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“We Could Employ 6 Million People to Dig Ditches”
Wednesday, October 1st, 2003I went to see New York Times Columnist Paul Krugman speak last night. According to Paul, he’s a moderate. According to me, he’s crazy.
If there is a more intellectually dishonest columnist out there, I am unaware. The fallacies and inadmissions by Dr. Krugman throughout the evening were to many too count. Unfortunately I was without pen and paper to document my outrage. Instead I was forced to settle for a heavy dose of eye-rolling, audible sighs, and a brief solo clap when no one else was clapping (mainly because I am sure Paul did not mean it as a good thing when he said that some out there want to roll back the welfare state created by FDR and LBJ).
The main thing I took from Dr. Krugman’s speech, aside from the fact that he is not above pandering to a decidedly liberal audience, is that he believes that deficits are a bad thing and that George Bush’s tax cuts are sure to lead to deficits for many years to come. According to Paul, GW’s tax cuts will lead to an immediate revenue decrease of $300 billion. Fine, let’s take him at his word. He’s studied economics and the tax package a lot more than I admittedly have. Its two of his following points that I take issue with though.
1) The $300 billion deficiency right now means that there will be deficits in the future. He, of course, puts the caveat in there “Unless we cut the welfare state. Which is what this administration and conservative extremist want to do.” Well, yes, we do. But let’s put that aside. Even without cutting spending, it does not necessarily mean that the tax cut will lead to deficits in the future.
He may disagree, but he should at least acknowledge the idea that cutting taxes will put money into people’s hands for them to spend. That money will then go to businesses who will employ people. These new jobs will in turn give people new or higher salaries, allowing them to spend more money and repeating the cycle. As the tax base expands, government revenues increase. All the while, the government is taking a smaller percentage of everyone’s paycheck. If you don’t think it will work Paul, say why.
Even if the tax cut is ‘for the rich,’ the rich go out and spend money too. There is no reason their spending won’t create jobs in the same way that a middle class tax cut would. (At point, by the way, which is by no means an acceptance that this is not a middle class tax cut.)
Further, even even if the rich don’t spend, but rather invest the $300 billion they are getting back, a large portion of that money is going to be invested industries that are making products people want. That’s how you make money. Invest in things people want. This influx of capital will allow successful businesses to expand and thus, employ more people. See above.
As long as the money is not being put under a matress, its going to create jobs. Sure their may be an imideate revenue decrease of $300 billion, but tax revenues do not operate in a vacum and the tax cuts should have a positive effect on future revenues in the years to come.
2) While Dr. Krugman’s first point was an inadmission of the legitimate economic theory behind the tax cuts, his second point showed a blatant misunderstanding of how economics should properly work. According to Paul, with that $300 billion dollars, the government could employ 6 million people (at $50,000) even to “dig ditches or something.” ???? What??? Are you a serious economist? I must have had you confused with someone who has taught at MIT, Princeton and Stanford.
Let’s dissect this “economic recovery” plan for a second, can we. So Paul, what you’re telling me is that rather than giving people back their tax money to spend on things they want, spending that increases the general population’s possessions and enjoyment, instead we should pay 6 million people to dig ditches so at the end of the year we have a bunch of ditches to show for our $300 billion. Babies go without blankets, children go with out shoes, lawyers go with out Tivo, but the United States will run a trade surplus in ditches.
Not only that, but have you ever tried to fire a government ditch digger? I haven’t but I can only imagine its hard. Now we’re stuck coming up with $300 billion every year to pay an army of ditch diggers or we’ll be accused of being mean old conservatives wanting to cut the welfare state.
The fact is, in almost any other time, Paul Krugman would be laughed out of any reasonable policy debate. Only now we have a President with a credibility problem. It was evident to me from the questions in the room last night that most people didn’t hate George Bush for his economic policy – they hated him for Iraq. More than that, they don’t trust him. To democrats, liberal leaning people and a growing number of moderates, Bush is as untrustworthy as Clinton ever was to Republicans. It makes it mighty difficult to sell even a genuinely good tax package if a majority of the population is not only convinced that you are lying, but that you have disingenuous motives. That’s how they think about George Bush and for those of us concerned with economics, its a shame.
