Do You Care More than Paul Krugman Cares?

At a conference at the Vatican I attended some years ago, Nobel laureate Gary Becker gave the opening speech. I found what he said quite remarkable:

The greatest beneficiaries of capitalism are those at the bottom of the income ladder. That’s why I favor capitalism. Were that not the case, I would not be in favor of capitalism. Milton Friedman feels the same way.

I was so struck by this comment that I wrote it down and have kept it all these years. In general, people who are right of center do not tend to talk all that much about their concern for the poor. Or is it that they just get drowned out by all the bleeding heart noise on the left? In any event, the evidence for Becker’s core observation is overwhelming.

What brings this to mind is Paul Krugman’s latest attack on Paul Ryan:

In pushing for draconian cuts in Medicaid, food stamps and other programs that aid the needy, Mr. Ryan isn’t just looking for ways to save money. He’s also quite explicitly trying to make life harder for the poor — for their own good.

This is the same Paul Krugman who almost never has an unkind word to say about the people who really are keeping poor people poor. More on that below.

Given the hostility of Krugman and others on the left toward capitalism and freedom, it’s worth a quick review of the bidding, as they say in bridge. 

I think one of the reasons you see so much anger on the left — not charity, just anger — is that they have been proved wrong by history. Whereas the left might have had a plausible case for its positions in the early 20th century, by the time we reached the end of the century it was clear to the whole world that they were wrong about almost everything. They were wrong about communism. They were wrong about socialism. They were wrong about the welfare state. The only thing they got right was their belated opposition to National Socialism. But that had nothing to do with economics. That was just opposition to the racist version of National Socialism.

[Note: I'm not accusing Krugman of sympathizing with these regimes. But can anyone remember his directing toward these mass murderers even a scintilla of the scorn he routinely heaps on people who believe in liberty?]

Anyway, the left wasn’t just wrong. They were terribly wrong. Many of the governments they favored or apologized for committed unspeakable horrors. About 174 million people were killed by their own governments in the last century. The vast majority of these genocide victims were killed by governments that pledged allegiance to the same leftwing rhetoric that has changed very little over the course of 150 years.

Bad ideas die slowly. Even today you can find students carrying copies of “Quotations from Chairman Mao” and sporting Che Guevara t-shirts. It’s hard to know what to say to people who are infatuated with cold-blooded killers.

Shifting from horror to science, economists associated with the Fraser Institute and the Cato Institute have actually found a way to measure “economic freedom” and investigate what difference it makes in 141 countries around the world. This work has been in progress for several decades now and the evidence is stark. Economies that rely on private property, free markets and free trade, and avoid high taxes, regulation and inflation, grow more rapidly than those with less economic freedom. Higher growth leads to higher incomes. Among the nations in the top fifth of the economic freedom index in 2011, average income was almost 7 times as great as for those countries in the bottom 20 percent (per capita gross domestic product of $31,501versus $4,545).

What about the effects on the poorest citizens? In the 2011 report, the average income of the poorest tenth of the population in the least free countries was around $1,061. By contrast, the poorest tenth of the freest countries’ populations earned about $8,735. If you are poor, it pays to live where capitalism is less hobbled.

What about equality of incomes? As it turns out there is almost no global relationship between the distribution of income and the degree of economic freedom. But in a way, that’s good news. It means that the rich don’t get richer and the poor poorer under capitalism. Everybody becomes better off.

There are also non-economic benefits to living in a free society. Comparing the bottom fifth to the top fifth, more economic freedom adds about 20 years to life expectancy and lowers infant mortality to just over one-tenth of its level in the least free countries.

What about within the United States? Some years back the Council of Economic Advisers (CEA) calculated a “predicted poverty rate” based on economic growth alone. In other words, economic growth by itself lifts people out of poverty, even if nothing else is happening. The CEA results suggest that if there had never been a welfare state (no Aid to Families with Dependent Children, no food stamps, no Medicaid, etc.) the poverty rate would actually be lower today than it actually is! This adds to a wealth of evidence that the welfare state is subsidizing poverty, not eliminating it.

I don’t like to get into partisan politics, because, like Milton Friedman, I believe in ideas and not politicians. But The New York Times editorial page is becoming increasingly partisan. The unsigned editorials these days are almost indistinguishable from the Obama campaign’s talking points. Far from being thoughtful, they are vehicles for White House propaganda. Many of Krugman’s editorials read pretty much the same way.

