Paul Krugman’s Economic Blinders

Paul Krugman is widely appreciated for his New York Times columns criticizing Republican demands for fiscal austerity. He rightly argues that cutting back public spending will worsen the economic depression into which we are sinking. And despite his partisan Democratic Party politicking, he warned from the outset in 2009 that President Obama’s modest counter-cyclical spending program was not sufficiently bold to spur recovery.

These are the themes of his new book, End This Depression Now. In old-fashioned Keynesian style he believes that the solution to insufficient market demand is for the government to run larger budget deficits. It should start by giving revenue-sharing grants of $300 billion annually to states and localities whose budgets are being squeezed by the decline in property taxes and the general economic slowdown.

All this is a good idea as far as it goes. But Mr. Krugman stops there – as if that is all that is needed today. So what he has done is basically get into a fight with intellectual pygmies. Thus dumbs down his argument, and actually distracts attention from what is needed to avoid the financial and fiscal depression he is warning about.

Here’s the problem: To focus the argument against “Austerian” advocates of fiscal balance, Mr. Krugman hopes that economists will stop distracting attention by talking about what he deems not necessary. It seems not necessary to write down debts, for example. All that is needed is to reduce interest rates on existing debts, enabling them to be carried.

Mr. Krugman also does not advocate shifting taxes off labor onto property. The implication is that California can afford its Proposition #13 – the tax freeze on commercial property and homes at long-ago levels, which has fiscally strangled the state and led to an explosion of debt-leveraged housing prices by leaving the site value untaxed and hence free to be pledged to banks for larger and larger mortgage loans instead of being paid to the public authorities. There is no hint in Mr. Krugman’s journalism of a need to reverse the tax shift off real estate and finance (onto income and sales taxes), except to restore a bit more progressive taxation.

The effect of Mr. Krugman’s suggestions is for the government to subsidize the existing financial and tax structures, leaving the debts intact and ignoring the largely regressive, unfair and inefficient system of taxation. It is unfair because the profits of the rich – and even worse, their asset-price (“capital”) gains are taxed at lower rates and riddled with tax loopholes and giveaways. The wealthy benefit from the windfall gains delivered by the public infrastructure investment advocated by Mr. Krugman, but there is not a word about the public recouping this investment. Governments are indeed able...