Monday, August 9, 2010

Krugman: The State is Light

[Update, Thursday, August 12, 2010, 9:20 AM]: I have deleted Wednesday's post on scientific fraud because I am not sure that the false temperature listing was deliberate. There may have been an error by the satellite readings that people did not pick up until later. I do try to make sure that what I put on my website is reasonably accurate, and I am not sure that what I have alleged is true, given the information I have now. [End Update]

On August 3, 1914, British Foreign Secretary Edward Grey looked out of the window of the Foreign Office and watched as workers lit the street lamps for the approaching nightfall. Germany had just invaded Belgium, Europe was at war, and Parliament the next day would declare war on Germany and Austria-Hungary, and much of the world would be plunged into the horror of World War I.

Grey then made his famous and prophetic statement: "The lamps are going out all over Europe. We shall not see them lit again in our time," and the slaughter of 10 million soldiers and countless civilians in the next four years would prove his point.

In his column today, Paul Krugman plays off that statement, but puts things in a different context. The lamps are going out, but they are going out because the state does not seize enough property and resources from Americans:
The lights are going out all over America — literally. Colorado Springs has made headlines with its desperate attempt to save money by turning off a third of its streetlights, but similar things are either happening or being contemplated across the nation, from Philadelphia to Fresno.

Meanwhile, a country that once amazed the world with its visionary investments in transportation, from the Erie Canal to the Interstate Highway System, is now in the process of unpaving itself: in a number of states, local governments are breaking up roads they can no longer afford to maintain, and returning them to gravel.

And a nation that once prized education — that was among the first to provide basic schooling to all its children — is now cutting back. Teachers are being laid off; programs are being canceled; in Hawaii, the school year itself is being drastically shortened. And all signs point to even more cuts ahead.

We’re told that we have no choice, that basic government functions — essential services that have been provided for generations — are no longer affordable. And it’s true that state and local governments, hit hard by the recession, are cash-strapped. But they wouldn’t be quite as cash-strapped if their politicians were willing to consider at least some tax increases. (Emphasis mine)
Why are we in this terrible, terrible state? It is because Goldstein's legions, er, the few Republicans left in Congress, have not properly worshiped the Greatness of the State. (Of course, this assumes that Republicans actually shrink government, but I have seen no evidence of that claim in the past 30 years, when the Republican Party was at its strongest since before the Great Depression.)

Krugman goes on:
...the federal government, which can sell inflation-protected long-term bonds at an interest rate of only 1.04 percent, isn’t cash-strapped at all. It could and should be offering aid to local governments, to protect the future of our infrastructure and our children.

But Washington is providing only a trickle of help, and even that grudgingly. We must place priority on reducing the deficit, say Republicans and “centrist” Democrats. And then, virtually in the next breath, they declare that we must preserve tax cuts for the very affluent, at a budget cost of $700 billion over the next decade.

In effect, a large part of our political class is showing its priorities: given the choice between asking the richest 2 percent or so of Americans to go back to paying the tax rates they paid during the Clinton-era boom, or allowing the nation’s foundations to crumble — literally in the case of roads, figuratively in the case of education — they’re choosing the latter.

It’s a disastrous choice in both the short run and the long run.

In the short run, those state and local cutbacks are a major drag on the economy, perpetuating devastatingly high unemployment.

It’s crucial to keep state and local government in mind when you hear people ranting about runaway government spending under President Obama. Yes, the federal government is spending more, although not as much as you might think. But state and local governments are cutting back. And if you add them together, it turns out that the only big spending increases have been in safety-net programs like unemployment insurance, which have soared in cost thanks to the severity of the slump.

That is, for all the talk of a failed stimulus, if you look at government spending as a whole you see hardly any stimulus at all. And with federal spending now trailing off, while big state and local cutbacks continue, we’re going into reverse.
So, we are to assume that the U.S. Government is just wallowing in money when, in fact, it is borrowed money, money that U.S. taxpayers ultimately must repay. (Of course, what will happen is that the government will repudiate the debt via inflation, which also is a tax, albeit a more hidden tax.)

