Tuesday, December 07, 2010

Doubling up on Doublethink

I barely finished pointing out the doublethink exhibited by New York Times columnist Paul Krugman before he compounded it in a new column.

Krugman spent the last two years saying that we need to ignore the deficit and spend money like the country did in World War II. He said this a lot. Admittedly he was talking about the government doing the spending instead of allowing individuals to do their own spending but even Krugman admits that there is some stimulus value to tax cuts. More on that later. In the meantime, here is Krugman's new line:

We're talking about almost $4 trillion in lost revenue just over the next decade; over the next 75 years, the revenue loss would be more than three times the entire projected Social Security shortfall. So giving in to Republican demands would mean risking a major fiscal crisis — a crisis that could be resolved only by making savage cuts in federal spending.

And we're not talking about government programs nobody cares about: the only way to cut spending enough to pay for the Bush tax cuts in the long run would be to dismantle large parts of Social Security and Medicare.

In the past Krugman has suggested spending much more that $4 trillion. As recently as September 5 he tossed the figure $30 trillion around when talking about WWII spending that he wants us to emulate. So, we can afford to spend $30 trillion but $4 trillion (actually $3.7 trillion rounded up) will ruin the country. I guess that you have to win a Nobel prize to understand that sort of logic, It somehow escapes me.

The other bit of doublethink come here:

A few months ago, the Congressional Budget Office released a report on the impact of various tax options. A two-year extension of the Bush tax cuts, it estimated, would lower the unemployment rate next year by between 0.1 and 0.3 percentage points compared with what it would be if the tax cuts were allowed to expire; the effect would be about twice as large in 2012. Those are significant numbers, but not huge — certainly not enough to justify the apocalyptic rhetoric one often hears about what will happen if the tax cuts are allowed to end on schedule.

So, he admits that the tax cuts will have some stimulus effect although his discounts it as minor. This is the same guy who, only last week, insisted that freezing the pay on federal workers would hurt the economy.

A couple of final points. One is that you cannot directly compare the cost of not raising taxes with the cost of actual spending. Once money is spent it is spent but tax rates change regularly. President Obama's deficit reduction panel recommended a total overhaul of the tax code, flattening the tax rates and eliminating most deductions. Also, raising the tax rate does not increase revenue in a direct proportion. If you double the tax rate the tax revenues will be less than double because of people sheltering their earnings.

Krugman's real complaint is not the cost of extending the tax cuts. There was no question that the cuts would be extended for most people accounting for $3 trillion. Krugman has not condemned this. He suddenly got anti-deficit religion because the Republicans won the tax argument. Krugman does not want President Obama to compromise with the Republicans. He wants continual war with them. This would ruin the Obama administration since Republicans control the House and have enough votes to block the Senate. Krugman would prefer the pyrrhic victory of seeing all of the Bush tax cuts expire than see Obama and the Republicans reach a compromise.

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