WASHINGTON: Since Donald Trump’s election, Nobel Prize-winning economist Paul Krugman has become delusional. Too numerous to name but one, Krugman’s columns take a position that is not just biased but completely void of reality. His latest column, “The Great Snake Oil Slump” continues Krugman’s bias induced delusionment over tax cuts and economic growth.
He refers to Trump as a “GOP presidential candidate (that) loses the popular vote, but somehow ends up in the White House anyway.”
The Electoral College
Krugman certainly understands that the founders of our country wanted to ensure that states had equitable representation. They wanted to prevent an occurrence where highly populated states, like Los Angeles, could exert more influence in a national election than, say Vermont.
As such, they established the electoral college, where each state received votes based on population. This is similar to the way the members of the House of Representatives are allocated to the states. Donald Trump won a majority in the electoral college and that’s why he is in the White House.
Nobel Prize Winning Economist Paul Krugman forgot what he wrote in his own textbooks.
Economic theory tells us, and Paul Krugman textbooks concur, that federal income tax cuts will stimulate economic growth. It has always worked. It works especially well when the tax cuts were given to all taxpayers. Cutting taxes for the higher income earners, as well as the middle class, will always have a great impact on economic growth. This is especially true in the capital-intensive economy today.
As Krugman knows, the top priority of the recently passed tax cut is to stimulate economic growth. This is critically important since the US economy has not seen economic growth of at least 3% since 2005. We haven’t had annual growth of 4% since 2000.
That is the longest period of economic stagnation in US history.
Of course, the result of that slump is millions of underemployed workers, millions of discouraged workers and stagnant incomes. Trump said he would fix that and so far he has. He was sworn into office on January 20, 2017. It took him a couple of months to begin to reduce growth stifling regulations and instill confidence.
But since April 2017 our economy has been growing at just above a 3% rate. The tax cuts began to benefit households in February of this year resulting in a whopping increase in consumer spending in March. The reduction in corporate income taxes will take a little longer to impact the economy.
By this fall, the economy could / should be growing at a 4% rate or better. This is exactly what happened after the Kennedy/Johnson tax cut in 1964 and the Reagan tax cut in 1982. But Krugman points out that growth did not accelerate significantly after the 2001 Bush tax cut. And he is right, but….
What happened after the Bush tax cut.
President Bush cut everyone’s taxes by 10% in 2001. That helped to bring the country out of the relatively mild 2001 recession, but growth averaged just above 3% for the next four years. Krugman says that shows that the tax cut was not effective.
The reality was that is 2001 the US had experienced 20 years of high growth, except for a slight hiccup in 1991. Cutting income taxes after a high growth period will not have a huge impact on growth. Still, the 2001 tax cut did pull the US out of recession.
Krugman says Trump’s economic promises are ludicrous. He says,
“Republican claims about the benefits of tax cuts (are)……so far out of the ballpark as to be in a different universe.”
It is easy to wonder if Krugman is so delusional as to be in a different universe himself. Trump claims that the tax cuts will stimulate growth and, more importantly, provide an opportunity for all well prepared Americans. There will be more jobs available. And more jobs available at higher wages.
Based on what we saw after the Kennedy/Johnson tax cut and after the Reagan tax cut, Trump will keep his promises.
What is likely to happen with economic growth.
The first estimate of GDP growth for the first quarter of 2018 will be available next week. The consensus view is that growth will be in the 2% range. That is certainly below a 3% target, but much better than the 1.2% rate in the first quarter of 2017. There are some indications, though, that the number could be much higher than that.
By mid-year, business investment will begin to increase and consumers will continue to feel confident. That will likely lead to growth rates exceeding 3% and could be much higher by year-end.
Perhaps then Krugman will stop writing about things he knows are simply not true. Perhaps then he will remove his bias and look more objectively at the economic theory that he writes about in his textbooks. Maybe then he will become less delusional.