In a radical departure from his previous expressions of dissillusionment, Paul Krugman has implicitly declared in his latest blog post that we are now living under the best of all policy regimes. I presume he will now be able to retire with satisfaction from his career as a gadfly.
The context is Eric Cantor’s demand that any federal disaster relief in the wake of Irene be offset by spending cuts elsewhere. Krugman thinks this is silly, and proves his point with an appeal to the standard Ricardian theory of public finance. According to that theory, which all economists understand and accept, if you’ve got to bear a cost, it’s best to spread that cost out over as many activities as possible. So ideally, you’d pay for disaster relief partly through spending cuts, partly through (current) tax increases, and partly through an increase in the deficit. Therefore says Krugman, “the bottom line is that basic, regular economics says that Cantor isn’t making sense.”
Since Krugman has carelessly neglected to spell out an important detail of his argument, let me fill in the gap for him: The Ricardian conclusion does not come from thin air; instead it follows logically from certain premises, key among which is that you’re starting from an ideal policy regime.