Paul Krugman – The Conscience of a Liberal

Infrastructure Build or Privatization Scam?

Trumpists are touting the idea of a big infrastructure build, and some Democrats are making conciliatory noises about working with the new regime on that front. But remember who youre dealing with: if you invest anything with this guy, be it money or reputation, you are at great risk of being scammed. So, what do we know about the Trump infrastructure plan, such as it is?

Crucially, its not a plan to borrow $1 trillion and spend it on much-needed projects which would be the straightforward, obvious thing to do. It is, instead, supposed to involve having private investors do the work both of raising money and building the projects with the aid of a huge tax credit that gives them back 82 percent of the equity they put in. To compensate for the small sliver of additional equity and the interest on their borrowing, the private investors then have to somehow make profits on the assets they end up owning.

You should immediately ask three questions about all of this.

First, why involve private investors at all? Its not as if the federal government is having any trouble raising money in fact, a large part of the justification for infrastructure investment is precisely that the government can borrow so cheaply. Why do we need private equity at all?

One answer might be that this way you avoid incurring additional public debt. But thats just accounting confusion. Imagine that youre building a toll road. If the government builds it, it ends up paying interest but gets the future revenue from the tolls. If it turns the project over to private investors, it avoids the interest cost but also loses the future toll revenue. The governments future cash flow is no better than it would have been if it borrowed directly, and worse if it strikes a bad deal, say because the investors have political connections.

Second, how is this kind of scheme supposed to finance investment that doesnt produce a revenue stream? Toll roads are not the main thing we need right now; what about sewage systems, making up for deferred maintenance, and so on? You could bring in private investors by guaranteeing them future government money say, paying rent in perpetuity for the use of a water system built by a private consortium. But this, even more than having someone else collect tolls, would simply be government borrowing through the back door with much less transparency, and hence greater opportunities for giveaways to favored interests.

A lot of people in politics and the media are scrambling to normalize what just happened to us, saying that it will all be OK and we can work with Trump. No, it wont, and no, we cant. The next occupant of the White House will be a pathological liar with a loose grip on reality; he is already surrounding himself with racists, anti-Semites, and conspiracy theorists; his administration will be the most corrupt in America history.

How did this happen? There were multiple causes, but you just cant ignore the reality that key institutions and their leaders utterly failed. Every news organization that decided, for the sake of ratings, to ignore policy and barely cover Trump scandals while obsessing over Clinton emails, every reporter who, for whatever reason often sheer pettiness played up Wikileaks nonsense and talked about how various Clinton stuff raised questions and cast shadows is complicit in this disaster. And then theres the FBI: its quite reasonable to argue that James Comey, whether it was careerism, cowardice, or something worse, tipped the scales and may have doomed the world.

No, Im not giving up hope. Maybe, just maybe, the sheer awfulness of whats happening will sink in. Maybe the backlash will be big enough to constrain Trump from destroying democracy in the next few months, and/or sweep his gang from power in the next few years. But if thats going to happen, enough people will have to be true patriots, which means taking a stand.

And anyone who doesnt who plays along and plays it safe is betraying America, and mankind.

As I said in todays column, nobody who thought Trump would be a disaster should change his or her mind because he won the election. He will, in fact, be a disaster on every front. And I think he will eventually drag the Republican Party into the abyss along with his own reputation; the question is whether he drags the rest of the country, and the world, down with him.

But its important not to expect this to happen right away. Theres a temptation to predict immediate economic or foreign-policy collapse; I gave in to that temptation Tuesday night, but quickly realized that I was making the same mistake as the opponents of Brexit (which I got right). So I am retracting that call, right now. Its at least possible that bigger budget deficits will, if anything, strengthen the economy briefly. More detail in Mondays column, I suspect.

On other fronts, too, dont expect immediate vindication. America has a vast stock of reputational capital, built up over generations; even Trump will take some time to squander it.

The true awfulness of Trump will become apparent over time. Bad things will happen, and he will be clueless about how to respond; if you want a parallel, think about how Katrina revealed the hollowness of the Bush administration, and multiply by a hundred. And his promises to bring back the good old days will eventually be revealed as the lies they are.

