Tuesday, January 1, 2013

Krugman's Keynesian "Trickle-Down" Economics: Washington, D.C., as an Experiment

According to Paul Krugman and other Keynesians (not to mention almost all so-called political Progressives), endorsing a relatively free economy in which governments do not set or regulate prices and permit owners of factors of production to bargain in free markets is also to endorse what they call "Trickle-Down Economics." This "theory," according to the Progressives, operates like this: If we "help" the "rich," (that is, do not confiscate all or nearly all of their wealth), then by so doing, the spending of the rich will "trickle down" benefits to everyone beneath.

Obviously, this is presented with the belief that the "theory" is false on its face, or at least the results of the "theory." The rich, as Krugman and others will tell you, don't spend all of their income, which means that not everyone beneath them will receive enough income to survive. The better way to do things, according to the Krugmanites, is for the government to confiscate most of the earnings and wealth of the rich and distribute them to everyone else. This will result in equal incomes, which then assure enough spending to keep the Big Circle of the Economy moving and result in economic Nirvana.

For the past four years, we have had a major Keynesian experiment in Washington, D.C., as huge amounts of money have been transferred from elsewhere in the USA to the D.C. area, and especially the nation's capital itself. The outlying counties have become considerably wealthier, and especially wealthier relative to the rest of the USA. But what about Washington, itself? If the Keynesian theory is correct, then the wealth absorbed by government should have "trickled down" to the other residents of D.C. who are not directly connected to high-paying government jobs, political office, or lobbying firms or companies that have major government contracts.

Certainly the economy of D.C. has received enough new money to have gained "traction" (as Krugman likes to call it) to be engaged in a boom. Well, it turns out that unless one is well-connected politically, the Keynesian "stimulus" just might not have as much staying power as Krugman claims.

It turns out that income and living inequality in the District are worse than ever, according to recent reports:
Two decades of record federal spending and expanding regulation have fostered a growing upper class of federal contractors, lobbyists and lawyers in the District of Columbia area. The federal government funneled $83.5 billion their way in defense and other work in 2010 - an increase of more than 300 percent since 1989, even after adjusting for inflation. Private industry poured more than $3 billion into lobbying toinfluence the government, nearly double what it spent a decade ago.

Like spokes on a wheel, the high-rise offices of this elite radiate out from Capitol Hill along major arteries deep into suburban Maryland and Virginia. The latest Census figures placed 10 of the capital's surrounding counties in the top 20 nationwide for median household income - up from six in 1990.
The article lays out the rise of Lani Hay from military officer to out-and-out Washington tycoon whose wealth has come about solely from the income transfers from private individuals and businesses to the government. And her $120 million in government-awarded income pales next to the income that others gain at the government troughs.

Yet, at the same time, the regular people in Washington are not taking part in this orgy of new governmental wealth. This article lays out what the "other" people experience, as the blogger Glenn Reynolds received this from a D.C. council member:
"I really think you should reconsider your article about how Washington, DC was not affected by the recession and is doing so much better than the rest of the country. . . . I am not sure if you have ever been to the DC area, but I live here and there is a lot of poverty. The capital area might be doing great and the 2 wards where congresspeople live might be doing well, but the rest of the city is affected by poverty. Wards 7 and 8 have an average income of less than $30,000 and there are boarded up stores all over the city, just not in the 2 mile radius that tourists and outsiders see. . . . Maybe your next article could be about how DC has the largest income margin in the nation? About how the congresspeople and lobbyists make over $100,000 a year and the rest of city is living in poverty?"
 That is not all. The Reuters article lays out a few gems that would contradict the Keynesian Gospel:
  • Inequality has increased in 49 of 50 states since 1989. (See accompanying box on how inequality was measured.)
  • The poverty rate increased in 43 states, most sharply in Nevada, ravaged by the housing bust, and in Indiana, which saw a rise in low-paying jobs.
  • Twenty-eight states saw all three metrics of socioeconomic well-being worsen. There, inequality and poverty rose and median income fell.
  • In all 50 states, the richest 20 percent of households made far greater income gains than any other quintile - up 12 percent nationally.
  • The five largest increases in inequality all were in New England: Connecticut first, followed by Massachusetts, New Hampshire, Rhode Island and Vermont. The decline in manufacturing jobs hit New England's poor and middle hard, while the highly educated benefited from expansion in the biotech and finance industries.

  • And then there is this: 
    Massachusetts boasts the country's finest public education system, but that has failed to slow a sharp increase in the income divide. Indiana has revamped the state's welfare system, but the number of people in poverty has soared. And in the District of Columbia, the federal government's hand in rising inequality is visible locally and nationwide.
    This is not possible under Krugman's Keynesian Trickle-Down Theory. More money for public education means inequality disappears. The New England states vote heavily Democratic, and very liberal Democrats at that (no Republican holds statewide office in New England), so there can be no question that the policies that govern these states are correct, according to Krugman's views. Furthermore, there is no more Democratic political entity in the country than Washington, D.C., so there can be no doubt that the city is following "proper" political and economic policies.

