09 Nov 2013

Krugman: Austerity Is Bad, Unless It’s Taxing Rich People

Austerity, Krugman 20 Comments

Krugman is up in arms over the faux austerians: All along they’ve been worrying about the budget deficits in Europe, but when France goes and raises taxes on rich people, they complain about that too! The nerve of these people.

Yet as usual, Krugman doesn’t know when to keep his mouth shut. In his zeal to attack the people bashing the French authorities, Krugman slips and says:

Again, the point is not that France is problem-free; the question is why this only moderately troubled nation attracts rating downgrades and so much apocalyptic rhetoric.

And the answer just has to be politics. France’s sin isn’t excessive debt, especially poor growth, lousy productivity (it has more or less matched Germany since 2000), poor job growth (ditto), or anything like that. Its sin is that of balancing its budget by raising taxes instead of slashing benefits. There’s no evidence that this is a disastrous policy — and in fact bond markets don’t seem concerned — but who needs evidence? [Bold added.]

And here I thought balancing the budget in the midst of a liquidity trap was a really really bad idea.

(For those keeping score: Krugman is the one relying on a crude notion of “aggregate demand” causing the recession, where tax cuts and government spending are both examples of “stimulus” albeit with varying degrees of effectiveness because of different “multipliers.” In contrast, right-wingers have always stressed supply-side effects, and said that the best way to grow out of a budget hole is to slash government spending, rather than raising marginal tax rates. For example, see my EconLib piece on all of this from January, and especially follow the link to the June 2010 ECB bulletin (start reading at page 83), giving historical examples of “expansionary austerity” and stressing the importance of reducing budget deficits via spending cuts, not tax hikes. I guess Krugman gets his ideas of austerians from guys in a bar or something? He obviously isn’t reading their actual positions.)

20 Responses to “Krugman: Austerity Is Bad, Unless It’s Taxing Rich People”

  1. Tel says:

    I just looked up some stats on France to put this into perspective:

    * Government debt to GDP ratio was 64% in 2008 (that’s measured in years so 64% is 33 weeks) shooting up to 90% in 2013.

    * Government spending dipped in 2011 but went right back up and is now higher than ever (and rising).

    * The French government has run continuous deficits for more than 10 years, but the most recent four years have been exceptionally high compared to earlier, with 2010 and 2011 being worse than the others. If you just look at the past four years we could say the trend is toward smaller deficits, but that’s only by making the biggest deficit years your reference.

    * Employment participation in France is growing, which makes a contrast to the USA where people have been dropping out of the economy at a steady rate since 2000.

    * French GDP per capita was highest in 2008 and has not fully recovered to that height (but we could argue 2008 GDP was never realistic to begin with).

    * French income tax was 53.5% then dropped down to 45.8% and has recently been hiked back up to 50.2% but this is probably a very bad indicator of how much tax people are really paying, income tax has many exemptions and other taxes are indirect. Corporate taxes have also been recently hiked up, and the social security rate has gone up as well but only be a small amount. Strangely, current income tax rate and personal social security tax are both over 50% so when you add them together you get more than 100% which makes you wonder how people pay it.

    My conclusion on France is that overall it has been a high taxing, state controlled economy for many years, and that’s still the case right now. Nothing amazingly good is happening there, but nothing amazingly bad either, however the rising debt will be a problem if they don’t do something about it. Their recent tax hikes have reduced the government deficit but not anywhere close to balancing the budget, the debt is still rising and they still have a problem.

    • joe says:

      Employment participation is Employment level over the Civilian Noninstitutional Population. It does not tell you whether people have “dropped out of the economy.”

      You’re thinking of labor force participation rate. It’s fallen because the labor force has grown slower than the population. Not because people have dropped out of the economy since 2000 in the US. The labor force is at a record high right now.

      employment level, labor force and population
      http://research.stlouisfed.org/fred2/graph/?g=oiA

      • Major_Freedom says:

        Looks to me that the labor force now is pretty much where it was in 2008.

      • Innocent says:

        joe,

        I know what you are attempting to say, and you are correct the number of people in the economy is higher than in 2000. But what Tel was talking about was the percentage of the population that was in the labor force, not that the labor force was not increasing in size ( natural consequence of population growth and also one of the prime reasons for increases in GDP historically lol )

        The Labor Force participation rate I believe peeked in the late 90′s and is now down to where it was in the late 70′s as a percentage of the population.

  2. Cody S says:

    There is no evidence that Krugman has ever made a definitive statement about anything. The overwhelming evidence is that whatever you thought Paul was saying, isn’t what he meant.

    So, I am going to conclude that what Paul is not saying is that there is no evidence that balancing a budget on the backs of the wealthy during a fragile recovery is a disastrous policy.

    DK and LK will back me up.

    • Cosmo Kramer says:

      Keynesians practice hindsight-pick-your-korrelation economics. Where do you think the kurrent Keynesian definition of Austerity came from?

