Krugman is Deep in the Heart of Taxes

Paul Krugman loves those "Aha!" moments in which he believes (or at least wants US to believe) that an economy can thrive only if government tax heavily and have lots of union workers on the payroll. In his Friday column, he claims to have discovered one of those moments in his supposed expose of Texas.

Yes, Texas is having a budget shortfall in state government which is supposed to be shocking to anyone who believes that governments during a recession should cut back upon the burdens they place on others. As usual, Krugman depends not only upon a left-wing "think tank" to supply ideology masquerading as analysis, but also upon the kinds of stereotypes that really are not acceptable in academic thinking.

Krugman writes:

These are tough times for state governments. Huge deficits loom almost everywhere, from California to New York, from New Jersey to Texas.

Wait — Texas? Wasn’t Texas supposed to be thriving even as the rest of America suffered? Didn’t its governor declare, during his re-election campaign, that “we have billions in surplus”? Yes, it was, and yes, he did. But reality has now intruded, in the form of a deficit expected to run as high as $25 billion over the next two years.

Gee, I'm shocked. The country is mired in a depression and tax revenues are down everywhere. If anyone would think (or declare publicly) that Texas could be exempt from this problem because of its policies, I would also want to sell them a nice railroad tunnel that runs between New Jersey and Manhattan.

He continues:

And that reality has implications for the nation as a whole. For Texas is where the modern conservative theory of budgeting — the belief that you should never raise taxes under any circumstances, that you can always balance the budget by cutting wasteful spending — has been implemented most completely. If the theory can’t make it there, it can’t make it anywhere.

Once again, Krugman gives us a caricature of analysis versus serious thinking. In theory, obviously, if one cuts any budget enough, be it a state, national, municipal, or home budget, one can balance it. The issue, however, is the opportunity cost of raising taxes, and Krugman has been saying throughout the economic crisis that there is no opportunity cost when it comes to government spending. (In fact, while he has not openly said he believes in the Keynesian balanced budget multiplier -- in which higher taxes lead to more spending, which revitalizes the economy -- he writes as though he believes in it.)

As I see it, there is no "theory" here, unless one brings in the balanced budget multiplier "theory." Instead, we are dealing with an accounting problem: How does a state -- which is required by law to have a balanced budget each year -- deal with the problem in which its projected spending outstrips its projected revenues?

In fact, it seems to me that Krugman discredits his earlier statement in the next paragraph:

How bad is the Texas deficit? Comparing budget crises among states is tricky, for technical reasons. Still, data from the Center on Budget and Policy Priorities suggest that the Texas budget gap is worse than New York’s, about as bad as California’s, but not quite up to New Jersey levels.

First, the CBPP is a left-wing organization that is not exactly going to be objective in this situation. My guess is that if someone who were publicly disagreeing with Krugman were to use something from the Heritage Foundation, Krugman immediately would claim that the study is "tainted."

Second, Krugman includes three states that have followed pretty much the Krugman Policy Standards of spending and raising taxes. If Krugman's "theory" were to be applied here -- that militant public sector unions are "good for the economy" and that raising taxes will help stymie a recession -- then California, New York, and New Jersey should be wallowing in surpluses. Yet, they face real crises, and according to Krugman's "theory," that should not be the case.

In other words, Krugman really is saying nothing that is significant. Furthermore, he repeats the canard about education spending, as though it were the key to academic and economic success. If that were true, then Washington, D.C., public schools, which spend more per pupil than any states, would be the best in the country instead of one of the worst systems.

There is a much larger issue here. A welfare state is not an economic plus; it is a financial burden. One can argue as to its necessity, well as debate whether or not it makes things better in the long term, but Krugman is not interested in doing that.

I am not defending Texas or Gov. Rick Perry, or anything about its state government. Being that Texas seems to have this problem about prosecutors being out of control (something with which I deal in my other blog), I have nothing good to say about the issue of governance in that state.

However, if Krugman is wanting to argue that the "theory" of cutting spending is discredited, then one would have to claim that his "alternative hypothesis" (that raising taxes and increasing spending is the way to beat a recession) is true. Yet, we see the "alternative theory" at work in California and New York, and both of those places are bleeding jobs and revenue.

Krugman, not surprisingly, is silent on that point. But I have a better idea: Let us see how the Illinois legislature's current plan works. The Democrats, which control politics in that state (which means they have all of the answers, if one follows Krugman's partisan missives), have proposed a 75 percent increase in the state's income tax rates and a huge increase in the cigarette tax.

If Krugman is correct, then Illinois should be able to solve its budget problems and also create new avenues of prosperity. Perhaps we should revisit the state in a year to see if Krugman's "theory" is correct.