Streetwise Professor

May 15, 2010

Just Because We’re Not Greece Doesn’t Mean We’re Not Screwed

Filed under: Economics,Financial crisis,Russia — The Professor @ 1:28 pm

Imitating his hero Barack Obama, Paul Krugman wails on a straw man.  He argues that since the US has far better prospects than Greece, we have nothing to worry about:

Even more important, however, is the fact that we have a clear path to economic recovery, while Greece doesn’t.

The U.S. economy has been growing since last summer, thanks to fiscal stimulus and expansionary policies by the Federal Reserve. I wish that growth were faster; still, it’s finally producing job gains [barely, just barely–and at a rate far behind that at this phase of the recovery from recessions, especially severe ones]— and it’s also showing up in revenues. Right now we’re on track to match Congressional Budget Office projections of a substantial rise in tax receipts. [Which will still leave us deep in the whole.]  Put those projections together with the Obama administration’s policies, and they imply a sharp fall in the budget deficit over the next few years.  [What policies would those be?  The world wonders.]

Greece, on the other hand, is caught in a trap. During the good years, when capital was flooding in, Greek costs and prices got far out of line with the rest of Europe. If Greece still had its own currency, it could restore competitiveness through devaluation. But since it doesn’t, and since leaving the euro is still considered unthinkable, Greece faces years of grinding deflation and low or zero economic growth. So the only way to reduce deficits is through savage budget cuts, and investors are skeptical about whether those cuts will actually happen.

It’s worth noting, by the way, that Britain — which is in worse fiscal shape than we are, but which, unlike Greece, hasn’t adopted the euro — remains able to borrow at fairly low interest rates. Having your own currency, it seems, makes a big difference. [We should look to Britain for solace?  You’re kidding, right?]

There is no doubt that Greece is doomed.  We’re not doomed, but we are in very deep trouble.  From this I’m supposed to take comfort?

Of course, Krugman beckons his standard villain to explain the US’s budget troubles: conservatives who have starved the government of revenue:

And bear in mind, also, that taxes have lagged behind spending partly thanks to a deliberate political strategy, that of “starve the beast”: conservatives have deliberately deprived the government of revenue in an attempt to force the spending cuts they now insist are necessary.

As if.  Krugman is, how do you say it?  A liar.  That’s it.  In 1970, federal revenues as a fraction of GDP: 19 percent.  1980: 18.9 percent.  1990: 18 percent.  2000: 20.8 percent.  2010: 19.2 percent.   Some starvation.

Then we get a dose of Alfred E. (“What, me worry?”) Krugman:

Meanwhile, when you look under the hood of those troubling long-run budget projections, you discover that they’re not driven by some generalized problem of overspending. Instead, they largely reflect just one thing: the assumption that health care costs will rise in the future as they have in the past. This tells us that the key to our fiscal future is improving the efficiency of our health care system — which is, you may recall, something the Obama administration has been trying to do.

And yes, we know that intentions always produced the desired results!  The road to hell is quite well paved, actually.  Better in fact than even the typical highway to nowhere in the district of the chairman of the Appropriations Committee.  This is just another example of Tinker Bell Economics.

In the case of health care specifically, no honest person seriously believes that the health care bill is going to reduce health care expenditures, or improve the federal government’s budget situation.  And let’s not even talk about the states (which are already anticipating an increasing burden from higher Medicaid costs piled on top of already creaking budgets).

And of course Krugman attributes malign motives to those who express concern about the nation’s fiscal situation:

But we should ignore those who pretend to be concerned with fiscal responsibility, but whose real goal is to dismantle the welfare state — and are trying to use crises elsewhere to frighten us into giving them what they want.

No, people have real concerns, you yutz.  Those concerns have a real basis.  No amount of mooning over Obama’s health care plan can conceal the fact that the entitlement burden threatens the solvency of the US government.   Especially since the burden of government also will likely be a significant drag on growth, worldwide.

It would be more accurate to say that Krugman is trying to downplay the real prospects of a future crisis in order to protect an unsustainable welfare state.  Ignore Greece, or the rest of Mediterranean Europe.  If you look at the rest of Europe, the UK, or major US states, or the US itself, and don’t see the serious risk of a fiscal crackup, you need some dark sunglasses and a cane.

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9 Comments »

  1. “And bear in mind, also, that taxes have lagged behind spending partly thanks to a deliberate political strategy, that of “starve the beast”: conservatives have deliberately deprived the government of revenue in an attempt to force the spending cuts they now insist are necessary.

    As if. Krugman is, how do you say it? A liar. That’s it. In 1970, federal revenues as a fraction of GDP: 19 percent. 1980: 18.9 percent. 1990: 18 percent. 2000: 20.8 percent. 2010: 19.2 percent.”

    In 1980, President Reagan first raised the debt limit past 1 terabuck. We had a ~3 terabuck GNP back then. He then ct taxes and went on a defense spending spree. His OMB director gave him a test. Stockman laid out the major Federal programs, and asked Saint Ronnie whether each program should get a deep cut, a mild nick, or be left alone. Stockman graded the test, and the result was ~200 gigabuck deficits as far as the eye could see.

    In 2000, the Federal debt was ~5.4 terabucks. President Dubya believed that the only way to finance two wars was with tax cuts. After all, in the words of ‘Deadeye Dick’ Cheney, “Reagan proved deficits don’t matter.” In this manner, President Dubya got the Federal debt well past 10 terabucks on a ~14 terabuck economy, even before the global financial collapse of 2007-2008.

