Paul Krugman lobbed his critics a slow pitch over the plate with his recent column titled, “Deficits Matter Again.” The NYT’s famous Keynesian economist has just spent 8 years arguing for bigger deficits under Obama, yet now as Trump is poised to take office, all of a sudden Krugman the fiscal dove has turned into a budget hawk.
Krugman knows full well that cynics will claim hypocrisy on his part, but he claims the economic situation is now different. But unfortunately for Krugman, we can review his archives from just 2016 and see what his arguments were, leading up to the election. All along, Krugman was arguing for more deficits, and not just as an acceptable byproduct of “public investments” but also because the economy was still weak. Nope, this is a clearcut case of a Krugman Contradiction: Krugman’s statements about the economy and what its condition implied for budget deficits switched in a remarkably short time frame. The only way to avoid the charge of partisanship is for Krugman to admit that the prospects for medium-term US economic growth suddenly jumped way up because Trump won the election. Does Krugman want to say that?
To systematically document Krugman’s views throughout 2016, Tom Woods and I obtained the services of Jeremy Wagner (who has also worked on an interesting website that lets you look up any product you want, and pay for it in bitcoin). We asked Jeremy to give us a list of all the Krugman op eds (not blog posts) from 2016, which contained the word “deficit” and or “borrow.” There were 28 such columns, the stance of which I summarize below. (However, I have omitted columns where Krugman was referring to trade deficits or to banks borrowing.)
==> January 8, 2016. “When China Stumbles”
This column is about the vulnerability of China to an economic crash, as it transitions to lower growth rates. Krugman is worried that a sudden China shock could spill over into the US. He’s concerned that the Fed still doesn’t have much room to cut rates, and of course the Republicans are still hell-bent on fiscal austerity. Krugman asks rhetorically, “And while fiscal policy–essentially, spending more to offset the effects of China spending less–would surely work, how many people believe that Republicans would be receptive to a new Obama stimulus plan, or that German politicians would look kindly on a proposal for bigger deficits in Europe?”
In summary, this column is not calling for bigger deficits yet, it’s just saying that Krugman is worried we won’t be able to get them if China crashes. (On the other hand, the column certainly doesn’t say we need smaller deficits now, either.)
==> February 12, 2016. “On Economic Stupidity”
It is fitting that a column with such a pugnacious title contains this gem, for our current project: “It looks, in other words, as if we’re still living in the economic era we entered in 2008–an era of persistent weakness, in which deflation and depression, not inflation and deficits, are the key challenges.”
The part I’ve put in bold is unambiguous. As of February 12, 2016, Krugman was saying the economic situation was the same–vis-a-vis policy–as it was in 2008. So if things now in January 2017 are different, that means the economy had to change in 11 months, tops. (Unless of course, we find similar quotes, later in 2016… Keep reading!)
==> February 22, 2016. “Cranks on Top”
Krugman notes that the Republican field has been winnowed down to Donald Trump vs. Marco Rubio. Although Trump is crazy, the point of the column is to warn the reader that Rubio is also a crank. Rubio continues to peddle discredited supply-side orthodoxy. Krugman does warn against huge tax cuts for the rich, but he doesn’t actually say that the case for deficits has changed. All we get is this: “Then there’s Mr. Rubio’s call for a balanced-budget amendment, which, aside from making no sense at the same time he is calling for budget-busting tax cuts, would have been catastrophic during the Great Recession.”
==> March 7, 2016. “When Fallacies Collide”
This column discusses trade deficits, not the budget deficit. However, I’m retaining it because it has these observations: “What can we do to fight imported economic weakness? That’s a big subject, but one thing is for sure: given the pressures from abroad, and the worrying strength of the dollar, the Federal Reserve really, really needs to hold off on raising interest rates.” So Krugman hardly seems to think the economy is in great shape, as as March 2016.
