Thursday, August 11, 2016

Paul Krugman thinks voters should give Democrats the benefit of the doubt on debt and spending. Hmm …

Paul Krugman on the GOP presidential economic plans:
So now we have candidates proposing “wildly unaffordable” tax cuts. Can we start by noting that this isn’t a bipartisan phenomenon, that it’s not true that everyone does it? Hillary Clinton isn’t proposing wildly unaffordable stuff; Bernie Sanders hasn’t offered details about how he’d pay for single-payer, but you can be sure that he would propose something.
And proposing wildly unaffordable stuff is itself a declaration of priorities: Rubio is saying that keeping the Hair Club for Growth happy is more important to him than even a pretense of fiscal responsibility. Or if you like, what we’ve seen is a willingness to pander without constraint or embarrassment. Also, his insistence that the magic of supply-side economics would somehow pay for the cuts is a further demonstration of priorities: allegiance to voodoo trumps all.
Krugman is right that the GOP economic plans bleed too much red ink, even before their spending cut plans. But I don’t think any of the candidates, at least not of the major ones, is claiming his or her tax cuts will pay for themselves.
Paul Krugman speaks during an interview in New York, May 4, 2012. REUTERS/Brendan McDermid,
Paul Krugman speaks during an interview in New York, May 4, 2012. REUTERS/Brendan McDermid,
More importantly, he gives today’s Democrats, and the left in general, too much credit for fiscal responsibility. For instance, we “can be sure,” he says, that Bernie Sanders “would propose something” to pay for his $18 trillion spending plan. Really? As Jeff Spross write in The Week:

The conclusion, by now, should be obvious: Government deficits are too low, and have been too low for a good long while. … What’s funny is that Sanders might be gearing up to make this very argument. His chief economic adviser, University of Missouri-Kansas City economist Stephanie Kelton, is a fan of something called modern monetary theory: a batch of ideas that sketches out a very similar case to the one above. Of course, Sanders hasn’t done this yet. And maybe he won’t. But if he ever chose to throw down in favor of bigger deficits and more money-printing — on the national stage of a presidential election, no less — he’d be doing the country a tremendous service.
And more from Vox’s Dylan Matthews on Kelton:
Kelton disagrees with Romer and Mankiw on economic theory. In fact, she disagrees with just about every economist Bush or Obama ever hired about economic theory. Kelton is among the most influential advocates of Modern Monetary Theory (MMT), a heterodox left-leaning movement within economics that rejects New Keynesianism and other mainstream macroeconomic theories.
MMT emphasizes the fact that countries that print their own money can never really “run out of money.” They can just print more. The reason we have taxes, then, is not to pay for stuff, but to keep people using the government’s preferred currency rather than, say, Bitcoin. In some rare cases, consumer demand gets too high, so sellers raise prices and inflation ensues. Then, you need to raise taxes to cool the economy down. But the theory holds that this eventuality is pretty rare. James Galbraith, another MMT-influenced economist, once told me that the last time it happened was in World War I. The main takeaway from this is that you really don’t need to balance the budget over any time horizon, and attempts to do so will hurt the economy.
MMT may still be a minority position on the left, but I certainly sense a growing tolerance of higher spending under the belief that interest rates will stay very low, making borrowing more affordable than CBO and other budget experts think. And is proposing “wildly unafforadable stuff” by proposing wildly unlikely tax hikes — for both political and policy reasons — really mean you are fiscally prudent? And this from Tyler Cowen:
In most demand-side liquidity trap and secular stagnation models, there is a shortage of safe assets and that is a major problem which requires remedy.  Rubio’s plan, as I understand it, would raise the budget deficit and by a lot because it is unlikely to prove self-financing in the Lafferian sense.  By current Keynesian views, that should be a feature not a bug.
You might rather the deficit be increased by cutting taxes for the middle class, or by building productive infrastructure, but still the Rubio plan would be better than just sitting tight and doing nothing. Furthermore the wealthy will take their new surplus of funds and invest most of it and maybe spend some of it too.  That boosts aggregate demand, and…if you think the multiplier still is high…well, you can see where this is heading.
Are we all ready to turn “C + I + G” into a mere “C + G”?  I hope not.
And while the Fed is legally constrained from buying corporate bonds and other non-zero-ROR assets, wealthy people most certainly are not, so they could spend their Rubio tax cuts on equity, venture capital, and the like.  In essence we would be using wealthy people, and fiscal policy, to make asset swaps which the central bank cannot.  So liquidity trap arguments should not make this tax cut impotent and arguably they should necessitate it all the more.  You might even (heaven forbid) wish to target the tax cut toward the wealthy, if they are the most likely to take cash and buy relatively risky assets with it.  Right? So by the standards of the current New Old Keynesianism, what exactly is wrong with Marco Rubio’s fiscal plan?  Except that some other plan might be better yet.  Inquiring minds wish to know.
I think what’s happening here is that Krugman is using whatever argument is handy to attack the political party he disfavors.