In this morning’s New York Times, Professor Paul Krugman laments the state of America, and, as a remedy, proposes . . . surprise! . . . more government spending. He writes: “When we save a schoolteacher’s job, that unambiguously aids employment; when we give millionaires more money instead, there’s a good chance that most of that money will just sit idle.” I’m not an economist, but this sentence seems horribly flawed for someone who is. I agree that in a world with zero interest rates and 10 percent unemployment, some government priming of the pump might make sense. Macro-economic conditions need to be changed, and the government is uniquely positioned to do this. After all, it sets the rules, prints the money, sets the level of taxes, and determines through public policy where investment will flow. But the question is how and where to act. Krugman believes taxing us to raise money to pay teachers is part of the answer. I doubt it, for several reasons.
“Saving” a schoolteacher’s job is not unambiguously a good thing. Money spent to pay her is money not spent somewhere else. One would have to measure the value of a dollar spent here, as opposed to say, an investment in solar power technology, cancer therapy, or building a new train link to the airport. If the same investment in each of these areas or countless others would “save” the same number of jobs, we have to ask where the money is best spent.
The reason we can doubt the government’s recent decision to spend money on teachers (instead of these other things) is politics. Teachers and their unions are huge contributors of the president and his allies on Capitol Hill, and therefore one has to wonder whether the money spent here is less efficient for our economy than money spent there, but nevertheless better for the politicians making the decisions. When politicians start making investment choices, we should expect politics to play a role in the choices. As I write this, dozens of City of Chicago workers are repairing the sidewalk in front of a coffee shop. I’ve walked this street every day for months and never noticed a thing wrong with the street. I have no idea why they are “repairing” it, but it seems like digging holes and filling them in. And, I can assure you, there are plenty of other places where money could be spent in this city. The problem is the people who would get those jobs or benefit from those projects aren’t likely as powerful and connected as the ones benefiting from this one.
Another problem is that each dollar spent to save a job is a dollar not spent to create another job. After all, the government has to get the money to pay the teacher from somewhere. That somewhere is taxes. So if we raise taxes on a small business to collect the money to pay the taxes to hire a teacher, this small business may then refuse to hire an additional worker, since, after all, it will have less money to do this. (The same story can be told even if taxes are not raised now but only expect to be raised in the future.) This is the classic story told by economist Frederic Bastiat about the seen and the unseen. The seen is the teacher out of work, and we feel badly for her. The unseen is the unemployed worker not hired because of the taxes on the small business, and, since this person is unknown to us, we feel less badly for her. Again, the question is whether we are better off with an investment here or there.
There are other problems. For one, it is very costly for the money to get from taxpayers to the teachers, even assuming they are the right people to get the money. Taxes must be set, collected, enforced, routed through Washington bureaucracies, spent by Congress, which is influenced by billions in lobbying money, passed to state bureaucracies, sent to local agencies, given to schools, and then finally paid to teachers after everyone in the process takes their cut, not to mention all the money spent to administer and influence this process. Government may be uniquely positioned to deliver some public goods, but the costs are so high that we should be careful about spending too much this costly way.
Finally, there is the canard that the money spent on the teacher is productive capital, while the money hoarded by the millionaire is not. Money is not idle. Money saved by the millionaire is not buried in the ground. Rich people spend money just like poor people. (A recent study showed the top 5% of earners account for nearly 40% of total spending in the economy.) The money they spend, on iPads, yachts, mortgages, and health care, gets cycled through the economy, just like the money the teacher spends. Who knows which spending creates more jobs, and more socially efficient ones?
Money not spent gets saved, and perhaps this is what Krugman has in mind. But saved money is not idle. If the savings to into the bank, the bank uses that money to lend it out to businesses looking to start or expand. On might argue that the banks are not lending out enough, but the reason for this is to help increase the stability of the financial system – remember too much lending was the problem – so this money is socially productive. If the savings go into stocks or bonds or other investments, again, this money is being allocated to increase the productive capacity of the economy. Money is not idle, it just works in different ways. So again, the question is not whether we should spend money but who should decide. For instance, if the Bush tax cuts are not repassed, my taxes are estimated to rise by about $1000 per month. This is money I won’t have to spend at this coffee shop, to repair my home, to send my daughter to art camp, and so on. This money will be available to spend on teachers, but why them and not the barista, plumber, or art teacher?
