Dear Krugman: We Are Greece

17 May

Professor Krugman, in your op-ed piece at WSJ titled “We’re Not Greece” on May 13, you raise some valid points, but in all respect sir, I don’t think that you really see what’s going on out “in the trenches”.

Point 1 (US As a Safe Haven):

In your article, you specifically state: “One answer is that we have a much lower level of debt — the amount we already owe, as opposed to new borrowing — relative to G.D.P. True, our debt should have been even lower. We’d be better positioned to deal with the current emergency if so much money hadn’t been squandered on tax cuts for the rich and an unfunded war. But we still entered the crisis in much better shape than the Greeks.

True, the amounts that we already owe (which in all fairness ballooned during the Bush years to fund 2 wars, which you discuss in your article) were relatively low compared to the GDP rate at that time under much rosier growth assumptions. The record rate of change of the national debt in the past 2 years relative to a deteriorating “real” GDP has changed the picture considerably. When you have such a large structural problem of unemployment, is it really fair to attribute the transfer payments from the Government to the official GDP figures to say that we are growing? Programs like ‘Cash For Clunkers’ basically takes future growth and pushes it ahead to the present, which truly distorts the underlying picture.

If our Government cannot reduce the rate of change of spending for the country, all we are doing is keeping our foot on the accelerator in a Toyota that has bad brakes. Eventually, at some point we are going to run out of road or gas. If we can reduce the rate of change in spending (i.e. slowly take our foot off the accelerator), we can at least attempt to bring our debt problems in line. I haven’t seen that from our administration and their plans for the future.

Point 2 (The US Has A Clear Path To Recovery)

You state “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 — 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. 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.

I have to disagree with you. Based on my research out in the trenches (collar counties of Chicago and Chicago proper, as well as the boroughs of NYC) I don’t see real economic growth. The small businesses that I talk to do not see growth. The throngs of unemployed people (many of whom are long term unemployed) do not see real growth in terms of jobs. Yes, there are jobs being created Mr. Krugman, but those jobs are temporary in nature. Many state unemployment rules dictate that you must work X hours before becoming eligible to receive unemployment benefits (again), however these ‘temporary’ jobs have a duration that lasts just typically under that requirement. So, while the recipient of that temporary job has immediate income coming in, that income will not be put as quickly injected back into the overall economy. The temporarily employed person (hopefully) is going to save that money (almost assuredly the wages will be substantially lower than the person’s previous job) because they know that within X period of time, they will be back at square one. Many will try to reduce their debt burden, which, inherently is a good thing, but they will find themselves back at square one once the temporary job is over. Census workers are a case in point. The ‘growth’ that is occurring in the jobs market is only short term, and I’m willing to bet that when the Census is completed, you’re going to see a spike in the unemployment rate, which will reverse the “gains” made during the 1st and 2nd quarters of this year.

CBO’s projections of a substantial rise in tax receipts is laughable, as are the projections of the Obama administration. If business spending is constrained due to arduous regulations designed to stifle growth, that is going to ripple through the economy. The incomes of the employed people won’t grow in this environment, which means that the amounts of taxes collected by the Government will decrease. I implore you to ask a middle class worker in the Chicago area which suffers from a crippling structure of taxes (City, County, State, Federal – similar to NYC, only our taxes at the City and County levels are substantially higher) what an increase in taxes at the Federal level will do to their ability to spend.

Point 3: “We Demand More Than We Pay For”

In your op-ed, you blast the assertion that many people are making in calling for the reduction in entitlement programs. You state: “That said, we do have a long-run budget problem. But what’s the root of that problem? “We demand more than we’re willing to pay for,” is the usual line. Yet that line is deeply misleading.  First of all, who is this “we” of whom people speak? Bear in mind that the drive to cut taxes largely benefited a small minority of Americans: 39 percent of the benefits of making the Bush tax cuts permanent would go to the richest 1 percent of the population.

Greece has the same entitlement problem, most notably people thought that they could work for 40 years and that the Government would be there for them to “bail them out” and provide them all with cushy pensions in their retirement years. The same thing goes for the average US citizen, who has already shown that they cannot accept personal responsibility for their actions. You saw it with the housing bubble: when prices were rising, people took all of the credit for building their “net worth” – what’s worse, they kept leveraging up and discussing it at cocktail parties about how many HELOC’s they had. When the music stopped, instead of accepting responsibility for their borderline reckless behavior (some of it actually borders on the edge of criminality – knowingly lying about one’s income, debt levels in order to obtain that HELOC to keep up with their counterparts at cocktail parties), these same people, many of whom actually get a tax “refund” and therefore don’t really pay any taxes (or very little at all) cried foul at the easiest target around – us evil bankers.

My point is simple, Professor Krugman: If you had 40-50 years in which to save for your retirement, and you chose not to do so, collective society should not have to pay extra taxes for you to continue to try to live your life keeping up with the Joneses. Everyone decries leaving debt around for future generations, however this is what is happening today. The younger generation, with already unacceptably high unemployment rates (around 27%) is now being forced to pay for those who have had their shot at the brass ring of life. While we are trying (hopefully) to save for our retirements so that we don’t end up in the cycle of depending on the Government to subsidize our way of life into retirement, we are being saddled with paying for the previous generation who failed to do so and now look to absolve all personal responsibility and shift the blame to someone else.

If the economy doesn’t see robust growth, which I honestly don’t believe we will—growth that creates real (not Government or temporary) jobs (remember, Government must create clear, business-friendly regulations that do not penalize or demonize businesses for becoming successful), we are going to find ourselves in the same position as Greece. The debt issued over the last 2 years in addition to the 8 years of debt created is not going to go down. We will become a nation that is much like the person who pays the minimum monthly balance (almost 100% interest), kicking the can down the road so that future generations are paying for the mistakes that the existing generations have created. Did President Obama say in his campaign that “he was not going to kick the can down the road” several times? What are we doing presently?

