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The Conscience of Paul Krugman

February 20, 2008

Tags Free MarketsTaxes and SpendingInterventionism

[The Conscience of a Liberal. By Paul Krugman. W.W. Norton, 2007. 296 pages.]Like him or not, Paul Krugman is an economic theorist of distinction, a winner of the John Bates Clark Medal, and often rumored to be in the running for the Nobel Prize. It is disappointing, then, that Conscience of a Liberal contains virtually no economic theory. Instead, the book consists of crude propaganda for a "soak-the-rich" policy.

Krugman recounts a sad story of decline. In the years of his youth, the American economy grew steadily. Even more important, increased economic wealth was fairly distributed. Most people were middle class, and there were few "super-rich" to spoil our basically egalitarian order.

Postwar America was, above all, a middle-class society. The great boom in wages that began before World War II had lifted tens of millions of Americans … from urban slums and rural poverty to a life of home ownership and unprecedented comfort. The rich, on the other hand, had lost ground: They were few in number, and, relative to the prosperous middle, not all that rich. (p. 3)

These happy developments were in large part due to the fact that Republicans, who under President Eisenhower abandoned the intransigent anti–New Dealism of Robert Taft, accepted the main programs of the welfare state. There was thus a broad consensus on social policy. Wages remained at high levels, additionally, because labor unions were then strong.

This happy state of affairs has, since the 1980s, come to an end. Ronald Reagan, who for Krugman is a monster of iniquity, appealed to the racial hatreds of benighted white Southerners. In doing so, he persuaded them to vote against their own economic interests. By voting for him, they helped to bring about a policy that benefits only the rich and hurts all others. (Nixon had pioneered the "Southern strategy"; but he did not endeavor to reverse the social gains of the preceding era. To the contrary, he governed as an economic liberal.) Reagan of course did not act alone. He had the aid of "movement conservatives" who through powerful interlocking foundations and organizations, have come to dominate the Republican Party.

The result has been disaster. Economic growth has slowed, and the benefits of the increase have gone almost entirely to the rich and super-rich. The middle class and poor have been effectively shut out; real wages for the majority have either remained constant or fallen in the years since Reagan.

Fortunately, salvation is in the offing, should voters have sense enough to follow Krugman's advice. We should institute massively progressive taxes. Doing this will accomplish two goals at once. First, the nefarious super-rich will suffer a severe blow: we will be able more closely to approach the egalitarian middle-class society that Krugman fondly remembers from his youth. Further, we can use the money mulcted from the rich to finance universal health insurance.

Why should health insurance be provided by the government rather than left to the free market? For Krugman, a simple statistic resolves the issue. Health care per person is vastly more expensive in the United States than in European countries with a national health service. "The United States spends almost twice as much on health care per person as Canada, France, and Germany, almost two and a half times as much as Britain — yet our life expectancy is at the bottom of the pack" (pp. 217–18).

Should we not then replace our inefficient system with a much superior plan, perhaps using France, ranked by the World Health as having the world's best health care, as a model? Krugman reassures skeptics that he wants only government provision of insurance: this does not entail that doctors themselves become employees of the state. Further, we need not adopt the Canadian scheme that forbids private competition with the governmentally mandated plan.

Krugman looks to the future with considerable confidence. No doubt the nefarious Republicans, still dominated by the rightist ideologues, will again appeal to racial prejudice to retain their party's hold on Southern whites. This strategy, though, is likely to fail. Americans have become much less racist than in former days. People will see that their interest lies in soaking the rich and will vote accordingly.

Readers of The Mises Review will not be surprised to learn that this entire line of thought seems to me unconvincing. From a libertarian perspective, people have a right to their labor and property. Those unsatisfied with the distribution of assets do not have the right forcibly to impose their preferences on the outcome of the free choices of others. Of course, Krugman does not accept this perspective; but what has he to say against it?

He mentions it in connection with the provision of medical care. He says that some people hold the view that those who cannot pay for expensive medical care have no right to it, but that few people hold this position.

There is a morally coherent argument against guaranteed health care, which basically comes down to saying that life may be unfair, but it's not the job of government to rid the world of injustice. If some people can't afford health insurance, this argument would assert, that's unfortunate, but the government has no business forcing other people to help them out through higher taxes … [but] You'd be hard pressed to find more than a relative handful of Americans [who accept this argument.] (pp. 214–15)

Is the truth or falsity of a natural-rights view to be determined by majority vote? Perhaps we should settle other philosophical questions in the same fashion: why not a vote, say, on whether we have free will?

Perhaps Krugman does have an argument in mind. Suppose someone will die unless he undergoes expensive heart surgery. Is it not hardhearted to say that he must die because he cannot afford the operation? Of course, the libertarian view does not say this. Rather, the contention is that the person has no right to the surgery, i.e., he, or those who act on his behalf, cannot forcibly require others to pay for his surgery. It by no means follows from this that he will not receive the needed treatment. The point at issue is that, lacking resources, he is then dependent on the charity of others. If it is then said that charity is unlikely to be forthcoming, a response long ago suggested by Robert Nozick strikes to the heart of the matter: if one thinks that people are unlikely voluntarily to donate to charity to help the poor, why is it assumed that they will support compulsory taxation for the same purpose?

