NY Times economics writer Paul Krugman has argued in two recent columns that the Europeans are not focused on growth, instead are looking to cut spending, and he thinks this will be disastrous.
First of all, it looks like Krugman does not understand the difference between growth numbers that are simply held up by deficit spending, and growth that comes from greater private business activity.
Second, Krugman himself has pooh-poohed the idea that the Great Depression occurred because of the Smoot-Hawley Tariff and subsequent hikes in tax rates by Herbert Hoover. Now he is coming after the Europeans for raising taxes — even while Obama and the Democrats are ready to let the Bush tax cuts expire, and rates increase for all incomes, in addition to higher rates on estates and investment.
If Krugman thinks the Europeans shouldn’t be raising taxes, why should we? Why doesn’t he address himself to politicians who are supposed to listen to him, the Democrats in the USA?
…or is this your third post in recent days that seems to deliberately try to confuse the issue? First, the Russians are an example to follow; then everyone on the left is anti-growth; now you seem to be ascribing views to Krugman different from those he actually holds. Debate is fine, but starting with a bit of intellectual honesty would be nice.
Yes it’s confusing! Because it’s a glaring obvious contradiction in Krugman’s thinking. June 27 2010:
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p>http://www.nytimes.com/2010/06…
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p>I think Krugman is right that the Europeans shouldn’t raise taxes, however he is after them because his program has utterly failed here in the USA, and he can’t get Obama to propose another $800B stimulus package.
And which program would that be? The “stimulus””? Krugman said from the start that the “stimulus” was half of what it needed to be, and Obama’s effectively agreeing with this now by calling for another round. Too late, I think – Obama should have listened to people with excellent track records, like Krugman, rather than scoundrels like Summers and Geithner.
Apparently you haven’t read much Krugman yet. Your characterizations of what Krugman says miss the mark. Over and over.
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p>I’m happy to engage with someone who disagrees with Krugman but you have to first understand what he says to play that game.
Evasion. Keep the Bush tax cuts or don’t?
without paying the admission ticket.
The wealthiest Americans now pay about 18% in federal taxes, vs. 50% under Eisenhower. The middle class pays at a far-higher rate:
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p>http://taxprof.typepad.com/tax…
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p>This is absurd – the US has a hyper-regressive tax scheme. We are eviscerating the middle class.
one wants the tax burden to be more progressive, not less. One wants money in the hands of those who will spend it, not those who will save it. Bush’s redistributive tax cuts did the reverse.
There’s probably at least as good an argument that this is a case of the Fed and the President fighting the last war. The last war being the great depression.
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p>Banks weren’t allowed, because of the bailout, to suffer the rightful result that any insolvent businesses should suffer. Banks survive because of the Fed bailout and their collateral (i.e. real estate) remains inflated on their books.
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p>Government shoveled both borrowed money and printed money at citizens who used it to pay off debt, both credit car AND mortgages (on their inflated real estate).
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p>So the question, given that the government has shoveled tons of money and the Fed has printed same, and the result is less than triumphant, should we assume efforts weren’t enough (see Krugman) and shovel and print more?
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p>Or, should we assume that the TARP path might have been an error and pull back and let the real estate deflate and let some banks fail (see Nusbaum) and ask why more debt could cure the problem of have too much debt in the first place.
The original debt was in the private sector. It was fueled by relaxed borrowing rules and lax oversight, and led to the housing bubble.
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p>The additional debt being discussed now is to be incurred by the government. That is, the new debt will be incurred by a different sector for a different purpose. It will not be going to fuel ponzi housing schemes but to give desperate individuals some relief to meet day to day expenses. As explained elsewhere by Krugman, putting money into the hands of people most likely to spend it is the quickest way to create demand in the economy. Demand is the incentive that is needed to get businesses to invest.
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p>Granted, some unemployed individuals may use their UI checks to pay their mortgages and stay in their homes. This is not the same as taking on new unsustainable debt, as was done before the crisis.
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p>I’m not seeing it
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Where did this chart come from.
Here
Capital gains are taxed at 15%. Most of the rich make most of their income on capital gains – but, strangely, these charts tend to only show tax on earned income which is taxed at a higher rate.
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p>FICA (Social Security, Medicare, etc) is treated effectively as a tax by the government – it goes into the general pool of money. That tends to not be included in charts showing taxes paid by the middle class, although there are arguments to be made that in some cases it should not be counted. In any case, Obama’s Cat Food Commission is in the process of working to grab some of what would be my Social Security income, so I suspect that it’s becoming even more like a plain old tax.
