Am I talking about Paul Krugman's version of the Bush administration's build-up to the US-led invasion of Iraq? No, that's Paul Krugman's own campaign of lies, exaggerations and sexed-up intelligence designed to fool the American people into thinking that America's federal budget deficit is a deadly threat. The draconian countermeasure he calls for? Regime change, of course -- and tax hikes. As I heard America's most dangerous liberal pundit urge (in violation of the New York Times' Code of Conduct) in a lecture last week at the University of California at San Diego, "vote!" -- for any of the Democratic presidential candidates, all of whom are calling for the repeal of George Bush's tax cuts.

Krugman has excoriated President Bush for his allusion to a "mushroom cloud" in describing the potential threat of Saddam Hussein's weapons of mass destruction. Krugman's fiscal equivalent of a mushroom cloud is America's impending insolvency: the crash of the dollar, a debt default, a downright national bankruptcy. Bush made his allusion in the context of admitting what he doesn't know: "We cannot wait for the final proof -- the smoking gun -- that could come in the form of a mushroom cloud."  But for Krugman, insolvency is a clear and present danger -- a diagnosis certified on his own authority as an Ivy League economist who bragged to the San Diego lecture audience, "I invented currency crises" (pause for laugh; pause for Nobel Prize -- oh well, maybe next year).

Krugman has been calling Bush's America "a banana republic" now for months (for example here, here and here). He abandoned that slightly humorous metaphor in his Times column last Friday (which was all about "civility" in political discourse), writing "even the most sober observers now talk starkly about the risk to our solvency." Yes -- "most sober" -- as opposed to our President, presumably, whom Krugman has most uncivilly called "a recovering alcoholic falling off the wagon."

But who, then, are these "most sober" ones who "now talk starkly" in support of Krugman's predictions? As reader John Davidson put it in a letter on our letters page, "There is not one economist in the world who thinks that the US has any risk of insolvency." No, Krugman himself doesn't count.

But in his Times column yesterday, Krugman has some new intelligence, sexed-up to make it seem he's found his own little piece of financial yellowcake. Can mushroom clouds be far behind? Krugman writes,

"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.'"

Steven Antler, an economics professor at Roosevelt University, shot back yesterday on his must-read blog Econopundit,

"This is misrepresentation, pure and simple... Damocles is not a mathematical model but a very simple index of ten 'selected' indicators... genuine mathematical models, like the Yale multi-country trade and US macroeconomic models are definitely not predicting that a 'crisis could erupt at any time.' (Far from it, they're predicting a robust recovery even in the face of Iraq reconstruction costs!)"

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," I found that Krugman had sexed-up his hand-picked "model." First 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 US's "imbalances" are any worse than those of any other country. Rather, the US is "conspicuous" only because "any financial crisis could cause considerable spillover effects to the rest of the world." I obtained the full September 1 2003 report on Damocles -- no different.

Next I called Lehman's UK-based Chief International Economist Russell Jones, the author of the report on Damocles. He'd seen Krugman's column -- I could hear the sound of his eyes rolling all the way from London. He told me "Krugman can be somewhat twisted and bitter on occasion. This analytic tool was not intended to be applied to developed countries. Damocles gave him an in to write a piece he wanted to write. He's making a career out of this kind of thing." 

Strong words from Jones, who told me at the same time that Krugman is not wrong, in principle, to be concerned about the US's "rapid accumulation of debt," and that indeed the US scores poorly by Damocles' standards. But he firmly admonished, "to apply this to the US is not that relevant."

That's Krugman's sexed-up intelligence -- now here's his equivalent to the supposedly phony Al Qaeda/Saddam link. In Tuesday's column, Krugman pushed a phony link between the US's economic situation and that of Argentina. He warns that "our budget deficit is bigger relative to the economy than Argentina's in 2000" -- just as in a column in July he said "the U.S. government is running deficits bigger, as a share of G.D.P., than those that plunged Argentina into crisis." But three -- count 'em, three -- of his own columns written when the Argentina crisis was still making headlines in 2000 and 2001 (here, here, and here) show that Krugman himself believes there's no link at all. Back then he argued specifically that debt didn't have anything to do with Argentina's troubles: "...Argentina's fundamental problem isn't fiscal; it's monetary."

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. It's just a zany fantasy that the dollar is not only not collapsing (John Snow would like it to be lower than it is) -- and that yields on Treasury debt are still very low by historical standards (just where Alan Greenspan wants them). You poor deluded fool... the very fact that things appear to be getting better means they're really getting worse!

By the way -- you want a quick laugh? Click here and see where Krugman stole that Wile E. Coyote metaphor from. Beep-beep!

Hey, don't let Krugman get to you. Liberals claim that the so-called "neo-cons" have been plotting the invasion of Iraq for years. Well, Krugman's been forecasting the imminent demise of the US economy for even longer. Two -- count 'em, two -- of his books in the early 1990s (here and here) had the phrase "The Age of Diminished Expectations" in their titles. And when the boom of the late 1990s proved him wrong, he had the gall to write a book called The Return of Depression Economics. Last April Krugman was predicting that SARS would cause a global depression. A year earlier he was predicting a "third oil crisis." If it's not one crisis it's another.

What else can Krugman do now but pretend there's a crisis? It's in his genes. And for him, there really is one. A year from now, voting to repeal Bush's tax cuts will be tantamount to voting to repeal prosperity. For Krugman and the Democrats, that's the imminent threat.

Posted by Donald L. Luskin at 11:19 PM | link