For months now, policymakers and critics have been calling this the worst economic crisis since the Great Depression. Likewise, many wonder if President Obama’s recovery plan has the ingredients to match the alleged success of the New Deal. Americans refer to the post-depression era in fondness, citing a time when the country overcame a series of seemingly insurmountable challenges to become stronger than ever before. What can we learn from the economics of that time? What can it tell us about how to resolve today’s economic concerns?
Economist Paul Krugman explains one of today’s more pressing social and economic concerns—a growing income inequality—through his understanding of the Great Depression and the culture and politics it produced. Brink Lindsey, vice president for research at the Cato Institute, argues that Krugman’s theories are correct, to a degree. However, Krugman suffers from a political bias and a longing for the “good ol’ days” that distorts his explanation of income inequality. Krugman suffers from what Lindsey terms “nostalgianomics.”
Lindsey puts his arguments in perspective by pointing out where Krugman parts from other economists. He writes, “Under the conventional view, rising inequality since the 1970s has been understood as a side effect of economic progress—namely, continuing technological breakthroughs, especially in communications and information technology.”
“By contrast, Krugman and his fellow revisionists see the rise of inequality as a consequence of economic regress—in particular, the abandonment of well-designed economic institutions and healthy social norms that promoted widely shared prosperity.”
Lindsey agrees with Krugman that “changes in economic policies and social norms have contributed to a widening of the income distribution,” but disagrees with the explanations offered by proponents of nostalgianomics, which “give a highly selective account of what the relevant policies and norms actually were and how exactly they changed.”
Lindsey points out that many government policies restrict economic development. He refers in large part to the emphasis of post-Depression policies on limiting competition. Policies limiting competition also limited the potential for growth, he explains, and when these policies were reversed and competition began to increase, inequality also began to increase.
This increase was the result of a convergence of social and political changes that Krugman does not take into account. For one, the postwar era, which Krugman sees through rose-tinted glasses, was a time of racism, chauvinism and emphasis on the group. We have become more advanced as a society—changes in immigration have allowed thousands of migrants come to the country. Many of these migrants compete for the lowest paying jobs. This competition increases the income inequality despite the fact that the lowest paying jobs are a step up for many of those who seek them.
International comparisons of per capita incomes over time usually put the U.S. in front, at least of those countries that immigrants in America migrate from.
At the same time, the country has experienced a new emphasis on individuality. This new perspective has driven the competition between employers for the best workers in the highest paying positions. This has likewise driven up the income inequality, as the best in each field are courted with higher and higher salaries.
Lindsey explains, “These dramatic changes in political economy and social norms have brought about a broad-based intensification of competition in American life. Of particular relevance to the distribution of income, the changes in question have simultaneously increased competition among less-skilled workers for employment and increased competition among employers for highly skilled workers.”
A key problem with Krugman’s explanation of post-Depression economics is his ideological opposition to modern conservatism, which clouds his analysis. As Lindsey explains, “According to Krugman, the rise of income inequality is due to the rise to political power of the modern conservative movement. Specifically, conservatives were able to exploit ‘white backlash’ in the wake of the civil rights movement to hijack first the Republican party and then the country as a whole.”
“The fact is that influences from across the political spectrum have helped shape the more competitive, more individualistic, and less equal society we now live in. Indeed, the relevant changes in social norms were led by movements associated with the left. The great civil rights movements of the 1950s and ‘60s exposed the ugliness of traditional racial bigotry and provoked a widespread move toward more enlightened attitudes about race and ethnicity.”
Just as social norms developed in a nonpartisan way, Lindsey argues, economic policy developed in a bipartisan way. He explains, “Contrary to Krugman’s vast-right-wing-conspiracy theory, liberals and Democrats joined with conservatives and Republicans in pushing for those changes.”
“Paul Krugman’s Nostalgianomics: Economic Policies, Social Norms, and Income Inequality” by Brink Lindsey is available online through the Cato Institute.
Daniel Allen is an intern at the American Journalism Center, a training program run by Accuracy in Media and Accuracy in Academia.
