Philosopher Kings and Fiscal Cliffs

Helga y UzielPlato had a famously dim view of democracy. He regarded politics as a craft, thought that understanding the essence of a craft is to have expertise. Plato argues that we cannot hope the multitude to achieve expertise in craft of governing. They are too easily misled by sophists. It followed, for Plato, democracy must be rejected as a just system of governance. It is “probable that origins of tyranny are found nowhere else than in the democratic regime.” (“The Republic”). A just system of government must have a philosopher king, who understands the essences of things. Translated into modern context, Plato’s view is that the only just system of government is one that is run by one or several experts in economics and public policy. The multitude is too easily swayed by propaganda. Plato was right to regard his views as inconsistent with democracy. His view that citizens are not competent to make judgments about public policy, economics and policy are areas of expertise like the physician’s, is profoundly undemocratic. So what is required for a democracy to avoid the threat of “ending in tyranny”? Many theorists have argued that democracy requires an informed citizenry that can engage in reasoned public debate about policy issues. That’s a high standard. A weaker view of requirements of democracy is defensible, namely citizens must have a reasonable expectation to recognize when a policy is in their own interests. Plato’s view is undemocratic, because he thinks even this bar is too high. The multitude will always be tricked by propaganda and false rhetoric into voting against their interests. In previous columns, I have explored how language is used to sway public opinion+evade reasoned debate. Naming a bill “The Patriot Act” is a simple example, the thought being that voters would want to re-elect politicians who supported a bill called “The Patriot Act,” even if it went against public’s actual interests. This is clear example in which we are confronted with Plato’s problem with democracy. Such uses of rhetoric pose clear dangers to our democracy that are not justified by the situation. In the arena of contemporary fiscal policy, very much in news now, Plato’s problem is particularly perplexing. Here, analogy between someone competent to engage in the decision making and a physician seems apt. It is natural to think that competent judgment about fiscal policy requires expert training in economics akin to a physician’s training in medicine. But if only experts can make the judgments here, it isn’t clear that democracy is possible. Reasonable thought and discussion over the fiscal policy faces an additional obstacle. The vocabulary to describe some of most important notions is misleading. It follows the democratic decision making about fiscal policy faces additional hurdles over and above the complexity of the subject matter. As a result, it is much less clear whether it is wrong to mislead the public in a fiscal crisis. For these reasons, recent debate about the “fiscal cliff” therefore raises a particular worrisome version of Plato’s problem (…..)



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11 Responses to Philosopher Kings and Fiscal Cliffs

  1. Professor Uziel Nogueira says: Well informed citizens, Democracy and economic policy is an interesting topic for philosophical debate. As a professional trained economist, my experience of 30 years coincides with Plato’s philosophical thinking. That is, economics is an area of expertise in which citizens are not competent to make judgment. In a democracy, Congress is the place to settle down economic policy conflicts of preserving wealth/privileges for a minority or distributing wealth and opening up economic opportunities for the majority. People can be educated about these concepts through the political process. The author is correct, words used to describe important concepts in economic policy are often misleading. The debate between a fringe group of economists saying that fiscal deficits don’t matter and mainstream economists that think otherwise is a good example. Regardless of obfuscation of concepts, the educated section of the US population is aware of three fundamental policy concepts: (a) Prosperity cannot be maintained if federal debt –closer to 100%/GDP– continues to grow indefinitely; (b) Congress faces difficult choices about future spending. If welfare programs are kept intact, military spending has to be cut and investments in education, S&T and infrastructure be curtailed. Trowing money in everything is no longer an option; (c) The business model that brought prosperity and opportunity for the majority in the past is no longer working in favor of American workers.

  2. Three years ago, a terrible thing happened to economic policy, both here and in Europe. Although the worst of the financial crisis was over, economies on both sides of the Atlantic remained deeply depressed, with very high unemployment. Yet the Western world’s policy elite somehow decided en masse that unemployment was no longer a crucial concern, and that reducing budget deficits should be the overriding priority. In recent columns, I’ve argued that worries about the deficit are, in fact, greatly exaggerated — and have documented the increasingly desperate efforts of the deficit scolds to keep fear alive. Today, however, I’d like to talk about a different but related kind of desperation: the frantic effort to find some example, somewhere, of austerity policies that succeeded. For the advocates of fiscal austerity — the austerians — made promises as well as threats: austerity, they claimed, would both avert crisis and lead to prosperity. And let nobody accuse the austerians of lacking a sense of romance; in fact, they’ve spent years looking for Mr. Goodpain. The search began with a passionate fling between the austerians and the Republic of Ireland, which turned to harsh spending cuts soon after its real estate bubble burst, and which for a while was held up as the ultimate exemplar of economic virtue. Ireland, said Jean-Claude Trichet of the European Central Bank, was the role model for all of Europe’s debtor nations. American conservatives went even further. For example, Alan Reynolds, a senior fellow at the Cato Institute, declared that Ireland’s policies showed the way forward for the United States, too. Mr. Trichet’s encomium was delivered in March 2010; at the time Ireland’s unemployment rate was 13.3 percent. Since then, every uptick in the Irish economy has been hailed as proof that the nation is recovering — but as of last month the unemployment rate was 14.6 percent, only slightly down from the peak it reached early last year. After Ireland came Britain, where the Tory-led government — to the sound of hosannas from many pundits — turned to austerity in mid-2010, influenced in part by its belief that Irish policies were a smashing success (…..) So what do we learn from the rather pathetic search for austerity success stories? We learn that the doctrine that has dominated elite economic discourse for the past three years is wrong on all fronts. Not only have we been ruled by fear of nonexistent threats, we’ve been promised rewards that haven’t arrived and never will. It’s time to put the deficit obsession aside and get back to dealing with the real problem — namely, unacceptably high unemployment.