But it probably wont happen in a year. So the effort to reclaim American decency is going to have to have staying power; we need to build the case, organize, create the framework. And, of course, never forget who is right.

Its going to be a long time in the wilderness, and its going to be awful. If I sound calm and philosophical, Im not like everyone who cares, Im frazzled, sleepless, depressed. But we need to be stalwart.

Anyone who claims to be philosophical and detached after yesterday is either lying or has something very wrong with him (or her, but I doubt many women are in that camp.) Its a disaster on multiple levels, and the damage will echo down the decades if not the generations. And like anyone on my side of this debate, I keep feeling waves of grief.

Its natural, only human, to engage in recriminations, some of which are surely deserved. But while a post-mortem is going to be necessary, lashing out doesnt seem helpful or good for the lashers-out themselves.

Eventually those of us on the center-left will have to talk about political strategy. For now, however, I want to share some thoughts on how we should deal with this personally.

First of all, its always important to remember that elections determine who has the power, not who has the truth. The stunning upset doesnt mean that the alt-right is correct to view nonwhites as inferior, that voodoo economics works, whatever. And you have to hold to the truth as best you see it, even if it suffers political defeat.

That said, does it make sense on a personal level to keep struggling after this kind of blow? Why not give up on trying to save the world, and just look out for yourself and those close to you? Quietism does have its appeal. Admission: I spent a lot of today listening to music, working out, reading a novel, basically taking a vacation in my head. You cant help feeling tired and frustrated after this kind of setback.

But eventually one has to go back to standing for what you believe in. Its going to be a much harder, longer road than I imagined, and maybe it ends in irreversible defeat, if nothing else from runaway climate change. But I couldnt live with myself if I just gave up. And I hope others will feel the same.

I tweeted this out earlier, but for blog readers here it is in this form.

Some morning-after thoughts: what hits me and other so hard isnt just the immense damage Trump will surely do, to climate above all. Theres also a vast disillusionment that as of now I think of as the end of the romantic vision of America (which I still love).

What I mean is the notion of US history as a sort of novel in which there may be great tragedy, but theres always a happy ending. That is, we tell a story in which at times of crisis we always find the leader Lincoln, FDR and the moral courage we need.

Its a particular kind of American exceptionalism; other countries dont tell that kind of story about themselves. But I, like others, believed it.

Now it doesnt look very good, does it? But giving up is not an option. The world needs a decent, democratic America, or were all lost. And theres still a lot of decency in the nation its just not as dominant as I imagined. Time to rethink, for sure. But not to surrender.

Binyamin Appelbaum has a nice piece about the stall in world trade growth, which I (and many others) have been tracking for a while. And I thought Id write a bit more about this, if only to serve as a much-needed distraction from the election.

If theres a problem with the Appelbaum piece, it is that on casual reading it might seem to suggest that slowing trade growth is (a) necessarily the result of protectionism and (b) necessarily a bad thing. Neither of these is right.

I found myself thinking about this some years ago, when teaching trade policy at the Woodrow Wilson School. I was very struck by a paper by Taylor et al on the interwar decline in trade, which argued that much of this decline reflected rising transport costs, not protectionism. But how could transport costs have gone up? Was there technological regress?

The answer, as the paper correctly pointed out, is that real transport costs will rise even if there is continuing technological progress, as long as that progress is slower than in the rest of the economy.

To clear that story up in my own mind, I wrote up a little toy model, contained in these class notes from sometime last decade (?). Pretty sure I wrote them before the global trade stagnation happened, but theyre a useful guide all the same.

As I see it, we had some big technological advances in transportation containerization, probably better communication making it easier to break up the value chain; plus the great move of developing countries away from import substitution toward export orientation. (Thats a decline in tau and t in my toy model.) But this was a one-time event. Now that its behind us, no presumption that trade will grow faster than GDP. This need not represent a problem; its just the end of one technological era.

It is kind of ironic that globalization seems to be plateauing just as the political backlash mounts. But were not going to talk about the election.

Both Ross Douthat and David Brooks have now weighed in on the state of conservative intellectuals; both deserve credit for taking a critical look at their team.

