In a radical departure from his previous expressions of dissillusionment, Paul Krugman has implicitly declared in his latest blog post that we are now living under the best of all policy regimes. I presume he will now be able to retire with satisfaction from his career as a gadfly.
The context is Eric Cantor’s demand that any federal disaster relief in the wake of Irene be offset by spending cuts elsewhere. Krugman thinks this is silly, and proves his point with an appeal to the standard Ricardian theory of public finance. According to that theory, which all economists understand and accept, if you’ve got to bear a cost, it’s best to spread that cost out over as many activities as possible. So ideally, you’d pay for disaster relief partly through spending cuts, partly through (current) tax increases, and partly through an increase in the deficit. Therefore says Krugman, “the bottom line is that basic, regular economics says that Cantor isn’t making sense.”
Since Krugman has carelessly neglected to spell out an important detail of his argument, let me fill in the gap for him: The Ricardian conclusion does not come from thin air; instead it follows logically from certain premises, key among which is that you’re starting from an ideal policy regime.
Rather than write down the relevant equations, let me give you an example: Suppose you’ve got a perfect kid, who divides his time optimally among schoolwork, sports, chores and socializing. Now he wants to go to the prom, which is going to cost him some time. Rather than take all that time away from any one activity, he’s best advised to cut back a little bit on schoolwork, a little bit on sports, a little bit on chores, and a little bit on non-prom socializing. (It takes some hidden assumptions to reach that conclusion, but they’re entirely reasonable.)
But suppose, on the other hand, that your kid has not done his chores in a month. Then even if you agree that he really ought to go to the prom, it makes perfect sense to say “You’re not going to the prom until you finish your chores.”
And if your government is as far behind on spending restraint as your kid is on his chores, then it can make perfect sense to say “You’re not providing any disaster relief until you catch up on your spending restraint”.
To get a little wonkier, there are actually two separate points here. First there’s the point that comes from public finance: Unless you believe that everything is perfect to begin with, the Ricardian argument fails, leaving you with no reason to believe that the cost of new spending should be spread widely. Instead, you should start by cutting back on your least wise activities. Cantor and Krugman probably have some legitimate disagreement about what those least wise activities are, but neither of them has any reason that I know of to believe that all activities are currently equally wise at the margin. I’m guessing that if Cantor had proposed paying for disaster relief entirely through an tax increase on the very rich, that Krugman would not have been so quick to dissent with an appeal to Ricardian public finance.
(Come to think of it, if Krugman took his own point seriously, he’d be forced to conclude that every tax increase should be spread across all income groups, and accompanied by cuts in all expenditure categories. This would mark yet another radical change in several of his previous positions.)
Then there’s the separate point that comes from public choice: Sometimes it’s a good idea to constrain people from doing things they want to do until they improve their behavior elsewhere. Even if you approve of the Congress’s intention to provide disaster relief, it can still make sense to hamstring that intention until they get some other stuff right — just like with the kid whose prom plans you approve, but who is still required to finish his chores first.
(Incidentally, all of this completely ignores the issue of whether disaster relief is a proper federal function in the first place — I am granting Krugman that for the sake of argument.)
Notice that Krugman goes beyond implicit insistence that everything today is perfectly hunky-dory; he says that it makes no sense to believe otherwise. In other words, he’s really really sure of this. I await his salute to the Tea Party for its role in bringing us to this state of Nirvana.
P.S. I commented on Krugman’s blog here.