Asymmetrical Information

"our nation's tiny stock of really smart economists"

How indicative of one's "smarts" is it that the election of Bush unhinged him?

Not a very "smart" reaction, if you will.

I can see how Krugman irritates our proprietor, but I don't think it's because he's wrong.

Consider, if you will:

May 11, 2002: JG explains why as a matter of simple economics, Krugman is totally off base in thinking that Enron was manipulating the California power market

June 11, 2002: JG raps Krugman for failing to credit the Bush administration for its commitment to privatizing Social Security

June 18, 2002: JG goes after Krugman for criticizing the Republican plan on Medicare prescription drugs

January 6, 2004: JG goes after Krugman for suggesting that the Bush administration is "politically immature" for not raising taxes (cf. JG's recent conversion on this point)

(To be fair, when I went digging for these, I found an awful lot of entries of the form "he's correct, but why is this the Bush administration's fault?" or "Yes, but he wouldn't say that about Democrats if they were in office." The title of this entry might sum it up best. Come over to the dark side, Jane.)

Didn't Goolsbee teach courses on internet businesses and the "New Economy" at the University of Chicago back in the days before the bubble burst? I remember him being very popular among my classmates who wanted to start web-based companies and who sneered at bricks-and-mortar.

I never took his course and have never met him personally, but the fact that he was pushing that new economy foolishness doesn't make me think too highly of his intelligence.

On the other hand, maybe there's more to the story and he's really brilliant once you talk to him in person. Plus I hear he's really funny. So I guess I'm saying a newspaper column might be right up his alley.

The students may have been fools, but the teacher certainly was not. I took the class and learned a huge amount, even though I had no interest in working at a startup (been there, done that, didn't even get a lousy t-shirt).

I think Krugman's gradual unhingedness is due to, at least according to his allegations, his editors' refusal to let him say outright what he thought about the Bush economic plan once it was sufficiently unveiled for him to have an opinion on it. He claims that he was not allowed to baldly call Bush a liar in re: the economic plan, and, frustrated by this restriction which didn't let him make his point concisely, he was driven to find as many ways as possible to suggest mendacity without accusing it.

That's his side of the story of that summer, at any rate.

How would someone lie in an economic plan, exactly? It's a prospective document.

Shorter Krugman, 2000:
"Shorter Bush:
'I will do "x" and this will cause "y".' This is [a lie] because when you read the details of 'x' as set out in Bush's own plan, to believe that it would case 'y' is to believe that 2-1=3. Bush or his advisors must know this, because they wrote the proposal for 'x'."

I am too far removed from (and was, at the time, too unsophisticated in economics [hell, I still am]) to recall the specifics or assess the fairness, but that was Krugman's contention.

The students may have been fools, but the teacher certainly was not.

Well, I wouldn't say the students were fools, necessarily. They were coming to business school to learn. As part of their education they took courses on internet business from a professor who apparently pushed the "New Economy" and did not warn them away.

Which isn't to say that Goolsbee's a fool either -- just that he apparently failed to make the right calls in a field that's supposed to be his academic specialty.

I suppose I'm a bit biased -- I spent my time with the international business and finance professors. Many of them were deeply scornful about the New Economy and also scornful (in a diplomatic way) about some of the profs who pushed it.

I'm a little skeptical that anyone who is a "die-hard Democrat" and an advisor to Kerry could have much of a real fundamental understanding of economics. How can anyone who understands basic economics support Democrats, who after are all are basically the mainstream party of socialism and central planning? How can someone who understands demand curves and such actually be enthusiastic about a party that advocates minimum wages and intervention in the free market and is as hostile to business as
the Democrats are?

I'm a little skeptical that anyone who is a "die-hard Democrat" and an advisor to Kerry could have much of a real fundamental understanding of economics. How can anyone who understands basic economics support Democrats, who after are all are basically the mainstream party of socialism and central planning? How can someone who understands demand curves and such actually be enthusiastic about a party that advocates minimum wages and intervention in the free market and is as hostile to business as the Democrats are?

And how could someone post all that with a straight face?

Maybe the chap has other large areas of agreement with the Democratic party?

Nice ad hominem attack on Krugman. I wonder if you went back and actually read his columns and found out that he correctly predicted our current economic imbalances. I guess you's rather have someone funny to read - try Mad magazine, or the Economist.

Crazy:
President 'Just Fine' With Cheney Explanation

http://www.foxnews.com/story/0,2933,185062,00.html

Crazy: President 'Just Fine' With Cheney Explanation

Could you explain why that's so "crazy", given that the Cheney SHOT is also fine with his explanation?

