SPONSORED:

Red flag: Paul Krugman is optimistic about the economy

Red flag: Paul Krugman is optimistic about the economy
© Getty Images

Paul Krugman, the left-wing economist who writes for the New York Times, is excited about the coming “Biden Boom” that will follow, he explains, the rollout of a COVID-19 vaccine. The Biden Boom, he probably forgot to note, that depends on the Trump vaccine.

Given Krugman’s record, his upbeat forecast is alarming. As many remember, he predicted in 2016 that the election of Donald TrumpDonald TrumpTrump DOJ demanded metadata on 73 phone numbers and 36 email addresses, Apple says Putin says he's optimistic about working with Biden ahead of planned meeting Biden meets Queen Elizabeth for first time as president MORE would usher in a global recession, “with no end in sight.” Oops.

Krugman’s pessimism about the Trump economy, colored by his hatred of the president, endured. In April 2019, the NYU professor opined that the bond markets were signaling an imminent recession. Indeed, throughout 2019, as David Harsanyi wrote in a National Review column titled “Paul Krugman: Always Wrong, Never in Doubt,” the professor published: “Why was Trumponomics a Flop?” “From Trump Boom to Trump Gloom” and in October, “The Day the Trump Boom Died,” even as we went on to record record-low unemployment for every worker group and 56 percent of Americans declared themselves better off than they were four years earlier.

ADVERTISEMENT

Krugman was also dead wrong about the severity of the Great Recession. After the stock market tumbled nearly 3 percent on July 26, 2007, Krugman wrote a calming piece, explaining that trading in the government bond market showed “that investors still consider a recession, which would cause the Fed to cut interest rates, fairly unlikely” — a view that Krugman apparently shared.

Further, Krugman opined the next day that “stocks don’t look overvalued the way they did in 2000.” Shortly thereafter the stock market began one of its worst slides in history, collapsing 51 percent from the close on the day Krugman wrote that cheery note. 

Nobody’s perfect, but Krugman’s record is pretty poor.

Which is why his current optimism should make us nervous. On the surface, the U.S. does appear poised to profit from the roll-out of a vaccine that will put COVID-19 behind us, allowing the country to get back to work. Rising employment, especially in those industries most harmed by the coronavirus, like travel and entertainment, means higher incomes and spending.

Also, the country’s savings rate has soared during the past six months as people stayed home; most economists think, like Krugman, that there is considerable pent-up demand.

So, on the surface, the outlook is pretty rosy, which is why the stock market has been hitting new highs. What could go wrong?

ADVERTISEMENT

One word: taxes.   

There are two scenarios as we enter 2021. If Democrats win the two Senate seats up for grabs in Georgia, they will control that pivotal chamber, and will move to implement President-elect BidenJoe BidenPutin says he's optimistic about working with Biden ahead of planned meeting How the infrastructure bill can help close the digital divide Biden meets Queen Elizabeth for first time as president MORE’s monster tax hikes. According to the Tax Foundation, Biden’s proposals to raise taxes on wealthy individuals and corporations would take some $3.3 trillion out of the U.S. private sector over the coming decade, cost the country over half a million jobs and lower income for every earning group.   

Higher taxes mean lower spending by consumers and less investment and hiring by businesses. Biden argues that the increased tax revenues will fund much-needed infrastructure spending and also go towards combatting climate change, which will create jobs. 

Investing in infrastructure is worthwhile, but not all such spending is productive. Repairing poor roads may be needed but doesn’t provide much further economic benefit such as is produced from a privately-built factory complex or a resort, for instance. Those undertakings provide ongoing jobs and income.

Similarly, programs to combat climate change generally funnel money into unprofitable ventures like solar farms in the northeast or electric vehicle manufacturing that require taxpayer subsidies. Over time, investing in money-losing activities hurts productivity, which dampens wage growth.

Also, the Biden White House would unquestionably move to bail out blue cities and states facing financial trouble. Helping New York City cover its due bills to the excessive retirement plans of the teacher unions or other municipal workers will simply paper over unsustainable commitments that should be addressed today.  

The second scenario envisions Republicans winning one or both of the Georgia seats, and blocking a large-scale federal tax increase. In that case, blue cities and states will not be able to rely on federal handouts to meet their budget needs. Because they have no understanding of how to grow their economies by attracting businesses and how to keep wealthy taxpayers in place, they will raise taxes.

In New York City, the progressive Justice Democrats are waging a grass roots campaign advocating for $50 billion in tax hikes on the wealthy. They seem blind to the facts; between 2010 and 2017 high taxes and a declining quality of life have cost New York one million residents and more than $51 billion in adjusted income.

More tax hikes in a state that already ranks second highest in the nation in taxing individuals and fourth highest in business taxes will destroy its future.

California is in the same boat, facing high budget deficits, as are Illinois and New Jersey. Those four states alone account for almost one third of the nation’s economy. Higher taxes are inevitable and will slow the country’s recovery.

As for stock prices, investors are rightly cheering the arrival of the vaccine and the presumed liberation of the economy. This could be a moment to remember the old adage: “Buy on the rumor, sell on the fact.” As the vaccine rolls out, there will be hiccups and disagreements; it’s quite possible that the best case is now being priced into stocks.

It is also true that Biden’s agenda calls for mammoth new regulations and serious disruptions to a number of sectors, starting with energy. His newly formed economic team confirms: it begins to look like the slow-growth Obama era all over again.

None of this bothers Krugman, who recently wrote that “Joe Biden will eventually [after the vaccine defeats COVID] preside over a soaring, “morning in America”-type recovery.”     

Let’s hope he’s right, but his history suggests caution.

Liz Peek is a former partner of major bracket Wall Street firm Wertheim & Company. Follow her on Twitter @lizpeek.