Monday, June 18, 2012

Krugman: I Refuse to See the Elephant in the Room

A lot of people have weighed in on the Greek Morality Play, better known as the collapse of Greece's economy, and there is no shortfall of "wisdom" and advice. (For that matter, I made comments myself on the Greek situation during an interview on the RT network last March.)

Not surprisingly, Paul Krugman has weighed in again, and this time he not only claims that the problem is not enough inflation, but also deliberately ignores the real problem behind much of the Greek collapse: Greece's notorious and "bloated" (to use a term from Krugman's employer, the New York Times) bureaucracies led by its militant public employee unions. Instead, Krugman sets up other straw men and then claims that if only -- If Only! -- the Germans would crank up the monetary printing presses, Greece could be saved.

Before going into specifics, I would like to point out that Krugman is correct when he notes that a single currency union of many states indeed does impose certain fiscal restrictions. The examples he uses for the United States are dishonest, and even when explaining the European currency union, he does not tell the whole story, lapsing, instead, into his usual spate of accusations coupled with his demands for more inflation. (And, yes, I will explain my point later in this piece.)

Krugman writes:
So, about those Greek failings: Greece does indeed have a lot of corruption and a lot of tax evasion, and the Greek government has had a habit of living beyond its means. Beyond that, Greek labor productivity is low by European standards — about 25 percent below the European Union average. It’s worth noting, however, that labor productivity in, say, Mississippi is similarly low by American standards — and by about the same margin.

On the other hand, many things you hear about Greece just aren’t true. The Greeks aren’t lazy — on the contrary, they work longer hours than almost anyone else in Europe, and much longer hours than the Germans in particular. Nor does Greece have a runaway welfare state, as conservatives like to claim; social expenditure as a percentage of G.D.P., the standard measure of the size of the welfare state, is substantially lower in Greece than in, say, Sweden or Germany, countries that have so far weathered the European crisis pretty well. 

So how did Greece get into so much trouble? Blame the euro.
 His statement is more significant for what he ignores, not claims, and he has left out the role of Greece's legendary public employee unions. Interestingly, the paper for whom he writes, the NYT, has described the Greek government unions this way:
Stories of eye-popping waste and abuse of power among Greece’s bureaucrats are legion, including officials who hire their wives, and managers who submit $38,000 bills for office curtains.

The work force in Greece’s Parliament is so bloated, according to a local press investigation, that some employees do not even bother to come to work because there are not enough places for all of them to sit.
And there is more:
The government is in many ways an army of patronage appointments built up over decades. When election time rolls around, state workers become campaign workers, and their reach is enormous. There are so many of them that almost every family has one.

This puts the Socialist prime minister, George A. Papandreou, or any other Greek leader, in a tough spot: There can be little upside to cutting jobs precisely when the government most needs support for unpopular budget-cutting actions.

“There is a political cost to these reforms,” said Nickolaos G. Travlos, an economist at the Alba Graduate Business School in Athens. “These workers are opinion leaders in their communities. And they are busy blaming the government, especially a Socialist government that is supposed to protect them."

They are also well organized. This week’s general strike follows weeks of smaller strikes, rallies, sit-ins and a blockade of the Athens landfill that has left piles of garbage rotting in the streets. When auditors from the “troika” — the International Monetary Fund, the European Central Bank and the European Commission — arrived last month at the Finance Ministry, workers blocked their entry.
There obviously is a disconnect here, but one has to remember that Krugman considers government unions to be a source of wealth creation, and not something that destroys wealth. In fact, the more bloated and unproductive the Greek government unions become, the more wealth they create, because their non-productivity means that the government has to hire more people which means more jobs. This clearly is the proverbial "elephant in the living room" that Krugman refuses to acknowledge.

Most "conservative" and libertarian criticisms of Greece that I have read do not deal with Greece's welfare state, contra Krugman. Instead, they have been critical of the very thing Krugman pointedly ignores: government employee unions, and there is enough evidence on the table to demonstrate that the picture of the hard-working Greek citizen toiling long hours is not a government worker, but rather someone in the private economy working to support the bureaucrats that have become a huge burden. (Notice how Krugman lumps all Greek workers together instead of separating those who financially support the unions and those who consume the wealth that others produce.)

Now, if Greece were on the drachma, then I suppose the government could print a lot of money to pay for these workers, and the result would be inflation, lots of inflation. By being on the euro, the Greek government has not had that option, which meant that whatever extra money came into the system outside the private economy would come in via borrowing, and the Greek crisis precisely has been about the government's unmanageable debt service.

