A Debt-based Economy?

Reading columns by Paul Krugman is always an education. It's not what he says that is illuminating, it is what you learn from picking apart his arguments.

He has written several columns against the austerity measures being undertaken by several countries. His reasoning is that none of the measures enacted so far have brought prosperity so austerity is discredited.

Where to start with this one? Austerity is needed because of previous excesses. Countries such as Greece have run up such a debt that they cannot keep borrowing. There is a real danger that they will default on their current debt so no one wants to give them any further loans except with unaffordable interest rates. For these countries, austerity will not make things better. Services and social programs will have to be cut. This will be painful but not as painful as the crash that will occur if they don't make these cuts now.

Think of a family budget. You have been spending more than you earn for some time. You can stop eating out and switch to Hamburger Helper or you can keep on spending until you have to declare bankruptcy and loose your house and car. And are still stuck eating Hamburger Helper. Neither choice is desirable but one is less painful.

Krugman insists that the road to prosperity is paved with government spending. Since forty cents of every dollar the government spends is borrowed, he is trying to base the economy on ever-expanding debt.

A quick aside here - some government debt is a good thing. If the government needs to build a bridge it can either set aside money for years until enough is accumulated to pay cash for the bridge or it can borrow enough money to build it now and pay off the loan over time. If the economy grows then the amount of money the government can borrow also grows. The problem comes when the government starts borrowing faster than the economy is growing and interest payments get out of hand.

Krugman would brush off this argument saying that we can worry about the debt after the economy recovers. The problem is that we are two years into a recovery and economic growth has been sluggish at best. A major school of economics says that government spending slows an economy instead of accelerating it so Krugman's prescription might be doing ore harm than good.

More recently Krugman called for a jobs program comparable to the WPA. He proposed that it be sent to patch potholes. How many potholes can I find in Krugman's proposal?

First, this is an echo of the "shovel ready" jobs of a couple of years ago - the ones that President Obama admitted do not exist. Big infrastructure program take years to plan and get approval for. For immediate jobs, things have to be scaled back to something that takes no planning or approval. That means the simplest jobs like patching potholes.

Even there, there are problems. During the Depression a worker might be issued a shovel and told to get to work. Modern roads need heavy equipment. If a city has cut back on patching then it might have some excess capacity but otherwise some of the money will have to go for buying the required equipment. That caused delays and diverts money from a straight jobs program into a stimulus for heavy equipment manufacturers.

But, assuming that there is a large excess capacity, there is the matter of hiring the workers. Krugman treats the unemployed as an amorphous mass, willing and able to take any job offered. Will unemployed office workers be willing to take a job that requires them to work outdoors in the hot sun with dangerous equipment and hard manual labor? If my wife was unemployed she would never consider such a job.

How much will Krugman pay his patching crew?  A large percentage of the unemployed are getting unemployment benefits. They would lose these if they took one of Krugman's jobs. Will they break even? How many people would be willing to make this trade?

If the patching jobs pay more than unemployment benefits then they will cause other distortions in the job market. People who are already employed in lower paying jobs will be tempted to switch. This would create new openings but in low-paying jobs that would not interest people on unemployment.

Then there is the seasonal nature of his proposal. Around here you can only patch part of the year.

Part of the reason that unemployment has stayed to high for so long is that the new jobs that are being created are specialized and the majority of the unemployed do nto have the right skill set. Krugman would do nothing to solve that problem.

And then there is the problem of paying for these workers which brings us back to the national debt. He wants to borrow money to employ people to do essentially meaningless work. Any economic expansion will have to be repaid with interest at a later date.

Krugman's arguments boil down to one simple idea - cuts are painful so don't make them. Instead keep believing in the power of state spending state to solve all problems and keep borrowing.