Republican Candidates Versus The New York Times: Why Isn’t the Economy Growing Faster?

Townhall.com ^ | October 3, 2015 | John C. Goodman

[Kaslin]

Until we entered the Great Recession, most economists regarded Keynesian economics as a relic of the past. You could still find it discussed in some introductory textbooks. But, as University of Chicago economist John Cochrane points out, it wasn’t on the syllabus in any of the leading graduate schools.

Then came the most serious downturn since the Great Depression and something living economists had never seen before: interest rates that were near zero and in some cases negative. Keynes himself speculated that the economy could become stuck in a liquidity trap – where monetary policy is ineffective and only fiscal policy can stimulate the economy. Could that concept apply to the experience in recent years of the United States, Europe and Japan?

Enter Paul Krugman, the nation’s leading proponent of orthodox Keynesianism. As I explained at Forbes the other day, Krugman is a true reactionary. His explanation of Keynesianism is no different than the way introductory textbooks described it 50 years ago. And since he is a good writer, you would expect his columns in the New York Times to reflect a clearly presented exposition of the theory.

Ah, but there are three problems: (1) Krugman is a hater -- it’s hard for him to write a column without attacking the ethics, motivations and intelligence of those who disagree with him. (2) Krugman is a partisan – he hates Republicans even more than he hates economists who differ with him. (3) He is intellectually dishonest – perhaps more so than any other economics writer in the history of the profession.

That’s why if you put all of Krugman’s columns side by side and try to make sense of them, you won’t find a lot of sense.

Let’s turn to the basics. In the Keynesian view of the world, government deficits are expansionary. They lead to greater overall spending in the economy. Balanced budgets and government surpluses are contractionary. They are “austerity” policies. Deficit spending, of course, can be produced by an increase in government spending or by a reduction in taxes.

So there you have it …. Ooops. Did you say tax cuts are expansionary? Yes. Tax cuts. In the Keynesian model a tax cut puts more money in the hands of people and when they spend it aggregate demand increases. There are no direct supply side effects in the model. Tax cuts don’t get people to work more or save more or invest more. But they do get people to spend more.

You would never know any of this reading Paul Krugman’s New York Times columns, however. That’s not surprising. Virtually every Republican candidate for president is endorsing unpaid-for tax cuts. Large ones. If you go by the Keynesian playbook, any of these plans would cause the economy to roar forth. Somehow Krugman forgot to mention that in yesterday’s column, attacking the Republican candidate’s tax proposals.

Krugman has two favorite topics: austerity and Republican tax cuts. But when writing about one, he never mentions the other. In fact, when Krugman rails against tax cuts, he removes his Keynesian hat completely. It’s as though he is a Keynesian only when it fits his partisan purposes.

Lately, both at his blog and in his columns and espeicallly in yesterday’s column, Krugman has touted the fact that the repeal of the Bush tax cuts at the end of 2012 were followed by “the best job growth since the 1990s.” In other words, taxes went up and the economy hardly noticed.

The casual reader would never know that at the time of the 2012 budget agreement Krugman predicted that the economy would be thrown into a double dip recession. He even went so far as to claim that 2013 would be a test of “market monetarism” (see below) versus the Keynesian view of the world. As we’ve already noted, Krugman was as wrong as he could be. And more than one “liberal” economist has pointed that out.

[I can remember only one other occasion when an economist so completely put his reputation on the line with a prediction in advance of a policy change. In 1968 Lyndon Johnson asked for and Congress passed a 10% surtax on personal income in order to restrain inflation. Milton Friedman publicly predicted the surtax would have no effect. Unlike Krugman, Freidman’s prediction was correct.]

What about the other side of federal deficits: government spending. Krugman frequently advocates more spending on infrastructure and perhaps the need is there. But as a tool to regulate the economy, government investment in infrastructure is as far away from fine tuning as it gets. As the Wall Street Journalpoints out:

In 2009 the Obama administration dropped $800 billion of taxpayer cash known as the stimulus package, but as of last year a piddling $30 billion had been spent on transportation infrastructure. One reason the projects proved not as “shovel ready” as promised is that proposals must undergo extensive environmental and permitting reviews … [taking an] average six years for a major highway project to be approved.