So let’s consider the two political parties. Think of Democrats as being primarily responsible for the structure of the welfare state (social insurance programs) and Republicans as being primarily responsible for tax policy (including the Earned Income Tax Credit [EITC] — the embodiment of Milton Friedman’s negative income tax). Which policies have been better for poor people? If you buy the CEA analysis and the work of Charles Murray, George Gilder and a host of other scholars, the welfare state has led to more poverty, not less of it. On the other hand, almost every Republican tax change has made the tax code more progressive. That is, almost every time the Republicans change the tax law, the burden of the federal income tax is shifted from low-income people to high-income people! That’s why almost half the population doesn’t pay any income tax at all.

[As an aside, Democrats have been very reluctant to give money to poor people through means-tested social insurance programs. Whether it's food, housing, education or medical care, almost all the cash goes to a constituency that is definitely not poor. That's why it's hard to know how much anyone benefits from these programs. On the other hand, when the Republican-designed EITC delivers $1 to a poor family, the family gets $1 worth of benefit. Of course, the EITC may do other harm through its implicit high marginal tax rate, however.]

I’m not endorsing everything the Republicans have done. Rather, I simply note that under Republican policies we are likely to have less poverty.

All in all, the welfare state probably isn’t the primary reason poor people are poor. The main obstacles to success are (1) bad schools and (2) barriers to good jobs in the labor market.

This gets us back to Krugman. What is the biggest challenge in making bad schools better? The teachers’ unions. They are dedicated to the idea that the school system is foremost a jobs program and only secondarily a place for children to learn. Teachers’ unions have steadfastly opposed almost every reform idea that has any promise whatsoever in every city and town throughout the country. As for barriers to entry into the labor market, who is the foremost backer of minimum wage laws, Davis Bacon Act restrictions, medieval-guild-type occupational licensing laws and labor union monopolies everywhere? You guessed it: the labor unions themselves.

Yet who forms the backbone of the Democratic Party? The very same organizations that are most responsible for keeping poor people poor and closing off their opportunities to succeed in life. Further, their perverse political influence disproportionately affects minorities. That is one reason why the black teenage unemployment rate is almost 40% — double that of white teenagers! It is one of the reasons for the very large student achievement gap: black student test scores are 70% to 80% of the scores of white students.

If you are a regular reader of The New York Times editorial page, when is the last time you remember Paul Krugman excoriating teachers’ unions the way he takes out after Paul Ryan or compares conservatives to Ebenezer Scrooge? When is the last time you remember Krugman criticizing unions at all? Krugman is not pro-poor people. He is pro-Democratic Party. His primary allegiance seems to be to politicians with a D after their name. Indeed, after an exhaustive review of all of Krugman’s writings, Dan Klein concludes:

Krugman has almost never come out against extant government interventions, even ones that expert economists seem to agree are bad, and especially so for the poor.

As for my original question, do you care about those at the bottom of the income ladder more than Paul Krugman? The answer is probably yes.

Comments (32)

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  1. Vicki says:

    Where did you find that photo? It’s priceless.

  2. Ken says:

    Great piece.

  3. Earl Grinols says:

    Krugman is a sad soul. What else can one say? What state of mind would cause him to make the kind of statements about Paul Ryan and others that he does? His mistakes and misrepresentations are notorious.

  4. David R. Henderson says:

    Nice piece, John.

  5. Nichole says:

    Do you think the crime rate within areas that African American childern are facing water down educations and barriers to decent jobs in the labor market effect their ability to become a productive member of society?

  6. Robert A. Hall says:

    This is a must read, as it helps make the compelling moral case for free enterprise, property rights and limited government. I have long said that progressives care only about feeling good about having good intentions and being for the right things; but not at all about the results of their policies on real people. There are endless examples, from banning DDT to save the birds while killing millions of black, brown and yellow kids with Malaria to supporting black rule in Zimbabwe, with a resulting drop in black life expectancy from 63 to about 36. (Now that they want to feel good about green energy, they don’t care how many birds die in eagle-chopper wind farms!) I will link to this from my Old Jarhead blog.

