Tuesday, October 12, 2010

On Costs and Public Works Projects

The outright anger and angst shown by Paul Krugman and others regarding Gov. Chris Christie's cancellation of The Tunnel has been pretty predictable, but it also ignores the fact that governments today are spending huge amounts of money for things that were not in the budget back in the days of the Hoover Dam.

While I am not a regular reader of David Brooks' NYT column (given that I am not much into "National Greatness" Neoconservatism), I do believe that he has some important insights into the latest controversy in his column today. Perhaps the most important point he makes is that at the present time, state and local governments have most of their budgets carried away by government employees. He writes:
...nobody seems to be asking is: Why are important projects now unaffordable? Decades ago, when the federal and state governments were much smaller, they had the means to undertake gigantic new projects, like the Interstate Highway System and the space program. But now, when governments are bigger, they don’t.

The answer is what Jonathan Rauch of the National Journal once called demosclerosis. Over the past few decades, governments have become entwined in a series of arrangements that drain money from productive uses and direct it toward unproductive ones.

New Jersey can’t afford to build its tunnel, but benefits packages for the state’s employees are 41 percent more expensive than those offered by the average Fortune 500 company. These benefits costs are rising by 16 percent a year.

New York City has to strain to finance its schools but must support 10,000 former cops who have retired before age 50.

California can’t afford new water projects, but state cops often receive 90 percent of their salaries when they retire at 50. The average corrections officer there makes $70,000 a year in base salary and $100,000 with overtime (California spends more on its prison system than on its schools).

States across the nation will be paralyzed for the rest of our lives because they face unfunded pension obligations that, if counted accurately, amount to $2 trillion — or $87,000 per plan participant.
Unfortunately, the Keynesian version of this seems to be that the more governments pay out to employees in pay and benefits, the more "aggregate demand" is created. As one of the people who regularly comments on this blog wrote: "What Austrians do not understand is wages are not just a cost – they are always income as well."

This is most instructive, for what he is saying is that the higher the rates of pay, the more wealth is created. No, Austrians are not unaware that one's paycheck is one's income, but we hold that the Keynesians have it backward. One's paycheck should reflect the value of the marginal revenue product one has created, and if pay is raised above such a level -- as is often the case with unionized government employees -- then the real wages of others, after the transfers via taxation are completed are diminished to rates below their MRP (or Discounted MVP, to quote Murray Rothbard).

The Keynesians seem to believe that government spending itself creates wealth, so the more that government spends -- no matter how it does so, taxation, borrowing, or printing dollars -- the wealthier we become. Obviously, Keynesians and Austrians are at an impasse at this point, and there really is no bridging of the intellectual gulf.

Brooks is arguing that there really is a "crowding out" effect of government in which the public employee unions make it increasingly costly for state and local governments to afford to carry out many public works projects. Murray Rothbard noted that over time, true monopolies are captured by their employees, and by definition, governments are monopolies. I believe that this version of a "Capture Theory" is correctly applied here.

27 comments:

Bob Roddis said...

Just think like a Chartalist. Whenever there is a mugging and a robbery, the mugger gets your money! It's a net wash! Everything is still the same! No harm, no foul!

AP Lerner said...

“Perhaps the most important point he makes is that at the present time, state and local governments have most of their budgets carried away by government employees. “

Could not agree more. You could even argue this blog is a waste of state and local government spending.

“Unfortunately, the Keynesian version of this seems to be that the more governments pay out to employees in pay and benefits, the more "aggregate demand" is created.”

This is false and, not surprisingly, ignores the facts of the situation. The budget problems of state and local governments stem primarily from unfunded pension obligations. Pensions are just savings. Or deferred consumption. And since savings detracts from aggregate demand, it is an incorrect interpretation of Keynes to claim spending on benefits increases aggregate demand. Please show me where Keynes claims increased household savings contributes to aggregate demand?

“The Keynesians seem to believe that government spending itself creates wealth”

You keep repeating this line, and I’ll keep correcting you. Deficit spending creates surpluses in the private sector. Net new financial assets can only be created via deficit spending. Public deficits always equal private surpluses. This says nothing about wealth creation. It’s the tyranny of accounting. Sorry, but math still holds.

