Some commenters still seem confused about the locus of disagreement in this week’s back-and-forth with Paul Krugman. I post today not to beat a dead horse, but to clarify the issues for those who are interested in understanding them. Please keep any discussion both civil and on-topic. I’ve numbered the points below for easy reference.
- Government expenditures have benefits, and taxation has costs. Paul Krugman, I, and all other economists agree that the most efficient policy regime is one that equates all of those benefits and costs at the margin. Here’s why: If the marginal benefit of, say, cancer research, exceeds the marginal benefit of, say, national defense, then you ought to be transferring dollars from defense to cancer research. If the marginal cost of a tax on, say, onions, exceeds the marginal cost of a tax on grapes, then you ought to be switching the burden of taxation from onions to grapes. If the marginal benefit of cancer research exceeds the marginal cost of taxing grapes, then you ought to raise the grape tax to fund more cancer research. And so on, until all of the marginals are equalized.
Call this the equimarginal principle. (This is what Krugman calls the Ricardian analysis.)
(Notes: “Marginal” means that we’re looking at the effects of small changes. The marginal cost of a tax includes the disincentive effects of that tax.)
- Suppose you’ve successfully set up policies that equalize all of these marginals. Call the marginals A, B, C, D and E, where A is the marginal benefit of disaster relief. Now a disaster comes along, which increases that marginal benefit. Then you want to spend more on disaster relief, which means either lowering some other expenditures, or raising some taxes, or both. This will change the relevant marginals; if B is the marginal cost of taxing onions and if you change the tax rate on onions, then B will change. But in view of the equimarginal principle, you want to keep all of these marginals equal. If they’re all equal to begin with, and if you’re going to change one of them, and if you want to keep them equal, then you’ve got to change all of them. Thus in this case the equimarginal principle dictates changing all categories of government expenditure and changing all taxes — essentially, spreading the cost of disaster relief as widely as possible.
- Eric Cantor has said that he wants any new disaster relief to be funded by cuts in expenditures, without any cuts in taxes. On Tuesday, Krugman raised the question: Is there any reasonable worldview under which Cantor’s position makes sense?. This is not the same as the question: Do we approve of Cantor’s policy position?, and I hope commenters will keep that mind.
- Krugman’s post was quite ill-considered (I commented here), but fortunately for him, the majority of his commenters (both pro and con) seem not to have understood it. They thought Krugman was arguing against Cantor’s position, but he wasn’t: He was arguing something much stronger, namely that there are no legitimate assumptions under which Cantor’s position makes sense, and that this was true as a matter of theory.
- Krugman proceeded by explaining points 1 and 2 above (perhaps a little less clearly than I’ve explained them here). He then attributed to Cantor the belief that all policies are currently optimal, and concluded, by invoking points 1 and 2, that Cantor’s position makes no sense.
- I blogged on Wednesday to the effect that if you attribute to Cantor a different belief — namely that current policies are very far from optimal — then his position can make perfect sense. Namely, if you believe that some programs are very wasteful, those are the programs you should cut first. I cannot imagine how anyone can fail to see that this is a logically consistent position.
- A few commenters popped up to say “Well, Krugman was giving Cantor the benefit of the doubt by assuming he had employed a sophisticated economic theory”. But that’s a grossly misleading picture. Krugman assumed both that Cantor had employed a sophisticated economic theory and that Cantor believed something (namely the optimality of current policy) that neither Cantor, I, Krugman, nor anyone else I know of believes. The gist of his column was “If Cantor believes that all policies are optimal, then his position on funding disaster relief makes no sense.” One might as well point out that “If you believe that the tooth fairy will cure all your dental problems, then going to the dentist makes no sense”. This is not a good way to prove that going to the dentist is irrational, especially when nobody has ever suggested that there might be a tooth fairy.
If you want to give Cantor the benefit of the doubt, as those commenters claim Krugman was doing, then you start by assuming that Cantor means what he says: That a lot of current spending is wasteful and should be cut. Then you note that whether or not you agree with that position, it is certainly not an incoherent one.
