The New York Times publishes Paul Krugman’s latest diatribe against those evil Republicans. Rather than make general comments on Mr. Krugman’s rather outlandish arguments, let’s instead look at each argument he makes in turn:
As the debate over President Obama’s economic stimulus plan gets under way, one thing is certain: many of the plan’s opponents aren’t arguing in good faith. Conservatives really, really don’t want to see a second New Deal, and they certainly don’t want to see government activism vindicated.
Always start off a character assassination with a grain of truth. It is true that conservatives don’t want to see a second New Deal. We think that the first one was a disaster, as Amity Shlaes’ book The Forgotten Man details. When you consider the fact that the current recession is not as bad as the one that Reagan inherited in 1980 (which by the way, didn’t require a New Deal to recover from), one really does have the question why we need to completely revamp the social and economic order of the United States. But, then again, Krugman isn’t interested in defending the need for a New New Deal.
John Boehner, the House minority leader, has already made headlines with one such shot: looking at an $825 billion plan to rebuild infrastructure, sustain essential services and more, he derided a minor provision that would expand Medicaid family-planning services — and called it a plan to “spend hundreds of millions of dollars on contraceptives.”
I’m sorry, Mr. Krugman, but I thought this $825B plan was to stimulate the economy and reverse the recession. My bad! Had I only realized that the $825B was for something else entirely I would agree with you! However, since your party leaders are claiming that this is a stimulus plan, Congressman Boehner’s question remains valid: exactly how does increasing Medicaid spending on contraceptives stimulate the economy? Krugman can’t answer this question because the answer is that it doesn’t do anything to help the economy.
First, there’s the bogus talking point that the Obama plan will cost $275,000 per job created. Why is it bogus? Because it involves taking the cost of a plan that will extend over several years, creating millions of jobs each year, and dividing it by the jobs created in just one of those years.
It’s as if an opponent of the school lunch program were to take an estimate of the cost of that program over the next five years, then divide it by the number of lunches provided in just one of those years, and assert that the program was hugely wasteful, because it cost $13 per lunch. (The actual cost of a free school lunch, by the way, is $2.57.)
The true cost per job of the Obama plan will probably be closer to $100,000 than $275,000 — and the net cost will be as little as $60,000 once you take into account the fact that a stronger economy means higher tax receipts.
The problem that Krugman runs into here is that virtually all of his colleagues (and indeed the Obama Administration itself) agree that the stimulus must all be spent within the next year to 18 months. The stimulus package is supposed to create about 4 million jobs. Those jobs, if this package is to be effective, must be created within this timeframe. Therefore, $275,000 per job is an accurate figure.
Krugman also fails to provide you with the figure against which these same economists are saying that the package must be compared. That number is $50,233 (the average household income in the United States in 2007). That means that is should cost roughly $50K to created a new job in this country. This means that even under his scenario, it will cost government twice as much as it should cost to create these jobs. One has to ask the question: why does it have to cost between two and fives times as much? Krugman can’t answer it because the simple fact is that it doesn’t have to if this were strictly a stimulus bill.
Finally, Krugman attempts to bamboozle by suggesting that net cost is what we should look at. Krugman is saying that government will recoup up to 40% of this outlay, roughly $330B over some unspecified time period (although it’s probably much more than that considering that the $825B is financed through secured debt instruments). Of course, there’s a couple of assumptions tied up with that.
- We must assume that the economy will recover relatively soon in order to increase tax revenue. It will hard to claim the higher revenues four and five years out are the direct result of this stimulus package (which is the only way that he can credibly claim an offset).
- He assumes that the offsetting tax increases will be greater than inflation. If it’s not, the extra revenue is not a result of government spending, but a “naturally occurring” phenomenon of the economy. Inflation virtually guarantees that government revenue (by definition taxes) would increase by $81B next year without resorting to changing the price of goods (i.e. raising tax rates).
- He assumes that every dollar of increased revenue will be directly related to the stimulus package, not increased tax rates or the massive legalization of illegal immigrants (who will suddenly start paying taxes) or even something like a war or similar international calamity (which is what ultimately halted the Great Depression).
These are big assumptions. Assumptions that I’m afraid I must insist that he defend. If he won’t let Republicans throw numbers around, why should we allow him to do the same?
Next, write off anyone who asserts that it’s always better to cut taxes than to increase government spending because taxpayers, not bureaucrats, are the best judges of how to spend their money.
Here’s how to think about this argument: it implies that we should shut down the air traffic control system. After all, that system is paid for with fees on air tickets — and surely it would be better to let the flying public keep its money rather than hand it over to government bureaucrats. If that would mean lots of midair collisions, hey, stuff happens.
The point is that nobody really believes that a dollar of tax cuts is always better than a dollar of public spending. Meanwhile, it’s clear that when it comes to economic stimulus, public spending provides much more bang for the buck than tax cuts — and therefore costs less per job created (see the previous fraudulent argument) — because a large fraction of any tax cut will simply be saved.
Krugman sets up several false dichotomies. The first is that the argument is about taxpayers vs. bureaucrats. It’s not! The real issue here is whether or not you get more bang for your buck having the private sector spend the $825B or whether the government will do it better. Right now, the Democrats are claiming that this bill will produce 4 million jobs. Of course, each job will cost the government between $100K and $275K to create. Since each job created actually costs $50K, there is a valid argument to be made that the private sector could create between 8 and 22 million jobs with that same money.
He then makes the outlandish claim that it’s not even about taxpayers vs. bureaucrats, it’s actually life or death! The argument is so out there as to be ludicrous on its face. To the best of my knowledge, nobody has suggested that, without the stimulus package, millions of people are going to die.
As for the final piece of this argument, he suggests that public spending beats tax cuts because people save tax cuts, they spend stimulus. Right, so I guess everyone went out and spent those stimulus rebates? And all those corporations that received TARP funding, they spent the money, too, didn’t they? It’s just yet another false dichotomy.
Finally, ignore anyone who tries to make something of the fact that the new administration’s chief economic adviser has in the past favored monetary policy over fiscal policy as a response to recessions.
It’s true that the normal response to recessions is interest-rate cuts from the Fed, not government spending. And that might be the best option right now, if it were available. But it isn’t, because we’re in a situation not seen since the 1930s: the interest rates the Fed controls are already effectively at zero.
That’s why we’re talking about large-scale fiscal stimulus: it’s what’s left in the policy arsenal now that the Fed has shot its bolt. Anyone who cites old arguments against fiscal stimulus without mentioning that either doesn’t know much about the subject — and therefore has no business weighing in on the debate — or is being deliberately obtuse.
Krugman’s final act of defiance is to suggest that anyone who is against the stimulus obviously doesn’t understand the difference between monetary and fiscal policy. I suggest that Mr. Krugman read this. It’s an excellent primer on the stimulus package and the multiple options still available to the government under fiscal policy. It is apparent that Mr. Krugman either does not understand or else chooses to ignore that tax cuts and tax credits are also part of fiscal policy. As such, Republicans are merely legitimately arguing which elements of fiscal policy should take precedence.
Paul Krugman is the Democratic equivalent of Rush Limbaugh, an arrogant, opinionated, sanctimonious advocate of socialist thought. Unlike Mr. Limbaugh, however, he is not very careful with his arguments and is far too over the top in his righteousness. A little humility (and perhaps a good public flogging) would do him worlds of good.
