Stating the Obvious By PAUL KRUGMAN he lunatics are now in charge of the asylum." So wrote the normally staid Financial Times, traditionally the voice of solid British business opinion, when surveying last week's tax bill. Indeed, the legislation is doubly absurd: the gimmicks used to make an $800-billion-plus tax cut carry an official price tag of only $320 billion are a joke, yet the cost without the gimmicks is so large that the nation can't possibly afford it while keeping its other promises. But then maybe that's the point. The Financial Times suggests that "more extreme Republicans" actually want a fiscal train wreck: "Proposing to slash federal spending, particularly on social programs, is a tricky electoral proposition, but a fiscal crisis offers the tantalizing prospect of forcing such cuts through the back door." Good for The Financial Times. It seems that stating the obvious has now, finally, become respectable. It's no secret that right-wing ideologues want to abolish programs Americans take for granted. But not long ago, to suggest that the Bush administration's policies might actually be driven by those ideologues — that the administration was deliberately setting the country up for a fiscal crisis in which popular social programs could be sharply cut — was to be accused of spouting conspiracy theories. Yet by pushing through another huge tax cut in the face of record deficits, the administration clearly demonstrates either that it is completely feckless, or that it actually wants a fiscal crisis. (Or maybe both.) Here's one way to look at the situation: Although you wouldn't know it from the rhetoric, federal taxes are already historically low as a share of G.D.P. Once the new round of cuts takes effect, federal taxes will be lower than their average during the Eisenhower administration. How, then, can the government pay for Medicare and Medicaid — which didn't exist in the 1950's — and Social Security, which will become far more expensive as the population ages? (Defense spending has fallen compared with the economy, but not that much, and it's on the rise again.) The answer is that it can't. The government can borrow to make up the difference as long as investors remain in denial, unable to believe that the world's only superpower is turning into a banana republic. But at some point bond markets will balk — they won't lend money to a government, even that of the United States, if that government's debt is growing faster than its revenues and there is no plausible story about how the budget will eventually come under control. At that point, either taxes will go up again, or programs that have become fundamental to the American way of life will be gutted. We can be sure that the right will do whatever it takes to preserve the Bush tax cuts — right now the administration is even skimping on homeland security to save a few dollars here and there. But balancing the books without tax increases will require deep cuts where the money is: that is, in Medicaid, Medicare and Social Security. The pain of these benefit cuts will fall on the middle class and the poor, while the tax cuts overwhelmingly favor the rich. For example, the tax cut passed last week will raise the after-tax income of most people by less than 1 percent — not nearly enough to compensate them for the loss of benefits. But people with incomes over $1 million per year will, on average, see their after-tax income rise 4.4 percent. The Financial Times suggests this is deliberate (and I agree): "For them," it says of those extreme Republicans, "undermining the multilateral international order is not enough; long-held views on income distribution also require radical revision." How can this be happening? Most people, even most liberals, are complacent. They don't realize how dire the fiscal outlook really is, and they don't read what the ideologues write. They imagine that the Bush administration, like the Reagan administration, will modify our system only at the edges, that it won't destroy the social safety net built up over the past 70 years. But the people now running America aren't conservatives: they're radicals who want to do away with the social and economic system we have, and the fiscal crisis they are concocting may give them the excuse they need. The Financial Times, it seems, now understands what's going on, but when will the public wake up? I guess the Finacial Times (London "Wall Street Journal" )doesn't believe in the miracle theory of supply side economics either.
Funny how he mentions the Eisenhower administration, yet that was the only time in US history where the Government ran a true surpluss. DD
Bush's handling of the economy has been ATROCIOUS. Almost three million people have lost their jobs and the stock market has lost a third of its value since he was "elected." But at least a lot of for'ners are dead, so not all is bad.
Funny how the author also mentions that there has also been a few expensive programs (Social Security, Medicare) added to the budget since the Eisenhoweras era. Simply put, we have more obligations, and we won't be able to afford them with this tax cut.
WEll, I agree with Krugman and the fact that this tax cut is potentially disastrous and a horrible idea, but for the record Social Security is a New Deal program dating back to th e 30's. Ironic, what was born of one depression will be deeply involved in the next one. ON another note, I think we can save ourselves much trouble if we ship all of these right wingers who can't stand big government and expensive government programs off to Afganistan where such problems don't exist; or if you hate it when rich people pay taxes you should go to Russia, where they don't have to. Just a thought.
Please tell me how a president who is in his 3rd year of office can: 1. control the stock market 2. create jobs I'll sit waiting for your answers. Bush's "handling" of the economy...presidents, for the most part, don't "handle" the economy. They don't have the handle.
no..it would be ironic if we were actually headed towards a depression...please tell me you don't think we're on the way to a depression.
He can't max, the most a president can do is not f-ck things up. But he is accomplishing that; he is crippling long term government revenues, (while lying and pretending that his program is a short term stimulus) to the point where the future solvency of the federal government may be in jeopardy, all at the expense of the lower income classes and to the benefit of the higher ones. The real economic consequences of this? Crowding out, reduced consumption and consumer confidence, capital flight, etc. etc. etc. That is atrocious.
