State Aid
Paul Krugman makes the case for federal fiscal aid to state and local governments. But I also wanted to highlight this more general point:
In fact, the true cost of government programs, especially public investment, is much lower now than in more prosperous times. When the economy is booming, public investment competes with the private sector for scarce resources — for skilled construction workers, for capital. But right now many of the workers employed on infrastructure projects would otherwise be unemployed, and the money borrowed to pay for these projects would otherwise sit idle.
And shredding the social safety net at a moment when many more Americans need help isn’t just cruel. It adds to the sense of insecurity that is one important factor driving the economy down.
It’s important to recognize these points. There’s a certain line of sentimentalist moralism that holds that amidst a general economic downturn, it’s somehow improper for anyone or any institution to be spending money — we ought to be all tightening our belts and battening down the hatches for the lean years. And one needs to understand that things don’t work that way. It’s actually good for institutions that have the capacity to keep spending money — the public sector chief among them — to take advantage of the falling cost of a lot of stuff to expand their operations. That’s how you pull out of a recession. If everyone cuts back, then everyone just keeps cutting back.
30 Responses to “State Aid”
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December 30th, 2008 at 9:10 am
Alas, Professor Krugman fails to appreciate the effects of state prevailing wage laws which ensure significant labor price premiums regardless of economic conditions.
Keynesain repsonses are fine but lets not turn a blind eye to some of the pernicious special interest issues that undermine their potential.
December 30th, 2008 at 9:16 am
The only problem is that the public sector, while having the capacity to spend money, has less than it should have because of its profligate spending when it didn’t have to.
The true test will be when the economy picks up and starts growing again at 4% real per year–will the government have the cojones to cut its spending/raise taxes so GDP is “only” 3% real growth, thus banking that extra 1% for the next rainy season.
December 30th, 2008 at 9:22 am
“…federal fiscal aid to state and local governments…”
And how to distinguish between states that need aid because they really need aid vs. states that need aid because they spend recklessly and/or enjoy benefit levels higher than most other states? Why shouldn’t states just spend their brains out and then cry poverty so as to get “fiscal aid”? These are not trivial issues.
December 30th, 2008 at 9:23 am
Also, it’s not like we don’t need this stuff. It makes a heck of a lot more sense to buy a bridge when it’s cheap than when it’s expensive.
And i think it’s less sentimentalist moralism than it is the same kind of Republican arguments that got us into this mess.
The same politicians who preached trickle-down economics are now saying “the government shouldn’t buy stuff while it’s cheap–it should wait for businesses to start charging higher prices, THEN buy!” It’s the same school of thought that brought us deregulation, massive growth in CEO salaries and Wall Street pay, stagnant wages for the middle class, a jobless recovery, and the biggest gap between the rich and everyone else since the 1920’s crash. (Oh, not to suggest for a moment that huge gaps between the wealthy and everyone else are at all the root cause of the depression precipice we’re teetering on–after all, if you give a nation’s entire GDP growth to Wall Street instead of distributing it across the economy’s sectors, crazy schemes leading to a crash like this aren’t more or less inevitable. Yep, it would be crazy to not this critical feature of BOTH our greatest economic challenges and, you know, conclude maybe it’s not economically sustainable to give all the money to rich people. Crazy, I know.)
December 30th, 2008 at 9:34 am
stevie314159,
The last time a Democratic administration was finishing up, the big problem was that the surplus was too big.
December 30th, 2008 at 9:52 am
Alas, Professor Krugman fails to appreciate the effects of state prevailing wage laws which ensure significant labor price premiums regardless of economic conditions.
Alas Robert, you fail to grasp the fact that state and local governments have a competitive bidding process and that when times are lean contractors are more than willing to take work to stay in business even if they’re not making a huge profit.
December 30th, 2008 at 10:05 am
Alas, Professor Krugman fails to appreciate…
I love this formulation; I see it all the time:
“This year’s winner of the Nobel Prize in Economics doesn’t know that states have prevailing wage laws. It never occured to him, and his whole argument falls apart if you include that.”
“The dozens of PhDs in climate science who authored this report didn’t consider the effect of the sun in their models. They just plumb forgotted the Sun! If they had, it would totally disprove their conclusion.”
Right. It isn’t that public projects are actually less expensive during economic slowdowns; it’s just that Paul Krugman, Nobel Lauriat, just plumb fogot that there are prevailing wage laws.
December 30th, 2008 at 10:20 am
Krugman also knows that any programs started up know to employee people will continue to exist even during the good times. The States need to learn to cut spending, raise taxes, and put money away during the good times in order to ride out the bad times. Giving the states federal money during the bad times while the states start new programs during the good times is nothing more than enabling behavior.
