Paul Krugman sinks to a new low with this passage:
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.
Where to begin?
First, no economist—let me repeat that—NO economist, not even Paul Krugman on the days when he’s being an economist—would count a tax cut as a cost for purposes of policy analysis. A cost is something that consumes resources, not something that changes the ownership of resources. My Principles of Economics students all understand this; so, presumably, does the Nobel-prize winning author of a prominent Principles textbook. (A possible exception: You could call a present-day tax cut costly if it necessitates a future tax increase which, for some reason, is costlier to collect than the present-day tax. I guarantee you this is not what Krugman has in mind. If it were,the $1.3 trillion number that he highlights would be totally irrelevant to the actual cost.)
Next, unemployment benefits are costly, both insofar as they discourage recipients from seeking work and insofar as they necessitate taxes that discourage productive activity. The cost of $77 billion worth of benefits is not $77 billion, but it’s not zero either.
So unemployment benefits are costly and tax cuts are not. Which doesn’t mean that all unemployment benefits are bad or that all tax cuts are good, but it’s plenty adequate to absolve the hypocrisy charge.
But Krugman, as is his wont lately, appears committed to the following flat-out dishonest rhetorical agenda:
- Identify an adversary who is concerned about the cost of some program Krugman likes.
- Label that adversary a “deficit hawk”.
- Belittle (perhaps reasonably) excessive concern about the deficit while ignoring legitimate concerns about the costs of spending and taxation, which is not at all the same thing.
- Omit any attempt at an honest reckoning of costs and benefits.
- Pretend you’ve said something relevant.
- Sneer.
In short: Keep on pummelling that straw man.
The entire piece is in terms of “deficit hawks”. His point is that some people (hawks) are arguing that the deficit must be reduced as a priority. They agree that spending must be cut to do this. They do not agree that revenue raising must be maintained. The two points are contradictory *in terms of reducing the deficit*.
You argue that it is entirely consistent to disagree with employment benefits, and agree with tax cuts. But it is not possible to argue this if reducing the deficit is the number one priority. I do not know if this has actually been the argument used by the “hawks” consistently.
It perhaps should have read (perhaps, far be it from me to change the language of a nobel prize winning economist in economic matters) “the first Bush tax cut, which increased the deficit by a cool $1.3 trillion.”
You and he don’t seem to differ that much. I may have mis-understood this, but it seems to me that you both think that getting hooked on the deficit is not the point, but the spending itself. You disagree on the value of the spending. He thinks cutting spending will stifle demand and reduce growth. You think increasing taxes will have that effect. In fact, you probably both think that both will have that effect, but disgree only on the relative magnitudes.
I think your problem with Paul is ideological.
I think krugmans point was that, given that one is concerned with the size of the deficit per se, why is it that one would also vote to increase it by passing large tax cuts while not being willing to increase spending. But the way I see it one doesn’t have to be a hypocrite bc one can be for large tax cuts and even larger spending cuts to bring the deficit under control. Maybe I’m missing something.
Sen. Nelson offered the following rationale for his vote against the jobs bill: “Seventy-seven billion dollars or more of this is not paid for, and that translates into deficit spending and adding to the debt, and the American people are right: We’ve got to stop doing that.”
To be sure, Nelson might have had any number of reasons for opposing the bill. But this was the rationale he offered.
Whatever the merits of this rationale in isolation, I find it difficult to reconcile with the support for a $1.3 trillion tax cut that was unrelated to comparable spending cuts. I can’t see any Austrian support for this combination of fiscal policies. And it would seem to run flatly contrary to a Keynesian approach, engaging in simulative policies when the economy is doing relatively well while engaging in contractionary policies while the economy is doing relatively poorly. This incongruity certainly invites a charge of hypocrisy.
But maybe I’m missing something. If Landsburg (or anyone else) has an honest reckoning of costs and benefits regarding Nelson’s votes on fiscal policies, I’d like to hear it.