But of course theres a but Id argue that they and others on the right still have huge blind spots. In fact, these blind spots are so huge as to make the critiques all but useless as a basis for reform. For if you ignore the true, deep roots of the conservative intellectual implosion, youre never going to make a real start on reconstruction.

What are these blind spots? First, belief in a golden age that never existed. Second, a simply weird refusal to acknowledge the huge role played by money and monetary incentives promoting bad ideas.

On the first point: Were supposed to think back nostalgically to the era when serious conservative intellectuals like Irving Kristol tried to understand the world, rather than treating everything as a political exercise in which ideas were just there to help their team win.

But it was never like that. Dont take my word for it; take the word of Irving Kristol himself, in his book Neoconservatism: The Autobiography of an Idea. Kristol explained his embrace of supply-side economics in the 1970s: I was not certain of its economic merits but quickly saw its political possibilities. This justified a cavalier attitude toward the budget deficit and other monetary or financial problems, because political effectiveness was the priority, not the accounting deficiencies of government.

In short, never mind whether its right, as long as its politically useful. When David complains that conservative opinion-meisters began to value politics over everything else, hes describing something that happened well before Reagan.

But shouldnt there have been some reality checks along the way, with politically convenient ideas falling out of favor because they didnt work in practice? No because being wrong in the right way has always been a financially secure activity. I see this very clearly in economics, where there are three kinds of economists: liberal professional economists, conservative professional economists, and professional conservative economist the fourth box is more or less empty, because billionaires dont lavishly support hacks on the left.

There was a time, not long ago, when deficit scolds were actively dangerous when their huffing and puffing came quite close to stampeding Washington into really bad policies like raising the Medicare age (which wouldnt even have saved money) and short-term fiscal austerity. At this point their influence doesnt reach nearly that far. But they continue to play a malign role in our national discourse because they divert and distract attention from much more deserving problems, depriving crucial issues of political oxygen.

You saw that in the debates: four, count them, four questions about debt from the CRFB, not one about climate change. And you see it again in todays Times, with Pete Peterson (of course) and Paul Volcker (sigh) lecturing us about the usual stuff.

Whats so bad about this kind of deficit scolding? Its deeply misleading on two levels: the problem it purports to lay out is far less clearly a major issue than the scolds claim, and the insistence that we need immediate action is just incoherent.

So, about that supposed debt crisis: right now we have a more or less stable ratio of debt to GDP, and no hint of a financing problem. So claims that we are facing something terrible rest on the presumption that the budget situation will worsen dramatically over time. How sure are we about that? Less than you may imagine.

Yes, the population is getting older, which means more spending on Medicare and Social Security. But its already 2016, which means that quite a few baby boomers are already drawing on those programs; by 2020 well be about halfway through the demographic transition, and current estimates dont suggest a big budget problem.

Why, then, do you see projections of a large debt increase? The answer lies not in a known factor an aging population but in assumed growth in health care costs and rising interest rates. And the truth is that we dont know that these are going to happen. In fact, health costs have grown much more slowly since 2010 than previously projected, and interest rates have been much lower. As the chart above shows, taking these favorable surprises into account has already drastically reduced long-run debt projections. These days the long-run outlook looks vastly less scary than people used to imagine.

Like Claudia Sahm, I was struck by polling results indicating that around half of Trump supporters completely distrust official data although maybe a bit less surprised, since Ive been living in that world for years. In particular, the failure of high inflation to materialize led quite a few people on the right side of the political spectrum including the likes of Niall Ferguson to insist that the numbers were being cooked, so this is neither a new phenomenon nor one restricted to Trump types.

As it happened, there was a very easy answer to the inflation truthers: quite aside from the absurdity of claiming a conspiracy at the BLS, we had independent estimates such as the Billion Prices Index that closely matched official data. And theres similar independent evidence for a lot of the things where people now claim that official numbers are skewed. For example, the Gallup Healthways index provides independent confirmation of the huge gains in insurance coverage under the Affordable Care Act.