UPDATE: I almost forgot to mention the best line of the night, which Krugman credited to someone else although I forget who: “The US government is really the world’s largest insurance company that dabbles in the side business of national defense.” I almost started clapping. Until I realized he was saying this as if it was good.
Can someone PLEASE cite a specific example of something Bush did to lose credibility, something proven and legitimate and not just media here-say?
doesn’t really matter whether or not he did something, in the end all that matters is how he’s percieved. the left (meaning anyone to the left of republicans) has done a good job in creating this perception, and Bush has done NOTHING to try and combat this perception.
I saw Krugman speak at the 92nd Street Y a few weeks ago, and the night’s most illuminating moment came before Krugman even walked onstage. A pre-recorded voice told the audience to turn their cell phones off, per New York State Regulations, and the well dressed gentleman next to me whispered “It’s so great that that’s A LAW.”
Krugman got a standing ovation.
“As the tax base expands, government revenues increase. All the while, the government is taking a smaller percentage of everyone’s paycheck. If you don’t think it will work Paul, say why.”
I’ll take a stab at it. It is a matter of elasticities. The supply-side, laffer curve (http://www.investopedia.com/terms/l/laffercurve.asp) argument only works at very high marginal tax rates. It is not the case that by cutting taxes 10% you will necessarily increase the tax base sufficiently to get that lost revenue back.
I am in favor of lower taxes as long as it also means a smaller government and balanced budgets. The main problem with the Bush tax cut is that it is not the most stimulative one we could have had. Wealthy people have a higher marginal savings rate and so more of the stimulus comes from slower, second-level effects of increasing capital for lending purposes rather than from direct spending.
And while it should provide stimulus in a longer time frame, it runs the risk of deepening the slowdown in the short-run from Ricardian Equivalence effects in which expectations of taxes in future due to present fiscal deficit and government borrowing cause taxpayers to retrench…
Coupling this less-efficient tax cut with a spending binge is clearly a less than optimal approach given the price we will pay in future.
I don’t agree with Krugman who has become a socialist but I also do not subscribe to “voodoo economics”
I agree with most of your critique of Krugman, but there is one flaw in your argument about tax cuts for the rich. In the 1980s, the Feds ran huge deficits and naturally the interest rates on government borrowing, ie TBills, was high. The wealthy see this as a safe investment and money which otherwise would be available for entreprenurial activity is wasted to finance deficit spending. I believe this cycle will soon repeat itself. Had the money been given to the middle class, mass market spending would likely provide economic stimulus. The rich are not going to invest in products for which there is no market.
Garth,
First, to address your “voodoo economics” line, see this link:
http://www.heritage.org/Research/Taxes/wm182.cfm
As for the tax cut only helping in the long term, what about the $400 per child EVERYONE got? I’d be willing to bet most if not all of that money went straight into buying houshold products.
Aaron: Thanks I needed that – I simply love studies that say if X happened when Y happened then Y caused X.. That’s ridiculous. Could underlying economic growth in the US been caused by other factors during the 80′s that had nothing to do with the tax cuts? How about falling oil prices? Or the beneficial impact of rapidly falling inflation and subsequent easing by the Federal Reserve? How about financial innovation throughout the financial industry? I am sure that there was a stimulus from the tax cut but I do not believe that it created more revenue that it cost all by itself in a vacuum. I have seen studies that say the opposite of the Heritage one – I will have to dig them out and post them on my site.
Yes, yes we all got a $400 subsidy per child. I agree that that’s a nice bit of change and stimulative. However as a one-off and temporary gift it has much less an impact on consumption levels than an across the board cut for the less wealthy would have had.
Funny thing. I don’t have kids so I did’t get a break there but I happen to be in the demographic that got the most out of the whole package…..and I still think that it was inefficient overall.
And to be clear – I do mean to suggest that higher economic growth in the 80′s led to higher government revenue…..
and I would like to correct: “I do not believe that it created more revenue (THAN) it cost all by itself in a vacuum” Thanks
Me and my friends and family received that tax cut, and I’ll tell you exactly where we spent that money… Target and Walmart!
No we did NOT all get the 400/child tax refund. A two professional income home making in excess of around 130,000 (I’m not sure of the exact figure, but know that we did not qualify) did not get any refund. As that level qualifies as “rich” it’s hard to see how this tax cut goes only to the upper income brackets.
