Economic reality versus ideology: spending cuts and recovery

In this week's New York Times column, Nobel-winning economist Paul Krugman debunks the idea of heavy government cuts as a way to economic recovery:

The key point is that while the advocates of austerity pose as hardheaded realists, doing what has to be done, they can't and won't justify their stance with actual numbers -- because the numbers do not, in fact, support their position. Nor can they claim that markets are demanding austerity. On the contrary, the German government remains able to borrow at rock-bottom interest rates.

So the real motivations for their obsession with austerity lie somewhere else.

In America, many self-described deficit hawks are hypocrites, pure and simple: They're eager to slash benefits for those in need, but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we can't afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.

That '30s Feeling (via Making Light)

(Image: Library of Congress)


    1. Hold up. Because he failed to predict the future everything he has to say is invalid? Is that honestly a statement that seems logical to you?

    2. I don’t know what you’re talking about.
      Krugman was saying there was a housing bubble way before most.

    3. At this point, I think it is worth listening to people like Krugman who don’t believe in the “invisible hand of the free market” dogma that got us into this mess. And, yes, Krugman and others predicted the housing bubble and the economic crisis. He starts talking about the bubble as early as 2002 and is giving lengthy talks on the probable economic crisis by late 2007. Try Google.

  1. Paul Krugman is right about 1937. He’s right about the US deficit hawk hypocrisy. However, if the Germans don’t drag their feet about irresponsible fiscal policy in Europe, who will? France??

    June 19’s German tv news announced that, in a new trend, there are many (30,000) azubi (in-company training positions for young people) that are not filled because their economy is starting to cycle upward. FWIW. Of course these positions might be available because of recent deficit spending. Data?

  2. On the other hand, continued deficit spending likely has some painful consequences for everyone eventually, too, no?

    1. On the other hand, continued deficit spending likely has some painful consequences for everyone eventually, too, no?

      If the economy doesn’t grow faster than our debt and inflation stops then yes. Of course if either of those two happens, you’re going to have a lot more problems than growing debt payments.

      Managing debt for a country is not like managing your personal finances. You can not set your own interest rates on your debt, you certainly can’t print more money, you can’t force everyone who lives near you to pay you taxes and you don’t own trillions of dollars in land and natural resources.

  3. When the economy is good, SPEND! To feed growth of course. When the economy is bad SPEND! To prime the pump of recovery! Man, I want to write for the NYT. Numbers? You want numbers Krugman?

    Date. National Debt
    1990 4T
    1999 8T
    2010 13T

    How high will you take it? My guess is Krugman will never ask to cut spending.

    1. In 1946 you had a huge amount of resources being shifted into peacetime production.
      Also, the huge number of returning soldiers were headed to school rather than unemployment, due to the GI bill.

    2. In 1946 we still made things in the US and employed the workers of the US instead of outsourcing everything overseas.

    3. Thanks to the US being the only industrial country with an infrastructure that wasn’t heavily damaged by war.

      1. But rebuilding all that infrastructure stimulated the economy, right?

        (just pointing out the broken window fallacy)

  4. I am of the firm belief that economics and the economy are so complex, with so many different possible outcomes that both socialist and free market solutions are equally valid in the short term. In addition, What is considered a “good economy” is entirely depends on your world-view. A 10% unemployment rate yet massive profits would be a great economy to some. To others a 0% rate with all unemployed working on public works sound better.

  5. Dr. Krugman, as knowledgeable as he is in monetary economics, is out of his depth here. He does not understand governments, nor does he understand the effect of subsidies on the real economy.

    The historical record is clear: states that continually assume larger and larger obligations, whether to their creditors or to their own dependent populations, inevitably decline. For the interested, I refer you to the excellent book by Jane Jacobs, “Cities and the Wealth of Nations”.

    True, austerity programs will lead to short-term economic sluggishness. But in the long run, their absence will be fatal.

    True, as well, Krugman is correct that the plutocrat beneficiaries of the state are getting off easy. But increasing public spending will make that problem worse, not better.

  6. Krugman’s problem is that he demonstrates complete ignorance when it comes to the most fundamental issues of economics: incentives. Incentives are often ignored in large systems because there is some inherent balance present. However, that balance only goes so far. The reason that it is okay to slash taxes on the rich to the tune of $1.3 trillion and yet it is not okay to spend $77 billion to extend unemployment insurance is because slashing taxes increase investment and leads to economic growth because it increases the incentive to work. Providing extended unemployment insurance does the exact opposite – it increases the incentive NOT to work. This is a fundamental fact that cannot be ignored. The other fact that Krugman fails to point out is that when taxes are lower, government revenue actually increases. The reason, again, has to do with incentives. If people are provided with incentives to work, there will be less “need” for unemployment insurance, more motivation to produce and earn more, and thus a net gain in tax revenue.
    One last point – Krugman’s error is summed up when he talks about “slashing benefits for those in need”. Krugman believes that productive citizens have a fundamental duty to provide for people who are not productive, and that the needs of those people are valid claims on the wealth of others. That kind of attitude enslaves producers to consumers. It is undeniably immoral, and any philosophy that follows from that foundation is factually and ethically wrong on its face.

