11
Jun
2015
Krugman Kontradiction or Worse?
I extend David R. Henderson’s question on Krugman excoriating Republican governors for running up debts since 2008. Some of you are going to say I’m nuts, that Krugman is being totally consistent. Well, you’re wrong. No he isn’t. If Hitler closes down the concentration camps because he decides the war effort requires everybody gets back into the labor force, I suppose we can criticize him for violating his own rhetoric. But we shouldn’t call it a crisis.
Bob, the post was about Republicans’ professed concern over the deficit vs. their actual governing priorities, not about whether those deficits were a good thing. I don’t think Krugman was even thinking about the macroeconomic effects of deficits in that posts; he was making a political point.
But Krugman has addressed the fundamental issue you raised, in an old post about the Bush tax cuts:
krugman.blogs.nytimes.com/2010/08/05/tax-cuts-and-the-economy/
“Given the political realities, I’d go for a temporary extension of the lower-end cuts, and just letting the upper-end cuts expire.
Why?
It comes down to the dual fiscal problem the U.S. economy faces: short-term, the government needs to do all it can to prop up spending; long-term, it needs to reduce the deficit. The latter concern means that it would be a terrible idea to make the high-end tax cuts permanent; that would be a huge drain on the public finances, serving no good purpose. But why not a temporary extension? Because it would do very little to promote spending….”
And then he goes on to explain how temporary tax cuts for rich people have almost no stimulative effect, but tax cuts for poor people are at least somewhat stimulative. So to the extent that the Republican governors’ tax cuts were focused on the rich, Krugman would say “You ran large deficits with little to no benefit.”
Here’s what he specifically says about tax cuts for poor people vs. tax cuts for rich people: “So tax cuts for the lower 60 or 80 percent of the population are an OK, not great but OK, form of stimulus; tax cuts for the top 2 percent, not at all.”
Keshav, you are missing the elephant in the room on this one.
Regardless of what motivated Krugman to write the article titled “The Party of Fiscal Responsibility in Action”, even if he wrote it because he wanted to point out the hypocrisy of the republican party on fiscal responsibility, what cannot be denied is that, as Murphy pointed out, Krugman did call the resulting increased debt an “epidemic of fiscal crisis”.
That my friend is a whole other kettle of fish, it is a horse of a different color.
Krugman pulled the same stunt some time ago during a previous, you guessed it, Republican administration, which I believe Murphy linked to a while back on this blog.
Murphy is right. When deficits and debt grow under Republicans, Krugman talks about fiscal crises. But when they rise under Democratic administrations, he never criticizes it, and in fact defends them against the oh now they’re stingy worrywarts again Republicans.
I don’t think Krugman was trying to cast judgment on the deficits from a macroeconomic point of view. It’s just that state constitutions have balanced budget requirements, so the state budgets are literally in crisis right now.
Crisis because of the debts!
The budgets are a sideshow.
Krugman has stated being against “50 Herbert Hoovers”, I.e. states that refuse to borrow and spend more.
It does not matter if he was or was not taking about a ” macro” judgment of the debt. He is blaming Republicans for too much spending.
from an economics stand point taxing the rich is almost meaningless. Which is why it is also almost meaningless to then stop taxing the rich because there simply are not enough of them to make a real dent, add to this the rich are the most volatile of income groups and taxing them and relying on it as a form of revenue is VERY dangerous from a revenue perspective.
That being said I would agree with Krugman that taxing the rich more or less is not an effective for of either stimulus or revenue generation.
Now the real question is one in my opinion is one of integrity. I feel it is immoral to have a progressive tax rate and it pits people against one another and creates a disincentive to produce more because they retain less for each dollar invested or unit worked.
Personally I am a computer programmer and pick up lots of side work. I personally am tired of the government taking more from me because I choose to work 16 hours a day, at a highly skilled job. Seriously I am tired of doing it. Now this is anecdotal but if he more you work the more the government takes seems a little foolish don’t you think?
I’m pretty confident in saying that Krugman consistently criticizes Republicans.
Yup. When was the last time Krugman praised a Republican? God, I miss the neoliberal era.
The conservative party in the UK is proposing a law preventing Govt in the future running a deficit in times of growth. That does seem to be the other side of the Keynesian coin – spend in recession but not in times of growth. Is this something Keynesians would generally be in favor of?
The law would not prevent future Govts repealing the law, but that might be embarrassing for them.
Well, most Keynesians believe in a balanced budget over the course of a business cycle, i.e. running surpluses in the boom years and deficits during recessions. But I think Keynesians would oppose the law you’re talking about, because while it prohibits deficits during boom times, it doesn’t guarantee deficits during recessions. So there’s a risk that the budget would be in surplus in boom years, and would still run a surplus or in sufficiently large deficit during recessions. So that law might just lock in austerity,
For the record, Keynesians tend to use a different definition of “austerity” than Austrians, and it’s the source of much frustration to Austrians.
When Austrians refer to austerity, they mean that the *government* needs to be austere, and the artificially propped up sectors need to sink or swim on their own merits; This would include all government programs.
If you can make a killing during the correction, Austrians say more power to you. There’s no need for the people to be austere if they haven’t been the beneficiary of artificial stimulus.
