When Do Deficits Matter?

By Kevin D. Williamson

Monday, January 09, 2017

It has long been rumored that Paul Krugman does not write the New York Times column that appears under his name. I have no reason to believe that that is true, but I hope it is. There are not many situations in which the reputation of a winner of the Nobel prize and the John Bates Clark medal would be improved by an act of intellectual dishonesty, but this is one of them.

Like homelessness and military casualties, U.S. government deficits are an issue that bleep into visibility on the progressive radar almost exclusively during Republican presidencies. On October 23, 2016, Professor Krugman wrote that the “debt scolds should be ignored,” and that Hillary Rodham Clinton, then presumed to be the next president, should engage in “years of deficit-financed infrastructure spending, if she can.” A grand total of 78 days later, Professor Krugman declared, “Deficits matter again.”

As the kids say, Life comes at you pretty fast.

There is some explanation for this beyond simple hypocrisy.

In her very clear-eyed 2010 profile of Professor Krugman, Larissa MacFarquhar, of The New Yorker, considers the economist’s late-life discovery of politics. “In his columns, Krugman is belligerently, obsessively political, but this aspect of his personality is actually a recent development,” she writes, noting that his work has been strongly influenced by his economist wife, who has focused on making his prose “angrier.” She finds Krugman to be an out-of-touch new-media partisan, dividing his time between Princeton and his beachfront home in St. Croix. Strange that such a life would produce so much bitterness. Is Professor Krugman the world’s angriest economist? It isn’t his anger that is in question: “It’s been a long time — years now — since he did any serious research,” MacFarquhar notes.

Professor Krugman is familiar enough with the workings of social media to anticipate being called out on his remarkably quick — 78 days! — turnaround from scold of deficit scolds to deficit scold. It is unconvincing stuff. He argues that deficit-financed federal activism in the wake of the financial crisis was justified as a form of “depression economics” and that this represents a general consensus in the macroeconomic-policy literature. (It should be noted that this is not his particular area of economic expertise.)

What has changed, he says today, is that the unemployment numbers and wage figures suggest that we have returned to full employment, and hence the emergency measures he advocated earlier are no longer needed. Even if we buy that policy story entirely, the employment and wage figures today are not radically different from what they were 78 days ago, and that demand for deficit-financed spending 78 days ago was, in Professor Krugman’s own prescription, something that should be extended for years into the future.

What has changed since October 23, 2016, is not the labor markets. What has changed is what happened on November 8, 2016. Professor Krugman is simply another cracked Democratic partisan looking for any cudgel with which to beat the incoming Republican government. He was, by all accounts (even those of economists who disagree with him), a very fine economist. He is an incompetent newspaper columnist. The skills are not necessarily transferable.

What’s really a shame about all this is that we could use Krugman the economist just at the moment. In the December 23 issue of National Review, Robert D. Atkinson offered a provocative cover story, “The Case for a National Productivity Strategy,” in which he advocated a vision of “Trumponomics” that would be oriented toward raising overall U.S. labor productivity as an avenue to wider middle-class prosperity. Atkinson, the founder of the Information Technology and Innovation Foundation, has argued for a number of ideas that might strike some more traditional conservatives as an updating of what the Right used to scoff at as “industrial policy,” i.e., putting the White House Office of Science and Technology Policy in charge of a national program for developing automation research, creating a special “innovation box” in the tax code that reduces the tax on profits from “innovation,” doubling the research-and-development tax credit, etc.

The president-elect seems to have similar if less thought-out views, and he is hardly the first. George W. Bush, of the Harvard Business School, was to be the “MBA president,” putting his business expertise into the service of reforming the schools, entitlements, and the tax code, among other things. The events of September 11, 2001, ensured that he never got the chance, but what Bush promised was not so different from what Trump promises and what Ross Perot promised before him: the familiar, ancient formulation of “running the government like a business.”

The limits of that vision were addressed some years ago by an economist not very well-known outside of professional circles, a fellow by the name of Paul Krugman, who authored a persuasive cold-water essay titled “Competitiveness: A Dangerous Obsession.” He began by dismissing (only slightly sneeringly) President Bill Clinton’s insistence that each of the world’s nations is “like a big corporation competing in the global marketplace.” Programs of investment in — see if this sounds familiar — “infrastructure and high technology” were, Professor Krugman argued, political evasions based on economic errors. “Every few months a new best-seller warns the American public of the dire consequences of losing the ‘race’ for the 21st century,” Professor Krugman wrote. “A whole industry of councils on competitiveness, ‘geo-economists,’ and managed-trade theorists has sprung up in Washington.” Many of them, he lamented, occupied high positions in the Clinton administration. What he found was that real changes in standards of living were closely correlated with per-worker productivity — not with changes in productivity in comparison to workers in other countries — and that the most productive workers tended to be found in the most capital-intensive sectors. The vision of countries competing like Pepsi and Coke (his metaphor) is irreparably defective. Neo-mercantilist policies of trade restriction and the like, being based on that error, will not produce the desired results. Krugman:

If top government officials are strongly committed to a particular economic doctrine, their commitment inevitably sets the tone for policy-making on all issues, even those which may seem to have nothing to do with that doctrine. And if an economic doctrine is flatly, completely and demonstrably wrong, the insistence that discussion adhere to that doctrine inevitably blurs the focus and diminishes the quality of policy discussion across a broad range of issues, including some that are very far from trade policy per se.

If partisanship in the context of economic doctrine is something like a fever, then ordinary political partisanship is more like brain cancer. Which of course helps to explain the difference between Paul Krugman the economist and Paul Krugman the columnist.

Of course deficits matter. They mattered during the George W. Bush administration, they mattered during the Barack Obama administration, and they will matter during the Donald Trump administration, though it is always an open question whether congressional Republicans will act like they matter. A country with a modest amount of public debt can run relatively small deficits more or less indefinitely given sufficiently robust economic growth. (That’s the difference between Rex Tillerson’s having a $15 million mortgage and my having one.) But the United States is not that country, and there is a great deal more to our overall public financial picture than formal debt as such, including unfunded entitlement liabilities and unfunded public-pension liabilities that are not federal obligations today but that could very well end up being federal obligations in the future. (Consider those coal-miner pensions that everybody was making a fuss about two weeks ago.) And the deficit matters even if you believe, as Professor Krugman sometimes does, that deficit-financed federal spending programs are the right medicine in times of economic crisis.

There will be many occasions to consider deficit spending over the next several years, and much of that debate will happen in the context of a national-competitiveness debate of the kind that Professor Krugman criticized so trenchantly during the Clinton years. Paul Krugman might have contributed something useful to that debate, rather than spending the back half of his career as an upmarket Rosie O’Donnell.