    1. “Krugman’s problem is that he demonstrates complete ignorance when it comes to the most fundamental issues of economics: incentives. ”

      Really? Please take off your Nobel prize in economics when you call the good Professor Krugman ignorant. I’m being dazzled by it’s light and I can’t hear you.


            Nobel Prize in Physics
            Nobel Prize in Chemistry
            Nobel Prize in Medicine
            Nobel Prize in Literature
            Nobel Peace Prize
            Prize in Economic Sciences

            It’s a later addition, not in accordance with Nobel’s will. Tastelessly tacked on.

    2. to bad cutting taxes these days result more in conspicuous consumption by way of low production number cars and such then any actual investments in long term expansion.

      thing is that between the globalization and automation we have a workforce availability unseen since the end of world wars. And growth have been over hyped. If people dont see growth, or even crazier, increased growth, year by year, then they react as if the market is in the red even tho it may be going steady in the black.

    3. #10: “The reason that it is okay to slash taxes on the rich to the tune of $1.3 trillion and yet it is not okay to spend $77 billion to extend unemployment insurance is because slashing taxes increase investment and leads to economic growth because it increases the incentive to work.”

      perhaps I just don’t understand economics, but I keep hearing this argument and I keep being expected to accept it on face value. And yet I’ve never seen anyone show data to support this. What I *do* see is increased profits and dividends for rich, rich people, and a tanking economy.

      what am I failing to see, in my economic ignorance? will someone please explain.

      1. It’s because the $77Billion would go to freeloaders were as $1.3Trillion would go to productive layabouts silly. (sarcasm)

    4. The other fact that Krugman fails to point out is that when taxes are lower, government revenue actually increases.

      I think people tend to underestimate the cumulative effects of lower taxes — the long-term Laffer curve. S Korea gathers about 10x as much tax revenue as the North despite the latter ~95% effective tax rate, but of course no one thinks that’s the function of one year’s tax rates — after the armistice, N and S Korea had similar GDP, but today the South’s economic output is something like 20x higher.

      1. The long-term Laffer curve is certainly important when you’re talking about a 95% effective tax rate. I’ve never seen any indication, though, that America has ever come close to the turn-around point. Laffer himself proposed the curve without giving any supporting numbers, and since he’s one of the people who laughed at the very idea of the economic collapse, I have a difficult time trusting his judgement.

      2. And Somalia has had a 0% tax rate for decades, because they have no government to speak of. Their economy must be booming!

        Which is why the Laffer curve has been laughed out of respectable economic circles: its claims are trivial where they’re right, and wrong where they might be meaningful.

        Still, the Laffer Curve is a tour de force of economic thought when compared to the Right’s bowlderization of it: “Tax cuts always pay for themselves.”

    5. of course, who on earth would want to work when they can get $32 a day (in my state MA) for 6 months.

      what you seem to fail to understand it that unemployment insurance and state subsidies pay so that people can survive until they can find a new job and get back into the workforce

  7. In Australia, the government instigated a “Stimulus package” that is widely thought to have helped it’s economic position during the crisis (from “What effect have the Government’s stimulus packages had on the economy?”, half way down):

    It is too early to see what effect the federal and state governments’ infrastructure spending will have, as most of the projects are still on the drawing board. However, most economists agree that public infrastructure spending will keep more people in employment as government contractors soak up some of the workers laid off by the private sector. Building infrastructure during a downturn also represents better value for the taxpayer, as labour and material costs generally decline from their peaks and make infrastructure construction cheaper than in boom times. Improved infrastructure should also increase the economy’s capacity for growth when good times return, as long as the projects are well chosen.

  8. I don’t see any “debunking” he appears to just be stating his own point of view, which is at odds with the views multiple other “nobel prize winning economics”.

  9. In 1946, the US was one of the only remaining industrial powers, as we were unaffected by the destruction of the war. Most of Europe’s industrial centers had been bombed to smithereens. Even Russia took a hit to its population and some industry.

    We were the only supply to the world’s demand.

  10. It’s the 80’s and Reaganomics all over again. I can almost hear the Thompson Twins…

  11. Canada went through a round of quite brutal spending cuts in the mid nineties that eliminated an out of control deficit and revived a flagging economy. Canada now has what is considered to be the best run economy in the world and was the G8 country least affected by the global downturn.

