Trump has said some traditionally infrastructure-y words when he talks about this. “We’re talking about a very large-scale infrastructure bill,” the president-elect said in a long-ranging interview with the New York Times published Wednesday. “… [a]nd we’re going to make sure it is spent on infrastructure and roads and highways.” A proposal to privatize infrastructure projects released by Trump’s economic advisors describes the “complex network of airports, bridges, highways, ports, tunnels, and waterways” that underpins private sector growth.

Bliss worries that Trump will be more inclined toward “major new property development,” rather than infrastructure. She even cites Paul Krugman’s column, where such spending is often boosted, in The New York Times where he writes,

And we already know enough about [Trump’s] infrastructure plan to suggest, strongly, that it’s basically fraudulent, that it would enrich a few well-connected people at taxpayers’ expense while doing very little to cure our investment shortfall. Progressives should not associate themselves with this exercise in crony capitalism.

The President Elect’s infrastructure plan may or may not amount to crony capitalism. As my colleague Patrick Ishmael recently wrote, the Carrier deal in Indiana invites the accusation. Yet this is exactly the sort of crony capitalism that progressives seem to love in Kansas City and St. Louis. Recall that we’ve redirected hundreds of millions of tax revenue into property developments for wealthy corporations such as Cordish, Burns & McDonnell, Cerner, and H&R Block.

Meanwhile, important infrastructure spending (read: roads, bridges, sewers, etc.) is squeezed, because the city cannot afford it. We’ve heard that the city wants to borrow $800 million for such spending—but we have as much detail about where that money will go as Trump has given on his plans. Hopefully, those funds won’t go toward  “fraudulent” infrastructure projects instead of those truly necessary for the public good.

Policy debate on infrastructure is welcome, as is skepticism toward government spending. But if you want to be critical of fraudulent public programs that appear only to enrich the well-connected, you don’t need to travel to Washington to find it—or even leave Kansas City.

The post Kansas City and “Fraudulent” Crony Capitalism appeared first on Show-Me Institute.

According to Krugman, the “self-proclaimed libertarians” are either stupidly or maliciously engaged in “projection” – attributing base motives to their political opponents that underlie their own highly prejudicial reasoning.

Kudos to Per Bylund, a research professor at the Hankamer School of Business at Baylor University, for flipping the situation around and pointing out how all you need to do is to replace “libertarian” with any of the words that Krugman might use to describe his own thinking to see a wonderful example of projecting your own intellectual failings onto others of the opposite persuasion.

As Bylund observed in today’s Mises.org: “Keynesiasn/progressives/(whatever) like Krugman deal with the problem of government failure both by pretending that it doesn’t happen and by imagining the market as much worse than it is.”

The post Krugman Upended By His Own Logic appeared first on Show-Me Institute.

(As an aside, it was Mr. Krugman, writing in The New York Times in 2011 who stated that “the V.H.A. [Veterans’ Hospital Administration] is a huge success story, which offers important lessons for future health reform.”)

Mr. Krugman’s predictable protestations notwithstanding, there actually is a significant body of empirical evidence finding that, on average, states and countries with lower tax rates tend to grow faster. (See articles in this SMI study.) While economists, like any other group of scientists, debate their findings, there is real-world evidence to believe that reducing taxes can improve the economic lives of a state’s citizens.

Every principles of economics student, even those using Mr. Krugman’s textbook, learns that if you wish to reduce an activity, tax it. Since income taxes are derived from working, basic economic theory predicts that higher income taxes will reduce people’s incentive to work more hours. At the extreme, tax me 100 percent of my income and I’ll just stay home, thank you. So, lowering tax rates in income should reduce this disincentive to work.

Mr. Krugman does not seem to think that lowering taxes matters. The story that Walgreens is contemplating moving its headquarters to Switzerland to lower its tax burden belies that notion. Even if you find this proposed move disturbing, you cannot ignore the simple fact that Walgreen’s likely would not consider relocating if taxes were equal in the two countries. Tax rates really do matter in making economic decisions.

There is no denying the fact that since the Kansas legislature enacted the tax cut in 2012 (it became effective in 2013), the state’s economy has yet to achieve the economic take-off that some promised. Job growth is slower than the national average and, due partly to income shifting in response to the fiscal cliff, the drop in tax revenues in 2014 compared to 2013 has been larger than predicted.

Changes in the tax code cannot be expected to reverse years of weak economic performance overnight. Kansas, like many other states, is still recovering from the effects of the Great Recession. Like most medicines, changes in tax codes should not be expected to deliver immediate cures.

Before Mr. Krugman is anointed as the Cassandra of tax cuts, let’s give the experiment time to take hold. Time will tell, but basic intuition and existing evidence predicts that Kansas’ economic future is brighter today than it would have been without the tax cuts.