==> March 21, 2016. “On Invincible Ignorance”
Krugman mocks Paul Ryan’s concern over budget deficits while he clings to supply-side desires to give trillions in tax cuts to the wealthy. While noting the (alleged) hypocrisy, Krugman doesn’t say anything about the Keynesian case for deficits having changed.
==> April 22, 2016. “In Hamilton’s Debt”
THIS IS A BIG ONE! The article has the news hook of the attempt to remove Hamilton from the $10 bill. I quote extensively from the column because it is entirely relevant to our purpose in this blog post:
[Hamilton’s argument for the federal government to assume states’ debts] anticipates…one of the hottest ideas in modern macroeconomics: the notion that we are suffering from a global “safe asset shortage.” The private sector, according to this argument, can’t function well without a sufficient pool of assets whose value isn’t in question–and for a variety of reasons, there just aren’t enough assets these days.
As a result, investors have been bidding up the prices of government debt, leading to incredibly low interest rates. But it would be better for almost everyone, the story goes, if governments were to issue more debt, investing the proceeds in much-needed infrastructure even while providing the private sector with the collateral it needs to function. And it’s a very persuasive story to just about everyone who has looked hard at the evidence.
Unfortunately, policy makers won’t do the right thing, largely because they keep listening to fiscal scolds–people who insist that public debt is a terrible thing even when borrowing costs almost nothing…
Unfortunately, Hamilton isn’t around to help counter foolish debt phobia.
I think it’s safe to say that we can move our marker up to April 2016. Now Krugman only has nine months in which to engineer a change in the economy. Also note: In the above excerpt, Krugman is arguing for the benefits of more government debt PER SE. Yes, given that you are going to issue more debt, Krugman wants it to be for infrastructure spending, rather than tax cuts for the rich. But if the problem is a “safe asset shortage,” then even running up debt via tax cuts can ameliorate the problem. So clearly, as of April 22, 2016, Krugman couldn’t possibly be arguing that “things have changed” and now deficits mattered again.
==> May 6, 2016. “Truth and Trumpism”
This is so far the best column for Krugman, in the context of our task in this blog post. To be sure, he doesn’t ever come out and say, “The case for budget deficits is now different from what it was in 2010,” but he does say this: “Mr. Trump has proposed huge tax cuts with no plausible offsetting spending cuts, yet has also promised to pay down U.S. debt; meanwhile, Mrs. Clinton has proposed modest spending increases paid for by specific tax hikes.” To reiterate, I don’t think this rescues Krugman by any stretch, but I do want to report that this is the best I’ve seen so far, as I work through his 2016 columns.
==> May 13, 2016. “Trump and Taxes”
Krugman blasts Trump’s “tax plan that would, in fact, lavish huge tax cuts on the rich. And it would also, according to nonpartisan analyses, cause deficits to explode, adding around $10 trillion to the national debt over a decade.” Krugman doesn’t say why this is bad (i.e. he doesn’t say the case for deficits has changed), but I do want to establish that Krugman has consistently objected to long-term deficits from tax cuts on the wealthy.
==> May 23, 2016. “Remembrance of Booms Past”
ANOTHER BIG ONE. Krugman assumes Hillary Clinton will win, and looks to lessons from Bill Clinton’s (allegedly) great economy. Here’s the part for us:
The other big lesson from the Clinton I boom is that while there are many ways policy makers can and should try to raise wages, the single most important thing policy can do to help workers is aim for full employment.
Unfortunately, we can’t count on another spontaneous surge in technology-drive private investment to drive job creation. But some kinds of private investment might grow rapidly if we take long-overdue steps to address climate change.
And in any case, not all productive investment is private. We desperately need to repair and upgrade our infrastructure; meanwhile, the federal government can borrow money incredibly cheaply. So there’s an overwhelming case for a surge in public investment–and one side benefit of such a surge would be full employment, which would help produce another era of rising wages.
