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Chronicle of the Conspiracy
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Saturday, April 26, 2003
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He posted a first "response" Thursday night on his personal website, where Andrew Sullivan says "he admits to errors in order to avoid fessing up to them in the Times itself." Now, after another shot to the forehead (blog version and National Review Online version), he's got another "response" (it's appended to the first one -- same link).
The twitching is becoming more violent -- it's getting to the point where even I am tempted to avert my eyes from the bloody mess. But it's for the cause of truth, so here goes...
The second "response" is brimming with the usual Krugman intellectual bullying -- "Only someone completely ignorant of what's in the textbooks would expect..." -- "...most forecasts presume..." -- "...few people outside the administration think..." -- "...every macroeconomic model I can think of..." -- and so on. This kind of rhetoric works if the reader buys into the multi-linked mythic chain that economics is an exact science, that Krugman is a great authority in that science, and that Krugman is unbiased. But for the rest of us, let's look at the facts.
- First, Krugman refers to what he calls "a nice
piece
by Dwight Meredith" -- the only web source I'm aware of so far that has risen
to anything like a robust defense of Krugman's column (even Brad DeLong
has been silent: he may be subservient to Krugman, but he's too smart to take
this bullet for his master); this is all the hapless TAPPED blog
could
come up with either. The Meredith piece may indeed be "nice" -- in
the sense that it is favorable to Krugman -- but if O. J. Simpson had
this kind of defense he'd have been zapped long ago.
Meredith's defense is narrowly focused on whether 1.4 million jobs are all the jobs that will be created by Bush's tax-cuts. Even if you assume that no more than 1.4 million jobs will be created, Krugman's claim that $500,000 in tax-cuts is buying only $40,000 worth of jobs is still wildly wrong. For Krugman's claim to be correct, those 1.4 million jobs would have to exist for only a single year and then vanish -- and you'd have to believe that the tax-cuts would have no other favorable effect to which you could assign some of their cost. So to assert that my critique is wrong -- simply because one part of it relied on the assumption that over ten years there would be more than 1.4 million jobs created -- is like defending O. J. on the grounds that, yes, he stabbed Nicole to death in her kitchen, but it's a vicious lie to say that he left the lights on in the kitchen when he left.
- Second, would 1.4 million jobs be all that are created?
Did O. J. leave the lights on in the kitchen? Well, in Krugman's new
"response" he states that "Whatever model the CEA is using, it clearly..." --
clearly! -- "...has the property that fiscal expansion has only a
temporary effect on employment: the number of jobs increases at first, then
falls back to the baseline. There's a reason their model does that: it's a
property of every macroeconomic model I can think of."
But the very Council of Economic Advisors report Krugman is referring to explicitly discusses another macroeconomic model -- it must be one that Krugman can't "think of." As our friend Tom Maguire points out on his blog The Minute Man, the report states:
"...the statistical model used for the projections does not include any supply-side effects under which lower tax rates would be expected to boost labor supply and further improve job creation. Corporate income tax relief would likewise be expected to lead to positive supply-side effects through improved allocation of capital across the economy and thus higher growth and job creation—again, however, this is not reflected in the numerical projections."
So a model that Krugman can't "think of" would include supply-side effects -- and it hardly matters whether or not the CEA happened to have used this model or not (perhaps Krugman should even give them some credit for not using it, and as a result adducing employment figures less flattering to their case than they might have done). The point is that such a model exists -- and, in fact, such a model is at the heart of the pro-growth rationales that supporters of the tax-cut in and out of the Bush administration have offered repeatedly (here -- January 9, January 10, January 31, March 28, April 8, April 11 -- are several of mine).
Would such a supply-side model that Krugman can't "think of" be correct? I believe it could be theoretically; and it would be in this case. All tax-cuts are not created equal -- some have supply-side pro-growth effects and some do not -- but I believe for what I hold as sound reasons that this one is very pro-growth (here's why). Of course I'm willing to admit that this conclusion is nothing but my judgment as an economist. Krugman, on the other hand, acts as though all tax-cuts operate exactly the same way on the economy, and as though it is a matter of established scientific fact that this is so.