This post mystifies me. I suspect as a practical matter, I would agree with Jane on many issues of public policy. I would even agree that Krugman's intense dislike of the current administration distorts his writing and he'd be better sticking closer to his home territory in his writing.

That said, we have a President who openly claims that his tax cuts have increased federal revenues. While many of Jane's readers appear to believe this is true, she does not, and perhaps she should be a little more forgiving of economists who go off the deep end after such garbage is offered up to justify reckless fiscal policies. Is Krugman angry? Sure. Does he have reason to be? Yes.

Tom

The previous president offered up such risible claims as "lower budget deficits caused the growth of the late 1990's" and "urban empowerment zones cause growth". Mr Kerry's campaign offered up positively outrageous lies about the costs and benefits of his health care plan. Would you advise a good friend to hold his breath waiting for Mr Krugman's outrage at these palpable lies?

Tom G,

I'm pretty sure it wasn't Bush's fiscal policies that made Krugman go off the deep end. Krugman, after all, is a guy who has admitted to visiting dKos almost every day and finding it pretty insightful.

Is Krugman angry? Sure. Does he have reason to be? Maybe. Is the source of his anger *really* Bush's fiscal policy? If you believe that, I've got a purely peaceful Iranian nuclear program I'd like to sell you.

Krugman is deep into the extremist echo chamber, and it's a shame, because he's a hell of a trade economist when he wants to be.

We've got plenty of good lefty economists at Columbia, Jane, and we don't have to ship them too far.

And besides, everyone knows that the big brains in the GSB's Econ department belong to Alwyn Young.

One might argue that we need Krugman to balance the insane drivel that flies off of Ann Coulter's keyboard.

The difference being, I know almost no one, even Coulter's fans, who take her seriously. I can't say that about Krugman.

Jane,

There is a sound argument linking higher savings rates and higher growth. Reducing government deficits increases national savings. I'll concede that how large the effect is, particularly in the short-term is questionable. More to the point, the risks / bad consequences of someone making this argument seem pretty low to me - roughly the equivalent of telling your kid that eating his vegetables will make him grow up big and strong.

In contrast, Bush's argument on taxes has been refuted endlessly and is a source of seriously bad policy.

Do you really view the two as equivalent?

I can't speak about Kerry's health plan - I do not know much about it and you did not provide much detail about the "outrageous lies". And I do remember that Krugman had one of his worst columns talking about Kerry and Bush on trade, so I would grant since 2000 he has been a poor critic of democratic ideas.

Tom

Any replacement for Paul Krugman would be fine with me, economist or not. When you compare President Bush to the mad Emperor Caligula, as Krugam once did, you have abandoned both decency and sane discussion.

But if we are picking an economist, let's get one who knows enough methodology to avoid the "ecological fallacy". I don't know how often I saw that particular mistake in Krugamn's columns, but I do know I began to be seriously annoyed by this error in his columns before I stopped reading them.

(The repeated appearance of the error suggests something about Krugman. The ecological fallacy is so well known (in the right fields) that some methodologists at Princeton (and elsewhere) must have spotted it. Either Krugman is so difficult that no one told him about his persistent mistake, or he ignored their corrections.)

Not being a reader of the New York Times, I don't have any real interest if Krugman gets replaced or not. But I do not think his unhinging isn't strictly a result of Bush's 2000 election.

He was a professor of mine in College (undergrad) and back then in the Clinton presidency he had some pretty nasty things to say about folks in Clinton's economic cabinet (and about other professors at the university). In one talk he gave he simply said straight out the Laura Tyson was an idiot and didn't understand basic accounting.

While his vitriol may have been increased by the current administration, it has always been percolating there underneath the surface.

"...openly claims that his tax cuts have increased federal revenues."
FR = about 19% GNP
GNP greater after tax cut
That's what I read from Galt, Drezner, Marginal ...
blogs.

Still reading the pureed-tree version of the NYT, eh Jane? Before the firewall, there was a blogstorm about some Krugman or Dowd column every other week. Now there's nary a peep -- even if they are getting read, they're not getting linked or discussed or quoted anything like they used to. I haven't read anything by either of them in months. Why would you wish such obscurity upon poor Goolsbee?

Yeah, the NYT editorial page has been relegated to irrelevance, mostly due to the management of the NYT. In any case, prior to their delightful decision to go away, I gave up on Krugman when he wrote a column which put forth all manner of innuendo regarding possible criminal activity at the heart of Bush's fortune-making activities with the Texas Rangers. It was bad enough for a writer for the Paper of Record to gin up suspicions of criminal actions surrounding a run-of-the-mill eminent domain job, but the irony of a guy getting paid large green by a company which was engaged in the same activity in Times Square, while he denounced his political enemies for those same actions, while tossing about innuendo regarding criminality (hey, the real scandal is that it is all perfectly legal!), convnced me that Krugman was either a low-level hack with a talent for economics, or he had simply become unhinged.