      Kruggy was very unhappy about the Bush tax cuts, but this is a different kontext. At least Austrians are konsistent, sheesh.

      por ejemplo: “Or we’re told that it’s about helping the economy recover. But it’s hard to think of a less cost-effective way to help the economy than giving money to people who already have plenty, and aren’t likely to spend a windfall.”

      ~Krug 2010

      • Tel says:

        Keynesians have got around to providing a definition of Austerity?

        About time that happened. Please don’t keep the link to yourself.

        • Cosmo Kramer says:

          Best I can do,

          aus·ter·i·ty

          /ôˈsteritē/

          noun

          noun: austerity

          1. An increase in spending

    • Rick Hull says:

      *golf clap*

  3. Enopoletus Harding says:

    Wait, I thought Herbert Hoover was…*&$%6!

  4. Enopoletus Harding says:

    So, wait, is there any evidence Krugman has a series of mutually consistent thoughts about any economic issue?

  5. D says:

    Yes, the answer is always some form of market failure, government solution

  6. Pike says:

    “France’s sin isn’t excessive debt, especially poor growth, lousy productivity (it has more or less matched Germany since 2000), poor job growth (ditto), or anything like that.”

    Here is data on GDP, unemployment and government debt, of Germany and France since 2001
    http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tec00114&plugin=1
    http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tsdec450&plugin=1
    http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tsdde410&plugin=1

    On all three accounts since 2001 Germany has better numbers then France over time. From the same GDP level in 2001. Germany grew faster, in France unemployment rose, in Germany fell and Germany in 2001 had bigger government debt then France, now is opposite.
    You can add government spending and deficit to the picture…
    http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tec00023&plugin=1
    http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tec00127&plugin=1

    Bob, you are an expert on this, Is this intellectually dishonest, technically not lying, lie or Krugman is just fine here? Maybe “more or less” has very stretched meaning…

  7. Keshav Srinivasan says:

    Bob, Krugman is saying that there’s no evidence that increasing taxes is worse than cutting spending. He does believe that both are bad for the economy right now.

    By the way, concerning your expansionary austerity point, Krugman has been arguing that the problems people have found with the work of Alesina and Ardagna show that evidence has collapsed for the position that austerity can be expansionary, or that deficit reduction should be biased towards spending cuts rather than tax increases if you want economic growth.

    • Keshav Srinivasan says:

      See this post for an example of his dicussion of Alesina:

      http://krugman.blogs.nytimes.com/2013/03/13/night-of-the-living-alesina/?_r=0

    • Bob Murphy says:

      Bob, Krugman is saying that there’s no evidence that increasing taxes is worse than cutting spending.

      I agree with you that Krugman believes such a proposition, but that’s not what he’s saying in the quotation I provided.

      Look, Krugman is responding to people who are freaking out about France raising taxes on rich people. People are complaining about taxes in place RIGHT NOW, not to kick in in, say, 2015.

      • Keshav Srinivasan says:

        I’m almost certain that Krugman would prefer that the tax increases came in 2015 rather than now. He just thinks that tax cuts and tax increases, especially those for the rich, have relatively low multipliers (due in part to the Ricardian equivalence being partially correct). That was his argument for allowing the Bush tax cuts to expire in 2010, and then in 2012.

        • valueprax says:

          You guys sound like members of two different Christian sects arguing about what the Bible really says.

          Or two different American political sects arguing about what the Constitution really says.

          And it’s as effective.

        • Innocent says:

          They do have relatively low multipliers, but that is why they should not be the main topic of discussion when it comes to economics. There are too few Rich people to matter whether their tax rates are higher than other people so why bother with ridiculous tax rates on them? Other principles should be applied at that point in time such as the rights of people to own and accumulate property. At least in my mind.

          Look the real issue is that EVERY economy works, it is a question of liberty in my mind that is given to the individual versus control that the state gets to exercise. Would the economy still function in the USA if for instance the Government was cut in half? Yes, Would it still function if the Government doubled in size? Of course it would. However there are real long term consequences to debt, there are also long term real consequences to the mis-allocation of resources. I would suggest that a state controlled economy, which is really what the USA has turned into, will have significant issues over long periods of time. Add onto this that there is an issue of freedom, the ability of people to choose what they want, when they want it, and pay the price for it. Without some condescending intellectual forcing them to choose differently.

          Perhaps that is the real issue at hand. The real problem is one of freedom and self governance versus forced vassalization due to social contract restraints ( Government law )?

          I agree with Keshav that Krugman believes what is suggested. I would also argue that Bob is correct in pointing out that Krugman only likes one side of the coin versus the other. More state control and larger taxes allowing it to better control the economy and choose winners and losers.

  8. Potpourri says:

    [...] out the data into spending cuts versus tax hikes, then you see a different story. Note, this is exactly what I said, when Krugman was going ballistic about the phony-baloney deficit hawks who didn’t endorse [...]

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