Truth and Consequences for Krugman, and Keynes, and Obama
This column by ACRU General Counsel Peter Ferrara was published on February 10, 2014 on Forbes.com.
Just about one year ago, on February 8, 2013, New York Times columnist and unreconstructed Keynesian Paul Krugman was interviewed by another lefty, Marc Lamont Hill, on Huff Post Live, the Huffington Post website.
Krugman was expounding on how to get the economy growing again and create jobs, which he had discussed in detail in his book, End This Depression Now. “It’s the easiest thing in the world,” Krugman explained. “The really horrifying thing is this is something we know how to end, we could do it very quickly, it would be no problem at all.”
All we have to do is increase federal aid to state and local governments to increase their spending, “restart the road repair and other infrastructure projects that have been put on ice, and in a year, year and a half, we would be a long way back, somewhere near 6% unemployment.” Krugman added further, “this is easy, the problems are all political, intellectual, the fact that people don’t want to understand this stuff. The economics of recovery is actually really really easy.”
But if it is so easy, why hasn’t it worked already? What Krugman is describing is exactly what Obama did in the February, 2009, nearly $1 trillion, so-called “stimulus,” which didn’t stimulate anything except government spending, deficits, and debt. Except that “stimulus” was three times as much as Krugman is proposing now for increased government spending. That is supposed to work now so much better spending only one third as much?
On March 1, 2013, Krugman was interviewed on MSNBC by the rhetorically unrestrained lefty Ed Schultz about the sequester spending cuts. Schultz began his The Ed Show with the pronouncement: “Now who in the world thinks the American worker should have to pay more: The Republicans.” Oh, really? The Republicans want to increase taxes on working people?
For his evidence, Mr. Ed goes to an audio clip of Speaker Boehner saying, “The President got his tax hikes on January 1. The discussion on revenue in my view is over. It’s about taking on the spending problem here in Washington.” It sounds like Boehner was actually saying the Republicans are against any further tax increases on any one, and what is needed is to control government spending. But maybe Mr. Ed needs an English translator to translate his audio clips for him. Maybe that is why his show was switched out of prime time even on the out of control Left MSNBC. But if a tree falls in the wilderness does it even make a sound?
It was President Bush and Congressional Republicans that passed tax rate cuts for everyone in 2001, including the middle class, the working class, and the poor, over the opposition of most Congressional Democrats. Obama denied Republicans ever passed any tax cuts for those folks when he was running for President in 2008. But by 2013, Obama was demanding that Congressional Republicans vote to make the Bush tax cuts for the middle class, and everyone else in the bottom 97%, permanent, allowing the tax cuts to expire, and taxes to increase, only for the anti-socially productive top 3% of income earners. While Congressional Republicans wanted to keep the Bush tax cuts for everyone they originally passed, they ultimately went along with Obama and the Democrats to keep the Republican tax cuts at least for the 97% they could get.
But Mr. Ed went on to announce only that, “No deal has been reached to avert the sequester.” He then went on to a clip of President Obama saying, “It’s just dumb, and its going to hurt. It’s going to hurt individual people and its going to hurt the economy overall. It’s happening because of a choice that Republicans have made.” Mr. Ed then helpfully translated,
“The spending cuts start today and we all know who is to blame….Paul Krugman will tell us what this all means for middle class Americans. Today we are left to deal with the true priority list of the Republican Party. As the President regretfully informed America this afternoon, the working class well you are just going to have to pay more. We already know the cuts from sequestration will kill 700,000 jobs within 2 years. The Republicans think the wealthiest among us well they just have done everything they need to do. It’s the working class that just hasn’t done enough.”
Then he went back to the clip of Boehner explaining no more Obama tax increases for anyone and it is time for spending cuts. How does that possibly mean the working class is going to have to pay more? Apparently, instead of the Fox News motto of “We report. You decide,” the motto on MSNBC is “We distort, as we decide.” That may explain the dramatic difference in their ratings.
It was CBO, not the Republicans, that issued a report in December, 2013 showing that the top 1% of income earners produce 14.9% of before tax income, but pay 39% of federal income taxes. They also bear 49.5% of federal corporate income taxes.