    Robert A. Hall
    Massachusetts Senate, 1973-83
    Author: The Coming Collapse of the American Republic
    All royalties go to help wounded veterans
    For a free PDF of my 80-page book, write tartanmarine(at)gmail.com

  7. Dr. Bob says:

    Your comment on education is timely. We watch as they transform healthcare into a government run program that parallels the public education system. I doubt that socialized medicine in the US will be any better that our socialized education. (Refer to Milton Friedman interview with Charlie Rose available in iTunes).

  8. John Seater says:

    I find it interesting/amusing/disgusting that people such as Paul Ryan are criticized for recognizing the existence of the resource constraint. The present value of all expenditures on consumption, investment, and government purchases CANNOT exceed the present value of income. Yet if anyone mentions that fact, he is decried as hard-hearted, racist, evil, or deeply pessimistic. Perhaps we can convince Paul Krugman that the law of gravity is equally evil and pessimistic and then talk him into jumping off a cliff so that he can experience the joys of flight.

  9. Uwe Reinhardt says:

    One can agree with Becker without endorsing so much of the sharade we now call “capitalism” in this country. One should never confuse venture capitalism — which I truly admire, and which Becker had in mind — with what is now widely practiced by the so-called “capital markets,” but is more properly called “casino,” with its stacked decks, such as interest rate swaps sold to hapless school districts.

    In this regard, I recommend to you also University of Chicago’s Luigi Zingales’ new book CRONY CAPITALISM.

    Never assume that wealthy people are or have been practitioners of what economists dream of as “capitalism.”

    By the way, where’s the song, John? Here’s one you might have used:

    http://www.youtube.com/watch?v=_0uP4kSCS6I

    It is called “Liberta.” It’s not American, but nevertheless quite good.

  10. Brian says:

    You illuminate a concerning symptom of societal woes, John. Krugman espouses a cavalier position of socialist elitism, true. One that capitalists would argue is both self-serving and self-defeating. But he’s playing to an audience eager to suckle that teat.

    Americans appear to have a firm belief that you truly can get “something for nothing” . . . and that (eventually) the ends will justify the means. Witness the current administration’s implicit position that welfare should be a de facto career choice!

    As long as we continue to teach dependency instead of independency we have no hope for future freedoms. Case in point: Your discussion regarding the age 26 expansion of health insurance for “children”. Yes, it’s good to have people insured. Yes, it’s (usually) cheaper for parent’s to have “kids” on their plans. BUT . . . what did we teach them? That they are truly not yet adults? That malingering in society is acceptable? That they don’t need to take responsibility for themselves? And we do this on purpose?????? And it is amongst the most popular of the features of PPACA so far implemented.

    Returning to an old adage that may never been more important than today: Give me a fish and I eat today, teach me how to fish and I eat for a lifetime.

    We must STOP giving away the fish! Yes, there will be some short-term anguish as some get off their lazy butts and have to work in order to eat. If we hadn’t taught them to be lazy in the first place it wouldn’t be an issue.

    Krugman’s opinions are vitriolic and nonsensical at times, but they are unfortunately the steam rising from the cauldron boiling beneath him. And when it eventually boils over, heaven help us all.

  11. Raymond Wooldridge says:

    This hits the “nail on the head”! Maybe it’s a case of the liberals not being able to “see the trees for the forest”?

    Ray

  12. Joe Barnett says:

    “if there had never been a welfare state (no Aid to Families with Dependent Children, no food stamps, no Medicaid, etc.) the poverty rate would actually be lower today than it actually is!” Why? An explanation was offered in studies by the late NCPA senior fellow Jerry Scully, who demonstrated that excessive government spending “crowds out” the private sector, lowering the rate of economic growth and thus leaving more people mired in poverty. That’s why spending $4 trillion on alleged “antipoverty” programs has left more people in poverty than would have been the case if the money had been left in the hands of taxpayers: the economy would have grown faster, and more people would have been lifted out of poverty. There would also be more societal resources to help those in need, whether thru government or private charity.
    Click here!

  13. Robert says:

    What are the views on unemployment claims? If one’s place of employment is bought out, gutted, or sent overseas and they are laid off, does using unemployment benefits get viewed as form of socialism (as a ‘freeloader’) or a legitimate need?

    I do not approve of lifelong abusers of such systems, such as those who do not believe they should be drug tested for receiving benefits or those who view having additional children as ways to increase their “income”.