It also means that the government needs to tax their citizens less, not more. Government isn’t being austere when it imposes more taxes. Austrian “austerians” get blamed for this burden even though this isn’t our position.
When Keynesians refer to austerity, they mean that it’s the people that are in the position of austerity, and, in order to keep much of the government spending going, they make sure to put those programs on the block first that would most likely meet resistance from the most number of people.
They also think that austerity means more taxes.
Hi Guest,
“I also think that austerity means more taxes”.
Keynesian austerity can mean that but it can also occur where government expenditure expenditure falls more than taxes fall. An ex ante budget surplus is what Keynesian theory requires and /or a restriction in the quantity of money by central banks, if you wish to implement austerity..
The theoretical positions of Keynesian economists might suggest a number of possible options, in terms of Keynesian theory, but which ones actually get implemented by the political representatives in power will vary with their political preferences and their ability to get them through the system.
Of course, when Keynesians see the economy as being depressed, they advocate monetary and or fiscal stimulus to get the economy going again. In those circumstances where monetary policy expansion of the money supply does not reduce interest rates much because of a zero bound nominal interest rate , some of them may advocate coarse tuning of the economy either by increasing government expenditure or reducing taxation or a combination of both. This requires running a deficit, and will add to the total Government debt or (if a Government has accumulated surpluses) the running down of a Government’ s past accumulated stock of savings.
John Arthur
So, what you’re saying is that, to Keynesians, more taxes is only austere to the extent that it reduces debt, which is seen as necessary for stimulus during a recession.
And that I am mistaken to believe that the pain imposed on the citizens is intentional under a policy of taxation to boost government spending, according to Keynesianism proper?
If so, are you under the impression that taxation is nevertheless preferred for the demogogic opportunities it presents against laissez-faire?
Hi guest,
If a Keynesian wants smaller Government then all that would have to be done is to apply lower Government expenditure in a boom to dampen over heating of the economy (or even to lower both Government spending and Taxation but lower G more than T) and run a budget surplus
. In time of recession, then all that would need to be done is to stimulate the economy by lowering Taxation, thus running a budget deficit. Hence, that way the size of Government could fall.
Of course, politicians are not likely to use Keynesianism in this way. This is not the fault of the logic of Keynesianism, but of the political use of Keynesianism.
You could apply this form of Keynesianism till an optimal size of smaller Government is reached, but I doubt that it is likely to happen any time soon.
John Arthur
John, do you know of any small government keynesians?
Grane Peer,
I suppose you could consider someone like Greg Mankiw a (relatively) small government Keynesian.
Keshav,
So create a simple tax that creates a steady revenue stream. Expect there to be a business cycle accordingly and ride the wave. This allows you to have 0 deficit over the business cycle. However most Keynesians that I have met do not want to simply create a consistent budget which stays the same in good or bad times, they want to ‘stimulate’ the economy by throwing ‘money’ at the problem, even if it is digging a ditch and then filling it back in.
The belief by Keynesians seems to be, as Krugman said of this last recession, a larger stimulus. Never mind that the Federal Government threw an additional $800 Billion from 2007 to 2009 in spending ( 18.7% of GDP to 24.4% of GDP ) and it is not like we expect the expenditures to drop below 20 – 21% of GDP in the next 10 years ( and that is if we do not have another downturn in our current business cycle )
Could it be that as Austrians ( I am not one ) suggest that there is a misallocation of investment due to the perpetual intervention by the Federal Government? The only times we have had truely protracted recessions has been accompanied by massive intervention via fiscal policy by the Government. Could this, rather than doing what needs to occur. Could Keynes have gotten it wrong that rather than the issue being that prices and wages were sticky that Government and unions made them sticky? In this last recession, had Government not already created interventions minimum wage laws etc… did we not see deflation and a rampant attempt to stamp it out rather than view it as a correction to an inflated money supply and over extension of credit?
Finally when you look at the portion of our economy that is now Federal, State, and Local Government spending it has gone from a consistent below 30% in the mid seventies and back to above 35% now. I do not know if this is a sustainable model especially when you consider an aging population.
Depending on which Krugman you want to listen to, sometimes “austerity” is defined as no acceleration in the government debt (i.e. second derivative with respect to time). That is to say, if you want to avoid the dreaded “austerity” you need to not only get into debt, but every year you need to get deeper into debt at an increasing rate.
Sometimes he calls it “change in the cyclically adjusted primary surplus” which sounds more technical than saying “debt acceleration” but make no mistake this is a second derivative. The “primary surplus” is the first derivative, which is how much debt you managed to pay back this year. Change in primary surplus is the derivative of the derivative, and “cyclically adjusted” means someone borrowed from the climate scientists and fiddled the figures (after all, who knows what the business cycle is doing until well after the fact, and by then it’s absolutely useless for policy making).
Only in favour of it when you ask them, not when you watch their hands.
Remember the rule: saving yesterday, saving tomorrow, but always spending today.
Perhaps we all merely misunderstood what Krugman meant by comparing those Governors to Herbert Hoover at the time.
Good point Andrew FL. I meant to say that too in my original article, but I forgot. Yes, since Hoover ran up the debt, Krugman was right to compare them to the governors…