Monday, February 22, 2010

Leftist & Rightist Deficit Hypocricy

Many people, including me, have accused Paul Krugman of being a hypocrite on the issue of government budget deficits.

Back when Bush was president, he kept attacking Bush for his deficits, yet now that Obama has become president, he keeps defending the far bigger deficits that Obama is presiding over.

Note that this is not simply a matter of Krugman saying he prefers increased deficits compared to spending cuts, but not compared to tax increases.

Many free market advocates would similarly say that while deficits are bad, tax increases (or the absence of tax cuts) are even worse. Which is why they therefore would reject a fiscal austerity plans consisting entirely or primarily of tax increases, while welcoming a plan consisting entirely or at least primarily of spending cuts. If it was merely the case that Krugman with his opposite political preferences viewed a budget deficit as a lesser evil compared to spending cuts, but worse than tax increases (or the absence of tax cuts) that would be at least logical given his political preferences.

No, the point is that Krugman now not merely says that deficits are a lesser evil compared to spending cuts (or the absence of spending increases) , he denies that deficits are problematic at all, whereas he under the Bush presidency argued that any serious economist would recognize that deficits have negative consequences.

Krugman, however, isn't the only hypocrite, of course. Many other leftists have similarly "flip flopped" on the deficit issue. And it should be added, many "rightists" have "flip flopped" from denying that deficits could ever be a problem to now being deficit hawks that warns that the deficit is a big problem. They could however at least point to how the deficit is much bigger now than when they defended Bush's deficits.

Another case of rightist deficit hypocrites consist in rightist euro skeptics arguing that while fiscal discipline is good for America, it is bad for Greece.

One example of this is American Enterprise Institute fellow Desmond Lachman who have previously argued that there was no reason to believe that Obama's "stimulus package" was working.

Yet when discussing Greece's deficit, he argued that fiscal austerity in Greece would be "punishing" and increase unemployment to the extent that "no sane country would want".

Similarly, Arnold Kling hinted that Keynes could be right regarding the effects of fiscal austerity in the absence of devaluations, even as he has repeatedly (for example here) against Obama's stimulus. Also, Johan Norberg, similarly claimed (in Swedish) that deficit reduction measures will curt the economy, even though he has repeatedly argued (for example here) that fiscal stimulus won't work.

Just as in the first examples, this wouldn't necessarily be hypocritical if the distinction between tax and spending changes to achieve fiscal austerity or stimulus was emphasized. But in none of those cases it was, instead it was said that fiscal discipline by unspecified means were good in the case of America, while bad in Greece.

But what of the argument offered explicitly by Kling, and hinted by Lachman and Norberg, that the difference is that America can debase the value of its currency, while Greece can't? That argument doesn't hold at all, because even assuming for the sake of the argument that devaluations are good, America can't devalue its currency given the current situation and using the policy means it now uses.

With its floating exchange rate policy, America doesn't directly control its exchange rate and can't lower it in response to fiscal policy changes. The only way you could lower it under a floating exchange rate policy (America could of course also try direct currency market interventions, but that would represent a departure from the floating exchange rate policy) would be to lower its policy interest rates. But America can't do that since they're already almost zero, so for all practical purposes America is in the same situation as Greece right now.

Which means that either you must assume that the Keynesian policy analysis is correct, which would mean that Krugman is right in arguing that Obama's “stimulus” policy has boosted the economy. Or you must assume that the Keynesian policy analysis is incorrect, which would imply that Greek fiscal austerity is good. You can't both hold the position that the Obama stimulus is bad and that Greek fiscal austerity is bad.