Monday, April 1, 2013

Krugman's California Fantasies (Or are They Hallucinations?)

For many years, I have written that Paul Krugman is not so much an economist as he is a political operative, but I was wrong. He is not just a political operative, but also is just another leftist who believes that government debt and government spending actually are wealth-creating things. However, his latest column on California's supposed "comeback" proves my original point that he is no economist.

California, in Krugman's view, has been the victim of Republicans who blocked tax increases and kept the state from building the Ultimate Lefty Pipedream: High-Speed Rail. Now that the Republicans no longer have any political influence or power there, the Golden State can now tax and spend itself into a glorious future, and if that future of massive government spending turns sour, I am sure that Krugman will be able to blame Paul Ryan or Goldstein or Seinfeld or Blowfeld.

Writes Krugman:
...reports of the state’s demise proved premature. Unemployment in California remains high, but it’s coming down — and there’s a projected budget surplus, in part because the implosion of the state’s Republican Party finally gave Democrats a big enough political advantage to push through some desperately needed tax increases. Far from presiding over a Greek-style crisis, Gov. Jerry Brown is proclaiming a comeback.

Needless to say, the usual suspects are still predicting doom — this time from the very tax hikes that are closing the budget gap, which they say will cause millionaires and businesses to flee the state. Well, maybe — but serious studies have found very little evidence either that tax hikes cause lots of wealthy people to move or that state taxes have any significant impact on growth.
Now, even Krugman is not quite ready to proclaim Paradise Regained, although the lack of any opposition to an accelerated tax-and-borrow-and-spend certainly should speed its arrival:
I’m not suggesting everything in California is just fine. Unemployment — especially long-term unemployment — remains very high. California’s longer-term economic growth has slowed, too, mainly because the state’s limited supply of buildable land means high housing prices, bringing an era of rapid population growth to an end. (Did you know that metropolitan Los Angeles has a higher population density than metropolitan New York?) Last but not least, decades of political paralysis have degraded the state’s once-superb public education system. So there are plenty of problems.
The fact that California has the highest taxes in the country, has a virulent anti-business governmental culture, and has rules that increase the cost of just about everything has nothing to do with it. After all, in Wonderland, higher costs translate into more spending, and more spending creates more wealth, so these "problem" to which Krugman refers actually are opportunities for more government spending, which means a brighter future.

Given the leftist fetish regarding the evils of population growth, I'm not sure why Krugman even would cite the end of such growth as a bad thing. After all, as Matt Yglesias writes in Slate:
I'm reasonably certain that California's deteriorating public services aren't really driving the declining population growth. That's because if you look at someplace in California where it would be nice to live—Santa Monica, say, or Palo Alto—it turns out to be incredibly expensive. All the best land is occupied and the people in those communities don't want it to get filled up with more density and California's environmental legislation gives them powerful tools with which to block new residents.
Given that Krugman can afford to live in places like Santa Monica or Palo Alto, and given his strong environmental credentials, I am sure that he would approve of those laws that keep the Great And Beloved Unwashed far away from himself and others who love these folks who help keep Democrats in office but who really should try to live somewhere else. But California has another problem, and for all of Krugman's Greece I Tell You! fetishes, it seems that there really is a Greece connection.

Like Greece, California has great weather, beautiful and rugged mountains, and a magic coastline. Friends of mine who decry the financial madness and out-of-control governments nonetheless do not want to leave because of the quality of life they have enjoyed there. Like Greece, California governments have run up debts that over time cannot be repaid (two of which are discussed below), and like Greece, California is part of a central currency union and cannot print its own money, and sooner or later government employees in California are going to take such a huge chunk of public wealth (as they have in Greece) that the hard choices that are inevitable will create a lot of consternation.

There are two issues that are government budget eaters in California, and while Krugman kind of alludes to one (high-speed rail), the other is even more explosive: municipal and state pension obligations that have come about because of the state's powerful government unions. Steven Greenhut has written a lot about the state's out-of-control government unions which have driven a number of municipalities to bankruptcies.

The issue is quite simple: a number of cities, not to mention state agencies, pay their unionized employees very well and have promised even better pensions. However, paying for these things is another matter, and maybe Krugman is right in that businesses and individuals will allow tax hikes to go on forever to pay for the enrichment of others, but I have my doubts.

 High-speed rail, or what Krugman calls "infrastructure," is another California boondoggle that really could manage to bankrupt the state government. The original idea was that the state, through sale of bonds, federal grants, and tax increases, would build a high-speed rail line to run between San Francisco and Los Angeles. Like all such public projects, the original cost projections started out relatively small and have metastasized into something else. (I doubt seriously that Krugman ever will write a future column about the fiscal foolishness of California high-speed rail projects if for no other reason than he actually believes that higher costs will translate into more spending which then will create more prosperity. The Keynesian Way.)

Keynesians believe that government spending creates its own wealth multipliers, so when governments promise huge pensions, fund rail boondoggles, and block the growth of businesses, they actually are making everyone better off, as though government spending has an internal generator that can create something from nothing. The Law of Scarcity, however, cannot be repealed by government no matter what Krugman declares.

