It is undeniable that we, humans, cannot be neutral or objective. Every individual develops mental models through which he understands reality. This is what we call biases.
Intellectuals, scholars, experts, and so on are no exception. One could expect, though, even with their biases, for them to still be responsible with what they say. To be biased is one thing, but making reality fit your models, even when there is no relation, is another thing altogether.
When intellectuals do this, they are being irresponsible for two reasons. First, because as authors such as Friedrich Hayek and Joseph Schumpeter demonstrated a long time ago, intellectuals and experts have a direct influence on the ideas people believe in. This influence is greater if you are not just an expert but also, for example, a Nobel Prize recipient. Second, because experts are regarded also as those who possess unquestionable knowledge in their areas of expertise, so they impact decision-making, especially in places where knowledge is not created, but replicated.
Paul Krugman is a man who fits the stated characterization. He is a renowned economist; he received the Nobel Prize in economics in 2008; his opinions are heard everywhere, even in Latin-American countries by a growing Latin-American public and by Latin-American decision-takers. He is also biased — and, as one of his most recent articles shows, he is irresponsible.
We are used to his bias against the market and capitalism, but in this article (en español), even though he knows that the facts do not fit his ideas, he makes them do so. This attitude is more reprehensible when you consider that his statements will affect economic debates in Latin America, where his ideas, as well as Joseph Stiglitz’s, are commonly used by some intellectuals who think that economic progress can be state-led. And, unfortunately, most of the time they succeed with their intentions.
For these reasons, Krugman’s most recent irresponsibility must be refuted without delay.
At the beginning of his article, he states:
As you may recall, a few years ago Greece plunged into fiscal crisis. . . Unfortunately, many politicians and policy makers used the Greek crisis to hijack the debate, changing the subject from job creation to fiscal rectitude.
The one who hijacks the debate is Krugman himself. He acknowledges the fact: Greece’s problems stemmed from the fiscal negligence of its leaders. However, out of the blue, this Nobel Prize recipient concludes that the debate should have been focused on “job creation.” Why? There is no answer.
In his obsession to fit reality with his bias, he diverts attention from the real problem of unsustainable and reckless spending. This idea, however, affects debates in Latin America, where most of government officials still think that public spending cannot breed undesirable consequences in the future.
Now, the truth was that Greece was a very special case, holding few if any lessons for wider economic policy — and even in Greece, budget deficits were only one piece of the problem.
He never explains why Greece is so special. He never explains why economic policy cannot yield lessons from this case. He never even mentions the other pieces, besides budget deficits, in Greece’s problem.
How can one explain Latin-American opponents of the market that Greece is not that special and that what happened there could happen anywhere, if a respected economist such as Paul Krugman dares to assert that in a worldwide read newspaper? How can one explain to them that there are some universal economic principles, if one of its most prominent exponents disregards them?
But things get worse in Krugman’s article:
And this intellectual wrong turn did huge damage to prospects for economic recovery.
So, from Krugman’s point of view, the fact that Greece has not recovered from its crisis is due to intellectual debates and not to past mistakes made by its own leaders or to its own weak economic points. This statement will be precious for many Latin Americans: our underdevelopment is not the result of our own wrong decisions but of the economic debates in the US or in Europe. In other words, Krugman has added weight to the timeworn excuse that poverty is the heritage of Spanish colonization or of US economic growth.
Now, regarding Detroit’s bankruptcy declaration, he says:
Boston College estimates suggest that overall pension contributions this year will be about $25 billion less than they should be. But in a $16 trillion economy, that’s just not a big deal — and even if you make more pessimistic assumptions, as some but not all accountants say you should, it still isn’t a big deal.”
Yes, there is a fiscal problem. Yes, it was created by the state. But, hey, there is no need to worry because Detroit’s pension deficit is small compared to the size the entire United States economy. If Detroit has already declared bankruptcy, shouldn’t that show Krugman that the problem was, indeed, too big for Detroit itself?
No, because he assumes that wealth is created not by the market, but by the state, so that there is still room for more bail-outs, even for cities. It does not matter that wealth could be used elsewhere. Here, our expert suffers from what Frédéric Bastiat demonstrated in his famous essay, What Is Seen and What Is Not Seen, a shortsighted and narrow point of view, incapable of identifying the unseen effects of economic decisions.
Moreover, if we follow this statement to its obvious implications, then we should conclude that other fiscal crises or deficits do not matter because global wealth is so huge that it can simply be spent on solving each country’s problems. Has that logic not been applied to Greece? Has not this country been the recipient of aid from the IMF and the European Union, and it has not worked? Well, that is not something to bother Krugman. For him, that financial aid is nonexistent or perhaps too small.
Also, in this case, while Krugman downplays Detroit’s pension deficit, he does not recognize that this city is not the only one in the United States with that kind of financial liability. He forgets, also, that there is a huge problem at the federal level. His perspective begs the question, At what magnitude does a deficit become a problem for this Nobel Prize winner? Meanwhile, in Latin America, defenders of pay-as-you-go pension systems and of state-funded goods and services will be pleased by Krugman’s easy conclusions.
But all the oversight of economic principles and the misunderstandings of reality are not the result of accident or of neglect. They have a specific objective, evident in the following statement:
Detroit does seem to have had especially bad governance, but for the most part the city was just an innocent victim of market forces.
A huge turns of events? No, this is to expected coming from a writer such as Krugman. If there is one to blame for Detroit’s bankruptcy, it is not the bad decisions of the over-sized local state, but the market. Why? He answers later: creative destruction — an expression coined by Joseph Schumpeter, defender of capitalism and economic freedom — but he uses this concept just partially.
Joseph Schumpeter demonstrated that capitalism allowed individuals to create wealth and to achieve better living conditions due to the processes of innovation and change. These were, in turn, fostered by competition. In brief, competition leads entrepreneurs to invest in better products or in production processes. Those who succeed satisfy consumer needs through higher-quality products or more efficient production models, attained by innovation.
Competitors that fail to do the same are destined to disappear from the market. This is why Schumpeter called this process creative destruction.
According to Krugman, we should remember this expression for just one part of the process: destruction. He forgets the creative, innovative items that replace the obsolete items. He affirms that Detroit´s decline was the result of the loss of competitiveness of the automobile sector in the United States. This could be true: there are always losers in the process of economic change.
However, this view disregards the fact that humans, when faced with difficult situations, make decisions to avoid economic failure. This view forgets that humans are not passive in their fates or in their lives. This view assumes that change, that innovation benefits no one and affects everyone. The explanation of a whole city´s bankruptcy cannot be the “creative destruction,” because that would imply that nobody makes decisions to avoid their own bankruptcy. And this was not what really happened. The one that failed was the local city government. Thousands of individuals fled before that.
Detroit’s lesson, such as that of Greece, is not as complicated as Krugman’s bias states. It was public mismanagement that led to public bankruptcy. Private individuals responded and took the best decisions they could, given the environment in which they had to live. Period.
To dig deeper is to deliberately try to deceive the public so they come to the wrong conclusions. In Latin America, for example, this will support the visions against foreign investment, free trade, or the transition of economies from agricultural to manufacturing, and then to service economies.
For Krugman, then, the problem is economic change and not the existence of the perverse incentives, created by the wrong decisions from local politicians and bureaucrats. Reality refutes his conclusions, but the wrong decisions will be replicated elsewhere if not debated.
Economic nonsense can also be furthered, even by Nobel Prize recipients. Unfortunately, there are still huge audiences, as in Latin America, where false assumptions and conclusions are well-received.