    I’m not saying this model works for all situations, but here is an example of where deep cuts yielded substantial benefits.

  12. absolutely true. I haven’t worked a day since I got my first welfare check. Why bother working if I can’t make millions of dollars thanks to all these welfare bums sucking up my theoretical money???

  13. The hypocritical German neoliberal party, Merkel’s coalition partner, might be changing their agenda. Instead of pursuing the impossible triad of reducing taxes for most voters, reducing taxes for the wealthy, and “simplifying the tax code,” this week they said they might shift their focus to human rights and education.

  14. You’ve got a huuuuuge debt bubble after years of (partially) artificial economic growth. Many other countries too. Outsourcing of production to other countries meant the interest rate could be kept rather low without experiencing much inflation. This was excerberated by us putting a lot of money into the housing market which is not considered when we calculate inflation.

    We’re approaching a point where the debt burden is so great that even ZIRP is not providing boost. The accelerator is pushed to the floor, but the car is no longer accelerating. It’s going at full speed, but our entire system is built around the assumption that there is no full speed.

    We’re heading for new territory here.

    BTW – Krugman is of course wrong. Had there been less debt and the crisis was less severe then deficit spending would have been the appropriate response.

    (I’m Norwegian, our debt bubble is still privatized as the housing market bubble still hasn’t busted)

    1. sadly, keeping interest high to avoid inflation is basically backwards, as the very function of interest is to put more money into the system.

      heck, low interest just results in more borrowing, and if anything inflates the money in the system, its that.

    2. Thank you for your input, now eat some herring please.

      Cutting off spending the moment the economy tips to the positive would have the same effects today as it did in 1936 when the Repuglicans pressed FDR into cutting spending; i.e. it killed the budding recovery.

        1. Totally specious comment (Senate composition in 1936-37). The characters of both the Republican and Democratic parties are competely different now then they were in 1936. We need to worry about the a**hats that are in office now.

      1. It’s the Swedes who are crazy about their herring. But I guess we are easy to confuse. ;)

        However, with regards to stopping the deficit spending, I think it’s best to remember that the national debt/GDP ratio of the US is currently at around 100%. Anything above 80% is considered high, because the Gov’t ends up spending money on interests when they should be spending that money on their citizens. Had your current debt/GDP ratio been at 40% then I would have agreed that it’s wise to continue with the deficit spending for a while. However, you are no longer in the position to do so. You have too much debt. Your great nation is approaching the point where it would have to use its credit cards to pay off the mortages were it a family.

        (and I mean sincerely that the US of A is great, at least the majority of your population and technologies are great)

  15. 2 points

    1)the experts that put us in the position we’re in have voided their credibility.

    2) what is it the political parties stand to gain by the policies they’re pushing? And who actually thought of them?

  16. In Australia we currently have unemployment at 5.2% and going lower at each reading, the introduction of Paid Parental Leave, Federally funded National Broadband Network and taxes mooted on the super-profits of mining companies.

    Not many breadlines here.

  17. We’ve been on a runaway train since the invention of economics (in particular lending at interest). Economic collapse is the only way to free ourselves from our enslavement to growth, but the consequences of total economic collapse become worse for a growing and globalized humanity. We just jumped a train we cannot get off.

  18. Krugman makes two assumptions: that continued borrowing is sustainable, and that the “deficit hawks” want to cut spending. It should be clear at this point that unlimited, unrestrained government borrowing can and will put our country on a course to financial ruin – indeed, we are heading there today faster than ever. And the “deficit hawks” he refers to are the Republicans who want tax cuts but spending increases, which is a very odd definition of “deficit hawk”, since it is bound to increase the deficit just as it has done for at least the last 30 years. Thus it’s easy for him to attack them as as bad choice, because they ARE a bad choice – but they are not the choice of actually cutting government spending. There are numerous examples, both current and historical, where cutting government spending was beneficial to the economy. We have a choice – our government spending can choke our economy until it dies, or we can release the pressure and let it get back on its feet. Krugman has made consistently bad calls before and throughout this crisis, and there’s no reason to believe him now.

  19. Balderdash. A Harvard study was recently done to quantify the effects of a given district getting more gov’t pork. The result? More gov’t spending actual hurt those districts economies.

    I don’t know how many times the ultra-Keynesians have to have this explained: governments are generally less likely to create economic efficiencies than to destroy them. If this wasn’t true we’d all be happily waving the hammer and sickle today, under a GDP per capita of $100K.

    Seriously, at what % of GDP does Krugman imagine the government is no longer allocating more efficiently than the capitalist economy? 70? 90? Surely no one alive in 2010 can dispute the notion there IS a limit, and tales of government waste are legion.

    Nobel prize or not, he’s is a bit of a hack when it comes to policy. Forget Paul Krugman; listen to the lessons of Milton Friedman and Friedrich Hayek.