Because California now has a Democrat supermajority and will continue that way indefinitely, Krugman believes that there will be nothing to stop the state and municipal governments there from internally generating wealth through tax increases, borrowing, and spending. Even if high-speed rail costs much more than it could collect in actual revenues, that is good because it will mean more spending, and spending is actually a form of wealth production.

Please understand Krugman's larger point. He is saying that the government of California can make it difficult for businesses to operate in a high-tax, high-regulation environment (except businesses that are politically-connected), and try to make up for the loss of wealth through taxation, borrowing and spending. He is saying that the government can internally produce wealth simply by spending money that first must come from other sources.

So, drink up, California! Your future is unlimited all because your politicians and some "economists" believe they can tax you into Paradise.

Update: The Atlantic has a very interesting article on California about what Progressives can learn about governance, and the Democrat that writes it, Conor Friedersdorf, says this about Krugman's California column:

In California, my home state, Democrats have dominated the capitol since roughly 1970. In the last four-plus decades, they've controlled both houses of the state legislature for all but two years. They dominate the state bureaucracy and the leadership of most major cities. And they've long dominated the vast majority of statewide offices, the governorship excepted: Since Ronald Reagan departed in 1975, it has gone back and forth between Democrats (like current and former governor Jerry Brown) and Republicans, most recently the moderate Arnold Schwarzenegger.

Despite this, Paul Krugman, the Nobel Prize-winning economist and New York Times opinion writer, has managed to write a column that proceeds as if, insofar as partisans can be blamed, Republicans are entirely to blame for the state's woes, which he thinks are exaggerated, while Democrats bear no responsibility. As a Californian who hasn't given up on his place of residence, I'm glad to see Krugman thinks there are good times ahead for the Golden State, but the analysis that precedes his conclusion is causing me to doubt him.

Not that Krugman would take notice or admit to being wrong. No, Goldstein is EVERYWHERE and controls all things, don'tcha know?


Admin said...

California has had a HUGE spending problem for so many years

Mike said...

STOCKTON -- A federal judge ruled Monday that Stockton is eligible for bankruptcy protection

Nuff said

Mike said...

Were California's state government a business, it would be a candidate for insolvency with a negative net worth of $127.2 billion, according to an annual financial report issued by State Auditor Elaine Howle and the Bureau of State Audits.

OK now nuff said

Pulverized Concepts said...

Correct me if I'm wrong but it's my understanding that government agency purchases above some predetermined amount are required to go through a bidding process in which the low bidder receives the contract to deliver the product or service. For instance, the high-speed rail project in California will be awarded to the low bidder, as will that of the subcontractors. So if getting more money into the economy is important, why not award the contract to the HIGH bidder? In a return to sanity, however, public employees provide a service just like contractors do and should have to bid to provide that service. Yearly, public employees should have to compete against any other prospective hire by bidding for compensation for the service. If 5 DMV clerks apply for the position, it should go to the one with the lowest salary requirements and the least health benefits and retirement. A governor, senator or representative should have to PAY for the privilege of representing the citizenry.

William L. Anderson said...

Exactly, PC. Given that Krugman a few years ago was critical of a government project that went under budget because that meant less spending, what you say makes perfect Keynesian sense.

Anonymous said...

"Were California's state government a business, it would be a candidate for insolvency with a negative net worth of $127.2 billion, according to an annual financial report issued by State Auditor Elaine Howle and the Bureau of State Audits."

Tell that to any MMTer and they will scoff at you and call you a deluded, uninformed neoliberal austerity elitist fear mongering fool.

Patrice Denman said...

Aren't you a public employee? I bet you don't return your great state pay.

Mike said...

Anonymous @ 5:06
You got me :-) I'm sure Mike Norman would call me all kind of names for just citing the facts.

The fact the Professor Anderson is a public employee at a University is irrelevant to the argument presented. So either you don’t understand the argument presented or it’s an amateur attempt to discredit the person instead of the argument.

William L. Anderson said...

Actually, I do return part of my pay, as all of us do, in taxes. That being said, I do seriously wonder if higher education is more of a consumption good than a producer's good.

The degree itself is something that (to use Joe Stiglitz's term) "signals" something to employers, but I am not sure now much actual knowledge students receive or how useful it is to them. Part of the problem is that we use higher education (including graduate education) to create lots and lots of bureaucrats. Just because they learn some business skills does not make them entrepreneurs, nor does it necessarily make them into bureaucrats who do less damage than others.

But I am not sure of Patrice's point. I can say unequivocally that lots of state spending on higher education does not necessarily translate into a wealthier society. It seems to me that more higher ed spending would reflect a society becoming wealthier. I believe that is the proper causal chain.

But I think Patrice is saying that if I am a state employee (which I am), then I must be in full agreement with everything Keynesians do and say or I am a hypocrite. I'm not sure why that would be true, but there it is.

Dinero said...

Krugman does believe that government debt and government spending actually are wealth-creating things. Stateing his views and disagreeing with him politically does not show us that he is a bad economist.