See Liquidity trap, deflationary spiral, etc. Maybe not technically a depression, but quite possibly much much worse: Paul Krugman: Is the world stumbling into an economic quagmire? Paul Krugman NYT Tuesday, May 27, 2003 The meaning of deflation PRINCETON, New Jersey Suddenly the d-word is on everyone's lips. The International Monetary Fund has just released a rather ominous report titled "Deflation: Determinants, risks and policy options." The report made headlines by suggesting that Germany is likely to join Japan in the falling-price club. Alan Greenspan, chairman of the Federal Reserve, hastened to reassure Americans that the United States isn't at imminent risk of deflation. But alert Greenspanologists pointed out that he seemed to hedge his bets, and the fact that he even felt obliged to discuss the issue showed that he was worried. Though talk of deflation fills the air, most of that talk is subtly but significantly off point. The immediate danger isn't deflation per se, it's the risk that the world's major economies will find themselves trapped in an economic quagmire. Deflation can be both a symptom of an economy sinking into the muck, and a reason why it sinks even deeper, but it's usually a lagging indicator. The crucial question is whether we'll stumble into the swamp in the first place - and the risks look uncomfortably high. The particular type of quagmire to worry about has a name: "liquidity trap." As the IMF report explains, the most important reason to fear deflation is that it can push an economy into a liquidity trap, or deepen the distress of an economy already caught in the trap. Here's how it works, in theory. Ordinarily, deflation - a general fall in the level of prices - is easy to fight. All the central bank (in America's case, the Federal Reserve) has to do is print more money, and put it in the hands of banks. With more cash in hand, banks make more loans, interest rates fall, the economy perks up and the price level stops falling. But what if the economy is in such a deep malaise that pushing interest rates all the way to zero isn't enough to get the economy back to full employment? Then you're in a liquidity trap: Additional cash pumped into the economy - added liquidity - sits idle, because there's no point in lending money out if you don't receive any reward. And monetary policy loses its effectiveness. Once an economy is caught in such a trap, it's likely to slide into deflation - and nasty things begin to happen. Falling prices induce people to postpone their purchases in the expectation that prices will fall further, depressing demand today. Also, deflation usually means falling incomes as well as falling prices. In a deflationary economy, a family that borrows money to buy a house may well find itself having to pay fixed mortgage payments out of a shrinking paycheck; a business that borrows to finance investment may well find itself having to pay a fixed interest bill out of a shrinking cash flow. When the prices of goods and services are falling, the prices of assets - such as houses - must eventually follow suit. So a deflationary economy is one in which, far from being able to extract cash from their houses by refinancing, consumers find their equity disappearing. In other words, deflation discourages borrowing and spending, the very things a depressed economy needs to get going. And when an economy is in a liquidity trap, the authorities can't offset the depressing effects of deflation by cutting interest rates. So a vicious circle develops. Deflation leads to rising unemployment and falling capacity utilization; this puts more downward pressure on prices and wages; deflation accelerates, which makes the economy even more depressed. The prospect of such a "deflationary spiral," rather than the mere prospect of deflation, is what scares the IMF - and it should. A decade ago all of these fears might have been dismissed as mere theoretical speculation. But in Japan the whole nasty scenario is playing out, just as the theory predicts. And about five years ago I and other economists began pointing out that what can happen in Japan can happen elsewhere. (Part of the IMF report draws on my work on the subject.) So how seriously should we take the risk that something similar will happen in the world's other major economies? Neither the United States nor Europe, outside Germany, is likely to experience serious deflation in the next year or two. But that's the wrong question - and we should bear in mind that Japan's economic malaise took a long time to turn into all-out deflation. In fact, it's striking how gradually Japan's catastrophe unfolded. When the stock bubble of the 1980s burst, Japan's economy didn't fall off a cliff. By and large the economy continued to grow, if slowly, and the nation didn't have a severe recession until 1998. But year after year, Japan underperformed, growing less than its potential. Though the Japanese government tried to stimulate the economy using the usual tools - deficit spending, interest rate cuts - it was never enough. By 1995 or so the economy had slid into a liquidity trap; by the late 1990s it had entered into a deflationary spiral. The American situation is strikingly similar in some ways to that of Japan a decade ago. Like Japan circa 1993 or 1994, the United States is now facing the aftermath of a huge stock market bubble. Also like Japan, America faces a problem not of sharp downturn but of persistent underperformance - an economy that grows, but too slowly to prevent rising unemployment and falling capacity utilization. What's different is that America has Japan as a cautionary example. Is forewarned forearmed? Whatever reassurances Greenspan may offer, the staff at the Fed is very worried about a Japanese scenario for the United States - a concern reflected in their research agenda. In a major study of Japan's experience published last year, Fed economists reached two key conclusions. First, Japan could have avoided its current trap if policymakers had been aggressive enough, soon enough. But by the time they realized the danger, it was too late. Second, the Japanese weren't stupid: Their relatively cautious policies in the first half of the 1990s made sense given not only their own forecasts, but also those of independent analysts. But the forecasts were wrong - and the Japanese had failed to take out enough insurance against the possibility that they might be wrong. The Fed