December 30th, 2008 at 10:27 am
superdestroyer, in my experience the moment a state runs a budget surplus the hue and cry goes up to cut taxes and/or cut rebate checks. Also, the reason why governments aren’t generally eager to layoff personnel in tough times is that it’s very hard for them hire workers even when times are good given the skeptical attitude of plenty of taxpayers. I’m not saying this is good or bad, just that it is a fact of life that government has to deal with.
In any case, many of these public works projects don’t involve governmental hiring as the money will go to private contractors.
December 30th, 2008 at 11:10 am
Alas Robert, you fail to grasp the fact that state and local governments have a competitive bidding process and that when times are lean contractors are more than willing to take work to stay in business even if they’re not making a huge profit.
David W, I don’t know what state you live in but here and in many others that competitive bidding process must factor in prevailing wages that are significnatly larger than what market clearing labor prices would be. That’s a fact and that fact means that taxpayers are getting a lot less “stimulus outcome” for the dollar.
December 30th, 2008 at 11:18 am
Robert, you’re still not getting Krugman’s original point, which is that in fact it is cheaper for government to bid out public works projects in lean times than in flush times when there’s plenty of work to be had.
In addition, the economic stimulus of such work is indeed more effective when the wages are higher. When wages and/or employment was cut in the early years of the Great Depression, the deflationary spiral only intensified.
December 30th, 2008 at 11:19 am
Yeah, paying higher wages for work done as part of a stimulus package undermines the stimulus effect, because…uh…
OK, help me out here. How is less money injected into the economy if workers are paid higher wages?
December 30th, 2008 at 11:26 am
David,
The state of California disproves your point about tax cuts. while benefitting from the dot.com boom and the real estate boom, the State of California expanded government payrolls and made long term commitments to employees based upon boom cycle revenues. How that the bad times are here, the state wants to raise taxes 3 to 1 versus spending cuts. Do you really think they will cut taxes after the recession is over?
Toll roads are the greatest example. Even after the roads are paid for, the state keeps charging tolls to keep the employees paid.
December 30th, 2008 at 11:55 am
Toll roads are the greatest example. Even after the roads are paid for, the state keeps charging tolls to keep the employees paid.
I think you’re missing the need to rebuild said roads when it’s needed, or expand their capacity as traffic on them grows.
December 30th, 2008 at 12:03 pm
I just don’t see how the federal government can declare that banks or auto companies are “too big to fail”, yet do nothing to help states affected by the economic downturn that is at least partially caused by actions of the companies the feds are bailing out.
December 30th, 2008 at 12:50 pm
OK, help me out here. How is less money injected into the economy if workers are paid higher wages?
If workers are paid higher wages, the money only eventually winds up in the pockets of the rentier class, instead of being directly injected therein.
Which is Very Bad Economics. Moral Hazard. Invisible Hand. Immutable Laws of Nature…etc. etc.
December 30th, 2008 at 12:56 pm
Toll roads are the greatest example. Even after the roads are paid for, the state keeps charging tolls to keep the employees paid.
The efficient thing to do is to sell off the toll roads, give a tax cut on the back of the one-time bolus to the state budget, run for reelection on the back of the tax cut, and be safely out of office when the vendor begins their annual ‘requests’ to the legislature for a better deal because they mis-calculated the ROI, lowballed the savings from privatization, don’t have the capital for further improvements, and be safely dead when the state has the roads returned to them a few decades down the line as unprofitable.
December 30th, 2008 at 3:04 pm
joe from Lowell:I love this formulation; I see it all the time:
“This year’s winner of the Nobel Prize in Economics doesn’t know that states have prevailing wage laws. It never occured to him, and his whole argument falls apart if you include that.”
joe, you’re missing the point. It’s not thta Krugman doesn’t know, it’s that he is a liar and a dishonest toady of those who want the ever-expanding state.
His toadying-up to the central bankers and the statists is why he won the Swedish Central Bank Prize in Economics (he never won a Nobel Prize in economics, because such a prize does not exist. There’s a Swedish Central Bank Prize that pretends to be a Nobel Prize, but that’s all).
December 30th, 2008 at 4:33 pm
@Glaivester
You are so brilliant, what’s your solution? Whack the liberal?? Shoot the messenger? What did he lie about? Show me your prize…
December 31st, 2008 at 11:02 am
Question for the flesh pile(yglesias). If it’s indeed true that if we don’t engage in huge public spending on pyramids, hole digging, humanity departments ect. we will inevitably fall hostage to a self enforcing spiral of perpetual decline, how did any economy ever make a recovery from a downturn prior to the 1930’s?
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