Huggy,

Federal revnue has declined substantially as a portion of the economy. The websites you sited are actually run by people smart enough to know that.

Tom

In contrast, Bush's argument on taxes has been refuted endlessly and is a source of seriously bad policy

Bush's argument is that tax revenues are higher, today, than they would be if taxes hadn't been cut. It is impossible to refute that claim, or prove that claim, without getting in a time machine, travelling back to before the tax cuts, and preventing them from happening in the first place.

The supply-side argument that you'll get more revenue at X% than at Y% (where X

Not sure but I think that should be the outgoing president of Malaysia, not Indonesia. Assuming you mean the remarks of Dr. Mahatir.

Tom,

Echoing Dan there is no empirical data and can be no empirical data
on whether a given tax decrease increases federal revenues or whether
a given tax increase would increase federal revenues. We don't have
a baseline we can meaure against. The only way to definitely measure
the impact would be to pursue both policies at the same time.
Obviously that's not an option.

The reason we can't make a baseline is that there are always a lot of
other things going on in the world with possibly a bigger impact on
federal revenues than a moderate tax decrease.

All that is obvious enough or it should be obvious.

But here's a different line of thought that may be more interesting.
Suppose we have a difference in short versus long-term impacts.

Suppose we start with a tax rate of 36% and drop that rate by 3%
to 34.9%. And suppose there's a 1% Laffer Curve effect rebound so that
the new effective tax rate is 35.3%. At this point total tax
revenues have dropped 2% -- not so good. But suppose there's
a seemingly minor side-effect, the population uses that money more
effectively than the government would have and productivity increases
by 0.3% over that year than what it otherwise would be under the 36% tax
rate regime and every year thereafter where the real rate is kept to 34.9%.

So the first year our bottom line cost to revenues is a drop of 2%.
The second year it's 1.7%
The third 1.4%.
The fourth 1.1%.
The fifth 0.8%.

By the eighth year something remarkable has happened. Tax revenues
are actually higher than they would have been for eight years of
the 36% tax rate.

By the thirteenth year revenues are 1.6% higher than they would
have been at the 36% tax rate and the economy is 3.6% larger.

By the twentieth year revenues are 3.7% higher per year than they
would have been if the tax rate had been kept at 36% for twenty
years versus 34.9% -- even more important, the economy is 5.8%
larger, which is to say that the population is 5.8% wealthier.

Mark, Dan,

The we-can't-know-argument logically extended implies that we also can never know whether a medical procedure or drug worked. And in general, I tend to believe absolute knowledge of anything is impossible (maybe I am in a real-life Truman show! or the Matrix!). But in normal speach and action, we often say things that are proven only in probabilities - for example that modern medicine is more effective for an illness than finding a shaman.

We live in a world where we have to make decisions about taxes, and so we do statistical studies. We take large data sets and we observe economic responses to tax cuts and increases in many places and many times. Nailing down exact impacts of course are very difficult, but the results are so far from the Laffer threshold that it can be rejected out of hand. Now there is no particular reason to trust me on this, but look up some conservative economist and see what they say.

For example, Greg Mankiw, Bush's appointee to lead his council of Economic Advisers,wrote that there is "no credible evidence” that tax cuts can pay for themselves, and that an economist who makes such a claim is a “snake oil salesman who is trying to sell a miracle cure"

http://www.cbpp.org/2-2-05tax.htm

Mark,

Your long-term argument is really the only serious place to go and the estimates I have seen are that capital tax cuts may recoup something like 30% of cost - I have not see any higher estimates, but would be interested in your have. It's funny that almost all the arguments I see though are short-term in nature.

Tom

I saw him speak once at the Berkeley School of Journalism and asked him why he wrote political screeds instead of focusing on economics.

His answer was, in a nutshell: it's what the fans wanted. He might have been respected before, but he's popular now.

It is a tragedy that Krugman will no longer be writing. He was one of the few rational economic voices who could reliably be counted on to point out, clearly and concisely, the illogic and counterproductivity of Bush/Republican economic policy.

True, when he wrote about non-economic issues he became the equivalent of another Bob Herbert or Maureen Dowd.