You don't have to be an economics professor to have an opinion about this. Use your own judgment -- and don't let Paul Krugman intimidate you. Would a cut in income taxes have different long-term effects depending on whether (a) before the cut the tax rate was 99%; or (b) the tax rate was 10%? At current rates, would it make a difference depending on whether the cut applied to (a) the lowest income workers who are being taxed lightly already, and who can't really work any harder or longer in response to lower rates; or (b) the highest income workers who are being taxed heavily, and are more likely to be in a position to respond to incentives by working harder and longer? Any difference depending on whether the tax-cut applies to (a) wage income, where the incentive response is to work harder; or (b) capital income, where the response is to invest more or take more risk? Different people may have very different specific answers to these hypotheticals -- but to me it's pretty obvious that tax-cuts are subtler and more diverse things than Krugman's monolithic analysis assumes.
- Third, as these "responses" twitch along, it's clear that Krugman is
beginning to lose track of "which lie did I tell?" At the end of the latest
"response" he throws out the morsel that "...Bush now says that the big job
estimate comes from independent economists - when in fact it comes from his
own CEA, and few people outside the administration think it's realistic."
In Krugman's April 22 column, he wouldn't even give Bush credit for having gotten the 1.4 million job estimate from anyplace as authoritative as the CEA. Krugman wrote, "Basically, the job-creation estimate came from the same place where Joseph McCarthy learned that there were 57 card-carrying Communists in the State Department." So it's not a question of what "Bush now says" -- it's a question of what Krugman "now says."
As to Bush, he's been citing other sources all along -- see this page on the White House web site (it is not date-stamped, but I've seen it there for quite a while). It cites four independent estimates -- one with a far higher jobs forecast, one slightly lower, and two further lower (but averaging 1.4 million, as it turns out). Here again, the administration deserves real credit for fairness in advertising, for having the integrity to post the lower estimates. If Krugman had been working for the White House, would he have included any estimate but the higher one? Don't kid yourself.
At the end of the day, what is most striking to me about this whole affair is what it says about the so-called "science" of economics, aside from what it says about Krugman. It shows that highly credentialed (but politically biased) economists can use their reputations as scientists to offer to the public egregious errors-cum-lies. And then they can defend themselves, when caught at it, by twisting the infinitely elastic theories of their "science" into whatever shape is required to justify the lie after the fact. In terms of its long-range impact on human well-being, the "science" of economics may well be the most dangerous fraud ever perpetrated.
Posted by Donald L. Luskin at 3:04 PM | link
Friday, April 25, 2003
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From among the landslide of emails on my post "Krugman Responds," Jay Dillon writes the this blog and our National Review Online Krugman Truth Squad columns must be beginning to work -- they've forced Krugman into an ever-more tangled web of lies. More evidence: an anonymous reader reports that he sent my "Only Off by a Factor of 29" (4/22/2003) to a newspaper that normally syndicates Krugman's column -- and it appears they opted not to run Krugman's Tuesday column "Jobs, Jobs, Jobs."
What I want to know is: how come no comment from Junior K-Man, Berkeley blogger, intellectual property pillager and Pillsbury Dough-Boy Look-Alike Contest winner Brad DeLong rising to Krugman's defense with some sycophantic rationale, as usual?
On my post "Silence of the Wolves" covering Krugman's column today, Steven Antler asks how come Krugman doesn't seem to know about HIPAA, the existing law that guarantees insurance portability. And Brian Olexy asks how come it doesn't occur to Krugman that if people need help affording health insurance, they'd get that help from a tax-cut!
And there are even more Krugman letters on our letters page from earlier in the week, starting here.
Around the blogosphere, John Weidner at Random Jottings wishes that Krugman had engaged in a substantive discussion of the economics of health insurance -- rather than just using it as yet another political ploy. David Hogberg at Cornfield Commentary looks into the bigger-government implications of Krugman's insurance preferences -- and questions his sweeping factual claims. And Matthew Hoy at Hoystory.com puts Krugman into his grinder and comes up with this residue: "Hello, I'm Paul Krugman. I'm smarter than you. If you agree with me, then you know what's good for you. Otherwise, you're simply stupid."
