President Obama’s Job Speech – Kevin Caves, Paul Krugman, and Scott Sumner

by robekulick

I’ve been meaning to post about this all week. A few days before President Obama’s speech, Kevin had this to say:

“Robe – I saw that NYT posted this and several other fairly interesting essays by economists proposing various measures that the President could propose to spur job creation. The irony, of course, is that the odds of these or indeed any substantive measures going anywhere beyond the drawing board appear to be near zero, which leads one to suspect that all the buildup to the big speech on jobs tonight is much ado about nothing.”

As usual Kevin was prescient. Wall Street clearly wasn’t particularly impressed by the speech and, Scott Sumner had this to say about it:

“It was even worse than I expected.  I expected one good thing (an employer-side payroll tax cut) and lots of ineffective demand stimulus measures.  The actual plan botched the payroll tax cut, and was heavily focused on demand-side measures.”

However, perhaps unsurprisingly, Paul Krugman actually took the opposite view:

“First things first: I was favorably surprised by the new Obama jobs plan, which is significantly bolder and better than I expected. It’s not nearly as bold as the plan I’d want in an ideal world. But if it actually became law, it would probably make a significant dent in unemployment.”

Ok, so Scott Sumner and Paul Krugman disagree. That’s a common occurrence. But what’s particularly interesting is the why of Krugman’s positive reaction to the speech:

“Still, the plan would be a lot better than nothing, and some of its measures, which are specifically aimed at providing incentives for hiring, might produce relatively a large employment bang for the buck.”

I almost did a double take. Is Paul Krugman’s support for the plan because he favors an employer-side tax cut? That’s what I think I just read there, but is Paul Krugman supporting a measure that directly effects aggregate supply, ie a “supply-side” stimulus???

Here is Scott Sumner explaining the effects of a employer-side payroll tax-cut:

“Christina Romer recommended an employer-side payroll tax cut, which would help overcome the problem of sticky nominal wages.  It would shift the short run AS curve to the right.  Because the Fed seems reluctant to allow a fall in AD, any increase in SRAS should boost employment.”

Scott Sumner then goes on to propose that congress veto the bill as proposed and just pass an across the board payroll tax-cut. Given that this is what Krugman thinks is really good about the plan, does that mean in reality Krugman would favor Sumner’s approach? Have we entered an alternate universe? I just wish I was important enough to get reactions from Sumner and Krugman, because I really, really want to know if I have this right or if I’m just confused.