    As a state-run program, are unemployment benefits and other temporary assistance needs included in the discussion on social welfare or are we strictly speaking of the aforementioned lifelong abusers?

  14. no2liberals says:

    The same Paul Krugman that was economic adviser to ENRON?
    Nothing this individual can say will ever interest me. He is as wrong minded as one can be.

  15. Kyle says:

    There will always be free riders. Programs like Social Security Disability create a disincentive to return to work. Of course welfare programs create whole generations of people with an inflated sense of entitlement.

  16. Jack Shapiro says:

    When discussing Krugman you have to remember he cut his “academic teeth” with the acolytes of wage and price control while WW11 was on and for a while thereafter. The anointed in Washington had unlimited power over the economy and peoples lives. The left wing economists are still having orgasms thinking about the good old days. They see every crisis as an opportunity to reinstitute the old control ways. Power and control is their aphrodesic.

  17. Tom Carney says:

    Excellent article!! Paul Krugman is a living example of how meaningless Nobel Prizes are and how politically based they are. Every picture of Kurgman I see he looks like the devel.

  18. Steve Reeder says:

    Very concise and spot on.. Required reading for my children.
    I’d love to see someone try to refute this piece.

  19. Devon Herrick says:

    Some years ago Nobel laureate, James Buchanan, spoke to a gathering of the school of social sciences at the University of Texas at Dallas. He explained that when he began his doctoral program at the University of Chicago, he and all his classmates were socialists. Within three weeks, about two-thirds of them had switched their position and realized markets were better at allocating resources than socialism.

    A UTD student raised his hand and asked Buchanan why the remaining third of Buchanan’s classmates had not changed their opinion and still favored socialism? Where they unintelligent? Did they just not understand markets?

    Buchanan replied the remaining third that still favored socialism did indeed understand that markets were superior at allocating resources. But, the remaining third of students, who still favored socialism, wanted to be part of the establishment who made the decisions in place of the market.

    Presumably, the services of PhD economists; and their place in society, ranked much higher in an economy where bureaucrats made all the decisions rather than relying on markets.

  20. Milton Recht says:

    John,
    If government aid to individuals increases poverty over the rate predicted from economic growth as the CEA study suggests, then re-distributive income policies (government aid) also increase income inequality. It could be that the more the government tries to balance income inequality by redistributing income, the more income inequality the government creates.

  21. John Seater says:

    @Tom Carney: I disagree totally with regard to Krugman’s Nobel. Krugman deserved to get the Prize. The guy used to be a brilliant economist. He probably could continue doing good science if he cared to, but he has lost interest and now fancies himself a pundit. He also seemed to lose his mind with the election of George Bush in 2000, and he never got it back. Before that, however, he did truly fine work. He invented a new way to think about international trade and he more or less invented the field of economic geography. He was given the Prize for those accomplishments, which are genuine advances in economics, not for his political writings. No matter what you think of Krugman as he is now, he once was a great economist.

  22. John Seater says:

    @ Uwe Reinhardt: Uwe, you regularly criticize the market economy as it exists in the United States, but you never offer an explanation of why it is that way. I am a macroeconomist, not a health economist, but from what I have read of health economics, it seems to me that literally every failure in the American health market is the result of some kind of inappropriate government intervention. If that’s what you are complaining about, we are on the same page. Otherwise, I don’t follow your argument, which seems to be for ever more government intervention to fix the mess that the most recent intervention created. Most or even all of the time, the same seems true in other markets. The housing bubble that collapsed in 2007 was the direct result of misguided federal housing policies. The reason North Carolina (where I live) has the largest risk pool in the nation for auto insurance is that North Carolina has the most stringent restrictions on the rates insurance companies can charge. This is Econ 1 stuff. Wouldn’t it be better to undo the totally artificial causes of the problems (government interventions) than to pile more government interventions on top of those we already have? If not, why not? We did that with trucking and airlines in the 1970s, with the result that prices dropped precipitously and service increased dramatically. Why is health care different?

  23. Uwe Reinhardt says:

    John Seater:

    You seem to be advocating a world in which government does not intervene in any way in the health care sector.

    That could, of course, be done. It is done in many parts of the world, where 90% of health spending is out of pocket.

