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Monday, July 22, 2013

Paul Krugman: Detroit, the New Greece

The deficit scolds have a new battle cry -- ignore them:

Detroit, the New Greece, by Paul Krugman, Commentary, NY Times: 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? ...
O.K., what am I talking about? As you may recall, a few years ago Greece plunged into fiscal crisis. ... 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.
So now the deficit scolds have a new case to misinterpret...; 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,... 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...
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. ...
True, in Detroit’s case matters seem to have been made worse by political and social dysfunction. ... So by all means let’s have a serious discussion about how cities can best manage the transition when their traditional sources of competitive advantage go away. And 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.
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.

    Posted by on Monday, July 22, 2013 at 12:34 AM in Budget Deficit, Economics | Permalink  Comments (166)



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