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Paul Krugman Gets It Wrong – Again

Posted on July 16 2010 9:00 pm

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Paul Krugman, the liberal pro-spending economist, wrote an op-ed article today for the New York Times entitled “Redo that Voodoo.”  Krugman argues that across-the-board tax cuts do not work and praised President Clinton’s tax increases that he initiated early in his first term. Krugman thinks that Obama is on the right course, but not doing enough spending.

In order to debunk what he considers to be the myth of President Reagan’s economic success through across-the-board tax cuts, Krugman produced the chart below and accompanying explanation in his blog earlier this week, which purport to show that the Carter years as a whole were better than the Reagan years that followed. He conveniently omitted to mention the 21% interest rates and high unemployment that strict monetary policies combined with Reagan’s across-the-board tax cuts reversed.

Here is Krugman’s “proof” of his pro-Carter, anti-Reagan thesis:

A couple of points. First, the Carter years, contrary to legend, were not a period of economic stagnation and falling revenue because high tax rates were strangling the economy…Second, the revenue track under Reagan looks a lot like the track under Bush: a drop in revenues, then a resumption of growth, but no return to the previous trend.

(real federal revenue, in 2005 dollars, from 1970 to 1990)

Krugman plots an imaginary trend-line (in red) from the Carter years, with the implicit assumption that it would have continued its upward course unabated if the Carter economic policies, rather than the Reagan economic policies, had continued during the 1980’s.  There is only one problem – the actual data shows a sharp drop in federal revenue as Carter left office, which  Reagan was able to reverse within two years with his tax cuts.

However, all of this misses the larger picture.  Increasing tax revenues for the federal government to use for ever larger wasteful spending programs is not the ultimate goal of rational economic policy. A vibrant economy strong enough to produce plentiful jobs is the goal. Across-the-board tax cuts leave more money in the pockets of entrepreneurs and businesses to invest,  stimulating  job creation in the private sector and the overall growth of our economy.  Despite Krugman’s denials, this happened three times during the 20th century following the enactment of across-the -board tax cuts –  in the early 1920’s, during the 1960’s, and during the 1980’s.  It happened again after George W. Bush’s tax cuts took effect during his first administration.

Krugman’s retort is that the tax cuts only served to increase the budget deficit, setting the stage for more problems down the road, while the tax increases enacted early in Bill Clinton’s administration wiped out the deficit and set in motion a decade of prosperity.  He is right about increases in the deficit during both the Reagan and George W. Bush years as compared to the surpluses during the Clinton years, but he is wrong about the main reason for Clinton’s success.

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