“Brooks is arguing that there really is a "crowding out" effect of government in which the public employee unions make it increasingly costly for state and local governments to afford to carry out many public works projects”

That’s not crowding out. That’s poor resource allocation. Now, if you said spending by states and local governments on outrageous guaranteed pensions is a waste of tax payer money, then I would agree with you 100%. But state spending on benefits crowds out nothing, otherwise, interest rates would be higher in states with higher spending.

Bob Roddis said...

AP "hut tax" Lerner tries to confuse the point that was made. If resources must be used to pay donut eaters to lay around eating donuts, those resources can’t be used for something else. The law of scarcity rears its ugly head again.

Also, I’m going to try to replace the term “Keynesian” with the word “Krugmanite” so we don’t have to waste so much time debating the hair-splitting surrounding what it means to be a “Keynesian”.

William L. Anderson said...

Could not agree more. You could even argue this blog is a waste of state and local government spending.

Damn, AP, you know how to hurt a guy! I think you most likely are right on this comment! (Gotta have a sense of humor about all this.)

Anonymous said...

Out of curiosity, what specific economics classes do you teach in Frostburg?

jgo said...

There are 2 factions involved in the rail lobby: mass transport, and "gosh wow".

The mass transport people hate individual liberty and privacy and want to eliminate individually owned and driven cars and trucks.

The "gosh wow" crowd is more closely related to the flying car fans and those who were expecting us to have colonies on Mars and around other stars by now. They envision a faster train than is remotely economically feasible without government exercise of force and fraud.

Well, there's also a nostalgia faction. I used to know a guy who spent his vacations traveling around the world by plane just to be able to ride for a few days on a super-annuated train.

"Pensions are just savings. Or deferred consumption."

They would be if all were managed honestly; but that's rare these days. Now, they're promises/contracts which the government will help the firm or union violate... at tax-victim expense.

AP Lerner said...

@ Bob - I normally have little interest in commenting on your posts, since generally they add little value. Calling me AP 'hut tax' Lerner, just further supports my decision to ignore your comments. I had a post written up (which unfortunately got lost) about how enjoyable it is to debate folks like Prof. Anderson, Jason h, burk etc on this blog because, even though we disagree on just about everything, at least they are thoughtful and respectful. Calling me 'hut tax', and misinterpreting Mosler's views on money and taxes is not only thoughtless, its disrespectful, and the assumptions you draw regarding chartalism and Mosler could not be more ignorant. And to even imply the things you implied regarding Warren Mosler in your other posts is just disgusting and ignorant.

@ Prof. Anderson:

"Damn, AP, you know how to hurt a guy! I think you most likely are right on this comment! (Gotta have a sense of humor about all this.) "

Sometimes, the sarcasm comes across all wrong. Truth be told, I envy and respect educators. That comment was not meant to be personal and I totally agree, you have to have a sense of humor....but I still vehemently disagree with you on Says Law :)

@ jgo

"They would be if all were managed honestly; but that's rare these days. Now, they're promises/contracts which the government will help the firm or union violate... at tax-victim expense"

Good point. So not only does spending on benefits detract from aggregate demand today, but they detract from demand later.

Lord Keynes said...

This is most instructive, for what he is saying is that the higher the rates of pay, the more wealth is created.

No, higher rates of pay mean more demand for commodities, so that more production (wealth-creation) will take place).

Lord Keynes said...

The Keynesians seem to believe that government spending itself creates wealth, so the more that government spends -- no matter how it does so, taxation, borrowing, or printing dollars -- the wealthier we become.

A complete caricature:

http://socialdemocracy21stcentury.blogspot.com/2010/10/money-is-it-wealth.html

Wealth creation done in the private sector is facilitated by Keynesian macroeconomic management of the economy and ending recessions.

Deficit spending in a recession is a way of mobilizing idle resources like labour for creation of public infrastructure. Actual production (= wealth creation) is facilitated in the private sector by paying idle workers money as wages to allow them to consume from the private sector or by payment by government for other commodities from the private sector.

Far from thinking of money as “wealth,” Keynesians can easily conceive of money as the tool that facilitates production and creation of wealth. There is no contradiction here with proposition that real wealth is only output.

William L. Anderson said...

