Wednesday, July 14, 2010

Krugman Causality

According to Paul Krugman's latest blog post, the key to prosperity is for the government to raise taxes. To prove his point, he has two graphs that cover the Clinton and Bush administrations, and on a cursory level, they seem to make his point:

First, the jobs:


Now, the tax revenues:


So, there it is, end of argument. But, not exactly. Since the Bush tax cuts expire next year, which means that ALL readers of this blog are going to see their tax rates increase (not just the "rich"), then we should expect an explosion of new jobs and revenue. Will Krugman make that claim?

No, he won't. Krugman will argue that the economic conditions are different now than they were during the 1990s, when "Depression Economics" rules had not kicked in. However, it seems to me that he wants it both ways. He is claiming the following syllogism:
  • Clinton raised taxes during the 1990s, and Bush cut tax rates in 2001;
  • Job growth was greater during the 1990s than during Bush's presidency, and tax revenues increased at a faster rate during the 1990s than they did a decade later;
  • Therefore, raising taxes is better than cutting taxes.
Please don't claim that Krugman would not say that now. After all, it was Krugman who put those graphs up for everyone to see, and he is the one touting them as "proof" of his claim that cutting taxes is bad, bad, bad.

Furthermore, Krugman totally ignores the economic background (which he likes to bring in when he is discussing his view of "Depression Economics"). In 2000, the Clinton stock bubble burst, and shortly thereafter, there were the 9/11 attacks. As soon as he took office, George W. Bush had to deal with a recession (that Krugman's political allies were claiming was the result of the proposed tax rate cuts), which definitely would have changed the economic landscape.

There is another point. Whenever Krugman brings up tax revenues during the Bush administration, he fails to note that there was a recession when Bush took office, a recession that would have cut into what taxes would have been collected. What he does is to claim that the ENTIRE fall in the collection rates of revenues in those early Bush years was due to cuts in tax rates, and that job growth during that time was not as good as it was during the Clinton years because of the tax rate cuts. That is a most curious omission, and I wonder why he does not do the same thing for the current Obama administration.

So, Krugman uses the current economic situation to justify the government's imposing a mountain of debt on taxpayers, but then he ignores the economic background when discussing the Clinton and Bush years. This is classic "Heads I Win, Tails you Lose" argumentation. Not that Krugman nor his groupies care.

15 comments:

Anonymous said...

Let me attempt to deduce this; please correct what I get wrong. Investment and accumulation of capital are required to hire and pay employees. Taxation is the taking of money. Taxation leaves businesses with less money with which to invest. Therefore, higher taxes cause businesses to hire more people.

Anonymous said...

Let me attempt to deduce this; please correct what I get wrong. Investment and accumulation of capital are required to hire and pay employees. Taxation is the taking of money. Taxation leaves businesses with less money with which to invest. Therefore, higher taxes cause businesses to hire more people.

Anonymous said...

I offer a mundane explanation:

Clinton increased taxes at a time when we were heading toward a boom ANYWAY. Bush cut taxes during a slump that would have come ANYWAY.

Joshua D said...

I have a better explanation. Krugman is a sociopath. He simply lies. His goal is only to get what he can, while he can. Most politicians and 'journalists' do this every minute of every day.

jason h said...

With the modern push to move economics away from common sense, the study of human action and towards more 'scientific' mathematics and modeling, funny how Krugman make the mistake of equating correlation with causation, as any scientist knows correlation doesn't prove causation.

Anonymous said...

Of course, nowhere in this post did Krugman ever say "the key to prosperity is for the government to raise taxes." If he did, please point it out. I must have lost my ability to read English.

Unfortunately, all this post proves is Prof. Anderson's is no less a hack than Krugman. For a more objective, reality based interpretation of the Krugman post, see Andrew Samwick.

http://capitalgainsandgames.com/blog/andrew-samwick/1855/sense-and-nonsense-about-extending-unemployment-insurance?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CapitalGainsAndGames+%28Capital+Gains+and+Games+-+Wall+Street%2C+Washington%2C+and+Everything+in+Between%29&utm_content=Google+Reader

Anonymous said...

I'm also suspicious of the starting points of the graphs. Why not start in, say 1972, for instance?