- I want to be crystal clear here about the locus of the disagreement: Krugman says that under no assumptions does it make sense to cut expenditures without raising taxes. I said that under some assumptions it makes perfect sense —- for example, itt makes perfect sense under the assumption that some expenditures are very wasteful. That’s the main issue. This was not an argument about the validity of the assumptions, but about what follows from them.
- I made the side point that sometimes it makes sense to hold even a good policy hostage in order to get action on other good policies. I stand by that position, but I (slightly) regret bringing it up, since it distracted attention from the main point. We can reasonably disagree about this side issue, but I do not believe we can reasonably disagree about the main point.
- Yesterday, Krugman acknowledged that I was correct regarding the main point. Specifically, he wrote:
If you think the government’s priorities are all wrong, then theory doesn’t tell you much about what should happen.
Bingo. That’s most of what I was saying, exactly. It’s not a deep point; it’s completely obvious, and the fact that Krugman overlooked it at first only goes to show that we all make mistakes. His acknowledgement of that mistake is what I’d expect from any honest academic, and makes me glad that I’m in one of the few professions where we can expect that kind of honesty.
- Krugman deflected attention from this concession by objecting to my subisidiary point about holding policies hostage. (He goes so far as to say I “missed the point”, though this point never arose in his original blogpost.) That’s a separate discussion. But note that Krugman’s position on the subsidiary point directly contradicts his (now abandoned) position on the main point. He writes:
He’s denying disaster relief to people hard hit by a hurricane. That is, he’s holding suffering Americans hostage to his goal of smaller government.
By making this argument, Krugman tacitly acknowledges that any debate about disaster relief (and how to fund it) has to be based on the specific benefits of disaster relief (and other programs), not on general theoretical principles. That, again, was the whole point.
- As a side note, Krugman objected to one of my metaphors:
Where Landsburg really goes where he shouldn’t, though, is by comparing Cantor’s proposal to denying someone goodies unless he shapes up elsewhere — he uses the example of a teenager who won’t be allowed to go to the prom unless he does his chores.
Though I hate to be more combative than necessary, this strikes me as pretty weaselly (to use Bob Murphy’s formulation). A metaphor is good or bad depending on how it is used. I used this metaphor only in the sense that disaster relief and going to the prom are both good things. Their levels of importance or frivolity has no bearing on how the metaphor was employed.
- Some commenters have said: But it is an important part of the metaphor! If you were going to the hospital to fix a broken leg, you wouldn’t stop to debate how you were going to pay for it! Those commenters miss the point that whether it’s a prom, a fracture, or a mission to save the world, it’s still got to be paid for, and the issue of how to pay for it is still going to arise. And the issue of whether to spread that cost over multiple activities is still the same issue.
Moreover, as soon as you say “what if it’s a broken leg?”, you’ve conceded the whole main point. The whole main point — for the 99th time — is that pure theory can’t dictate policy; your beliefs about the values of different expenditures have to dictate policy. If you’re arguing about the importance of fixing a broken leg, you’re arguing facts, not theory. Welcome to my side.
Finally, let me say this: I’ve been blogging now for almost two years, and have been constantly delighted and astonished by the quality of the comments around here. Try looking at Krugman’s blog to see how much worse it can be. One of the things I value most in these discussions is that we generally try to stay focused on the topics at hand. In this case, the main topics at hand were:
1) Are there or are there not any assumptions under which Cantor’s argument makes sense? (Krugman said no, I said yes, Krugman now says yes.)
2) Did Krugman’s initial argument implicitly assume that the initial policy regime is ideal? (I said yes, Krugman now says yes.)
3) Does this make Krugman’s initial argument pretty much entirely inapplicable? (I said yes, Krugman now says yes.)
There are also, as always, subsidiary issues worth discussing. But “Is disaster relief called for?” is an entirely separate question, and I’m glad we’ve largely managed to avoid getting distracted by it. It’s an interesting question, though. Maybe I’ll blog about it soon.
Isn’t it still the case that linking spending cuts to disaster relief is merely a politically savvy move, not an economically savvy one?
I can’t think of a sound economic reason to artificially tie one expense to another.