In the above, Krugman is clearly indicating that the US economy is not at full employment and could benefit from more fiscal stimulus (in the form of infrastructure spending). He’s not merely making a case that spending money on bridges and roads is good for their direct ends, but that it will help workers. So I am moving the market up to May 23, 2016. Krugman now has only eight months in which to demonstrate that the economy has suddenly changed, vis-a-vis the need for budget deficits.
==> June 6, 2016. “A Pause That Distresses”
ANOTHER KEY COLUMN. Krugman opens up by lamenting a bad employment report, and then says: “Still, all the evidence points to slowing growth. It’s not a recession, at least not yet, but it is definitely a pause in the economy’s progress.” Later in the column he says that if Hillary Clinton wins, she’ll know what to do if the economy does in fact enter recession: “For the simplest, most effective answer to a downturn would be fiscal stimulus–preferably government spending on much-needed infrastructure, but maybe also temporary tax cuts for lower- and middle-income households, who would spend the money.“
So as of June 2016, Krugman was worried the economy was slowing, and he was glad Hillary Clinton would be able to cut taxes (not on the wealthy, to be sure) as a way of helping, should that be needed. Clearly I am justified in moving my marker up to June 2016, so now Krugman has only seven months to document that the economy has suddenly flipped.
==> July 8, 2016. “All the Nominees Enablers.”
This column complains about “deficit scolds” who praise Paul Ryan for worrying about the debt, even though his plans would add more debt (through tax cuts for the wealthy). But Krugman doesn’t say anything about the case for deficits having changed.
==> July 11, 2016. “Cheap Money Talks”
ANOTHER MOVEMENT. Krugman looks at the bond market and concludes, “[Investors have] thrown in the towel, in effect conceding that persistent weakness is the new normal. This means low short-term interest rates for a very long time, and low long-term rates right away.” In light of this reality, Krugman calls for deficit-financed infrastructure spending, and says that “deficit scolds would issue dire warnings about the evils of public debt. But they have been wrong about everything for at least the past eight years, and it’s time to stop taking them seriously.”
Clearly I am moving the marker up to July. Now Krugman has only six months to turn things around.
==> August 1, 2016. “Worthy of Our Contempt”
Krugman bashes Trump for (among things) suggesting he’d default on the debt, but no discussion of the state of the economy.
==> August 5, 2016. “No Right Turn”
Krugman dismisses the suggestion that Hillary Clinton move to the right, to court Republicans. It would have been a great time for him to mention that the case for “big government” deficit spending had changed, but he makes no such statement.
==> August 8, 2016. “Time to Borrow”
ANOTHER MOVEMENT. This one had people chortling on Twitter–contrast this headline “Time to Borrow” with Krugman’s current column, “Deficits Matter Again.” The punchline:
“So what should [Hillary Clinton] do to boost America’s economy, which is doing better than most of the world but is still falling far short of where it should be?
There are, of course, many ways our economic policy could be improved. But the most important thing we need is sharply increased public investment…
How should we pay for this investment? We shouldn’t–not now, or any time soon. Right now there is an overwhelming case for more government borrowing.”
Later Krugman says, “Despite a low headline unemployment rate, the U.S. economy is still probably short of full employment, and an investment agenda would also offer valuable insurance against possible future downturns.”
I am clearly moving the market up to August. Krugman now has five months in which to document that the US economy has changed. Note also that here Krugman was talking about what Hillary Clinton should do when elected; so he was looking ahead, and predicting that the US economy could still use a fiscal boost. Note in particular that Krugman is saying the labor market was still weak.
==> August 15, 2016. “Wisdom, Courage, and the Economy.”
Krugman worries about the low labor force participation rate, but admits (to his credit) that he doesn’t know how to solve it. Still, he thinks the safe bet is to engage in large-scale borrowing and infrastructure spending.
==> October 7, 2016. “What About the Planet?”