In Krugman's world, however, things are turned upside down. Private savings are bad, government spending and debt are good. Public sector unions create wealth and private enterprise destroys it.
His comparison of this country's state governments with Greece might have some bearing in the argument, but even there Krugman gets it backwards. Krugman's support of the government unions in Wisconsin and California and his recent claim that state government spending -- or the alleged lack, thereof -- is causing the current downturn ignores the simple fact that state government unions mostly consume, not create, wealth. Steven Greenhut writes:
Over the past decade, California governments have dramatically increased the pay and especially the benefit packages of public-sector workers. We have firefighters earning average total compensation packages of $175,000 a year in many jurisdictions, and majorities of police officers in some agencies retiring on questionable disabilities. The standard retirement package for the ever-expanding class of “public safety” officials allows them to retire at age 50 with 90 percent of their final year’s pay—and that’s before all the add-ons and scams. Miscellaneous members—the rest of public employees—aren’t far behind, and we’ve seen absurd enrichment schemes and salaries in one scandal after another.

I’ve watched a sea of proposals pass that give government employees special privileges that would never be allowed for mere private citizens, such as a recently passed California bill that allows many officials to shield their personal information from public property databases. These privileges encourage arrogance and misuses of power. Pensions are now consuming 16 percent of California’s discretionary budget, and in cities such as San Jose, pension costs escalated an eye-opening 350 percent in a decade.
In Krugman's world, all of this is justified not only under the guise of "democracy" and "fairness," but also because such measures mean more "spending" by government employees, and such spending in Wonderland creates wealth. But a column by Paul Krugman, unfortunately, does not contain just bad economic analysis, but also encompasses some outright howlers, and we see them in his comparison of the Greek situation to this country:
Ask yourself, why does the dollar area — also known as the United States of America — more or less work, without the kind of severe regional crises now afflicting Europe? The answer is that we have a strong central government, and the activities of this government in effect provide automatic bailouts to states that get in trouble.

Consider, for example, what would be happening to Florida right now, in the aftermath of its huge housing bubble, if the state had to come up with the money for Social Security and Medicare out of its own suddenly reduced revenues. Luckily for Florida, Washington rather than Tallahassee is picking up the tab, which means that Florida is in effect receiving a bailout on a scale no European nation could dream of.

Or consider an older example, the savings and loan crisis of the 1980s, which was largely a Texas affair. Taxpayers ended up paying a huge sum to clean up the mess — but the vast majority of those taxpayers were in states other than Texas. Again, the state received an automatic bailout on a scale inconceivable in modern Europe.
 None of these situations involved state spending; in fact, the housing bubble and the S&L crisis involved federally-sponsored institutions which also had crises in other states. Furthermore, his examples of Social Security and Medicare fall into the non sequitur category, given that both are federal programs and paid not by state taxes and spending, but rather through a nation-wide taxation system. In other words, Krugman gives us a dishonest apples-and-oranges comparison.

However, if the states, such as California, were to have fiscal problems because government employee unions have plundered everyone else, that is a different matter altogether. Krugman has argued that the federal government should borrow in near-unlimited amounts in order to prop up the budget deficits in the states, and he essentially argues that Europe should do the same for Greece and other countries.

Yes, this will mean more inflation, but in Wonderland, more inflation means more spending and more spending means a better economy. And, yes, Krugman has argued many times that increased inflation is good for us, almost as good as an invasion of "space aliens."

As Lew Rockwell has noted in this appearance on RT, many of the "austerity" measures imposed upon Greece have been done in the name of bailing out the European banks that were foolish and craven enough to go along with Greece's spending schemes. Instead of bailouts, Rockwell has recommended that Greece simply default, which actually would better serve both Greece and Europe.

Why? Greece would be forced to put its own fiscal house in order by being realistic about government spending, and the European banks in the future would have to lend money for productive measures, not unsustainable government foolishness. Indeed, as he notes, Greek workers have been victimized by governments and banks, but his sympathies are aimed toward the real Greek taxpayer: the private sector worker who has to work long hours to support those who don't have to work at all.

Paul Krugman, on the other hand, claims that the only way to have real economic recovery and growth is for governments to borrow, print money, and continue with excessive government employee union activities. This is not economics in any authentic sense; it is just more Keynesian misrepresentation of reality.


