Krugman’s Right. Again.

Terrance Heath

I wonder sometimes if Paul Krugman ever gets tired of being right. Or does he get bored with it, given how often it happens?

This week, at the Take Back the American Dream conference, Krugman shared the stage with Chris Hayes for the “End This Depression NOW!” plenary session. (Videos of all the plenaries are available on our conference videos web page.) During the plenary, Krugman held that we could be at 7% unemployment right now, if Congress had extended part of the Recovery Act that sent money to states in order to prevent worker layoffs.

Today, a couple of news items suggest Krugman may be right again.

First, here’s what Krugman had to say at the conference this week.

And as Paul Krugman explained at the Take Back the American Dream conference today, we could have driven unemployment down below 8% if only we extended one aspect of the initial Recovery Act: send money to the states to prevent public worker layoffs.

“Just by filling the potholes,” hiring idle construction workers and saving teaching jobs, said Krugman, we would be at 7% unemployment. We would not incur much more debt to do it, because interest rates are so low. It would not take much time to implement, as opposed to also needed heavy infrastructure projects, because all that’s involved is putting the money into the state accounts.

Krugman wrote in his new book, End This Depression Now, helping states reverse recent budget cuts would “create well over a million jobs directly and probably something like three million jobs once you take the indirect effect into account.”

The issue of saving our public sector workforce is becoming one of the major flashpoints in the upcoming elections, which makes sense since it is one of clearest policy reversals that occurred after Republicans swiped the House in 2010.

Yesterday, a New York Times article underscored Krugman’s point with the news that layoffs of public workers at the state and local level are hurting the recovery.

So while the federal government has grown a little since the recession, and many states have recently begun to add a few jobs, local governments are making new cuts that outweigh those gains. More than a quarter of municipal governments are planning layoffs this year, according to a survey by the Center for State and Local Government Excellence. They are being squeezed not only by declining federal and state support, but by their devastated property tax base.

“The unfortunate reality is our revenue streams have not rebounded,” said Timothy R. Hacker, the city manager of North Las Vegas, which has cut its work force to 1,300 from 2,300 and is about to lay off 130 more. “Shaking this recession is becoming increasingly difficult.”

If governments still employed the same percentage of the work force as they did in 2009, the unemployment rate would be a percentage point lower, according to an analysis by Moody’s Analytics. At the pace so far this year, layoffs will siphon off $15 billion in spending power. Yale economists have said that if state and local governments had followed the pattern of previous recessions, they would have added at least 1.4 million jobs.

The article goes on to suggest that the political decision to not to send money to state in order to avoid layoff of the very public public workers Mitt Romney thinks we need America needs fewer of — like teachers, police officers, fire fighters, etc. — has a predictable “trickle-down” effect.

“Fourteen states plan to resolve their budget gaps by reducing aid to local governments, according to a report by the National Governors Association and the National Association of State Budget Officers.”

The consequences trickle all the way down Main Street. For citizens, layoff mean “longer response times to fires, larger class sizes, and in some cases lawsuits when short-staffed agencies are unable to provide the required services.” Local businesses, “not only lose prospective middle-class customers but may face long waits for services.”

No wonder Fed Chairman Ben Bernanke begged Congress for help him fix the economy.

But in response to questions from skeptical media, Fed Chairman Ben Bernanke reminded reporters that the Fed isn’t the only game in town, and practically begged Congress to take affirmative steps to boost recovery.

Bernanke cited “Fiscal restraint at the federal state and local levels,” as a key head wind threatening the recovery.

“Monetary policy is not a panacea,” he implored. “Monetary policy by itself is not going to solve our economic problems. We welcome help and support from any other part of the government, from other economic policy makers. Collaboration would be great.

…But in the meantime, he offered Congress his familiar prescription – it amounts to stimulus in the short term paired with a credible long-term path to reduced deficits.

It turns out that Tip O’Neill was right: All politics is local.

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