Krugman: Raising Taxes Worsened Depression But OK Now

It appears being bestowed a Nobel Prize for economics doesn't improve one's economic acumen, for in the course of roughly 60 seconds Sunday, Paul Krugman said Franklin D. Roosevelt's decision to raise taxes in 1937 deepened the Depression, but it's okay to raise taxes 70-plus years later when the economy is in trouble.

Interesting contradiction, wouldn't you agree?

What precipitated this bizarre, almost instantaneous economic flipflop on Sunday's "This Week" was ABC's George Will bringing up a little history by stating that net investment was negative throughout most of the 1930s because of the uncertainties about the economy and government's activist role during that period.

Nobel Laureate Krugman took issue with this premise (video embedded below the fold, relevant section at 6:57): 

PAUL KRUGMAN, NEW YORK TIMES: What actually happened was, you know, there was an enor, there was a collapse in the financial system, which was not restored for a long time. There was a persistent deep slump in consumer demand, and therefore no investment demand and so you're stuck in this trap. Roosevelt got the economy moving somewhat. By 1937 things were a lot better than they were in 1933...

GEORGE WILL: And then they tanked (?)...

KRUGMAN: ...then he was persuaded to balance the budget, or try to, and he raised taxes and cut spending, and the economy went back down again, and it took an enormous public works program known as World War II to bring the economy out of a Depression.

Interesting, wouldn't you agree? After all, the seemingly always opposed to cutting taxes Krugman was sounding almost like Ronald Reagan and George W. Bush who believed that cutting taxes and increasing spending during a recession is the way to jumpstart the economy; Krugman was admitting that raising taxes and cutting spending actually harms the economy.

Yet, when George Stephanopoulos followed this up with a question about whether or not the current economic condition required the president-elect to "put off any plans for tax increases next year," Krugman objected:

No, I think, the way people like me are pushing, I think what will happen is there is going to be push for legislation to do things like healthcare. But that wasn't really ever going to happen. It wasn't going to actually go into effect until 2011, cause we weren't going to so much raise taxes as let the Bush tax cuts expire at the end of 2010.      

This is an economics Nobel Laureate? Is he really stating that letting tax cuts expire isn't a tax hike? 

Let's see EXACTLY what these tax cuts were, and therefore, what the tax HIKES are going to be if these cuts expire:

  • a new 10% bracket was created for single filers with taxable income up to $6,000, joint filers up to $12,000, and heads of households up to $10,000.
  • the 15% bracket's lower threshold was indexed to the new 10% bracket
  • the 28% bracket would be lowered to 25% by 2006.
  • the 31% bracket would be lowered to 28% by 2006
  • the 36% bracket would be lowered to 33% by 2006
  • the 39.6% bracket would be lowered to 35% by 2006

As such, if these cuts are allowed to expire, in 2011: taxes in the lowest marginal bracket will be raised from 10 percent to 15 percent; taxes in the 25 percent bracket will be raised to 28 percent; taxes in the 28 percent bracket will be raised to 31 percent; taxes in the 33 percent bracket will be raised to 36 percent, and; taxes in the 35 percent bracket will be raised to 39.6 percent.

Forgive me, Nobel Laureate Krugman, but no matter how you want to slice it, this is INDEED a tax hike for EVERY working American. And, if you agree that raising taxes was a mistake in 1937, why would we be talking about raising taxes two years from now while our economy is currently in so much trouble?

After all, assuming economic conditions have improved by 2010, couldn't a tax hike then send the economy back down just like it did in 1938 after FDR's 1937 tax increases? Or, maybe even worse, if conditions haven't improved two years from now, couldn't tax hikes turn a recession into a depression?

Sadly, time ran out on the panel discussion, for I would have loved to see Will pose that question to the Nobel Laureate.

Also, it would have been nice for the host to recognize this glaring contradiction, and ask his guest why raising taxes was a mistake in 1937, but just fine today as our nation faces its worst economic crisis since possibly 1937.

Alas, that might have been too much like being a journalist for Stephanopoulos.

Taxes Economy ABC New York Times This Week George Will
Noel Sheppard's picture