, the Fortune “Deals” columnist. His mind is made up.

Last week I wrote about why Tribune’s Co.’s reorganization by real estate entrepreneur Sam Zell as a tax-sheltered Employee Stock Ownership Plan (ESOP) might make sense. I speculated that a few other big businesses might be organized along the same lines with good results.

Earlier, Sloan had scorned the deal. Last week, in a note at the end of the Washington Post version of a column excoriating Bank of America for the tax advantages that its acquisition of troubled mortgage lender Countryside Financial will bring, he reiterated his disapproval:

A year ago, I wrote about Sam Zell’s takeover of Tribune Co. and predicted that the tax-dodging employee stock ownership plan structure he was using would be widely imitated by other dealmakers. It wasn’t, which I should have said in my year-end column two weeks ago. Mea culpa. I’m still happy that the House Ways & Means Committee is trying to close the loophole.Which just goes to show that one man’s social policy is another man’s loophole. And that’s leaving aside the issue of whether the potential tax benefit to Zell as equity sponsor is as one-sided as has been stated.The striking thing about the architecture of the Zell deal is the way it gives Tribune Co employees a 51 percent piece of the action — if they can find ways to make their various newspapers work (In addition to the 160-yeard-old Chicago paper, Tribune counts the Los Angeles TimesBaltimore Sun, New York’s Newsday, Hartford Courant and Orlando Sentinel among its holdings.)

Had the sale been structured as an all-too-familiar leveraged buyout, the sponsor would have acquired 95 percent of the equity, managers would have received 5 percent for their role in facilitating the deal, and employees would have received nothing except the benefit cuts and job losses necessary to pay down the debt and taxes. Incentives to persevere would have been diminished all around.

It’s no surprise to find Fortune rooting for the buyout boutiques in the name of “closing loopholes.” But perhaps House Ways and Means Chairman Charles Rangel (D-NY) will think twice before acquiescing to Wall Street’s demands. Zell’s ESOP is an innovative departure from the standard tyranny of private equity.

It would be worth a little tax expenditure if a new form employee ownership could save several of the nation’s most distinguished newspapers.

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