Nostalgianomics: If the Shoe Fits…

In a recent post commenting on my new Cato paper, Matt Yglesias just doesn’t get why I would accuse Paul Krugman of peddling nostalgia for the good old days of his boyhood. Indeed, Matt says my whole argument is “kind of silly.” Here’s the gist of Matt’s critique:

In his paper, Lindsey takes the unusual-for-a-libertarian tack of agreeing with Krugman (and others) that public policy changes have played an important role [in increasing inequality]. But he argues that the changes have mostly been changes that, on net, are positive. So it’s wrong of Krugman to espouse nostalgianomics and support a return to the policies of the 1950s. Which is fine, except I read almost every Krugman column and I’ve read Conscience of a Liberal (and, indeed, other works of Krugmanania such as Pop Internationalism and Peddling Prosperity) and it’s not as if the book ends with a call for the return of comprehensive regulation of airline fares or the re-establishment of the AT&T monopoly. To observe that the growth of inequality has policy roots isn’t to say that the right response to it is to methodically reverse every policy change of the past thirty years. It’s simply to deny the previous conventional wisdom – that it would be impossible to reverse the growing inequality of our society.

I think Matt misunderstands both my argument and what Krugman has been doing. I quite agree that Krugman doesn’t want a full-scale reinstatement of the corporatist, cartelistic policies of yesteryear. I say as much in the paper. What Krugman does want, however, is to portray the economic policies of the early postwar decades as an inspiration for progressives today – an example of how activist, interventionist government can simultaneously promote growth and reduce inequality. To quote Krugman’s Conscience of a Liberal: “During the thirties and forties, liberals managed to achieve a remarkable reduction in income inequality, with almost entirely positive effects on the economy as a whole. The men and women behind that achievement offer today’s liberals an object lesson in the difference leadership can make.”

To get to that ideologically convenient punch line, Krugman is forced to systematically misrepresent the policies and culture of the early postwar decades. He has to leave out all the things he doesn’t like, all the things that virtually all his fellow economists and fellow progressives don’t like, about the supposedly good old days – for example, the widespread cartelization efforts of the thirties, farm supports, price and entry controls on large sectors of the economy, restrictions on retail competition, high trade barriers, racist immigration laws, and the sexist confinement of working women to a pink collar ghetto. All of these contributed to the compression of incomes, yet they don’t serve Krugman’s ideological purposes. So he ignores them. That’s nostalgia-mongering, plain and simple: the selective recall of the past to make it seem better than it really was.

The relevance of all this to today’s situation is both real and important. Progressives have returned to power, and because of the current economic crisis the policymaking environment is incredibly fluid. Big changes are possible, indeed almost inevitable. In particular, proposals to substitute government control for market competition on a massive scale are now on the table: large-scale industrial policy in the name of creating “green” jobs, a full-court press to restore the power of private-sector unions, a qualitative increase in government’s role in health care, and “temporary” (such a dangerous word in Washington) government control of large parts of the financial system. We run the risk right now of making disastrous mistakes that will haunt us for many years to come. And that risk is exacerbated by the nostalgic fantasy, peddled by Krugman and others, that the record of the early postwar decades shows that Big Government and Big Labor are actually good for the economy.

Executive Pay Restrictions

Government-imposed pay restrictions are generally a bad idea; we have literally centuries of evidence showing that price controls always undermine economic performance.

But in the case of executives who came begging to the feds after mismanaging their companies: Sorry, guys, you asked for it.

President Obama’s proposal gets me nervous since it may lead to further meddling by government, but there is a silver lining.  Bailouts are a major threat to the economy’s long-run dynamism, so I want to discourage companies from sticking their snouts in the public trough. Restricting pay for incompetent corporate executives is not a proper role of government (by definition, successful corporate executives do not try to loot taxpayers).  But propping up poorly-run companies is so misguided that second-best (or even 50th-best) options may be palatable.  Corporate chieftains who run their companies into the ground should not be allowed to simultaneously shift the burden of their mistakes to taxpayers and expect multi-million dollar pay packages.

