Does the impact of Keynesian stimulus depend on what we call it?

Obviously Krugman is a statist whenever the two diverge. “Anything that increases government revenues or spending is good” is not a Keynesian argument.

From the graph, it looks like Krugman is comparing absolute number of jobs, not jobs per 100,000 people.

There are 30 million more people in the US today than there were in 2003.

I don’t think that graph is saying what Krugman wants it to say.

I think Krugman’s point is supply side effects from tax cuts are never as big as supply siders claim. For sure he believes Jebs tax plan has no hope of boosting real GDP growth to 4%. Krugman linked to this old James Tobin paper a few posts back. Tobin talks about supply side effects starting on Pg 36 and moves in for the kill on page 40 – Tobin:

“Likewise, considerations of efficiency-and equity, too-support reforms of individual income taxation that would spare savers taxation of the purely inflationary components of capital gains and interest income.
But tax reductions of this kind would presumably be made up by increases
elsewhere. The supply-side notion that uncompensated tax concessions
to saving will increase the national supply of saving for private capital
formation, as a fraction of GNP, is dubious. The fatal flaw is that such
concessions are likely to lose more public saving than the private saving
they promote unless the rate-of-return elasticity of saving (saving as a
whole, not particularly favored assets) is much greater than any credible
estimates”

Tobin goes on to back up this assertion with a simple model in the footnotes.

[Comment edited with commenter’s permission.–Econlib Ed.]

I applaud your patience and effort, in this post and in many others, but like some of the other commenters, it’s hard for me to be charitable.

Republican bashing has infected people in all manner of positions these days. It’s taken over Paul Krugman’s thinking and writing, and it’s taken over Neil deGrasse Tyson’s. It’s even taken over actual defense of substantive issues that are supposed to be important to the parties, such as women’s rights in Iraq. The government is 25% female now, which I would have thought to be a huge win for women’s status in the world. It’s being played down by women’s groups, though, because it’s a positive change that was caused by George W. Bush.

I find it depressing at a deep level, and it makes me want to not take part in intellectual discourse on this planet any more.

What I really don’t understand is why it’s so tempting to become troops for the Democrats. I understand why a failed thinker might turn to partison hackery as a way to get some blog hits. But why people like Paul Krugman? If he wanted to, he could make a big impact on the strongest economic thinkers of our times. Instead, he is alienating them, and for what? What is he really going to get out of being a loyal trooper for the Democrats?

Mr. Sumner, you really should read thru the comments attached to Mr. Krugman’s posts if you are confused about what point he is trying to make.

It took me 30 seconds to find this one…

Again, this is simple, so why do people seem so perplexed?

Krugman is not saying one recovery was “easier” than another. He is focusing specifically on predictions that were made. Republicans have an economic ideology they near universally adhere to. This ideology says that regulations and government programs always kill jobs and obstruct private investment. They never claim that the situation matters. Tax cuts should produce jobs. Tax hikes should kill them. Getting rid of regulations should create jobs. Instituting them should kill them. Government programs always increase the deficit. Tax cuts should actually create a surplus by increasing taxable income.

This ideology, however, has been proven wrong again and again. This is just one major example. If supply side was correct, a massive amount of jobs should have been created as the tax cuts on the rich freed up investment money. This was not what happened. The ACA and environmental regulations should have killed jobs. Instead millions were created and the unemployment rate dropped to 5.1%. Under Bush we should have had a surplus. Instead the deficit increased 1.8 trillion dollars. Under Obama it should have dramatically risen because of the ACA, Dodd-Frank, and the tax increases on the rich. Instead it was reduced over 60%.

And no, not being able to go into the future does not weaken the argument. Even over the same time scale the difference is dramatic. The Bush tax cuts did not “unleash the private sector”.

Mr. Krugman’s post has nothing to do with economics, Keynesian or otherwise.

@baconbacon:

The GOP made specific predictions about the results of tax and regulatory policy. They did not condition their predictions on base UE, etc., etc., etc. Those predictions turned out to be wrong.

OT
Apparently, if you model a monetary policy shock it has bad outcomes. Genius!
http://blogs.ft.com/gavyndavies/2015/09/10/what-caused-the-equity-crash/

Andrew,

Krugman was arguing in Dec. 2012 that raising taxes and cutting spending was going to hurt job growth, so while the chart doesn’t support supply-siders predictions about the 2003 tax cuts, it also undermines his own predictions about the 2013 tax hikes.

I love this post. I would like to comment on this:
—
Foosion, You said: “Krugman is arguing against the Republican supply side claims that tax increases are job killers and tax cuts are magic. That’s the main point and he seems to have made it effectively.”

I’d respond: Krugman is arguing against the Democratic Keynesian claims that austerity is a job killer and fiscal stimulus is magic. That’s the main point and he seems to have made it effectively.
—
I think Krugman would agree with Foosion. And so would I. I know Krugman would disagree with second statement. I think he was in such a rush to make the point as Foosion interpreted it, that PK completely overlooked the obvious connection to this second statement. Yet the second statement is glaringly true too.

I remember Milton Friedman saying that the best real measure of taxes is government expenditures, as opposed to tax revenue.