If these were the worst things PK said, he did pretty well.
It’s really not respectable for an economist to suggest that Bush’s tax cuts would end up paying for themselves, which is what you’re implying. Of course, you’re not an economist so you can say what you like. Even the WSJ editorialists are denying they ever suggested any such thing about Reagan’s tax cuts. Certainly, any knowledgeable person would agree that the revenue loss from the tax cut is partly offset by some additional taxable income because of behavioral changes, but all of it? No way.
As to digging ditches, here again PK is talking basic textbook macro: if the Gov spends a dollar, for digging ditches or whatever else, that boosts spending by a dollar, more than if it gives that dollar to you, since you save part of the dollar. (There are feedback effects in both cases, but in one case the first round is an extra dollar, in the other, a dollar minus your saving.)
Reasonable people can disagree with the theory, but elevating these ideas to “intellectual dishonesty” is wrong.
cheers.
Bush does not have a cred problem. He has a communication problem. He fails to hit back at leftists who are still pissed off about the 2000 election. He has yet to clearly and concisely connect Iraq to the War on Terror (not to Al qaeda specifically or 9-11) to the public. If he does not set his record straight then the left’s rapid fire of negative details will continue to erode his administration.
He has another problem too: He is a conservative republican who has supported proposed a massive entitlement for the baby boom generation. That is prescription drug bene’s folks. Now that’s the kind of stuff I’ve come to expect from self-absorbed libs like Hillary and Dean, but Bush?
I think American politics is in a state of flux where the two sides will eventually be the “big government, if-only-we-had-really-smart-north-eastern-egg-heads in power faction” and small “L” libertarians who have come to understand that government is the problem, not the solution.
Max, I don’t know if I agree with you, but you’re smart.
The importance of the tax cut is that I was given back MY money to decide what I wanted to do with it. The govt already has enough of my money to toy with.
Max:
If the gov’t pays someone a dollar to dig a ditch what’s make you think they won’t save part of that dollar just like I would? Also in order for the gov’t to pay that person one dollar to dig that ditch how many dollars do they have to take from me? In other words they probably have to take $5 from me in order to pay a person $1 to dig a ditch.
And American politics is in a state of CRAP!
Garth: I’m not sure that Bryan’s justification here is really based on Laffer. Laffer’s balance has to do with revenue affected by what you might call a coefficient of disincentive, not by economic contraction (although that in itself will likely be coincidental with the tails of the curve). Economic growth within the context of lower marginal rates can lead to revenue growth, up to a maximum (similar, but unrelated, to a Laffer’s T), at which point rates will have to rise in order to create more revenue, up to the point of Laffer’s T itself — at which point revenue will fall again.
Bush is just another politician, and no matter how conservative he says he is, he’s acted nothing even close to conservative since entering the office. Look at bugdet #’s if you think I’m wrong.
I’ve got a New Deal for you. For more info, email krugman@insano.gov. Let’s put people back to work by having them do something useless.
“He has yet to clearly and concisely connect Iraq to the War on Terror (not to Al qaeda specifically or 9-11) to the public. ”
Please, Heinz. There was a poll out last month indicating that something like 69% of Americans believe Saddam was involved in 9/11.
The fictional ‘connection’ between Saddam and 9/11 is the only thing keeping Bush’s approval rating so high. (Even 49% or whatever it has plummeted to so far is too high given this president’s mismanagement.)
The Bush presidency has been a trainwreck – massive inefficient tax cuts + spending INCREASES = huge deficits which we will be paying back for the rest of our lives. The interest we’ll be paying could go for baby’s blankets, children’s shoes, or lawyer’s TIVOs.
And Krugman is actually right if he’s referring to a short term horizon. 6,000,000 ditchdigging jobs would be a better short-term stimulus for the economy than massive cuts for top earners/dividend recipients, who will use some if not most of their windfall to buy the treasuries that the gov’t must float to pay for their tax cuts!
One point about savings that some people forget: whether you spend all of the $1 tax cut you receive or save a portion of it is basically irrelevant. Unless you keep you cash under your mattress, it ends up in a bank, where it is loaned to someone one else who in turn buys a house, built by some now *employed* construction worker etc, etc. Offering a tax cut to the rich allows them to either hire a maid, start up a new business venture and/or ‘save’ a portion of their money, which is just another form of investing these days. It is all about productive/efficient use of money by their rightful owners as opposed to stupid ditch digging.