You can make an argument that taxes are too high.
You can make an argument the deficit is too big.
You can even make both arguments at the same time.
However, if you want to make both arguments then you need to talk about spending cuts.
Since Steven Landburg rarely talks about spending cuts then it doesn’t really make sense to attack Krugman for pointing out that you can increase the deficit by either cutting taxes or increasing spending.
To be fair to Krugman, most Republicans and most Democrats are “deficit hawks”.
It also seems fair to complain that many people are straining out gnats and swallowing camels.
The death tax creates all sorts of stupid activity to avoid it. However, it does raise revenue and reduce the deficit far more than extending unemployment benefits.
Mr. Landsburg: I am willing to bet that you are significantly smarter than I am.
I am also willing to bet that you will get more visitors to your blog and sell more books if you actually try and make your arguments honestly and avoid cheap shots.
Just a thought.
Krugmanites might suggest that he wrote the word “cost” as perceived by the fabled “deficit hawk” rather than an economist. Who’s a pure deficit hawk?
You missed one of the components to Krugman’s rhetorical agenda: Leverage the aura of a Nobel.
There is an important distinction between “cost to the government” and “cost to the economy.” Granted, Krugman doesn’t explicitly make this distinction, but in my view it is implied, since he is using “cost” in a general-interest publication in the way that most people would use the word. The tax cut does cost the government $1.3 trillion, since $1.3 trillion (minus the taxes on whatever marginal business activity the tax cuts create) flows out of the government’s coffers. What you seem to be arguing is that the $1.3 trillion is just a shift of resources from the government to the people, which is not wrong of course, but it’s also not at odds with what Krugman is saying. The $1.3 trillion tax cut could even be a net benefit to the system overall, since it relieves some deadweight loss created by the taxes in the first place.
By your definition, almost nothing that the general public thinks of as “costs” count as costs, since entities usually pay costs as payments to other parties, and this is in fact just a transfer of resources. From what I can tell, what you are referring to as a cost in a policy sense is what economic principles texts would call deadweight loss, since it is deadweight loss that accounts for the shrinkage in the economic pie (usually due to regulation) as opposed to transfers from one party to another.
It is in fact true that unemployment benefits cause deadweight loss and tax cute (if we ignore potential externalities) lower it, and on those grounds it is consistent that people would favor cutting both aid to the unemployed and taxes. However, this issue is to some extent separate from the budget-balancing issue, and Krugman is arguing that it is hypocritical to be for one form of deficit reduction (cutting benefits) and against another (increasing or maintaining the status quo on taxes). In order for his argument to be valid, he would have to be ignoring the differing effects of the policies on deadweight loss.
That said, arguing semantics without acknowledging the partial validity of the point isn’t as convincing of a counterargument as it could be, so I hope that this clarification is somewhat helpful.
I’m not sure what everyone’s gripe is today. Isn’t Steven saying that if spending increases are a cost (because they consume more capital) and tax cuts are neither a cost nor a benefit (because they merely redistribute capital), Krugman is comparing apples to oranges?
Well said; I’ve often suspected that the biggest problem liberals have is that they simply don’t understand how an accounting balance sheet works. Costs are on one side, revenues on the other. You really don’t even need an econ class (sorry!) to figure it out; it’s accounting 101.
“Paul Krugman on the days when he’s being an economist”
I’d appreciate it if you would let me know when those days are. As it is, I generally ignore him completely.
I’ve been mulling this over. Yes, a tax cut results in the change of ownership over resources. But an extension of unemployment benefits would seem pretty darned similar: a wealth transfer. So what makes one of these situations privileged over another?
True, income taxes fall on productive parties. These parties can alter their behavior in socially sub-optimal ways to reduce their tax liabilities, resulting in the “deadweight social loss.” But a loss relative to what? To a world in which there is no taxation – in which things like property rights magically enforce themselves and roads magically build themselves, etc. In short, it’s a fantasy world.