But using quintile numbers is misleading. Most of the top quintile still earn a living working, so they pay income taxes at a progressive rate. The wealthiest 1%, on the other hand, earn more from investments and thus pay cap gains at only 15%.
Here in Table 1, the stats show that the top 1% paid 22.45%. Apparently the highest average rate of any measured bracket.
Is completely irrelevant, because it ignores my comment.
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p>The link specifically refers to individual income tax.
I specifically referred to capital gains taxes, and the fact that the wealthiest 1% make most of their money through investments, which are taxed at a lower rate than salary/wages.
Individual income tax encompasses capital gains tax. Look at your 1040.
Logic exercise for you: Poster claims that there is a current tax rate of the wealthiest of 18% and an Eisenhower period rate of 50%.
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p>The chart I linked disproves the 18%, thereby making this sentence “The wealthiest Americans now pay about 18% in federal taxes, vs. 50% under Eisenhower,” logically false.
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p>Do you disagree?
By “wealthiest”, one usually means a considerably narrower range than 20%.
You are aware that you are apparently defending a statement that seems to be plucked from thin air, with no substantiation whatsoever.
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p>i.e. “The wealthiest Americans now pay about 18% in federal taxes, vs. 50% under Eisenhower.”
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p>What’s the point? The CBO shows that for the past 30 years, the top 20% pay the highest average rate. But, you say top 20% aren’t the “wealthiest”. Tell me, what is the “wealthiest”? Top 1%, top 3 people, one guy living in Silicon Valley?
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p>Let’s assume, arguendo, that the “wealthiest” pays only, say 10%, do you seek to raise his rate out of a sense of justice? Obviously, the more narrowly you define wealthy for a tax increase, the less money you’ll take for the coffers. So, if you’re narrowly defining “wealthy” and raising the tax on a handful of people, it’s not fiscal policy. If must be for another reason: screw the rich, justice, other?
I’m sorry but this is crap. Only recently, I spent a lot of time pestering Cape Cod Democrat for better evidence and I wasn’t alone in that.
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p>On policy discussions — as opposed to taunting exchanges — the participants really do try to get the facts right and backed up. These discussions occur entirely between liberals.
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p>You don’t participate in them much so you don’t notice.
I post, >>Logic exercise for you: Poster claims that there is a current tax rate of the wealthiest of 18% and an Eisenhower period rate of 50%.
The chart I linked disproves the 18%, thereby making this sentence “The wealthiest Americans now pay about 18% in federal taxes, vs. 50% under Eisenhower,” logically false.>>
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p>Do you disagree? >>
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p>And from nowhere, what I thought was a decent and reasonable and civil rebuttal of a particular assertion, someone rates “3”. Am I missing something?
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http://taxprof.typepad.com/tax…
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p>in which Warren Buffet claims that he pays less than 18%. The IRS used to do a yearly publication looking at tax returns for the top 100 taxpayers (in terms of income) – this was stopped under Bush. It would show that these folks paid an aggregate tax rate slightly above the capital gains rate, which makes perfect sense since the wealthiest Americans get virtually all income from capital gains.
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p>The capital gains rate is now 15%. What Buffet says makes perfect: that he (and the other super-rich) pay just a little more than that in federal tax.
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p>Top 20% is not the rich, not by a long shot.
The top marginal tax rates are listed here at the Tax Policy Center.
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p>From 1950 to 1963, the top marginal rate was 91%.
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p>Currently it is 35%.
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p>It rose to 39.6% under Clinton and was reduced twice since then.
So what? The post isn’t about marginal rate. The post is about what people actually pay.
I don’t know where the usually well-sourced MannyGoldstein got his figures from. However, the word from most experts I’ve read on the left indicates that the wealthy Americans used to pay much more in taxes than they currently do. Both the Reagan and Bush II Administrations were part of drastically cutting those taxes.
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p>The figures MannyGoldstein quotes are vague and unverifiable. For example, we could imagine that there is some unknown definition of “wealthiest” for which they are true.
I just added more information in another post as well.
The link gives me anecdotal evidence that one wealthy person is paying just under 18% and no evidence as to what wealthy people were paying under Ike.
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p>I don’t think the point you’re making is difficult to prove, possibly with better or different statistics, but it would be good to start from a stronger footing rather than to try to chase down the 18% and 50%.