But that is not all. We are supposed to think that the government is sitting on piles and piles of cash, but Goldstein selfishly is letting rich people keep some of their income, and then those evil rich people also are sitting on that cash. So the problem is that those who have the money are not spending it, and that is why we are in recession. And why are they not spending the money? Krugman explains with this non sequitur:
How did we get to this point? It’s the logical consequence of three decades of antigovernment rhetoric, rhetoric that has convinced many voters that a dollar collected in taxes is always a dollar wasted, that the public sector can’t do anything right.

The antigovernment campaign has always been phrased in terms of opposition to waste and fraud — to checks sent to welfare queens driving Cadillacs, to vast armies of bureaucrats uselessly pushing paper around. But those were myths, of course; there was never remotely as much waste and fraud as the right claimed. And now that the campaign has reached fruition, we’re seeing what was actually in the firing line: services that everyone except the very rich need, services that government must provide or nobody will, like lighted streets, drivable roads and decent schooling for the public as a whole.

So the end result of the long campaign against government is that we’ve taken a disastrously wrong turn. America is now on the unlit, unpaved road to nowhere.
Now, the last time I ever heard anything about "Welfare Cadillacs" was in the 1960s, more than four decades ago. Since then, the American State at all levels has grown fantastically, and while I have heard some rhetoric from Republicans about "big government," nonetheless the reality of governmental expansion belies whatever politicians might say.

Yet, according to Krugman, the problem is that the state does not swallow enough wealth. I suppose that he believes that perhaps had his hero FDR been successful in his attempt to levy a 100 percent tax on all incomes above $25,000 (he tried to do this with an executive order in 1942, but Congress struck down his attempt and the courts did the rest), then we would be a rich, happy country right now.

Furthermore, states and localities are cutting back spending just like the rest of us because the U.S. economy is in a serious recession, and, contrary to what Krugman tells us, the recession did not happen because of anti-government rhetoric or rich people or the lack of high tax rates. There is this problem of causality, and, unfortunately, Krugman confuses cause with effect.


Anonymous said...

"But those were myths, of course; there was never remotely as much waste and fraud as the right claimed."

Does Krugman have anything solid or quantifiable to back this up? Or is just another of those "drive-by" claims that his columns seem to rely on more and more - "facts" that we shouldn't question because he's a Nobel prize-winning genius and all?

Jason Cato said...

His latest article is spectacularly bad, even for Krugman standards.

Daniel Hewitt said...

Krugman was so worried about the future interest rate increase that the Bush administration's borrowing and spending was going to cause, that he locked in his mortgage rate.

Today, he uses the meagre 1.04% 10-year yield on inflation-protected treasuries to justify more borrowing and spending from the Obama administration.

The yield of 10-year inflation-protected treasuries on March 11, 2003 (the date he wrote the above column) was 1.68%.

What a difference 0.64% can make.....especially when coupled with the fact that "his" party now controls the White House!

EDP said...

I remember cruising down a stretch of interstate outside of Cleveland, Ohio. Every 100 yards or so there stood a very high pole with a cluster of lights at the top. It was so bright that, even in pitch black darkness it was as if the sun was at high noon. The long string of uber-lampposts stretched on mile after mile, illuminating the highway for no apparent reason. I wondered why we even had to have headlights on our vehicles. When I exited the highway, I stopped at an intersection that had four stoplights pointing in my direction and the number of street signs that surrounded me were too numerous to count.

Only where other people's money is heaped upon unnecessary boondoggles can so much be spent that it causes an entire nation to become insolvent through graft, waste, rent-seeking, and corporatism.

Mr. Krugman should ponder the fact that the lights are going out because the government chooses to forgo those services in favor of vote-buying backroom deals. The state has plenty of money as it stands but, by its very nature, is incapable of doing right by it.

Bob Roddis said...

