Cheap Indianapolis Colts Jerseys Professor Krugman
The piece argues that high and rising levels of public debt are a real concern. It also makes the case that the stimulus packages that began in 2009 which have consisted mainly of temporary tax cuts and transfer payments have significantly raised the public debt while doing very little to solve the nation's long term employment and growth problems.
That op ed and others I've recently written have discussed the policy recommendations of Professor Paul Krugman, a Princeton economist and New York Times columnist. economy on the road to a real and sustained recovery. I've also spelled out my views in detail in my book The Price of Civilization (2012).
I have argued against short term stimulus packages. Krugman has supported them, and indeed argued that they should have been even larger. I have been against temporary tax cuts and temporary spending programs, believing that instead we need a consistent, planned, decade long boost in public investments in people, technology, and infrastructure. Such a sustained rise in public investment should have been paid for by ending the Bush era tax cuts in 2010, or by adopting a comparable boost in revenues. Instead Obama and Congress have now made almost all of those tax cuts permanent, putting us into a deeper fiscal bind.
Yesterday, Krugman responded to my recent op ed by digging in deeper on the deficit question. can and should incur more debt to pay for a short term boost in aggregate demand. While he did not lay out a Cheap Indianapolis Colts Jerseys quantified plan (that has been the case from the start, so it's hard to know exactly what Krugman has in mind in a quantitative sense), the CBO has recently estimated that without the recent deficit reduction actions of the White House and Congress, the public debt would rise to around 87 percent of GDP in a decade. I presume that Krugman would support that trajectory or something like it (he should tell us by now what path of deficits he actually recommends).
Let me address his points here in detail.
First off, here is what I mean when I say that Krugman is a crude Keynesian: he takes a simplistic and inadequate version of the Keynesian economic approach as his guide for budget policy. Keynes himself was far subtler. In 1937, with British unemployment still around 10 percent, Keynes wrote: "But I believe that we are approaching, or have reached, the point where there is not much advantage in applying a further general stimulus at the centre." He believed, for example, that more structural policies were needed to address the continued unemployment.
There are four elements of crude Keynesianism and, indeed, of Krugman's position:
(1) The belief that multipliers on tax cuts and transfers are stable, predictable and large;
(2) The belief that America's employment and growth problems are overwhelmingly cyclical, not structural, and therefore remediable by short term aggregate demand management;
(3) The belief that a growing debt burden is a minor nuisance as long as the economy is in recession;
(4) The belief that for practical purposes, the most urgent need is to raise aggregate demand rather than to focus on the quality and type of public spending.
I believe that all of these positions are misguided.
First, Krugman believes that fiscal multipliers are predictable and large. Thus, a $1 rise in government spending of any kind, according to Krugman, predictably leads to something like $1.50 in higher GDP. Similarly, a $1 cut in payroll taxes leads to something like a $1.30 rise in GDP.
The belief in stable, predictable, and large multipliers is belied by both theory and evidence. Households and local governments might simply use a temporary tax cut or temporary transfer, for example, to pay down debts rather than to increase spending, especially because the tax cut or transfer is seen to be temporary. Businesses, concerned about the buildup of public debt, might hold back on business investment in the face of large deficits, anticipating higher taxes in the future.
The original stimulus legislation was overwhelmingly of the form of temporary tax cuts and temporary transfer payments, the kind of deficit spending especially likely to have little effect on aggregate demand. Only $88 billion of the $787 billion stimulus package was in direct purchases of goods and services by the federal government. The rest christian louboutin so kate kid leather pumps was temporary transfers and tax cuts.
(This was not an accident. A critical and predictable weakness of the 2009 stimulus is that House Democrats and the White House negotiated it in just a few weeks. In the unnecessary haste, there was no serious consideration given to long term needs in infrastructure, for example. With presidential leadership we could and should have forged a decade long strategy. Now we have no such strategy in place or likely to come into place.). Later stimulus packages (such as the 2010 two year extension of the Bush tax cuts) have been even more weighted towards temporary tax cuts.
The Keynesian theory is that the stimulus would raise output and employment while the economy naturally returned fairly quickly to full employment and rapid growth from the cyclical downturn. This long term recovery did not occur as projected. Growth has not louboutin replica resumed on a normal basis. economy.