Posted by Donald L. Luskin at 4:18 PM | link
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Check it out! Excusing himself for making an apples-for-apples comparison of the $40,000 annual salary associated with new jobs created by Bush's tax-cut proposals to the ten year $500,000 per job tax-cut, he says:
"No, I didn't forget to divide by 10. (For God's sake: whatever you think of my politics, I am a competent economist, and know how to use numbers.) What I foolishly assumed readers would know - this isn't condescension, I really was foolish - is that no serious economist thinks that a tax cut or spending increase will have any effect on employment more than a couple of years from now."
What follows is an hilariously complicated theory involving the role of the Federal Reserve and various other abstruse elements, leading to the conclusion that the 1.4 million jobs created in the first two years of the Bush plan are all there will ever be. It's full of intellectual bullying ("...Nobody, and I mean nobody, who knows any economics thinks...") and completely fabricated un-facts ("The Fed, by the way...thinks that a good recovery is just around the corner, and that it will soon be raising interest rates...").
If all that crap had been included in the original column, Krugman's simple, flat-out, drop-dead claim that the Bush plan would cost a whopping $500,000 to produce a meager $40,000 in wages would have come off like the brittle, over-specified, forecast-dependent econobabble that it is. Or as Krugman (condescendingly) puts it:
"So why didn't I explain all this in Tuesday's op-ed? Partly I fell prey to the occupational hazard of the professional economist writing for a general audience: I forgot that the ordinary intelligent citizen isn't necessarily familiar with the background material. (I'm in the same position when reading, say, about art or physics.) After 3 years writing for the Times, I usually have a good sense of what my audience doesn't know, but sometimes I forget."
Except for just one thing. The theory he offers still doesn't explain his failure to divide by ten.
Krugman's theory asserts that there would be no more jobs beyond the 1.4 million created in the first two years of the Bush plan (I don't agree with that, but let's stipulate it). While there would be no more jobs, he never asserts that those initial 1.4 million jobs will vanish at any time over the then years of the plan. They will be there generating $40,000 per year wages for ten years. So we still have to divide the ten year cost of the tax-cut by ten, because those jobs will be around for ten years.
Krugman's original claim about the cost per job of the tax-cut was a lie. And his response to being caught lying was to lie again.
This is exactly the kind of response I predicted. And now another prediction. We won't hear anything about this for a seemly period, while Krugman waits for memories to fade. But at some point not too far in the future, Krugman will tell the same $40,000-to-$500,000 lie again in the pages of America's "newspaper of record." Bet on it.
Posted by Donald L. Luskin at 2:27 AM | link
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The specific way Krugman asks that question is:
"Why shouldn't the American people favor a proposal like Mr. Gephardt's? Never mind the details; why shouldn't the typical citizen, faced with a choice between Bush-style tax cuts and a plan to provide health insurance to most of the uninsured, choose the latter?"
Krugman is referring to a proposal by Missouri congressman and Democratic presidential candidate Richard Gephardt to, according to a Gephardt press release, "eliminate all the Bush tax cuts and put in place a new refundable tax credit for employers who provide health care coverage for their employees."
Krugman thinks the voters should think about it this way:
"Most families, as best I can estimate, will see their taxes fall by less than $800 — many cases, much less. Meanwhile, a handful of people will benefit hugely: the top 1 percent of families, with incomes averaging more than $1 million, will get tax breaks to the tune of $80,000 each.
"On the other hand, ordinary families would benefit greatly from a plan that provided health insurance to those now uninsured.
"It's true that at any given moment most middle-income families have insurance. But people lose their jobs, companies go bankrupt, benefits get suddenly slashed. Over any given two-year period, roughly a third of Americans spend some time without health insurance; over longer periods, the risk of losing health insurance is very significant for most families.