Just the top 5% pay nearly two-thirds of all federal income taxes, at 63.6%, while producing just 27.4% of before tax income. And their share of corporate income taxes is virtually the same at 63.2%. The top 10% pay 77.4% of federal income taxes, over three fourths, while producing only 37.3% of before tax income, just over one-third. The top 20% carry virtually the whole load for the rest, paying 93% of total federal income taxes, almost twice the share of before tax income they produce, at 52%.
The middle 20%, the true middle class, pay just 2.9% of federal income taxes, while earning 14.2% of before tax income. The bottom 40% as a group on net pay less than nothing in federal income taxes, instead receiving cash payments from the IRS.
This official, real world data gathered from IRS tax returns in fact does show that the wealthiest among us have done everything they need to do, at least in regard to federal income taxes. Moreover, this tax distribution is the result of 30 years of Reagan Republican tax policy, as it reports the tax data before any of the Obama tax increases went into effect. So rather than supporting tax increases on the working class, it was Reagan’s Republicans that abolished federal income taxes on the working class, and almost abolished them on the middle class, while sharply increasing the share of federal income taxes paid by the wealthiest. In 1981, when Reagan entered office, the share of federal income taxes paid by the top 1% was just 17.6%! If that shocks you as not possibly true, that is because you have been grossly misled and manipulated by whoever you rely on to report the news.
But Mr. Ed then returned to the sequester, saying, “Republicans did nothing absolutely nothing about sequestration because they are comfortable with these cuts regardless of the outcome.” A clip of President Obama further explained, “All of this will cause a ripple effect throughout our economy. Layoffs and pay cuts will mean people will have less money in their pockets and that means they have less money to spend at local businesses. That means lower profits that means fewer hires. The longer these cuts remain in place, the greater the damage to our economy. A slow grind that will intensify with each passing day.” Painful to even listen to President Obama even try to talk about the economy, since he seems to understand it less than most people sitting in his audiences.
Mr. Ed then asked Krugman, “How serious is this and is it going to have the impact that has been talked about?” Krugman explained, “Well certainly that 700,000 jobs number is if anything a bit conservative, this is not good for the economy. Not only are cuts not the thing to be doing right now, but these are especially dumb cuts, so this is not a very good thing at all.”
Mr. Ed: “So it could get a lot worse than 700,000 jobs.”
Krugman: “Yeah…there are a lot of reasons to believe that austerity hurts a lot more than the standard estimates say. [The sequester] was designed to be stupid. This was supposed to be a doomsday device that would force the parties to reach an agreement and of course they didn’t.
Mr. Ed: “How long will it take for us to start feeling the effects? How long will it take for the economy to start getting soft?”
Krugman: “Well that takes a number of months. But by late this year you should definitely be seeing it. This is definitely not what the doctor ordered.” Krugman repeated the same over and over in his New York Times columns and other interviews last year. The sequester spending cuts would cause an economic downturn.
Well, the economic results are now in for the second half of 2013. The economy grew at a real rate of 3.5%, the highest of Obama’s entire Presidency, according to the Wall Street Journal. The Journal editorialized on January 31, “Remember how the Keynesians predicted that less spending would mean slower overall growth? Maybe the opposite is true: When government shrinks, the private economy has more money and room to expand.”
In other words, Keynesian analysis has been a documented failure yet again. It has never worked.
Keynesian economics is the doctrine that the way to stimulate economic recovery and growth is to increase demand for more goods and services, precisely through increased government spending, deficits and debt. The fallacy is the failure to understand double-entry bookkeeping. The money for the increased government spending has to come from somewhere, whether through increased taxes, increased borrowing, or increased inflation. But all of those drain an equivalent amount of resources from the private sector, leaving no net increase for the economy, if not a net, effective loss.
The more fundamental error is to fail to understand that demand can never be inadequate in a free market economy. Human wants are insatiable, and if the demand for any good or service is inadequate for the current supply, then the price will fall until demand equals supply. Keynes’ response to that argument was that the economy is dominated by vertical, parallel, supply and demand curves that never cross in equilibrium, which is transparently false.
What drives economic growth and recovery is not increased spending (we can’t spend ourselves rich), but increased production, which is the only path to greater prosperity. That means what is important are the incentives for increased savings, investment, business creation, business expansion, entrepreneurship, work, and other productive activities.
In February, 2009, my commentary in the Wall Street Journal, “Reaganomics versus Obamanomics,” explained that Obamanomics was following exactly the opposite of every policy of Reaganomics. So I predicted it would get the exact opposite results.
