The Detroit mess: "So now the deficit scolds have a new case to misinterpret" (Paul Krugman)

-- Tim Eagan (click to enlarge)

"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."

-- Paul Krugman, in his NYT column yesterday,
"Detroit, the New Greece"

by Ken

I suppose it would be going too far to suggest that the deficit hawks are giddy about the Detroit bankruptcy situation because of the opportunity it presents to stick it to working people -- or, better, still, retired working people. Oh, I think they're pretty happy about this. After all, what's not to like about screwing working people? But it's not as if they've been looking forward to the city going down the tubes in order to have this opportunity. I think of it as more of a secondary benefit. Much prized, but still secondary to spreading their loopy anti-gospel. "Bad news!" they shout gleefully. "The sons of bitches be screwed!"

In his NYT column yesterday, "Detroit, the New Greece," Paul Krugman wrote:

When Detroit declared bankruptcy, or at least tried to -- the legal situation has gotten complicated -- I know that I wasn't the only economist to have a sinking feeling about the likely impact on our policy discourse. Was it going to be Greece all over again?

The Greek fiscal crisis of a few years back, Krugman wrote, "was a bad thing but should have had limited effects on the rest of the world," partly because Greece's economy is so small on the world scale ("actually, about 1½ times as big as the economy of metropolitan Detroit"), but also because 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.

So now the deficit scolds have a new case to misinterpret.

Let's cheat and jump to the conclusion of the column. "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.

It doesn't matter, Krugman notes, that the deficit doomsters continue to be wrong about, well, everything.

Never mind the repeated failure of the predicted US fiscal crisis to materialize, the sharp fall in predicted US 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.

Is there a problem in state and local pension funding? Yes. Is there a crisis? No, PK insists, citing numbers that indicate the situation indeed is far from ideal, but arguing that if "overall pension contributions this year will be about $25 billion less than they should be," it's "just not a big deal"in a $16 trillion economy -- "and even if you make more pessimistic assumptions, as some but not all accountants say you should, it still isn't a big deal."

"So," he asks, "was Detroit just uniquely irresponsible?" And again he says 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," says Paul. And we run smack into a frequent problem with the right-wing economists. Even with their own sacred texts, they tend to cherry-pick.

[F]ree-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.

"Political and social dysfunction" may well have made the Detroit mess worse.

One consequence of this dysfunction has been a severe case of "job sprawl" within the metropolitan area, with jobs fleeing the urban core even when employment in greater Detroit was still rising, and even as other cities were seeing something of a city-center revival.

Fewer than a quarter of the jobs on offer in the Detroit metropolitan area lie within 10 miles of the traditional central business district; in greater Pittsburgh, another former industrial giant whose glory days have passed, the corresponding figure is more than 50 percent. And the relative vitality of Pittsburgh's core may explain why the former steel capital is showing signs of a renaissance, while Detroit just keeps sinking.

"So by all means," says Krugman, "let's have a serious discussion about how cities can best manage the transition when their traditional sources of competitive advantage go away."

But "let's also have a serious discussion about our obligations, as a nation, to those of our fellow citizens who have the bad luck of finding themselves living and working in the wrong place at the wrong time -- because, as I said, decline happens, and some regional economies will end up shrinking, perhaps drastically, no matter what we do."

Of course this isn't what the deficit scolds have in mind. They will be preening about this latest "proof" of the evils of deficits, increasing the likelihood that real economic recovery will remain a mirage for most Americans for the foreseeable future. "The important thing," says Krugman, "is not to let the discussion get hijacked."

Alas, he knows as well as we do that our political system and its media boosters are designed precisely to hijack all such discussions. I don't see why this one should be an exception. There are too many important people with too much to gain by misinterpreting the Lesson of Detroit.

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