Careless Arithmetic

Paul Krugman has done everyone a service in warning against the dangers of making policy on the basis of facile analogies, such as those between countries and corporations. Yet while he justifiably accuses others of "careless arithmetic" in making their case, he shows little concern with immunizing himself from the charge. With regard to European labor costs, he cites Sam Brittan (Financial Times, June 1, 1993) in asserting that they "have not risen in relative terms when the exchange rate adjustment is made." Thus he concludes that European firms have not suffered a decline in competitiveness, as British Prime Minister John Major had claimed. In fact, Brittan's statistics show that between 1987 and 1993 European Community unit labor costs in manufacturing rose approximately 19 percent as compared with only 5 percent in the United States, both before and after the exchange rate adjustment. How Krugman could have missed this point, as he put it, "cries out for an explanation."