In his National Review Online article titled "Crisis Management", Donald Luskin once again combats alleged distortions by Paul Krugman with distortions of his own. He states:
But in his
Times column Tuesday, Krugman had some new intelligence —
sexed-up to make it seem like he found his own little piece of
financial yellowcake. Can mushroom clouds be far behind? Krugman wrote,
Lehman Brothers has a mathematical model known as Damocles that it
calls "an early warning system to identify the likelihood of countries
entering into financial crises." Developing nations are looking pretty
safe these days. But applying the same model to some advanced countries
"would set Damocles' alarm bells ringing." Lehman's press release adds,
"Most conspicuous of these threats is the United States."
Luskin then goes on to quote another Krugman Truth Squad member who
criticizes Krugman's use of the word "model" to describe Damocles,
saying that it is not a mathematical model but a very simple index
of ten "selected" indicators. He then continues:
So Krugman hand-picked a "model" that confirmed his prejudices. But does it? After spending a few minutes playing the role of Joseph Wilson IV and "drinking sweet mint tea," the Krugman Truth Squad found that Krugman sexed-up his hand-picked "model." I downloaded the Lehman press release Krugman cited. It turns out that Lehman never claimed to have "appl[ied] the same model" to the United States. It only stated that "the developed countries ... are exhibiting large economic imbalances." Nothing whatsoever was said to the effect that the U.S.'s "imbalances" are any worse than those of any other country.
Luskin is correct that the Lehman press release never claimed to have applied the same model to the United States. In fact, Krugman never claimed that the Lehman press release said that. However, an article titled "America the risky?" on page 70 of the October 4th-10th issue of The Economist stated the following:
When Lehman ran America's economic numbers through Damocles, the outcome was striking. With its rapidly climbing current-account deficit and foreign debt, among other worries, America's Damocles index is just shy of 75. There are, points out Russell Jones, the bank's international economist, problems applying Damocles to America, which enjoys the luxury of having the world's reserve currency. Granted. Poorer countries tend to owe dollars, and therefore suffer when their currencies fall. Lucky America, of course, owes its own currency.
In a previous paragraph, the article had stated that a "reading above 75 indicates that a country has a one-in-three chance of a crisis in the next 12 months". In any case, the Economist does confirms that Lehman did apply Damocles to the United States. Luskin could be excused for not knowing this except for one fact. Later in his article, he references the online version of the Economist article. He left this reference out of his blog, possibly because the reader must be a subscriber to the Economist online in order to access it. In any case, Luskin continued:
Krugman Truth Squad member
Robert Musil
nailed the essence of Krugman's deception: Krugman sliced in half this
sentence from the Lehman press release:
Most conspicuous of these threats is the United States, where any
financial crisis could cause considerable spillover effects to the
rest of the world.
Musil noted that Krugman's "reference to the 'conspicuous' United
States eliminates the part of the sentence that makes clear that the
'conspicuousness' relates to the extent of the consequences
of a crisis, not the likelihood of a crisis."
It's a little difficult to figure out exactly what Luskin and Musil are complaining about. Following is the full quote from the Lehman release, with the portion that Krugman quoted in bold characters:
He adds, however, that the biggest risk today to emerging economies is the developed world where many countries are exhibiting imbalances “that would set Damocles’ alarm bells ringing.” Most conspicuous of these threats is the United States, where any financial crisis could cause considerable spillover effects to the rest of the world.
The fact that imbalances in the U.S. would "set Damocles' alarm bells ringing" would seem to indicate an increased likelihood of a crisis, at least before considering the United States' unique position in the world. Of course, this unique position also increases the extent of any spillover effects on the rest of the world. Hence, it would seem that the quote addresses both the likelihood and the extent of a crisis. In any case, Luskin continues several paragraphs later:
And how about Krugman's version of the disclaimers, pretending to say
that the financial crisis that he predicts isn't really "imminent"?
That's the best part.
The crisis won't come immediately. For a few years, America will still
be able to borrow freely, simply because lenders assume that things
will somehow work out. But at a certain point we'll have a Wile E.
Coyote moment. For those not familiar with the Road Runner cartoons,
Mr. Coyote had a habit of running off cliffs and taking several steps
on thin air before noticing that there was nothing underneath his
feet. Only then would he plunge.
In other words, don't look for evidence of impending insolvency —
the very fact that you think you don't see any evidence is part of the
problem! It's just a cartoon illusion that GDP growth is beginning to
surge, that payroll jobs creation has ticked up, that unexpectedly
large tax inflows to the Treasury have caused both the Office of
Management and Budget and the Congressional Budget Office to
reduce their
deficit forecasts sharply.
In fact, the CBO document that Luskin references states the following:
CBO estimates that the federal deficit was about $374 billion in 2003, up from $158 billion in the previous year. The estimated deficit is about $27 billion lower than CBO projected this summer. Higher revenues account for about $13 billion of the change, including $7 billion from unexpectedly strong receipts of corporate income taxes. Lower outlays account for about $14 billion of the change, primarily because of lower-than-anticipated spending by the Departments of Defense and Education, and for Medicaid, unemployment benefits, Temporary Assistance for Needy Families, and net interest.
Hence, higher revenues accounted for $13 billion, or slightly less than half, of the $27 billion deficit forecast reduction. The other half was due to lower outlays. Yet Luskin stated just that "unexpectedly large tax inflows to the Treasury" have caused the reduction in deficit forecasts, totally failing to mention the lower outlays. I guess he assumed that nobody would check the source that he himself provided. In any case, Luskin continued:
You poor deluded fool ... the very fact that things appear to be getting better means they're really getting worse! (By the way — want a quick laugh? Click here and see where Krugman ripped off that Wile E. Coyote metaphor. Beep-beep!)
Luskin is alleging that Krugman ripped off the Wile E. Coyote metaphor from an article he wrote on March 22, 2002, over a year and a half ago. Following is Luskin's Wile quote:
All the Nasdaq has to look forward to is Wyle E. Coyote's definition of a recovery: You jumped off a cliff, your rocket skates flamed out and you've splattered on the desert floor — but at least you've stopped going down.
and, once again, following is Krugman's quote:
But at a certain point we'll have a Wile E. Coyote moment. For those not familiar with the Road Runner cartoons, Mr. Coyote had a habit of running off cliffs and taking several steps on thin air before noticing that there was nothing underneath his feet. Only then would he plunge.
The only similarity seems to be that both involve Wile E. Coyote and both involve one of Wile's main activities (falling). It appears that Luskin feels that all mentions of Wile hereafter are direct steals of his article on March 22, 2002. He's right, that was good for a quick laugh!