Lockdown socialism, the substance

by
Eric Kramer
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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.

1. We want people to engage in less economic activity, because we believe that will save lives.

[details omitted]

2. 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.