After all, if it’s a good idea (economically) to cut wasteful spending (but not raise taxes or borrow) when a disaster strikes, doesn’t that imply it was also a good idea (economically) to cut wasteful spending (but not raise taxes or borrow) before the disaster struck?
Tying the two together sounds (to me) like good politics, bad economics.
Nice one, Steve.
I’ve seen a LOT of bad policy (including in the West) and most of it is defended by economists (usually “consultants”) who often cook up data to show that benefits exceed costs. I’m more inclined, therefore, to use first principles which are more sturdy than social cost-benefit analysis, although there is some value in using the social cost-benefit analysis “tool” as a starting point for policy discussion.
As a matter of principle, limiting government spending to things which are desperately necessary for a civilised society (defence, police, justice, and some infrastructure), and by ensuring that we do these things well (but not perfectly), we will maximise LIFE and LIBERTY – and to me that is pretty much the end result of “social policy.
I’ve discussed this briefly at: http://sabhlokcity.com/2011/09/steven-landsburg-debates-paul-krugman-on-social-policy/
@Steve: “…makes me glad that I’m in one of the few professions where we can expect that kind of honesty.”
Do you mean academia?
Is there no English, Sociology, Women’s Studies department at your university? I’d say that overall you are in one of the LEAST intellectually honest professions. In my profession — software — errors are ruthlessly exposed and rarely defended. Google “Sokel hoax” for how truth is treated in English departments.
@Steve: Having carped at your critics reading I will now carp at your writing. “Locus of disagreement”? I suggest there is a catachresis here. Better would be the crux or gravamen of the disgreement.
So there are really two questions here:
– How should we pay for the disaster relief?
– When should we decide how to pay for the disaster relief?
Cantor was answering both. I agree with all of Steve’s points regarding the first question. To me, the question really is re. the second. Should our position be, “Of course we will provide relief, and we’ll work out afterwords how to fund that relief.” Or should we stop and make a determination up front on how to fund the relief prior to providing the relief. It appears that Cantor was arguing for the latter, but I think most people (the average U.S. citizen) is more comfortable with the former.
Re. #13, last year my daughter broke her leg, and we took her to the emergency room. My wife and I didn’t debate whether we had the money to fix her leg, we put the bill on a credit card – i.e. we took on debt to cover the cost.
On #13… agreed. I even wrote a note to Krugman lamenting the fact that his comment board, in contrast to so many other econ blog comment boards, was largely devoid of intellectual content. His comment board is mostly an echo chamber of fawning sycophants.
I have to say, despite my recent participation, the commenters on this blog are some of the best.
Landsburg blogs to educate; Krugman blogs to incite.
I have come to think of Krugman as an infantry drummer: he bangs his drum to instill courage and aggression in his troops so they will attack the enemy with malice. Judging by the comments for his columns and blog posts, I’d say he is successful.
I, for one, would love to debate you on the legitimacy of and necessity for disaster relief.
Mike H. – If it is decided to pay for disaster relief, that money has to come from some where. Deciding where it comes is THE link.
I’m late to this exchange, but I’m confused about where Krugman saidt his Steve: “Krugman says that under no assumptions does it make sense to cut expenditures without raising taxes.”
Could you clarify?
He seems to have initially made an argument that was contingent on an invalid assumption. He doesn’t seem to have said that that argument applies to all assumptions.
You seem to want to have it both ways and I’m not sure that’s possible: is Krugman guilty of making an inaccurate general claim or is he guilty of misapplying an accurate special claim.
It seems he’s guilty of the latter only, and can still maintain that given his assumptions Cantor is very wrong. It just moves the debate from public finance theory to the strength of Cantor’s assumptions.
The notion of governmental “disaster relief” is the notion that all human beings in a given geographical area are to be born into bondage, sentenced to whatever amount of labor may be required to pay for whatever costs may be incurred by whomever may experience a “disaster”.
What on earth justifies this notion that one man’s “disaster” is automatically another man’s cost? What fact of reality makes it morally proper to force one completely innocent man — a man who had absolutely no role in causing the “disaster” in question — to nonetheless bear some portion of the cost of that “disaster”? The answer is that nothing justifies it — absolutely nothing.