So if fiscal policy doesn’t work, what’s left? Monetary policy. The leader of a new school of thought called “market monetarism” is Scott Sumner – arguably the intellectual heir to Milton Friedman in this realm. Sumner sees the business cycle as the dance of the dollar. He argues (convincingly in my opinion) that tight money caused the Great Recession and that a more expansive monetary policy is the surest way to return to faster growth.

[mountainlion]

The economy is growing too fast in the negative direction. I suspect this is part of the plan form the FED to make their world bank handles rich at our expense.

[jsanders2001]

Look to the Marxist in Chief who hates capitalists and thinks they should be taxed at 100 % but doesnt because then the businesses would just close their doors. He will tax everyone to their maximum pain threshold level beingb he sadist and masochist that he is. No one is happy under him except his fellow ogliarchs and their corporate sponsors.

[ClearCase_guy]

I know a lot of people in MA who think electing a Socialist in 2016 will really get this economy moving.

[txrefugee]

People in MA should just move to Europe where they would be happier, and Americans would be happier, too.

[fhayek]

I am just a simple farmboy from Western New York. But I DO have a spreadsheet. Anyway, (and I invite anyone to critique my thinking on this), GDP includes government spending (at all levels). But a sizeable part of Federal Government spending is borrowed (i.e. 'the deficit). So what happens when you deduct the deficit from the GDP? For 2014, instead of 2.4% growth, you have a much more modest .91% growth in GDP. In other words growth is much less impressive if you don't count what you put on the credit card. My thinking is that you are inflating today's economic growth on the backs of future generations.

But you know what? That .91% is by far the best growth rate during the Obama years:

2010 -5.00%
2011 -4.80%
2012 -2.81%
2013 -0.45%
2014 0.91%

These are the rates of growth for the economy if you net out the deficits that were used to goose the numbers. In other words, we got something like $3 trillion in increases to the GDP, but we increased the national debt by nearly $4.9 trillion over that period. I am sure our grandchildren will really appreciate Obama's economic record.

[1rudeboy]

Nice to see Krugman take it on the chin.

[Brian Griffin]

There are a number of reasons why the economy isn’t growing.

A major one is that there is a shortage of buildable land that is rationally priced. Why? Because governments have the funny idea that urban areas should be contiguous.

Sprawl is an American tradition. Working men created a town in Westchester County in 1846 when most Manhattan was building up south of 14th Street. Hyattsville and Chevy Chase were built up miles past the boundaries of the City of Washington.

Almost all land should be residentially zoned except:
1. land flooded within the past 100 years
2. land used for industrial purposes or adjacent land owned by the same entity
3. land owned by a government and not suitable for residential use (such as a landfill site)

[Brian Griffin]

The second major problem is that government has made it very undesirable to be a job provider.

[Brian Griffin]

Lower taxation rates pay off in the long term.

In the Washington, DC area one only has to compare nearby Maryland and Virginia.

Virginia came from behind Maryland and won the economic growth rate race.

Consider Detroit and its suburbs. Detroit has an income tax. Detroit has lost the growth race big time.

Consider Chevy Chase, Maryland and its large homes. Why are they there?

[Toddsterpatriot]

Anyway, (and I invite anyone to critique my thinking on this), GDP includes government spending (at all levels).

Yes, one method of calculating GDP uses spending.

GDP (Y) is the sum of consumption (C), investment (I), government spending (G) and net exports (X – M).

So what happens when you deduct the deficit from the GDP?

You get the wrong answer.

In other words growth is much less impressive if you don't count what you put on the credit card.

Use a different method of calculating it. You'll see borrowing isn't involved in the measurement.

[expat_panama]

see Krugman take it on the chin.

Here at least, for whatever that means. It's like how so many of of are appalled at how say, Hillary can commit all those felonies and nobody but us seems to care.

--as the world becomes curiouser and curiouser...

[fhayek]

I will check all that out, but I am sure you are right. I stand corrected.