Hamsterdam Economics said...

Excellent post, Professor Anderson.

I found Krugman's assertion that Greece is a hard working country based on its hours worked per week statistic to be pretty absurd. I looked to the source that Krugman quoted on this one--The Guardian--and found that Greece's "productivity per hour worked" was just over half that of Germany's. (Honestly, though, I don't know how much I trust any of this data).

To me, Krugman's use of hours worked instead of productivity per time period reveals his belief that labor, like capital, is homogeneous. Labor in, wealth out, apparently. I wrote about this today on my blog, at

Dan said...

Anderson's ideology does not allow him to make a distinction between public sector employees that add value to society and those which don't. This makes him look a fool when comparing the Greek situation to the American one where value adding public sector jobs in the states have been drastically cut over the past few years.

Mike M said...

Dan, Please define your definition of “American values added public sector jobs” so we can better understand your ideology.

Mike M said...

Krugman asks: Ask yourself, why does the dollar area — also known as the United States of America — more or less work, without the kind of severe regional crises now afflicting Europe?

Answer: A post revolutionary war common Federal debt and while States may issue their own debt it can’t be used as reserves to issue currency against. World War II victory and with it Bretton Woods and subsequent monopoly status of the USD. (for now)

Krugman’s answer to his own question: A strong central government … = unadulterated nonsense. Krugman will only be happy with State Governors are relegated to the status of small town Mayors and a small group of “intellectual’ elites in a central power decide and control every material thing in society.

Krugman’s arrogance blinds him from the fact if that ever were to happen, he could not be part of the club. His “services” would no longer be necessary.

C. Van Carter said...

Setting up an online store in Greece requires, among other things, stool samples.

Meng Hu said...

It seems that the effectiveness of fiscal stimulus depend on the type of spending. But even so, it does not necessarily imply that government would spend wisely the money. It seems that government size correlates with higher corruption. And finally, government could easily justify a policy calling for an increasing control over the economy by the way of increased spending.

By the way,
If you want to have a good laugh, see here :
Hazlitt’s Criticism of Keynes’ General Theory

Tel said...


Anderson's ideology does not allow him to make a distinction between public sector employees that add value to society and those which don't.

Do you have a way to discover which public sector employees add value to society and which do not? Krugman presumes they all do, Anderson presumes none of them do. Obviously both positions are extreme, but let me propose a test.

You have a hypothetical city with 1000 police and one candidate suggests reducing the number to 900 and also reducing taxes (let's presume everyone in the city pays equal tax to avoid wealth transfer arguments), another candidate suggests increasing the number of police to 1100 but this will require higher tax.

Which is best, and why? I probably haven't given enough information to solve it, but it's an open ended question so feel free to make reasonable assumptions or describe how you would go about collecting the necessary data.

Anonymous said...

Is it just me or does Sunday's article in the Washington Post ( refute Keynesian economics almost in totality? If deficit spending leads to lower long term GDP growth, government spending cannot be an economic stimulus. Thoughts?

Lord Keynes said...

"In Krugman's world, ... Public sector unions create wealth and private enterprise destroys it."

Nothing but a straw man, Anderson.

And in point of fact, for all the alleged union power in Greece, the country has already had about a 30% cut in wages, contractionary fiscal policy, and austerity for years on end, and its done nothing but cause endless depression.

William L. Anderson said...

Yes, LK, the Greeks need to be subsidized by the rest of Europe so they can have living standards that they are not producing.

Oh, I forgot. Printing money is what creates wealth. So, the solution is for Greece to go to the drachma, print a lot of drachmas, and get rich. Of course. The Keynesian solution!

Pulverized Concepts said...

An article from a Greek English language newspaper describes the various possible scenarios in the inevitable event that the Greek government runs out of the money needed to pay its bills. There are some interesting numbers in the piece. Of the budgeted 5 billion euros in expenses due in June, 3.6 billion euros comprise the refinancing of T-bills and interest payments. That means only 1.4 billion euros are needed for current expenses. Operating on borrowed funds has been expensive for the Greeks. Four billion is expected to flow in from the International Monetary Fund and the European Financial Stability Facility (EFSF).

