Sunday, January 18, 2009

Krugman's Letter

Paul Krugman, nobel prize winner in economics, has penned a letter to President Elect Barack Obama in Rolling Stone. The whole thing is a very interesting read as he gives his opinion for what Obama should do regarding the economy and at the end in regards to prosecuting people in the Bush Administration. There is one part I want to excerpt though because of some of the things I have seen on liberal and progressive websites.

IMHO to a certain extent we (liberals and progressives) have caught some of the "ideologue" bug when it comes to tax cuts/stimulus checks. Its interesting when you stand back and watch it because now we are willing to take the word of wing nut economists when they say the first round of stimulus checks didn't work. Well I dont think you can even begin to quantify whether they worked or not in light of the jobs lost last year and the mortgage crisis. I expressed my reasoning about this yesterday at the Swampland blogs and Krugman kind of makes the same case. What we should take great care to do now that we have the Presidency and Congress is avoid taking totally ideological and partisan stances against policies that might have a great benefit. When President Elect Obama put forth his stimulus plan there was no shortage of belly aching because it contained tax cuts/stimulus checks for middle income families, tax cuts that Obama actually campaigned on. But most if not all of the criticism never even took into account of WHY they might be needed as a part of an economic stimulus plan. Well here is Krugman speaking on it in Rolling Stone:

You can also do well by doing good. The Americans hit hardest by the slump — the long-term unemployed, families without health insurance — are also the Americans most likely to spend any aid they receive, and thereby help sustain the economy as a whole. So aid to the distressed — enhanced unemployment insurance, food stamps, health-insurance subsidies — is both the fair thing to do and a desirable part of your short-term economic plan.

Even if you do all this, however, it won't be enough to offset the awesome slump in private spending. So yes, it also makes sense to cut taxes on a temporary basis. The tax cuts should go primarily to lower- and middle-income Americans — again, both because that's the fair thing to do, and because they're more likely to spend their windfall than the affluent. The tax break for working families you outlined in your campaign plan looks like a reasonable vehicle.

But let's be clear: Tax cuts are not the tool of choice for fighting an economic slump. For one thing, they deliver less bang for the buck than infrastructure spending, because there's no guarantee that consumers will spend their tax cuts or rebates. As a result, it probably takes more than $300 billion of tax cuts, compared with $200 billion of public works, to shave a point off the unemployment rate. Furthermore, in the long run you're going to need more tax revenue, not less, to pay for health care reform. So tax cuts shouldn't be the core of your economic recovery program. They should, instead, be a way to "bulk up" your job-creation program, which otherwise won't be big enough.


Now most of the liberal/progressive blogosphere swears by Krugman when it comes to economic policy. I think it would be wise to take note that he himself believes that tax cuts should be an integral part of any economic stimulus. If you are going to believe him when he advocates infrastructure spending then you can't be selective when he also advocates middle and lower class tax relief. In the end we need to be about results, not about how we accomplish them. To do any less would relegate us to the left wing version of Wing Nuts and make it even harder than it is now to get our voices heard.

1 comment:

  1. Good piece (yours not Kruggie)! Good to see you walking back off of your hard idealogical tint in the face of a severe crisis. Shows maturity and an innate understanding of crisis management.

    Tax cuts are good. Spending will only do so much. Until people with long bread decide to take risk and invest again we're toast, so it only makes sense to placate (to some extent) those with the real power to diffuse the situation!

    I envision a scenario where the stimulus has a moderately calming effect, that then signals all clear for investors across industry to slowly begin engaging risk (investment!) which slowly but surely brings jobs and stronger P&Ls and more investments - think positive feedback loop.

    Again, very good piece!

    k1
    ryanculver.blogspot.com

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