  3. Professor Uziel Nogueira says: Over the years, Prof PK appears to have developed two models to deal with macroeconomic fiscal imbalances. One for third world economies another for Europe and the US. In the past, Prof PK was a strong support of IMF-type of programs centered in (inevitable) fiscal policy austerity to deal with unsustainable public debt in LA, Africa and Asia. He was a frequent speaker in my organization, the Inter American Development Bank in Washington DC. He argued that negative social effects of such stabilization programs -unemployment and increase in poverty – were inevitable, could not be avoided. Today, Prof PK thinks otherwise when the problem of public debt and fiscal policy is occurring among the G-7, highly indebted countries led by the US. He argues that public debt is not a big deal and austerity is causing unacceptable impact on employment and poverty. Perhaps, this two model question can become topic for Prof PK next column. Today’s column — aimed at the US public — is becoming too repetitive to read and debate.

    However, the two model question will attract a lot of attention internationally. For example, Egypt is negotiating a huge loan with the IMF. I am sure that fiscal AUSTERITY is the center of such program.

  4. Martin: Uziel, you write: “As a professional trained economist, my experience of 30 years coincides with Plato’s philosophical thinking. That is, economics is an area of expertise in which citizens are not competent to make judgment”. You may be right. However, I would add that the last 30 years of history proves conclusively that economics is also an area in which “mainstream” economists themselves are not comptent to make judgment.

  5. Professor Uziel Nogueira says: Martin, Your comment is correct. The financial debacle of 2009 was not anticipated neither by Nobel Prize winner professors nor by one of thousands of economists working in major corporations. The crisis should have humbled the profession of economists. Besides, the US-European economic crises reveal clear shortcomings of macro economic models and how economics is taught at undergraduate and graduate levels.

  6. Like many advocates of financial reform, I was a bit disappointed in the bill that finally emerged. Dodd-Frank gave regulators the power to rein in many financial excesses; but it was and is less clear that future regulators will use that power. As history shows, the financial industry’s wealth and influence can all too easily turn those who are supposed to serve as watchdogs into lap dogs instead. There was, however, one piece of the reform that was a shining example of how to do it right: the creation of a Consumer Financial Protection Bureau, a stand-alone agency with its own funding, charged with protecting consumers against financial fraud and abuse. And sure enough, Senate Republicans are going all out in an attempt to kill that bureau. Why is consumer financial protection necessary? Because fraud and abuse happen. Don’t say that educated and informed consumers can take care of themselves. For one thing, not all consumers are educated and informed. Edward Gramlich, the Federal Reserve official who warned in vain about the dangers of subprime, famously asked, “Why are the most risky loan products sold to the least sophisticated borrowers?” He went on, “The question answers itself — the least sophisticated borrowers are probably duped into taking these products.” And even well-educated adults can have a hard time understanding the risks and payoffs associated with financial deals — a fact of which shady operators are all too aware. To take an area in which the bureau has already done excellent work, how many of us know what’s actually in our credit-card contracts? Now, you might be tempted to say that while we need protection against financial fraud, there’s no need to create another bureaucracy. Why not leave it up to the regulators we already have? The answer is that existing regulatory agencies are basically concerned with bolstering the banks; as a practical, cultural matter they will always put consumer protection on the back burner — just as they did when they ignored Mr. Gramlich’s warnings about subprime. So the consumer protection bureau serves a vital function. But as I said, Senate Republicans are trying to kill it (…..)

  7. Professor Uziel Nogueira says: The creation of a Consumer Financial Protection Bureau reflects the ongoing political conflict fought in the US Congress and brought about by the financial debacle of 2009. The consumer protection agency is a small step — even though too little, too late since the financial system has already imploded — to curb the excesses of a banking system out of control. The agency is a timid attempt to level the playing field between the 99% and the 1%, between consumers and bankers-rich investors.