Here is the CBO forecast made in mid 2009 and the actual growth outcomes:
Why has the CBO model failed so badly? There are of course many theories. Krugman argues that the stimulus worked just as advertised, with the multipliers that were predicted, but that other factors held up recovery. He does not present a quantified model, so doesn't really account for the shortfall of the CBO Keynesian modeling. My own view is that the predicted multipliers were too high in the first place, especially for such a poorly designed tax and transfer program, and that recovery is impeded by structural factors. These structural components are not susceptible to a Keynesian diagnosis or to a Keynesian remedy. They require a long term public investment response that has not been forthcoming. economy. He repeatedly emphasizes that we suffer a demand shortfall, pure and simple, one easily remedied by more stimulus. economy with this view. profits are soaring. export growth is feasible. Unlike the Great Depression, vacancy rates are recovering even as unemployment is stuck. (Technically, the Beveridge Curve has shifted to the right.)
The CBO also suggests that much of the slowdown in GDP growth after 2002 is the result of a slowdown in the growth of potential GDP. According to CBO, potential GDP growth was 3.1 percent per year during 1991 2001, but slowed to just 2.2 percent per year during 2002 2012.
What are some of the structural problems? These include large scale offshoring of jobs, large scale automation of jobs, decline in demand for low skilled workers, skill mismatches, broken infrastructure, and rising global energy and food prices. These require various kinds of targeted public investment spending, not simply aggregate demand.
In view of christian louboutin studded sneakers replica these challenges, would a different kind of spending program have worked better? If the spending had been concentrated on long Cheap Tennessee Titans Jerseys term infrastructure and job skills, with investments carried out not for two years but over the course of a full decade (as in the 1950s 60s national highway program), the answer is probably yes. But such projects were not "shovel ready."
Such long term investment programs are very different from quick and dirty Keynesian "stimulus" packages such as temporary tax cuts. Long term investment programs require thinking and planning of the kind that has never happened with Obama's stimulus packages. Examples of long term federal investment programs include the national highway system, the moon program, and the human genome project. for electric vehicles) is an example of what is needed over the course of a decade. It might have been feasible in 2009 when Obama had the upper hand and the momentum. It is, alas, very unlikely today.
The Administration should indeed have taken several months in 2009 to design and advocate for long term investment programs for renewable energy, fast intercity rail, large scale highway upgrading, large scale skill and job training, and so forth, rather than rushing to pass a stimulus package of hundreds of billions of dollars of shortsighted and largely ineffective temporary tax cuts and transfer programs. The budget should have paid for such new long term investments by allowing the temporary Bush era tax cuts to expire on schedule in 2010 (or by negotiating equivalent revenues of 2 3 percent of GDP per year as the price for maintaining the Bush era tax cuts).
One of the Obama arguments at the time was that the rush in the stimulus program was needed to avoid a Great Depression. This was and is highly doubtful (though, yes, it is widely accepted). The US economic emergency in late 2008 and early 2009 wasn't really an aggregate demand crisis but a financial crisis. The chaotic failure of Lehman Brothers had led to an intense panic and credit squeeze. The Fed therefore needed to flood the markets with liquidity, which it rightly did, in order to unwind the panic. The Fed's action was the real difference with 1933 (when the Fed allowed the banks to fail). It was the Fed, not the fiscal stimulus, which prevented a fall into depression.
Third, crude Keynesians like Krugman believe that we don't have to worry about the rising public debt for many years to come, perhaps well into the next decade. This is remarkably shortsighted. The public debt has already soared, from around 41 percent of GDP when Obama came into office to around 76 percent of GDP today (and with no lasting benefit to show for it). If Krugman had his way, and deficits were not restrained, the debt GDP ratio would already be above 80 percent by now and would be rising rapidly towards 90 percent and above (as shown in the recent CBO alternative scenario).
Krugman now writes: "everyone repeat with me: there is no deficit problem." He says, in effect, that since the debt GDP ratio is now likely to be stable at around 75%, we need not worry. But his claim is thoroughly misleading. The forecast of a stable debt GDP ratio is precisely because Washington has rejected Prof. Krugman's advice. If DC instead followed his advice, the debt GDP ratio would indeed already be significantly higher and would be rising rapidly.
