Monday, December 13, 2010

Krugman Has Finally Lost It

Apropos of FLG's time horizons theory, Krugman argues that the various stimuli, including the tax cut deal, are too short-term focused. Instead, he argues we need to take a "long-term" strategy of stimulating and stimulating until were fully stimulated:
What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained: we’re not talking about a brief burst of aid; we’re talking about spending that lasts long enough for households to get their debts back under control. The original Obama stimulus wasn’t just too small; it was also much too short-lived, with much of the positive effect already gone.

Krugman keeps dismissing concerns about the deficit as worries about mythical bond vigilantes. (As you know, this is consistent with FLG's time horizons theory.) But does he really think the government has a blank check to keep running deficits until the develeveraging, which could take several more years to complete, is done? Furthermore, even if it does, then isn't running government deficits to stimulate the economy while people pay down their debt akin to indirectly nationalizing their debt? Is that really a wise decision? FLG gets how it could be appealing from a progressive standpoint since you can nationalize middle class debt and then get the rich to pay the taxes to pay it down, but is that really a good long-term strategy?

All told, for whatever reason, FLG is constantly astonished by Krugman's inability to separate long-term from short-term. And to the extent that people bring up long-term concerns, Krugman dismisses them as irrelevant or irrational because there is no empirical evidence to suggest right now that the bond market will price in additional default risk in the future. Consequently, let's keep borrowing and spending and when we see something, well, we'll worry about it then. Kinda reminds me of the Titanic. Sea looks clear. Full speed ahead. Do-do-do. Oh shit, Iceberg! Full stop! Hard to port!

Much better to take precautions now -- sorta like not going full speed into a fog over what most people presume to be treacherous waters -- than to recognize the problem too late to stop.

PS. FLG has seen no evidence that either party is better on this deficit issue.


The Ancient said...

He's turning into the economist in that old joke: "Assume a ladder."

Anyway, he writes:

Tax cuts for the wealthy will barely be spent at all; even middle-class tax cuts won’t add much to spending. And the business tax break will, I believe, do hardly anything to spur investment given the excess capacity businesses already have.

Given that he thinks "wealthy" starts at $250,000 a year, I think he's clearly wrong on the facts. If I had to pay an additional couple hundred thousand dollars a year in federal taxes starting in January, I guarantee you that I would spend less -- probably an amount roughly equivalent to the increase in my taxes. I would spend less on "things," of course, but mostly I would spend less on "people" who provide services I could easily do without.

He keeps using that old Friedman model without ever stopping to look for evidence that it's right. Given the high level of contempt he's had for Friedman's work over the past thirty years, this is very odd -- though certainly convenient for his larger political purpose.

The Ancient said...

FLG has seen no evidence that either party is better on this deficit issue.

It's more a question of which party is less bad.

The problem with the deficit and the debt, as I've said before, is that it is fundamentally unfixable with the current tax system -- even assuming a reform of entitlement programs that's probably unrealistic from a political standpoint.

Summers and Goolsbee have been talking up a "tax reform" similar to what Reagan did in his second term (with heavy lifting from Bill Bradley, Dick Gephardt, and especially Dan Rostenkowski). Lower rates, fewer deductions, a broader base, and the expectation of more total revenue.

I'd be happy to be proven wrong, but I don't think that sort of thing would come close to generating the additional revenue needed to pay down debt or push down the deficit to a tolerable level. We need a fundamentally different tax system -- one that encourages savings, discourages consumption, and promotes growth. (And if we can somehow -- through God's benevolence -- get that type of system, we need to find a way to protect it from the machinations of the tax-writing committees. Good luck with that!)

Anonymous said...

"It's more a question of which party is less bad."

Agreed. Hey, how about that ruling out of Virginia? Awesome. I especially like how the judge managed to work in a *direct* slam against Kagan. I'll explain tomorrow at PP. Until then....

Mrs. P

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