has taken these conclusions to heart: Once the U.S. economy began to falter, it cut rates early and often, trying to get ahead of the problem. Those cuts certainly helped moderate the slump; but at this point, with the overnight interest rate down to 1.25 percent, the Fed has almost run out of room to cut. (Fed officials believe, for technical reasons, that going below 0.75 would be counterproductive.) And the economy remains weak. The Fed still has some tricks up its sleeve. Now would be a very good time to announce an inflation target. But it's also clear that the Fed could use some help, at home and abroad. Alas, it's not getting that help. The Fed's European counterpart, the European Central Bank, has been far less aggressive in cutting rates. There are economic, institutional and psychological reasons for this passivity, but the central bank's immobility is one main reason why Germany seems set to follow in Japan's footsteps. European governments aren't much help, either. Bound by the "stability pact," which limits the size of the deficits they are allowed to run, they have been cutting expenditure and raising taxes even as their economies falter. The Bush administration is, of course, notably unconcerned about deficits. Aren't the tax cuts in the pipeline exactly what the economy needs? Alas, no. Despite their huge size - if you ignore the gimmicks, the latest round will cost at least $800 billion over the next decade - they pump relatively little money into the economy now, when it needs it. Moreover, the tax cuts flow mainly to the very, very affluent - the people least likely to spend their windfall. Meanwhile, state and local governments, which are not allowed to run deficits - America has its own version of the stability pact - are slashing spending and raising taxes. And both the spending cuts and the tax increases will fall mainly on the most vulnerable, people who cannot make up the difference by drawing on existing savings. The result is that the economic downdraft from state cutbacks (only slightly alleviated by the paltry aid contained in the new tax bill) will almost certainly be stronger than any boost from federal tax cuts. In short, those of us who worry about a Japanese-style quagmire find the global picture pretty scary. Policymakers are preoccupied with their usual agendas; outside the Fed, none of them seem to understand what may be at stake. Of course, it's possible, maybe even likely, that their nonchalance will be vindicated. Most analysts don't think America will find itself caught in a liquidity trap. And even the Fed believes - or is that hopes? - that a surge in business investment will save the day. But few analysts saw the Japanese quagmire coming either, and there is now a significant risk that Americans will find themselves similarly trapped. Even so, America won't have deflation right away. But by the time it does, it will be very hard to reverse. Like the Fed, I hope that doesn't happen. But hope is not a plan.
you seem to be talking about long-term effects on the economy...whether you're right or not is debateable...but we won't know for sure for many years. you're talking previously about current problems economic concerns (drop in stock market and unemployment). seems to me those would be residue from the policies of the previous administration. or they're neither. ultimately the president has nearly nothing to do with the economy in the United States. maybe it's that the economy tends to go through cycles. i remember before the election of 2000, people kept saying that no matter who won the election, they would inherit economic concerns.
Three words: Alan Greenspan. On another note, what are you going to do with your tax cut money? A) Spend it B) Save it C) Invest it D) Mail it to your congressman and tell him to give it to someone who is more needy E) None of the above (I probably shoulda made a poll out of this) If you selected A, B, or C, then you are just as guilty of screwing the poor as Bush is. If you selected D then you may truly call yourself either an idiot or a truly principled liberal, take your pick. If you selected E then you're either a wierdo or are more imaginative than I am.
Stating the obvious- a tax cut will help spur investment, which is exactly what this economy needs. Too bad Krugman decided to focus on how much he hates Bush and rich people.
Well, max, I don't believe that the long term consequences are as debatable as you make them out to be. According to Krugman, Robert Rubin, Greenspan, or whoever, be they left or right wing, no reputable economist will tell you that it's a good idea to run long term deficits as massive as the Bush Administration is suggesting, and his head of a council of Economic Advisers suggested otherwise as well. I don't understand why you brought up the stock market; I didn't mention the stock market or unemployment once, and I understand the business cycle and I know that neither clinton nor bush can control it, whatever that means. While the president has "nearly nothing" to do with the business cycle, that doesn't mean that they can't affect the economy. A president who excercises a degree of control over the budget is able to affect the "G" in aggregate demand. He's setting up that "G" to take a massive hit after he is out of office; eventually it will come time to pay the piper and the consequences will be very very ugly.
Then that would be a variation of answer "C", since you are investing it in order to get a return in the form of political change. Which makes you complicit.
Wrong again! Given the way the DNC has operated lately, it is the equivalent of throwing the money in the garbage can.
Krugman is a well off guy with well off friends--I didn't know he was into self-loathing, just thought he was a brilliant Princeton economists who balances theory and pragmatism. I am waiting for those to use sound logic to challenge Krugman and Greenspan's view that tax cuts w/o offsets in spending is the most dangerous game in town. Maybe Trader-Junior will come up with one of his many classic treatises (e.g., “The Wealth of Nations, Too”) to show their faulty thinking.
Investment contributes to long term productivity gains, not short term growth. Many ecnomoists (and most voters) would argue that a short term stimulus is far more important than long term productivity gains (which could be offset in any event by the fiscal disaster that they produce and/or deflation)