As AP knows, I don't take myself too seriously. Personally, I like to see the give and take with people commenting on this blog, as I like the forums and having a place where people can speak their minds.

I tend to take the issues on my other blog more seriously because it often deals with police and prosecutorial misconduct, and that means innocent people go to prison. That is something I take seriously, and on that blog, I take no prisoners, and make no apology for it. Someone has to speak out when people in power abuse others, and I'll do it as long as I can.

And don't worry about what you say on this blog, including the insults (because it makes it more fun -- I'm a big boy and can take the stuff that comes along). As for the classes I teach, generally I teach two sections of either micro or macro principles and one section of the MBA economics class.

In that one, I generally concentrate on entrepreneurship and differing views of the firm. I try to do something a bit different each term. The students seem to like it, and I like teaching principles. Our students often are not well-prepared for college work and I believe it is my job to help them conceptually understand the material. We do the requisite graphs and the like, but I try mostly to teach them how to apply economic theory logically, emphasizing things like marginal utility, factors of production, and the like.

I'm in my 10th year here, having taught at North Greenville College for two years. I got my doctorate in 1999 (a bit later in life than most people, but that is OK as I finally got to pursue what I had wanted to do for 20 years).

AP Lerner said...

Nice post. Thanks.

jason h said...

I quite enjoy Bob's wit. He has the patience to call out the nonsense.

Bob is merely pointing out the immoral origins of MMT and Krugmanism.

The State wants a monopoly on the money supply so it can consume more than it produces and confiscate from the productive class quietly.

Those who advocate this pillage through inflation are immoral, no matter how many times they try to justify it saying it will end the recession

William L. Anderson said...

One thing to keep in mind is that I don't get upset at posts on this blog. I appreciate hearing from people on all sides of the debate. It's fun, and I think all of you are having a good time, and that is what is important to me.

I do get pissed on the other blog, however. When someone defends the undefendable -- prosecutorial misconduct and lies -- I take no prisoners.

I could go out and have a beer with Krugman and have a fun time, and we would not have to disagree. Remember, I'm in a minority where I work, but they still put me in charge of the university committee that makes recommendations for tenure and promotion for university faculty. That means that people know they can trust me to do the right thing concerning their own careers.

However, I would NOT have a beer with someone like Len Gregor or Chris Arnt (the prosecutors in the Tonya Craft case) or most federal prosecutors. There is a huge difference in having an intellectual disagreement with someone like Krugman or AP or anyone else on this blog and breaking bread with someone who lies for a living and who is responsible for innocent people going to prison. To me, we are beyond the realm of intellectual agreements in that situation!

So, have fun, fire away, and contribute something!

Bob Roddis said...

AP “hut tax” Lerner:

Let’s review your history. You’ve ignored EVERYONE’S comments. All of your silly nostrums have been repeatedly eviscerated by many different commenters. We’ve endured the repeated claim that governments were not “revenue constrained”. Others pointed out that such is the case ONLY because the government can loot someone else to pay its debts OR it can pay the debt with diluted currency, an effective default.

Ignoring those points, you then cite to your
McCulley
article asking:

1) Could you explain the errors in this essay by Paul McCulley?

http://www.pimco.com/Pages/GCBFocusJuly2010FactsontheGround.aspx


McCulley then proceeds to explain that when push comes to shove, we can always use the printing press. Thank you, Mr. McCulley for proving our point for us.

Then there were these bizarre claims about how great it is that the government can treat its citizens like rats in a maze because they have to pay taxes with the government’s fiat money. You then cite the Mosler book who excitedly explains the British hut tax as the FACTUAL basis (no theory!!) for this outrage.

There’s really nothing more to say.

AP Lerner said...

"The State wants a monopoly on the money supply so it can consume more than it produces and confiscate from the productive class quietly."

Sorry, but this logic defies math. If the state consumes more than it produces, then it is creating net new financial assets in the private sector. If it consumes less, then it is stealing from the private sector, and history tells us depressions follow.

If you want to say government consumption has been wasteful and not equitable, I'm with your 100%. But if you want to say deficits are the problem, then I disagree with you 100%. The distribution of the deficits is the problem, not the deficit itself. If you have been paying attention to what I have been writing, then you know I believe the US is grossly over taxed at the Federal level, and the deficit should be larger to provide additional income to the private sector. I have said on this blog I thought the Bush tax cuts were the correct policy at the time. I stand by that because I know there the limit to the deficit is not solvency, but inflation.

