November 27, 2007

One Star for Mister Krugman

Gregory Mankiw links to an excellent Amazon Review of Paul Krugman's "The Conscience of a Liberal."

Krugman's vision for the future has three key premises, all wrong.

First, he believes progressives can win on a platform of redistributing from the rich. However, no one cares about inequality. People care about injustice, unfairness, poverty, sexual predators, family values, gay marriage, terrorism, and many other problems of everyday life. People don't care about Gini distributions and other abstractions. Moreover, Krugman should know that if the wealth were redistributed to the middle class, the US investment rate would fall, since the rich save their money and it is translated into investment, whereas the middle classes would spend their gains on consumption, thus driving out investment. A "soak the rich" policy simply cannot work to the advantage of the middle classes.

Second, Krugman would strengthen the labor unions, which he credits for their egalitarian effects. However, unions were strong only when industry was highly non-competitive in such areas as automobiles and steel. The oligopolistic character of mid-twentieth century industry, with a few countries in the lead, made fighting over the excess profits highly rewarding. With globalization, there are no excess profits to be fought over. Thus, it is not surprising that most successful unions in the USA are public service, not private (e.g., teachers, government employees). There is no future in unionism, period.

Third, Krugman believes that liberalism can be restored to its 1950's health without the need for any new policies. However, 1950's liberalism was based on southern white racism and solid support from the unions, neither of which exists any more. There is no future in pure redistributional policies in the USA for this reason.


There are quite a few things in the review I disagree with, but "The Enemy of Krugman is my Friend." And the separation of injustice and inequality is brilliant.

Posted by jk at November 27, 2007 1:10 PM

His second and third points are good. His first is somewhat off. It sounds almost Eidelbusian when he talks about the futility of soaking the rich, but Mankiw doesn't understand the old Bastiat lesson: "To save is to spend." Ultimately *everything* is spent. If you save money by buying stock or land, the recipient of the money will spend it, or he'll save it and transmit it to someone who will spend it. The last one may take many steps, but it will eventually happen. Thus in the end, what matters isn't the ratio between saving and investment, but total economic output.

"Soaking the rich" doesn't work because it means *government* will spend the money that "the rich" would have either saved or spent. They'd have saved it and eventually provided money that the rest of us borrowed for mortgages and auto loans, or they'd have spent it on goods and services that the rest of us provide. Either way, it means jobs for the rest of us. Most importantly, supply-siders have been vindicated by major tax cuts that spurred revenues, because when "the rich" don't have to pay as much in taxes, they want to produce more.

Besides, a free market will determine, all by itself with no need for government, the proper ratio between savings and investment. The key is to let interest rates adjust on their own. If there isn't enough being saved, then investors will offer higher returns, unless there's a central bank willing to undercut them. If there's too much being saved, the returns will be too low to compete with the satisfaction of consumption spending.

Posted by: Perry Eidelbus at November 28, 2007 3:02 PM

First, I should clarify that this not Perfesser Mankiw, just a hat-tip to his blog. Mankiw liked the differentiation between injustice and inequality as I did.

Sadly, the whole review includes an insult of "Robber Barons" and this:

Conservatives, on the other, are political sophisticated and hold clear visions of what they want. It is too bad that what they want does not include caring about the poor and the otherwise afflicted, or dealing with our natural environment.

Posted by: jk at November 28, 2007 4:54 PM

Ah, I didn't follow the link. That paragraph you quoted is the old liberal fallacy: if you don't want government to do it, you must not want it at all.

Posted by: Perry Eidelbus at November 29, 2007 10:43 AM | What do you think? [3]