Here's my crude graph based on BLS numbers, of raw number of people unemployed and actively seeking work


Ah, here we go; this one includes the number of people employed: components of USA civilian, non-institutionalized population 16+

And this is the base of the whole graph collection.

My thought is that there's plenty of room for distorting cause-effect conclusions due to lags.

William L. Anderson said...

I'm just using the graphs that Krugman provides. If you are suspicious of them, then contact Krugman, but don't insinuate that I am trying to put something over on you.

Greg said...

Prof. Anderson,

Would you kindly refute AP Lerner once and for all. He's all over your blog calling you out, challenging you on the accuracy of your blog and your general understanding of economics in general, and you're AWOL. You can find him all over your Inflation/Deflation post, though I'm sure he'll be around.

He has made some claims and challenges that do warrant a defense, and as a layman to AS, I'm not qualified to give it.

William L. Anderson said...

Greg,

I doubt it would do any good to answer him. Also, I like for people in the comments section to have their say. If he calls me out, that is fine.

Having read Krugman for many years and having met him and heard him speak, I am quite familiar with his line of thinking. He has become even more defensive, more partisan, and nastier in recent years, as though the Nobel, instead of having a positive effect upon him, made him angrier.

I don't know. I have met a number of Nobel winners in economics and they seem to act differently than does Krugman. So, if one of his True Believes wants to call me out, let him! He is just acting like his Master.

burkll13 said...

i dont think it would do any good either. seems to me the "Data Wonk" is so convinced of the infallibility of his equations, and accounting standards, that to have them questioned is insanity. I have yet to see AP Lerner show how 'his way' applies to the real world. To an individual (me) who works in a manufacturing environment, its pretty easy to see how the structure of our production is changing and why it needs to change. but, because the structure of production doesnt fit into a neat little equation, it must be irrelevant.

Greg said...

An honest debate of ideas is hardly a pointless venture. I can think of more useless things to do with one's time.

I think Prof. Anderson does a disservice to himself and to readers of his blog. For one, a debate from Krugman is something the Prof. would surely like, but Krugman won't come here or even answer people who comment on his blog. Why take the same approach to someone on your blog that wants to challenge you on what you write?

Second, by leaving it to readers (laymen mostly) to refute AL Lerner for you, it tasks the student to argue ideas in which he clearly does not yet possess expertise in, so it's usually not a very productive exercise.

I think most of what Al Lerner says is pure hogwash -- quantitative easing being deflationary, deficits not mattering, SS not being similar to a Ponzi scheme (he really has a bone to pick you on that one), etc., but I don't pretend to have all the concepts of AS Econ. theory down pat, plus I am truly was baffled that monetary growth has been declining recently according to shadowstats.com, which AP Lerner brought to my attention. I have questions about liquidity traps, when deflation (just talking price deflation) could switch into an inflationary cycle. And I would appreciate it coming from the author of the blog rather than the laymen readers, which is another reason why a debate would not be pointless.

William L. Anderson said...

Actually, Greg, I think you are on the right track. Economists like to think that they are special experts because they solved lots of calculus equations when they were in grad school and the math "proves" that economics is a most difficult discipline.

Actually, ALL of economics is based upon the simple but profound concept of opportunity cost. Understand that, and everything else falls into place. Furthermore, economic laws (i.e. scarcity, demand, supply, opportunity cost) are immutable and do not change over time.

Krugman and others insist that there are "special situations" that require changes in the rules. Thus, during a "liquidity trap," government should borrow, as though all that spending suddenly will bring about economic "traction" that will enable to economy to move by itself.

I don't have a lot of interest in debating AP because he really does not understand opportunity cost, and he believes that different times create different laws of economics. Debating someone like that really does not good, as neither of us would be speaking the same language.

Anonymous said...

>Debating someone like that really does not good, as neither of us would be speaking the same language.

Then what's this blog for? How does this blog do any good if Paul Krugman speaks a different economic language than you?

burkll13 said...

"Then what's this blog for? How does this blog do any good if Paul Krugman speaks a different economic language than you? "

Its more like, 'how does Paul Krugman do any good if he doesnt acknowledge opportunity cost?'