Paul Krugman on the US as a Banana Republic

via Jennifer Dill:

And what about the economy’s future? Everything we know about economic growth says that a well-educated population and high-quality infrastructure are crucial. Emerging nations are making huge efforts to upgrade their roads, their ports and their schools. Yet in America we’re going backward.

How did we get to this point? It’s the logical consequence of three decades of antigovernment rhetoric, rhetoric that has convinced many voters that a dollar collected in taxes is always a dollar wasted, that the public sector can’t do anything right.

NYT Online: America Goes Dark

Krugman followed up on Maxine Udall!!

A few years ago, the chief lobbyist for Triple A told me that Los Angeles was headed in this direction, but unlike Krugman, he blamed:

a) overspending locally on unproductive new transit at the expense of roads, when roads were still carrying the same and/or greater traffic loads they always had in southern California; and

b) a failure to tap into local taxes–this was prior to Measure R–and tied hands among local governments in California regarding their property tax bases.

Now, a) is a complicated question, as we’ve discussed here before. It is possible that transit investments in general are productive, but the planning and politics around them erode their productivity–that is, we invest badly instead of wisely in a sector that could be more productive. There is also the second part of the statement: it’s possible to underinvest in streets even if transit investments have been prudential.

As my colleague Richard Green has said: “I don’t see anybody being an adult about this right now.” So what would being an adult entail? Taxing the rich?

Krugman is a bit too ready to assume that when the rich save money, the money just sits idle, as he suggests. That’s a populist ploy for his column–he has to know better. If we go back to our first year formulation of economic growth, we have the principle ingredients of land, labor, and capital. Things get a lot more complicated, but using those basics, we can think about the government investment in infrastructure as being capital investment, education being about labor productivity, and land being something that becomes more productive once there is capital investment or labor investment in it.

The argument in favor of tax cuts for the rich has always hinged on the idea that if investors are allowed to keep their money, that savings then provides the wherewithal for investment in capital.

The key problem is that nobody really agrees on the marginal productivities of these factors. So politically, it’s possible to stress capital over labor, but it is less clear that a dollar saved by a rich person has a better multiplier effect on the economy than a dollar spent on labor productivity.

So we are in a situation now in the US where investments in the labor factor have gone down for decades because education has become–as Tocqueville predicted–almost entirely devalued. The less we value it, the less we want to invest in it, and the less good it becomes. For example, I have students who say to me “What do you know? You just have a piece of paper that says you’re a doctor.” School is all just so much worthless time they have to waste; teachers like me are merely leeches on that system that has trapped them. And the most we degrade education and fail to invest in it, the more that’s true. Employers hire new workers who know little and wonder what the point of hiring people with degrees is.

I’m less sure, as Krugman seems to be, that we are in a death spiral. I have a sense that there must be regions and cities that are doing better at “being an adult” than others are. And may be what we are seeing here. Jennifer Dill suggested there is a shrinking cities component to this phenomenon, and that means the disinvestment in different roads may not be a bad thing. Some places in the US are simply not all that competitive in the global marketplace for labor and economic activity, and it’s probably ok to let investment in those places lag. However, that’s not true in cities like Los Angeles and San Francisco, and it may be that these regions have to become self-financing.

I suspect that those regions who do understand how to act like an adult will emerge looking pretty good in another 10 years.

But those regions may be in China, where they have aggressively invested in education and infrastructure.

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