Paul Krugman likes to talk about how he’s been right about almost everything, and his conservative opponents have been wrong about almost everything. While that’s certainly overstating things, I do believe he’s been right about the need for more demand-side stimulus, and that government policies since 2008 were not likely to lead to higher inflation and interest rates.
Let’s assume Krugman was correct. Why wouldn’t the left gradually win the vigorous debate among intellectuals? Why wouldn’t the gradual accumulation of facts tend to discredit one model and support the other? Isn’t the intellectual debate in the blogosphere a sort of Darwinian struggle?
Krugman’s answer is that the right is dishonest. The smarter people on the right don’t believe what they are saying; rather they’ve been corrupted by the promise of plum jobs in DC, or money from the Koch family. But that doesn’t seem plausible to me. It doesn’t explain why I became a right-winger when young, or why I’ve morphed into being a pragmatic libertarian (out of step with both the GOP and the Koch family.) And when I talk to other right wing intellectuals they seem a lot like me. So unless I’m incredibly naive, I think there is an honest debate taking place. If so, why doesn’t one side gradually win?
My guess is that both sides are right, but about different things. The left is right about two big things, the value of social insurance and the need for a government policy that stabilizes aggregate demand. Right wing intellectuals (not necessarily the GOP!) are right that prosperity depends on a set of “conservative” ideas like property rights, prudence, thrift, hard work, ownership, personal responsibility, and the various government policies that encourage those things. In other words the left is right about the demand side of the economy and also the steeply diminishing marginal utility of consumption, and the right is right about the supply-side of the economy. Of course I’m oversimplifying, the left has made some contributions to the supply-side, and the right has a better understanding of the potency of monetary stimulus than the left. But as broad generalizations, they explain why both sides keep seeing confirmation of their model in the news they read—they are looking at a different set of issues:
1. The left sees the folly of a monetary regime that allows AD to collapse, as in Greece and Latvia. The right sees that the state willing to do more “responsible” supply-side policies (Latvia) does better than the one which is more statist (Greece.)
2. The right sees sound economic policies and low taxes producing very rich countries (Singapore, Hong Kong, Switzerland) whereas the left sees fairly rich and more egalitarian models in places like Sweden and Denmark. If I’m right that both sides are partly correct, then you’d expect the most successful countries on Earth to embody ideas from both sides of the spectrum, and they do.
Another point I’d make is that whereas left wing pundits are right about some issues, and right wing pundits are right about other issues, the markets are always right. Now that’s a pretty bold assertion, so let me qualify it. I don’t mean the market have perfect foresight, and can predict the future. And I am restricting this claim to policies about efficiency, supply-side and demand-side policies, not egalitarian policies. My claim is that the markets are left-wing on the need for adequate AD, and right-wing on the need for sound pro-growth supply-side policies. The markets believe that each side of the ideological debate has a sort of blind spot—the left underestimates the importance of incentives, and the right underestimates the damage done by demand shortfalls. Here’s Arnold Kling discussing the recent moves to save the eurozone:
I believe that for the crisis to end, two things have to happen: the defaults by insolvent governments must be formalized, so that creditors know exactly how far to mark down the value of their holdings; insolvent banks must be resolved, as Kapoor defines resolution.
The new agreement accomplishes neither of these. The financial markets were pleased. As is often the case, I am baffled by the markets.
During the 1930s the slow motion collapse of the gold standard was extraordinarily damaging to AD. The markets know this, which is why oil soared $6 and equities also rallied on the positive eurozone news. (This post was written a week ago.)
Kling is also right that Europe is not addressing the fundamental problems. They are just kicking the can down the road. But markets know that can kicking can be very important, if it staves off disaster until a more durable solution can be developed.
This perspective doesn’t just apply to economic policy, but to social science more generally. The right is correct that culture helps explain why some groups are more productive than others. The left is correct that those on the right are often too resistant to the sort of progressive cultural change that comes from increasingly polyglot cosmopolitan societies. In criminal justice you can build similar dynamic around deterrence vs. civil liberties.
Because both the left right embody perspectives that at least to some extent “work” (I’m a pragmatist so I can’t say “are true”) they may lose a battle here or there, but can never lose the ideological war of the social sciences.