The IRS no longer publishes the info on the returns of the top wage earners. However, the 18% figure is a lot different than random information:
1. We have no reason to believe that Buffet would lie. The right would have been yammering about this if he had.
2. It totally makes sense, given that capital gains are taxed at 15%. Putting it another way, under what reasonable scenario could you see Buffet paying at a substantially different rate?
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p>As to Eisenhower… I read the 50% figure at some point in something authoritative, but stupidly did not keep the reference. However, we know that the top rate on earned income was 91% back then, and capital gains was at 25%, so the rate was between 25% and 91%, weighted more towards 25%.
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p>Here’s some more info that points in this direction:
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p>http://www.mymoneyblog.com/arc…
Buffet’s comment, the CBO chart and the offhand reference to the 50% figure are impossible to compare because it’s not clear what the denominator (income) is in each case. Is income AGI? Taxable income? Gross income? Does it include tax exempt interest? Gross proceeds from the sale of capital assets or just net gain or loss?
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p>I would guess that the CBO chart defines income as AGI plus tax exempt interest received. Assuming Buffet also uses this definition:
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p>Your focus solely on capital gains to explain the effective tax rates for Buffet and other super wealthy folks is likely misguided. There are at least five factors that could explain Buffet’s effective rate:
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p>a) Certain “Qualified Dividends” taxed at 15% (a rate enacted via the “Bush tax cuts”, will revert to 39.6% if such cuts are allowed to expire at the end of the year. I believe the rationale for this rate (which applies mainly to dividends from US corporations) was to dilute the effects of double taxation on corporate profits).
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p>b) Long term capital gains taxed at 15% (the rate reverts to 20% next year if the BTCs are allowed to expire)
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p>c) Tax exempt income (reduces the borrowing costs of state and local governments)
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p>d) Charitable contributions
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p>e) the alternative minimum tax (AMT, 28% rate)
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p>I would think Buffet has consistent and copious amounts of a, c and d annually. Cap gains are likely more hit or miss.
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p>If Buffet’s dividends and cap gains force his effective tax rate (on his taxable income) below 28% the AMT kicks in. However, AMT income does not include most tax exempt interest and allows deductions for charitable contributions so its really those items that are likely getting him to 18%.
I think you’re thinking about rates, not the amount coming from each quintile.
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p>In any case during the 50’s we had a high top rate, but inflation has distorted the comparison massively. Very few people paid the top rate, in fact few middle class workers paid income tax at all.
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p>During the 70s with inflation people were boosted up brackets even though they were not in fact making any more money. If we ever see job stabilization and nominal income growth that will be happening now as well, because the prices for everything have gone up so far since 2002.
The top tax rate on earned income was 91% under Eisenhower (and Republicans controlled both houses of Congress, too!!!), but because of capital gains the wealthiest Americans paid about 50%, or three times what they pay now.
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p>Shows how staggeringly far to the right our country has moved since the 1950s. I’ll leave it to the reader to judge how well that’s worked for us.
That’s about covers your entire post.
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p>But I would also say that Krugman’s position, which has always been the case is that we didn’t spend enough. The Democratic party gave in to Republicans for a reduced spending plan and got no votes. He pretty much said we should have just spent what we needed instead of playing politics. A larger stimulus was needed.
but have we even spent the money from the first Stimulus “deficit” spending bill (my unborn grandchildren are asking since they will be paying for it).
On Europe: Krugman says the time is wrong to cut programs and spending (austerity). He points to Ireland as an example. He doesn’t believe that raising taxes in the EU is a good idea at the moment.
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p>It’s not just what you do, it’s when you do it.
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p><Tax cuts vs. spending: tax cuts do have some stimulus value, but not as much as spending. Tax cuts can be saved, invested in overseas assets, or as, I think, David Whelan said, spent on existing debts. None of this gets the economy going.
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p>Spending goes directly into the economy. Extending jobless benefits, for example, is most likely to be spent. Keeping teachers, police, and EMS people employed also preserves their purchasing power, though they’re still prey to the paradox of thrift. Employed or on unemployment, workers pay taxes and purchase goods and services and thus feed the economy and give a discount on the government’s investment. Tax cuts don’t provide a discount on stimulus.
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p>Aside from benefitting the very rich, Bush’s tax cuts have less stimulative value than unemployment benefits. The rich are more apt to park money in safe investments like bonds right now and there are fewer of them to really increase economic activity.
