Economics in the Rear-View Mirror
Jude Wanniski
March 7, 2000

 

To: Paul Krugman, Ph.D., NYTimes columnist
From: Jude Wanniski
Re: "Crude Awakening"

In your Sunday column "Crude Awakening," Professor Krugman, you pondered the rise in the price of crude oil and wondered if it mattered, in this new high-tech world: "So even though crude oil prices have surged above $30 a barrel, even though the U.S. energy secretaryís pleas to OPEC to loosen up are starting to sound a bit desperate, itís hard to get worked up about the situation. Surely we cannot really be at risk of replaying the 70's energy crisis, which was caused by ... actually, what did cause the energy crisis? ... Incredibly, there is no widely accepted answer; nor is there even a live debate about the issue. In fact, I havenít been able to find a single economics research paper published after 1991 that even tries to make sense of the era of high oil prices. And if we donít know why it happened then, how can we be sure that it wonít happen now?"

You may be surprised to hear this, Professor, but the column was kind of of encouraging -- in that you actually admitted you did not know something as important to the world as the "energy crisis" of the early 1970s. If you donít know why that crisis occurred, maybe you donít know why it ended, huh? Maybe you donít know why interest rates soared in 1980 under President Carter and why they came down in the Reagan years? We donít really expect Nobel Prizewinners to explain teeny moves up or down in prices or values. But if a world class economist -- which is what you say you are -- cannot explain one of the most cataclysmic economic events of the century in his analytical framework, maybe he doesnít know much about anything about which he writes in the worldís greatest newspaper. Maybe he will be listening to arguments about why these things happened that he previously ignored completely. Is this right?

After all, what is an academic economist good for? Not having formally studied economics, I always thought professional economists were supposed to predict the future. That is, an economist will say: If you do X, Y will happen. If you do A, B will follow. At the most recent gathering of pros at the American Economic Association convention, it was a surprise to learn from AEAís president, Robert Eisner of Northwestern, that it is not the job of economists to predict the future, but to explain the past. In other words, they should be good at telling their clients why they lost their shirts betting on a lower oil price just before it soared. Now you tell us, Professor, that you canít explain why oil is at $30 today, or why it went from $3 to $12 in the early 1970s. You canít predict the future and you canít explain the past!!!

Please. Listen here. As you are still a world-class Ph.D. economist under 40 years of age, you at least have a small excuse in not knowing why your daddy sat in long lines at gas stations in 1974, when you were in knickers and late for Little League. At the time, I was already a grown-up, writing editorials for the WSJournal and trying to figure out the oil crisis. What I did was look around for an economist who had actually predicted an oil crisis, and when I found one, asked him to tell me how he did it. The fellowís name was Bob Mundell, a Canadian with a Ph.D. from M.I.T., who made a speech in Geneva in January 1972 in which he said, flat out: "We will soon see a dramatic rise in the price of oil, and thence all other commodities." You see, Professor, if all economists had made this prediction, you would not now be scratching your head. Because only one guy did it meant that all other economists missed the boat and had a vested interest in getting all their clients in business, politics and the news media to pay no attention to Mundell.

Well, I paid attention. Just as you take your new job as NYT columnist seriously, by admitting to your readers you donít know something important, but by gosh, you are going to find out, I admitted my own ignorance and let Mundell and one of his students, a chubby fellow named Art Laffer, explain it to me. And thatís how "supply-side economics" came to be, a phrase I coined to encompass an up-to-date version of what was once called classical economics -- the economics of production. I even wrote a book about it in 1978, The Way the World Works, which I understand you refuse to read because it was not written by a Ph.D. economist. Alas, if you will only read Ph.D. economists, you can never find the right answers, because, as you say, you have scoured the research papers and there is only silence on this topic.

Now Iím not going to write you the answers here, because you are probably refusing to read even this because it has not been certified by the AEA. You can always sneak a look at the top of my home page and read my "Short History of the 20th century." You also can register as a student in Supply Side University, of course with an alias to spare you the embarrassment of learning at my knee. With a little effort, you will understand why it was that Mundell observed the price of yellow gold soaring, and he knew the price of black gold would not be far behind. When the light bulb goes on with the oil crisis, you can then put yourself to figuring out why the stock market crashed in 1929. You can do it yourself, as no research papers exist on that topic either, as all economist know it was a bubble. Or, you could read Chapter Seven of my book. You can order it at the top of this home page, Professor. Just click on it. You can give us an assumed name, to spare you the embarrassment. We will even send it in a plain brown envelope.