Who is Right? Krugman or Mankiw?

Question/Comment: Paul, please help me understand who is more correct when it comes to the multiplier as applied to tax cuts, versus increased government spending. Professor Greg Mankiw believes that the stimulus package should have more tax cuts, while Professor Paul Krugman wants more government spending. Who is more correct in their arguments?

Paul Solman: I have long known both professors and have long admired their work. But over the years, Krugman has more trenchantly challenged my economic assumptions than just about anyone I’ve consistently interviewed and has – best I can tell – been remarkably right: from his against-the-crowd skepticism about Japan back in the mid-‘80s, right through to the present. I thought he was nuts back then (about Japan), or at least a gloomy Gus.

Krugman takes on this very taxes versus infrastructure debate in a recent New York Times column and I don’t think he’s misstating the case: people tend to save tax cuts and may save a very large portion of them in today’s crisis.

The last thing we need in the short run is more savings. If the government spends the money on the proverbial bridge – even a one-way bridge to Palooka-ville – someone will be hired to build or repair it, someone who might otherwise be out of work. That newly hired person will HAVE TO spend the wages and government will save the safety net costs it otherwise incurs to protect the unemployed.