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p>Did I miss something or did nickp try to refute the tax rate during Eisenhower’s years with a graph that only goes back to 1979?
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p>How come conservatives complain about Obama adding to the deficit when it was they who pushed for an unprecedented, unstimulating Bush tax cut and a war we didn’t need and will cost a trillion (Iraq) and a war we can’t win (Afghanistan)? My grandchildren will be paying… Welcome to the world of conservatism!
I appreciate the time you put into such a long answer, all I can say though is that it’s unconvincing and not really the problem with Krugman. Are you suggesting Krugman believes we should raise taxes and raise spending?
hasn’t written on what to do with the Bush tax cuts. He’s not a policy-maker, after all, he’s a economist, professor, and columnist/blogger. In my opinion, your problem with Krugman is that he isn’t answering a question you want him to answer. Maybe you should try commenting on his blog. He does read his comments.
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p>I’ve been reading Krugman for years, including his books. I couldn’t find anything recent he’s said about Bush’s tax cuts, except that 39% of the cut went to 1% of the population. I don’t know what he’d say to do with Bush’s tax cuts as they are set to expire, but I know how he would approach the answer: 1) he’d look at the actual costs and benefits of letting them expire (or) not 2) he’d make a recommendation based on those costs and benefits. A Democrat interested in outmaneuvering the Republicans might argue for letting the tax cuts expire and initiating a round of tax cuts for the middle-class.
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p>You seem to be buying into the rhetoric that letting Bush tax cuts expire would be increasing taxes. That may be true rhetorically, but it wouldn’t necessarily be true economically. There are some taxes that could be raised without affecting demand. Here in Massachusetts, the sales tax was raised 1.25 percent. I’m unaware of that decreasing demand.
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Mark I’m not an economist but what I’ve outlined is an obvious problem. If Krugman doesn’t answer it then fine, but he can’t avoid it and still go around writing like everybody who disagrees with him is an idiot, and the same goes for his acolytes.
it’s already been addressed. Krugman is an academic not a politician. Academics spend all their time trying to shoot holes in each others arguments. They also presume one has read “the literature”.
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p>You seem to be treating Krugman’s writing the way one might mine Joe Biden or Lindsey Graham quotes to figure out what their preferences are.
but Krugman doesn’t write about others being idiotic, simply thinking idiotically. He’s one of the fairest critics I know.
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p>When he calls someone out, it’s for 1) lack of evidence 2) poor reasoning. When he makes an argument, he provides his evidence and reasoning. You can follow it and agree or disagree. He follows the rules and ethics of academic discourse, which allows people to constructively engage with him on an informational, not an ideological level. As pundits go, Krugman has few peers.
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p>As an economist, he’s also a great economist. I don’t say that as an economist, but as someone who has been told that by a conservative, Bush-supporting academic economist.
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p>If I may ask, why the interest in Krugman?
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p>Maybe you missed something. The post to which I replied claimed a current tax rate of the wealthiest of 18% and an Eisenhower period rate of 50%.
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p>The CBO chart seems to disprove the 18%, thereby making this sentence “The wealthiest Americans now pay about 18% in federal taxes, vs. 50% under Eisenhower.” logically false. True?
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p>False, that is, if you accept the upper quintile as being the “wealthiest”. If you carve the population into smaller and smaller groups, then maybe, just maybe, Warren Buffet is the wealthiest and maybe he pays 18% and maybe the wealthiest, and stupidest guy in 1960 paid 50%. In that case, the statement would be true. Factually correct, but otherwise irrelevant.
Please excuse me for my belief that Nobel-prize-winner Krugman surely does understand any such difference. If your interpretation is different from his, the burden’s on you to show him wrong.
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p>Second, isn’t his objection more to the cutting spending than to the raising taxes?
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But if one’s not working we need the other. At least that seems to be the lesson of Hoover vs. FDR.
We are talking about increasing spending in ways that would put more (or some) money in the pockets of people who are not well off. These people are very likely to spend the money.
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p>Leaving tax cuts in place disproportionately puts more money in the hands of people who are already well off. These people are less likely to spend their windfall; instead, they invest or hoard it.
Is that the government is already in an awful lot of debt, certainly compared to governments In Keynes’ day.
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p>Keynes thought that government should spend and incur debt during recession, and then pay the debt down with surplus during up cycles. Our government didn’t so the latter.