  20. Balderdash. A Harvard study was recently done to quantify the effects of a given district getting more gov’t pork. The result? More gov’t spending actual hurt those districts economies.

    I don’t know how many times the ultra-Keynesians have to have this explained: governments are generally less likely to create economic efficiencies than to destroy them. If this wasn’t true we’d all be happily waving the hammer and sickle today, under a GDP per capita of $100K.

    Seriously, at what % of GDP does Krugman imagine the government is no longer allocating more efficiently than the capitalist economy? 70? 90? Surely no one alive in 2010 can dispute the notion there IS a limit, and tales of government waste are legion.

    Nobel prize or not, he’s is a bit of a hack when it comes to policy. Forget Paul Krugman; listen to the lessons of Milton Friedman and Friedrich Hayek.

  21. Does anyone know the percentage of government expenditure now compared to when Keynes made his original statements about borrowing during recession?

  22. “hypocrites, … eager to slash benefits … concerns about red ink vanish when it comes to tax breaks”

    Okay, for the sake of discussion let’s assume that’s true. If the Democrats are not hypocrites, they should be proposing tax increases on the wealthy sufficient to bring the budget back in balance, right?

    Or at least passing a Federal budget for this year, right?

    Sorry, the crickets are chirping so loudly I can’t hear you…..

    1. How do you propose the Democrats do this when the Repuglicans filibuster Every Single piece of legislation that comes to the floor? The Democrats couldn’t even pass a bill that allowed female government contractors sue if they were raped while on the job with out a Repuglican filibuster let alone anything substantive.
      Now why don’t you on your high mount tell us who are so oblivious to your wisdom how to overcome this?

      Sorry, couldn’t hear you over the crickets choking on spilled gulf oil.

      1. The Republicans were just as wrong to cut taxes without cutting spending, as the Democrats are wrong to raise spending without at least proposing a source of revenue.

        It’s just that in raw dollar terms, the size of the “wrongness” over the next ten years appears to be about an order of magnitude greater than that of the past ten.

        1. Appears,,,.

          And the Dems are trying to press forward with new taxation but as I stated there is a filibuster a day that has turned Congress into an ineffectual morass.

  23. You can’t cut the BuSh tax cuts, that would stop the trickle down economy. Oh, wait, that has NEVER worked, has it? Cut the taxes of the hyper-rich and they’ll invest in their businesses? Not so much. Instead, they just invested in risky, high return securities with Bernie Medhof and bought second, third, and fourth houses. (McCain doesn’t even know how many houses he owns, fer crissakes.) Or half million dollar cars or hundred thousand dollar wristwatches. But we dare not even think about what could be a source of a TRILLION dollars, because they own the country.
    Flame away, Randists.

    1. Your definition of ‘BuSh tax cuts’ for the ‘hyper-rich’ doesn’t jive with the facts.
      My father-in-law benefited from those tax cuts. He used his extra income to open a second dental office (he’s a dentist), hire three new employees, and increase the hours of his part-time employees. He owns one well-located but modest home, drives a 12-year-old Chevy, and wears a Timex. Clearly he is not hyper-rich, and clearly trickle-down worked in this instance.
      Keep your angry and inaccurate talking points to yourself.
      (Also, I’m familiar with the bit about ‘data’ and ‘anecdotes.’ Spare me the lesson – you’re the one with the blanket statements and vitriol.)

      1. Facts are facts. 2+2=4, the Sun rises in the East and sets in the West; and Bush’s tax cuts improved the lives of and created Millions of more Millionaires.
        Do you think you Father-in-law was being an altruist when he opened a second office? Or did he think ,(much like everyone else in the rational world), “Hmmmm, if I open a second office maybe I’ll make MORE MONEY.”
        So please what was it”
        A) Time to share my wealth by giving away free dental care with second office
        B) MORE MONEY!!!

        1. I think maybe you don’t understand the theories you’re commenting on.
          He clearly wanted to make more money. Duh. He’s not irrational (though he did marry my mother-in-law).
          To do so, he had to create new jobs for some people, and give more hours and *gasp* raises to others.
          Hey-presto, trickle-down economics. It’s not a great economic policy by itself, but it doesn’t have the 100% failure rate that you ascribe to it.
          (For the record, he’s actually an altruist to the degree his means allow – he gives his time and money generously to Habitat for Humanity and local food pantries, and yes, occasionally provides dental care at cost to needy patients. He’s no Bill and Melinda Gates, but not many of us are.)

          1. When you look at the “Big Picture” Trickle Down does not one whit for the average person and only benefits those who don’t need it to begin with. When you look at individual companies say your Father-in-law it can have/show benefits for the average person.