Debating the efficiency of tax cuts for the rich or middle class is meaningless as cash is never static and those who have it (regardless of how much they happen to have) will endeavor to put it to efficient use – or their bank/investment institution will do it for them anyway.
The debate should be about who employs cash more efficiently in your or society’s best interest – the unaccountable gov’t bureaucrat or you?
At this point, the usual arguments can be made about police, defense etc, etc, but digging ditches? – come one people, I have leaves to rake in my back yard,…and I promise to pay you, with your own money, heh heh heh…..;-)
Enobarbus: Good point and correct, though the effects are ultimately related and I really am not sure from what angle the original post was coming from (though I have to assume that it’s the ideological saw of “lower taxes = higher revenue.”) And since the cuts have led to a net loss in revenue by almost all calculations I have seen I will just assume that either that argument remains wrong or will entertain the idea that we need to consider lag effects more thoroughly
At present I am much more interested in the Ricardian Equiv. effects from the massive borrowing binge the government is engaging…
Garth: I think we’re pretty much in agreement. Balancing either of the curves is an exercise in approximation, and the “cut in taxes = revenue growth” equation is too often used as though it were a law of physics.
I’d like to read more on your take on Ricardo if you’d care to put something up on your blog. I’m always skeptical of any theory that assumes too much rational propensity to save, rather than spend, but perhaps in this I’m too much influenced by my own fiscal mismanagement.
Enobarbus: Plan to post something on subject tomorrow.
Tony and Joker — it’s true that if someone is paid to dig a ditch, they will save part of that. But that’s in the second round. The first round is the government spending. With a tax cut, the first round is the recipient’s spending and saving. In both cases, there is a ripple effect. The difference is that the first ripple is different. Again, you may think this is b.s., but it is what is found in every econ textbook. It’s not a sin to invoke it as a policy criticism.
Naturally, if the Gov is going to spend some money, we would like it to be for useful things. Keynes used the example of burying money in jars and letting people dig them up and claim the contents as pay, in order to emphasize the spending impact.
The other consideration is that savings rates increase with income, so if you want a bigger spending impact, you cut taxes for lower-income persons, or you pay them to provide public services.
Why focus so much on whether people will spend or save their refund? As Joker said, there are benefits either way. Bottom line, is it really better to pay people to put in a lot of effort for zero benefit (digging ditches) than to let them keep some of their own money? People get disutility from digging ditches, and there’s no offsetting benefit if the ditches aren’t needed. Why not have people do something productive?
But, of course, government isn’t good at finding productive things for people to do. Therefore, we should let people keep their own money and use it well. Someone in the market will find something productive for the “ditch-diggers” to do (unless government regulations prevent it), and total output will increase.
Regarding what tax cuts do to tax revenues, that’s an empirical question, since it could go either way. If we went from a tax rate of 100% to a tax rate of 50%, would tax revenues increase or decrease? A sufficiently high tax rate (100%? 80%? 60%?) would induce people and companies to leave the country, work underground, or otherwise center their efforts around tax avoidance rather than production. Lowering the tax rate from an excessive level stimulates the economy and improves incentives, which can lead to an increase in tax revenues. How high a tax rate is “excessive”? That’s what we need to figure out.
But most important, to measure the effect of the tax cuts on deficits, we also need to consider the effect on government spending. When Bush first mentioned a tax cut (as a way to “spend the surplus”), I was against it because of our large debt. But I changed my mind because of the last budget under Clinton, when Republicans had control of the legislature and could have paid down more of the debt if they’d tried. Because of the tiny, temporary surplus, politicians of both parties had a feeding frenzy, funding everything they could think of simply because the money was there. Conservative or liberal, you can’t trust politicians. The higher the revenues, the higher the spending.
Thus, if the lower tax rates lead to lower tax revenues, they may also lead to lower debt (through lower spending). Yes, it may take a while, since spending is still high and increasing, but would spending have increased less if there hadn’t been a tax cut? I think that the central question is: Who uses our money better, the people that earned it or the government bureaucrats?