"Would ending that risk be worth several hundred dollars a year to the typical family?"
In other words, shouldn't those $800 wolves vote to eat that $80,000 sheep? Well, maybe that's just what they'll do. But not if they're smart. Smart citizen wolves will realize something that apparently eludes a Princeton economics professor whom many people think is in line for the Nobel Prize: you can't eat your $80,000 sheep and have it too. When all the sheep are eaten, who's going to drive the economy -- who's going to pay the taxes?
Looking deeper, there's also another reason why the wolves may not vote the way Krugman thinks they ought to: this isn't just a question of wolves versus sheep, it's a question of wolves versus wolves. Why should a healthy wolf, or a well insured wolf, forego a tax-cut for himself in order to lower risk for sickly and uninsured wolves? Or would Krugman have all the sickly and uninsured wolves get together and vote to eat the healthy ones along with the sheep?
That's not only a very impractical long-term survival strategy for the sickly wolves. It's profoundly immoral.
Posted by Donald L. Luskin at 2:26 AM | link
Thursday, April 24, 2003
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"We initially refused to believe an alert ABC News fan who told us that the closed captions for the 6:30 p.m. Tuesday feed of Peter Jennings's 'World News Tonight' informed viewers that Federal Reserve Chairman Alan Greenspan was 'in the hospital for an enlarged prostitute.'
"But yesterday a network spokeswoman confirmed the wording -- provided by ABC's Pennsylvania-based closed-captioning contractor. Apparently the typist hit the wrong key, or keys. The glitch was fixed for the 7 p.m. feed.
"'We strive for perfection,' ABC's Cathie Levine told us, 'but when you're typing that fast, there are occasional mistakes. We regret the error.'
"Greenspan was home recovering yesterday from prostate surgery, said his wife, NBC correspondent Andrea Mitchell. As for that 'enlarged prostitute,' Mitchell told us: 'He should be so lucky.'"
Thanks to our friend at Bloomberg, Caroline Baum, for pointing this out.
Posted by Donald L. Luskin at 8:28 AM | link
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When the Trustees of the Social Security Trust Funds released their 2003 annual report in March, the media generally hailed it as offering good news about the program. Although it's only one of many examples, I can't resist quoting this commentary from -- you guessed it -- the New York Times on April 13:
"The Social Security report was little noticed in the news media, which were busy covering the [Iraq] conflict. That oversight was unfortunate, because the trustees had some good news. They extended by a year two important deadlines often cited by critics as evidence that the system faces real trouble:
"* The projected point at which tax revenues will fall below expenses, forcing the system to dip into its trust fund to pay benefits, was moved to 2018 from 2017.
"* The point at which the trust fund will be exhausted was put at 2042, instead of 2041 as cited in the report last year."
Seems like an objective recitation of simple facts, doesn't it? But it's not. Even if you ignore the possible political agenda behind it, this is an example of an extraordinarily complex expert subject being covered by what are nothing more than generalist journalists -- people who are doing little more than shooting their mouths off about things they aren't remotely qualified to understand.
Here's an expert take -- looking at the facts behind the facts, to see if they really mean what they seem to mean. From a report by Andrew G. Biggs, assistant director of the Cato Institute’s Project on Social Security Choice:
"Each year, Social Security’s trustees examine projections for the various economic and demographic variables...new data from the Bureau of Labor Statistics show that wage growth during 2001 and 2002 was slightly lower than had been assumed in the 2002 Trustees Report. Although lower wage growth reduces actuarial balance in the long term, it is reported that, since benefits are tied to wages, the corrected wage growth figures entail slightly lower benefit obligations in the medium term and therefore contributed to the extension of trust fund solvency. Nevertheless, the long-term effect of corrected wage growth figures for 2001–2002 should be modest.
