The Liberal Laffer Curve

Inspired by a recent piece from Investors.com, and an original tweet from @clasicaliberal, I bring you the liberal Laffer Curve.

According to the likes of Paul Krugman and President Obama, we need more deficit spending. The stimulus will create a booming economy that will more than pay for itself in tax revenues.

Hold on a second. Haven’t we already heard this argument?

Said Paul Krugman in late 2009: “Spending more on recovery will lead to a stronger economy, both now and in the future — and a stronger economy means more government revenue.”

President Obama opined at a recent press conference: “One of the most important things we can do for debt and deficit reduction is to grow the economy,” adding that “if there are steps that in the short term may reduce the amount of cash in the treasury but in the long term mean that we’re growing at 3.5% instead of 2.5%, then those ideas are worth exploring.”

The president really could use a boost in the job market before 2012, so it’s not surprising that he would make this suggestion. However, his logic goes one further than Krugman’s: deficit spending in the short-run will reduce the deficit in the long-run. Hmm, it is possible, but unlikely to play out that way when the deficit is as high as 10% of GDP (and we’re at a cumulative point where we need to think about more than just reducing the growth rate of the deficit). Even if the debt began to come down in, say, 2015, it does not make deficit spending today and the hypothetical 2015 debt reduction directly causal events.

The liberal Laffer Curve sounds nice, but we had hundreds of billions of dollars in stimulus already and are still enjoying the weakest recovery since the Great Depression. As the vintage liberal counterfactual goes, just think how bad things would have been had we not spent hundreds of billions in stimulus and the Fed didn’t buy $2 trillion of securities.

That unprovable statement always sells me. Especially when natural experiments work their way out, such as the comparison of commercial versus residential real estate since the crisis. The government did not intervene in commercial and have done all they can to prop up residential. As a result, commercial real estate is recovering because we did nothing, while residential still has a ways to go before bottoming out in most markets. We know this because total housing inventory (plus shadow inventory) is very high and the weak job market isn’t creating new buyers. Maybe we finally have that coveted counterfactual.

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3 Comments

  • Sandy


    Hi! Here is a great video series on the Laffer Curve, in case you are interested:

    http://www.youtube.com/watch?v=fIqyCpCPrvU

    http://www.youtube.com/watch?v=YsB_rnzBA08

    http://www.youtube.com/watch?v=Mw7LtVwDCbs

  • Doug


    I realize this post is old, but since you guys like to beat up on Krugman while I find myself agreeing with him often, I wanted to share what is essentially a rebuttal of his to the proposed notion that he wants government spending to be infitine: http://krugman.blogs.nytimes.com/2011/08/12/the-cracked-conservative-mirror/

    • Thanks Doug. Most people don’t have a background in economics; conservative or liberal. They like to operate on the political plane and spew the standard arguments. We’ve tried to bring an economic perspective here. So, yes, most people do not understand the nuances of the Keynesian model. But liberals who like to spend don’t necessarily understand the liquidity trap either. I have seen and shared on SE plenty of evidence that declared Keynesian successes throughout history are questionable at best, fallacies at worst. I totally agree with Krugman that the excerpt he quoted from Mike Shedlock was evidence free. But that supports his argument and confirms his bias of conservatives so it’s not surprising that he chose it. Keynes’ ideas have been used by politicians to spend in any number of economic environments. I would like Krugman a lot more if he spent less time on the political plane and more time discussing economic analysis.

      Also, I’ve never said Krugman wants government spending to be infinite. He wanted a stimulus which was much larger, and floated a $2 trillion figure.

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