            BTW, if you had started with the “whole” story, instead of just the frame work my response would have been completely different. Online responses to complex conversations are like slow motion Madlibs, or slowly typed “chat sessions” you know the ones where received questions and answers don’t line up. So, good for him, he both increased his income and lent a helping hand. Too bad those that truly shovel in the money can’t do the same.

          2. This is logically inconsistent, unless “one whit” > all the jobs created by small businesses that expanded after the Bush tax cuts. About 20 million people are employed by companies with 20 or fewer employees (Census Bureau). A whit might end up being a rather large unit of measure even if the average small business only expanded by a fraction of an employee.
            Like I said, trickle-down isn’t a good policy, but it’s not the unmitigated evil you’re making it out to be.
            Also, you’re right. It’s frustrating to have dialogue through comment boards. I haven’t had enough coffee to keep this up much longer.

        2. They had these powers in the Supreme Court. Which is why FDR tried to expand it’s size.

          1. “They had these powers in the Supreme Court.”
            Sorry, SCOTUS doesn’t have the power to create budgets or spend money. Nice try.
            Unless you’re talking about the parts of the New Deal they found unconstitutional – but it’s important to note that much of the New Deal legislation that was struck down was written poorly and defended in court badly, and that there were 5 formalists and 4 realists on the Court at the time, resulting in 5-4 votes against challenged New Deal programs motivated by jurisprudential philosophy and not (necessarily) party politics.
            Remember, the prevailing legal doctrine at this time sought to protect the right to contract to a degree we would find absurd today. Even though that protection was losing popularity among judges and legal thinkers around the 1930s, there’s that pesky stare decisis doctrine…
            (Interestingly, in 1933 the Economy Act cut retired Justices’ pensions by 50% which, given the state of the economy at the time, dissuaded two formalists from retiring. Had FDR not signed that bill, he probably would have had a 5-4 or 6-3 advantage on the Court. Quirks of history.)
            tl;dr The New Deal was poorly executed and poorly defended, and the SCOTUS can’t control spending in anything like a direct manner.

  24. How exactly is it hypocritical for someone to oppose government spending programs (in which taxpayer money is spent) but support lower taxes (in which lower amounts of tax money are taken from citizens)? If you are in favor of smaller government, the two positions are completely consistent.

  25. Until we fix a few things in the USA, we’re going to keep having these booms and busts.
    First, we have to have real financial reform. Not reform as approved by Wall Street and the banks.
    Second, we have to allow the Bush tax cuts to expire (at the least).
    Third, the USA has to actually start producing things other than paperwork and service industry jobs.
    Fourth and probably the most important, we need real campaign finance reform.
    Here’s the problem, though. With 1 percent of the population controlling most of the wealth and good numbers of them being sociopaths, I’m not going to hold my breath.
    At this juncture, we are no longer operating as a democratic republic. Too many people don’t pay attention, too few people have control over too much wealth and our “news” organizations have become nothing but scandal reporters and DC lackeys.

  26. And yet I’ve never seen anyone show data to support this

    There’s data everywhere. China didn’t start growing until they enacted free-market reforms. Really, the whole Cold War was largely a disagreement over incentives versus social justice. It was a legitimate question in the first half of the 20th century — could governments create prosperity at confiscatory tax rates by eliminating “inefficient” profit and competition? The answer turned out to be HELL NO, but arguably we couldn’t have known that in 1900.

    The question now is: how much social justice can we afford? And the answer depends on how much economic growth you’re willing to forego to have it, because it’s in direct conflict with incentive.

    One last though on “the needy” — the 2010 poverty line is at about the 1950s average income. And the 1950s weren’t some time of terrible privation. Most poor people in America today not only have more than adequate food, they have cars, computers, TVs, refrigerators, air conditioners, cell phones, and Internet access. It’s no wonder we have talk of “funemployment.” The amazing thing is that people on unemployment look for work at all.

    1. You have obviously never met anyone truely in need of help and apparently have no understanding of the concept of inflation. What inflation means is that what used to cost say 5c (i.e. a candy bar in the 20’s) now costs $1. this means that although the number of dollars they have might be the same as an average american in 1950 the buying power is far less.

  27. ^^ “how much social justice can we afford?”
    I don’t know. But I’ll start worrying about the cost of “social justice” when we stop spending trillions of dollars on war and filthy Wall Street corporations that ruined the economy.
    I guess it could be argued that the working classes in this country aren’t starving (although the numbers of children in poverty is still horrifying) I don’t think it’s a good idea to wonder if the bar is low enough.
    Working families in all income spectrum have taken it in the shorts for the last 30 years. They are working harder, producing more and getting paid less. They have less vacation time, less health care and almost zero job stability.

  28. @Anon # 10
    You write “Krugman believes that productive citizens have a fundamental duty to provide for people who are not productive, and that the needs of those people are valid claims on the wealth of others.”