"However, the one-year increase in trust fund solvency from 2041 to 2042 is largely attributable to the 2000 census’s findings of a substantially higher level of 'other than legal' immigration than was previously assumed. Specifically, the new findings led to projections of 400,000 illegal immigrants annually—a one-third increase over the 2002 projection. Since many illegal immigrants pay payroll taxes and proportionately fewer collect benefits, an increase in their number can have beneficial effects on Social Security’s finances. The trustees report that it was the assumed increase in illegal immigration that pushed the date of first cash flow deficits from 2017 to 2018, contributing to the additional year of trust fund solvency."
So the "good news" in the "deadlines often cited by critics" turns out to be the "good news" that people made less money last year and that there are more illegal aliens.
But even pretending that one year's deferral of Social Security's date with destiny is an improvement, the Trustees are clear that on that date the government is going to have to come up with a great deal of money to redeem the claims held in the so-called Social Security Trust Fund. The Trustees state,
"By the time the combined OASDI Trust Fund is exhausted in 2042, the redemption of its Treasury bonds to pay scheduled benefits will be requiring an annual general revenue transfer of $375 billion (in today’s dollars), or the equivalent of nearly 19 percent of Federal income tax revenues under the same assumption."
Undaunted, the Times article insouciantly claims, "But that's not Social Security's problem. It's a fiscal problem for the government..." In other words, it's not moi -- it's l'etat!
Posted by Donald L. Luskin at 12:08 AM | link
Wednesday, April 23, 2003
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A review of the movie "XX/YY" in Weekend on April 11 misstated the medium in which it was made. It was film, not digital video.April 23, 2003:
A movie review in Weekend on April 11 about an aspiring filmmaker misstated the medium in which it was made, and a correction in this space yesterday misstated its title. It was made on film, not on digital video. Its title is "XX/XY," not "XX/YY."
Posted by Donald L. Luskin at 10:34 PM | link
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Today the Journal admits, in another story by Davis, that "The Journal had paraphrased Mr. Snow in the Monday story." Of course Davis defends himself by noting that "During the interview, Mr. Snow did say he would be reluctant to draw out the rate cut over a longer period, because many small-business owners pay the rate, and might be encouraged to invest more if their tax bill declined," and indeed that was stated in the original story -- in the second paragraph from the end! The second paragraph from the beginning said, "...instead of slashing the top individual marginal tax rate to 35% this year from 38.6%, as the president has proposed, Mr. Snow said he would consider delaying that rate cut while reducing other income-tax rates this year."
Oh well. The 43rd Street gang would have said nothing at all.
Posted by Donald L. Luskin at 10:35 AM | link
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"An article on April 16 about the severity of the economic slump in Wichita, Kan., misstated the amount of food distributed there last year by the Living Word Outreach food pantry. It was 1.3 million pounds, not tons."This makes Paul Krugman's exaggeration of the cost of job creation in President Bush's tax-cut plan by only a factor of 29 seem downright honest. And we're still waiting for that one to be corrected.
Posted by Donald L. Luskin at 12:10 AM | link
Tuesday, April 22, 2003
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"According to a senior Treasury official who sat in on the Journal's interview with Snow, the Treasury secretary responded to a hypothetical case where a 50% dividend exclusion would be more amenable to a $550 billion tax-cut package — rather than the administration's original proposal of $725 billion. But Snow characterized this as only 'one possibility' to reporter Bob Davis.
"On another contentious point, it was Davis — not Snow — who suggested a delay in cutting the top individual marginal tax rate from 38.6% to 35% while accelerating the other income-tax rates. In fact, according to my Treasury source, Snow at least twice told Davis, 'I don't like that idea.'
"When Davis noted Snow's view that a top rate cut would benefit small-business owners, he quoted Snow saying, 'This [top-rate] cut has so much oomph to it, in terms of immediate impact to the economy.' But when Davis wrote that Snow 'suggested the top rate could still be phased in' at a later date, he did not support the statement by directly quoting Snow."
The Journal's not exactly falling on its sword over this. In it's lead editorial this morning it upbraids Snow for running up the white flag -- and suggests that maybe Donald Rumsfeld should be put in charge of the tax-cut. But then it runs up its own white flag, suggesting that the first thing that should be compromised is the 100% elimination of the unfair double-tax on dividends -- which the edit page has been praising to the skies for months. Not a word suggesting that Davis got it wrong.