Let us, though, put rights to one side and consider Krugman's principal contentions on their own terms. Does not Krugman have a point? Why should the rich get all the benefits of economic growth? Here two issues of fact are relevant. Thomas Sowell, among others, has persuasively contended that the benefits of growth have not all gone to the rich: the statistics that Krugman cites are misleading. 1 Further, George Reisman has argued that, to the extent that the rich have improved their position relative to the poor, the cause lies with interference with the free market: specifically, an inflationary boom may redistribute income to the rich. 2

But let us put these issues to the side as well and assume that the free market has generated precisely the inequalities that arouse Krugman's ire. Should people tax them away? As Mises points out, policies of redistribution cannot immediately be shown to fail to achieve their purpose, as can other types of intervention, such as wage and price controls. Since, however, the only way permanently to raise wages is to increase capital investment, redistribution is a shortsighted policy. Its deleterious effect on incentives to invest will in the long run worsen the position of the workers. One should recall, in this connection, that if redistribution slows the rate of growth only by a small amount, this would make a large difference over an extended period of years.

Krugman is well aware of the incentives argument but dismisses it with a shrug. Such "Economics 101" considerations must bow before the facts. In the period of Krugman's youth — that Golden Era — we had much higher growth than now, accompanied by progressive taxation. How then can it be argued that such taxes impede growth?

Here once more an appeal to Mises is in order. Krugman assumes that the propositions of economic theory can be tested against the facts: the "Economics 101" argument that taxes affect incentives is refuted by the historical record. As Mises notes, the many different causal factors in a given economic situation cannot be disentangled: we cannot directly test economic hypotheses. (I leave aside here the a priori nature of economic theory, which I presume Krugman would reject.)

Krugman would no doubt respond that he disagrees with Mises: he thinks that empirical tests are entirely appropriate in economics. But even if he thinks this, he has failed in his task. If he wishes to claim that progressive taxes do not adversely affect incentives, he needs to offer a theoretical account of why this is so. Merely to point to data that allegedly disconfirm the contrary view leaves the situation unclarified. Perhaps the data do not in fact disconfirm the standard account: what if growth in the Golden Era would have been even higher with lower taxes? If Krugman thinks otherwise, he owes us a model.

In like fashion, when he claims that labor unions raise wages, an obvious question from elementary economics arises. (Krugman makes an even more extreme claim. He thinks that as a result of union activities, wages for nonunion workers rise as well.) Can unions raise wages above the rate determined by the workers' marginal productivity, without causing unemployment elsewhere? If he answers that they can, he owes us an account of how this is possible. If he denies that they can do this but claims instead that wages without union activity would have been below the workers' marginal productivity, he owes us another model to show how this is possible. Why would not competition among employers have bid up wages to the point that standard theory suggests? Again, when he defends minimum-wage laws, more is required than a reference to the study of Krueger and Card, which he acknowledges is controversial. Where's the theory?

Perhaps Krugman has such models in mind but chooses not to display them in a book written for a popular audience. But one wonders. He makes a great fuss over very high salaries to corporate CEOs. He mentions the view, derived from standard theory, that these salaries are economically efficient, but his counter to this view amounts to no more than saying that it might not be correct, hardly a refutation. "What all this [Krugman's discussion of the view that competition drives up executive salaries] suggests is that incomes at the top … may depend a lot on 'soft' factors such as social attitudes and the political background" (p. 144, emphasis added). Is he unable to find a theoretical weakness in the standard account?

Krugman also points to what he terms the Great Compression. Owing to government restrictions on raising wages during World War II, wages were much more equal than they had been before the war: "the system had an inherent tendency to raise wages for low-paid workers higher than for the highly paid" (p. 53). When, after the war, the controls were relaxed, wage differentials did not return to their previous extent. If inequalities really did increase efficiency, would not the free market have restored them? I do not think that this argument succeeds. People in the free market always seek to improve their position, starting from the situation in which they find themselves. We cannot say a priori what degree of inequality is required for efficiency.

Krugman's argument for national health insurance also fails. He acknowledges that the American system is a mixture of private and government provision. "In 2004 government programs paid for 44 percent of health care in America, while private insurance paid for only 36 percent: most of the rest was out-of-pocket spending, which exists everywhere" (p. 224). How then do statistics about its high per capita cost show that a free market in health care would be likewise inefficient?

In his assault on "movement conservatives," Krugman has a bee in his bonnet. He refers six times to praise in National Review during the 1950s for Francisco Franco, "who overthrew a democratically elected government in the name of church and property" (p. 9). This is a most misleading picture of the onset of the Spanish Civil War. In the "democratically elected" Cortes, conservative deputies were openly threatened with death.

Let us conclude, though, on a positive note. Krugman's continued opposition to the Iraq war is heartening.


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