What’s so different about Greece, where people dodge paying taxes, but still believe that they are entitled to be taken care of by the Government while saddling the younger generation with all of the burden for their past mistakes? There has to be some vicious cuts to these entitlement programs – it will not be popular, it will be very painful, but it should serve as a lesson to future generations of what not to do. It should hopefully engrain in the younger generation that it is up to them to save for their retirements. Financial literacy needs to improve vastly in this nation to achieve that. What we do now will determine the next century for this nation.

References:

Krugman, Paul – “We’re Not Greece“, Wall Street Journal Op-Ed, May 13, 2010 – http://www.nytimes.com/2010/05/14/opinion/14krugman.html?src=twt&twt=NytimesKrugman

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13 Responses to “Dear Krugman: We Are Greece”

  1. Kid Dynamite May 17, 2010 at 9:00 am #

    the US is not greece – but many US states are Greece. Cali is Greece. NY is Greece… Illinois is Greece.

    • chibondking May 17, 2010 at 9:31 am #

      Hey KD-

      I agree with you regarding the states, especially IL (I don’t know if you saw DV’s latest post: http://www.distressedvolatility.com/2010/05/illinois-has-45-billion-in-unpaid-bills.html)

      I realize that the US can just “print” currency in an attempt to devalue our way out of the mess, however in the long run is that really a viable option? Do we really think that the Chinese (and others holding our debt) are just going to idly sit by and let that happen without applying some sort of political pressure? For the states, yes, they do face a very “Greek” like situation in the immediate short term given that they can’t issue currency.

      The main point of what I am trying to get at is that we share many of the same problems as Greece when it comes to the entitlement spending in this country. The only difference is that yes, we can turn on the printing presses, but we risk the ire of just about everyone else that has “enabled” us by buying our debt. That confidence, perhaps not in the short term I envision will fade in the future and when it does, will force us back to where Greece is now in terms of deciding on some painful cuts + higher taxes.

      • Danny Black June 13, 2010 at 10:08 am #

        You sure the US CAN just print money? For instance the UK’s liabilities are index-linked on the whole so they CAN’T inflate away the debt.

    • eradke May 31, 2010 at 11:01 pm #

      It may be true but the US is not Greece, yet. However the biggest economies in the US, by your own admission are Greece. It does not look all that promising. We are running a Ponzi scheme or MLM scheme with social security and health care insurance that was passed. More than ever we have to work together.

  2. Ian May 17, 2010 at 10:59 am #

    So re #2 and the recovery- You basically just threw together a bunch of vague anecdotes “from the trenches” to refute Krugman’s point. I could throw together a bunch of anecdotes that point in the other direction. And that’s without diving into the latest employment report which was actually quite strong (for instance manufacturing job growth had its best month in more than decade).

    • chibondking May 17, 2010 at 12:24 pm #

      Yes, but having one month of “blockbuster” gains[1] in a sector that has shed a large amount of jobs while something that is worth cheering for is not going to have a meaningful impact of jobs lost since the beginning of 2007 in this sector. We’ve lost 2.37 million jobs (I included the most recent gains).

      Yes, I see factories who during the worst of the recession had their lights off – after spending much of the decade running 3 shifts. The lights are back on increasingly later at night, and there is sporadic hiring, however that sporadic hiring is not enough to fuel the growth that is needed to “repair” the losses while keeping on track with the “projected” rosy levels that exist out there.

      I’m quite sure there could be pockets of growth out there, but that’s it – pockets. The US needs a strong recovery in terms of jobs to address the core issues.

      [1]-for the sake of fairness, mfg. showed positive gains in total of 101,000 since January

      • chibondking May 17, 2010 at 12:31 pm #

        For fairness, so I don’t get accused of making the numbers up, the data was obtained from St. Louis’s FRED system, series NDMANEMP and DMANEMP, seasonally adjusted numbers.

    • eradke May 31, 2010 at 11:05 pm #

      The only way a number matters is if it changes the actions of the people. Employement numbers, IMHO are used for political reasons. If we are going to get through this we need to promote small businesses.

  3. Byrne May 17, 2010 at 1:24 pm #

    In some ways, I wish we were Greece. Something like 25% of their economy is part of the black market, which means they could raise tax revenue through better enforcement. (See, e.g. http://www.nytimes.com/2010/05/02/world/europe/02evasion.html?pagewanted=1)

    The US has less room for going legit.

  4. perrymecium May 17, 2010 at 10:39 pm #

    Do you think the turmoil in Europe will give the US a lot more breathing room as the flight to safety generates a lot of investment in the US, a la the Asian Economic Crisis in 1997?

    Also, you didn’t mention that Krugman slashes the throat of his own argument with the last paragraph. “We do have a serious long-run budget problem, which will have to be resolved with a combination of health care reform and other measures, probably including a moderate rise in taxes.”

    • perrymecium May 17, 2010 at 10:40 pm #

      Translate that sentence to “we have all the same problems as Greece and should do everything they didn’t”.

  5. Salvador Schmid June 26, 2010 at 8:22 am #

    I bookmarked this blog a while ago because of the interesting content and I have never been unsatisfied. Continue the good work.

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  1. Morning Take-Out - DealBook Blog - NYTimes.com - May 17, 2010

    […] Paul Krugman says the United States is no Greece. Stone Street Advisors begs to differ. […]

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