The Poster Boy For Liberal Economics Discovers The Tax Factor

Paul Krugman seems to be having a supply-side-economics moment… sort of. Raising taxes, the NY Times columnist and Nobel laureate has been arguing lately, threatens Japan’s fragile economic recovery. “Shinzo Abe is doing the right thing, seeking to delay the next rise in consumption taxes,” Krugman wrote on his blog yesterday. “This is good economic policy….”

It’s not every day that we learn that an influential economist who leads the charge for left-of-center policy in his day job has embraced the virtues of lesser taxes (if only in relative terms and as a temporary measure) in the cause of growth. Krugman’s current advice, by the way, is more than fodder for academic debate. As Bloomberg reports, Krugman convinced Japanese Prime Minister Shinzo Abe to delay a tax hike in Japan that was previously scheduled for next April… and in the course of just one limo ride! One might wonder if the outcome would have been different if Krugman had taken the bus on his way to meet the prime minister.

In any case, postponing taxes isn’t the same thing as cutting taxes, of course, and so no one will confuse Krugman’s latest stance with the likes of Larry Kudlow and the supply siders. I suspect that if pressed on the matter, Krugman would revert to his long-held belief that the connection between tax cuts and growth is tenuous at best. Nonetheless, it makes perfect sense that a vocal opponent of austerity is keen on keeping macro burdens to a minimum in a period of sluggish growth around the world. Lower taxes, after all, are part and parcel of fiscal stimulus, which is at the core of the Keynesian perspective that Krugman admires so much.

Still, it’s slightly unusual to find that the dismal scientist at the center of the liberal orthodoxy is asserting that raising taxes can be harmful for economic growth. It seems that “Voodo Economics” may not be witchcraft after all.

If this policy isn’t strictly taboo for Japan, does that mean that Krugman’s latest recommendation has application at home? The US has been described in recent years as suffering from a degree of the malaise that afflicts Japan. Does Krugman’s updated views on taxes mean that he might switch his pitch for US policy? Perhaps he’ll enlighten us in his next column (or during a limo ride with President Obama).


2 thoughts on “The Poster Boy For Liberal Economics Discovers The Tax Factor

  1. Robert

    Not sure if you skipped econ class the day they taught macro but your point would suggest yes. Pain medication is a good thing, but that doesn’t mean it is always a solution. Like everything else, the implications of tax cuts or increases are subject to cost benefit analysis. When an economy suffers from low aggregate demand, raising taxes to reduce deficits doesn’t reduce crowding out, it only serves to reduce demand further. In an environment where an economy is producing at capacity, the impact of tax cuts are ambiguous because it depends on where the proceeds of the tax cuts go. Their is a large body of academic research that demonstrates this (Friedman and Feldstein have contributed to this literature – see Joel Slemrod’s surveys of the material). This shouldn’t be partisan, these are simple well established facts. If you would like further proof, examine the resulting growth in the US after the 2001, 2003 tax cuts and campare to growth after the 86, 91 , and 93 tax increases. Not enough? compare the growth rates in Wisconsin and Kansas to other states following the tax/budget cuts with neighboring states. The jury is in on this issue … facts aren’t partisan, something policy makers and pundits need to come to grips with.

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