"Those who advocate this pillage through inflation are immoral"

I, nor anyone that advocates MMT has said or believes this. This line sounds fancy at a cocktail party, but it's simply nonsense.

The irony is MMT is based on the private sector/free market determining the size of the public deficit because MMT'ers understand the relationship between the public and private sector. Whereas a lot of Austrians believe in no deficits and balanced budgets. MMT'ers would argue that government should intervene less with the private sector and allow the deficit to expand and contract based off the private sectors desired income levels. Austrians see a deficit and want to start running for the hills...

Another Anonymous said...

Jason H:The State wants a monopoly on the money supply From the MMT/Chartalist point of view, this is crazy. Money is a creature of the state. Money is created by states. The state always has a monopoly on the money supply, by definition.

It is like saying the army wants a monopoly on the supply of Colonels, a military rank. That there are such things as Kentucky Colonels, people who call themselves Colonels, and Colonel Sander's Fried Chicken doesn't make it less crazy. Arguably non-state monies like cigarette money only ever arose in extreme & temporary conditions, long after the creation of money by states, and are as important in the history of money as Colonel Sanders is to military history.

This is a or the key difference between MMT & Keynes (& most historians) and Austrians - Menger (& most economists). These two schools are the only ones with the wit to see the importance of the metaphysical question "What is Money?"

jason h said...

I was referring to the historical origins of State controlled money. If the King can only 'produce' $Y through taxation, but wants to 'consume' $X worth of guns (where X>Y). What does he do? The King doesn't have a gold mine, and citizen's have chosen gold as their medium of exchange. First he declares his citizens can only use the King's gold, then he dilutes the King's gold with silver. If he's smart he'll keep the King's (diluted) gold circulating among his citizens and reserve pure gold for trade with foreigners, who will probably test the purity of the gold as they are suspicious and not legally bound to the State currency. Fast forward and the King now issues paper receipts as substitutes for hard money, convinces the world to use his receipts for trade based on gold backing, then removes the gold backing when the world begins to see just how many receipts have been issued and the convenient lack of gold. Now you have a fiat currency backed only by the King's guns. Chartalism is born from counterfeiting and fraud.

I understand what you have posted many times regarding MMT and deficits. However the accounting is entirely disconnected from the actual system it tries to measure. All the Chartists could fly to the moon, print a trillion moon bucks, pay half the population to dig moon ditches and the other half to fill moon ditches, while taxing their income at 50% of course, and the tyrannical arithmetic says the moon colonist have increased their private savings by 500 billion moon bucks. Too bad nothing has been produced to buy with those moon bucks.

State sponsored money printing and private counterfeiting are morally identical. While the rest of us have to produce and sell our goods and services through voluntary exchange in order to get our hands on FRNs, the money printers and counterfeiters simply fire up the presses, and because the King's guns force us to accept FRNs the counterfeiters are buying up the same scare resources as the productive folks robbing their purchasing power. Fraud and theft.

Another Anonymous said...

jason h : Fine, but my point is then that is what money has always been, fraud and theft. Money historically originated from states. It did not exist before states, and long predates coinage and even usage of precious metals. Money is intrinsically and originally social credit, fiat money. Citizens have chosen gold as their medium of exchange. The argument is that this is historically false. It never happened. Money is fundamentally a unit of account, not a medium of exchange, which arose later. Menger was "wrong". Economists' textbook history of money is wrong. Thinking about "the historical origins of State controlled money" is bizarre - it is like thinking about the historical origins of Army-controlled Colonels, as if there were perfect platonically ideal Colonels before armies. You had what I was saying righter when you said Chartalists rewrite the history of money. They do it the same way historians, anthropologists and archaeologists do, by looking at the historical record.

The subsidiary contention is that in a well-run state, this fraud and theft called money has no victims, and benefits everyone, so it is a very odd kind of fraud and theft, a very odd kind of immorality.

Richard said...