    So, if all of the claims that Krugman has been making the past several years are true, then there is little or no economic inequality in Massachusetts and in Washington, D.C., and they are the two most "liberal" political entities in the country. Inequality cannot be happening there because Paul Krugman always is correct.


    Anonymous said...

    Happy New Year, Professor Anderson!

    By the way, Bob Murphy was mentioned in one of Professor Krugman's latest posts. I guess that's the closest we'll ever come to seeing a debate between the two.


    Pulverized Concepts said...

    Up/down, left/right, good/evil, hot/cold, short/tall; we seem to live in a bi-polar world, as in the US Tweedely-Dum/Tweedely-Dee political spectrum. But the drama that is US politics is simply that, drama. Retaining power is all that counts, as Bob Dole once said on national television, "The number one job of a United States senator is to remain a United States senator." Both sides can't emphatically advocate the same things, they must tailor their message to what they hope will be the majority of interested constituents, even though the message is out of date moments after the polls close. Bureaucrats, simultaneously a millstone and a fortress, make our lives miserable but through institutional inertia prevent the elected geriatrics from implementing the weirdest ideas of their aides. Political parties aren't the issue, mindless democracy is.

    Salamano said...

    I think Krugman would argue that we're not in a Keynesian regime yet (after all, he's still suggesting we're closer to an austerity regime than one of stimulus).

    Dinero said...

    Does anyone here have a definition of what the aim of Keynsianism is

    Dinero said...

    Does anyone here have a formal definition of what the aim of Keynsianism is

    Anonymous said...

    From Bogart:
    What are you talking about the 4 year long Keynesian experiment? Even the most ardent freedom/wealth destroying tyrants in the 20th century would not be able to damage the capital structure this much in only 4 years. It took Lenin 4 years to ruin the agriculture base Russian economy.

    In reality this is the result of a 42 year long Keynesian experiment beginning in 1971. There was a brief turn back to monetary sanity from 1980 to 1982. It has never been since 1971 a return to government fiscal sanity at any level.

    As for Krugman, his only argument on inflation breaks down to the idea that because 4 years is a long time not to experience significant or even hyper-inflation then it won't happen. Keynes said: "In the long run we are all dead."

    There are several errors here:
    1. (Austrian) Economic Theory cannot determine the timing of events given the complexity of the economy.
    2. The economy can have a long term depression and still not have hyper-inflation aka: The Great Depression.
    3. At the end of the 20th Century the Western World incorporated most of South America, the Pacific Rim and India into the world wide division of labor. The product was a massive increase in wealth across the planet. This change in the world economy has made it not only more productive but also more stable thus hosing up all of those predictions/guesses about inflation.

    mishami5 said...

    The author simplifies a Nobel Price Economists work. Pretty bad at that. Krugman is far more intelligent in his argument then the fool that slapped this article together.

    mishami5 said...

    The author simplifies a Nobel Price Economists work. Pretty bad at that. Krugman is far more intelligent in his argument then the fool that slapped this article together.

    mishami5 said...

    Oh By the way Keynesian Theory or economics described here and is not such a bad thing. The writer of this article discounts the harsh reality of Britain's failed austerity programs, the 1930's, the great recession. https://en.wikipedia.org/wiki/Keynesian_economics

    Anonymous said...

    The author seems to be greatly confused about some very basic economics concepts. Trickle-down economics can work in certain situations, but Keynesianism is not equal to trickle-down. When you are in a recession, you need stimulus, and that can come in only two forms: fiscal or monetary. Both mechanisms are used to get you out of recession, such as lowering the Fed funds rate (monetary) and cutting taxes on the rich (fiscal), thereby stimulating investment and spending (make the cost of borrowing less). Spending money you don't have now obviously creates a hole in your budget, so you need to pay your debt back down at some point.

    The idea is if you can stimulate enough & accelerate the economy out of recession, once the economy is actually booming, you can increase taxes on the rich--and they should gladly comply because business is booming--and/or increase interest rates (other fiscal & monetary tools are available as well). That way you prevent yourself from going into bankruptcy.

    It comes down to a brake-accelerator system to navigate the ebbs & flows of the economy. Right now, this country has gone off the rails completely. We have massive & unpayable debt and we continually malinvest & now want to cut taxes on the rich.

    I will skip ahead a couple paragraphs in this story and tell you what's coming: massive inflation with unemployment (stagflation) and likely bankruptcy after that.