But our brilliant Chartalists will PROVE that if the tons of wasted money are wasted through deficit spending, this creates private savings. And that such a process is the ONLY way to create private savings. That makes sense, right? And history and logic prove it's true, right?

Another Anonymous said...

Yes, Bob, it is true because grade-school arithmetic is true. Any other kind of arithmetic and accounting will get you in trouble with even a nightwatchman government and your schoolteacher, your customers and suppliers, bankers, etc.
EDP, I don't think Krugman would disagree with you, although the boondoggle you mention is very minor for such a rich county.

Jardinero1 said...

Streetlights are vastly overrated and a waste of money. Good riddance. Privatize the roads after we have turned off the last of the streetlights on them.

Anonymous said...

"basic government functions — essential services that have been provided for generations — are no longer affordable."
Except for basic government functions like blowing people up on the other side of the world.

Anonymous said...

I am somewhat interested in the ideal that Krugman and others actually believe this stuff they say:
1. That humans can create wealth (More stuff, planes, cars, hospitals, computers, chairs, clothes, etc) that people desire by printing little pieces of paper or even easier by typing keys into a computer.
2. That 536 people with no qualifications than they have one or move votes than someone else can manage an economy of hundreds of millions of people interacting with several billion other people.
3. (My personal favorite) Have 1 above be absolutely true and think that it is bad because it reduces some employment.

Another Anonymous said...

There's a lot that is wrong with Professor Anderson's post from the Chartalist viewpoint.

The lamps are going out, but they are going out because the state does not seize enough property and resources from Americans No, the state does not mobilize, not seize, enough resources for constructive projects. The private economy just leaves these to waste, basically flushing an enormous amount of wealth down the toilet. Maybe a mythical Austrian libertarian goldstandard entrepreneurial Rainbow Pony economy would do better. But not flushing resources down the toilet is better than flushing them down the toilet. These Americans, unemployed Americans, would love to have their time seized in return for a job and $ they could use to pay their bills.

So, we are to assume that the U.S. Government is just wallowing in money when, in fact, it is borrowed money, money that U.S. taxpayers ultimately must repay. (Of course, what will happen is that the government will repudiate the debt via inflation, which also is a tax, albeit a more hidden tax.) Yes, the US government is wallowing in money. The US can and does just print money. This is not "borrowed money" and the taxpayers need not ultimately repay it - although they probably would. This will not cause inflation, defined the non-Austrian / hyper-monetarist / totally inapplicable to reality way. The standard way of defining inflation is in terms of prices rising. In depression conditions, the gov can go crazy spending newly printed money, and it won't cause inflation - rising prices. It will just DO GOOD STUFF - if what it spends is good. Sure , the US Government is insane, and spends trillions on murdering innocent people for no reason at all, except to make some well-placed people billions. But that is par for the course. What is being debated is whether we can spend on basic things for a civilized society. If we can afford an insane evil military empire, of course we can afford street lights, teachers, and cops.

I have mixed feelings, but MMT- truth arrived at by reasoned argument is irrefutable. Before I learned about MMT, I at least thought that the insane US military empire attacking the third world for no reason would stop because we would run out of money. This is Chalmers Johnson's argument. Now I know better - and learnt that Dick Cheney knows MMT/Chartalism perfectly well. (One of the big 3 MMTers, Warren Mosler, knows and taught Arthur Laffer, and Laffer taught Cheney.)

Ethan said...

"Another Anonymous", I almost pissed myself laughing after reading your post! You think the government printing money won't cause inflation?? Where in the heck did you learn economics?! If *poof* more dollars appear, chasing the same number of goods & services, *bam* prices rise. Econ 101 at my business school.

Ethan said...

Oh, and ever heard of stagflation back in the '70's? Increasing the money the money supply even in recession/depression conditions can, and has, cause inflation without economic growth.

sb101 said...

@ Ethan – I hope you dried yourself, because another anonymous is spot on.