MORE MOVEMENT. Krugman implicitly argues that literally the fate of the world hangs on the election (because of climate change). He complains about the Committee for a Responsible Federal Budget worrying about deficits in the debate. Krugman grudgingly concedes that maybe this is something that is an issue for decades in the future. I am moving the marker up. This would have been the time to say, “Oh actually, they’re right–deficits DO matter now.” But he didn’t, so they must not have mattered, as of October 7, 2016. Krugman now has three months to explain that the case for deficits has changed.
==> October 31, 2016. “Working the Refs”
Krugman complains again that “deficit scolds” like Paul Ryan. No mention of the case for deficits having changed since his column earlier that month.
==> November 14, 2016. “Trump Slump Coming”
THE MOST SMOKING GUN EVIDENCE YET.
“Eight years ago, as the world was plunging into financial crisis, I argued that we’d entered an economic realm in which “virtue is vice, caution is risky, and prudence is folly.” Specifically, we’d stumbled into a situation in which bigger deficits and higher inflation were good things, not bad. And we’re still in that situation–not as strongly as we were, but we could still very much use more deficit spending.
Now, however, power has fallen into the hands of a man who definitely doesn’t suffer from an excess of either virtue or prudence. Donald Trump isn’t proposing huge, budget-busting tax cuts for the wealthy and corporations because he understands macroeconomics. But those tax cuts would add $4.5 trillion to U.S. debt over the next decade–about five times as much as the stimulus of the early Obama years.
True, handing out windfalls to rich people and companies that will probably sit on a lot of the money is a bad, low-bang-for-the-buck way to boost the economy, and I have my doubts about whether the promised surge in infrastructure spending will really happen. But an accidental, badly designed stimulus would still, in the short run, be better than no stimulus at all.”
That really seals the deal. As of November 14, Krugman admitted his 2008 “depression economics” analysis still held, and that “we could still very much use more deficit spending.” Fans of Krugman can endorse this column and say, “See you guys? He’s not against Trump per se. Right after the election, Krugman admitted Trump’s deficits would be good, just not as good as Keynesian-designed deficits.” Cynics on the other hand might argue, “Uh, Krugman knows he can’t just turn on a dime, given his shtick up till this point. So he has to do this pivot, and watch as he gradually morphs in just two months more into saying there is no longer any case for deficits.”
I’m actually not sure myself what to make of this. In any event, clearly we are moving the marker up to November 14, 2016.
==> November 21, 2016. “Build He Won’t”
Krugman expresses skepticism about Trump’s infrastructure plan. He doesn’t say anything about the case for deficits changing.
* * *
And there you have it, folks. Throughout 2016, Krugman never wrote a single column arguing that there was a change in his prescription for deficits to help the economy. In contrast, there were several columns throughout the year, making the case for deficits and wagging fingers at those idiotic deficit scolds. Furthermore, on November 14, 2016, Krugman explicitly said that his analysis of deficits from the Great Recession period still held, though not as strongly.
So when Krugman now, on January 9, 2107, tells us “Deficits Matter Now”–and mocks his critics for accusing him of inconsistency–he must mean that the economy fundamentally changed in eight weeks.
Now, I caution Krugman supporters not to dismiss my post by saying, “Oh come on, Krugman wanted infrastructure spending to fuel those deficits, not tax cuts for the rich.” First of all, remember the point about “safe assets.” That has to do with more government debt per se.
Second, and more important, the underlying health of the economy was the justification for stimulus spending. As Krugman makes clear throughout 2016, he didn’t think the economy was fully recovered, and he wanted a President Hillary Clinton to borrow and spend, partly to help the labor market.
To his credit, Krugman admitted on November 14 what many of us were saying: A true Keynesian should welcome Trump’s “budget busting” policies at least as a short-term boost, better than someone who delivered a balanced budget.
So to reiterate, when Krugman now (and presumably henceforth in the Trump Administration) argues that deficits matter again, keep in mind that he thinks the case changed over the course of eight weeks.