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Paul Krugman Emphasises Public Choice; Pity He Doesn't Do That More Often

Paul Krugman’s absolutely correct in his column today: for wealthy nations war just isn’t a way of making money, as it arguably used to be in more primitive times. The damage that is done by anything even vaguely approaching modern weaponry is just too great for it to be even possible to recoup that expense through whatever it is that can be conquered.

That’s not, of course, to say that war is always a losing game. Imagine that someone insisted that they were coming to enslave us, kill all the men, rape all the women and then impose an entirely foreign governance upon us. Roughly the deal the Mongols offered those they attacked for example. It could well be valid to resist such an overture, even if in stricter economic terms that’s not going to pass the accounting test.

Krugman’s also correct in this:

The larger problem, however, is that governments all too often gain politically from war, even if the war in question makes no sense in terms of national interests.

Recently Justin Fox Fox of the Harvard Business Review suggested that the roots of the Ukraine crisis may lie in the faltering performance of the Russian economy. As he noted, Mr. Putin’s hold on power partly reflects a long run of rapid economic growth. But Russian growth has been sputtering — and you could argue that the Putin regime needed a distraction.
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Similar arguments have been made about other wars that otherwise seem senseless, like Argentina’s invasion of the Falkland Islands in 1982, which is often attributed to the then-ruling junta’s desire to distract the public from an economic debacle. (To be fair, some scholars are highly critical of this claim.)

And the fact is that nations almost always rally around their leaders in times of war, no matter how foolish the war or how awful the leaders. Argentina’s junta briefly became extremely popular during the Falklands war. For a time, the “war on terror” took President George W. Bush’s approval to dizzying heights, and Iraq probably won him the 2004 election. True to form, Mr. Putin’s approval ratings have soared since the Ukraine crisis began.

We can add to that series of examples nearly ad infinitum. The point that’s being made here is what is usually termed “public choice” economics. The point being that those in government might make choices for the rest of us that are based not actually on what is good for the public but rather what is good for those doing the choosing. What Krugman’s describing there is a limited and special case of the wider phenomenon, the decision over whether to go to war or not. But it’s one of the standard libertarian (and classical liberal) critiques of government as a way of doing things that this is pervasive all through the decisions made by anyone with any power at all. And that’s a point that Krugman rather tends to downplay, sadly.

A trivial example might be the vast pensions that public sector workers get: the costs of these come decades down the line when the careers of the politicians that agreed them are long over. So, said politicians get to have the support (or at least the absence of strikes by) the public sector unions without actually having to find the tax money in the here and now to buy them off. Eventually of course this turns into Detroit. The benefit of that public choice goes to the insiders in government, the cost is borne by the general public in some later time period.

Public choice would also be a useful explanation for why the laws on insider dealing are different for members of Congress than they are for the rest of us. And we can even see signs of it in macroeconomics, something which is rather more Krugman’s field.

Think back to the stimulus: there’s very modest theoretical support for the idea that spending more money is a better way of providing fiscal stimulus than simply cutting taxes and letting people spend more of their own. Indeed, as Keynes himself came to agree, cutting payroll taxes is something that would act a great deal more quickly in producing stimulus than any other possible method. But you’ll certainly recall the entire political class insisting that if there was going to be stimulus then it had to be from greater spending. No, no, just had to be: the public choice reason being that politicians with $800 billion to spend can buy an awful lot of interest groups for the next electoral cycle.

Now that’s not to say that they did (although some of that spending quite obviously was) but we can see how the interest group of cynical politicians (as if there were any other kind) might well manage to convince themselves that this is so. Whether or not stimulus was needed, whether or not FICA tax cuts would be a better idea or not, public choice gives us an insight into why the outcome, as decided by politicians, is almost always going to be that politicians get more of our money to spend.

As I say, Krugman’s almost certainly correct on this in military matters. It’s just a pity that he doesn’t make more of that same point more generally. Our rulers often do things that benefit our rulers, not us.

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