But aside from validity, what explains this distrust of statistics? Is it because peoples own experience clashes with what theyre being told? I dont think so. In fact, when people are asked about personal outcomes, not about the economy, the story they tell is a lot like the official numbers. From that poll about Trumpian distrust of the data:

So people are feeling better, in line with what the data say, but claim that the economy is getting worse. Hard to believe that this isnt political, a case of going with the party line in the teeth of personal experience.

Ive posted other performances of this song by this band, but this is a good one and topical this week!

The much-hyped severe Brexit recession does not, so far, seem to be materializing which really shouldnt be that much of a surprise, because as I warned, the actual economic case for such a recession was surprisingly weak. (Ouch! I just pulled a muscle while patting myself on the back!) But we are seeing a large drop in the pound, which has steepened as it becomes likely that this will indeed be a very hard Brexit. How should we think about this?

Originally, stories about a pound plunge were tied to that recession prediction: domestic investment demand would collapse, leading to sustained very low interest rates, hence capital flight. But the demand collapse doesnt seem to be happening. So what is the story?

For now, at least, Im coming at it from the trade side especially trade in financial services. It seems to me that one way to think about this is in terms of the home market effect, an old story in trade but one that only got formalized in 1980.

Heres an informal version: imagine a good or service subject to large economies of scale in production, sufficient that if its consumed in two countries, you want to produce it in only one, and export to the other, even if there are costs of shipping it. Where will this production be located? Other things equal, you would choose the larger market, so as to minimize total shipping costs. Other things may not, of course, be equal, but this market-size effect will always be a factor, depending on how high those shipping costs are.

In one of the models I laid out in that old paper, the way this worked out was not that all production left the smaller economy, but rather that the smaller economy paid lower wages and therefore made up in competitiveness what it lacked in market access. In effect, it used a weaker currency to make up for its smaller market.

In Britains case, Id suggest that we think of financial services as the industry in question. Such services are subject to both internal and external economies of scale, which tends to concentrate them in a handful of huge financial centers around the world, one of which is, of course, the City of London. But now we face the prospect of seriously increased transaction costs between Britain and the rest of Europe, which creates an incentive to move those services away from the smaller economy (Britain) and into the larger (Europe). Britain therefore needs a weaker currency to offset this adverse impact.

So, now were supposed to feel sorry for Paul Ryan?

For years, Ryan has cultivated a reputation on both sides of the aisle as a paragon of decency, earnestness, and principle; that rare creature of D.C. who seems genuinely guided by good faith. To many in Washington including no small number of reporters Ryans support for Trump is not merely a political miscalculation, but a craven betrayal.

Ugh. Ryan is not, repeat not, a serious, honest man of principle who has tainted his brand by supporting Donald Trump. He has been an obvious fraud all along, at least to anyone who can do budget arithmetic. His budget proposals invariably contain three elements:

1. Huge tax cuts for the wealthy. 2. Savage cuts in aid to the poor. 3. Mystery meat claims that he will raise trillions by closing unspecified tax loopholes and save trillions cutting unspecified discretionary spending.

Taking (1) and (2) together that is, looking at the policies he actually specifies his proposals have always increased the deficit, while transferring income from the have-nots to the haves. Only by invoking (3), which involves nothing but unsupported and implausible assertion, does he get to claim to reduce the deficit.

Yet he poses as an icon of fiscal probity. That is, he is, in his own way, every bit as much a fraud as The Donald.

So how has he been able to get away with this? The main answer is that he has been a huge beneficiary of false balance. The media narrative requires that there be serious, principled policy wonks on both sides of the aisle; Ryan has become the designated symbol of that supposed equivalence, even though actual budget experts have torn his proposals to shreds on repeated occasions.

And my guess is that the media will quickly forgive him for the Trump episode too. They need him for their bothsidesism. After all, its not as if there are any genuine honest policy wonks left in the party that nominated Donald Trump.

Simon Wren-Lewis has an excellent new paper trying to explain the widespread resort to austerity in the face of a liquidity trap, which is exactly the moment when such policies do the most harm. His bottom line is that

austerity was the result of right-wing opportunism, exploiting instinctive popular concern about rising government debt in order to reduce the size of the state.

