Krugman on
stuff:
Do the dismal economic numbers really reflect the turn to fiscal austerity? I keep hearing people say no, because austerity hasn’t actually happened yet in America. But they’re wrong.
The fact is that the fading out of the stimulus, and in particular of aid to state and local governments, is already and noticeably leading to substantial withdrawal of government demand.
This is, of course, lunacy. Yes, state and local governments buy services and supplies in the course of their duties and this does act as a source of demand in the economy more generally. However, by far the largest amount of spending in operating accounts is on salaries and benefits for public employees. The idea that such spending should be financed permanently by the use of Federal aid whenever state and local governments run out of money, which Krugman seems to be suggesting, is ludicrous. For starters, people move. Demographic changes and the resulting changes in things like the tax base (which could increase or shrink) or the need for services (which can also increase or decrease) mean that nothing is constant. Just because a government run out of funding for existing services doesn't mean that level of service should be maintained. Krugman believes it does because, for him, government has one big job, i.e. to get bigger.
In the real world, states and localities need to constantly evaluate the kind and level of services they provide, and what staff they need to provide those services. Additionally, those services will not be the same from locality to locality. The preferences of voters in the various locales will also play a large role in determining what is being paid for and what isn't. This is especially true when the funding for these services comes directly from the tax payers in the community. Switching the funding of these services away from local tax payers and towards federal aid has the effect of hiding the true cost of these services. This is great if you believe in the God given right of government to grow larger, but it is nonsense if you believe in democratic accountability and fiscal sanity.
The truth is if Middletown, America wants to have a library system, well, then Middletown ought to be prepared to pay for it without counting on everyone else to pick up the tab if they run a little short. No, if MIddletown runs short they need to ether A) find a local revenue stream to pay for he desired level of service, or B) do less.
What happened in localities across the country was they experienced a boom in revenues when real estate prices soared during the heights of the housing bubble. Their coffers swelled and they did what governments at all levels do when the coffers swell, they spent it. However, they often spent it in ways that created a higher baseline of spending, as would happen when you increase the numbers of employees you are paying. Unfortunately, increasing the number of public employees isn't the same thing as increasing the number of employees in a factory. Factories hire more employees because they believe there is more money to be made. This will come as a shock to many Democrats but, yes, factories can increase their payroll and at the same time increase profits. Public employees, by and large, never create profits. They are there to provide services (some vital, some not), but the money flows one way only.
Now, what happens when property taxes stop going up and in fact begin to decrease? The Krugmans of the world want to say "Nothing should happen, keep right on spending! Money grows on federal trees!"
However, it doesn't. The truth is none of the money spent on maintaining state and local spending at housing bubble rates stimulated anything. Instead all it did was allow politicians, local officials and voters/taxpayers to ignore reality.
