(FORTUNE Magazine) – Who are you going to believe? Nobel laureate Paul Samuelson calls fellow MIT economist Paul Krugman ''the rising star of this century and the next.'' What's more, says Samuelson, Krugman's The Age of Diminished Expectations (MIT Press, $17.95) is ''a tour de force.'' The Wall Street Journal's reviewer, on the other hand, trashes the book, saying his expectations were ''diminished by reading it.'' Now I am a hard-core free-marketer, and in most conflicts between a liberal like Samuelson and the market-oriented Journal I naturally side with the Journal. But this time I don't. Krugman's book is first-rate. What has received the most attention is the weakest and, fortunately, a minor part: the author's claim that the U.S. ''may well be the third-ranked economic power by the end of this decade.'' Although he makes the statement in the preface, Krugman does not attempt to justify it until four pages from the book's end. His reasoning turns on semantics. By treating all of Europe as one country, he gets the U.S. to second place. He then pushes it to third through the way he measures Japan's economy -- not by its GNP, which he estimates will be about 80% of America's, but by its overseas investments and exports, which likely will exceed America's. Bottom line: Measured by GNP, the U.S. will still be No. 1 in 2000. So what makes Krugman's book so good? He treats clearly and insightfully a broad range of economic issues, including income inequality, employment and unemployment, free trade vs. protectionism, and the budget deficit. And he does so with an obviously effective yet too-seldom-used method: He actually looks at numbers. As well as being a top-notch economics book, therefore, The Age of Diminished Expectations is a top-notch exercise in numeracy. Take income inequality. Krugman points out that inequality in the U.S. increased dramatically in the 1980s. From 1979 to 1987, he reports, real income before taxes of families in the population's top tenth rose 21%, while that of the bottom tenth fell 12%. But Krugman does not conclude that the rich got richer by exploiting the poor. Good line: ''For one thing, most of our very poor don't work, which makes it hard to exploit them.'' Krugman also notes that the rich families' gain in income was about 12 times as large as the poor families' loss, making it impossible for the rich to have grown richer solely at the expense of the poor. Nor does he advocate taxing the rich further to throw more money at the poor. Tax increases might reduce incentives, he argues, which would hurt productivity growth. Also refreshing is the discussion of the American job machine. Krugman points out that the U.S. economy created jobs for almost all the baby-boomers and immigrants who entered the U.S. labor force during the 1970s and 1980s. This achievement, he writes, contrasts sharply with Europe's experience. The European economies created no new jobs between 1973 and 1985, multiplying unemployment fivefold. Nor was the boom in U.S. jobs a lucky development that just happened to coincide with the huge increase in people looking for work. The credit, writes Krugman, goes to our ''highly competitive and flexible labor markets,'' which contrast sharply with their stiffly regulated European counterparts. WITH THE LATEST round of GATT in the headlines, Krugman's analysis of free trade vs. protectionism is worth reading. Although he favors free trade as a ''reasonable rule of thumb,'' he believes that even extreme protectionism would do much less harm than most people think. Before reading his book, I believed that a 1930s-style trade war could cause a serious depression. But Krugman's simple numerical example convinced me otherwise. Imagine, he writes, that the world's market economies grouped themselves into three trading blocs -- one centered on the U.S., one comprising the European Community, and one based in Japan. Suppose each trading bloc imposed tariffs of 100%. (To put this in perspective, tariffs now average less than 10%.) Suppose further that these 100% tariffs reduce world trade by 50%, a reasonable supposition. How would this reduction in trade affect people's well-being? First, notes Krugman, employment would not necessarily be hurt. Although workers in export industries would lose jobs, workers in industries that compete with imports would gain jobs. The damage from tariffs, he writes, is not from loss of employment but from loss of efficiency. A 100% tariff would cause some goods to be produced domestically even though they could have been imported at lower cost. Krugman figures world trade averages 10% of world GNP, so if it fell by half, that would be 5%. The cost of wasted resources would be some fraction of this 5% -- half seems a reasonable estimate. Thus, the maximum loss from a serious trade war would be about 2 1/2% of GNP. Enough to cause a recession? Sure. But a depression like the last one, in which real GNP fell 30% from 1929 to 1933? No way. KRUGMAN ALSO sheds light on the savings and loan debacle. The problem was that S&Ls had done what they were supposed to do: They had borrowed short and lent long to home buyers. This worked in the Fifties and Sixties, when the thrifts paid modest interest on deposits and lent money to homeowners at 4% to 6%. But inflation in the Seventies drove rates on money market funds as high as 10%, causing S&Ls to lose depositors. The federal government responded by allowing thrifts to pay higher interest to depositors, but to be competitive they eventually had to shell out the same 10%. With assets earning only 4% to 6%, S&Ls couldn't make it up on volume. By 1980, claims Krugman, $15 billion of government money could have liquidated the now sick S&Ls. But Congress and the Reagan Administration postponed dealing with the problem and continued to insure increasingly risky S&L deposits. If Washington had studied the numbers as rigorously as Krugman has, taxpayers would be spared much of the $150 billion bailout.

BOX: EXCERPT: The only way to make the rich less so is to tax them. Yet this conflicts with other policy goals -- such as encouraging risk-taking and entrepreneurship. Given that the deepest problem with the U.S. economy is slow productivity growth, it is difficult to argue for tax increases.