Tax Cut Denialism, With A Freudian Slip

Tom Maguire:

Paul Krugman explains that he was right and Evil Righties were wrong about the response to the financial collapse of 2008. But the Times delivers a lovely correction of a Freudian slip, and Krugman continues to wear his Big Government blinders in contradiction of his own earlier analysis.

Slips first:

Correction: May 2, 2014 

An earlier version of the web summary with this column pointed out that few economists saw the fiscal crisis coming. The crisis should have been referred to as a financial crisis.

It was not now, has never been and never will be a fiscal crisis! Fears that out-of-control spending will put us on the road to Argentina are soooo 2003 and subsequently sorta-kinda repudiated.

Let’s switch to Krugman’s ongoing tax-cut denialism of the logic of his own arguments. From the recent column:

…since the fall of Lehman Brothers, basic textbook macroeconomics has performed very well.

…

In what sense did economics work well? Economists who took their own textbooks seriously quickly diagnosed the nature of our economic malaise: We were suffering from inadequate demand. The financial crisis and the housing bust created an environment in which everyone was trying to spend less, but my spending is your income and your spending is my income, so when everyone tries to cut spending at the same time the result is an overall decline in incomes and a depressed economy. And we know (or should know) that depressed economies behave quite differently from economies that are at or near full employment.

For example, many seemingly knowledgeable people — bankers, business leaders, public officials — warned that budget deficits would lead to soaring interest rates and inflation. But economists knew that such warnings, which might have made sense under normal conditions, were way off base under the conditions we actually faced. Sure enough, interest and inflation rates stayed low.

And the diagnosis of our troubles as stemming from inadequate demand had clear policy implications: as long as lack of demand was the problem, we would be living in a world in which the usual rules didn’t apply. In particular, this was no time to worry about budget deficits and cut spending, which would only deepen the depression. When John Boehner, then the House minority leader, declared in early 2009 that since American families were having to tighten their belts, the government should tighten its belt, too, people like me cringed; his remarks betrayed his economic ignorance. We needed more government spending, not less, to fill the hole left by inadequate private demand.

What Krugman can’t bring himself to write is that cutting taxes can serve as well as increasing government spending. The gist – if the tax cuts are spent, then it represents a government funded boost to demand; if they are saved, they help repair household private sector balance sheets by substituting public for private debt.

In earlier writings Krugman has acknowledged the private sector balance sheet problem:

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