Paul Krugman on zombie Reaganism

Today Paul Krugman has an op-ed in the NYT asking why Reaganism, which he defines as "an ideology that says government intervention is always bad, and leaving the private sector to its own devices is always good," continues to dominate Washington policy debate even though events of the last few years have done so much to discredit it.

He has a point, but also is missing a point.

How, why, and when markets work or don't work is theoretically well understood, and we've learned in the last few years that market failure is more pervasive than the academic consensus held a decade ago. And he is right to label the financial crisis as Exhibit A, whether one primarily blames corporate governance failures within a rational behavior framework for individuals or thinks the framework's direct limitations were more crucial.

But he leaves out the other side of the horse race between market and government solutions that is crucial to evaluations of the proper size and scope of public sector decisionmaking. That is, while pervasive market failures call for government intervention, pervasive defects in political decisionmaking call into question how much benefit to expect in practice from government intervention.

Trained as a policy-oriented economist rather than a political scientist, Krugman has a view as to what sorts of government interventions could address market failures and lead to better outcomes. His approach to politics is to hope that making good arguments and supporting (while also exhorting) the relatively good guys against the really bad guys will lead to a close enough approximation of the policies he advocates for good to result overall. If you are arguing "We should do X" and your analysis is right (X if done correctly would have good effects), that may seem to be the end of it. But in the long run one also needs a political theory of how discretion will be exercised in practice.

Consider the hands-off non-regulation of new financial products that Krugman decries. Suppose we agree that the regulatory approach he advocates, if adopted and vigorously enforced 10 years ago, would have staved off the financial collapse. But now let's suppose that the approach was already in place but we had Greenspan, the Bush Administration, and for that matter the Eastern Democrats in Congress who were tight with the financial firms calling all the shots. There's a well-known theory of regulatory capture suggesting that the regulators end up serving their "constituents" rather than the diffuse public interest. Krugman's answer, a perfectly understandable one for someone playing his role, is simply: let's demand that they do the right thing, hold their feet to the fire, put in good people, etc. Keep on fighting and don't give up the ship.

But from a broader perspective one does have to think about market failure versus government failure. And one important intellectual force keeping the "zombie" of Reaganism alive is all too well-founded skepticism about the political process, enhanced pretty much every day one reads the papers. It's hard to come up with good theoretical grounds for expecting good things to happen, even if one can identify (and fight for) policies that would have good effects.

Case in point is the public option on health insurance. Krugman today notes the view expressed by Democrats such as Senators Conrad and Nelson that, if the option were available and people chose it over private insurance, this would be "a self-evidently bad thing, rather than ... what should happen if the government plan was, in fact, better than what private insurers offer."

Well, we know (as does Krugman) where Conrad and Nelson are coming from on this. But in fact the popularity of publicly provided health insurance would be normatively ambiguous until we understood more about how it was being run and why it was proving popular. One possibility is that the genuine cost savings proponents claim such a program could provide would be operating. A second possibility is that it would be heavily enough subsidized to offer a better price. Maybe that's fine too, but it raises a different set of issues. A third possibility, by the way, is that the insurance companies would make sure it was run in order to fail.