Krugman’s Fiscal Advice to the Democrats

I’m not quite sure what to make of the latest from Paul Krugman (with hat tip to Brad DeLong):

One of the biggest questions is whether the party should return to Rubinomics – the doctrine, associated with former Treasury Secretary Robert Rubin, that placed a very high priority on reducing the budget deficit. The answer, I believe, is no. Mr. Rubin was one of the ablest Treasury secretaries in American history. But it’s now clear that while Rubinomics made sense in terms of pure economics, it failed to take account of the ugly realities of contemporary American politics. And the lesson of the last six years is that the Democrats shouldn’t spend political capital trying to bring the deficit down. They should refrain from actions that make the deficit worse. But given a choice between cutting the deficit and spending more on good things like health care reform, they should choose the spending.

Both Brad and Paul understand the costs of fiscal insanity and both realize that the Republican Party is not about to step up to the plate by supporting income tax increases. What we have is a “game of chicken” where the political realities that Paul notes have led to an irresponsible position of spend&spend and borrow&borrow. A fiscal game of chicken is how Thomas Sargent described fiscal policy in the 1980’s. The Republicans were all for slashing transfer payments, while the Democrats insisted on reversing the fake Reagan tax cuts. The current debate seems to be playing out in similar terms – with the Republicans all for slashing Social Security benefits. A few conservatives favor increases in regressive taxes (gasoline, consumption, or payroll) as they continue to find more ways to reduce taxes on capital income.

While I tend to count myself in the Rubin camp, I have often said take your hands off of our Social Security benefits. The good news is that the 1980’s game of chicken was resolved in the 1990’s. The bad news is that we allowed George W. Bush to start it anew. The policy question now is how will we resolve this fiscal game of chicken this time? And how we avoid letting ourselves fall for those free lunch promises of pandering politicians like George W. Bush and quacks like Art Laffer in the future?