My life belongs to me — not to you, not to “society”, not to the government — and not to anyone who happens to fall victim to a “disaster”.
Thank you for a well written, logical explanation of a politically, emotionally charge subject. I look forward to more.
This is what I took away from Krugman’s article:
1) Any and all spending is beneficial, ‘wasteful’ or ‘less efficient’ isn’t a serious consideration’.
2) Borrowing is a nearly costless solution. He makes the point about interest rates being so low that you’d be crazy to NOT borrow more money for disaster relief. I don’t think Dr. Krugman assumes that government debt is capital pulled out of the real economy and therefore doesn’t have any negative effects. If the Federal Reserve is purchasing the Treasuries with ‘new’ money or China is purchasing the debt, is he partially right? I also think it’s safe to assume he believes the principle of Govt debt will never be repaid and it will ‘roll over’ forever at low interest rates.
3) All Republicans are bad people, especially Eric Cantor.
I think Krugman truly, with all his heart, believes borrowing is a painless and easy way out. He’s exasperated others don’t see this. Beyond that, I don’t see a lot of other economic reasoning in his articles.
@BCanuck…
My view on Krugman is that he is a classic class warrior. As long as the lower classes benefit at the expense of the upper classes he is happy — and that end justifies many questionable means.
Pay interest? Repay principal? It matters not. The only people that are really going to pay any of that are the rich and productive. As far as Krugman is concerned these people are rich and productive due to luck and the vagaries of typically insidious “free” markets. It only follows that they have no moral right to their money.
Steve,
Even if you were dead wrong (which you are not), I would applaud the clarity with which you’ve laid out the points of your arguments. Well done.
@Seth – I think you don’t get my question. Never mind, everybody else just ignored it.
“One of the things I value most in these discussions is that we generally try to stay focused on the topics at hand.” Fair enough: it’s your blog. I rather like the ones where the comments wander about a bit, as long as they are spirited and reasonably civil.
@Seth, ok, I’ll give a paragraph or two to explain my point better. First of all, though, read and understand Steve’s point 1 above.
If it makes sense to pay for disaster relief exclusively through cutting spending (but not raise taxes or borrow), it means there is spending for which the marginal benefits are less than the marginal costs of taxation of borrowing. If so, this was almost certainly also true before the disaster happened. If so, it would have made sense to cut spending (and not raise taxes or borrow) before the disaster.
Therefore, there’s no economic reason to link disaster relief to spending cuts.
If cutting spending is better than raising taxes or borrowing, spending should be cut irrespective of the disaster. If spending is not better than raising taxes or borrowing, we should fund disaster relief through tax hikes or debt, or these and spending.
Therefore, linking spending cuts to disaster relief is an economically silly move.
It can only makes sense as a politically smart move, and then only if
* spending should be cut (irrespective of the disaster relief)
* Eric Cantor’s political opponents don’t accept this (and are wrong)
* Eric Cantor’s political opponents want disaster relief.
However, that’s politics, not economics.
Mike H:
Therefore, linking spending cuts to disaster relief is an economically silly move.
It can only makes sense as a politically smart move, and then only if
* spending should be cut (irrespective of the disaster relief)
* Eric Cantor’s political opponents don’t accept this (and are wrong)
* Eric Cantor’s political opponents want disaster relief.
However, that’s politics, not economics.
I understand and appreciate your argument. However, I think we should note that
a) Eric Cantor *was* arguing for additional spending cuts prior to the hurricane. Therefore he surely believes the first of your three points.
b) And I have no trouble assuming that he believes the second and the third (how could he possibly not?!)
c) Therefore, whether you call it economic sense or political sense, his conclusions surely do make sense in light of his assumptions.
@ Mike H.
My understanding is that there was a deal (made when raising the debt ceiling). The deal defined levels of spending, debt, and taxation. That deal (for Cantor) represents a compromise that continued to allow high levels of wasteful spending.
The link is that Obama is now seeking to change the structure of spending and debt with Irene disaster relief. That opens up the issue to negotiation again.
The quote from Krugman, “If you think the government’s priorities are all wrong, then theory doesn’t tell you much about what should happen,” still mises the point. It isn’t necessary that the priorities are ALL wrong, only that some are wrong. It would take most rational people only a few seconds to make a list of bad policies.