    But try to run for Congress on that platform. Or, get your local community hospital board to agree with you. Or try to get the CEO of any corporation to sign on and put his or her name to it, for public consumption.

    Presumably, you would like to have the macro-economy run without government intervention, too.

    Then come back to me.

    Best,

    Uwe

  24. Wanda J. Jones says:

    John and Colleagues, including Uwe:

    Such a good topic, as it brings out the mindsets of our time beautifully.

    Krugman is, indeed, a sad character. His nobel is beside the point regarding his present behavior, which includes advocacy of Obamacare, the most disturbing public program ever developed, as it is specifically designed to lead to single payer, while passing through a phase of flattening the extremes of the bell-shaped curve of ability in healthcare to become a standardized product with controlled prices. And its rules are tyrannical.

    Uwe, on the other hand, has plenty to say about the evils of capitalism, but nothing to say about the evils of socialism. His example, rate swaps by “hapless school boards” he offers as an example of capitalism gone bad, yet it is something created by government and used by units of government. In healthcare, he needs to focus on the effects on professional services by government regulation against the interests of patients, as when so limiting reimbursement that hospitals will close and both primary and specialist doctors will close their doors to government patients.
    As we already have a live research project in the form of what has happened in Medicaid, one would think that it’s worth taking that reality into account while accepting something as far-reaching as Obamacare. But maybe neither Krugman nor Reinhart can bring their professional frameworks into this century.

    Sign me sick of Obamacare….its dangers, externalities and centralization of power. Won’t people be shocked when they see their favorite hospitals close? They will be “covered” but not served.

    Wanda J. Jones, President
    New Century Healthcare Institute
    San Francisco

  25. Mary Kohler says:

    Good article. I wish more people understood.

    Mary Kohler

  26. Joe Barnett says:

    @Uwe makes a good point about what is politically practical. But it is also a good illustration of why people do not view economics as a science (social, mathematical or otherwise): sometimes economists are explaining why, logically and empirically, something is so (e.g., @Devon, James Buchanan); other times they are providing political analysis (Krugman).

  27. John Seater says:

    @Uwe Reinhardt: Uwe, what in the world did I say that could possibly justify such conclusions? My view is that neither you nor any other health economist has ever answered my challenge to show me a single example of a serious problem in health care that is being debated today that is NOT caused by a government intervention. If there is none, then the problem is government failure, not market failure. If it’s government failure, the correction is to eliminate the government failure, which usually means eliminating the government intervention causing it. The only major market failure I know of in health care is communicable diseases because there we have an obvious externality. So there we also have an obvious cause for government intervention in the form of required vaccinations.

    My understanding is that the other routine *theoretical* standby, adverse selection, in fact goes the other way, with disproportionately many people in poor health being that way because they are risk-takers who engage in unprotected sex, do drugs, drop out of high school, don’t hold down regular jobs, and so on and who also choose to take the risk of not bothering with health insurance. In other words, they select themselves out, not in, and so negate the adverse selection problem. And in any case, the effect of adverse selection on the market has not, to my knowledge, been shown to be severe, especially when private insurers are allowed to engage in medical underwriting, examine prospective policy-holders, and set rates according to their state of health and their habits relating to health and medical care.

    Another intervention I favor, which has nothing to do with market failure, is income assistance for the poor both for the purchase of health care and for the purchase of health insurance. However, I favor that intervention in the form of vouchers, just like food stamps. It works for food, so why wouldn’t it work for health? Health care is less important than food.

    Now, except for communicable disease and income assistance, it seems that all we have left is government failure. If that is right, then by all means I am willing to advocate the correct fix of getting rid of the government failure. Your preferred solution seems to be to pile on more ways to have more government failure. Shouldn’t we leave that to the political hacks? Shouldn’t we, as social scientists, be uniformly advocating good economics? That’s what I’m trying to do. I say to hell with the short-run politics of self-interest for the benefit of the politicians, at least as far as we as economists are concerned. Our job is to explain to the public how the market works, how to intervene in it when that is necessary, and definitely how not to screw up everything through ill-conceived or downright deceitful policies designed to help one bunch of voters at the expense of everyone else just so some jerky politician can get himself re-elected. The last thing in the world I am willing to do is take the results of that kind of behavior as a given, on which we condition everything else. The same goes for the state of economic ignorance among the people on health boards. Our job is to educate them, not pander to them.

