Man Without Qualities

Friday, February 07, 2003

Sedating The Latest Krugmania

Don Luskin does a commendable job explaining why Paul Krugman's latest column is just more hollow partisan hooting, uninformed by serious economics and failing to offer any stimulus plan as an alternative to the policies which are the focus of today's Krugmania.

From today's column it appears that Professor Krugman is no longer amused by Alan Greenspan. And this full Princeton professor of economics works himself into a positive lather over the prospect of what will be, in terms of a percentage of gross domestic product, a rather modest federal budget deficit.

Yes, Paul, yes. We all know you're very upset. But perhaps when you calm down you could explain how it is that it is so very important not to have a deficit now but, back when the Balanced Budget Amendment was up for consideration, balancing the budget was considered just plain loony by people like your good friend Brad DeLong.

Of course, Professor DeLong was considering a mandatory Constitutional amendment. But his economic reasons for disfavoring the Balanced Budget Amendment didn't have much to do with it's legal nature - just the economic effects of balancing the budget at the wrong time. And his arguments seem just as applicable now. For example, consider this DeLongian wheeze:

The balanced-budget amendment would do more than run the risk of creating a recession on its implementation. It would have damaging long-run economic consequences as well by eliminating the fiscal "automatic stabilizers" that moderate the depth of recessions. When the economy enters recession, government revenues automatically fall: as individuals' incomes and firms' profits decline, they owe less in taxes. When the economy enters recession, government spending rises as more people draw on unemployment insurance and other social welfare programs. The fall in tax collections and the rise in spending both act to boost the economy. They provide a cushion, keeping aggregate demand, and thus employment, from falling as much as they would otherwise.

Isn't Professor Krugman one of the nation's greatest heralds of weakness in the economy? Isn't he the one who sounded the alarm when Santa left a lump of coal last December for the nation's retailers?

And what about this fervid DeLongian concern:

The deficit reduction efforts already underway are putting a substantial burden on the current recovery. .... The rapid contraction in spending and increase in taxes resulting from hasty implementation of an amendment could shrink demand by enough to trigger a nationwide recession.

Dear me. Professor DeLong seems to warning us about raising taxes in a situation very much like the one we have now!

And maybe I'm just not as smart as Professor DeLong and Krugman - dammit, I admit it, I'm not that smart, nobody is that smart - but Professor DeLong's other arguments don't seem to be consistent with the current Krugmania, either. Perhaps when Professor Krugman returns from orbit he can explain some of this to me.

And, while he's at it, perhaps someone can remind him that the solvency of the United States is not at issue here. A reasonable person may support or oppose deficits of the order proposed by Mr. Bush - but the United States is not going to go broke because of them. And regardless of Professor Krugman's fulminations, Alan Greenspan's reputation as one of the most respected and successful - perhaps the most respected and successful - Federal Reserve Chairmen is not in any danger.

So maybe the Chairman of the Princeton Economics Department can drop by Professor Krugman's office and let him know - in a friendly way, of course - that when the Professor allows his Krugmania to extend to scribing sentences such as "Mr. Greenspan must know that many people, whatever they say in public, now regard him as a partisan hack" and "This may be Alan Greenspan's last chance to save his reputation — and the country's solvency" he sounds like a complete fruitcake.

On the other hand, there are some putative economists around whose reputations are now under serious attack and who have been seriously and widely accused of becoming mere "partisan hacks." But none of them has intitials "A.G." - and they don't still live in the Washington D.C. area.

MORE: Perhaps Professor Krugman is having trouble suggesting an alternative plan because, as the New York Times points out, the more people learn about the Democratic alternative the less they like it:

The Senate Democratic leader, Tom Daschle of South Dakota, announced a plan in January that would send checks equal to $300 for each adult in a family and another $300 for each of the first two children. Senator Byron L. Dorgan of North Dakota has proposed rebate checks of $500 for individuals and $1,000 for married couples.

Instinctively, however, many people seem to understand that a temporary tax cut is more like a gift than something that allows people to change their behavior.

When households got rebates in 1975 as part of President Gerald Ford's effort to help the economy, they spent about one-third of them, according to several studies. People behaved similarly in 2001, even though those rebates — a Democratic idea — were actually a down payment on a permanent tax reduction, said Joel Slemrod, an economist at the University of Michigan.

In the early 1980's, by contrast, people spent about 90 percent of the additional money that showed up in their regular paychecks from President Ronald Reagan's tax cut, according to Nicholas S. Souleles, an associate professor of finance at the University of Pennsylvania.

Mr. Slemrod said, "The more persistent people think a tax cut is, the more likely they are to incorporate it into decisions about how well off they are."

This Times article more or less gets it right, except I don't think its just public "instinct" that leads people to doubt the effectiveness of the Democratic proposals. A better term might be "intelligence and experience." The Democratic counterproposal is nothing more than a one-off gift, and most of us have the intelligence and experience to know how people respond to a gift.

Christmas, for example, is within most people's experience.

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