In contrast, how does a tax cut compare to unemployment insurance? Specifically, does such insurance only induce destructive behavior and no constructive behavior? Clearly, if society has spent many years educating people, it would be sub-optimal to let those people starve to death merely for a temporary lull in the economy. Less dramatically, it may be sub-optimal to let those people incur costs related to deferred medical care or to get evicted if a small investment would tide them over. More to the point, it may be sub-optimal if desperate people resort to a life of crime, or even open revolt. At a minimum, I expect desperate people to begin embracing ever more protectionist, xenophobic and even racist policies.
The Great Depression launched a variety of political movements throughout the world that were not especially respectful of autonomy and property rights, to say the least. Imagine that adequate safety net programs could have placated the masses and averted much of the public polices of the 1930s-1940s. Yes, classical theory tells us that the taxes to finance those programs would have produced deadweight social losses – but could you really call those investments losses compared to what actually occurred?
In short, economists sometimes speak as if the world of autonomy/property rights is maintained costlessly. I have to wonder if there isn’t more in heav’n and Earth and France and Russia and China and Cuba and … than are dreamt of in their philosophies.
Nobody Really:
But a loss relative to what? To a world in which there is no taxation – in which things like property rights magically enforce themselves and roads magically build themselves, etc. In short, it’s a fantasy world.
No. A loss relative to a world where you enforced property rights and built roads exactly as you do now, but offered fewer unemployment benefits.
Here’s a fun game. First, read one of Krugman’s principles textbooks cover to cover, where the approach he takes focuses on solid positive economics and he presents both sides (the normative economics) relatively fairly. Then read any of his editorials. Then try to convince yourself that the same person who wrote the textbook is the same person who wrote the editorial. Note: it’s not an easy game.
thanks steve,
I think you need to clarify what you mean by cost. as in cost to the government or cost to the economy. I understand you are basically meaning taxes are a more efficient method of “redistribution” than welfare. I think jodi from ediwm explains it well in her blog. That you mean cost to the economy (as in DWL) and I completely agree with you, Krugman is not being an economist in his critique, he is being a pollitical scientist and avoiding any real rigour.
Mind you, 1.3tr is quite a lot larger than 77b and i’m not sure the benefits of tax cuts vs “costs” of welfare would be great enough to make the senator not a hypocrite, so Krugman’s point is also quite valid. if the numbers had been 77b for both, sure krugman is wrong, but 1.3t vs 77bn?
I can see how Krugman’s position is tenable… if there are people who actually make the argument ‘you can’t spend that much on benefits because it will increase the government deficit by $X million’ and if those same people say ‘it’s okay to lower taxes by $Y million, even though it will increase the deficit by $Y million’, then those people are inconsistent.
It’s true that the reason they are inconsistent is because they are fixated on deficit, and that their actual positions on spending and on taxes are perfectly sensible, but that doesn’t necessarily mean that they are not hypocritical.
Well, in the world in which I live, I pay for property rights enforcement and roads with income taxes (and, ok, some other taxes). And in the world in which I live, the classical model show a “deadweight social loss” with respect to income taxes used for ANY purpose – including the purpose of property rights enforcement and roads. That is, the classical model seems to imply there are greater social losses living with a world that has taxes, property rights enforcement and roads than living in a world without. Or, to put it more charitably, the classical model appears to assume that the state of property rights enforcement and roads is exogenous, unrelated to the level of taxation. This strikes me as a big, fat weakness of the classical model.
I suspect Landsburg means to bolster reliance on the classical economic model by using it to refer to incremental taxes for extraneous things like the social safety net, unrelated to important things such as property rights enforcement. But this begs the question I posed above: Are social safety net expenditures really unrelated to other variables? Or is it reasonable to expect that increasingly desperate people will turn to crime or revolution? Is it reasonable to think that increasingly stressed people will require additional public health expenditures? In other words, is it appropriate to assume that a social safety net is not a productive investment, offsetting other costs?