Patrice Denman said...

My comment is said tongue in cheek, there is nothing wrong with public service. I just think it is disingenuous for a public employee to criticize public employment. (Public service is continually dismissed by the far right as valueless.) Your blog is full of offhand attacks on public employees. Yet, you are one. According to you, aren't you(albeit a small cog) part of the bloated government problem.

Additionally, you pay taxes, as you know, in part for your salary and benefits, but also for roads, bridges, courts, libraries, jails and on and on.

You see, this is the part of the tea party dilemma. The right wing loves their government benefits.

Anonymous said...

Patrice, if Anderson didn't pay his taxes, he'd be thrown in jail, wouldn't he? What's wrong with having an opinion on these things?

Mike said...

Patrice said: “I just think it is disingenuous for a public employee to criticize public employment.”

Why? You’re statement assumes that all public employment is created equal. It is not.

You’re statement assumes all public contributes to society equally. It does not.

You also assume an individual is incapable of objectively separating issues and assessing them in an intellectually honest manner. That is an incorrect generalization. Some individuals are capable of such intellectual discipline.

Mike said...

sorry for the bad typos, too much multitasking ugh

Cato said...

Patrice wants us to understand the full ad hominem-ness of her ad hominem attack.

Let's stipulate that Prof. Anderson is a public employee.
Let's stipulate that Prof. Anderson receives benefits paid for by the government.
Let's stipulate that this is bad, even when the government has made itself the legal monoplist in these benefits.

I'll even be glad to stipulate that Prof. Anderson is a wino, a slave-owner, and a Big Gulp abuser.

Only by recourse to the fallacy ad hominem does any of this bear on Prof. Anderson's argument.

Otherwise, his argument stands or falls on its merits. If there are issues of moral inconsistency between his life and his values, that is for Prof. Anderson and his conscience alone.

William L. Anderson said...

"I'll even be glad to stipulate that Prof. Anderson is a wino, a slave-owner, and a Big Gulp abuser."

NEVER!! I don't do Big Gulps! They are bad for you, right?

Jeff Metcalf said...


Soquel by the Creek said...

Ah, yes, Paul Krugman remains one of the most intellectually dishonest "academics" in media.

Paul Krugman forgot to mention that one political party, the Democrats, has had nearly exclusively control over both chambers of the California Legislature for most years since 1959.

Krugman's spin matches that from the Chair of the Democratic National Committee (DNC) who calls California "the oasis of Democratic politics." Let's see what that "oasis" means to everyday Californians.

Despite recent good job growth, California's unemployment rate remained highest in the nation, tied with "economic powerhouses" like Nevada and Rhode Island.

Thanks to Governor Brown's Proposition 30 tax hikes, California has the nation's highest state sales tax rate and the nation's 1st-, 2nd-, 3rd-, 5th-, and 7th-highest marginal state income tax rate. Proposition 30 was bankrolled by the two biggest spenders in California politics, both of whom are taxpayer-funded, state-mandated, public-sector employee unions who will benefit most from higher taxes and more government spending. Did I mention that both contribute almost exclusively to Governor Brown's political party?

Thanks to high costs, high taxes, heavy regulation, heavy debt, and a state government ranked the nation's worst-run for two consecutive years, California also "enjoys" some of the nation's lowest ranking for business climate. Our low ranking directly affects tax revenues, which directly affects government spending for education, roads, and California's generous social safety net.

No, Mr. Krugman, you don't get into this situation overnight. It took years of mismanagement and plenty of bad policy.

Anonymous said...

I'm a California Native here continuously since '68.

We're in flames. My town in the central valley has 20% unemployment, a gang war raging between the two primary Mexican factions with innocent bystanders getting killed, Oakland is like Mogadishu. And this week the legislature's priority? Homeless Bill of Rights and NON-CITIZENS on juries.

I'm 5 minutes from the proposed route of the high speed rail (they have no idea where they're actually going to put it by SF or LA so they're cramming the "first leg" down the throat of the powerless valley). They're not even going to buy the displaced businesses out, it's an "offer you can't refuse" loan deal. They are supposed to break ground this summmer and they still haven't acquired the properties.

Don't believe what they say about population growth, the Mexicans are pouring in here like it' a Gold Rush. Just the free medical and day care (public schools) is enough. Did you know they don't pay for high school in Mexico? So they just come here, then we have to sort out which ones are career gangsters, necessitating more of a burden on the "continuation" (kick-out) sites--the fastest growing part of the school system (we have two sites just to separate the main gang factions).
As I'm writing this the Fresno radio said they busted some SoCal mafia today with 50 POUNDS of crystal meth. Somehow the poor immigrants have plenty of money for drugs, guns, and luxury SUVs; the word is with NO ENFORCEMENT of fake ID laws they collect benefits under multiple IDs.

Did you all catch the news a few weeks back about the last black family on the block getting run out of Compton by Mexican gangsters? The LA Times wrote about but no national news picked it up. Yup, racial terrorism ignored because the perps were "minorities".

They should just re-name us "Orwellifornia".