Krugman on Getting Mugged by Moralizers

In the NYT today, Paul Krugman, after recounting the birth of the Tea Party movement in the Rick Santelli outburst on CNBC and stating the Keynesian macro position without defense, writes:

So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang.

As a student of Modern Monetary Theory, and someone with a decent respect for the implied neo-Keynesian position, I think the first recommendation is correct — although I doubt Krugman and I want to “spend” in the same way (I’d favor tax cuts, or suitcases full of money dropped in peoples’ backyards, or, if forced to go for real government programs, actual infrastructure spending, including the military infrastructure).

The second recommendation is quite problematic. Apparently, Krugman will attack those who don’t think it meets the standard of justice to ask investors to take a haircut as “moralizers.” The same “moralizers” who have always stood in the way of leftist “progress,” no doubt.

But here’s the thing: we’ve basically accepted, as a people, for decades now, that government has a role in making everyone, on average, better off, even if it means making a few worse off than they would be in a free market with a night watchman state. So, if a thorough analysis could establish that it serves “the common good” to force certain investors to forgive large portions of debt (to avoid a very ugly foreclosure wave), is that just a “sacrifice those people will have to be willing to bear?” After all, there are many scenarios in which Americans have adopted similar policies (we drafted particular men and sent them to die in two world wars to serve some abstract notion of the common good, to take but one example). It’s not like this would be breaking any really new moral ground.

What do you think?


5 thoughts on “Krugman on Getting Mugged by Moralizers

  1. It’s not a moral issue. It’s a moral hazard issue. When you undermine the rule of law, people take notice. Fewer people will trust in the sanctity of legal contracts, and the markets will be distorted as a result. Rule of law is one of the main things that separates a thriving capitalist economy from Bangladesh. People will not invest time and resources into building something of durable value unless they are confident that they can reap the benefits.

  2. Absolutely ESM. Thomas Sowell and many other economists point to property rights being a strong indicator of the economic promise of a given society. Many of us have a strong desire to create a good store of value somehow that we can later turn to when we are in need. With good property rights, this can be achieved somewhat, and those who want to store more will be willing to work harder to produce goods for others today, in order to feel safer about tomorrow.

    Draco I think is also referring to a serious flaw that some economists make.
    If we set up a family of utility functions U(w,n) (where the n denotes a particular individual), then some economists would argue that if you just redistribute everyone’s wealth to maximize sum(U(w_n,n)) then in some crazy ensemble measure of utility we would all be better off. This is absolute nonsense. The flaw is in thinking that the system is just static, but it’s not, our proclivity to produce is highly variable and dependent upon our belief that we can eventually consume what we produce – and for the savers it means that they can, today, safely store what they produce. Once it is clear that this is not the case, then we will no longer produce as much. It’s also takes a degree of arrogance found only in those who would be dictators to think that you actually know everyone’s utility.

  3. @ESM

    Yes. But a rather obvious counterargument is: While you are doubtless correct that consistent protection of property rights is good thing for markets and advancing wealth and human happiness, a one time “emergency” intervention wouldn’t do long term damage to those things. We violated rights on a massive scale in WWII to achieve a goal that was only tenuously in any citizen’s interest: draft, rationing, resource seizure, etc. But because this was an “emergency” and we went back to normalcy after the war, there was no long term harm done to the notion of right to life and property. Progressives are fond of declaring emergencies (hurricane relief) and “wars” such as the “war on poverty” – and this is probably the reason why.

  4. @MagnaTalea

    Yes. And the very same argument is used as the rationale for a progressive income tax: the arrogance is that I get to tell you that because each marginal dollar gained by you (assuming you have high income) is less valuable to you than it is to me (who has lower income), it is right and just for me to take that dollar from you and keep it for my own use, so that Draco and MagnaTalea are now, as a whole, happier than before. I agree that the problem is that the MagnaTalea’s of the world may come to resent this, and just tend not to earn the extra dollar, leaving the world as a whole poorer than if we didn’t have a progressive income tax.

  5. @Draco

    “But because this was an ’emergency’ and we went back to normalcy after the war, there was no long term harm done to the notion of right to life and property.”

    It is impossible to compare with the counterfactual history, but I suspect that there was long-term harm done. We’ve done well enough since WWII, but perhaps we could have done better if the rule of law held better during FDR’s reign. In the past, it was also much easier to hide the bad things government did from the public. Secrecy mitigates the moral hazard damage. Secrecy is not an option any more.

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