Paul Krugman: We need politicians to be honest about economy

It’s fantasy football time in political punditry, as commentators try to dismiss Hillary Clinton’s dominance in the polls – yes, Clinton Derangement Syndrome is alive and well – by insisting that she would be losing badly if only the Republican Party had nominated someone else.

We will, of course, never know. But one thing we do know is that none of Donald Trump’s actual rivals for the nomination bore any resemblance to their imaginary candidate, a sensible, moderate conservative with good ideas.

Let's not forget, for example, what Marco Rubio was doing in the memorised sentence he famously couldn't stop repeating: namely, insinuating that president Barack Obama is deliberately undermining the United States.

It wasn't all that different from Trump's claim that Obama founded Islamic State. And let's also not forget that Jeb Bush, the ultimate establishment candidate, began his campaign with the ludicrous assertion that his policies would double the American economy's growth rate.

Centre-left vision

Which brings me to my main subject: Clinton’s economic vision, which she summarised last week. It’s very much a centre-left vision: incremental but fairly large increases in high-income tax rates, further tightening of financial regulation, further strengthening of the social safety net.

It’s also a vision notable for its lack of outlandish assumptions. Unlike just about everyone on the Republican side, she isn’t justifying her proposals with claims that they would cause a radical quickening of the US economy. As the nonpartisan Tax Policy Center put it, she’s “a politician who would pay for what she promises”.

So here’s my question: is the modesty of the Clinton economic agenda too much of a good thing? Should accelerating US economic growth be a bigger priority? For while the US has done reasonably well at recovering from the 2007-2009 financial crisis, longer-term economic growth is looking very disappointing.

Some of this is just demography, as baby boomers retire and growth in the US working-age population slows down. But there has also been a somewhat mysterious decline in labour-force participation among prime-age adults and a sharp drop in productivity growth.

Potential GDP growth

The result, according to the congressional budget office, is that the growth rate of potential GDP – what the economy could produce at full employment – has declined from about 3.5 per cent a year in the late 1990s to about 1.5 per cent now. And some people I respect believe that trying to get that rate back up should be a big goal of policy.

But as I was trying to think this through, I realised that I had Reinhold Niebuhr’s famous serenity prayer running through my head: “Grant me the serenity to accept the things I cannot change, courage to change the things I can, and wisdom to know the difference.” I know, it’s somewhat sacrilegious applied to economic policy, but still.

After all, what do we actually know how to do when it comes to economic policy? We do, in fact, know how to provide essential healthcare to everyone; most advanced countries do it. We know how to provide basic security in retirement. We know quite a lot about how to raise the incomes of low-paid workers.

I’d also argue that we know how to fight financial crises and recessions, although political gridlock and deficit obsession has got in the way of using that knowledge.

History

On the other hand, what do we know about accelerating long-run growth? According to the budget office, potential growth was pretty stable from 1970 to 2000, with nothing either Ronald Reagan or Bill Clinton did making much obvious difference. The subsequent slide began under George W Bush and continued under Obama. This history suggests no easy way to change the trend.

Now, I’m not saying that we shouldn’t try. I’d argue, in particular, for substantially more infrastructure spending than Clinton is proposing, and more borrowing to pay for it. This might significantly boost growth. But it would be unwise to count on it.

Meanwhile, I don’t think enough people appreciate the courage involved in focusing on things we actually know how to do, as opposed to happy talk about wondrous growth.

Bushonomics

When conservatives promise fantastic growth if we give them another chance at Bushonomics, one main reason is that they don’t want to admit how much they would have to cut popular programmes to pay for their tax cuts. When centrists urge us to look away from questions of distribution and fairness and focus on growth instead, all too often they’re basically running away from the real issues that divide us politically.

So it's actually quite brave to say: "Here are the things I want to do, and here is how I'll pay for them. Sorry, some of you will have to pay higher taxes." Wouldn't it be great if that kind of policy honesty became the norm? – New York Times service