In “Paul Krugman and Detroit, Part 1” I discussed the New York Times columnist’s failure to understand why Detroit currently resembles the United States in Atlas Shrugged. But Krugman’s error doesn’t stop there; on top of claiming that Detroit was destroyed by market forces rather than state intervention, Krugman adds that the city’s budget woes aren’t that big of a deal. Krugman says,
“Are Detroit’s woes the leading edge of a national public pensions crisis? No. State and local pensions are indeed underfunded, with experts at Boston College putting the total shortfall at $1 trillion. But many governments are taking steps to address the shortfall. These steps aren’t yet sufficient; the Boston College estimates suggest that overall pension contributions this year will be about $25 billion less than they should be. But in a $16 trillion economy, that’s just not a big deal — and even if you make more pessimistic assumptions, as some but not all accountants say you should, it still isn’t a big deal.”
This is a display of one of Krugman’s most effective tactics. Everything in the quote above is true, but only because of a few unfounded and smuggled assumptions. To marginalize the problems in Detroit, Krugman abstracts the issue to the nationwide local debt crises, and then subtly shifts his premises to make him appear to be making one claim (that Detroit’s debt isn’t particularly significant) while he is actually making another.
First, Krugman drops the context. The bankruptcy in Detroit and fiscal problems in states/municipalities across America do not exist in a vacuum, of the fiscal variety or otherwise. They exist in a country with a depressed economy and an unsustainable federal debt. US GDP growth last year was a mere 1.7%, and due to quantitative easing and GDP calculation oddities, that figure is doubtlessly overestimated. But even if the figure is accepted, growth rates in the indebted states and localities do not appear strong enough to reverse deficit problems with the favorite progressive liberal policy of “growing out of debt.”
According to Krugman’s Boston College source, states and localities are facing unfunded liabilities of $1 trillion, but that isn’t accounting for discount rates which by the source’s estimation, raise the figure to $1.7 trillion. But that is only a measure of future deficits. These shortfalls are adding on to a current state debt level of over $4.2 trillion (2011 figures) and a high municipal debt (aggregated local figures are difficult to calculate). On top of that, the US federal government currently owes almost $17 trillion, with a projected deficit of $450-$950 billion and projected unfunded liabilities of anywhere from $60 trillion to over $120 trillion.
Yes, $1.7 trillion isn’t that much in its own, but it’s not on its own. It’s one portion of a massive debt crises which could have drastic consequences for the US economy.
Second, Krugman smuggles the fallacious Keynesian assumption of aggregation. He notes that $1 trillion is “not a big deal” in a $16 trillion economy (it is only 6.25% of GDP). But the $1 trillion isn’t owed by the $16 trillion economy, it’s owed by a collection of far smaller economies. These economies have far higher debt to GDP ratios and lack the central banking and bond-selling capabilities of national governments. Even if these states and municipalities expand their ability to issue debt, there is no guarantee that the credit markets will be willing or able to accommodate them in such an indebted national and international economy.
Krugman’s most insidious implication is the collectivization of the economy. Not only does he look at the nation’s economy and individual sub-government debts in aggregates, but he assumes that because these local and state governments exist within national boundaries, that national wealth can be martialed to support these debts. This notion might provide relief to Detroit city employees with jack pot pensions, but it is not good for individuals living under fiscally healthy governments who will be expected to cough up extra tax dollars or suffer inflation for the sake of distant irresponsible bureaucrats.
Detroit’s debt is a big deal. The indebtedness of states and localities around the country are a big deal. The federal debt is a big deal. Combined, all of these debts add up to an approaching crisis. The very worst thing to do about this crisis is what Paul Krugman is suggesting: ignore it. No amount of debt or spending will ever be enough to scare the Keynesians and the short-run view of the world. If we are all dead in the long-run, then we might as well borrow as much as we can while we can.
The long-run is approaching quickly. The negative effects of existing debt are real and painful, not just for bankrupted cities like Detroit, but for everyone due to inefficient credit consumption and the fragilization of the government. But the current negative effects of debt are nothing compared to the potential of default. The US government needs to abandon its aggressive Krugmanite/Keynesian approach to fiscal matters on all levels if it is to avoid a serious debt crisis.