David R. Henderson  

John Goodman on Why We Have Political Stability

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One person who does understand economics and who frequently writes approvingly of Roosevelt's approach to politics is Paul Krugman. In The New York Times last Friday he had this to say:

"... the political right has always been uncomfortable with democracy. No matter how well conservatives do in elections, no matter how thoroughly free-market ideology dominates discourse, there is always an undercurrent of fear that the great unwashed will vote in left-wingers who will tax the rich, hand out largess to the poor, and destroy the economy."

Close. Take out the word "poor" and insert "every special interest group that can help in the next election" and take out "tax the rich" and insert "tax everybody and his uncle" and I think he's right on the mark. [Sometimes you wonder if Krugman is living on another planet. Does he really not know what happens when Democrats rule without constraints? Ever hear of Detroit?] Here is another gem from Krugman the political scientist:

"... if you worry that low-income voters will run wild, that they'll greedily grab everything and tax job creators into oblivion, history says that you're wrong. All advanced nations have had substantial welfare states since the 1940s -- welfare states that, inevitably, have stronger support among their poorer citizens. But you don't, in fact, see countries descending into tax-and-spend death spirals."

True. But the reason why "advanced" countries are "advanced" is that they have managed to resist what the "non-advanced" countries have not resisted: the natural tendency of democracy to descend into a sea of special interest gluttony, like sharks in a frenzy -- feeding on a dead whale.

And they have managed to resist such temptations by resisting the way of thinking that pervades so many of Paul Krugman's columns.

This is from John C. Goodman, "Why Is There Political Stability? Because Most Voters Don't Think Like Paul Krugman," at Forbes.com.

Above, I've quoted almost half the piece. Here's one of my other favorite lines from Goodman's article:

So far at least, Americans don't believe in arbitrarily taking from Peter and giving to Paul, even if they happen to be Paul.

Dwight Lee covers some of the same ground in this last quote, in more detail, in "Do the Poor Vote Their Self-Interest?", Econlib Featured Article, August 5, 2013.

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COMMENTS (8 to date)
Liberal Roman writes:

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LD Bottorff writes:

I admit to a certain lack of comfort with the democratic process. I think that the FDR administration made it clear that if you can blame the bad economic conditions on someone that you are trying to punish (the rich, the powerful, etc.) then you can get re-elected even when your policies make a bad situation worse.
I know many will respond that we need a constitutionally limited government, but no constitution will constrain a government if the people do not support and understand limited government.
However, I don't have an alternative, so I'm sticking with democracy.

Liberal Roman writes:

I disagree with this criticism of Krugman and liberalism in general. You are just serving things up on a tee for liberals here by trying to infer large, crude conclusions like "Reason region X is rich is solely because it has picked free market policies"

Here is an example: "Sometimes you wonder if Krugman is living on another planet. Does he really not know what happens when Democrats rule without constraints? Ever hear of Detroit?"

Yes, you have identified one city that has not done well recently under liberal rule. I mean that kinda happens when your main industry is shell shocked by things outside your control like cheaper markets opening up and producing goods at a better value than you possibly can.

But on the other hand, you have cities like New York & San Francisco that have been dominated by Democrats and they are only...the richest concentrations of wealth in the history of mankind!!

You also have Republican dominated Mississippi and Alabama. Two historically poor states. Obviously it's because they have had Republican leadership.

The other obvious rejoinder to the claims in the article is that richer countries actually do MORE redistribution and welfare than poorer countries.

Again none of this implies causality. I am not saying France is richer than Nigeria because it has a larger welfare state. But it's factually wrong to state that Nigeria is poorer than France because it has a larger welfare state.

Andrew_FL writes:

What is an "advanced country?" It sounds like a sneaky way to get in a term which is defined as "welfare state that hasn't descended into a tax and spend death spiral."

If you point to a country that has indeed done so, the response can easily be "that's not an advanced country." It goes without saying that no matter how modern an economy a country has, Krugman would consider it not merely not modern, but paleolithic if it lacked a welfare state.

Granite26 writes:

@LD 'Democracy is the worst form of government there is, except for all the other forms of government', and all that.

I especially liked the selection bias point in the piece. To bad there's no way to back that up with facts about countries starting from a similar state and going down. (not sure if that's snark or not.... Is there a way?)

Mark V Anderson writes:

I agree that looking at the history of the world for the last 200 years, the incredible increase in riches could only have come under what has been mostly free markets, and it is clear that those that are the richest corresponds pretty well with those with the freest markets.

On the other hand, this blog posting doesn't show anything of the sort, and Liberal is certainly right to disagree. Using Detroit as an example is a terrible argument -- what do they call that, picking your examples? I constantly hear the opposite argument in my state of Minnesota, where leftists tell us not to vote Republican so we don't become Mississippi. I guess I should use Detroit as a counter example every time I hear that.

michael pettengill writes:

take out "tax the rich" and insert "tax everybody and his uncle" and I think he's right on the mark.

I constantly attack Krugman on that point, and a lot of others.

And I point out that the tax rate actually paid by the "rich" was not higher than the tax rate paid by the middle class because they made lavish use to tax dodges, making insane investments in productive capital assets to avoid paying taxes.

The investments were insane because they contributed to an excess of capital investment and wastefully created middle class jobs.

The one Milton Friedman taught about because he thought higher gasoline prices were needed was the oil depletion allowance, accelerated depreciation, and the tax laws on limited partnerships - to dodge taxes, doctors and dentists became oil wildcatters and developers create the ultimate in drill baby drill activity.

That was killed off by ending these tax dodges circa 1970. That resulted in peak oil in the lower 48 in 1970.

And as supply became limited by ending capital investment, prices firmed, and profits, not ROIC, but monopoly profits, became the dominant cost at the pump.

But lots of other tax dodges remained and thus high tax rates and lots of job creating tax dodges created a, growing, middle class. Tax policy promoted over investment in capital killing off monopoly profit and spreading the benefits of capitalism by maximizing capital investment to the disinterests of those making the investments.

Tax reform has reduced rates, eliminated many job creating tax dodges while creating tax dodges for creating monopolies to reap ever higher profits to drive up asset prices without increasing their value.

The only way capital assets can increase in value is by labor input in excess of depreciation ultimately dictated by entropy. Scarcity can increase the price, but not the value. If a tornado destroys half the houses in a town, and seriously damages the rest, the higher price of the damaged houses still standing does not mean houses are move valuable, only that the scarcity allows huge profits be charged.

Tax hikes and tax dodges were constantly being proposed and passed to create jobs and fully utilize labor while eliminating profit. After all, economists then did agree that profits were a sign of an inefficient economy that was not fully utilizing all resources. Again, profit is not return on capital.

FDR fully agreed with: So far at least, Americans don't believe in arbitrarily taking from Peter and giving to Paul, even if they happen to be Paul. FDR believed the only way to help someone in need was a job if he could work. That set Federal tax policy from the mid-30s to the 70s to 80s.

Even Reagan agreed that taxing everyone to create jobs was a good idea - he said so when he signed the 125% Federal gas tax hike. Very much in accord with FDR who called for jobs building "self liquidating" infrastructure.

John B writes:

"But you don't, in fact, see countries descending into tax-and-spend death spirals."

None so blind as those who cannot see. Mr K should look at most of the Countries in Europe, which have increasingly, spent, increasingly taxed and are descending increasingly into debt.

The USA is doing the same, but has managed it without the advanced welfare States of European Countries.... although it is catching up.

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