Krugman's Greek Temple of Keynesianism

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by William L. Anderson: Federal
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A lot of people
have weighed in on the Greek Morality Play, better known as the
collapse of Greece’s economy, and there is no shortfall of “wisdom”
and advice. (For that matter, I
made comments myself
on the Greek situation during an interview
on the RT network last March.)

Not surprisingly,
Paul
Krugman has weighed in again
, and this time he not only claims
that the problem is not enough inflation, but also deliberately
ignores the real problem behind much of the Greek collapse: Greece’s
notorious and “bloated” (to use a term
from Krugman’s employer
, the New York Times) bureaucracies
led by its militant public employee unions. Instead, Krugman sets
up other straw men and then claims that if only — If Only! — the
Germans would crank up the monetary printing presses, Greece could
be saved.

Before going
into specifics, I would like to point out that Krugman is correct
when he notes that a single currency union of many states indeed
does impose certain fiscal restrictions. The examples he uses for
the United States are dishonest, and even when explaining the European
currency union, he does not tell the whole story, lapsing, instead,
into his usual spate of accusations coupled with his demands for
more inflation. (And, yes, I will explain my point later in this
piece.)

Krugman writes:

So, about
those Greek failings: Greece does indeed have a lot of corruption
and a lot of tax evasion, and the Greek government has had a habit
of living beyond its means. Beyond that, Greek labor productivity
is low by European standards — about 25 percent below the European
Union average. It's worth noting, however, that labor productivity
in, say, Mississippi is similarly low by American standards —
and by about the same margin.

On the other
hand, many things you hear about Greece just aren't true. The
Greeks aren't lazy — on the contrary, they work longer hours than
almost anyone else in Europe, and much longer hours than the Germans
in particular. Nor does Greece have a runaway welfare state, as
conservatives like to claim; social expenditure as a percentage
of G.D.P., the standard measure of the size of the welfare state,
is substantially lower in Greece than in, say, Sweden or Germany,
countries that have so far weathered the European crisis pretty
well. 

So how did
Greece get into so much trouble? Blame the euro.

 His statement
is more significant for what he ignores, not claims, and he has
left out the role of Greece’s legendary public employee unions.
Interestingly, the paper for whom he writes, the NYT,
has described the Greek government unions
this way:

Stories of
eye-popping waste and abuse of power among Greece's
bureaucrats are legion, including officials who hire their wives,
and managers who submit $38,000 bills for office curtains.

The work
force in Greece's Parliament is so bloated, according to a local
press investigation, that some employees do not even bother to
come to work because there are not enough places for all of them
to sit.

And there is
more:

The government
is in many ways an army of patronage appointments built up over
decades. When election time rolls around, state workers become
campaign workers, and their reach is enormous. There are so many
of them that almost every family has one.

This puts
the Socialist prime minister, George A. Papandreou, or any other
Greek leader, in a tough spot: There can be little upside to cutting
jobs precisely when the government most needs support for unpopular
budget-cutting actions.

"There
is a political cost to these reforms," said Nickolaos G.
Travlos, an economist at the Alba Graduate
Business School in Athens. "These workers are opinion leaders
in their communities. And they are busy blaming the government,
especially a Socialist government that is supposed to protect
them.”

They are
also well organized. This week's general strike follows weeks
of smaller strikes, rallies, sit-ins and a blockade of the Athens
landfill that has left piles of garbage rotting in the streets.

When auditors
from the "troika" — the International Monetary Fund,
the European Central Bank and the European Commission — arrived
last month at the Finance Ministry, workers blocked their entry.

There obviously
is a disconnect here, but one has to remember that Krugman
considers government unions to be a source of wealth creation
,
and not something that destroys wealth. In fact, the more bloated
and unproductive the Greek government unions become, the more wealth
they create, because their non-productivity means that the government
has to hire more people which means more jobs. This clearly is the
proverbial “elephant in the living room” that Krugman refuses to
acknowledge.

Most “conservative”
and libertarian criticisms of Greece that I have read do not deal
with Greece’s welfare state, contra Krugman. Instead, they
have been critical of the very thing Krugman pointedly ignores:
government employee unions, and there is enough evidence on the
table to demonstrate that the picture of the hard-working Greek
citizen toiling long hours is not a government worker, but rather
someone in the private economy working to support the bureaucrats
that have become a huge burden. (Notice how Krugman lumps all
Greek workers together instead of separating those who financially
support the unions and those who consume the wealth that others
produce.)

Now, if Greece
were on the drachma, then I suppose the government could print a
lot of money to pay for these workers, and the result would be inflation,
lots of inflation. By being on the euro, the Greek government has
not had that option, which meant that whatever extra money came
into the system outside the private economy would come in via borrowing,
and the Greek crisis precisely has been about the government’s unmanageable
debt service.

