Friday, October 26, 2012

Bill Vallicella tries to take on Paul Krugman

The maverick philosopher, Bill Vallicella, whose views of philosophy and religion I am beginning to admire greatly, takes issue with Paul Krugman (whose views on economics I am beginning to admire equally as much), in Left, Right and Debt.

First, let me point out that Vallicella's veiled implications that  Krugman is  a communist are completely false, not to mention unfair.  Krugman is not a communist.  He's  not even a "socialist."  He has full faith in a properly regulated capitalist system.

Next, I do agree with Vallicella that Krugman's analogy breaks down. The government owes money to whoever has leant it. That is why the important part of Krugman's argument is that as long as the tax base is bigger than the debt that is owed, this isn't a significant problem. The problem is when we choose not to raise taxes in order to repay it. Before Reagan, the highest tax rate in America was around 70%. Under Reagan this was reduced, I believe, to around the 36% level, even though the Reagan administration increased government spending enormously for much additional military spending. Two things happened as a consequence: Many jobs were created (by government spending on new military projects) and the government debt more than doubled (and by the Bush I years, more than quadrupled).  Under Clinton, the highest tax rate was raised slightly, which combined with other factors resulted in a few years of government surplus, which lead to a small reduction of government debt.

Then Bush II got elected and reduced the highest tax rate even more than Reagan, and the government debt began skyrocketing again, especially because of the two wars we were fighting.  Bush kept the war budget separate from the general budget, so that the overall debt looked smaller than it actually was.  When Obama got elected, he combined the war budget with the general budget, and suddenly the overall debt grew enormously.  Silly Democrat.  Truth only makes you look bad.

But should Vallicella continue to read Krugman, he'll find out that we are in a liquidity trap:  private investors  do not have the funds for entrepreneurial projects, and are not yet willing to borrow large sums to invest in them.  Since private sources are not yet willing to spend large sums of money, then in order to get our economy going, it will take large sums of government spending.   (By the way, if Vallicella continues to read Krugman, he'll learn that this is the problem that Greece and other European countries are facing.  If they were not in the European Union, they could simply increase debt and spend their way out of their recessions.  But because they are in the EU, their hands are tied by the austerity policies imposed by the other members of the Union.)  Once consumers have money to spend, investors will be willing to grow businesses where consumers can buy things.  But of course, this means that government debt will have to increase first.   Which is only a problem if we are not willing to increase taxes.  but then as Krugman so eloquently puts it, "The fault, then, is not in our debt, but in ourselves."

No comments: