03 Jan 2014

Krugman Can’t Stand People Who Switched Their Fiscal Policy Views From the Bush Years

Krugman 7 Comments

[UPDATE below.]

I’m sure most people wouldn’t have caught this, but that’s why you kids have me on the job. In trying to show everyone how intellectually dishonest Republicans are, Krugman stretches so far that he throws his back out. Follow me:

In discussing a Pew poll on evolution, Krugman argued that Republicans moved their views during the Obama years purely as a signaling device, to show their support for their “tribe.” (Note: We’ll come back to this on Sunday; let’s not discuss evolution right now, because the point here is Krugman.) Then he likened this to how Republicans have also (allegedly) changed their views on countercyclical policy, too. He wrote:

As recently as 2004, the Economic Report of the President (pdf) of a Republican administration could espouse a strongly Keynesian view, declaring the virtues of “aggressive monetary policy” to fight recessions, and making the case for discretionary fiscal policy too. (Naturally, the only form of discretionary fiscal policy considered was tax cuts, but the logic was straight Keynesian, and could have been used to justify public works programs equally well.)

Oh, and the report — presumably written by Greg Mankiw — used the “s-word”, calling for “short-term stimulus”.

Given that intellectual framework, the reemergence of a 30s-type economic situation, with prolonged shortfalls in aggregate demand, low inflation, and zero interest rates should have made many Republicans more Keynesian than before. Instead, at just the moment that demand-side economics became obviously critical, we saw Republicans — the rank and file, of course, but economists as well — declare their fealty to various forms of supply-side economics, whether Austrian or Lafferian or both. Compare that ERP chapter with the currency-debasement letter and you see a remarkable case of intellectual retrogression.

I don’t want to spend too much time on this, but it is quite remarkable just how wrong and hypocritical the above commentary is. For example:

(1) Krugman thinks he is documenting a shift in Republican views on economic policy, presumably because of the change in Administrations (from Bush to Obama). But Mankiw didn’t sign the currency debasement letter, and I don’t ever remember him saying since 2008 that he thought Bernanke had no role to play in the recovery. Furthermore, the rank-and-file Republicans who oppose aggressive monetary policy today, certainly were not parsing the “Economic Report of the President” back in 2004. That’s not something Rush Limbaugh read on the air. And if, for some crazy reason, you had asked the average Fox News fan back in 2004, “Do you think it would be a good idea for the Fed to create more than $2.5 trillion so it can buy assets from the feds and Wall Street bankers?” the answer would have been a resounding, “No! That would wreck the dollar!” So even on Krugman’s own terms, there is zero shifting going on here.

(2) Krugman is completely full of it when he says that the 2004 case for fiscal stimulus is Keynesian. From the summary provided at the report: “Tax cuts can boost economic activity by raising after-tax income and
enhancing incentives to work, save, and invest.”
So what is so inexplicable about going from that position in 2004, to a Laffer position today? That’s the same position. I realize Krugman is incapable of thinking that tax cuts can do anything except give taxpayers more money to spend, but that’s not the actual reason conservatives/libertarians favor tax rate reductions as a way to boost economic growth. (Perhaps Krugman should start reading people with whom he disagrees? Then he wouldn’t have to get his notion of conservative tax policy from a guy in a bar.)

(3) Mankiw didn’t sign the currency debasement letter, but even if he had, there is nothing in it that contradicts the 2004 report. The letter isn’t making blanket statements like, “Monetary policy can never provide countercyclical relief.” Rather, it is very specifically saying that as of November 2010, the people signing the letter thought the Fed had already done what it could, and that further QE would risk doing more harm than good. Maybe that’s right, maybe that’s wrong, but that doesn’t explicitly contradict someone arguing in 2004 that Greenspan’s lowering of interest rates cushioned the blow from the dot-com bust.

(4) I believe I have demonstrated that Krugman is on very shaky ground when trying to document a major (and politically convenient) shift in the opinion of Republicans on the effects of monetary/fiscal policy. In contrast to Krugman’s examples, I can think of a much better case of an economist who has done a complete 180 in his views since the Bush years, and moreover in a way that very conveniently lines up with his partisan stance. But in this particular economist’s view, this isn’t evidence of his perfidy; rather, he is to be congratulated for changing his position, because he has a better moral character than his foes. If anyone tries to bring up his previous writings, this economist dismisses the move as an unfair ad hominem attack, irrelevant to the correctness of his current view. Do I need to tell you who this mystery economist is? Hint: It’s not Greg Mankiw.

UPDATE: OK, in response to a comment I went and looked more carefully at the exact defense given in the Economic Report from 2004 for the earlier Bush tax cuts. And it’s true, on pages 43-44, that the author of the report (Mankiw?) gives a “Keynesian” justification in that they increase after-tax income and hence boost aggregate demand. The report then goes into supply-side considerations, but Krugman is correct if he says that there exists a Keynesian justification for tax cuts in the 2004 report. Even so, that doesn’t really document a shift in any individual Republican’s position; Mankiw (the author?) hasn’t changed since then, as far as I know, and the average Republican wasn’t running around in 2004 saying, “I just love pages 43-44 of Bush’s report!”

Note that I’m not saying Krugman has a monopoly on switching his opinions with the party in the White House. I’m just saying he really hasn’t documented his claims of massive Republican shifting on matters of economic policy in this post.

