Lockdown socialism, the substance
Arnold Kling writes (my bold):
Yesterday’s post on lockdown socialism was unusual for me, in that it was not aimed at persuading someone who might disagree. Let me approach the topic by trying to make the best case for the other side.
If I were a lockdown socialist, I would argue as follows.
- We want people to engage in less economic activity, because we believe that will save lives.
- Because we want everyone to comply with lockdowns, we have to make sure that they do not suffer privation. Therefore, we have to send checks to every household so that they can afford necessities, we have to make sure that people are not evicted from their homes for failure to pay rent or mortgages, we have to bail out key industries, we have to protect banks from failure, we have to make sure that hospitals obtain funds, and we have to compensate state and local governments for their expenses and the revenue shortfall that will fall on them from lower tax collections.
Assuming that this is a fair steel-man argument, here are my counter-arguments.
I am more worried about (2) than (1). That is, we might need to continue the lockdowns, but we absolutely have to stop the socialism.
I am going to skip Kling’s argument against the lockdown and focus on his argument against “socialism”. Here is his brief against socialism:
Even so, there will be sharp declines in some industries, notably travel, tourism, and mass-audience entertainment. That gets me to the socialism issue.
To deal with economic dislocation, what we need most is capitalism. That is, the signals from prices, profits, and losses, will get people out of patterns of trade that are no longer viable and into patterns of trade that are sustainable.
I have proposed offering loans to every household and business so that those that are still viable can resume operation. I also favor giving relief to particularly hard-hit households, provided that the relief is paid for by tax increases on the rest of us.
The socialism that I object to consists of
–rewarding people and businesses who do not build up reserves during good times.
–not being explicit about the tax increases that are needed to provide relief, instead trying to pretend that everyone is getting a check and no one is incurring any liability
–putting the Fed in charge of capital allocation.
In 2008, a relatively minor sector of the economy–housing–brought the entire financial system to its knees. That was because we had evolved a system of privatized profits and socialized risks that was bound to be fragile. Instead of changing that system, we reinforced it with bailouts. And we are doing the same thing now.
When we provide relief to households that need it, there is no reason not to increase taxes on the rest of us (or to reduce government spending elsewhere). We do not need any more deficit spending for “stimulus.” Our economic challenge is not a lack of spending. It is the need to shift workers who have been dislocated by the crisis into more viable economic activities.
Finally, as Luigi Zingales and John Cochrane have pointed out, the Fed is now doing capital allocation. That is socialism by any definition.
There is at least a gesture at an economic argument against the federal government’s response to the economic crisis here. I will return to that below, but first a few general points.
First, what the Federal Reserve is doing is not “socialism by any definition”. There is no Annual Plan or Five Year Plan in the United States. There is no GOSPLAN. There is no ratchet effect. Firms do get bailed out in economic crises (a major concern of Kling’s), but this is nowhere near equivalent to the soft budget constraints firms faced under real socialism. If Kling wants to argue against the Fed’s lending activities on the merits, that’s fine, but to suggest that what the Fed is doing is unacceptable because it is “socialism” is not intellectually serious.
Kling says that he favors giving relief to “hard-hit households” but only if it “is paid for by tax increases on the rest of us.” Here is what Tyler Cowen says about this style of argument:
Another conservative and libertarian vice is come up with some better means of helping people — usually involving markets — and if that doesn’t happen, to be content with doing nothing.
I would add two points. First, Kling’s unwillingness to compromise is not politically neutral. Suppose that Republicans do not favor expanding unemployment insurance, and Democrats do, but neither party is willing to raise taxes during an economic collapse triggered by a pandemic. By insisting that expanded unemployment insurance is only acceptable if it is bundled with a tax increase, Kling is de facto siding with the Republicans, but he hides his partisanship behind his obscure reference to “Lockdown Socialism” and his uncompromising moral purity.
Second, economic conservatives frequently like to claim that, appearances to the contrary notwithstanding, they are deeply concerned about the welfare of the poor and disadvantaged. However, when libertarians refuse to support aid to the poor that deviates from what they consider to be ideal, this suggests that they do not put much weight on helping the poor, relative to whatever other moral issue they believe is at stake. In Kling’s case, his unwillingness to compromise on taxes suggests he does not really care very much about the hardships caused by the current economic crisis.