Again, the classical model’s analysis of the consequences of taxation seems to be useful, assuming you can conclude that the taxed resources are simply dumped in a pit. Absent such an assumption, the classical model seems pretty flawed. No economist—let me repeat that—NO economist, not even Steven Landsburg on the days when he’s being an economist—would count a the costs of a policy while excluding its benefits for purposes of policy analysis.
Of course, my analysis may simply reflect my failure to fully understand the classical model. Yes, taxes cause parties to refrain from mutually-beneficial transactions that otherwise would have occurred. But don’t transfer payments also permit the recipients to engage in mutually beneficial transactions that otherwise would NOT have occurred? That is, is there a theoretical basis for saying that the deadweight social loss that results from taxation is greater than the deadweight social loss that would result from the LACK of a transfer payment?
Nobody really:
Of course, my analysis may simply reflect my failure to fully understand the classical model.
No, I think it reflects your failure to understand what we’re talking about.
You are pointing out that government expenditures can be worthwhile. Nobody disputes that.
I am pointing out that government expenditures can be non-worthwhile. Nobody disputes that either.
I made no argument about the value (or lack thereof) of any program. My only point is that programs should be evaluated on their merits, and that Krugman has not only failed to do that, but directed attention away from it.
P.S. Well, given this statement: That is, the classical model seems to imply there are greater social losses living with a world that has taxes, property rights enforcement and roads than living in a world without., I guess we can *also* conclude that you fail to understand the classical model.
Cute, cute.
But briefly, and earnestly, I’d be interested to hear people’s thoughts on the question of whether there is any theoretical basis to conclude that the deadweight social loss related to taxes is greater or lesser than the deadweight social loss related to a lack of transfer payments that the taxes might have financed. Are these just reciprocal graphs?
Dave, for quite a while I would argue that Wikipedia was unreliable by pointing to its entry on Paul Krugman, which implausibly claimed that the intellectually serious Nobel laureate was the same person as the partisan NYT columnist sharing the same name. Boy do I have egg on my face!
Hmm, I suppose some people might think that was lacking in earnestness; sorry, Steve. More seriously, have you ever blogged about the existence of a “Nobel” in economics versus the lack thereof in mathematics?
Bob: Between the Wolf Prize, the Abel Prize, and the Fields Medal, I think mathematics at this point is fairly awash in “Nobel equivalents”.
>> Of course, my analysis may simply reflect my failure to fully understand the classical model.
> No, I think it reflects your failure to understand what we’re talking about.
This is ironic, because this whole post is based on your failure to understand what Krugman and the politicians he’s referring to are talking about. They’re very specifically talking about the government budget, and costs and revenues relative to that. The “costs” you’re speaking of are something entirely different, and very much not what either the “deficit hawks” meant, nor what Krugman meant.
Playing semantic games would be one thing (“no, that’s not what the word ‘cost’ means!” even when you can tell what they’re talking about), but what you’re doing is subtler and much more obfuscatory – you *assume* that the terms they use mean what you want them to mean, and criticise as if that were the case.
Cos: Because Krugman was evaluating policies, I gave him the benefit of the doubt and assumed that by “cost” he meant some notion of cost that was relevant to policy evaluation. Given that, he misused the concept. But perhaps you’re right; perhaps he was simply employing an irrelevant notion to begin with.
I don’t think that it was “an irrelevant notion” in the context of his column, because he’s specifically addressing the *politics* of the “deficit hawks” he’s talking about. However irrelevant the notion may be in the field of economics, it’s the notion these politicians have in mind, and that’s what his column is about: the policies they advocate. If he were talking about what you’re talking about, that’d be irrelevant, because it’s not what they’re talking about.
If I tell you about my personal budget and talk about my income and my costs, and you tell me that some of my costs aren’t actually costs because they’re just shifting resources from me to someone else, you’re being irrelevant. That’s what you’re doing here, with one more level of indirection.