Friday, March 18, 2005

Krugman: enemy of the free market

Steve Antler at EconoPundit said today of Paul Krugman: "The import of his current editorial is to finally show him not as someone who questions the viability of markets as opposed to planning, but rather as an active advocate in opposition to the market mechanism." Antler contrasted Krugman's old review of "Commanding Heights" with Krugman's New York Times column this morning. On second thought, what contrast? Krugman was an enemy of the free market then, and he's still an enemy of the free market today. In his column this morning, he expressed some views only a socialist would love:
...the administration went into Iraq determined to demonstrate the virtues of radical free-market economics, with nobody warning about the likely problems...

...the attempt to turn Iraq into a laissez-faire showpiece was, in its own way, as much an in-your-face rejection of world opinion as the decision to go to war. Dogmatic views about the universal superiority of free markets have been losing ground around the world.

Latin Americans are the most disillusioned. Through much of the 1990's, they bought into the "Washington consensus" - which we should note came from Clinton administration officials as well as from Wall Street economists and conservative think tanks - which said that privatization, deregulation and free trade would lead to economic takeoff. Instead, growth remained sluggish, inequality increased, and the region was struck by a series of economic crises

Mexico's current president, Vicente Fox, a former Coca-Cola executive, is a firm believer in free markets. But his administration is widely considered a failure. Meanwhile, Mexico City's leftist mayor, Manuel López Obrador, has become immensely popular. And his populist rhetoric has raised fears that if he becomes president he will roll back the free-market and free-trade policies of the past two decades.
Winston Churchill once observed, "Indeed, it has been said that democracy is the worst form of Government except all those other forms that have been tried from time to time." I recall that Dr. Ikeda, one of my economics professors as an undergrad, said that the free market is the worst economy, except all those others that have been tried. Nobody's arguing the free market is perfect, but it's better than an unsustainable socialist system. Sure, everyone will be equal under socialism, but equally poor. In a free market, at least I have a fighting chance to get ahead. Nor is the free market the zero-sum game that Krugman and others claim it is; it's not inherent that "winners" succeed at the expense of losers.

My goodness, my goodness, where to start. First, Iraq's problems are not because of the free market, or a "failure" to implement it; the underlying social and political problems affect the function of the free market. If Krugman thinks we should have already privatized the oil fields, then to whom were we supposed to give them, and how? With no stable government, with no financial infrastructure? We needed to help Iraq establish a democratic form of government and a stable financial system, and then we could worry about privatizing the oil fields.

Let me tell a little story about a colony that seceded. It didn't formally achieve independence until seven years after its initial proclamation, and after formal recognition of its sovereignty, it was plagued by chaos for five years. There were no effective courts, just a bunch of provinces that squabbled amongst each other. There was no national treasury that minted stable currency, only the provinces' banks and private ones that tended to issue worthless paper notes. There were riots, and even one armed rebellion by farmers. Even the general who had led his nation to freedom worried that the latter signaled civil war.

The name of that country: the United States of America. Our Declaration of Independence was in 1776, but the Treaty of Paris didn't come until 1783. From 1783 until the Constitution's ratification in 1788, we had incredible chaos between the states, between the banks, and uprisings like Shay's Rebellion. George Washington was among those who feared we had won independence only to plunge into civil war. In 1786, he lamented in a letter, "what a triumph for the advocates of despotism to find that we are incapable of governing ourselves, and that systems founded on the basis of equal liberty are merely ideal and fallacious!" We had our own growing pains that threatened to tear us apart. Some might reply, "Yes, but we didn't have insurgents like Iraq does." Indeed, and despite the insurgents, Iraq moved to self-rule faster than we did. It's amazing to me that it was only 20 months from Saddam's collapse to Iraq's first post-Saddam government that they elected themselves. Whether they had help is irrelevant; all that matters is they made the transformation. As President Bush said during the debates, "It's hard work," and indeed it is. Nobody said the road to freedom was easy or bloodless, but it's worth the effort.

Notice that Krugman used one of his usual tricks: he cited an entire, diverse group so generally, yet keeping them anonymous, so that he not only ascribes "authority" to them, but puts words into their mouth if necessary:
Journalists who spoke to Paul Bremer when he was running Iraq remarked on his passion when he spoke about privatizing state enterprises. They didn't note a comparable passion for a rapid democratization.
Which journalists, and when did they speak of this? What are the article citations? Against what objective benchmark did these "journalists" base their ascertation of Bremer's "passion," and what are their qualifications to measure a person's emotional responses? Or is this like Krugman's frequent claim about unnamed "leading economists" who concur with his prediction of a "fiscal train wreck"?

Even so, it takes time. You don't build a democracy overnight. You can't erase decades of corruption and cronyism like a chalkboard, nor can you do the same to decades of Sunni-Shiite strife.