Yes, there's separation of church and state at the Wall Street Journal -- between the conservative edit page and the liberal front page. But when a front page reporter screws up, it seems the wagons get circled.
Posted by Donald L. Luskin at 10:58 AM | link
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In his column today in the New York Times Krugman makes what seems to be a drop-dead argument that the Bush administration's tax-cut proposal is a hopelessly bad way to create new jobs. 10 will you get 1 that this argument gets repeated in the liberal media a dozen times before the week is out. And 100 will get you 1 that the Times never corrects it (but I'll bet Krugman will come up with some lame pseudo-confession about it on his personal web site). Listen to this:
"...let's pretend that the Bush administration really thinks that its $726 billion tax-cut plan will create 1.4 million jobs. At what price would those jobs be created? ...The average American worker earns only about $40,000 per year; why does the administration, even on its own estimates, need to offer $500,000 in tax cuts for each job created?"
The lie in this argument is three-fold. To unravel it, you need to understand two facts.
- The Bush administration's estimate of 1.4 million jobs -- made in a Council of Economic Advisors report February 4 -- is only for new jobs created through 2004.
- $726 billion is the cumulative value of the tax-cut over ten years.
Are you already beginning to see the three-fold lie? Follow along with me...
First, because the average worker's earnings of $40,000 is a one-year figure, and the tax-cost per job of $500,000 ($726 billion in tax-cuts divided by 1.4 million new jobs) is a ten-year figure, you have to divide $500,000 by ten to make the figures comparable. So a $40,000 job is created with only $50,000 in tax-cuts, not $500,000. So Krugman is off by a factor of 10.
Wait... it gets worse.
Second, if the Bush tax-cuts create 1.4 million jobs just through 2004, we can assume that they will create many more jobs over ten years. The CEA report doesn't give specific estimates beyond 2004, but they do say they believe that the impact of the tax-cuts is front-end loaded -- so let's guess that in the next eight years 500,000 new jobs are created each year. By the end of 2012, that's cumulatively 5.4 million new jobs.
Over ten years, that means that 30.86 million new job-years will have been worked. If we divide the $726 billion value of the tax-cuts over ten years by 30.86 million, we get a tax-cost of only $23,522 to create a $40,000 job. Now Krugman's off by a factor of 21.
But that's not all! That's only two of the three folds in this three-fold lie. Here's the extra-credit round.
Third, Krugman entirely, ignores the fact that all the workers who get those new $40,000 per year jobs will pay taxes on their wages. The $726 value of the tax-cut was calculated assuming that there would be no new jobs at all -- so any taxes on the wages from any new jobs created ought to count against the tax-cut. Let's say that all in, including direct and employer-paid FICA taxes and federal income taxes, these wages were taxed at 15% -- over ten years that's $185 billion. And that reduces the tax-cost per job to only $17,522. And yes, that's just what's supposed to happen when you make supply-side tax-cuts.
And that puts Krugman off by a factor of 29. Not bad for a politician -- but scandalous for an Ivy League econ professor.
Unfortunately, Krugman doesn't stop with just that one three-fold lie, brazen as it is. He then moves on to another one entirely -- claiming that Bush is
"...sacrificing other potential pro-employment policies on the altar of tax cuts. Once you take those sacrifices into account, it becomes clear that the Bush plan is actually a job-destroying package...indirectly destroying jobs by preventing any rational response to a weak economy."
What he's referring to is potential job losses resulting from fiscally strapped states having to cut back on spending. If this makes Bush's tax-cuts a "job-destroying" package, then presumably Krugman must believe that more state jobs will be lost than the 1.4 million new jobs that will be created through 2004. But while he ridicules Bush's 1.4 million estimate as coming "from the same place where Joseph McCarthy learned that there were 57 card-carrying Communists in the State Department," he doesn't even cite any figure at all for the number of jobs "destroyed."