I wouldn't say that Krugman is to the left as Ann Coulter is to the right. The only person on the left who could possibly compare to the insanity of Coulter would be Ted Rall. Krugman's counterpart on the right would more likely be the WSJ editorial board. Unfortunately, the WSJ editorial board is still around to spew the utter nonsense of supply side economics.

The we-can't-know-argument logically extended implies that we also can never know whether a medical procedure or drug worked.
No. Procedures and drugs are tested on large numbers of patients whose other properties can be grouped in order to reduce the number of variables being examined, and there are large numbers of patients who do not get these treatments who serve as controls. Tests on one subject - the US economy - cannot provide a valid statistical test. There is no control group for tax policy. This doesn't mean you're wrong about the conclusion...I don't know... but the analogy is not apt.

Tom G.

Is it bad if tax revenues fall as a portion of the economy? I mean, under the view that the goal of tax policy should be to have government activities displace the private sector, one might want tax revenues to be the very largest portion of the economy. But most people seem to think the role of taxes is to fund the government, in which case it seems to me that getting the needed funds while causing the smallest possible deadweight loss should be the real goal. Decreasing tax revenues as a portion of the economy would be a pretty good indicator of success.

Jim,

But we are not restricted to one subject.

While not all the economies of the world have reliable statistics, many do. Likewise, we can also examine data at the state level within the US. Finally, we have a decent historical record within the US so we can compare reactions to different tax polies at different points in our history.

I will concede that all of those options are more limited than a large-scale drug trial, for several different reasons. On the other hand, the difference between the hypothesis the President is advocating and the data results I have seen is so large that even conservative economists reject the President's view out of hand.

Tom

James,

My comment spoke nothing of goals. I doubt there is anyone that is trying to maximize government's share of the economy. I was simply explaining to Huggy why his math did not add up.

My perspective is that we should decide how much we want the government to spend, and then choose the taxes that equitably and efficiently fund it. Diminishing taxes without adjusting spending can not be anyone's long-run goal. I cna however see its political appeal.

Tom

Krugman's columns are fulfilling a useful function at the NY Times:

He is bolstering and reinforcing the world view of those on the left who hate Bush and free(r) markets.

At the same time he is bolstering and reinforcing the world view of those on the right that the leftists like Krugman are just plain nuts, if not completely intellectually dishonest and deranged.

Tom,

Greg Mankiw has written he beleives that tax cuts pay for only 50% of themselves. To me that is a heck of a deal. For every extra dollar of mine I keep, it only detracts $.50 from the Fed Revenue.

There are many more well thought of analysis that sugest it is higher that Mankiw's 50%.

For me any percentage over 0 is reason for the tax cut.

TomC,

You are right Mankiw did develop a model with a 50% return in long-run on capital taxes, albeit a lower number on labor (my memory led my astray). It is worth noting that is a theoretical and not empirical result, but long-run empirical results may be impossible to obtain. Mankiw's model also assumes spending cuts in parallel with the tax cuts - I don't know what he assumed about the value of government spending.

I am not aware of the other "well thought of analyses" that you refer to. Perhaps a link?

Your comment though that any increase in economic growth justifies a tax cut is hard for me to figure out.

Do you mean a coupled tax and spending cut? Or just tax cuts without spending cuts? If the former, you would presumably stop when you began to care about government spendings (defense?). If the latter, the best estimates I have seen are that the increased public borrowing offsets anyother effects.

Either way, I think we can agree that taxes need to be approximately equal to spending and that if we want to spend the amount we do today, then we need to raise taxes to do it.

Tom

Tom,

You said, "Federal revnue has declined substantially as a portion of the economy."

I've read the rest of the comments section, so I think I understand the general context of this post. However, in a very simplistic example, one could assume that tax revenues grow at the rate of inflation, and thus in real dollar terms don't change at all, while at the same time the economy grows at 3.5% in real terms. Over a five year period, federal revenue as a percent of the economy would drop from 19% to 16%, yet real government spending power wouldn't have changed at all.

I once thought that Krugman had some secret agenda when he made the claim that electricity markets were being manipulated in California when everybody else was saying that California's problem was its ieadequate approach to electric deregulation. It turned out that the electricity markets were being manipulated and all those saying Krugman was unhinged were wrong.

The 2-1=3 formula that Krugman pointed to happened during the Bush/Gore debates. Bush, while accusing Gore of "fuzzy math" described how we could balance the budget, pay down the debt, increase funding in education, and pass a bunch of tax cuts. Krugman showed how Bush wrong on the numbers. I admit that Krugman might be wrong about Bush lieing about this. One always has to allow that he might be brick-stupid. If he is brick-stupid he's invariably is in ways that are convenient politically. If you reread Krugman's articles carefully you'll see that he is right once more. You don't really have to do that - just check out the current deficits and the increasing debt. Krugman's frustration at that time was less with Bush, who was trying to win an election afterall, and more with the people who promoted the notion that Gore was the lier and Bush was the straight shooter, both notions demonstrably false.