    I hope you or your family never become sick, unemployed or have children – all cases where you may not be “productive” for a longer or shorter time. Or if you do make sure never to make any “claims on the wealth of others.” Any others, ever.

    1. Any country can afford to help its poorest citizens or those who are temporarily affected by a disaster.

      However, we are approaching the point where the middle class expects it will be a net beneficiary of government spending. That’s not sustainable.

      1. Is that because the middle class have been expecting more government spending, though, or because they’ve had less and less portion of the wealth to contribute?

      2. “However, we are approaching the point where the middle class expects it will be a net beneficiary of government spending.”

        What are you talking about? Because I’ve never heard of anything like that.

  29. When the top 25% of taxpayers pay over 86% of total income taxes received by the IRS, it should be obvious that the middle income brackets are not paying their weight.

    That’s why I expect Obama’s promise that no one with an income under $250K will have a tax increase to evaporate soon.

    1. When the top 25% of taxpayers pay over 86% of total income taxes received by the IRS, it should be obvious that the middle income brackets are not paying their weight.

      No it is not obvious in the slightest. If the top 25% take in more than 86% of the total income, then there is absolutely nothing strange with them paying 86% of the taxes.

      We live with a progressive tax system. The rich have *always* from day 1 of the first income tax in this country paid more than the poor. In fact, they paid *all* the income tax.

      If you want a flat tax that taxes everyone the same percentage, then be prepared for the bottom 50% paying their entire income to the government. Does that sound fair? Does that sound even remotely practical? Do you think it would be a good thing for the rich of this country to live in a place where their workers live in abject poverty?

      1. I have to thank Aloisius for doing the good work of pointing out that statments that take the form of inferential statements do not necessarily contain any inference. This is what I”m talking about – this was a gesture meant to pose as an argument, without actually making any point. And further, to suggest that income taxes are equivalent to all taxes, or are somehow special on their own, leads this statement even farther away from relevance.

        And on the subject of irrelevant arguments, the link in #7 takes you to a completely specious argument. The author of it is either pretending to be unaware that the level of demand in America after the war similar to the collapse of demand during the depression, or that the demand environment is not related to the outcome of the spending cuts.

  30. re: unemployment – i take it none of you have collected unemployment before. i collected it when i got laid off from the dotcom bust and it was no picnic. when it ran out i spent pretty much every dime i had saved, including clearing out my retirement accounts, while moving in with my parents. some people don’t have families to lean on and when unemployment and savings run out they’re fucked.

    there is plenty of incentive to work when you are unemployed: after the first couple of weeks on unemployment the depression sets in and it only gets worse from there.

    re: deficit spending and tax cuts – both parties have half of the issue ass backwards. you raise taxes and cut spending in the good times because people and businesses can afford it, and you increase spending and cut taxes in the bad times to stimulate recovery, using the money you collected during the good times.

    the republicans always want to cut taxes, and the democrats always want to increase spending, but no one wants to do anything about the obvious drains on the economy, like wars, and no one wants to take steps to ensure we are becoming economically self reliant, i.e. energy independence.

  31. You are right, that the rich paid all the income tax when the 16th amendment was put in force. They paid seven percent on any income over $500,000. (And half a mill in 1916 really -was- rich!)

    I would be totally OK with reestablishing that same tax rate and bracket today. Call me a wild and crazy soak-the-rich guy, I don’t mind.

  32. Krugman is wrong. The bubble was mostly caused by credit expansion (low interest rate by FED, fractional reserve banking) and various policies which encouraged recklessness (FDIC, Freddie/Fannie, …). Krugman’s proposal is only trying to re-create bubble conditions.

    The result is that too many resources were allocated to some sectors such as housing, which got caught in this illusory growth: too many workers, real-estate agents, machines, raw materials, etc. This caused artificially high prices in those and related sectors.

    The Keynesian “remedy” (government spending and increased consumption) is not a remedy at all, because it is a crude tool which only delays the reallocation of those resources to more socially valuable uses and the adjustment of prices/wages to their sustainable and realistic relative levels.

    It is important to understand the role of savings, which are the source of wages and improvements in productivity. Encouraging consumption may hide symptoms in the short-term, but sets us up for worse long-term consequences.

  33. Graduated last year with a Master’s. Haven’t been able to find a job in my field. Now working in a grocery store stocking shelves. At least I am working…..

    There is so much ideology running in this thread…

    If one can look beyond your ideology and see how much people are hurting. Wealth is getting sucked up by the rich and the rest are trying to get by in the rubble created by this great “sucking up.”

    If you got yours, good. Hold on to the ideology that put you there, no matter what, no matter how scorched our society becomes. Close your eyes and pretend the pain and suffering of others is good for them. That they need a motivation to work, as that for most they are just lazy. Believe that with all your heart. And maybe, just may be it can come true.