Finally, let’s look at Kling’s economic arguments. I see three. First, Kling denies that we need stimulus spending. This is certainly debatable. Even though the economic collapse is not due in the first instance to a traditional demand shock, it seems likely that the initial shock will lead to a drop in consumer and business spending, and to a decrease in exports, and that government efforts to maintain spending may well be justified. Of course, this hardly settles the question of whether we need stimulus spending (to be clear, I think we do), but Kling says nothing of substance on this question.
Second, Kling claims that “what we need most is capitalism”, so that price signals will re-allocate workers and other resources to new pursuits “that are sustainable”. This is also a highly debatable claim. Arguably, the allocation of resources we want after the pandemic ends is pretty close to the allocation we had before the pandemic began, and our goal should be (in addition to providing people with income support) to prevent too many bankruptcies of small businesses to avoid disrupting valuable relationship-specific investments (avoiding bankruptcies of large businesses is arguably less important, because the bankruptcy system will keep existing firms intact). Preserving businesses will, hopefully, make it easier for the economy to come back to life when the epidemic recedes. We can debate how best to do this, but Kling gestures towards a highly controversial liquidationist position without actually making a serious or substantive argument to defend it. (Kling is willing to let the government make loans to households and businesses. I am not persuaded of the merits of his proposal, but it seems to be another case of Kling’s “my way or the highway” approach to policy advocacy – we can preserve businesses as long as we do it in his preferred way.)
Third, Kling seems to believe that we need to avoid bailing out firms and households who took on too much debt and thus made themselves excessively vulnerable to economic shocks. Bailing out these bad actors only encourages the type of debt-fueled risk-taking that turns shocks into crises. There are some economists who argue for this position, but it is highly controversial and (I believe) a minority position among economists even if it is limited to preventing moral hazard in bank lending and capitalization, but Kling believes it should be extended to all firms and (apparently) even to households. Again, if Kling really believes that millions of low-income people should be allowed to fall into destitution and homelessness to ensure that they save more money in the future, he is free to argue for this position on the merits. He doesn’t do that, even in his so-called “steelman” argument.
Kling started out by ridiculing a majority of Americans for favoring something he called “lockdown socialism”. It turns out (as far as I can see) that his main complaint against the policies he opposes is that they encourage people not to save enough, or to take on too much debt. If Kling wants to argue for that, fine, but this highly debatable moral hazard argument bears no relationship to the inflammatory way he framed lockdown socialism. That was gratuitous.
Kling is a total ah living in his Galt’s Gulch bubble.
“The socialism that I object to consists of
–rewarding people and businesses who do not build up reserves during good times.”
Yeah, for some businesses and some people this may make sense. However, for the vast majority of people and businesses it is simply not possible. It only takes a second to actually look up income levels for people and businesses, but that would run Kling the risk that he is totally clueless about the world and simple math.
Kling doesn’t understand the origin of “socialism” , nor it’s germanic tradition. He just slobbers like many glibers do about odds and ends of the bourgeois states myriad of arms.
Wouldn’t a logical extension of his argument that the virtuous companies and individuals save in time of plenty against future hardship be that the government should *increase taxes* in good times to pay off the debt and raise a surplus against the possibility of a future pandemic?
Asking for a friend.
“seven years of abundance in the land of Egypt followed by seven years of famine. Joseph recommended that ‘a discerning and wise man’ be put in charge and that food should be collected in the good years and stored for use during the famine.”
I do not believe we have found a wise and discerning man yet. Instead during the state famine periods, Georgia cuts unemployment aid from 22 weeks to 14 weeks. No rainy day funds and just low taxes feast or famine.
Joel: the countercyclical fiscal policy you suggest is pretty standard fare for mainstream economists . . . but not sure what Kling would say about this . . . he seems to be skeptical of Keynesianism, so maybe he would prefer the government to balance its budget every period . . . I just don’t know.
