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

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.

About Craig Pirrong 223 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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