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p>It really matters not that this fact is the result of Reagan, Tip O’Neill, or Republicans or Democrats in general. It is the fact on the ground that cannot be ignored.
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p>The government cannot issue debt ad infinitum. The limit point won’t be known until it has been surpassed.
That’s the scary part, IMHO. Reining in debt long-term isn’t going to be easy. It will require a fully rational approach to health-care, for example.
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p>Our current political culture punishes rationality.
Krugman wants us to spend as many trillions as needed to get the economy going with totally dismissive concerns about the national debt. Krugman believes the Social Security Fund is in wonderful shape and totally dismisses the concerns of the “hoards” of politicans, economists and regular folk as being “Zombies”.
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p>So… what if he is wrong and we increase our national debt to $20 TRILLION? What happens if in addition to this horrendous debt and the giant tax increases needed to pay for it, we also find Social Security is insolvent and yes we are forced to raise the payroll tax rates? These are not 2 issues which we can simply announce “Oh well, I guess Paul Krugman made some incorrect assumptions!”
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p>WHat is the right rate? 7%, 8% 12% (please remember the increasing Federal Income tax rates and the increasing state tax rates…)?
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Again, you clearly have not read Krugman’s very careful weighing of debt. There’s nothing “totally dismissive” going on.
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p>Krugman is not alone, by the way. So there’s no reason to personalize the critique he’s making. He simply writes better than most economists. One might also look at Brad DeLong and Mark Thoma.
wrong, we’re the only ones listening to him. I’m sure the White House reads him, but they don’t follow him to closely at least rhetorically.
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p>You seem to be imputing powers to Krugman he doesn’t have.
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p>And if you bothered to read Krugman regularly, you’d see what everyone has been telling you here: dealing with the deficit is a matter of timing. In your either/or thinking, you guys tend to miss that concept time and again.
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p>If Krugman is right, we’re looking at a lost decade like Japan has been experiencing. That means little or no growth. That mean flat-lined tax revenue. We can’t cut our way out of the deficit. If we followed Keynesian economic policies, following Krugman’s argument, the economy would grow, tax revenue would grow and then we would work on paying off the deficit, which would be much smaller without two wars and a the Bush Tax Cuts.
according to you we will be having a lost decade (like Japan). When will we know if you’re right/wrong? Certainly the Dems will be looking for economic improvements over the next 5 months and by 2012.
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p>Will we know in 1 year, 2 years, 3 years… when will we know if Krugman’s way was right or whether he was wrong?
The problem with the credit bubble is that it left us with a severe debt hangover, as did the Japanese in 1992. They attempted to stimulate their way out of it with all kinds of government spending. For their efforts they have (i) a lot of useless infrastructure; (ii) a lot of government debt; and (iii) no end to the recession.
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p>I was engaged in an discussion of this here the other day, much of which I think happened after the post fell off the front page.
I don’t play one of tv. In other words, how should I know?
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p>I do know that economists actually have figures and equations that they use as indicators of improvement in the economy. That’s what they would use to judge the effects of Obama’s economic policy and whether we’re in a lost decade.
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p>If you want a precise date, let’s say July 11, 2013.
both economists with excellent track records. Obama prefers Summers and Geithner, who’ve both instigated one disaster after another.
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p>Blows my mind.
The consequences of bad decisions are – well, bad. Bad governmental decisions were instrumental in creating our current high unemployment and decimating our 401Ks.
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p>Many of us on BMG are big fans of Krugman because he has correctly warned against some of the major problems we are now facing. Those who dismiss his warnings without substantive arguments do not have so much credibility.
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p>Since it appears that Krugman is not being taken seriously by Congress and Obama, those who advocate government austerity should explain with equal rigor exactly how and in what ways austerity is likely to improve peoples’ lives.
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p>The Wall Street Journal recently published an op-ed expressing concern that a failure to extend unemployment benefits could actually increase the budget deficit in the long run.
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p>Krugman builds on that concept in a recent blog post, positing that government austerity at this point in time would contract the economy. That would decrease government revenues well into the future and increase the deficit in the long run.
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p>Lest you think Krugman is always against cutting spending, note this excerpt from the blog post mentioned above:
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p>I’ll counter your question “What if this is wrong?” with “Why do you think it is wrong, taking into account the fact that we are currently in a liquidity trap?” What’s your recommendation and how do you answer Krugman’s arguments?