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Source link: http://archive.mises.org/10011/paul-krugman-raise-taxes-spend-more-and-all-will-be-well/

Paul Krugman: Raise Taxes, Spend More, and All Will be Well

May 25, 2009 by

According to Paul Krugman, who wrote in The Return of Depression Economics that governments can solve almost any crisis simply by printing money, declares that California easily could solve its present crisis by raising taxes.

First, he goes into the “real” cause of the trouble: Proposition 13. The only problem is that it was passed more than 30 years ago and California has balanced many budgets since then (and that includes the 2/3 majority in the legislature needed to raise taxes). Thus, if Prop 13 were the cause, why has California not been in crisis sooner? The Great One has no answer.

Second, he points toward the current situation, and claims that our nation’s current crisis can be “solved” by raising taxes:

Last week Bill Gross of Pimco, the giant bond fund, warned that the U.S. government may lose its AAA debt rating in a few years, thanks to the trillions it’s spending to rescue the economy and the banks. Is that a real possibility?

Well, in a rational world Mr. Gross’s warning would make no sense. America’s projected deficits may sound large, yet it would take only a modest tax increase to cover the expected rise in interest payments — and right now American taxes are well below those in most other wealthy countries. The fiscal consequences of the current crisis, in other words, should be manageable.

However, Krugman has his own “Goldstein,” the Republicans. Yes, even though Democrats have huge majorities everywhere, the very presence of a few Republicans still is the reason that governments cannot act “rationally” and give us steep tax increases and provide all of the things Krugman demands government “give” us:

But that (a modest tax increase is all that is needed) presumes that we’ll be able, as a political matter, to act responsibly. The example of California shows that this is by no means guaranteed. And the political problems that have plagued California for years are now increasingly apparent at a national level.

To be blunt: recent events suggest that the Republican Party has been driven mad by lack of power. The few remaining moderates have been defeated, have fled, or are being driven out. What’s left is a party whose national committee has just passed a resolution solemnly declaring that Democrats are “dedicated to restructuring American society along socialist ideals,” and released a video comparing Speaker of the House Nancy Pelosi to Pussy Galore.

This makes no sense. If a party is out of power, then how can it be responsible for the current policies? You see, all of the wild spending in California (and this country) has nothing to do with what is happening now. No, the only problem that we face is that government does not have enough money to spend. “Solve” that problem, and everything else falls into place.

I have nothing good to say about the Republicans, whose policies have led us to the edge of the cliff. However, since taking absolute power, the Democrats not only have resumed the march over the precipice, but are demanding that we increase our steps to double-time.

So, to date, Krugman has advocated even larger deficits than what are being run, the printing of more money, large tax increases, and huge increases in government spending. And he calls that “responsible.” Well, I call it madness.

{ 12 comments }

Eric May 25, 2009 at 7:17 am

Krugman’s economic views don’t shape his political views – but his political views shape his economic views. Someone as ridiculous has him should just be ignored.

Joe O. May 25, 2009 at 9:48 am

“According to Paul Krugman, who wrote in The Return of Depression Economics that governments can solve almost any crisis simply by printing money”

I’d like to see Krugman try to sell that plan which is already in its advanced stages to the people living in Zimbabwe. I’m sure they would get a laugh out of it.

John C. Randolph May 25, 2009 at 9:55 am

Krugman is a devoted disciple of Keynes, and Keynes was no more an economist than Lysenko was a biologist.

-jcr

kmeisthax May 25, 2009 at 2:59 pm

War is Peace
Freedom is Slavery
Debt is Solvency

filc May 25, 2009 at 4:25 pm

doublespeech

Walt D. May 25, 2009 at 6:36 pm

Paul Krugman is wrong (again!).
This one is easy to work out from the following principles:
1) The government always spends more than they take in in taxes. This is due to the static budget methodology – i.e. the failure to account for the dead weight loss effect of taxes. In other words, the budgeting methodology over estimates the taxes collected as a result of a tax rate increase.
2) Suppose the tax rate was raised to 100%. There would still be a budget deficit because they would still over estimate the taxes collected and over spend accordingly.
If you actually look at the California budget, over $100 billion is spent on Education K12 ($40b), Health and Social Services ($38b), Higher Education ($13b) and Prisons ($10b). There is no way to come up with a balanced budget without cutting into these program.

HM May 25, 2009 at 8:04 pm

Actually I thought Dr. Krugman’s article was fairly correct. One of his points echos an article in a recent edition of The Economist. That being that the political process in California is broken. The jist being that although the Republicans are in the minority, due to the 2/3 majority needed to pass the budget they can hold the budget hostage. Coupled with the fact that due to rigging the electoral districts, the election is largely over during the primaries leading to more radical Republicans.
The Economist does a good job of covering this issue. They make the point that California’s experiment with direct democratic involvement is a failure. The speculation being that the California Constitution will have to be tossed out and redone.

Michael Orlowski May 25, 2009 at 9:01 pm

He should have spent his time learning about Hoover Era policies of this sort before he goes on blabbering.

Walt D. May 25, 2009 at 9:17 pm

HM wrote:
“the political process in California is broken.” ????
Imperfect though it may be we still have some vestige of democracy left in California. Consider the Wall Street bailout package – 99% of the electorate opposed it. Even so, the Congress overrode the will of the electorate. At least in California, we do have ballot initiatives. They have been used to reign in the government – Proposition 13, limiting property taxes to 1%. Rose Bird Supreme Court recall (over the death penalty), recall of Governor Gray Davis, rejection of gay marriage, and most recently the rejection of the budget proposals. Whether I like these decisions or not, (in fact I don’t like all of them), it is hard to claim that the ballot proposition process is undemocratic. The idea that voters can piss all over their desire to raise taxes, must drive the control-freak elites in the Democrat and Republican political parties crazy.

George May 25, 2009 at 10:08 pm

That being that the political process in California is broken. The jist being that although the Republicans are in the minority, due to the 2/3 majority needed to pass the budget they can hold the budget hostage.

So something 1/3 are against should be forced through because might makes right?

I’d think it much harder to justify anything opposed at all, especially if the ones opposing it have to pay for it.

Emil Suric May 26, 2009 at 2:26 am

Can someone tell Mr. Krugman to focus on temporary international trade trends, and let the big boys handle trade cycle theory.

Taylor May 28, 2009 at 5:06 pm

Bill,

You point out that Prop 13 was passed over 30 years ago, so why wasn’t CA in crisis sooner?

The Federal Reserve Act was passed in 1913. If the Federal Reserve is the cause of this crisis, why didn’t we face a crisis sooner? (Yes, I know the Great Depression came shortly after, but how many of those have we had in the meantime?)

I agree with you, Bill, but this is shoddy work and opens you up to simpleton attacks like the one I mention above.

I think we Mises folk are getting tired and lazy, responding to this claptrap nonsense on a daily basis, and our quality is lacking as a result, although I have enjoyed a lot of your other recent writings. All I am saying is, be careful, and try to be as airtight as possible… they’re looking for leaks so they can quickly dismiss our arguments and go back to rapin’ and pillagin’

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