David Frum and Conservatism

It's hard to understand what would be left of conservatism if David Frum had his way and supply-side economics was no longer a central part of the conservative movement. In this column David Frum's Weird Attach, James Pethokoukis discusses Frum's disagreements with Larry Kudlow.

..... Frum's "facts" are wrong. Moreover, I think he has misjudged terribly the actual performance of the U.S. economy during the past eight years and should probably buy Kudlow dinner in Manhattan as penance. Frum's economic errors are many, but probably fairly common among readers of the New York Times. I will attempt to briefly dispel at least some of them.

1) Workers' incomes have been stagnant for years. Wrong! According to economist Ed Yardeni, average real pretax earned income per worker rose to a record high of $48,957 in April and is up 11 percent since January 2001, when President Bush took office. Now I'm not sure what those numbers have done lately with the slowing economy and credit crunch (more on that later), but the economic pessimists have been complaining for years about workers continually falling ever further behind. And remember, this measure does not include benefits. Plus, many estimates of real income or real wages skew lower because of the inaccurate way the government measures inflation, overstating it by two thirds of a percentage point (says economist Michael Boskin) to almost a full point (says the Labor Department) every year.

2) Income inequality has exploded. Wrong! More and more research is revealing that the supposed rise in income inequality is a bit of a crock. One reason is the "China Effect." A recent University of Chicago study found official income inequality statistics fail to take into account that lower-income Americans tend to consume more inexpensive Asian goods. As the study's authors conclude, "This price effect offsets almost all the rise in inequality measured by official statistics." And whatever slight rise in inequality that's left over can easily be explained by technology and the expanded global market for CEO talent.

3) The fundamentals of the economy are weak. Wrong! There is way more to the U.S. economy than Wall Street. Did you know that the World Economic Forum, the Davos folks, for the second straight year judged the United States as possessing the most competitive economy in the world? (Then came Switzerland, Denmark, Sweden, and Singapore.) Among America's strengths: innovation, flexible labor markets, and higher education. And remember, the core U.S. economy is in far better shape than it was in the 1970s. Productivity, the key measure of an economy's strength, consistently grew at less than 2 percent in the 1970s and stayed weak until the tax cuts, deregulation, inflation fighting, and corporate restructuring of the 1980s blossomed into the tech and productivity boom in the 1990s and beyond. Productivity has averaged about 2 percent since 1995 and is now running closer to 3 percent year over year, including 4.3 percent in the second quarter.