U.S. productivity miracle a statistical illusion.

Paul Krugman's blog questions whether the boom in the U.S. financial industry actually increased the productivity of the economy, and speculates that the “the apparent US productivity miracle, a miracle not shared by Europe, was a statistical illusion created by our bloated finance industry,” as its recent collapse demonstrated. 

Krugman cites a paper showing that standard of living, the best measure of economic productivity, has increased more in Europe than in the U.S. in the past thirty years.

The paper took into account a number of measurements that track tradeoffs a nation makes in allocating resources for short term consumption at the expense of long-term growth, such as living on debt and not saving. Another important factor taken into consideration was adjusting for decreases in the balance of trade. Larger trade deficits translate into increases in the standard of living – as the U.S. has seen though buying cheap goods from China – but are not sustainable in the long term because the imbalance must eventually decrease and thus erase the standard of living gains. The paper also uses net domestic product instead of gross domestic product so resources that go simply to replace deteriorating capital equipment and infrastructure do not count toward economic growth.

So much for the notion that the U.S. version of unrestrained free markets and absence of a social safety net is superior to the European brand of regulation and more socialist human services programs.

No brains in California May Propositions

“No brainer” is the tag line for the campaign urging voters to approve the latest smoke and mirrors referendums put forward by California’s dysfunctional state legislature and Governator. “No brain” is a better description of the opinion the “leaders” behind these referendums have of voters. There has been very little public discussion of these six propositions, which will be on the ballot on May 19. I believe that the supporters do not want voters to know much about the details and are hoping to fly them through under the radar.

These propositions are a train wreck resulting from the inability of the legislature to agree on a budget year after year. The Democrats won’t reduce spending the Republicans won’t raise taxes. In good economic times, they stumble all over themselves to reduce taxes to make voters happy, knowing full well that the in bad times they won’t have the courage to raise taxes in order to keep the state out of the red. The requirement for a two-thirds vote to pass a budget gets us a worsening series of accounting tricks, of which these propositions are the latest.

We’re told that this is the best deal we’re going to get, and that failure to pass these six propositions will plunge the state back into uncertainty. We should not buy into to these scare tactics. The plan is already fatally flawed because it is based on unrealistic revenue projections. Even if these propositions pass, the latest estimate is that the state will still be facing an additional eight billion dollar deficit this year that they do not address.

1A continues the tax increases recently approved for four years instead of two. Rather than hiking the gas tax and encouraging people to get fuel efficient vehicles or drive less, one Republican legislator whose vote was needed to pass the budget insisted on a sales tax increase instead, which is the most regressive form of taxation (hurts the poor the most). To take the heat off the legislature and get voters to swallow this bitter medicine themselves, 1A sets up an automatic rainy day fund. The problem with this is that revenue only flows into the fund when the State actually spends the amount of money on education mandated by Prop 98, which never happens (see 1B below). Given how many prior propositions are being eviscerated by the May 19th “gang of six” (see below), it’s hard to believe much about how all of this will work in the future.

1B would give schools and colleges 9.3 billion dollars starting in 2010-2012 they think they should have been paid under Prop 98 and that they think the Governator screwed them out of. Is the only way to solve this dispute is via another proposition? What are the odds various government entities will be fighting about this new one in 2010 and beyond? Where is the 9.3 billion dollars going to come from?

1C is an end run around Props 58 and 98 and is one the worst accounting tricks. It borrows money from future lottery revenue that is supposed to go to education to help close today’s budget deficit. This whole Madoff-like Ponzi scheme depends on the economy roaring back in 2010 so there will be money for the payments mandated by 1B. Oh, and it removes competitive bidding requirements from some lottery operations.

1D is an end run around Prop 10 that allows the state to take tobacco litigation money that is supposed to go to "First Five" early childhood development programs and instead spent it on other human services programs. Many First Five programs will end. Just to be consistent with the name of the programs it will kill, 1D will steal that money for five years.

1E allows the state to take money that voters said in Prop 63 should go to mental health programs for children and instead use it to pay for federally mandated Medicaid programs. Cutting and reducing funding for mental health programs will hurt people who need the help the most and cost taxpayers more in the long run, as failing to treat mental health problems always does. Its annual savings are less than half of one percent of the deficit.

1F is a Trojan Horse built to fool voters into thinking that elected officials are sacrificing something in this package. All it does it prevent salary increases for public officials during deficit years. It does nothing to prevent foregone increases from being made up later when times are good. This sort of faux pain for politicians is often used to bait voters into supporting propositions containing bad public policy.

Where is the proposition to lower the votes in the legislature to pass a budget or raise taxes from two-thirds to something more sensible like sixty percent, or God forbid, the simple majority used in Congress and most state legislatures? Vote no on the May 19th gang of six.