Krugman inkles the D-word

Paul Krugman’s op-ed piece today took my fears about the global free fall in manufacturing from the monetary sector straight to the real sector.   He  makes the case that the U.S. economy may be at the start of depression.

“The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending. Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression.”

As a liberal economist with impeccable credentials,  Dr. Krugman has always been called the consummate Keynesian.  This is despite his major contributions come from Trade Theory where he argues continually in his academic work for open, unfettered trade. Economists generally tend to be a pragmatic and practical sort because we focus on outcomes.

The main question posed by Krugman today concerns the Obama stimulus plan.

If we don’t act swiftly and boldly,” declared President-elect Barack Obama in his latest weekly address, “we could see a much deeper economic downturn that could lead to double-digit unemployment.” If you ask me, he was understating the case …

So will we “act swiftly and boldly” enough to stop that from happening? We’ll soon find out. “

Krugman continues with some extremely good back ground on fiscal and monetary policy.  He argues the Keynesian case for swift, large, fiscal policy.   As usual, the piece is to the point, easy to read, and right on.  I’m not going to repeat his case here because its his question that has been circulating in my mind all weekend.  While Krugman tackles the do we need monetary or fiscal policy question nicely, he does not confront the conflict within the fiscal policy debate.  Do we use tax cuts or government spending?

The answer to this question separates the true FDR-style Keynesian from the Reagan-style supply sider.  Any good Keynesian will choose government spending for several reasons.  The first is that when you give $1 trillion to a governor, they spend it all and they spend it on things that usually involve Americans.  In economic terms, the actual project isn’t that key.  When expanding the U.S. WW2 Museum or  the U.S. interstate system, a governor will use American workers, American Contractors, and American materials.  You can debate that the interstate system will have a longer impact on the economy but in terms of immediate stimulus, both will have the same bang for the buck.  They will start the process of multiplying through the economy with 100% of the stimulus out there stimulating.

Not so with the elusive tax cuts.  You can always tell a supply sider (the Reagan type) because their answer to EVERYTHING is cut taxes.  Got a recession?  Cut taxes.  Got inflation?  Cut taxes.  Got too many poor people? Cut taxes.  Cutting taxes is a more elusive thing because not all of the tax money goes out to stimulate demand for goods and services.  In fact, in most situations but especially with one time tax rebates and credits, the wise recession-fearing American will NOT spend the money but pay down debt or hold on to it in some kind of savings vehicle.  This does NOT stimulate the economy.  The spend-happy American may actually take the money and buy something like a fancy TV.  Chances are about 100% that the fancy TV is not built by an American, does not contain American materials, and probably stimulates the source country a lot more than it does the U.S. economy.  The only really stimulatory tax cut for the American consumer is one that he can see in his pay check month after month and year after year.  Even then, it will still not go to buying all  American goods and to buying at all.  100% of a tax cut never carries the bang that government spending does.  All you have to do is take an entry level economics course and any instructor worth their salt can prove this to you quite easily.

Republicans like their tax cuts to stimulate the businesses and business owners.  They argue that by giving businesses incentives to expand, they will hire more workers and buy more machines.  This sounds really logical and works when the economy is working. The problem is that when you are in a Depression/Recession, businesses aren’t expanding and they aren’t buying more stuff.  It isn’t because their taxes are too high.  It’s because they wouldn’t be able to sell the stuff they make even if they had cheap financing and low taxes.  That was the huge lesson of the Great Depression that some how Reagan Republicans missed.  It’s not just a matter of building it, pricing it right, and selling it.  It’s a matter of finding ANYONE to buy it.  Hopefully, all of this makes sense to you at this point.  Because I’m about to go back to Dr. Krugman’s question.

Before I read the op-ed page today at the Times, I read the front page.   The answer to Krugman’s  question is right there, oddly enough, before Krugman knew the answer.  We don’t have an FDR style liberal president folks.  We’ve got some one who has an appreciation for Ronald Reagan and that should’ve sent off a lot of firecrackers in folks’ minds during the primary. 

Here’s the headline:  Obama Plan Includes $300 Billion in Tax Cuts.

WASHINGTON — President-elect Barack Obama plans to include about $300 billion in tax cuts for workers and businesses in his economic recovery program, advisers said Sunday, as his team seeks to win over Congressional skeptics worried that he was too focused on government spending.

The legislation Mr. Obama is developing with Congressional Democrats will devote about 40 percent of the cost to tax cuts, including his centerpiece campaign promise to provide credits up to $500 for most workers, costing roughly $150 billion. The package will also include more than $100 billion in tax incentives for businesses to create jobs and invest in equipment or factories.

So Obama’s bold swift plan is warmed over Reagonomics.  It includes a tax credit for working families which will undoubtedly go straight into paying down credit card debt or other loans (last year’s or the year before’s spending) and a bunch of incentives to businesses who need customers, not tax savings on imaginary earnings.  All we need included in this is a break on the corporate income tax and sustaining the no capital gains tax and we’re completely back into Voodoo Economics land. 

Just in case you are going to point back to the Reagan recession in 1984 and say, well look things turned around back then, let me remind you that what really turned things around back than was a HUGE increase in military spending.  When Reagan re-started the arms race, he basically started a mini-war and it was all deficit financed.  In fact,  most economists that spend their time dissecting the past have completely debunked the supply side myth and pointed to the remilitarization of the 80s as the source of much of that growth.

Let me pull something else from that Time’s article.

 Mr. Obama’s advisers said they were still discussing with Congressional leaders the precise plan for phasing out the credit for wealthier Americans. They said no tax increases were included in the plan because it was focused on measures that create jobs. Obama aides have signaled that they will wait to let Mr. Bush’s tax cuts for the wealthiest Americans expire in 2010, rather than try to repeal them sooner.

Likewise, other tax proposals Mr. Obama made in the campaign are not in the economic package because they are not aimed directly at job creation. Aides said the president-elect might return to those later on, possibly as early as the annual budget proposal he is to present in February.

Conveniently, everything that should be considered a progressive tax and spending agenda is now considered not directly aimed at  job creation by the Obama Team.  Let me remind you, if businesses have no customers, no amount of tax credits or incentives will get them to spend.  If customers don’t have secure jobs and income above survival level, they will not spend.  If  NO ONE spends, then the government has to spend.  But then, I’m something that you’re not really seeing in the Obama Economic team:  A KEYNESIAN economist.

So, can I just say it here while I have your attention?  President Elect Obama is NO Liberal when it comes to the economy.  Is any one out there listening?