    For the rest of us. We work to survive.

  34. Debunks? More like he opines against spending cuts and you agree. Not very scientific of a debunking if you ask me. And since when is reducing the intake of the fed. gov’t the same as a cost the gov’t has to pay. That only makes sense if you first assume all wealth belongs to the federal gov’t. I suspect Krugman understands the difference but is writing to persuade rather than inform.

  35. I had no idea there were so many Randroids on BoingBoing.

    The top 10% of the country (that’s 30 million people) earn over 50% of all the income in the US. Clearly what is needed is that we continue to tilt the scales in their favor even further. Eventually we’ll reach a tipping point where suddenly we’ll be in laissez-faire free market nirvana where employment will suddenly jump back to “full” employment and deficits & debt will magically disappear.

    Quick question for the Randroids: at exactly what share of income/wealth for the top 10% can we actually expect trickle-down to actually work? 75%? 90%?

    Another quick question for the Randroids: have you ever heard of the Gilded Age?

    (The bottom 50% of the country, by the way, shares 10% of the income. That’s 150 million people.)

    Oh, and I love the comment up above about how the $1.3 trillion Bush tax cuts actually helped the economy. Why then, pray tell, is real employment (the absolute number of people employed today) LESS than it was in 2003? What happened to the jobs that should have been magically trickle-downed by those tax cuts?

    1. I’m not particularly a fan of Rand, but I swim in that direction. Can I ask why we care what proportion of the population earns what? Surely what we should care about is the living standards that the poorest enjoy – not how much other earn in comparison.

      Certainly when I’ve been harder up than I am now I didn’t care about what the guy next door earned – I cared about what I was eating for dinner. I think I’m heading slightly OT, but the whole idea that relative poverty is more important than absolute poverty, or even that relative poverty is important at all grinds my gears. What matters is making sure kids eat properly, in good housing, with good education, not making sure that their parents earn some arbitary proportion of the national wage.

      So, to long windedly answer your question, I don’t care how much the richest earn, as long as other people, particularly the poorest, eat well, I don’t think you should care either.

      1. Have you actually looked at the health statistics in this country lately? If your sole measure as to the health of our society is whether our children are being fed, we’re failing miserably.

        1. Hi Strabo – I didn’t say that you were doing great in the US – I said what matters is absolute, not relative poverty. I specified the measure, not where that measure was…

  36. I don’t know if Krugman predicted the housing crisis, but I definitely predicted that this comment thread would be full of free-market fundamentalist crankery as soon as I read the post. I am a visionary!

    The excellent thing about so many of the comments here are how beautifully they illustrate the very phenomenon that Krugman was describing: pre-existing ideological beliefs getting in the way of empirically-driven policy. Among all the comments critical of Krugman, I don’t see anything actually addressing the substance of his argument. Instead, I see generalized capitalism-vs-socialism arguments being offered as if that were the point of disagreement.

    Econ 101 concepts and the idividualism vs. collectivism dichotomy are attractive heuristics that lighten the cognitive load of understanding real world economies in their vast complexity. But comforting yourself with the elegant simplicity of Friedman or Hayek at the expense of addressing empirical reality is never going to lead to effective policy.

    The right wing in this country discovered a brilliant but dangerous campaign giveaway to help get themselves elected. Instead of a chicken in every pot, they put a narrative in every noggin – this pacifying, simplifying story that reduces all of society’s stakeholders and their motivating interests to tribal ingroups and outgroups, where the finances of a nation work just like the finances of a family. It sure has worked, but if you wonder why we have such a hard time responding to big problems, look no further than this very thread to see how far smug ignorance can lead you astray from addressing the actual problem at hand.

  37. I want to meet these people who want to be taxed more because they think the government is competent and should have more money at their disposal.

    1. Hi golfballs03. Nice to meet you. I’d be happy to pay more taxes (and I’m already in the highest tax bracket) if it meant a reasonable education (good education with trained teachers, free higher education), maintained infrastructure (really, those bridges shouldn’t collapse), a safety net (losing your job should not mean you have to rely on soup kitchens), and available health care for all (no more friends going into debt or bankruptcy because of medical bills). I realize that I wouldn’t personally benefit from these things here and now, since I can afford education, health care, and a car that doesn’t have a problem with potholes. But unlike the Randoids, I do not believe that I am invincible. Nor do I believe that I have achieved what I am by sheer skill and hard work. I know how lucky I’ve been, and I’m willing to share the benefits of that with others. If you think you achieved everything you have based only on your own hard work, you’re delusional.

      It’s mind blowing to read the comments about trickle-down economics, and about those poor downtrodden rich people who have to pay taxes. I expected the BB commenters to be more willing to look at reality.

