A Question for Krugman
By David Henderson
Paul Krugman has a post today about how badly some Republican governors have been doing with their budget policies. His basic criticism is that they have cut taxes. But he also has, at various times recently, complained about austerity. What, to Paul Krugman, is austerity? He has often been vague about whether it means raising taxes or reducing government spending, but he seems to mean a combination of those.
So, on the one hand, he doesn’t like austerity right now, given current macroeconomic conditions, which means, in part, that he doesn’t like tax increases. On the other hand, he doesn’t like tax cuts. That could leave the possibility that he wants taxes to stay the same. But then he praises the California government for its fiscal position, which, as he well knows, is due in part to tax increases.
Is there a way out of this apparent contradiction? Yes. What he might be arguing is that we shouldn’t have austerity at the national level because he wants the Keynesian fiscal multiplier to work and to do that, you need either tax cuts at the national level or government spending increases at the national level. But, he could argue, that doesn’t make sense when we’re considering fiscal policy at the state level. If, for example, the Kansas government cuts taxes, that might be marginally good for the country, because people will take their higher after-tax income and spend it mainly in the United States, but it will be lousy for Kansas, which will find itself in a fiscal bind. I’ve seen him make the “lousy for Kansas” point, although I’ve never seen him say, which I think he would have to, that it’s slightly good for the United States as a whole. And, Kansas, after all, is such a small economy that any policy there can’t have much effect nationally.
Given Krugman’s demand-side fiscal policy view, there is an internal coherence here. But that coherence starts to fray as he brings in to his evidence base larger states. He has singled out California and praised that government for a fiscal position that has come about, in part, due to recent tax increases. California is about 1/8 of the U.S. economy. So how many Republican governors need to cut taxes for how many states with what percent of the economy for Krugman to praise them for resisting austerity?