7 Responses to “Krugman Can’t Stand People Who Switched Their Fiscal Policy Views From the Bush Years”

  1. Jonathan Finegold says:

    Regarding (4), did Krugman really make a 180 dgr. change? He’d say that in 2004 the economy wasn’t in a liquidity trap, and that in 2010 it was. (Although, he did change his views on fiscal policy somewhere between 1998 and 2007.)

    For (2), presumably the objective of increasing after-tax income is to increase private spending, right? But, you could be right if the theory behind tax cuts is to increase the share of resources allocated by the private sector, for the efficiency gain (to reduce crowding out). But, that the same report pushes for countercyclical monetary policy suggests that they believed there to be a demand shortage, which means that the rationale behind tax cuts is at least partly the same as the rationale for government spending.

    I think you’re right that a large number of Republicans who, to one extent or another, oppose monetary and fiscal policy are a different stock of people to the Republicans of 2004. At the same time, I do think there are a lot of Republicans who “switched views,” so to speak, because those views were becoming politically attractive — after all, this is what we have in mind when libertarians argue that certain Republican politicians took advantage of, and distorted, Ron Paul’s liberty movement. And, if Krugman were wrong, I think we would see a lot more division within the Republican Party over countercyclical monetary and fiscal policy.

    • Jonathan Finegold says:

      But, I agree that Krugman has to assume that Republicans changed their minds in bad faith, which is something that he has to substantiate.

    • Sam says:

      The theory behind tax cuts is that taxes are destructive, pure and simple. Sure, they hurt demand and spending, but they also diminish incentives, confound investment, increase barriers, and consume real resources…anything the economy produces or uses that is taxed, even indirectly, including things not yet invented, has or will have its positive outcomes diminished by a tax burden. THAT’S the theory. If you give an economic defense of a tax cut, anything positive you say is pretty likely to ring true, especially to a non-economist, since we expect a tax reduction to be a reduction in negative outcomes in virtually any economic area. There’s nothing inconsistent about backing tax cuts every time, and opposing spending increases every time, even if you admit that taxes demonstrably hurt the parts of the economy that stimulus is supposed to help.

      • Jonathan Finegold says:

        Sam, look at the report, they explicitly argue that tax cuts will increase after-tax income. That’s a very specific argument.

  2. Tel says:

    • Contributing to growth-enhancing policies through analysis of tax-relief and other stimulus measures.

    The Administration had been extraordinarily successful in introducing and gaining passage of substantial tax cuts early in the recession in FY 2001. As a result, consumer spending showed only modest effects from the recession. Employment and capital spending remained weak, however. In March 2002, additional stimulus was passed that was designed to address those problems. Benefits for the insured unemployed were extended for an additional 13 weeks and 30 percent immediate expensing was allowed on business purchases of equipment retroactive to September 11, 2001. Analysis of the expensing option was undertaken by Treasury in Fall 2001. By the second calendar quarter of 2002, capital spending had begun to rise.

    I went and highlighted the Keynesian-sounding words, but overall I’d argue that’s written from a very traditional Keynesian perspective. It demonstrates that the regime at the time believed that the economy was facing a downturn and needed some sort of stimulus to bounce it back again.


    I might point out that Paul O’Neill who wrote that was sacked at the end of 2002 for complaining in public about the risk of deficit blow out. Paul O’Neill attempted to confront Dick Cheney about the same and got the famous retort, “Reagan proved deficits don’t matter.”

    So yeah, the Bush / Cheney / Rumsfeld administration were willing to go the Keynesian stimulus path, and they were willing to start a war in the process, but that doesn’t mean the Republican Party as a whole supported that. After all, Ron Paul has been Republican since the year dot and he disagreed openly and often. The Tea Party Republican movement took ideas very much from Ron Paul and they grew in power over 2009, 2010, 2011, and forced a change in attitude. A lot of conservatives who started off supporting the War in Iraq and Afghanistan back when the whole terrorist schtick was fresh, gradually grew weary of the quagmire, grew weary of the slow bleeding of the USA and started to change their attitude.

    Remember Bush is the guy who had to destroy Capitalism in order to save it (and destroy various parts of the Middle East in order to same them too). If you were thumbing around looking for a way to destroy Capitalism, you would have to give Keynesian stimulus a good try. Now we just need to figure out what got saved.

  3. Sam says:

    The point stands though that tax cuts, whatever the rationale, have been the Republican idea of economic policy for an awfully long time. Even when we catch Republicans defending tax cuts on such Keynesian grounds, that does not mean they have reversed their positions when they refuse to defend the stimulus on similar grounds. It may be that tax cuts do achieve aims that general stimulus don’t, or don’t without massive side effects. I just don’t see how this goofy language in this report can overcome the fact that real-world Republican policy went from “Tax cuts” to “Tax cuts” and then back to “Tax cuts” and somehow we’re extracting hypocrisy from that, because there’s theoretical overlap between one of the many reasons to cut taxes and a reason other people give to spend madly.

    And yes…Bush years…blind panic…inconsistencies…we’ve learned our lesson. Maybe that’s the reversal, maybe we’re not allowed to learn from mistakes. It just seems odd to call that out on fiscal policy and not say, foreign policy, where many of us will make no secret of having abandoned our previous attitude toward warmaking.

  4. von Pepe says:

    Well, AD is such a funny concept. You said we could increase investment which falls under their AD and I am pretty sure k is talking about consumption increasing AD. So, technically investment is AD but I think everything from that point is totally different view of how things can get better.

    AD is such a silly catch-all.

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