Sunday, April 27, 2003

Over the past few hours, I've been tracking the argument that has gone on between Paul Krugman (via his website) and the supply-side Objectivist Donald Luskin. Luskin attacked him for a column he wrote for the New York Times earlier, where Krugman argued that the "1.4 million jobs" that Bush claims his tax cuts will deliver won't justify the cost of the cuts. Luskin attacked Krugman, as Luskin believes (quite passionately) that the cuts will create jobs over the entire 10-year period. Krugman responded on the website, and Luskin fired back with the link above, attacking two main arguments: one forwarded by Dwight Meredith about how "the dog didn't bark" and the other Krugman's own piece.

Dwights piece brought up, among other things, a "the dog didn't bark" argument:

Secondly, and far more persuasive to a Sherlock Holmes fan, is the dog that didn├»¿½t bark. President Bush in currently traveling the country in an effort to build support for the tax cut plan. He and his surrogates say at every stop that the tax cut is meant to create jobs. If credible evidence that his tax cut proposal would create 5.4 million jobs existed, a Donald Luskin column in NRO would not have been the first time we had heard that figure. In the absence of hearing that dog bark, it is safe to assume that no credible evidence that the tax cut would create 5.4 million jobs exists.
Seems credible enough, and Dwight followed it up with a credible defense of Krugman's figures and attack of Luskin's as being willfully disingenuous. Luskin's response?

Meredith's defense is narrowly focused on whether 1.4 million jobs are all the jobs that will be created by Bush's tax-cuts. Even if you assume that no more than 1.4 million jobs will be created, Krugman's claim that $500,000 in tax-cuts is buying only $40,000 worth of jobs is still wildly wrong. For Krugman's claim to be correct, those 1.4 million jobs would have to exist for only a single year and then vanish -- and you'd have to believe that the tax-cuts would have no other favorable effect to which you could assign some of their cost. So to assert that my critique is wrong -- simply because one part of it relied on the assumption that over ten years there would be more than 1.4 million jobs created -- is like defending O. J. on the grounds that, yes, he stabbed Nicole to death in her kitchen, but it's a vicious lie to say that he left the lights on in the kitchen when he left.
This is where things start to get a little hairy. Luskin's attack on the Krugman article itself depends on attacking one key point of the argument in order to break it down- his entire critique hinges on Krugman supposedly messing up these figures. (There was an additional attack on Krugman based on the financial crisis of the states, but it's immaterial, and telling that it was never raised again.) Dwight was attempting to question Luskin's credibility in the same fashion that Luskin attacked Krugman- and even implied as much with his final section:

Thus, based on the CEA report, the effects of the tax cut proposal will be to increase job growth for the first year and a half of the ten-year period and then decrease the creation of jobs after that initial burst.

The administration often talks about the 1.4 million jobs to be created in the first two years of the tax cut. It rarely talks about the effects of the tax cut on job creation for any period after 2004.

We find it highly ironic that Luskin would call Krugman a liar for failing to consider the job creation effects of the tax cut after 2004 when Luskin first links to the CEA report and then ignores its findings on that very subject.

Paul Krugman is not the liar here.
Luskin was obviously responding to this by attempting to bully and dodge his way around it (in the exact same fashion that he accused Krugman of doing), yet Dwight's critique holds, as Luskin did not challenge it on its substantial points, including the accusation that Luskin was spreading deliberate falsehoods. With that, we're forced to make a choice: either the credibility of Luskin's entire critique comes into question, or the credibility of Krugman remains untouched by Luskin's attack on this one set of numbers. Luskin's defense, ironically, implies the latter.

However, there's a much worse game being played here. I'll hit you with two paragraphs, one responding to the other. First, Krugman's defense:

No, I didn't forget to divide by 10. (For God's sake: whatever you think of my politics, I am a competent economist, and know how to use numbers.) What I foolishly assumed readers would know - this isn't condescension, I really was foolish - is that no serious economist thinks that a tax cut or spending increase will have any effect on employment more than a couple of years from now. The reason is straightforward: normally the economy is operating more or less at full employment, and any demand stimulus from a tax cut will be offset by an interest rate increase by the Fed. The Fed, of course, polices the economy to prevent inflationary pressures. And eventually we will return to normal circumstances.

The only situation in which a tax cut or spending increase creates jobs is when the economy is operating below full employment, and the Fed is unable to remedy the situation.

We are in such a situation right now - or at least I think we are. The Fed, by the way, does not agree: it thinks that a good recovery is just around the corner, and that it will soon be raising interest rates; in that situation any demand push from a tax cut will simply cause it to raise interest rates faster.