The post Give Tax Cuts A Chance appeared first on Show-Me Institute.

Nevertheless, economist Robert Murphy catches several writers — who should know better — repeating this hoary old myth. For instance, Nobel laureate economist Paul Krugman recently compared the current Republican position on federal spending to Hoover’s during the Depression:

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” That, according to Herbert Hoover, was the advice he received from Andrew Mellon, the Treasury secretary, as America plunged into depression. To be fair, there’s some question about whether Mellon actually said that; all we have is Hoover’s version, written many years later.

But one thing is clear: Mellon-style liquidationism is now the official doctrine of the G.O.P.

To which Murphy responds:

To his credit, Krugman acknowledges that this quote comes from Hoover’s own memoirs, written well after the fact. But to his discredit, Krugman fails to notify us that on the very next page of Hoover’s memoirs, after he explains the liquidationist advice he got from his treasury secretary, Hoover wrote,

“But other members of the Administration, also having economic responsibilities — Under Secretary of the Treasury Mills, Governor Young of the Reserve Board, Secretary of Commerce Lamont and Secretary of Agriculture Hyde — believed with me that we should use the powers of government to cushion the situation.“[2]

If you read Hoover’s memoirs in context, you see that his whole point in bringing up the Mellon doctrine was to tell his readers that he rejected the advice. Hoover was trying to show people (and of course I’m paraphrasing here), “Hey, I did everything I could to get us out of that awful downturn! You should have seen the crazy laissez-faire stuff my treasury secretary was recommending.”

And Hoover was not exaggerating when it came to his expansion of the government. It’s relatively well-known that Hoover endorsed and signed the Smoot-Hawley Tariff into law, causing American exports and imports to decrease by more than 60 percent by the end of his term. However, Hoover’s meddling was hardly limited to the sphere of international trade. He increased federal spending by almost 50 percent and dramatically increased taxes, including raising the top income tax rate from 25 to 63 percent. Perhaps most disastrously, Hoover urged businessmen to keep wages up, which they did even amid serious deflation. These artificially inflated wages forced businesses to lay off workers. Soon, the country experienced the greatest mass unemployment in history, with a quarter of the labor force out of work.

It was Hoover’s dramatic interventions into the economy that turned what would have been a severe recession into the Great Depression. In a 2009 article, UCLA economist Lee Ohanian estimated that Hoover’s high-wage policies accounted for two thirds of the 27-percent drop in GDP from 1929 to 1931. Unfortunately, Franklin Roosevelt built on Hoover’s mistakes instead of learning from them. Rexford Tugwell, a leading member of FDR’s brain trust, later remarked that “[t]he ideas embodied in the New Deal legislation were a compilation of those which had come to maturity under Hoover’s aegis.” Not surprisingly, the continuation of bad policy did nothing to remedy the economic situation, and the country stayed mired in depression until after World War II.

The post Herbert Hoover the Interventionist appeared first on Show-Me Institute.

What is his point? That cheap imports are causing unemployment in our current recession, and the proper solution is to raise tariffs on imported goods. From his article:

The only conceivable way to revitalize the American middle class — the little engine of consumption that pulls the global economy — is to impose labor tariffs on imported goods, making their cost comparable to those manufactured here.

Let us now quote famous men and women writing about the Smoot-Hawley Tariff, which did almost exactly what Guzy calls for, and is near-universally derided as one of the worst pieces of legislation ever passed by Congress. Here is Great Depression historian and economist Amity Shlaes:

This lack of concern resembles many Americans’ disregard for the effects of the Smoot-Hawley Tariff Act, signed into law by Hoover in June 1930. Republicans told themselves that the tariff couldn’t hurt much since trade was a small part of the U.S. economy at that point.

But that view overlooked the signal that markets were sending. Long ago Jude Wanniski noticed that the progress of the Smoot-Hawley legislation tracked declines in the stock market. More recently Scott Sumner, a professor of economics at Bentley University in Waltham, Massachusetts, has argued that the tariff reduced investment all over the world, and therefore produced deflation.

Shlaes’ great book, The Forgotten Man, goes into much more detail about the harm of the tariff.

And now we turn to Paul Krugman for his views on the Smoot-Hawley Tariff:

Just to be clear, I don’t think the Smoot-Hawley tariff was a good thing — it was a really bad thing. Nasty protectionism! Bad Smoot-Hawley! Bad! Bad! Bad!

Krugman is clear that although he doesn’t think protectionism and the tariff caused the Great Depression, it was nonetheless a terrible idea.

