Paul Krugman – The conscience of a liberal

Abstract

In this forward looking book Krugman already predicted in 2007 a swing to a more liberal/Democratic perspective which indeed happened in the US elections of 2008. Krugman gives an impressive historical overview of US politics over the last 150 years, outlining a swing from conservatism in the 1920s to New Deal liberalism in the 1930s which persisted to the 1970s back to conservatism from 1980. Furthermore, the book uses income inequality data between 1920 and now to show little has changed between the 1920s and the current balance of economical power. Krugman also explores the impacts of race on politics and especially the role that race (still) plays in the American states in the South.

Historical overview

There are 3 general time frames discussed in the book:

1. The gilded age, until 1920s:

Although America prospered during this time, a limited number of people benefitted from the increase in wealth. The society consisted of rich oligarchs, limited unionization rates and poor workers’ bargaining powers. Furthermore, the state played an active role suppressing any union and labor uprising also when this would imply violent intervention.

Nevertheless, the “not haves” were divided and unable to unite for 3 reasons. Firstly, there was a division between city and country, resulting in difficulties coming up with proposals that benefitted both land laborers and city factory workers. Secondly, there was tension between natives and immigrants: the former immigrants (like Irish) did not feel the urge to unite with the new immigrants (like Italians and Jews) even when they were in the same (poor) economical situation. Lastly, there were tensions between (poor) blacks and (poor) whites.

This situation would have continued, where it not that the laissez fair economics were unable to cope with the rise in unemployment and lack of economic recovery at the end of the 1920s. This paved the way for new ideas and radical changes.

2. The New Deal and the welfare state – 1930 – 1980:

The great depression heavily damaged the reputation of the old economists and politicians. Roosevelt was allowed to let the government play a more active role in the 1930s and was helped by the Second World War: during wars, government control over the economy increases automatically, resulting in price and wage controls. Maybe surprisingly to the classical economists, it worked! Income grew steadily during the Roosevelt years going hand in hand with less income inequality (a proof that government and union intervention does not automatically lead to lower total welfare). However, the welfare state led to examples of misuse and the hippy era misled middle class people to the idea that they were providing poor people for undeserved social security benefits.

3. The new politics of inequality 1980s – now:

The Vietnam exit and Iran revolution led to fear for many and a demand for a more aggressive American foreign policy. Also, the influence of union power decreased partly because of political and business pressure and illegal firing activities which de-motivated workers to join unions. This paved the way for higher management and stockholder remuneration. Also norms and values changed:  a higher numeration at the top became accepted partly because boards determine CEOs pay packages and due to lack of union power, there was little resistance to curb these excessive rewards. Mass media also made high pay packages for celebrities possible.

More wealth not benefiting everyone

One particular interesting myth Krugman unravels is that less government intervention leads to more rewards for the better educated or the people who work hard. Instead either people from rich heritage,  celebrities, or CEOs benefit from more income disparity while the middle class does not benefits in gains that the society as a whole makes: it are mainly the “top performers” who can ensure they benefit the most from the overall wealth increase. Krugman compares this with Bill Gates walking into a bar: although the average income in the bar will increase, most people won’t profit.

Why come, democracy?

One of the strengths of a 2 party system, like in America, is that is provides leaders with power, however to gain this power they need to convince the majority of voters and hence have to convince the voters in the middle. As a result, a healthy balance will result from elections and powerful leadership cannot be used for extreme sentiments. However, in practice it doesn’t turn out that the average voter determines the outcome of elections, due to the following:

  • Some of the voters are not allowed to vote. Immigrants, who would benefit from more income equality, are sometimes not allowed to vote at all. Furthermore, an influx of immigrants can induce citizens to vote more conservative as an effort to protect their rights.
  • Due to the media influence on voters, the candidate’s financial resources are an important factor which determine the chances of candidates. As a result, candidates promoting interests aligned to big business can expect to receive more financial resources.

Therefore after 1970 politics have moved more to the right than individual voter preferences might have indicated. The gap between Democrats and Republicans has increased after 1970: voting along party lines is hence more common now than in the 1970s, leading to more extreme opinions (e.g. Tea Party) and has led to punishment when party members deviate from the main party line. This has led to a lack of criticism, resulting in a tunnel-vision with the disastrous result of the Iraq war in which any form of criticism was treated as treason.

Politics <=> economics?

One of the key elements of the book is the question if politics determines economical (in)equality or if the relationship works the other way around. Economists tend to believe that economic circumstances lead to changes in political preference: e.g. due to globalization and the increased use of technology, inequality has increased as some people are more flexible, and higher educated than others and can reap the benefits of their skills. However, Krugman disagrees with this and believes that changes in politics can lead to changes in economical inequalities: unionization rates, and changes in norms and values can all lead to different society structures. Where in the 1960 and 1970s, CEOs and board members earning significantly more than average employees were seen as disgraceful, this was less the case from the 1980 onwards. These days, a moderately paid CEO is portrayed as a sign of incompetence instead of modesty. The fact that the impact of CEOs on company’s profits is limited due to a wide range of circumstances they cannot control, does not alter today’s compensation level.

The result of more income inequality is a lack of equal education opportunities for children. Even when people of poor parents outperform their children from rich parents at the 8th grade exam, they have less chance than their rich peers to finish college. The ideal of equal opportunities for all is hence not applicable in practice.

Looking ahead

The disaster in Iraq, the issues around Guantanamo bay, and the economic decline around 2007 paved the way for new ideas. The absence of universal US healthcare, and rising income inequality led to an automatic demand for a move to the left.  And indeed, in 2008 a liberal won the presidential elections and introduction of universal health care and a less aggressive foreign policy has since then been an important part of new policies.

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Please note that the books I recommend are purely based on the fact that I think they are awesome and others should read them as well! No referral fees, or personal relationships (e.g. friendships or family ties) exist between me and the author(s).

About Servaas Houben

I am a Dutch actuary and worked in the Netherlands for the first 4 years of my career. Thereafter, I worked for 2 years in Dublin and 4 years in London. I am now heading the actuarial department of ENNIA in Curacao.
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