Reagan cut tax rates for everyone, with the economically crucial top marginal income tax rate reduced from 70% when he entered office to 28% when he left. Obama has been all about increasing tax rates, especially for investors, job creators, and successful small businesses that historically have created the most jobs.
Obama increased federal spending by close to $1 trillion when he first entered office through his failed “stimulus.” Reagan cut federal spending by close to 5% in his first year (the then notorious Reagan budget cuts, check the front pages of the New York Times and the Washington Post at the time). He then held that spending restraint on the spending he most controlled (domestic discretionary) for his entire 8 years, leaving total federal spending when he left office in 1989 down by 10% as a percent of GDP from its peak.
Reagan pursued deregulation, most prominently in energy. Obama has pursued overregulation, of energy, health care and insurance, finance, and everything.
Reagan crucially supported the Fed in restrained, strong dollar, monetary policy that attracted investment to America from the world over. Obama and his Treasury have called for the wildest monetary policies since the 1970s, which ended in double digit inflation for years. That together with the rest of Obamanomics has caused the greatest capital strike and flight probably in American history.
This is why Obama has gotten the exact opposite results from Reagan, whose policies produced a 25 year economic boom, from 1982 to 2007, with only two short, shallow recessions that entire time. Art Laffer and Steve Moore have called that boom “the greatest period of wealth creation in the history of the planet.” Steve Forbes has called it “an economic golden age.” George Washington University Economics Professor Henry R. Nau explained in the Wall Street Journal on January 26, 2012, “the U.S. grew by more than 3% per year [in real terms] from 1980 to 2007, and created more than 50 million new jobs, massively expanding a middle class of working women, African-Americans and legal as well as illegal immigrants. Per capita income increased by 65%, and household income went up substantially in all income categories.”
In sharp contrast, Obamanomics has given us, by the numbers, as I have fully documented in prior columns, literally the worst economic recovery from a recession since the Great Depression, almost a century ago. That is reflected in declining middle class incomes, soaring poverty, skyrocketing inequality, millions fleeing the work force, a record 100 million working age Americans not working, and weak to non-existent economic growth worse than any other President since the Great Depression, and maybe before. That is all we have gotten for the nearly $1 trillion, 2009, so-called economic stimulus that Krugman wants to now repeat, at least in part.
The Joint Economic Committee of Congress reports that if economic growth during Obama’s recovery was the same as during the average recovery from the 10 other recessions since the Great Depression, the American economy would be $1.3 trillion bigger today. That translates into an extra $8,000 of annual income per family. This is a minimum of what the advice of Krugman, and the outdated Keynesian policies of Obamanomics, are costing the American people today.
The Heritage Foundation reports that at this same point in Reagan’s recovery, the economy was averaging 4.9% real growth, with 6 quarters of more than 5% real growth. In 1984, the economy boomed with 7.3% real growth. The fastest year of real growth for Obama was at 2.8%. If Obama’s recovery had grown at the same pace as Reagan’s, the American economy would be $1.9 trillion bigger today. That would mean higher annual income per family of about $11,700 today. That is a high price to pay for ideological extremism.
Reagan explicitly left Keynesian economics for dead over 30 years ago, after the disastrous Keynesian policies of the 1970s ended in double digit inflation, double digit unemployment and double digit interest rates. He was so right to do so, given the results discussed above. Obama’s greatest failure has been to bring it back Rip Van Winkle-like, as if nothing has changed since 1979, and the world record Reagan 25 year boom never happened.
For that, Obama and his Democrats must be held politically accountable by the voters this fall. As for Krugman, what is the point of the New York Times publishing, and Princeton University employing, an arrogant smart-alec who is repeatedly in error in his analysis and prognostications, and who ignores all criticism like a French aristocrat in 1789? It is long past time for the American people to hold accountable institutions that fail them so miserably as well.
The same applies to all institutions that continue to teach the long discredited, disproven, even disgraced doctrine of Keynesian economics. Such institutions are defrauding their students, at costs of tens of thousands a year. It is time for courts to start recognizing causes of action by students against universities abusively teaching this politically correct fraud.
People believe in Keynesian economics for the same reason they believe in global warming, because they want to believe in it. Because it justifies big government, which is their religion, their Christianity, their Islam.