In Krugman’s
world, however, things are turned upside down. Private savings are
bad, government spending and debt are good. Public sector unions
create wealth and private enterprise destroys it.

His comparison
of this country’s state governments with Greece might have some
bearing in the argument, but even there Krugman gets it backwards.
Krugman’s
support of the government unions
in Wisconsin and California
and his recent claim that state government spending — or the alleged
lack, thereof — is causing the current downturn ignores the simple
fact that state government unions mostly consume, not create, wealth.
Steven
Greenhut writes
:

Over the
past decade, California governments have dramatically increased
the pay and especially the benefit packages of public-sector workers.
We have firefighters earning average total compensation packages
of $175,000 a year in many jurisdictions, and majorities of police
officers in some agencies retiring on questionable disabilities.
The standard retirement package for the ever-expanding class of
"public safety" officials allows them to retire at age
50 with 90 percent of their final year's pay — and that's before
all the add-ons and scams. Miscellaneous members — the rest of
public employees — aren't far behind, and we've seen absurd enrichment
schemes and salaries in one scandal after another.

I've watched
a sea of proposals pass that give government employees special
privileges that would never be allowed for mere private citizens,
such as a recently passed California bill that allows many officials
to shield their personal information from public property databases.
These privileges encourage arrogance and misuses of power. Pensions
are now consuming 16 percent of California's discretionary budget,
and in cities such as San Jose, pension costs escalated an eye-opening
350 percent in a decade.

In Krugman’s
world, all of this is justified not only under the guise of “democracy”
and “fairness,” but also because such measures mean more “spending”
by government employees, and such spending in Wonderland creates
wealth. But a column by Paul Krugman, unfortunately, does not contain
just bad economic analysis, but also encompasses some outright howlers,
and we see them in his comparison of the Greek situation to this
country:

Ask yourself,
why does the dollar area — also known as the United States of
America — more or less work, without the kind of severe regional
crises now afflicting Europe? The answer is that we have a strong
central government, and the activities of this government in effect
provide automatic bailouts to states that get in trouble.

Consider,
for example, what would be happening to Florida right now, in
the aftermath of its huge housing bubble, if the state had to
come up with the money for Social Security and Medicare out of
its own suddenly reduced revenues. Luckily for Florida, Washington
rather than Tallahassee is picking up the tab, which means that
Florida is in effect receiving a bailout on a scale no European
nation could dream of.

Or consider
an older example, the savings and loan crisis of the 1980s, which
was largely a Texas affair. Taxpayers ended up paying a huge sum
to clean up the mess — but the vast majority of those taxpayers
were in states other than Texas. Again, the state received an
automatic bailout on a scale inconceivable in modern Europe.

None of these
situations involved state spending; in fact, the housing bubble
and the S&L crisis involved federally-sponsored institutions
which also had crises in other states. Furthermore, his examples
of Social Security and Medicare fall into the non sequitur
category, given that both are federal programs and paid not
by state taxes and spending, but rather through a nation-wide taxation
system. In other words, Krugman gives us a dishonest apples-and-oranges
comparison.

However, if
the states, such as California, were to have fiscal problems because
government employee unions have plundered everyone else, that is
a different matter altogether. Krugman has argued that the federal
government should borrow in near-unlimited amounts in order to prop
up the budget deficits in the states, and he essentially argues
that Europe should do the same for Greece and other countries.

Yes,
this will mean more inflation, but in Wonderland, more inflation
means more spending and more spending means a better economy. And,
yes, Krugman has argued many times that increased inflation is good
for us, almost as good as an
invasion of “space aliens.”

As Lew Rockwell
has noted in
this appearance on RT
, many of the “austerity” measures imposed
upon Greece have been done in the name of bailing out the European
banks that were foolish and craven enough to go along with Greece’s
spending schemes. Instead of bailouts, Rockwell has recommended
that Greece simply default, which actually would better serve both
Greece and Europe.

Why? Greece
would be forced to put its own fiscal house in order by being realistic
about government spending, and the European banks in the future
would have to lend money for productive measures, not unsustainable
government foolishness. Indeed, as he notes, Greek workers have
been victimized by governments and banks, but his sympathies are
aimed toward the real Greek taxpayer: the private sector
worker who has to work long hours to support those who don’t have
to work at all.

Paul Krugman,
on the other hand, claims that the only way to have real economic
recovery and growth is for governments to borrow, print money, and
continue with excessive government employee union activities. This
is not economics in any authentic sense; it is just more Keynesian
misrepresentation of reality.

June
20, 2012

William
L. Anderson, Ph.D. [send him
mail
], teaches economics at Frostburg State University in Maryland,
and is an adjunct scholar of the Ludwig
von Mises Institute
. He
also is a consultant with American Economic Services. Visit
his blog.

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