A key issue with the “you should have saved” argument for poorer Americans is that the assistance they depend on such as SNAP is tied in part to not having savings. Even if they had the ability to save they get punished for it.
countercyclical fiscal policy in a pandemic doesn’t work so well. Worrying about a economy now is sorta oxymoronesque. Nor is there savings to be had in capitalism. Business as the aristocracy started in the 16th century as they began their treat from governing and the lands turned into Agribusiness, is financed by debt. It was debt in 1700. It was debt in 1900. It was always debt. The truth is, the economy was showing problems last fall. Subprime and nonbank loans were falling which is usually a bad sign. Everything including New Deal’s falsetto Housing Boom was a Virus pre-driven mirage created by Virus prepping starting in December. Companies tried to lock in sales and products before the pandemic hit globally. I saw 5 areas that were leading to recession:
1.Obama’s tech/software boom had run out of gas. The planned decrease in investment out west was the first since the last recession and it would have negatively impacted 2020 growth.
2.Republican attempts at reigniting mining after the 2015-16 bust created a mismatched allocation which was going to drive down oil prices below 50$ decreasing growth there at a faster rate.
3.Trump’s bubble jumbo mortgages were done as well. The number of bad loans giving out by nonbanks with their balance sheets struggles was already showing signs of strain in November 2019. Most of it, likewise, out west and in California especially.
4.Long running structural issues with commercial Real Estate was coming to a head. Empty lots and poorly performing bonds was a growth killer over the course of 2020.
5.Subprime loans began cratering in October of 2019, much like many loans, it doesn’t show up into numbers until about 6-12 months later. Indeed, by spring it would have been a early signal.
Covid 19 just piled everything together. Instead of a recession starting in November 2020 as the models suggested and basically being a 2021 event, it got a head start. With the shutdown bailouts, the shutdown basically will be irrelevant by January 2021 unless short term interest rates spike with a buyer shortage. All damage left will be cyclical and coming for years.
It is bad enough we end up reading your comments. What makes it even worse is when you come up with things that are not even remotely true.
Why do you bother?
“…Kling seems to believe that we need to avoid bailing out firms and households who took on too much debt and thus made themselves excessively vulnerable to economic shocks.”
This is a standard argument trotted-out by what I call evangelical economists. It is based on the medieval notion that only the truly worthy will succeed and those who fail deserve their fate. Kling’s argument is actually the corollary which posits that only those who are truly worthy should receive assistance in times of trouble. All of this is, of course couched in pseudo-intellectual doublespeak: in this case “too much debt” and “excessively vulnerable”. In an economy based upon debt, does he bother to define what too much debt might be? In an economy that pushes just-in-time business relationships that rely on fragile supply chains does he bother with what constitutes excessively vulnerable? WHY OF COURSE NOT just believe it’s true! He’ll know it when he sees it.
I’m not going to worry about lockdown socialism while fascists are storming state legislatures with guns and bulletproof vests. So much for law and order.
well, i’d worry a little more about lockdown socialism…it puts people in the position of going to jail, or being shot by the police if they are outside their house without the permission of “the rulers” if it weren’t for the fact that now that talk about ending the business closures is causing people to forget about “social distancing” which is only sane in a time of plague.
as for Kling, he doesn’t seem to understand the difference between a person and a bank. a bank can and should keep reserves. people should, but most people can’t… certainly not large enough reserves to weather a long recession.
what i suggest… and ask those who know if it is possible… is that the government become the “saver of last resort”(largely because it can print money even when it can’t borrow it. Then, businesses which are not necessary (food mostly) and cannot be run safely (without actual intelligent planning and adaptation) during a pandemic, can be closed. The laid off workers, and even the owners, can get unemployment benefits sufficient for necessities… i’ll lave it to the experts to decide if rent is a necessity or if landlords should collect unemployment for the duration.
Then there is no reason not, and good reason to, tax those still employed enough to pay for the unemployment benefits of those unemployed… while paying the workers at least sufficient to oompensate for their risk as well as the fact that they have to show up to work (sufficiently more, that is, than unemployment benefits.
i am not terribly interested if this is socialism or just saving capitalism during a time of war (against the bug). i am interested if the mechanics can be made to work. without worrying overmuch about moral hazard.
most people would rather work than be unemployed. you would think a capitalist would understand that…. or course they’d have to offer a wage people would be willing to work for if they were not otherwise afraid of starving.