The confessions of Paul Krugman

A column by syndicated columnist Jay Ambrose appeared in the local paper a few days ago (I couldn't find it online, but try this). I sent a reply to the editors, but as far as I know they didn't publish it; here it is.



In his recent column [“An imagined confession”, August 11, 2005], Jay Ambrose imagines Paul Krugman apologizing for his past criticism of President Bush’s economic policies. Mr. Ambrose argues that in fact the Bush policies (the 2001-03 tax cuts in particular) were a success. In doing so, he seriously misreads or distorts the evidence. In particular:



• Mr. Ambrose contends that a cut in tax rates does not reduce tax revenues because it stimulates economic growth. In fact, according to the Congressional Budget Office, federal tax revenues were $145 billion lower in 2004 than they were in 2000, the year before the first round of Bush tax cuts went into effect. And that’s before taking into account five years of economic growth and inflation, which had the effect of pushing tax revenues up. As a fraction of Gross Domestic Product, tax revenues have fallen from 20.9 percent to 16.3 percent over the same period (the lowest level since 1959). By contrast, after the 1993 tax rate increases under President Clinton, tax revenues rose from 17.6 percent of GDP to 20.9 percent by 2000. It is simply a myth that tax cuts raise tax revenues.

• Mr. Ambrose’s imagines Professor Krugman congratulating President Bush for “bringing down the deficit by billions”. Let’s see, according to the CBO, there was a $236.2 billion budget surplus in 2000 and a deficit of $412.1 billion in 2004. True, the CBO projects a budget deficit in 2005 of a mere $365 billion, but crediting the President with reducing the budget deficit on that basis is like a gambler who lost $10,000 in a night at the blackjack table proclaiming the night a success because he won a buck fifty on the last hand.

• Mr. Ambrose would also like to applaud President Bush for “creating millions of jobs and getting the unemployment rate to a heartening 5 percent”. It’s important to note that when President Bush took office in January 2001 the unemployment rate was 4.2 percent. Meanwhile, in January 2001 total employment was 132.5 million (according to the U.S. Bureau of Labor Statistics) and by July 2005 it had risen to a whopping 133.8 million. This is a gain of 1.3 million jobs over four and a half years, which sounds impressive until you realize that during the Clinton administration the number of jobs grew by an average of 2.8 million jobs per year. In fact, more jobs were created in President Clinton’s worst year (1.6 million in 2000-2001) than in the entire four and a half years of the Bush presidency. President Bush’s record looks weak even if we absolve him of all blame for the 2001 recession. The National Bureau of Economic Research says that the 2001 recession ended in November 2001. Since then the number of jobs has grown by 2.9 million, still barely better than the annual average of the Clinton years. Contrast jobs growth following the 2001 recession with jobs growth during the previous recession, which began in July 1990 and ended in March 1991. The recovery from the 1990-91 recession was until then the weakest ever recorded in the U.S., yet 44 months after that recession ended (the same number of months between November 2001 and July 2005), the economy had created 7.2 million jobs. Other data show that the labor market is much weaker than a 5 percent unemployment rate would suggest: the percent of the population employed has fallen from 63.0 percent at the bottom of the 2001 recession to 62.8 percent in July 2005; the median length of an unemployment spell has risen from 7.7 weeks to 9.0 weeks; hourly wages (after adjusting for inflation) have not risen at all since November 2001. It’s hard to look at this data and agree with Mr. Ambrose’s statement that “everyday folks have seldom had it so good”.

• Mr. Ambrose contends that all income groups benefitted from the Bush tax cuts and that to the extent that the rich benefitted more than the rest of us, this was necessary if the tax cuts were to have their intended effect. First of all, almost all economists would agree that if the intent of the tax cuts was to help the economy recover from the 2001 recession, it would have been most effective to target the tax cuts towards the poor and middle class, since these groups tend to spend a larger fraction of their income than do the rich. In fact, the tax cuts were so skewed towards the rich as to justify every epithet that Paul Krugman has spewed at them. A study by William Gale and Peter Orszag of the Brookings Institution found that only 15.8 percent of people in the lowest 20 percent of the income distribution benefited from the 2001-03 tax cuts; that the richest one percent got 30 percent of the benefits of the tax cuts; that the richest one percent got tax cuts averaging $56,000, while those in the middle of the income distribution got an average of $1400; and that once one takes account of the fact that in the future the tax cuts will have to be paid for with lower spending or higher taxes, everyone but the richest 20 percent actually will lose money from the tax cuts.



In my imagination, I see Jay Ambrose writing a column in which he apologizes profusely for his pathetic attempt at misleading his readers regarding the success of President Bush’s economic policies...