Diary

Krugman, Kansas and Greece

Four names get my blood boiling- Reid, Wasserman-Schultz, Brand (as in Russell) and Krugman (as in Paul).  Last year, Paul Krugman got into an argument over Kansas’ tax cuts.  His reaction seems to epitomize the Left in all areas.  Governor Sam Brownback shares some responsibility since after his tax cuts were passed and went into effect he basically over-sold their promise.  Perhaps seizing upon the gaffe and claim, Krugman and the Leftist media declared the Kansas experiment a failure after only one year.  This illustrates the Left’s propensity for instant gratification.  They expected the tax cuts to have an immediate effect on all aspects of Kansas fiscal life, including the budget.  Along the way, liberal think tanks and the lapdog media that relies on their “expertise” picked up the cue and Kansas and the tax cuts were vilified in publications like Forbes, USA Today, The New York Times, and Huffington Post.  Kansas and Sam Brownback may just get the last laugh.

One of the problems with the Kansas tax cuts is that no one correctly predicted the immediate decrease in revenues.  These decreases in revenue could have been offset or at least mitigated with some spending cuts.  But, the Kansas legislature did no such thing.  State agencies were later scaled back, downsized, eliminated or merged to make state administration more efficient.  In fact, this lies at the heart of one of the Left’s arguments against the tax cuts: job growth in Kansas has lagged behind national and regional levels, and unemployment has improved appreciably compared to national and regional rates.  For example, they trot out the example of neighboring Oklahoma out-performing Kansas in these areas ignorant of the fact that Oklahoma has an advantage Kansas lacks- large energy reserves.  You could go a little north to the Dakotas- rich in energy- and compare those states to Minnesota.  Yet Krugman and his ilk lack criticism of “progressive Minnesota” when they talk of regional job growth and unemployment rates.

Kansas represents the midpoint between the high tax states and the no tax states.  If we are seeking a positive trend for a state’s financial outlook, the evidence is clear.  Compared to the nine states with the highest income taxes, the no-income tax states have 2.5 times higher population growth, 1.5 times higher GDP, and 2.6 times higher payroll growth.  As some economists have pointed out, the net in-migration to states without an income tax averages 3.7% while that of the high income tax states averages NEGATIVE 2%.  Non-farm payrolls, over a decade, show a 9.7% increase in no-tax states and less than half that- 4.3%- in the high tax states.  We can look at the 10 largest out-migration states: 8 are blue states, one red and one swing. (Note: the one red state is Louisiana and takes in the decade of Katrina).  Conversely, six of the fastest growing states in terms of migration are red, three swing states and one blue state.  Given this economic evidence regarding trends, any sane state would move towards lower or no income tax.

Kansas is headed that way, but they are not even close.  And its a bit ironic that Krugman would criticize Kansas for an experiment not finished, yet write his columns from a state notorious for its high taxes and whose economic growth lags behind that of Kansas.  That is, if the high tax states were such Nirvanas, people and businesses would be moving there, but they aren’t!  Instead, they are voting with their feet by moving to the low tax states.  In effect, by decreasing tax rates and bringing in less revenue at first, one is almost forcing austerity on government.  Yes, priorities must first be established and cuts should match up as close as possible to the initial loss of revenue, lest there be too much pain.

Which brings me to Greece and a whole other situation and one which Krugman is not afraid of voicing his opinion.  That opinion boils down to: Give Greece what they want because it is you big evil Western European banks and nation-states being unfair to Greece with your demands for austerity.  In fact, he has even suggested an Obama-style stimulus on steroids for Europe.  Yet he and the Left is eerily silent when it comes to why Greece finds themselves in their current dire straits.  In the decade leading up to 2008, Greece along with Spain, Ireland and Italy were living way beyond their means and spending way to much on too many social welfare programs.  Part of this was beyond their control since the EU was diverting investment dollars to Eastern Europe and the Baltic states, but Greece shares responsibility since they did not adapt.  What they should have doing 10-15 years ago, they are now being forced to do now.

Furthermore, the Greek tax system is a joke and ripe with fraud.  There is a reason many ships are registered in Greece.  Profligate defense spending is another area that cried out for reform, but Greece resisted blaming neighboring Turkey for their woes.  Greece was required, under the original terms of the loans, to raise 50 billion euros by selling off state assets.  To date, they have sold a mere 2.5 billion euros of assets.  Under the Krugman rubric, the EU, the IMF and the banks in Europe should not be telling Greece what to do.  Being portrayed as the particular villain in this story is Germany which seems to be biggest advocate of austerity in exchange for loans.

That is because coming out of World War II Germany had to adopt austerity as a path to financial stability the hard way.  As a result, they are perhaps the strongest economy in Europe today.  If Greece stopped the thumb-your-nose nationalism and adopted austerity, Paul Krugman and his minions would be proven correct in the short term, just as they seemed to be correct in the short term with Kansas.  But over time, the austerity measures would pay off.  If Greece was to tap some of that nationalism into shared sacrifice now for long-term good, then perhaps Germany would be less hard line.  But their near socialist government refuses, calls referendums, and offers nothing new.

As with Kansas, Krugman will be proven wrong (again!) with Greece.  There is the hypocrisy of Keynesian economics- big spending now for greater gain in the future.  The opposite view is Kansas and Greek austerity- greater sacrifice now for greater gain in the future.  German austerity and the developing positive economic picture in Kansas are proving Krugman’s path to be the wrong one.  In Kansas, a little pain now is paying off long-term.  Greece is a different situation as it will require great pain now to pay off long term.  Either way, Krugman will continue his streak of failed economic predictions.

Unfortunately for Greece, they need to totally reform their economic system root and branch.  The national wage structure must align itself with productivity.  That entails wholesale reform of the labor market, the laughable tax system, higher education and pension systems.  With an economy dominated by trade unions, don’t expect it to happen any time soon.  Also, for the EU, the European Central Bank and the IMF to relent now in the name of saving the eurozone it would set a bad example for those countries (Spain, Ireland and Italy) in similar financial straits turning to the EU for help.

Conservatives seem to understand that money in the form of loans comes with strings attached.  Liberals want to cut those strings and make money free.  In effect, Krugman and his kind are calling on the EU to embark on a path of wealth redistribution on a continental scale.  That is akin to punishing those who made the hard decisions and stuck with them for the long-term good.  Just as German demands of Greece will pay off in the end after a period of initial turmoil and trouble, so too will the Kansas tax cut experiment.  It will be interesting to hear Paul Krugman five years from now with regards to Kansas.