I don't agree, and neither do most private-sector economists; they think that the economy will remain sluggish for a while. And the Fed can't remedy the situation by cutting rates, because it has already cut them almost as far as it can. So since the economy could use a demand push right now, for the time being a fiscal expansion - either a tax cut or a spending increase - would indeed create jobs.
Fairly straightforward, and entirely sensible: if the economy heats up, the feds will cool it off. Krugman doesn't feel it's that heated up right now, so there will be a short-term affect on jobs, but the recession will eventually end, and the feds will eventually step in to cool things down. "When" is a valid question, but not "whether". This is no new argument- it goes back to most of Krugman's books, where he lays out the macroeconomic reasons why tax cuts aren't a cure-all nostrum, and have little to do with wage or job growth, but do have valid productivity effects.

Luskin's response, however, severely damages his credibility:

What follows is an hilariously complicated theory involving the role of the Federal Reserve and various other abstruse elements, leading to the conclusion that the 1.4 million jobs created in the first two years of the Bush plan are all there will ever be. It's full of intellectual bullying ("...Nobody, and I mean nobody, who knows any economics thinks...") and completely fabricated un-facts ("The Fed, by the way...thinks that a good recovery is just around the corner, and that it will soon be raising interest rates...").

If all that crap had been included in the original column, Krugman's simple, flat-out, drop-dead claim that the Bush plan would cost a whopping $500,000 to produce a meager $40,000 in wages would have come off like the brittle, over-specified, forecast-dependent econobabble that it is.
This is not what Krugman wrote, Luskin knows this is not what Krugman wrote, and the very use of the inane term "econobabble" speaks volumes. Luskin knows very well (or should know) that this is not what Krugman wrote. To argue that this is "complicated" implies either that Luskin is utterly ignorant, willfully tendentious, or engaging in the kind of deliberate anti-intellectualism that Scott Adams satirized so well when he had Dilbert's boss say "anything that I can't understand must therefore not be important".

If Luskin had attacked Krugman's points on their merits...if he had contradicted the idea that the Feds would have an effect on employment, then that would be valid. It'd be hard to argue, but he could resurrect the ghost of Milton Friedman and go from there. Of course, then Krugman would eat him alive, as Krugman dissected supply-side arguments with great skill in "Peddling Prosperity" and he'd probably need only to turn to the right page and quote himself. Still, he could make a go of it. That is not what he did*. By deliberately misinterpreting Krugman's response, he not only entirely conceded any and all of the points that Krugman made, but irretreivably damaged his own credibility among any but the already-converted.

In many respects this is quite academic, as opinions will not change. Krugman is going nowhere, his detractors aren't going to find much in the way of support outside of the red-meat circle, and it'll take a hell of a lot more to damage the credibility of Paul Krugman than anything his BlogStalkers have brought to bear -- including Luskin's jihad. What interests me more is nature of the battle itself. Luskin makes great hay out of the lack of support that Krugman received on this. Oddly enough, he's correct: this sort of attack on a right-wing economist supporting the Bush plan would have been quickly met by all the rhetorical weaponry the Movementarians and their BlogFollowers can bring to bear. Even right-wing bloggers can count on no small amount of support. Yet when Krugman is attacked, it ends up being akin to medieval bear-baiting- he far outmatches any of his detractors, but their sheer numbers may lead them to (at least perceived) victory.

Well, this is, at least, my own small contribution.

(*There were two other points he made, which was that the jobs would be around for 10 years- Krugman didn't account for that, and that there would be supply-side effects, which Krugman ignored... which means that Krugman was mistaken. (Luskin says "lying", but that is merely more base attacks.) Both raise questions. Krugman and Bush are both talking about employment over-and-above what the economy would normally provide, and Krugman is quite rightly ignoring other employment: If 1.4 jobs exist in three years that would have been there anyway, then the Bush tax cuts become meaningless. As for supply-side effects, Luskin's attempt to invoke them as proof that there would be more than 1.4 million jobs created raises two questions: why didn't the CEA include them, and more importantly, why didn't Bush include them? Dwight's missing dog, once again, doesn't bark.)

edit: Max Sawicky has his own take on it here, which appears to be that both are wrong, but to different degrees: PK is somewhat wrong and a little arrogant, but that Luskin "just babbles like a fool". I'd say that comes out as a win for Paul. Brad DeLong mostly linked to the Meredith piece, but check out the comments section; Luskin gets ripped to shreds by many of the commentators there, including the always-interesting "Dsquared". Even my old friend Tom Maguire ends up backing Krugman (mostly), which makes it both a red letter day for Krugman supporters and a probable Real Bad Day for the less-supportive Maguire.

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