Tuesday, October 21, 2008

Krugman and the deficit

Fresh off the heels of his recent Nobel prize New York Times columnist Paul Krugman says that the government ought to be spending more of your money:
If Barack Obama becomes president, he won’t have the same knee-jerk opposition to spending. But he will face a chorus of inside-the-Beltway types telling him that he has to be responsible, that the big deficits the government will run next year if it does the right thing are unacceptable.

He should ignore that chorus. The responsible thing, right now, is to give the economy the help it needs. Now is not the time to worry about the deficit.
That deficit that he so blithely dismisses, incidentally, could reach the neighborhood of $750 billion next year according to the director of the Congressional Budget Office. Looking past the deficit when Democrats are in charge, of course, is nothing new for the New York Times columnist, as this piece from December 2006 demonstrates:
Now the Democrats are back in control of Congress. They’ve pledged not to be as irresponsible as their predecessors: Nancy Pelosi, the incoming House speaker, has promised to restore the “pay-as-you-go” rule that the Republicans tossed aside in the Bush years. This rule would basically prevent Congress from passing budgets that increase the deficit.

I’m for pay-as-you-go. The question, however, is whether to go further. Suppose the Democrats can free up some money by fixing the Medicare drug program, by ending the Iraq war and/or clamping down on war profiteering, or by rolling back some of the Bush tax cuts. Should they use the reclaimed revenue to reduce the deficit, or spend it on other things?

The answer, I now think, is to spend the money — while taking great care to ensure that it is spent well, not squandered — and let the deficit be. By spending money well, Democrats can both improve Americans’ lives and, more broadly, offer a demonstration of the benefits of good government. Deficit reduction, on the other hand, might just end up playing into the hands of the next irresponsible president.

In the long run, something will have to be done about the deficit. But given the state of our politics, now is not the time.
And by "the state of our politics" you can bet he means having Democrats in charge of the country's purse strings. After all, this is the same Paul Krugman that regularly excoriated President Bush and Congressional Republicans for the deficits under their watch. They don't call him America's most partisan columnist for nothing. Besides the partisanship angle, what really upsets Krugman was that the deficits under Bush could be at least partially attributable to that bane of liberal economists everywhere, tax cuts. You think I am joking? This is from a column written in mid-2004:
Why, then, do we face the prospect of huge deficits as far as the eye can see? Part of the answer is the surge in defense and homeland security spending. The main reason for deficits, however, is that revenues have plunged. Federal tax receipts as a share of national income are now at their lowest level since 1950.
A giveaway that Krugman is spinning here is that he refuses to quote actual budget revenue figures and instead resorts to speaking of them in the context of "share of national income." Well, let's look at what the Congressional Budget Office had to say about tax revenues in the 2003-06 time span:
Growth in Federal Tax Revenues From 2003 to 2006
Total federal revenues grew by about $625 billion, or 35 percent, between fiscal year 2003 and fiscal year 2006. CBO’s analysis of that increase in revenues since 2003 is necessarily preliminary because relevant data are not yet fully available. CBO examined the available data using the commonly employed method of analyzing the sources of revenue growth as a percentage of GDP. Had revenues grown at the same rate as the overall economy between 2003 and 2006, federal receipts would have increased by only $373 billion. The other $252 billion of the actual increase in revenues represents growth in excess of GDP growth. As a result, receipts as a share of GDP rose from 16.5 percent in 2003 to 18.4 percent in 2006, an increase of 1.9 percentage points (see Table 1, attached).
So, basically, Krugmam is full of it.

Furthermore, one can't help but note that while Krugman bashed Bush for cutting taxes in early 2001 during the onset of a recession that he justifies increased government spending now even in the face of an already massive deficit because of...a recession. So really what it comes down to is that if the government lets you keep more of your own money to help stimulate the economy then that's bad, but if the government itself directs where that money is spent then that's good.

What's more bizarre and infuriating about Krugman's Keynesian prescription to solve the country's economic ills -- increased government spending -- is that it is a formula that mirrors that of Japan during the 1990s. Krugman has to know this, having written extensively about Japan's economy. The result of all that spending? As a recent New York Times column says:
What came next for Japan was depressing but far from a depression. There were no miso soup lines and the relatively low official unemployment rate often seemed to belie that there was a problem at all. But Japan seemed out of miracles. The economy would grow a little, then stop, then contract a little. Countless bridges to nowhere were built, but all the spending on infrastructure failed to lift the nation out of its doldrums.
A column in The New Republic sounds a similar note:
The government also started plowing money into the public sector to keep the economy alive. "The additional spending was largely directed toward public works projects, shoring up a weak financial system, and subsidies to the weakest of Japan's businesses, which, in retrospect, ought to have been allowed to fail," writes American Enterprise Institute economist John Makin. "While the direct stimulus of government works projects and subsidies to weak businesses kept the economy from falling back into negative growth for a time, the weakness resumed once the direct stimulative effects of the spending packages wore off."
I would note incidentally that this is exactly the formulation that Obama appears bent on pursuing, having voted for the financial bailout, pushing for additional infrastructure spending and loan guarantees for weak businesses such as the auto sector.

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