Monday Smackdown: Paul Krugman on Kevin Hassett et al.

Paul Krugman: The Schlock Of The New: "I’m still thinking about Kevin Hassett’s appearance at the Tax Policy Center...

Insults aside, he offered a new analysis of corporate tax incidence – an approach that is novel, innovative, and completely boneheaded. Oh, and it just happens to say what his political masters want to hear. As I see it, this is part of a broader pattern.

(1) When the financial crisis struck... the implicit story, pretty much taken for granted as true, was that the crisis proved the inadequacy of economic orthodoxy and the need for fundamental new concepts.... What [had] actually happened was very different. True, nobody saw the crisis coming.... [It] was an empirical failure – few realized that the rise of shadow banking had done an end run around Depression-era bank safeguards.... Only the dimmest of free-market ideologues reacted with utter bewilderment. The rest of us slapped our foreheads and said, “Diamond-Dybvig! How stupid of me! Diamond-Dybvig!”

And post-crisis, pretty standard macro worked pretty well. Both fiscal policy and monetary policy did what they were supposed to (or, in the case of money, didn’t do what they weren’t supposed to) at the zero lower bound. Plenty of room for refinement, lots of opportunities to use the mother of all natural experiments for empirical work, but no huge requirement for radical new thinking.

Nonetheless, there was a proliferation of radical new concepts: contractionary fiscal policy is actually expansionary, expansionary monetary policy is actually deflationary, terrible things happen to growth when debt crosses 90 percent of GDP. These ideas instantly got huge amounts of political traction – never mind the fuddy-duddies in the economics establishment, the policy establishment leaped at the chance to apply new ideas.

What did the ideas they leaped at have in common? All of them had, implicitly or explicitly, conservative ideological implications.... And all of them proved, quite quickly, to be dead wrong.... New economic thinking since the crisis has proved, for the most part, to consist of bad ideas that serve a conservative political agenda. Not exactly the script we were promised, is it?...

Conventional macro has worked pretty well, so you’d need really, really brilliant innovations to make a persuasive major break with that conventionality. And really, really brilliant innovations don’t come easy. Instead, the breaks with conventional wisdom came mainly from people who, far from transcending that wisdom, simply failed to understand it.... And while there are such people on both left and right, there’s a huge asymmetry in wealth and influence between the two sides.... Confused views on the right get mainlined straight into policy pronouncements by the European Commission and the leadership of the Republican Party.

Which brings me back to Hassett.

Tax incidence, like macroeconomics, is a technical subject with a mainstream consensus that faces challenges from left and right. But a lot of hard work went into creating that consensus; this doesn’t mean that it’s right, but you have to come up with a really good idea to challenge it effectively.

On the other hand, you can get a lot of political traction with a really bad idea challenging the consensus, as long as it serves the interests of big money and the political right. And that’s what just happened at TPC.