Meet the New Boss…

On Tuesday the Obama administration changed tunes from his campaign rhetoric and did nothing to change the government’s position on the State Secrets Privilege.  A government lawyer told the Court of Appeals for the Ninth Circuit that the government was continuing to assert the controversial defense to a civil suit arising from the extraordinary rendition program.

Glenn Greenwald and David Luban have taken the Obama administration to task.  Read some more here and a word from my colleague Tim Lynch.

Reporting on Smoking Costs

How does one explain a one-sided story like “Cigarettes’ Cost in Dollars and Lives” in the Washington Post?”

The article assumes that everyone agrees that smokers impose big costs on society, with the upshot that the government needs to try and squelch the bad behavior.

The article discusses how “doctors, health advocates, and patients tally the costs” of smoking, but left out one crucial group: economists.

If the reporter had done his homework, he would have found out that many economists believe that smokers may actually subsidize nonsmokers through various fiscal effects.

For example, the Congressional Research Service found that smokers either impose fairly small costs on nonsmokers or they subsidize them “primarily because smokers’ early death leaves their Social Security and pension contributions unused and available to reduce future financing demands on nonsmokers.”

One can find many similar views by other economists in articles on the Internet. Thus, if the Post reporter had Googled “smoker cost on society” the second hit leads to this quote by economist Kip Viscusi:

The other study I’ve done is looking at the financial ramifications to smoking for the rest of us. These include higher medical costs on the one hand, but lower social security, pension, and nursing home costs on the other hand because smokers die sooner. On balance if you put those together, smokers don’t cost us money, but save society $0.32 per pack.

Don’t they know how to use Google at the Washington Post?

Hat tip: Patrick Fleenor.

Obama Truth Check

President Obama may have preempted the first hour of prime time Monday night, but he certainly did not fail to entertain with several pronouncements that require suspension of disbelief.

Here are four Obama statements that deserve closer scrutiny:

1.      “[I]f you delay acting on an economy of this severity, then you potentially create a negative spiral that becomes much more difficult for us to get out of. We saw this happen in Japan in the 1990s, where they did not act boldly and swiftly enough…”

The fact is that numerous presidents, including Obama’s immediate predecessor, have used desperation and fear to sell some of the truly awful policies to come out of the U.S. government in the last 50 years – the Gulf of Tonkin resolution and the Iraq War resolution, to name two.

2.      “What it does not contain, however, is a single pet project, not a single earmark, and it has been stripped of the projects members of both parties found most objectionable.”

This one severely strains credulity.  The president is right about one thing: many of the bill’s projects are online for all to see.  But could any reasonable person agree that these projects are stimulative and not aimed at special political interests?

3.      “Most economists, almost unanimously, recognize that…when you have the kind of problem we have right now…that government is an important element of introducing some additional demand into the economy.”

We’ve been over this, Mr. President.  The truth is that a huge and still-growing number of respected economists think that a massive government spending effort in our present circumstances is wasteful and foolhardy.

4.      “What I won’t do is return to the failed theories of the last eight years that got us into this fix in the first place…”

OK, so we actually agree with the president on that one.  But then why is he bound and determined to repeat the reckless spending habits of George W. Bush?  We thought the November campaign was all about “change.”

Obama and Economists

In his news conference last night, President Obama made exaggerated and untrue statements about economics, economists, and the stimulus.

On economics, the president made claims such as “I can tell you with complete confidence that a failure to act will only deepen this crisis.” Yet how can he have “complete confidence” when the economics profession is divided on the stimulus issue, and when we have seen policymakers and top economists making continual mistakes with their policies and predictions over the last year?

On economists, the president opined “although there are some politicians who are arguing that we don’t need a stimulus, there are very few economists who are making that argument.” Mr. President, please look at the Cato list of more than 300 university economists who oppose a big stimulus spending bill. Please have your advisers call these experts to get an independent outside-the-beltway view.

Finally, the president bought into the “Government as Santa Claus” theory with his statement that “the federal government is the only entity left with the resources to jolt our economy back into life.” In reality, the federal government is broke. It has no “resources” left, and will run a $1 trillion deficit this year even without a stimulus. Besides, any resources that the government spends must be vacuumed out of the private economy through borrowing and taxes, which is particularly damaging when the private economy is already suffering from recession.