Krugman's idea of a "rational response to a weak economy" is to "provide an emergency package of aid to state governments — not to pay for new spending, but simply to maintain basic services." Like what? Among other more important ones, college scholarships are one item mentions (to Princeton perhaps?). And he ridicules the money-saving step of "unscrewing every third light bulb in Missouri government offices" -- though in a column a couple weeks ago about the California energy crisis he scolded Vice President Cheney's National Energy Policy Development Group for not endorsing conservation. How many jobs do you have to create to screw every third light bulb back in? (Answer: 57.)
Krugman sets it up so that the Bush tax-cuts are seen as a treadmill to nowhere -- with new jobs being created with tax-cuts, but with old jobs being "destroyed" for lack of emergency aid. But here's the lie in that: those state job cuts are the result of a weak economy, not the cause of it. States are shedding jobs and services because their tax revenues are down in this recession -- period. How will it help the cause of economic recovery to simply maintain the recessionary status quo -- same state services, the same state employees, the same tax rates? No, if Krugman wants to keep the states spending on scholarships and light bulb screwers, there's only one thing to do: get the economy up on its feet and growing again so that there are more private sector jobs producing the wages that will get taxed to pay for public sector jobs.
>>Update... Krugman says that Bush spokesman talk about 1.4 million jobs so much it's like "an embarrassing nervous tic." Krugman and his buddies at the Times have a tic or two themselves, and I know where they got one of them. In today's column Krugman refers to "the Congressional Budget Office, now headed by an economist handpicked by the Bush administration." The lead editorial in the Sunday Times referred to "the Republicans' hand-picked head of the Congressional Budget Office." And what do you know... the web site of the Democratic National Committee refers to the "Congressional Budget Office -- led by an economist hand-picked by the White House." Now we know where the Times gets its ticcing points.
Update 2... Matthew Hoy calls a spade a spade on Krugman's dream of spending the tax-cut on aid to profligate states: "That's what we need! More government workers! If he talks like a socialist and walks like a socialist..."
Update 3... My friend the "maverick economist" Reuven Brenner has his own take on Krugman's fuzzy math. He telle ms, "1st year undergrad students would get a BIG FAIL if they used Krugman's reasoning. The $500,000 tax cut should be compared to the discounted value of the job created. Take his own $40,000, discount it by the Treasury's 5% rate, and you get that the $500,000 tax cut creates a $800,000 discounted value. You can't compare 'flows' ($40,000 per year) with 'stock' ($500,000 tax reduction). May be he should restart his studies."
Posted by Donald L. Luskin at 2:42 AM | link
Monday, April 21, 2003
UN-FACT OF THE DAY: 50 YEARS OF DEFICITS Paul Krugman on ABC's "This Week" yesterday:"The Bush administration is projecting budget deficits every year for the next 50 years, and those are over-optimistic projections."
Uhh... can we see a source for that 50-year projection, please?
Posted by Donald L. Luskin at 12:01 PM | link
Sunday, April 20, 2003
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In a commentary titled "When Cities Go Broke, the Options Are Few," Sam Roberts writes about the tough fiscal decisions facing New York City. He wonders whether the city may be at "a tipping point at which taxes become so onerous that the individuals and businesses who pay the government's bills leave?"
Hallelujah, glory in the morning! When a liberal admits that you can't necessarily bring in big government revenues with high taxes -- because eventually people will just move away to stop paying them -- you've got him started in a 12-step program destined for a supply-side epiphany, complete with visions of the Laffer Curve.
The next step is to get him to see that you might actually raise revenues by lowering taxes. Roberts is almost there. He writes, "Many people forget that one legacy of the 1970's fiscal crisis was, temporarily at least, lower taxes to lure business and to demonstrate that the city was serious about living within its means."
Funny how the Times is willing to admit the near self-evident truth of these supply-side principles when they are applied to the area immediately surrounding their headquarters on 43rd Street. Don't be surprised -- even liberals usually get the point when their own interests are at stake. But whether the liberals admit it or not, Bush's proposed tax-cuts for the whole nation are based on precisely the same truth.