If government wants to stimulate the economy, it should try to create conditions in the economy, through tax rates (hopefully lower) and regulations (hopefully fewer), that encourage entrepreneurship, investment by the private sector, and private industriousness. Why don’t we lower corporate tax rates, repeal the minimum wage, ban public sector unions, eliminate the subsidies for the rich in corporate welfare, the housing interest deduction, and other distortions on investment? There are thousands of ways for the government to stimulate the animal spirits of the economy, but taxing Peter to pay Paul doesn’t make much sense unless we can identify a clear market failure. Professor Krugman and other defenders of more government spending haven’t done so.
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“eliminate the subsidies for the rich in corporate welfare, the housing interest deduction, and other distortions on investment?”
Eliminating the deduction for mortgage interest would nuke the middle class. This would equate to a huge tax increase for mortgage holders and send many of them into financial distress. The political fall out would be massive. I admit I am biased – as I do have a rather large mortgage that without the interest deduction would send me into foreclosure and onto the streets protesting. But what about the “rule of law” or at least something closely related to it; When I signed the 30 year mortgage I relied on an implicit contract with the government that mortgage interest is deductible. I know technically there is no such contract, but still I relied on it as millions of others have for decades and decades before me. That year after year I can deduct this interest and have never heard one politician even mention that at some point I may not be able to deduct it has lead me to have Faith that it will remain deductible forever. The same sort of seemingly irrational Faith that sustains governments and their fiat money.
Just another “nit”.
The money held in reserve supports the money lent out.
Just sayin’.
Just a nit, but money saved in a bank is not necessarily lent out. Instead it may be held by the bank as reserves, especially with the Fed paying 25bps on reserves now.
Boris — you don’t want to repeal the minimum wage?!? How heartless can someone be…
Boris has no heart; it’s just an idol falsely worshiped like so many others. Whoever wrote the comment is concerned only with changing the focus from the article’s focus.
Thanks for noticing Dan.
You’re kinda my hero, for today.
You want to repeal the minimum wage? Wow, you really care about people don’t you. Just Wow.
Minimum wage does more harm then good.
Also, minimum wage, no matter what number is arbitrarily invented by government, is $0.00/hour.
I was gonna go on about all the jobs that don’t exist anymore simply because government regulations (i.e. the minimum wage) make them too expensive; but i think our friend Boris has had enough teaching for today.
By the way, Tom, real minimum wage is actually lower than zero! Unpaid volunteers effectively pay for the priviledge of working.
Yes, repeal minimum wage. You don’t have to accept a job do you? Also how about the poor people who want jobs but can’t get them because there is a minimum wage? When I was laid off I was happy to earn anything but nobody would hire because they have to pay a minimum. Where are my rights to work for what I want to earn?
Boris, You obviously know very little about basic economics. It might help if instead of considering “minimum wages” you would think about “maximum employment”, which is what so-called minimum wage laws really are. Or think about it this way: suppose you were looking for a job, and the government told you that it is against the law to accept a job for less than X dollars. If you try to accept a job for less than X dollars, the government will throw you and your employer in jail. Does that seem fair to you? Or maybe you think that all the employers will just raise the wages that they offer? People who try to repeal the Laws of Economics will surely fail. Just look at our esteemed President and Congress. I would call them both an Epic Fail.
Apparently some folks know even less about economics than the author.
For example, he also wants no corporate welfare for the rich. Economics says this would raise the marginal cost of remaining “rich”, forcing them to go to the market for their money like everyone else. On the other side, keeping the money in the market instead of giving to the rich people frees more resources for all of us to appeal to the market for.
Likewise, the minimum wage lowers the marginal cost of remaining idle. Eliminating it would raise the rewards for idle people to go to the market for their money like everyone else. On the other side, the minimum wage is a productivity limit below which it is illegal to hire someone. Removing it allows lower productivity people (such as the younger and the less educated) to get jobs otherwise legally unavailable to them.
Boris,
I want to start a landscaping business. I figure I can hire 4 workers at $6.50 an hour and still clear a profit. There are guys who want the job at the price but the government says I can’t pay that wage. The business isn’t worth my time if I have to pay $7.25 so I don’t start the business, the 4 guys don’t get hired, my prospective customers don’t get a service they would like to have and the social safety net has to pay for 4 more unemployed people. It doesn’t matter that you care about people if your actions harm people.
Economist or no, you’ve pretty much nailed it.