"You think the government printing money won't cause inflation?? "

No, it doesn't. Deficit spending in excess of the private sectors demands to save causes inflation. Ask yourself this, despite all the 'money printing' (the government does not print money, by the way. It's all done electronically, basically on a giant spreadsheat..but I'm sure you have no interest in how the monetary system actually operates, so I'll use your silly terminology) in the last two years, and all the excess reserves created, where is the inflation? Why is the 10 yr. note at 2.70%? And please don't say 'It's coming in only a matter of time'. Any economist that thinks inflation is just around the corner should have their license to be an economist revoked.

"If *poof* more dollars appear, chasing the same number of goods & services, *bam* prices rise. Econ 101 at my business school. "

You may want to transfer and ask for a refund on your way out the door because this is nonsense. We are in a balance sheet recession. If you don't see the difference between a balance sheet recession such as this, and an inventory correction recession, then you are hopeless to understand the monetary system and inflation. And by the way, more dollars don't appear when the central bank creates more reserves (or as fear mongers like to say, print money). And excess reserves do not cause inflation since the banking system is never reserved constrained, so why would more reserves cause inflation if they are never constrained? The price has not changed (still at zero). Ask yourself this, if I own a lemonade stand, will I sell more lemonade just because my inventory increases and the price remains constant? Of course not. Demand has not changed.

Inflation occurs when deficit spending exceeds the savings demands of the private sector. This is MMT 101. This is not theory. It's basic operational fact. It's common sense. It’s functional finance. It’s chartalism. Call it what you will, but it’s fact supported by reality and data. You may want to take what you are learning at your neo liberal business school with a grain salt. If it's anything like what Prof. Anderson preaches on this blog, it's all wrong and based off nonsense political fear mongering.

"Oh, and ever heard of stagflation back in the '70's?"

Yes, which was caused by the deficits of the 60's exceeding the savings demands of the private sector combined with an oil shock because the Saudis decided to raise the price (which is not inflation at all). It's all in the data.

Good luck in business school. I hope you do not base investment decisions on your overpriced mis-education.

Anonymous said...

>MMT 101
>functional finance


P.M.Lawrence said...

"...Parliament the next day would declare war on Germany and Austria-Hungary...".

Codswallop. The UK is not a clone of the USA in which only Congress can declare war; for the UK it is a matter of the royal prerogative, so His Majesty's Government did it. Any announcement of that in Parliament was no more the declaration itself, or a condition for it, than Chamberlain's famous radio announcement in 1939 that war had been declared.

Bob Roddis said...

Yes, which was caused by the deficits of the 60's exceeding the savings demands of the private sector combined with an oil shock because the Saudis decided to raise the price (which is not inflation at all). It's all in the data.

Why not make a small attempt at proving your point WITHOUT a resort to historical data and/or accounting identities? Bet you can't.

I tried to drag it out of you guys with my nightwatchman scenario. That didn't get me very far.

Anonymous said...

Chartalists = Charlatanists.

Anyone who thinks an economy is the even rotation of money instead of the even rotation of resources (land, labor, capital) or simply stuff is a crank.

Max said...

It's interesting to see that the US followed a keynsian strategy, while some European countries did not (and how this turned out). If we compare Germany and the US, we can see that in the beginning, Germany also tried the idea of putting money into the system (Konjunkturpaket I/II - financial stimulus I/II). They capped at about 50 billion dollar and it had no net effect.

Unlike the American government the German government then did not try to get more money into the system or to take part in the economy in any major way (no GM here, we even abstained from bailing out OPEL - the technologic power house of the GM business).

I think the best solution in Germany came not directly form the government but was a result of management-worker cooperation and the ability of internal "unions" to agree to reduce work hours and payment to allow capacities to equal market conditions without having to lay off a lot of people.

This is why we have no a very strong boom in Germany, when car companies try to return to pre-recession load-out levels(even though they still suffer from the german cash for clunkers program).

Was the German reaction pareto-optimal? Sure not, but it was a hell better than the American reaction.