Bush's proposal to eliminate the unfair double taxation of dividends and retained earnings is all about keeping taxpayers from fleeing a place that is facing even tougher challenges than New York City -- and about luring back taxpayers who have already left. The "place" I'm talking about is the stock market.
Still trading near the bottom of what has shaped up to be the worst bear market since the Great Depression, the stock market needs all the help it can get. And it's not just the stock market itself -- companies listed on the NYSE or the NASDAQ -- they're only the highly visible tip of the economic pyramid. The whole pyramid needs help. The persistent high level of unemployment is evidence of the same malady that ails the stock market -- that malady is that investors have "moved away."
When investors "move away," sometimes they send their money overseas. But more often it just means they'll do something else with the money than invest, like mothball it in unproductive money-market funds. That means lower stock prices and fewer jobs, because high stock prices and more jobs come from one and the same source: the willingness of investors to risk their money on new ideas, new technologies, and new companies. Clearing away the unfair double tax on dividends and retained earnings could bring investors back.
Right now, when a corporation earns a dollar of profit, it pays corporate income taxes at the rate of 35%. Then when the company pays out those already taxed profits to its shareholders, the profits are taxed again on the shareholder's personal income tax return, at a top rate of 38.6%. That's right... the simple act of licking a stamp and mailing the shareholder his own money causes that money to be taxed a second time. It's like a tax on taking money out of your left pocket and moving it to your right pocket.
Put those two taxes together, and consider what happens to a dollar in profits. At the corporate level it gets taxed down to 65 cents. Then by the time the shareholder has paid the second tax, all that's left is 40 cents! That's right -- today's double taxation amounts to a 60% tax on the fruits of investment. And that's just the federal tax -- it doesn't even include the additional taxes levied on corporations and individuals by individual states.
During the good times it seemed that America was able to get away with these prohibitively high taxes on invested capital. But now we're paying the price. Corporations learned to take on lots of debt, because interest payments to bondholders are only taxed once -- but when the 1990s boom ended, all that leverage was pure risk when the economy slipped into recession and earnings collapsed. And corporations learned to get cash to shareholders with stock buybacks, because capital gains are taxed at a lower rate than dividend income -- but with benefit of hindsight it's obvious those buybacks had to be made at high stock prices that didn't take shareholder value into account.
So here we are. The bad times are upon us, and we've run out of tricks. At this point, if America wants its markets to be a place where investors want to live, we'll have to end the unfair double taxation of investment income.
If we do, we'll get an immediate recovery in the stock market -- my firm Trend Macrolytics has calculated that the first-order windfall should be at least 15%. That will mean an immediate boost to investor confidence, all the way from Wall Street to Main Street. But that's just a down-payment: the real payoff comes next. With higher stock prices and higher investor confidence, companies large and small, new and old, will have access to the capital they need to create American jobs, keep America globally competitive and keep America strong and secure. Will greedy investors make scads of money in the process? You bet they will -- and they deserve it!
If the liberal media elite is beginning to see that high taxes aren't the way for New York City to recover and thrive, maybe there's hope for the political elite in Washington. Maybe the so-called "moderates" who are blocking the president's tax-cut proposal will see that ending the unfair double taxation of dividends and retained earnings is the only way to get American investors to come home to the markets where they belong.
Posted by Donald L. Luskin at 11:46 PM | link
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"No New Tax Cuts
"To the Editor:
"Re 'In a Concession, Bush Lowers Goal of Tax Cut Plan' (front page, April 16):
"In a time when we need to pay for the war in Iraq, and require billions to rebuild that country, and when we are faced with huge budget deficits caused by the 2001 tax cut and the corporate accounting scandals that depressed the stock market, one would hope that President Bush would be realistic and drop his call for any tax cuts.
"Slashing taxes now will increase the deficit for years to come, leaving a huge burden for our children and grandchildren to pay for."SYLVIA FOX
Scarsdale, N.Y., April 16, 2003"
Well, we know what happens to letters that disagree with Raines' positions...
Posted by Donald L. Luskin at 10:45 AM | link