When legislation makes the goods that we import, and voluntarily choose to purchase, more expensive, it limits our choices and our freedoms, and increases our costs of living. It also immediately harms the enormous number of Americans who depend on trade, shipping, and related industries for their employment, and results in retaliation by other trading partners that would limit our exports. Instituting higher tariffs for protectionist purposes is always a net loss for our economy.

The post Free Trade Does Not Cost Too Much appeared first on Show-Me Institute.

If free trade is one area that this contentious group can agree, why do elected officials in Washington and in Jeff City continue to pass measures that impede, rather than proliferate, free trade?

As the latest example of impeding free trade, the U.S. Senate is targeting companies that outsource, particularly to India:

Democrat Senator of Missouri Claire McCaskill on Thursday said the proposal would increase fees for particular companies that exploit two categories of visas — H-1B and L.

Not only do legislators seem to ignore economists, they also seem to ignore history. The fact that protectionist policies do more harm than good has been repeatedly demonstrated in the past (e.g., the Smoot-Hawley Tariff Act in 1930, the steel import tariffs in 2002, and protectionism in the vehicle manufacturing industry).

When a country or a state protects certain industries, those companies do not have to innovate their product to compete in the marketplace. As additional negative consequences, such protectionism dampens downward pressure on consumer prices and reduces the variety of goods and services available to consumers in a region, who are more limited to that which they can produce themselves because goods from elsewhere are artificially priced out of market availability. If this proposal progresses, perhaps the same problems could plague the IT services industry.

Subsidizing favored companies and industries and simultaneously imposing restrictions on those that are not favored is an expensive and inefficient practice. In doing so, the government sends the fallacious message that it can pick winners and losers in the marketplace. Overall welfare would improve if the United States and Missouri both embraced the creative destruction of their respective economies, instead of cementing favored activities for reasons of nostalgia and/or xenophobia.

The post Legislators Should Listen to Economists, History appeared first on Show-Me Institute.

Given the current state of the economy and the deficit, is this the time to pull back on stimulus spending and pay more attention to the deficit, or should Washington worry more about the short term and let the long term take care of itself?

The Paul Krugman camp, consisting of those economists wanting to stimulate the
recovery through expansive government spending, are — like the spending they are advocating — lost in their own arguments.
In the article, Steve Fazzari, a professor of economics at Washington University in St. Louis, states, “One person’s spending is someone else’s income.” I absolutely agree. But then, in a quick turn of events, he goes on to say, “When the government cuts spending, it’s cutting income to someone.” This is also true, strictly speaking, but the implications of his first statement are more important.

I used to mow lawns, and if my employer had told me that he would give my payment to my brother after I finished my work so that my brother could do some weeding, I would have immediately walked away and taken my labor elsewhere.

If that same employer had given me $10 the week before I was supposed to mow the lawn, two things might have resulted: (1) With cash already in hand, my attention to detail would have suffered considerably; and, (2) I would not have been in any hurry to finish the job.

Historically speaking, capital evolved before credit, and for most of the real world, that is how personal finance is understood — you largely only spend what you have. The problem that got us into this recession was egregious spending beyond our means. If mortgage lenders hadn’t been so eager to hand out money — apart from the fact that home loans were implicitly backed by the federal government’s approval — this last recession most likely could have been avoided.

Without the possibility of high default rates at the micro level, the financial instruments that impregnated the system with risk may never have been implemented on such a large scale. Now, after the crisis, we see the world’s top economists trying to formulate a plan to fix the system. In practice so far, that has involved injecting liquidity into the economy through massive government spending. The Krugman camp claims this is more responsible than private investment, because the Fed can print more money to increase the flow of capital rather than bearing the risks of default. There’s no need to worry about the deficit now, they say; we can take care of that later.

Yet few are buying the empty promises of the government. And why should they? With an aging population and massive health care overhauls on the way, everyone can see that entitlement spending is about to skyrocket. Higher taxes are almost certain. Increasingly larger numbers of the American people are holding onto their money in an effort to maintain liquidity in anticipation of the expiring tax cuts at the end of the year. Stimulus money is falling into the same trap; it’s not multiplying the way Keynesians had hoped because investors are wary of the uncertain economic conditions that may be brought about by still more government spending and higher taxes.

We cannot extricate ourselves from the hole we are in until we stop digging. Americans need to see the sunlight before they are willing to buy an expensive ladder to climb out.

The post Capital Before Credit appeared first on Show-Me Institute.

This article first appeared in the St. Louis Beacon.

Determining when business cycles start and end is a tricky call. Recently released GDP data indicated that the economy expanded during the second quarter of this year at a healthy 3.5-percent rate. This is quite a turnaround from the 6.4-percent decline in GDP during the first quarter. And, as expected, optimism in our economy is being restored, even if gingerly. Before all the champagne bottles get uncorked, let’s raise a few cautionary flags.