    As for macroeconomics, I favor prudent monetary and fiscal intervention to combat short-term fluctuations and a coherent set of policies that foster long-term growth.

    The reality is that fiscal policy is too politically charged and too cumbersome to move fast enough to be useful as an active countercyclical tool most of the time. The vast majority of recessions last less than a year, and it usually takes much longer than that to recognize that a recession is upon us and then to enact a fiscal response. Because the timing is usually gotten wrong, active fiscal policy in fact has a tendency to exacerbate cycles rather than attenuate them. Monetary policy can react faster, but it also typically takes longer to have an effect. So in practical terms, I am skeptical of active countercyclical policy. That’s why I tend toward simple rules, such as the Taylor rule for monetary policy and a fixed income tax law that doesn’t change radically over the course of just a few years. I spent seven years at the Fed helping make policy and know first-hand what the problems are. They are severe.

    In terms of long-run fiscal policy, what we need to foster growth is a coherent, predictable set of fiscal policies, in terms of both spending and taxation. The current very incoherent and ever-changing personal income tax is a poster child of precisely what not to do.

    There’s nothing radical in any of my views on macroeconomic policy. I also don’t see the relevance to health care policy. My stance on health care policy boils down to this: Show me the market failure or get out of the market. There’s nothing radical in that, either.

    Finally, I believe you still owe me an example of a serious health care problem (other than communicable disease) that is not the result of some government intervention in the health care market. Even if you come up with one, does it justify the grotesque mess we have now? Wouldn’t that require several really serious examples of market failures? What are those? And do they really justify government destruction of the private market? How?

  28. Uwe Reinhardt says:

    John Seater:

    So let me turn the argument around. Outside of the externality of communicable disease, you cannot think of any private-sector failure in health care and health insurance?

    If there aren’t any, one surely must marvel at the fact that virtually all industrialized nations in the world infuse their health systems with heavy government intervention. It is so even in Hong Kong and Singapore, both of which always rank high on the scale of “economic freedom” scale. What are all these human beings on earth missing that only the handful of disciples of the NCPA get?

    (Btw: In re “freedom” index, a former student in Hong Kong once told me that you pay low taxes there but high rents to the landlord who literally own that place, including its government, through crony capitalism).

    As to subsidizing low income people with voucher-like subsidies, I actually know of a plan that does that, but I won’t tell you which.

  29. John Seater says:

    Uwe Reinhardt:

    No, I can’t think of any other market failure in health care. Apparently you can’t, either, because you steadfastly refuse to provide an example.

    The fact that most countries have a lot of government intervention in health care tells me nothing about the existence of market failures. Most countries have a national post office and public schools, too. In neither case do I see any evidence of a market failure that requires government intervention in those industries. Most countries have heavy government intervention in agriculture. Same problem: no evidence of a market failure to justify the intervention. Most countries have subsidy programs for favored types of business. I see no market failure to justify them. The mere fact that those government interventions exist does not provide evidence that they are justifiable.

    We must do better than arguing something must be optimal because “everybody else does it that way.” There was a time when all countries were kingdoms rather than democracies. By your logic, the US never should have blazed the trail to republican democracy.

  30. John Seater says:

    Uwe:

    One last point. I don’t see anything surprising in the extent of government intervention where there is no justification for it. Most people cannot understand how a competitive economy can regulate itself to achieve a social optimum. It’s not an easy thing to see. DeBreu got the Nobel prize for proving the First and Second Welfare theorems. Nobels are not given for ideas that are obvious to the man in the street. Most people think of market dynamics as the interaction of monopolists with the customers, not understanding entry, much less potential entry. They do not understand market equilibrium, much less general equilibrium, and the role of prices and profits in allocating resources. Most people do not understand the distinction between averages and marginals. And on and on. Most people *can* understand government control, so they go for it. That they are making a mistake is precisely what we economists must explain to them.

  31. Al says:

    I do not understand Uwe R. at all. He does not seem to believe government should have any limitations as to how far it should intervene in health care. Assuming some degree of government is necessary in the health sector wouldn’t a prudent economist that believes in a market economy at least advocate actions that have the least negative effects upon the market?

  32. William G Shipman says:

    John:

    Particularly good piece.

    Bill

    William G. Shipman
    Chairman
    CarriageOaks Partners, LLC