I think this is right; but I would emphasize more than he does the extent to which both the general public and Very Serious People always assume that reducing deficits is the responsible thing to do. We have some polling from the 1930s, showing a strong balanced-budget bias even then:

I think Simon would say that this is consistent with his view that large deficits grease the rails for deficit phobia, since FDRs administration did run up deficits and debt that were unprecedented for peacetime. But has there ever been a time when the public favored bigger deficits?

Meanwhile, as someone who was in the trenches during the US austerity fights, I was struck by how readily mainstream figures who werent especially right-wing in general got sucked into the notion that debt reduction was THE central issue. Ezra Klein documented this phenomenon with respect to Bowles-Simpson:

For reasons Ive never quite understood, the rules of reportorial neutrality dont apply when it comes to the deficit. On this one issue, reporters are permitted to openly cheer a particular set of highly controversial policy solutions. At Tuesdays Playbook breakfast, for instance, Mike Allen, as a straightforward and fair a reporter as youll find, asked Simpson and Bowles whether they believed Obama would do the right thing on entitlements with the right thing clearly meaning cut entitlements.

Meanwhile, as Brad Setser points out, the IMF whose research department has done heroic work puncturing austerity theories and supporting a broadly Keynesian view of macroeconomics is, in practice, pushing for fiscal contraction almost everywhere.

Again, this doesnt exactly contradict Simons argument, but maybe suggests that there is a bit more to it.

Ive been writing about Donald Trumps claim that Mexicos value-added tax is an unfair trade policy, which is just really bad economics. Heres Joel Slemrod explaining that a VAT has the same effects as a sales tax. Now, nobody thinks that sales taxes are an unfair trade practice. New York has fairly high sales taxes; Delaware has no such tax. Does anyone think that this gives New York an unfair advantage in interstate competition?

But it turns out that Trump wasnt saying ignorant things off the top of his head: he was saying ignorant things fed to him by his incompetent economic advisers. Heres the campaign white paper on economics. The VAT discussion is on pages 12-13 and its utterly uninformed.

And its not the worst thing: theres lots of terrible stuff in the white paper, at every level.

Should we be reassured that Trump wasnt actually winging it here, just taking really bad advice? Not at all. This says that if he somehow becomes president, and decides to take the job seriously, it wont help because his judgment in advisers, his notion of who constitutes an expert, is as bad as his judgment on the fly.

Last nights debate was an incredible blowout yet both candidates were pretty much who we already knew they were. This was the Hillary Clinton of the Benghazi hearing confronting the Donald Trump weve seen at every stage of the campaign.

But this then raises a question: how did the race get so close? Why, on the eve of the debate, did polls show at best a narrow Clinton lead? What happened to the commanding lead Clinton held after the conventions?

You might say that Clinton ran a terrible campaign but what, exactly, did she do? Trump may have learned to read from a TelePrompter, but was that such a big deal?

Well, my guess is that it was the Goring of Hillary: beginning in late August, with the AP report on the Clinton Foundation, the mainstream media went all in on abnormalizing Mrs. Clinton, a process that culminated with Matt Lauer, who fixated on emails while letting grotesque, known, Trump lies slide. Heres a graphic, using the Upshots estimate of election probabilities (which is a useful summary of what the polls say):

The thing is, it was all scurrilous. The AP, if it had been honest, had found no evidence of wrongdoing or undue influence; if meeting a Nobel Peace Prize winner who happened to be a personal friend was their prime example But dinging the Clintons was what the cool kids were supposed to do, with normal rules not applying.

And this media onslaught pushed the race quite close on the eve of the first debate. It was feeling like 2000 all over again; and I think Jamelle Bouie got this exactly right:

But it all went off script last night, partly because HRC did so well and DJT so badly but also, I think, because pressure from progressives ensured that there was a lot of real-time fact-checking.

Whether it turns out to have been enough to turn the tide remains to be seen. But anyone in the media who participated in the razzing of Hillary Clinton should think about what we saw on that stage, and ask himself what the hell he thought he was doing.

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Paul Krugman - The Conscience of a Liberal