Krugman again mentioned Jay Garner. Back in May 2004, Krugman wrote,
A number of people, including Jay Garner, the first U.S. administrator of Iraq, think that the Bush administration shunned early elections, which might have given legitimacy to a transitional government, so it could impose economic policies that no elected Iraqi government would have approved. Indeed, over the past year the Coalition Provisional Authority has slashed tariffs, flattened taxes and thrown Iraqi industry wide open to foreign investors — reinforcing the sense of many Iraqis that we came as occupiers, not liberators.
The main difference between Bremer and General Garner (retired) is that Bremer is a diplomat, not a military officer. He had the diplomatic skills and political know-how to get things done, unlike Garner and other military officials. Garner later complained to the BBC and others that he had been "fired" for wanting free and early elections, in addition to opposing privatization of Iraq's oil fields. I maintain his sacking was proper. First, he was too eager for elections and didn't realize Iraq wasn't yet ready. Second, he opposed privatization.

The only people who seem to have problems with the transitional government's "legitimacy" are Osama, Zarqawi, al-Sadr, and their terrorist followers who kill Iraq civilians as easily as Iraqi police and U.S. forces. Furthermore, who is to say "no elected Iraqi government would have approved" those economic measures -- all of which are right? What's wrong with slashing tariffs, cutting taxes, and inviting foreign investment? Or is Krugman suggesting Iraq should enact high tariffs and hike taxes so those evil foreign investors won't want to deal with Iraq?

That said, on to the rest of Krugman's column. Ah, South America. What a perfect example for Krugman to cite. As an internationally renowned "expert on currency crises," he of all people should know that those crises fundamentally were not the fault of the free market, but from initial attempts to main overvalued currency pegs. When Brazil had no choice but to devalue the real in January 1999, the size of its economy guaranteed a rippling effect throughout the continent. Then in April 1999, then-Treasury Secretary Robert Rubin said the U.S. and IMF would stop making loans for the purpose of pegging currency. Those loans were what largely sustained the overvalued pegging -- they should never have been made in the first place. The inevitable crises weren't the fault of the free market, but of government and banking intervention.

Then Argentina infamously had its own problems pegging its peso one-to-one against the dollar. While that facilitated an influx of foreign investment throughout the 1990s, it brought trouble when the U.S. dollar appreciated and Brazil devalued the real. This created new ripples that spread throughout South America. Uruguay, for example, was hit hard because it depends heavily on trade and banking services with Argentina. But again, the currency crisis that precipitated the rest was not the fault of free market economics, but the fault of central bank interventionism.

Courtesy of its high degree of economic liberalization, Chile boomed in the 1990s until the Asian Crisis and its South American neighbors' economic troubles. Yet again, it had nothing to do with the free market, but a contagion effect from its neighbors' economic interventionism. However, Chile has recovered in recent years, and negotiating further Free Trade Agreements can only help it. Chile's mineral and agricultural exports will become more competitive in global markets, and so will Chilean wines, which are becoming a very important export. I think they already compete well against comparable French wines, which I feel have become overpriced in the last few years of a strong euro. If France refuses to participate in FTAs while Chile does, well, let me just say I'm the last to cry about slumping Burgundy (not just exports, but overall sales!).

Perhaps Krugman dreams of the wonderful 200% average inflation during Salvador Allende's rule. What wonderful times, with severe shortages of goods precipitated by things like nationalization of banks, lands and whole industries, all to achieve Allende's dream of collectivism. And history records the triumphs of his Marxism! Come to think of it, "My Favorite Marxist" sounds like a good biography for Krugman to pen. Or would Hugo Chavez compete for the book's subject?

Mexico's problems are again not because of free markets, but chiefly because of violations of the rule of law. Fox might believe in free markets, but his administration is a failure not because of them, but because Mexico is still saddled with political corruption after decades of PRI rule. Furthermore, Obrador's popularity with the poor is because he's been playing Robin Hood. It's a good thing that Obrador has given so much in cash handouts from the public treasuries; it's another example of how easy it is to be "generous" with other people's money. In using others' money to make himself the champion of the poor, he now enjoys popular support from the same people in the charges against him. (The cash handouts have also sparked protests elsewhere, because now the poor all over Mexico want their piece of the action.)

Currently Obrador is accused of violating a court order that compelled him to stop construction of a road, because it was on disputed land. If Mexico's Congress does strip him of immunity from prosecution, and he's convicted, that would disqualify him in Mexico's presidential election next year. If he avoids prosecution or is cleared, what would he do if he became president? Would he initiate socialist reforms like Allende did? Would he pull out of NAFTA and wreck the Mexican economy, ignoring the evidence from a decade of free trade with the U.S. and Canada?

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