What's The Matter With Paul Krugman?


What's The Matter With Paul Krugman?

Jul 8, 2014 3 min read
Stephen Moore

Distinguished Fellow in Economics

Stephen Moore is a distinguished fellow in economics at The Heritage Foundation.

Paul Krugman of the New York Times took a shot at Arthur Laffer and me last weekend, calling us "charlatans and cranks" for advising governors around the country to cut taxes to boost economic growth and jobs.

Krugman says such moves went awry in Kansas, where Republican Gov. Sam Brownback cut the top tax rate from 6% to 4.5% and to zero on small-business income. According to him, "Kansas isn't booming; in fact its economy is lagging." Kansas shows that "tax cuts don't have magical powers," he concludes.

Well, it's true: Tax cuts don't have magical powers, and it's an often-repeated caricature by the left that Laffer and I and others believe that to be true. There are dozens of reasons why some places grow and others lag behind — and taxes is only one of them.

But what is irrefutable from the evidence in the states, not just Kansas, is that strategic tax-rate reductions can ignite growth and employment. Memo to Krugman: Read our new book: "An Inquiry into the Nature and Causes of the Wealth of States."

Here's what the national data tell us: Over the past two decades, the nine states without an income tax have had double the population growth and more than double the income growth of states with very high income taxes. These results are statistically significant, which means it's very unlikely they happened by chance.

This does not mean all states that cut taxes have growth or that all states with high taxes don't have growth. It means there is a strong propensity for low-tax and tax-cutting states to grow. Period.

This is a problem for the left because places such as New York, Massachusetts, Illinois and California that have been following Krugman's (and President Obama's) economic strategy to a tee are getting clobbered by tax-cutting states.

In the 5 year period beginning in December of 2007 (the month the last recession started), no-income-tax Texas gained roughly half-a-million jobs, while California managed to lose approximately the same amount. 

When looking at the long-term jobs data (from 1990-May 2014), the two big no-income-tax states of Texas and Florida show job growth up 65 percent and 45 percent respectively.  These figures dwarf both California (up 24 percent) and New York (up only 9 percent). These are just a few examples of a long term, irrefutable trend as explained fully in my co-authored book, the Wealth Of States.  State policy dramatically affects job opportunities.

And despite Illinois raising taxes more than any other state over the last five years, its credit rating is the second lowest of all the states, below that of Kansas!

Low taxes might not be "magical," but they do seem to make places mighty attractive to millions of Americans who are voting with their feet to call these places home.

As for Kansas, the tax cut has been in effect a mere 18 months — not a lot of time to measure the impact. What we do know is that Kansas had slightly more economic growth (2.4%) than the nation as a whole (2.2%).

Krugman says job growth in Kansas lags the rest of the region. But in an interview, Brownback explains why: "We've cut public-sector jobs by making government more efficient and ending duplication. That's a good thing." As for private-sector job growth, "we're second in the region last year behind only Oklahoma, which has an energy boom."

The Kansas story is still incomplete, and we will see over the next few years whether growth is revived in a state that people have been fleeing for the past decade. Tax revenues are down, but they are down in most states because of reductions in capital gains receipts from 2013.

The state currently has a $395 million cash surplus. In Kansas City, the growth has been much faster on the Kansas side of the border than the Missouri side. For now, there is nothing the matter with Kansas.

Krugman resorts to a line of argumentation that is all too typical of liberals: Cherry-picking a few events — the occasional high-tax state that is doing better than average, or a low-tax state that is falling behind — to blur the unmistakable pattern that low taxes (along with light regulation, energy production and right-to-work laws) have become magnets for people and businesses and jobs.

Krugman's logic is similar to a tobacco company pointing to a 75-year-old lifelong smoker without any trace of tumors and concluding: See, smoking doesn't cause cancer.

The Krugman model is for policymakers to forget about taxes, forget about regulation, raise the minimum wage and welfare benefits, and let unions have unlimited power over workers. That model has been tried for 40 years. The final result has been Detroit, a once-great city leveled by years of such bad advice and progressive policies on steroids.

Governors and state legislators are starting to get it. Liberalism left unchecked creates economic mayhem, high unemployment, poverty and dead zones such as Detroit and Newark and Rochester. Blue states and cities have two options: lower taxes and regulations to grow the economy or keep listening to Paul Krugman and continue to bleed to death.

Note: This column has been updated to correct an earlier version.

 - Moore is chief economist at the Heritage Foundation and part of the IBD Brain Trust.

Originally appeared in Investor's Business Daily