    Moreover, the financial crisis revealed deep seated social problems covered by a false sense of prosperity.

    The golden era in which everyone got a piece of the wealth generated in the economy is over. As far as income distribution is concerned, the US became Latin America. The US Congress is the main theater of operations for two opposite social groups. A powerful elite attempting to preserve wealth and enhanced access to economic opportunities in detriment of the middle class and the poor. Who is going to win? the 99% or the 1% crowd? If the political system continues to be rigged in favor of those with money, the outcome is already written in the wall.

  8. John Boehner, the speaker of the House, claims to be exasperated. “At some point, Washington has to deal with its spending problem,” he said Wednesday. “I’ve watched them kick this can down the road for 22 years since I’ve been here. I’ve had enough of it. It’s time to act.” Actually, Mr. Boehner needs to refresh his memory. During the first decade of his time in Congress, the U.S. government was doing just fine on the fiscal front. In particular, the ratio of federal debt to G.D.P. was a third lower when Bill Clinton left office than it was when he came in. It was only when George W. Bush arrived and squandered the Clinton surplus on tax cuts and unfunded wars that the budget outlook began deteriorating again. But that’s a secondary issue. The key point is this: While it’s true that we will eventually need some combination of revenue increases and spending cuts to rein in the growth of U.S. government debt, now is very much not the time to act. Given the state we’re in, it would be irresponsible and destructive not to kick that can down the road. Start with a basic point: Slashing government spending destroys jobs and causes the economy to shrink. This really isn’t a debatable proposition at this point. The contractionary effects of fiscal austerity have been demonstrated by study after study and overwhelmingly confirmed by recent experience — for example, by the severe and continuing slump in Ireland, which was for a while touted as a shining example of responsible policy, or by the way the Cameron government’s turn to austerity derailed recovery in Britain. Even Republicans admit, albeit selectively, that spending cuts hurt employment. Thus John McCain warned earlier this week that the defense cuts scheduled to happen under the budget sequester would cause the loss of a million jobs. It’s true that Republicans often seem to believe in “weaponized Keynesianism,” a doctrine under which military spending, and only military spending, creates jobs. But that is, of course, nonsense. By talking about job losses from defense cuts, the G.O.P. has already conceded the principle of the thing. Still, won’t spending cuts (or tax increases) cost jobs whenever they take place, so we might as well bite the bullet now? The answer is no — given the state of our economy, this is a uniquely bad time for austerity (…..)

  9. Professor Uziel Nogueira says: Mainstream macro economists like Lawrence Summers, Kenneth Rogoff and policy makers in Washington do not pay attention to Prof Krugman’s academic advise on public finances. Why is that?

  10. Last week Eric Cantor, the House majority leader, gave what his office told us would be a major policy speech. And we should be grateful for the heads-up about the speech’s majorness. Otherwise, a read of the speech might have suggested that he was offering nothing more than a meager, warmed-over selection of stale ideas. To be sure, Mr. Cantor tried to sound interested in serious policy discussion. But he didn’t succeed — and that was no accident. For these days his party dislikes the whole idea of applying critical thinking and evidence to policy questions. And no, that’s not a caricature: Last year the Texas G.O.P. explicitly condemned efforts to teach “critical thinking skills,” because, it said, such efforts “have the purpose of challenging the student’s fixed beliefs and undermining parental authority.” And such is the influence of what we might call the ignorance caucus that even when giving a speech intended to demonstrate his openness to new ideas, Mr. Cantor felt obliged to give that caucus a shout-out, calling for a complete end to federal funding of social science research. Because it’s surely a waste of money seeking to understand the society we’re trying to change (…..) The truth is that America’s partisan divide runs much deeper than even pessimists are usually willing to admit; the parties aren’t just divided on values and policy views, they’re divided over epistemology. One side believes, at least in principle, in letting its policy views be shaped by facts; the other believes in suppressing the facts if they contradict its fixed beliefs. In her parting shot on leaving the State Department, Hillary Clinton said of her Republican critics, “They just will not live in an evidence-based world.” She was referring specifically to the Benghazi controversy, but her point applies much more generally. And for all the talk of reforming and reinventing the G.O.P., the ignorance caucus retains a firm grip on the party’s heart and mind.

  11. Professor Uziel Nogueira says: Prof PK and his unrelenting criticism of the GOP raises an interesting question. The last presidential election showed a GOP hostage of radical right wing elements, lacking analytic thinking and good sense. The Grand Old Party became the Likud Party of America representing a sizable but diminishing segment of the electorate. The GOP is at a crossroad. Either it moves back to mainstream politics or continues to be an extreme right party. One thing for sure. The dynamics of the political game favors the Democrat Party after Obama’s reelection. The proposed reform of immigration policy is a good example. The growing Latin electorate is a sure vote for Democrats from now on.


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