How does the world work?

Krueger's Keynesian Leftovers

IBD Editorial

Just a week before he unveils a new, improved jobs plan, President Obama has named a new person to be his top economic adviser, Princeton University's Alan Krueger. This doesn't bode well for job creation.

Krueger, a labor economist, is no obscure academic. Though youngish at 50, he's been around for decades, most recently spending two years in Obama's Treasury Department. And in the 1990s, he served a stint as Bill Clinton's chief labor economist.

By naming him to the chairmanship of the president's Council of Economic Advisers, replacing the departed Austan Goolsbee, Obama is sending a strong signal to the business world, Wall Street and the rest of America: expect little in the way of major economic policy shifts.

Or in other words: if you don't like the White House status quo, tough.

Krueger's a known quantity. While serving as Treasury's chief economist in 2009 and 2010, he analyzed several programs, including giving employers tax incentives to hire, "Cash for Clunkers," the Small Business Lending Fund and "Build America" muni bonds.

The economy is still a shambles. None of these programs has worked very well. Was Krueger at Treasury telling the White House these were bad ideas? Nothing we know of suggests that's the case.

Going further back, Krueger was co-author of a major 1992 study that posited rises in minimum wage could lead to more hiring. Try telling that to black youth, who suffer a 40% unemployment rate largely because the minimum wage has priced them out of the job market.

Common sense should tell you that when you tax something, you get less of it — not more. Krueger's study was roundly criticized and debunked.

As such, with joblessness remaining stubbornly above 9%, we're not optimistic about Krueger's input into Obama's coming Jobs Program.

Still more recently, Krueger popped up as an advocate for a value-added tax (VAT) or, as some call it, a consumption tax. Nothing wrong with that, per se, unless you're pushing it not as a replacement for our current dysfunctional income-tax code, but as an addition to it.

But that's exactly what Krueger did, although to his credit he did write in a January 2009 New York Times piece that "the main downside of this proposal is that taxes reduce economic activity."

Darn right. Not only that, but unless you get rid of the income tax entirely when you impose a consumption tax, you end up with an overtaxed, stagnant mess. Don't think so? Look at Europe, where citizens are hit with both income tax and a VAT, and the two just keep marching higher.

"European nations imposed VATs about 40 years ago, which simply encouraged more spending and more debt — and now several nations are on the verge of bankruptcy," noted economist Daniel Mitchell of the Cato Institute.

Not everyone feels as we do about Mr. Krueger. Some right-of-center economists, such as former George W. Bush adviser Greg Mankiw and George Mason University's Tyler Cowen, lauded his selection.

And, to his credit, Krueger is the author of several influential studies that have held up over time — including one that suggests extending jobless benefits isn't really stimulus — significant, since this is expected to be part of Obama's jobs program.

Even so, we're disappointed in Krueger's appointment. Nothing personal, but we had hoped Obama would select someone who stands outside of the reigning Keynesian consensus that accepts the primary role of government as a driver of the economy.

That's not how the world works. A massive amount of new and innovative economic research shows that. That's why we can't join others in rejoicing, especially given this administration's repeated economic errors.

Intellectually, Krueger represents nothing new.

Just more Keynesian leftovers.