Krugman on Detroit: Move Along, Folks; Nothing to See Here!

There's nothing to learn from the failure of cities with high tax rates and oppressive bureaucracies! Don't be silly!


Things like this just happen. Sometimes for several city blocks!
Credit: dreaming_of_rivers / Foter / CC BY-NC

We know economist Paul Krugman has taken to avoiding reading competing economic and political theories, but has he given up all reading altogether in order to perhaps avoid accidental exposure? In Sunday's New York Times, Krugman tackles the Detroit bankruptcy and determines that the important thing is that we stop comparing America's various fiscal problems with Greece's:

As you may recall, a few years ago Greece plunged into fiscal crisis. This was a bad thing but should have had limited effects on the rest of the world; the Greek economy is, after all, quite small (actually, about one and a half times as big as the economy of metropolitan Detroit). Unfortunately, many politicians and policy makers used the Greek crisis to hijack the debate, changing the subject from job creation to fiscal rectitude.

Now, the truth was that Greece was a very special case, holding few if any lessons for wider economic policy — and even in Greece, budget deficits were only one piece of the problem. Nonetheless, for a while policy discourse across the Western world was completely "Hellenized" — everyone was Greece, or was about to turn into Greece. And this intellectual wrong turn did huge damage to prospects for economic recovery.

What made Greece such a very special case? Why is it so different from, say, Spain's economic situation? Or even Detroit's? Why is an economist saying there's little to learn about economic policy from a failing state? All of this is simply asserted.

Krugman, amazingly, pivots to argue that Detroit's budgets and pension obligations are not part of the problem:

Never mind the repeated failure of the predicted U.S. fiscal crisis to materialize, the sharp fall in predicted U.S. debt levels and the way much of the research the scolds used to justify their scolding has been discredited; let's obsess about municipal budgets and public pension obligations!

Or, actually, let's not.

Are Detroit's woes the leading edge of a national public pensions crisis? No. State and local pensions are indeed underfunded, with experts at Boston College putting the total shortfall at $1 trillion. But many governments are taking steps to address the shortfall. These steps aren't yet sufficient; the Boston College estimates suggest that overall pension contributions this year will be about $25 billion less than they should be. But in a $16 trillion economy, that's just not a big deal — and even if you make more pessimistic assumptions, as some but not all accountants say you should, it still isn't a big deal.

What a ludicrous way of looking at the pension crisis, and obviously deliberately so. Cities are actually in the real world going bankrupt due to these pension commitments. It is not an imaginary problem and most importantly, not unique to Detroit. But you can try to present it as an imaginary problem by comparing an individual city's budget to the size of the entire country's economy with no context or explanation why it matters. Well, it matters to Krugman, because no doubt he sees the answer to the problem as "bailout," which is his answer to everything. What do you mean San Bernardino and Stockton can't pay the bills? We've got all this money! That the size of the pension commitments is growing is not addressed at all. "Many governments are taking steps to address the shortfall." Yes, they're filing for bankruptcy. Did he even look at a list of Detroit's creditors?

But no, Krugman knows why Detroit failed. It's because of the free market! Of course, it is:

So was Detroit just uniquely irresponsible? Again, no. Detroit does seem to have had especially bad governance, but for the most part the city was just an innocent victim of market forces.

What? Market forces have victims? Of course they do. After all, free-market enthusiasts love to quote Joseph Schumpeter about the inevitability of "creative destruction" — but they and their audiences invariably picture themselves as being the creative destroyers, not the creatively destroyed. Well, guess what: Someone always ends up being the modern equivalent of a buggy-whip producer, and it might be you.

Sometimes the losers from economic change are individuals whose skills have become redundant; sometimes they're companies, serving a market niche that no longer exists; and sometimes they're whole cities that lose their place in the economic ecosystem. Decline happens.

Y'all, it just happened! There are no policy issues here. Pay no attention to Detroit's incredibly high tax rate! He goes on to blame "job sprawl" moving folks away from Detroit's city center without noting anything about Detroit's massive physical size or, you know, actual reasons that push businesses out of the city. As Reason's own Shikha Dalmia noted, Detroit chose bureaucracy over entrepreneurial spirit, shutting down 1,500 "illegal" businesses that weren't complying with city regulations. Detroit's leadership did not want to provide citizens with the kind of freedom the city needs to recover, and so it did not. You can only be a "victim" of Schumpeter's idea of creative destruction if you refuse to or aren't allowed to adapt.

Krugman's conclusion:

The important thing is not to let the discussion get hijacked, Greek-style. There are influential people out there who would like you to believe that Detroit's demise is fundamentally a tale of fiscal irresponsibility and/or greedy public employees. It isn't. For the most part, it's just one of those things that happens now and then in an ever-changing economy.

"Shit happens" is apparently valid economic theory. It's also undoubtedly the only argument you could use if you want to argue that Detroit should get a federal bailout.

Oh, and a postscript: Greece's latest bailout from international lenders is tied to a commitment to reduce the size of its public employee work force. No, certainly, there's no comparison.