AA,

How can I have a good that acts as a unit of account (money) before it becomes a medium of exchange? If I have a good as a unit of account, that means all other goods must first have price in terms of it. If all other goods have a price in terms of it, then it must have traded at some ratio with respect to these goods in the recent past. If it traded at some ratio with respect to these goods, it must have done so based on a mutually beneficial exchanges, otherwise there would have been no trade in the first place, and thus no ratio of exchange. What does a mutually beneficial trade have to do with the state? People trade all the time for mutual benefit, and by definition, without the state telling them to do so.

Anyone forced to make a trade they do not want to make is a victim, whether they are forced to do so in a 'well run' state monetary system, or one poorly run. By definition, they are not making a trade for their own benefit whether you believe it is an 'odd morality' or not.

Richard said...

Correction, last phrase should have read:

"an 'odd immorality' or not."

jason h said...

I believe Richard is on to it. The money must have some value first, or why would the State want to accumulate it through taxation? What about foreign trade? Other nations are not going to accept payment in a currency that only used to pay taxes in another land.

If the State imposes a ten widget per week tax on its peoples it obviously creates a market for widgets, but the State must value widgets for some reason (hmm...perhaps they are a widely accepted medium of exchange)

AP Lerner said...

"The money must have some value first, or why would the State want to accumulate it through taxation?"

Nope. It's taxation that gives value to the money/currency, not the other way around. If you did not have to pay taxes in USD, then they would worthless. I know, I know, you think this is immoral. But it's also reality.

"If the State imposes a ten widget per week tax on its peoples it obviously creates a market for widgets,"

Sorry, you have it backwards. The tax on the widgets creates a market and value for the currency the tax is denominated in, not the other way around.

http://findarticles.com/p/articles/mi_6787/is_41/ai_n28321631/

Here's a rule of thumb: take everything you learned in your Mankiv textbook about money, crowding out, inflation, savings and investment and turn it around. The opposite is more likely to be true.

Bob Roddis said...

Since Mankiw was only 13 when I took macro, I don't have a Mankiw book to unlearn. Oh, that brilliant "national income" stuff.

AP "hut tax" Lerner's comments daily fill me with a happy/warm feeling inside by repeatedly demonstrating that there are absolutely no existing critiques of the Austrian School.

jason h said...

We've been here before, tell me you must see what I see...

USD have value because gov't collects taxes in USD; the gov't collects taxes in USD because they have value.

Quite circular no?

How did the dollar become the worlds reserve currency? Foreigners obviously did not have a high enough US tax liability to justify accumulating all that cash. Perhaps it was because it was backed by real money that could not be printed.

Fortunately, I am not handicapped by the formal gov't sponsored Keynesian economic education.

Richard said...

AP,

Another Anonymous (10/13 @ 3:52) wrote:

“The argument is that this is historically false. It never happened. Money is fundamentally a unit of account, not a medium of exchange, which arose later.”

I do not see how a good can become a unit of account before it is used as a medium of exchange. One cannot use a good as a unit of account before all other goods are priced in terms of it. In order for all other goods to be priced in terms of it, that certain good must have been used in exchange for all other goods. In other words, that certain good must have been used as a general media of exchange.

I don’t see how your response refutes what I wrote.

Bob Roddis said...

Richard has it right.

For example, gold and silver had use value as medium of exchange regardless of what any government thought of it.

Now, the chartalists might properly say that if the government outlaws gold and silver and forces everyone at the point of a gun to use its evil funny money and the people are ignorant of the nature of money, and the government controlled schools suppress the true nature of money, then such funny money may likely become a medium of exchange.

But that's no reason to cheer.

Another Anonymous said...

I was speaking historically. Don't have time to write a better reply:
money originally was a unit of tax/fine account to religious temples / states in Egypt and Mesopotamia. (Taxes are the price we pay for Marduk & Horus's protection?) Money was not a good, didn't arise from private trading, and predates by millennia use of gold and silver. Money was not originally commodity money, but fiat money - at least the original ancient concept was much closer to the latter than the former. Prices, widespread monetary trading etc came later, as is logical.

I don't think I understand the ancient concept(s) perfectly - Chartalist Mr AA ironically leads an Austrian/Libertarian life, and just woke up from 16 hours sleep after working 28 hours straight on his bidness, and has less time for research than he would like. But I think what I wrote above is the gist of what historians and MMT/Keynes works say.