While Dr. Krugman’s first point was an inadmission of the legitimate economic theory behind the tax cuts, his second point showed a blatant misunderstanding of how economics should properly work
And Mr. Westhoff hereby proves that he’s a moron..
Krugman is one of the best economists in the world right now. If you don’t understand his arguments, fine. Join the club, most of the rest of the world probably doesn’t have the background to understand them either.
But only a real moron would tell us that he knows economics better than Krugman (unless, of course, he happens to be one of the dozen or so economists in the world who actually is better).
Word of advice, bub. When you peddle your simplistic econimic theories, people might actually buy your logic if you don’t spend your time trashing actual economists at the same time.
If you don’t think it will work Paul, say why he HAS said why, you moron. Of course, he normally only publishes his proofs in journals that are directed at actual economists, so you might have missed it. But rest assured when he says that the tax cut will not lead to increased revenues, he has the numbers to proove it.
Actually, moron, ALL economists have the numbers to prove it. Only crackpots still subscribe to voodo economics. The ones who know what they are talking about will tell you that at some marginal income tax rates, cuts will partially pay for themselves. Although the rates where this is true are probably well above the current maximum rates, but probably below the 70% top rate that was in effect when Reagan first started talking about the laffer curve.
Serously, Radley, you shouldn’t let this moron post on your blog. He gives libertarians a bad name.
Bones, despite your feelings about me, I still love you. Two responses though:
1) My contention that Krugman has a blatant misunderstanding of economics is based on my opinion that the study of economic should be directed towards maximizing the efficient use of resources. Increasing our ditches, even if does spark the economy, provides no tangible benefit to anyone (unless the ditches were necessary for something – which was not Krugman’s point).
I believe that Krugman has a strong grasp on how the Laffer’s T and the elasticity of demand. I’m sure his technical analysis is stellar. Really. I have issue with the ends. If quality of life doesn’t improve on the macro level – as I don’t believe it will when we encourage our money to be spent on pointless ditch digging to employ the masses – what’s the point of economics.
Further, I was there. Krugman was not saying “let’s have people dig ditches to spark the economy.” He was saying let’s have people dig ditches to give them jobs.
I have no argument with people like Max who say that people will spend more of the first dollar they earn than they will spend of the first dollar they are given back. I was simply saying that its an inefficient use of the dollar to only have a ditch at the end of the day. Considering most of us don’t want to see an expansion of the welfare state, its my opinion we don’t want to give out any more first dollars. Let’s have the market give out the first dollars making things people actually want. (Tivo instead of ditches.)
2) And this point is really directed to a number of people (Enobarbus, Garth and others). I didn’t mean to imply that these tax cuts, by themselves, would pay for their deficits. Or that generic tax cuts in general pay for their deficits. I’m not willing yet to concede that tax cuts don’t normally spark other catalysts, the combination of which eventually pay for the deficits, but as Max points out, I’m not an economist so I can’t back that up with ‘numbers.’ Its just my theoretical intuition.
Back to the point though, I only meant to say that when Krugman projected out the deficits created by this tax cut, he did not even acknowledge that it was premised on the fact that the deficits would shrink in subsequent years. He projected out deficits at the levels they were in year 1. That to me is dishonest.
Even if he is right and the tax cuts do nothing to replace the revenue that is cut (a possibility) I still believe it is dishonest not to even mention to the audience the theory that some of the revenue might be replace. That George Bush and his advisors do not believe that these tax cuts will lead to $300 billion shortfalls, year in and year out.
In between calling me a moron, Bones points out that Krugman has written about why cutting taxes won’t replace revenue. That’s fine. As I said in my post, I assume he has a reason. but when he speaks about economics to a general audience like this – he should tell that reason. He’ll do a lot more to bring people to his side if he’d address and dismiss opposing viewpoints rather than set-up strawmen and ignoring the actual issues.
Let’s see:
1. Ad hominem? Check.
2. Appeal to authority? Check.
3. Petitio principii? Check.
4. Generalization? Check.
Bones, I congratulate you; that may be the technical limit on the number of fallacies worked into an argument that contains absolutely no shred of substance, evidence, citation, or analysis. Bravissimo!
I await your next installment with bated breath.
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