Actually the following statement is true, if only in a trivial sense- ‘there are no legitimate assumptions under which Cantor’s position makes sense’
Assume there is a type of public expenditure which is wasteful and has very low or negative marginal social benefit. Apply a tax only on income associated with rent seeking costs for that type of public expenditure. Since, both reducing that type of public expenditure and taxing the activities which militate for it, have the same result- the principle of equi-marginal returns shows that a change in public spending of the Cantor sort should be accompanied by a change in tax.
The objection may be made- our model has no rent-seeking. But we may stipulate for only concrete models as being considered ‘legitimate’.
DeeBee9: Good point.
Yes, I’m not saying his position makes no sense. But the sense it makes is politics. In a rational world, there’s no reason to link the two. They only need to be linked if he can’t or won’t or doesn’t want to try to persuade his political opponents using reason and good economic sense.
Since either Eric is doing something silly, or his opponents are, it follows that politicians don’t always listen to reason. I guess that’s not exactly breaking news, but it should be at least a little worrying…
… which brings me back, almost, to my first question – has Eric Cantor ever tried to claim that his desire for spending cuts is based on sound economic theory?
I get a feeling the baby is being thrown out with the bathwater here. Essentially, if x thinks at least one type of spending is ‘wasteful’ then x is in a Second Best world where no agent necessarily improves allocative efficiency by making marginal returns equal. This is a bit like the argument made by my activist friends when they condemn me for going shopping while hideous injustices are being perpetrated somewhere or other.
Notice that if x acts on his belief that some type of spending is wasteful then his equilibrium has changed. If his action was not motivated s by ‘justified true belief’ then there is a market failure. Our world immediately is proven to be Second Best.
Another point is that the tax/spending distinction tends to collapse at the margin. Govts have a menu of choice, in pursuing a given policy objective, with different mixes of tax based incentives and direct spending. Similarly, the current revenue/borrowed fund distinction dissolves up close. If Govts. had to follow the rule ‘never borrow, not even for a single second’ they could not function as Economic agents.
I so very much appreciate this great discussion (without malice and name calling) on actually a a subject that has deeper ramifications.
As as “student” of Austrian economics I have benefited greatly by the detailed article and precise points raised. Sometimes it is not “agree or disagree” instead it is the use of logic and reason that is outstanding.
Thank You All
Lynn
“If you were going to the hospital to fix a broken leg, you wouldn’t stop to debate how you were going to pay for it!”
Under federal EMTALA law, patients in emergency care are treated regardless of ability to pay. Thus, the issue of paying is secondary.
As snother poster stated, the general US rule for disaster relief has been to fix the problem first and then figure out how to pay for it later (which assumes the budgeted expenditures for this category have been exceeded).
“What on earth justifies this notion that one man’s “disaster” is automatically another man’s cost? What fact of reality makes it morally proper to force one completely innocent man — a man who had absolutely no role in causing the “disaster” in question — to nonetheless bear some portion of the cost of that “disaster”? The answer is that nothing justifies it — absolutely nothing.”
This is a faulty premise.
The disaster happens to the *country* and its economy–not just to individuals. Thus, it is appropriate to fund fixing what was damaged–as everyone benefits (not just those who live in the disaster area). If changes are needed in the disaster area, they can be considered during repair/restoration period because the long-term objective is to maximize benefits and minimize costs based on expected returns (cost/benefit ratio). Thus, it may make sense to spend more *now* in order to get a much higher return later. I do not see that being discussed.
What a fascinating exchange, and you make things so clear. This blog just when into my bookmarks.
Steve,
I like you very much and think you’re probably the best analytical thinker around today. But I’d rather leave all those disaster victims out on a limb than go through that logical morass again.
I don’t agree with the premise “Government expenditures have benefits, and taxation has costs.”
Government expenditures are costs, just like any other expenditure.
Expenditures are the demands one makes of society. They are the costs one imposes on society in exchange for doing what others demand.
This question will give more insight: What if someone produced what others demanded but never spent the profits?