First, how much of last quarter’s expansion was fueled by one-time gimmicks? GDP is driven by sales. The cash-for-clunkers program, for example, rearranged the timing of car purchases. Purchases that may have occurred over six months were accelerated into the program’s window of opportunity. Without that government-backed program, GDP growth would have been slower than reported.

Second, the government’s subsidization of new home purchases also provided a boost to the recent GDP figure. The housing market appears to have righted itself. But, going forward, the question is whether it has legs. Will there be sustained recovery in housing?

Third, the success of the federal government’s stimulus package is getting partisan scrutiny. Those in the administration and their supporters aver that the government’s open checkbook approach has saved or even created hundreds of thousands of jobs. An analysis conducted by the New York Times, however, suggests that such claims are wide of the mark.

That analysis also indicates that the jobs “saved” are predominantly in the public, not private, sector. As I have written before, this is predictable: Government jobs tend to be more secure than those in the private sector. Why not use stimulus money to protect your own and expand the pro-government electoral base?

These items are not meant to say that government intervention did nothing. Quite the contrary. But it does raise an important question: When the government’s dole ends, will the economy be able to stand on its own two feet?

There are some who argue that it won’t. The Federal Reserve’s policymaking arm, the FOMC, announced earlier this month that it intends to keep short-term interest rates close to zero. This clearly reveals their outlook.

Paul Krugman, the liberal economist and columnist, continually complains that the original $787 billion stimulus package (not counting the bailouts) was insufficient. His solution is the same as many in Congress: Spend more taxpayer money, enlarge government programs and create more dependency on the government’s largess.

What evidence will be brought to bear on the question of whether this expansion is viable? Any slip in the growth of GDP will be taken as a sign to increase government intervention. This is a false premise. Economic recoveries are uneven and unpredictable. Following the bottom of the 1981–82 recession, the economy roared back, growing at nearly an 8-percent rate over the next year. In contrast, in the year following the 1990–91 recession, economic growth limped along with growth rates of less than 2 percent.

Recessions are unique in character, and this one is no different. Real economic growth may be choppy, consumer spending will rise in fits and starts, and the unemployment rate will bump up before it recedes. We must resist the temptation to use such uncertain economic signals to justify increased refutation of the economic system upon which our economic growth has been built.

Further centralizing economic decision-making with the government will have adverse, long-run effects on our productivity and well being. The economic expansion that lasted for most of the 1982–2000 era was not based on increased governmental intervention. Just the opposite. And, if one needs reminding of how well bureaucracies operate, think Fannie and Freddie, FEMA, Sarbanes-Oxley, the SEC and Bernie Madoff, and the state of our educational system, just to name a few.

Rik W. Hafer is distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.

The post Don’t Overreact to Bumps in the Economic Recovery appeared first on Show-Me Institute.

According to the Bureau of Labor Statistics, the United States economy lost 273,000 jobs last month. Of those lost jobs, 29,000 were in state and local education, bringing the total losses in that category over the past five months to 143,000. That may not sound like much, but education is one of those areas that should, and normally does, keep growing even during a recession.

Krugman doesn’t mention the steady growth in per-pupil spending that has taken place over the last several decades. I refer interested readers to Andrew Coulson’s analysis of public schooling’s productivity.

Sinking resources into an inefficient sector will not propel the economy forward. But Krugman is right that people should increase investment in human-capital formation during a recession. So, why would the government back away from funding schools just when people need education the most? Is it a newfound interest in efficiency? Not if the calls for a stimulus are any indication!

It turns out that the government isn’t very good at timing expenditures. Russ Roberts explains why:

Government is actually staffed by human beings. It is not something called G that economists or even politicians can move up and down at will. Bureaucrats are cautious. They’re uncertain about what is going to happen to their budgets in the future. They’re uncertain about what the best thing is to do with the money they’re given. They’re worried about being accountable for their actions. So what do they do? They hoard.

Education means different things to individual people and to states. A person who can’t find a good job during a recession will think ahead, realize that he will earn more later if he goes to school now, and pay tuition in order to reap the future benefits. But, to government officials, education spending is just spending — it isn’t an investment that they will personally benefit from later. Sure, they may talk about it as an investment, and they probably know that education can lead to higher tax revenues in years to come. However, there’s no direct link between what officials spend on schools now and their prosperity in a few years’ time, the way the market rewards people who pay for their own education. So the government spends less on education during a recession.

Recessions are a rare opportunity for inefficient public systems to be pared back, which is good. The flip side is that when the government pays for education, spending increases don’t come at the optimal times. If Krugman cares about the timing of human capital investments as much as he cares about the overall level of education spending, he should reconsider whether the government ought to pay for as large a share of schooling as it does.

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