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Krugman Loves Deficits, So Long as They're From Democrats

Krugman Loves Deficits, So Long as They're From Democrats
Profile photo of Robert P. Murphy

Some things in life are very dependable. The sun rises in the east, water flows downhill, and Paul Krugman thinks Nobel Prize winning economist Paul Krugman smiles during the World Business Forum in New Yorkbalancing the budget during a recession or weak recovery is a terrible idea.

Indeed, on this last point, recall Krugman’s late 2008 lament over the “50 Herbert Hoovers”–the 50 governors who were striving to balance their budgets amidst plunging revenues, because states are not allowed to run deficits the way the feds can.

Also recall that throughout the recession (and tepid recovery), Krugman has often pointed out that the proper gauge of U.S. “austerity” was total government spending–federal, state, and local. (See this post, for example.) Krugman would roll his eyes at people who merely looked at federal spending under the Obama Administration to try to show the U.S. government wasn’t really all that austere–didn’t these clowns know that you had to include the fiscal policies of the 50 Herbert Hoovers too?

In this context, when the NYT runs an article about the many states that actually ran up huge debts during the recession and recovery, surely Krugman would be applauding those governors. After all, they did their part to boost aggregate demand by running big deficits, so that the state government could partially counteract the shortfall in private sector spending. Phew!

Ha ha, fooled you. Krugman actually took the opportunity to excoriate the governors who ran up government debt and thereby caused “an epidemic of fiscal crisis” (his term).

Can you guess why? Since when does Krugman think that running up deficits since 2008 is a bad thing?

The answer is that most of the debt was accumulated under Republicans, and the budget shortfalls were from tax cuts, not spending increases. (Note: I have not gone and verified the actual budgets of the states in question. Let’s assume Krugman’s narrative is accurate.) Economist David R. Henderson tries to be a nice guy and come up with escape hatches for Krugman, but I think on this one we can go with the quite obvious hypothesis: Krugman only embraces Keynesian logic when it reinforces his political preferences for more government spending. I know he assures us he’s not biased, but, well, that’s just what a biased person would say.

Before closing, let me address one obvious objection to my post: I know some people will say, “But Murphy, the estimates of Keynesian multipliers suggest that spending increases give more stimulus than tax cuts. So Krugman is being a good economist when he prefers deficits fueled by spending hikes rather than tax breaks, especially if it’s tax breaks for the rich who are just going to save it.”

I agree. But that’s not the point. Krugman on Keynesian grounds should still like deficits fueled by tax cuts compared to a balanced budget alternative. For those states now contemplating tax hikes in order to close their budget shortfalls, Krugman ought to be saying, “Yes, they should raise taxes now if they feel the need–perhaps out of a constitutional requirement–to quickly balance the books. But still, it was great that they provided that extra aggregate demand, albeit only for a few years, with those temporary tax cuts when the economy needed it the most. True, it would have been even better still had they simply had a few years of high spending–followed by spending cuts to balance the books–but this was better than if they had kept revenues and expenditures balanced since 2008.”

So now we have ironclad proof: Krugman really is against budget deficits when they’re due to Republican officials. He was against them during the George W. Bush years, and now he says that that’s because we weren’t up against the zero lower bound. OK, well according to Krugman we were up against the zero lower bound since 2008. So at best he should be saying, “Don’t get me wrong, I’m glad those Republican governors ran up large debts. I’m just pointing out their hypocrisy.” But instead, he actually refers to an “epidemic of fiscal crisis.” One does not get the sense from his post that he thinks those Republican governors did their states any favors by priming the pump.

  • DavidRHenderson

    Thanks, Robert. You nicely handled the various outs people could come up. You follow Krugman more closely than I do and so I had forgotten (although I read at the time) his 50 Little Hoovers piece.

  • DavidRHenderson

    Thanks, Robert. You nicely handled the various outs people could come up. You follow Krugman more closely than I do and so I had forgotten (although I read at the time) his 50 Little Hoovers piece.

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Profile photo of Robert P. Murphy

Robert P. Murphy is the Senior Economist at the Institute for Energy Research, and a Senior Fellow with the Fraser Institute. He holds a PhD in economics from New York University. Murphy is the author of Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015) as well as numerous other books and hundreds of articles.

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