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.

Krugman: Capital Stalls Economic Growth and Creates Inequality

One of the differences between mainstream Keynesian (and neoclassical) economists and the Austrians is the view that both sides have of capital. On the Keynesian-socialist side, capital is useful mostly in the spending that is done in capital creation, and future capital improvements and repairs are useful only if these things require more spending.

Before going further, I need to emphasize that Austrians do not endorse all capital expansion, as we do see expansion based upon aggressive efforts by the government via the Fed pushing down interest rates or the government offering all sorts of subsidies and tax benefits (see "green energy") as promoting malinvestment. Since Keynesians such as Krugman do not recognize malinvestment as an economic issue (except for rare times when they think it might aid their arguments, and even then they will not use malinvestment as an economic term), they can endorse things like the massive subsidies for "green energy," since those sectors allegedly "create jobs."

If one ignores the Law of Opportunity Cost, then "green energy" is a great investment. Except, as the Wall Street Journal recently pointed out in an editorial, the Algore Sector of the economy is a disaster, an investor's version of the black hole. If Paul Krugman is interested in the relationship between capital formation and inequality, he need look no further that what has happened to the economic sector that President Barack Obama promised would lead us out of the economic downturn. Time and again we see the government transferring wealth to those who already are wealthy via this unjustified program of capital malinvestment.

(Al Gore, by the way, has managed to become fabulously wealthy living off these taxpayer subsidies while the investors who have helped provide the up-front money that he pockets have taken a financial bath. That is a story for another time and another posting, but I do find it instructive that Krugman never has gone after Gore the way that he has gone after people who actually might be productive.)

So it is today that Krugman takes on the capital bogey, first repeating (with some skepticism) yet another version of David Ricardo's pessimistic "steady state" plateau to be reached at an unnamed time. Ricardo's insistence of decreasing marginal returns to capital is there, as well as the view that at some point, capital formation will run into the proverbial brick wall. To his credit, Krugman disagrees, although not for the right reasons.

For Krugman, growth occurs only if government spending increases. One should not forget his preposterous claim that the recovery was faltering because state government spending was not rising at rates comparable to previous economic recoveries. (It never occurs to Krugman that because states must balance their budgets, they are heavily dependent upon real economic growth from private firms, so if anything, the financial problems in states and municipalities should be the "canary in the coal mine" warning that maybe Obama's policies are not promoting growth.)

Krugman then lets loose with this gem:

So machines may soon be ready to perform many tasks that currently require large amounts of human labor. This will mean rapid productivity growth and, therefore, high overall economic growth.

But — and this is the crucial question — who will benefit from that growth? Unfortunately, it’s all too easy to make the case that most Americans will be left behind, because smart machines will end up devaluing the contribution of workers, including highly skilled workers whose skills suddenly become redundant. The point is that there’s good reason to believe that the conventional wisdom embodied in long-run budget projections — projections that shape almost every aspect of current policy discussion — is all wrong.

Yeah, it is capital creating mass unemployment across the economy just as capital is responsible for the high cost of medical care. True, if it is malinvested capital, then in the long term, the malinvestments direct investment away from truly productive uses, and after the inevitable bust occurs, we see unemployment rising.

On the subject of "inequality," Krugman is insinuating that unless government steps in to limit investment returns to capital, then those returns will enrich some, but at the expense of others. Thus, Krugman reasons, capital that actually might be profitable in a market setting actually helps to create poverty. This is an amazing conclusion, but then we live in amazing time.

Krugman does not address the fact that maybe, just maybe, people purchase goods because they believe use of those goods will make themselves better off. In other words, he recognizes only the returns to investors as having anything to do with economics, while the actual uses of these goods and their economic effects either are ignored or are devalued.

During the 1930s, the New Dealers that Krugman so often praises claimed that the economy was in depression in part because ours was a "mature economy." I remember reading a 1980 Daniel Patrick Moynihan newsletter in which he made essentially the same claim. If that really were true, then I would challenge readers to go back to those eras and see who has a higher standard of living, Americans then or Americans now.

One one last point, Krugman continually claims that our present policies are starving Washington of wealth and that Washington really is on an "austerity" plan. If that is true, then why is the economy of the D.C. area booming at a time when the economy elsewhere is stagnant? Seven of the top 10 wealthiest counties either are contiguous to D.C. or are contiguous to counties that touch the D.C. borders, and the pattern continues. But if D.C. is booming, then why is the rest of the country doing poorly?

Washington, D.C.: The REAL Oligarchy

Back from Iceland, Paul Krugman now takes on what he calls the Oligarchy, but as usual, he points his guns in the wrong direction. According to Krugman, we have huge amounts of income inequality that is destroying U.S. society because, according to him, the State does not have enough power.

(Since Krugman's annual income literally is in the millions of dollars, I am not sure why he does not blame himself in part for the problem. After all, if according to his Keynesian doctrines, wealth only can be distributed, not created, then Krugman is as big a thief as he accuses others of being.)

Readers can look at the column and draw their own conclusions, but it seems to me that Krugman has missed something that tells the REAL story about our economic plight: the least-productive and most parasitic area of the country -- Washington, D.C., and its immediate environs in Maryland and Northern Virginia -- is also the highest-income locale. Let that one sink in, folks.

No doubt, a number of readers of this blog will be enraged by what I am writing. Washington not productive?!? Why, no one spends more than those who inhabit the nation's capital, and every Keynesian knows that the most productive thing anyone can do is to spend, spend, spend.

Indeed, according to the Keynesians, Washington is SO efficient in its spending that it is making the rest of us better off via the vaunted Keynesian multiplier. Furthermore, Washington with its regulatory and lawmaking power is able to create huge barriers to economic growth, confiscate property (and redistribute it among those who live there), and then get its shills like Krugman to claim that others are to blame.

It is Washington that forces us to put ethanol into our cars, damaging the engines and lowering gas mileage; it is Washington that creates regulations that benefit the least productive people at the expense of those that are productive. It is Washington that has created thousands of new criminal laws that are so expansive that most readers of this page have committed at one time or another felonies that could land them in prison -- yet were not even aware that they were breaking the law.

(The courts in Washington have ruled that every citizen is responsible for knowing every law and every regulation that comes out of the city. There are exceptions, however: prosecutors, judges, and the police do not have to know the law and are not punished when they break it, especially out of ignorance. "Ignorance of the law is no excuse" applies only to those of us who are not employed carrying out the law.)

I agree that Wall Street has been out of control. This blog has long dealt with those issues regarding finance and the symbiotic relationship between Washington and the banks, but let us also keep in mind that both the Republicans and Democrats have seen Wall Street first and foremost as a cash cow for campaign contributions are are desperate to keep the spigots flowing.

Yet, when Wall Street goes over the cliff, Washington forces the rest of us to rescue the bankers instead of permitting people to bear the consequences of their own actions. But what is Krugman's "solution"? It is to expand the moral hazard that Washington creates, and to force taxpayers to pony up and finance disasters like Solyndra. (And Krugman has defended the Obama administration's funding of this firm, as has his employer, the NYT.)

So, let us be frank here. Paul Krugman is not against an "oligarchy." Indeed, he absolutely supports Washington becoming wealthier, and according to his Keynesian doctrines, the more Washington confiscates our wealth, the better off we are.