Gerard Jackson
BrookesNews.Com
Monday 29 September 2003

Paul 'Rumpelstiltskin' Krugman, one of America's better known Keynesians, has developed a pathological loathing of Republicans. For instance, in December 2000 when anecdotal evidence of recession was getting increasing support from economic indicators, Rumpelstiltskin went into a state of denial.

He vigorously attacked Dick Cheney's muted and quite sensible observation that America could be in recession in 2001. In any case, ol' Rumpelstiltskin had two strikes against him: 1) he's an unrepentant Keynesian and (2) he's a fanatical Democrat, and he was wearing his Democrats' hat when he savaged Cheney. You know, the long pointy one with a big D painted on it.

Tax cuts always stimulate economies, but not in the Keynesian sense. However, let's stick to recession. One does not need to be a MIT professor to know that in a recession most companies find their profits evaporating. What is not understood is that a recession is the recovery period. That period when the economy rids itself of the excesses created by a monetary boom usually brought on by the type of Keynesian policies that Rumpelstiltskin teaches.

Let's not forget that this is the same man who told Japan it could cure its economic problems by letting the money supply rip. The thought that cheap money policies created Japan's situation in the first never occurred to Krugman, anymore than the possibility that why Japan has never fully recovered is due to its refusal to allow recession to eliminate the country's malinvestments. But then Rumpelstiltskin is a Keynesian first — or is it Democrat first and Keynesian second? I guess that depends on who is in the White House.

To me, Krugman revealed his political bile when he argued that tax cuts are a "specious recession fighting rationale." Perhaps he meant that only Republican tax cuts are "specious". If this were true, why not a 100 per cent tax rate on business? After all, if tax cuts cannot stimulate business in times of recession why should tax increases depress them in boom times?

I think a few figures would illuminate the issue. In 1929 pre-tax corporate profits were $9,770 million and post–profits were $8,337 million, for 1930 they were $3,225 and $2,348 respectively; for 1931 they were -$846 million and -$1,365. The situation was even worse for1932 when they fell to -$3,100 and -$3,489. (Yes, these are negative numbers). And 1933 was utterly ridiculous: profits reached a meagre $99 million only to be reduced by taxation to -$444 million!

It was only from 1934 that post-tax profits turned positive. Even then the profits picture was depressing (pun intended) with corporate taxes on average being twice the 1929 level. Is Rumpelstiltskin going to seriously argue that these tax rates stimulated production during the 1930s? (The situation was aggravated by government price fixing but our only concern here is the effect of taxes on investment and production).

I put it to him and his supporters that the Hoover/Roosevelt tax increases contributed significantly to the depth and length of the Great Depression. As the St. Louis Chamber of Commerce put it in 1932: "When governments seek to maintain the high levels of taxation they reached in good times in these days of seriously impaired income the impending specter of higher taxes constitutes one of the chief deterrents of business recovery."

Every sensible economist should know, except perhaps the ones Krugman hangs out with at the DNC, taxes are a burden. But as the classical economists would say, taxes are a necessary cost of doing business by contributing to law and order, for example. However, we are now a long way from the limited government that classical economists praised. This is the era of Big Government the price of which is high taxes.

All of which brings us back to tax cuts as a means of averting recession. They are not and never will be. But they are a means of alleviating the pain of recession, accelerating recovery and encouraging savings.

Cutting taxes releases resources to the private sector by raising the savings consumption ratio. It is also vital that unsound investments are quickly liquidated which in turn will release capital for profitably sustainable lines of production.

Fiscal policy should never be designed to encourage consumption at the expense of investment, especially during a recession. The prominent economist Joseph Stagg Lawrence pointed out in the 1930s, as did others, that it is thrift and not consumption that creates prosperity.

It's time the Republicans accepted the grim fact that they are now at war on all fronts. Professor Rumpelstiltskin's dishonesty and his public hatred for Republicans is another bitter example of this reality.

Gerard Jackson is Brookes' Economics Editor