Bad Faith Economics - by Paul Krugman - Nobel Prize Laureate for Economics Paul Krugman rebutts conservative Republican arguments against President Obama's economic stimulus plan. In his New York Times editorial, Krugman's declares that Republicans are arguing in "bad faith." Below is a summary with some added commentary...

No "New Deal"

Conservative Republicans don't want a second "New Deal" or to see "government activism vindicated." So they bad mouth any proposals for more government spending. For example, they label a minor provision to expand Medicaid family-planning services as a plan to "spend hundreds of millions of dollars on contraceptives." But spending on contraceptives is a very wise investment that will help reduce unplanned pregnancies and abortions. A win-win for both parties

Cost of job creation

Conservative Republicans claim the Obama economic stimulus plan will cost $275,000 per job created. A bogus argument because Republicans are not doing the math right. The cost of the plan extends over several years, and creates millions of jobs each of those years. But Republicans are taking the cost over several years and dividing by the jobs created in ONE year. It's like taking the cost of the school lunch program over five years, and dividing that number by the lunches provided in just ONE year. By that erroneous calculation, each lunch appears to cost $13. To correctly calculate the cost per lunch, divide the total cost over five years with the total lunches provide over FIVE years. Do that and the actual cost per lunch is about $2.57.

So a more accurate calculation of the cost per job under the Obama plan is $100,000. But the cost to government is even lower if you consider that much of that amount represents a taxable salary, which the government will receive back as income and payroll taxes. Krugman estimates a final cost of only $60,000.

Tax cuts vs. Government spending

Which is better: tax cuts of government spending? - Conservative Republicans often assert that it's always better to cut taxes than to increase government spending. They say taxpayers are better judges of how to spend their money than government bureaucrats. It's an argument that's raised when convenient, and taken to the extreme, it's ridiculous. By its premise, we should shut down the air traffic control system, which is supported by taxes (or "fees) on air tickets.

Krugman asserts that "nobody really believes that a dollar of tax cuts is always better than a dollar of public spending" and that "when it comes to economic stimulus, public spending provides much more bang for the buck than tax cuts." Not sure he supports this with anything more than his assertion. But then, he's got a Nobel Prize in Economics. Does that mean I should believe him?

If stimulus means spending, I guess he has a point that government spending leads to one form or another of spending; whereas tax cuts could be spent or saved, and saving is considered bad right now. But is saving such a terrible thing? Doesn't savings go into banks, which gives banks collateral to make loans? At least that's what we thought before the bank bailout package failed stimulate bank loans.

Krugman's QED: "Public spending rather than tax cuts should be the core of any stimulus plan." But conservative run from this logic to weak arguments against public spending in general.

Monetary policy vs. Fiscal policy

How low can you go? Conservative Republicans shout out the fact that, in the past, Obama's chief economic adviser has supported monetary policy over fiscal policy as government response to recessions. That may be true, but monetary policy is off the table -- Fed controlled interest rates are already effectively zero. The only option left is a large-scale fiscal stimulus.

Krugman believes that "conservatives are throwing any objection they can think of against the Obama plan, hoping that something will stick." But, as he points out, no one appears to be listening.

As Obama put it: "I won."

Why is Obama hedging?

Obama and the Democratic Party did win, but is Obama's goal of pulling Republicans on board the stimulus package merely a hedge for if it fails? With Republicans and Democrats supporting the bill, both can blame the other if it fails. But I don't think Republicans have anything to gain by supporting the Obama's stimulus bill. Voters already don't trust them with the economy--the election showed that. As McCain said, if it weren't for the election, Obama probably wouldn't have won.

To be self-serving, it's probably best for the Republicans to lay low and see how things turn out. Let the democrats make the move, then jump on them hard if it fails.

None of this says anything about what's best for the country. Problem is, I don't think Krugman or anyone else really knows. We're in uncharted territory. Or as Nassim Nicholas Taleb calls it, a Black Swan.

The Return of Depression Economics and the Crisis of 2008
by Paul Krugman

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