The real interesting statement is this: Finally, the government may use part of the resources of the Financial Stability Fund (FSF), which are mainly earmarked for the recapitalization of banks. The fund currently has a reserve of 3 billion euros.
According to statements by FSF members, the fund will disburse 18 billion on Tuesday or Wednesday to boost banks’ capital base. National Bank of Greece will receive 6.9 billion, Eurobank 4.2 billion, Alpha Bank 1.9 billion and Piraeus Bank 5 billion euros.

The Greek government budget has expenses of 5 billion euros and an unknown amount of income. Greek banks are going to receive 18 billion euros for recapitalization. This must mean that the survival of Greek banks is a higher priority than the survival of the government itself. At least, that's the way I see it.

William L. Anderson said...

Very interesting. Watching central banks and governments scrambling to protect and bail out the banks reminds me of William Faulkner's book, The Hamlet, in which the Snopes family moves into Frenchman's Bend and gradually takes over.

The rumor was that someone in another community had crossed the Snopes and they had burned down his barn. Thus, the people were afraid of what might happen to their barns, so they tried to appease the Snopeses at every turn.

Likewise, the banks are protected because we are told that their failure would be utterly disastrous. As I see it, not as disastrous as propping them up and not dealing with the fundamental issues that created this crisis in the first place.

Anonymous said...

Mr. Anderson,

Either you don't understand Prof. Krugman's positions or you are purposely misrepresenting them. In any event, I won't waste any more of my time reading your blog.

William L. Anderson said...

I understand Krugman's positions quite well. He is a Keynesian and I am very familiar with the Keynesian system.

You support Krugman, so you don't like to read someone criticizing him. By the way, do you believe that Krugman has "understood" the Austrian positions? When he calls the Austrian Theory of the Business Cycle a "Hangover Theory," which it is not, and then creates a straw man in order to refute it, do you then support what Krugman is saying?

Just wondering. But since you won't be reading the blog, I guess you won't know about this.

ALima said...

What are value adding public sector jobs?
Which could not be done by the private sector?
I suspect there is no distinction except in the eyes of government employees.

Anonymous said...

Mr. Anderson if you think you understand Keynesian theory so well then perhaps you can tell us under what conditions Keynesian theory actually agrees with austerian policies about what to do during a downturn such as a recession/depression? I can tell you right now if you think there is no places where these two approaches agree, then you really don't understand the Keynesian approach.

Anonymous said...

I don't think Anderson understands wealth creation. Wealth creation is more than just raw productivity, or savings, or even how efficiently the profits are collected. Wealth creation is also dependent on how the profits are divided among the various workers in an organization. I would say agreements on how the profits are divided are more important than raw producivity when it comes to wealth creation. For example, I could be the most productive slave in the world, but if the agreement is that the spoils of all efforts go almost exclusively to the Pharoah, then obviously my productivity won't allow me to gain wealth. Subsequently if I'm the Pharoah and my productivity is so small that I can't be bothered to walk when others can carry me, that lack of productivity won't stop me from being the wealthiest person in the kingdom. So of course organizations that negotiate how profits are split produce wealth, just not for the pharoah and his royal clan.

JfW said...

"Anonymous said...
Mr. Anderson if you think you understand Keynesian theory so well then perhaps you can tell us under what conditions Keynesian theory actually agrees with austerian policies about what to do during a downturn such as a recession/depression? I can tell you right now if you think there is no places where these two approaches agree, then you really don't understand the Keynesian approach

in otherwords, you have a pet theory you plan on using to disqualify Anderson from commenting? That's a very strange way to appeal to your own authority.

JfW said...

"Anonymous said...
I don't think Anderson understands wealth creation. Wealth creation is more than just raw productivity, or savings, or even how efficiently the profits are collected."

You seem to be taking aimless shots in the dark to determine what Anderson thinks 'wealth' actually is.

"Wealth creation is also dependent on how the profits are divided among the various workers in an organization."

no it isn't. You are conflating wealth with your ideals of social justice.

"I would say agreements on how the profits are divided are more important than raw producivity when it comes to wealth creation.

That theory is dumbfounding and invokes images of an ecomonic race-to-the-bottom in search of a perverse ideal of "equality"

Anonymous said...

The only thing that is disqualifying Anderson from responding is his lack in understanding Keynesian theory, the same lack you no doubt have JW. I assure you of no pet theories under my sleeve.

Also I would enjoy hearing why you feel the division of profits has nothing to do with wealth creation, and also why you feel that I'm trying to foist my ideas of social justice through this notion as oppossed to stating a direct fact about wealth creation.