I hadn’t meant this page to turn into a Paul Krugman defense site, but after watching Treasury Secretary John Snow’s rebuttal of Krugman’s op-ed last night on the PBS Newshour, I feel I need to take issue with his support of Bush’s tax plan and the resulting budget deficits. For one thing, he argues that if Paul Krugman’s predictions of future rising interest rates were correct, the financial markets are forward-looking enough to reflect them already. Well, maybe. Markets do look ahead, but they also work on inertia, waiting for some tipping point before registering even the obvious. Witness the overinflated dollar, which continued to remain high on currency markets for a long time, even though the capital inflows into the US were unsustainable. And the bubble stockmarket of the late 90s should make everyone a little hesitant of financial-markets-as-rational-choice dogma.
Even more, we should be hesitant of any projections and assurances this administration has that the tax cuts won’t cause future deficits. After all, they swore last time that the 2001 tax cut wouldn’t cause any and now even conservative CBO estimates are bleeding red. Sure, we can’t all tell the future, but if someone back then (Krugman) was warning that this would happen over administration denials and sneers of fuzzy math, then you’d think that even conservatives would be giving them a little credit. And that the business community would wake up from its strange optimism in this supply-side nonsense.
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