Mankiw does a nice job of making the case for the conservative cause, though I'm not sure if there are any powerful people in the Republican party who actually embody this cool and rational approach. In any event, Mankiw's piece is a plea to the President to understand economic conservatives as standing for the following principles:
1. Focus on long-run issues: Milton Friedman was a strong proponent of this approach. When pressed for his views on short-run macroeconomics, Friedman's framework looked like an IS-LM model, but he was firmly against the use of short-run stabilization policy. According to Friedman, given policy lags and our lack of knowledge about how policy works, we would be better off not intervening to smooth business cycle fluctuations.
2. Incentives are important: The tax system and social insurance have to be designed with incentives in mind. For example, high marginal income tax rates discourage work. Note that this applies to the rich as well as the poor, if not more so.
3. Forget about income redistribution: Essentially all changes in fiscal policy have implications for the distribution of income and wealth. What I think Mankiw means here is that fiscal policy should not be designed specifically to redistribute income. For example, some objections to the recent tax bill from Democrats were related solely to the fact that the bill would retain the top marginal tax rate where it has been since the Bush tax cuts, instead of increasing it.
4. But inequality is a serious problem. We need to improve our educational system: Mankiw is not specific here. It's not clear if what he has in mind is an expansion of public education, or incentives for private education.
5. The demonization of conservatives won't get anything done.
Now, Krugman's column from today is not about these conservative principles, of course.
1. Focus on the short run: Mankiw, who certainly appears to be very much a short-run Keynesian (he of the Sticky Price Manifesto) seems to think that we have done enough stimulus, and it is time to move on. However, Krugman is very concerned, most of all about what he thinks is unwarranted optimism.
2. Don't worry about incentives.
3. Income redistribution is the main goal: Krugman states:
Jobs, not G.D.P. numbers, are what matter to American families.Krugman focuses almost exclusively on the unemployment rate as a welfare measure. What he seems to have in mind is that, in any recession the dispersion in income across the population increases, and this effect is even larger in this recession. In the aggregate, we of course care about GDP numbers, but Krugman cares a lot about the distribution of income, and he wants to change it through the tax system and government expenditures on goods and services.
4. Public education? I think if you asked Krugman, he would come out in support of more resources for public education. In line with his focus on the short run, he does not mention that here.
5. Demonization: Krugman is of course well-known for this. You know that eventually he'll get around to "this Republican is a jerk," or "that Republican is a dope." This time out, he's a little milder than usual, but comes up with:
Realistically, the best we can hope for from fiscal policy is that Washington doesn’t actively undermine the recovery. Beware, in particular, the Ides of March: by then, the federal government will probably have hit its debt limit and the G.O.P. will try to force President Obama into economically harmful spending cuts.Before we see it, we know that nothing good can come from Republican economic policy.
What are we to make of this? To me, Mankiw is making some sense, but I don't see any long-run vision coming from either political party, and Krugman isn't helping.