Krugman was the first columnist who brought up the notion of transition cost in the ill-fated plunge towards privatizing Social Security. He spelled it out easy enough for even an objectivist to understand.

The man is a national treasure. You don't have to like him or agree with him but describing him as an unhinged Bush-hater doesn't really come to grips with his arguments, does it?

It's funny how Fearless Leader's boosters feel they have to copy the old Soviet trick of claiming anyone who dares to disagree with them is insane.

Unless, of course, someone really is going insane.

And the fact that the conversation has reached this new depth means....CONTENT! *gasp* We require...fresh...CONTENT! *wheeze*

"My perspective is that we should decide how much we want the government to spend, and then choose the taxes that equitably and efficiently fund it."

Hmmmm, Tom, do you start your personal budget figuring what you want to spend or do you budget according to your likely income?

Have you ever met a politician who cannot think of ANOTHER "worthwhile" program to fund?

The problem with the federal budget is that all too many people think like you. Too many people believe that there is some "optimum" or "right" amount for the government to spend and that it will spend the money it takes out of private hands "better" than the rest of us. Unfortunately, no one knows what the "right" amount of government spending. We can't even agree when the goverment should pay for something instead of the individual. Given these facts, starting the government budget process with "What do we 'need'?" versus everyone else's typical approach ("What do we have to spend") is silly.
Yeah, there are going to be periods when the federal budget is going to be in deficit (just as personal and business budgets sometime do) but that doesn't mean we should manage government budgets any differently than we do any other budgets.
No, what we should experiment to find out is that marginal tax rate which optimizes BOTH government revenue AND economic growth. Should we ever determine that balance between taxation and growth (baring war or catastrophe)the resulting federal income should be the only amount, legally, up for grabs politically.
To approach the subject from any other perspective, at some point, will kill the golden goose all together.

Jag,

The problem with starting with income for the federal government is that, unlike me, the federal government has substantial discretion as to what it's income is.

That said, there is a natural back and forth between what we want the government to do and how much we want to pay in taxes. So if our list of spending priorities equalled too much in taxes we would have to cut some. I still think it makes sense to start with spending.

I do not understand your comment about finding the tax rates that optimizes growth and government revenue - there is tension between those goals. Do you believe a single rate optimizes both?

Tom

Please replace: "Over 10,000 readers visit each day to read our mix of finance, economics, and public policy blogging"

With: "Over 10,000 readers visit each day to see that this blog never gets updated, and then they go to Fark."

Tom,
Your more recent posts re: Mankiw make it appear you are knowledgeable about his true position regarding tax cuts and economic growth. But in case any others are confused as to the Mankiw quote about snake oil salesmen, I am pasting the following quote from Bruce Bartlett:

"Mankiw was simply trying to illustrate the point that sometimes a fad can sweep the economics profession that later turns out to be false. This is indisputably true. Unfortunately, he chose a poor example to make his point. Mankiw acknowledged this fact by purging this section from later editions of his book, the 3rd edition of which is due out shortly.

Yet even in the first edition of his textbook, Mankiw acknowledged that the Laffer Curve is correct in theory — it simply shows that at a 100% tax rate or a 0% tax rate no revenue is collected. Every economist knows that this is true....To his credit, Mankiw quickly recognized that he had made a mistake."

As you wrote above, we can't know with empirical proof where the perfect rate of taxation should be. But reasonable people can believe that markets are more efficient at creating and distributing resources than bureaucrats.

We will always struggle to find the right balance of economic growth versus social justice. World events of the last century lead me to believe that economic growth can and generally will lead to greater social justice. Social justice, pursued with the religious fervor of moral righteousness, has devoured many economies and destroyed justice in the process.

best,
Jack Straw

Jack - well said.

But reasonable people can believe that markets are more efficient at creating and distributing resources than bureaucrats.

Markets tell you how much things cost. A crutial thing to know, I admit, but describing any additional characteristics to markets is to engage in anthromorphism. Some of the tasks ascribed to markets are actually done by real anthros, you know: speculators, managers, entrepreneurs and...(especially when markets fail)...bureaucrats.

"700 words is far too short to say anything interesting or meaningful about economics."

That depends on the audience's understanding of economics. Walter Williams does well making clear, basic points about economics in his column most of the time.

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