    Republicans love spending, but lack the balls to do the taxing. Hence, their spending is nothing other than a tax on the future. And you know what they say about taxes, when you tax something, you get less of it. And that’s what we have now, a vastly diminished future.

    As to how Andy Mellon would have handled the global financial collapse of 2007-2008, we can look at Latvia and Estonia. Even Pres. Hoover had the sense to reject such lunacy.

    Comment by rkka — May 15, 2010 @ 2:01 pm

  2. Pirrong is right. Krugman is wrong.

    The only long-term solution is to bring jobs back to America. (full stop)

    A strategy on how to bring these jobs back is part of a much larger discussion.

    Comment by Timmy — May 15, 2010 @ 2:22 pm

  3. If you look at the rest of Europe, the UK, or major US states, or the US itself, and don’t see the serious risk of a fiscal crackup, you need some dark sunglasses and a cane.

    This might be a dumb question, but what is this a reference to? (the dark sunglasses and a cane).

    Comment by Sublime Oblivion — May 15, 2010 @ 2:44 pm

  4. Anatoly: Craig is saying that if you don’t “see” the risk of a fiscal crack-up then you must be blind (i.e. blind people sometimes where sunglasses to hide their eyes and use a cane to self-sufficiently get around by themselves).

    Comment by Timmy — May 15, 2010 @ 3:15 pm

  5. “In 1980, President Reagan first raised the debt limit past 1 terabuck”

    Actually, it was early 1981.

    Comment by rkka — May 15, 2010 @ 3:44 pm

  6. S/O, uhm, like blind people wear dark sunglasses and use canes.

    The ProfessorComment by The Professor — May 15, 2010 @ 5:41 pm

  7. Thanks Tim and SWP. That was a dumb question.

    Comment by Sublime Oblivion — May 15, 2010 @ 7:13 pm

  8. Peak debt + aging. Not peak energy is doing in the West. But I think the Prof should be more worried about Japan than Russia at this point unless those clever Japanese can invent a generation of superintelligent robots to do the jobs all their youngins (now defined as anyone under forty, not thirty) previously would have done.

    Korea and China, the most logical source of migrants for Japan, both have historic grievances against Dai Nippon so they are unlikely to let millions of them in – Brazilians and Peruvians first! In this, Tokyo is similar to Israel – they started with the Jews in Russia then started letting in their third cousins by marriage who might or might not fit the Rabbinic definition, hence the Palestinian Christian’s complaint that they have more 1st century Jewish ancestry than some of the 1 million Russians let in. One of my former profs talking to high level Israelis and Palestinians once observed that it was the Russian influx in the 80s that triggered the intifada, because up until that time Arafat imagined that time was on the P’s side, and that the Israelis would not resort to mass immigration to maintain their preponderance. But they did. The Russian influx also made some sort of reapproachment between Moscow and Jerusalem inevitable despite Russia’s significant Muslim population. I can’t wait for the humongous wedge Moscow is going to drive between the pro-Israel and anti-Russia lobbies in the next five years, and for SWP’s angry posts when all the top Israeli mil and nanotech developed with U.S. taxpayer dollars goes to the Russian military.

    Tokyo is also smarter than Washington that which with a wink and nod promotes millions coming from a nation that has historic claims on U.S. territory. Both parties business supporters need the cheap labor (with the Sorosites at the top dreaming of a North American Union) and the D’s dream of perpetual electoral dominance on the backs of La Raza.

    Comment by Mr. X — May 17, 2010 @ 1:33 pm

  9. Peak debt + aging. Not peak energy is doing in the West. But I think the Prof should be more worried about Japan than Russia at this point unless those clever Japanese can invent a generation of superintelligent robots to do the jobs all their youngins (now defined as anyone under forty, not thirty) previously would have done.

    Korea and China, the most logical source of migrants for Japan, both have historic grievances against Dai Nippon so they are unlikely to let millions of them in [plus the Chinese birth rate is plummeting even faster than that for Mexico] – Brazilians and Peruvians first! In this, Tokyo is similar to Israel – they started with the Jews in Russia then started letting in their third cousins by marriage who might or might not fit the Rabbinic definition, hence the Palestinian Christian’s complaint that they have more 1st century Jewish ancestry than some of the 1 million Russians let in. One of my former profs talking to high level Israelis and Palestinians once observed that it was the Russian influx in the 80s that triggered the intifada, because up until that time Arafat imagined that time was on the P’s side, and that the Israelis would not resort to mass immigration to maintain their preponderance [also those new ‘settlements’ and the electoral rise of Likud are linked to the Russian exodus]. But they did. The Russian influx also made some sort of reapproachment between Moscow and Jerusalem inevitable despite Russia’s significant Muslim population. I can’t wait for the humongous wedge Moscow is going to drive between the pro-Israel and anti-Russia lobbies in the next five years, and for SWP’s angry posts when all the top Israeli mil and nanotech developed with U.S. taxpayer dollars goes to the Russian military. Will SWP become a Buchananite then and decide maybe it’s time for Israel to get off the U.S. taxpayer teet to the tune of $2 billion per year?

    Tokyo is also smarter than Washington that which with a wink and nod promotes millions coming from a nation that has historic claims on U.S. territory. Both parties business supporters need the cheap labor (with the Sorosites at the top dreaming of a North American Union) and the D’s dream of perpetual electoral dominance on the backs of La Raza.

    Comment by Mr. X — May 17, 2010 @ 1:35 pm

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