      1. The problem is that the situation you are describing does not often exist in practice, much as we might wish it does.

        Money that is not directly tied to the act of being voluntarily given in exchange for value creates distinct problems.

        Let’s look at schools: sure, we can all agree that students should get good educations. But unfortunately, studies have shown there is not a strong corellation between funding and academic success. See, for instance,

        Money not tied to satisfaction can simply patch over weak underlying system. In many cases, more money is simply not the answer, because it can make people lazy and/or defensive of retaining pay higher than they are worth (i’m talking about certain corrupt school districts, or government workers in greece rioting and burning things because they risked a salary cut).

        Then, you have the problem that with funding comes control. In California you can get a free public education at thousands of schools..but you are not free, right now, to teach your children in your own home. All schools must use state approved curriculum in order to be certified. Both of these are very new things in American society, and I think it is fair to say that the higher level of central control that came since the DoE was founded in 1980 has coincided with a deteriorating quality of graduates.

        Same with health care: The more it is centrally funded, the more it will be centrally controlled. This is just the nature of things.

        Unfortunately, when things are centrally controlled, for profit interests have an increased incentive to infiltrate and take control of it in order to smash smaller competitors- such as the flagrant regulatory capture of the FDA by the pharmaceuticals.

        Then, you have the problem that money that is meant for one thing, in the long run, doesn’t end up there. So, you want money for schools and bridges and food for the poor. All well and good. So you agree to have $100 dollars taken from you every week to support these things. And, for a while, it does. But, what if there is, say, some sort of “war”? Well, you are obligated to pay this $100 a week. You can’t choose not to pay it, no matter what it is spent on. But hey, what do you know, war is pretty important. Expensive too. And us poor Amerikuns sure seem to get involved in a lot of them. It’s a good thing you are putting $100 into the pot every month, we might just need that for some tanks and bombs…

        Finally, the most fundamental problem. You have the right to support any cause you want, in any way you want. But what if I don’t support it? Do you have the right, through force of arms, to make me support the causes that are important to you? I don’t believe that you do, and I don’t see how the creation of an entity called the “government,” which I did not vote for, ask for, want, or support in any way at any time in my life, changes that fundamental fact.

        At least, if it’s a local thing I don’t support, I can simply move out of town. But if it’s a national thing I don’t want to support, or even more so find morally repugnant, then the only option I have to not support this thing that I find so wrong it is to break away from my family, friends, and homeland, and renounce my citizenship. That’s not very fair, is it?

        You might say that it’s ridiculous to call funding roads “morally repugnant”; I refer you to the paragraph three above, about war.

        In order to exist in the United States today, you must pay money to support Prisons, the CIA, corporate subsidies, WMD research, genocidal wars, etc etc etc. If you pay taxes in America today, YOU ARE GUILTY of aiding and abetting the crime of mass murder.

        The mechanisms by which you are compelled to support these unspeakable crimes, such as the income tax, are ones that are kept in place because the average person, such as yourself, thinks we need them in order to have fire departments, schools, and bridges.

        So, if you support these worthy endeavors you mention, I would suggest devoting your time, money, life energy, and creativity to organizations that can provide them peacefully. Not to supporting organizations that through force impel your neighbors to support the same things you do.

        This is simply how we must act as individuals in
        a society in order to achieve a peaceful world.

  38. one thing to remember about the chinese is that they have their exchange rate locked to a certain point below the us dollar to make it attractive for importers from there.

    similarly, the south korean currency is about 1/1000 of a us dollar.

    oh, and i would avoid using “communist” nations as examples, given that they are more or less banned from international trade (for various reasons).

  39. There is a broader picture to look at here. We are working rapidly through the world’s resources. We are consuming more and more. We have been spending money on things we don’t need and that don’t improve our lives or our productivity. Suddenly the credit that was facilitating this has been pulled from under our feet.

    Is the answer really to put in more money to use more resources? Borrowing more money in the public sector, when we are already borrowed up to our gills in the private sector

    Surely it would be better to improve the way we spend money/resources? There are so many things that can be done.

    By the way, I agree that spending money to lift people out of absolute poverty should be a priority and something worth spending money on.

  40. I wonder if Krugman is competent enough to tie his shoelaces. I am seldom impressed by his writing.

    He seems shocked that anyone would have a moral problem with large deficits. That is, with

    As it is now, 10% of all money the government spends is interest payments. Totally wasted money that mostly goes straight to foreign investors. This has risen significantly just in the short but profligate Bush years, and will only rise higher during the term of Bush 3.

    This is, in a very real sense, borrowing from our children without their consent, in order to continue unsustainable economic patterns today. It’s very much immoral, yes. I am astounded that someone as widely read as Krugman can simply ignore this simple fact.

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