Subscribe to BrookesNews’ Bulletin
Krugman's bigotry vs the Bush tax cuts
Gerard Jackson
Because I am in the process of packing and moving I have had no time to write articles for this week’s edition. This is why I am posting previously published articles. However, these articles have been chosen because their content is still highly relevant. The following article was published on 2 May 2003.
When in December 2000 Dick Cheney pointed to an emerging recession, a view that the economic indicators supported, Krugman, one of America's better known Keynesians, went into instant denial and immediately attacked Cheney. But Krugman had two strikes against him: (1) he is an unrepentant Keynesian and (2) he is a bigoted Democrat. I think he was wearing his Democrats' hat when he attacked Cheney. You know, the long pointy one with a big D painted on it.
Regardless of what Bush critics claim, tax cuts always stimulate economies, but not in the Keynesian sense. However, let us stick to the recession. One does not need to be a MIT professor to know that in a recession most companies find their profits evaporating. What is not understood is that a recession is the recovery period. This is the period during which the economy rids itself of the excesses created by a monetary boom usually brought on by the type of Keynesian policies that Krugman teaches.
Let us not forget that this is the same man who told Japan it could cure its economic problems by letting the money supply rip. That cheap money policies created Japan's situation in the first place has never occurred to Krugman, anymore than the possibility that why Japan has never fully recovered is due to its refusal to allow its recession to eliminate the country's malinvestments. But then Krugman is a Keynesian first — or is it Democrat first and Keynesian second?
To me, Krugman revealed his political bile when he argued that tax cuts are a "specious recession fighting rationale." Perhaps he meant that only Republican tax cuts are "specious". If this were true, why not a 100 per cent tax rate on business? After all, if tax cuts cannot stimulate business in times of recession why should massive tax increases depress them in boom times?
I think a few figure will illuminate the issue. In 1929 pre-tax corporate profits were $9,770 million and post–profits were $8,337 million, for 1930 they were $3,225 and $2,348 respectively; for 1931 they were —$846 million and —$1,365; 1932 they were —$3,100 and —$3,489. And 1933 was just as tragic; aggregate profits were a meagre $990 million only to be reduced by taxation to —$444 million.
It was only from 1934 that post-tax profits turned positive. Even then the profits picture was depressing with corporate taxes on average being twice the 1929 level. Is Krugman going to seriously argue that these tax rates stimulated production during the 1930s? (The situation was aggravated by government price fixing but are our only concern here is the effect of increased taxes on production). I do not doubt that the Hoover/Roosevelt tax increases contributed significantly to the depth and length of the Great Depression. As the St. Louis Chamber of Commerce put it in 1932:
When governments seek to maintain the high levels of taxation they reached in good times in these days of seriously impaired income the impending specter of higher taxes constitutes one of the chief deterrents of business recovery.
Every sensible economist should know, except perhaps the ones Krugman hangs out with at the DNC, taxes are a burden. But as the classical economists would say, taxes are a necessary cost of doing business by maintaining law and order. However, we are now a long way from the limited government that classical economists praised. This is the era of Big Government the price of which is high taxation.
All of which brings us back to tax cuts as a means of averting recession. They are not and never will be. But they are a means of alleviating the pain of recession, accelerating recovery and encouraging savings. Cutting taxes releases resources to the private sector by raising the savings consumption ratio. It is also vital that unsound investments are quickly liquidated which in turn will release capital for profitably sustainable lines of production.
Fiscal policy should never be designed to encourage consumption at the expense of investment, especially during a recession. The prominent economist Joseph Stagg Lawrence pointed out in the 1930s, as did others, that it is thrift and not consumption that creates prosperity.
It is time the Republicans accepted the grim fact that they are now at war on all fronts and Professor Krugman is another bitter example of this reality.
Gerard Jackson is Brookes' Economics Editor
BrookesNews.Com
Monday 30 June 2008