Perhaps the austerity of 2013 produced a reduction in the rate of growth of government expenditures while the tax rate reductions of 2003 were actually associated with an increase in government expenditures.

I think that Krugman is so eager to go against Republicans in every single subject that he does not even care anymore about consistency with his own previous economic views. He is probably just trying to get a data evidence that increasing taxes don’t destroy jobs, because some Republican said otherwise …

I had the same reaction as Thomas. Where did Keynes say that fiscal stimulus at full employment was expansionary? I read him as saying it is merely inflationary and a bad idea.

No doubt it will be hard to get people to agree on what “full employment” means but I think it’s clear that whether or not Keynes saw deficits as expansionary was entirely dependent on where you where in the business cycle.

Krugman’s post seems dishonest. Isn’t he on record that 2013 performance should have been disasterous, but for the fortuitous intervention of “other stuff?”

If he’s adjusted these graphs to correct for “other stuff,” he should spell that out.

Seriously, the Krugman/DeLong response is typically to sigh a lot and point out some unstated assumptions that any reader is expected to understand if they want to read Krugman’s writing at any level deeper that “Republicans bad!”. In this case, I would bet Krugman would say that since he believes that multiplier is always lower for tax changes than for fiscal changes, he doesn’t consider tax austerity to be comparable to fiscal austerity, not tax stimulus to be comparable to fiscal stimulus.

I think the “other stuff” might still give him s problem, though. If “other stuff” lifted the economy and prevented the cataclysm Krugman was predicting, then how is 2013 a good comparison for anything?

ThomasH/Greg — As has been pointed out before, NPV is a measure of cash flows. Government spending virtually never has (or even intends) positive NPV. And changes in real borrowing costs don’t have much effect on the value proposition of a new road or bridge or welfare program, and to the extent it does matter, the best value proposition is going to be spend money within revenues, where borrowing costs are zero.

The classic statist/Keynesian dodge is on display again here — Krugman certainly did not argue the economy was doing so well in 2001-3 that the tax cuts were unnecessary, he argued (and still does) that tax cuts are ineffective. Again, that’s statism, not a Keynesian argument.

Justin,
I think we both believe there are no magic bullets to achieving more real growth. But, right now we have 2% real growth on average since the recovery. 2.3% real growth would be a big improvement.

@Tall Dave:

When doing an economic analysis of an investment one should consider both cash and non-cash costs and cash and non-cash benefits. I fail to see why you think the government borrowing rate is not relevant to the relative value of costs and benefits at different times.

Nor do I understand your (very common) presumption that Keynesian analysis it “statist.” If government invests in activities that have positive NPVs the economy expands by more than the borrowing so government becomes a smaller part of GDP.

I will grant that I am remiss in always talking only about financing activities that that will have future benefits as if they are always government investments. In principle, the same logic applies to private activities financed by subsidies or tax cuts. Tax cuts such as reducing the wage tax or a higher EITC could have the same effect of creating future benefits greater than the discounted presents costs as well chosen public investments. Since the Bush tax cuts were not of that nature (transferred income to high income people and were permanent, not temporary), it’s not surprising that a Keynesian would not be very enthusiastic about them.

Keynesian prescriptions are statest only relative to “austerity,” the idea that expenditures should be reduced (paying no attention to their NPV) during a recession. And one suspects that people who hold that opinion probably think that expenditures should be reduced (paying no attention to their NPV) during full employment, too.

ThomasH —

Consumption is utility, and not an input to NPV. When you buy and eat a hamburger, the NPV of the purchase is zero, even if you’re really hungry or borrowing costs are low. Government spending is generally consumption, not investment, and the borrowing rate is a small component given that most expenditures have zero borrowing cost.

Again, Keynesian-ism and statism are different things, and “Keynesians” like Krugman are clearly statists whenever the two diverge. You even managed to repeat his anti-Keynesian fallacy of equating only expenditures with the stance of fiscal policy.

The point of the post is that the supply side claim that increasing the tax rate will lead to a collapse in employment, while cutting taxes will lead to measurable job growth, in general, is wrong.

These two data points can’t be used to say anything about small impacts in either direction. But, remember when Milton Friedman predicted the Clinton tax hike would lead to a recession? Showing that this didn’t happen is possible with essentially one observation.

For Keynesians, the Bush tax cuts shouldn’t necessarily have been expansionary — see Scott Sumner’s post. The Fed moves last. Keynes prescription was to run surpluses when the economy is doing well, not structural budget deficits…

That leaves 2013. I don’t see this as strong evidence against Keynesian economics, as it is one data point. Other things aren’t equal so there isn’t a good natural experiment. And the theoretical impact of raising taxes on the rich, who aren’t exactly hand-to-mouth consumers, is that you should have a small multiplier. Thus, call the expected hit — 1% of GDP? How do you know what would have happened absent the tax increase?

Better example: the NPV of a personal vehicle purchase is its discounted future trade-in value, or zero if you never expect to sell it. (Well, plus any discounted future cash flows you expect from Ubering and Lyfting.)

Utility =/= value. You cannot include the utility of being able to drive the vehicle in your NPV calculation (though of course you do consider it in the purchase decision, because you want to maximize utility when you trade value for utility).