Krugman on the Corruption of our Nation via Perverse Incentives

By William K. Black
April 4, 2016      Bloomington, MN

Paul Krugman April Fools’ Day column launched another attack on Bernie Sanders.  In it he announces that he, a strong Hilary Clinton supporter, is “Dad” and gets to set the rules for candidates – “it’s time to lay out some guidelines for good and bad behavior.”  This is a lot like John McEnroe giving lectures on tennis etiquette.  Two sentences later, Krugman mocks voters for Sanders in “very white states,” which is a pretty clear example of “bad behavior.”  Tellingly, Krugman is oblivious to his bad behavior.  Krugman ends with this patronizing and insulting sentence:  “Sanders doesn’t need to drop out, but he needs to start acting responsibly.”  Krugman is obviously itching to instruct Bernie to “drop out” and hand the contest to his candidate.

First, the Sanders campaign needs to stop feeding the right-wing disinformation machine. Engaging in innuendo suggesting, without evidence, that Clinton is corrupt is, at this point, basically campaigning on behalf of the RNC.

There is something quite wonderful to using false “innuendo” to falsely declare a rival candidate guilty of using “innuendo.”  But it gets better – for Krugman’s “second” basis for attacking Bernie and his staff is that they have a “conflict of interest.”

It’s important to realize that there are some real conflicts of interest here. For Sanders campaign staff, and also for anyone who has been backing his insurgency, it’s been one heck of a ride, and they would understandably like it to go on as long as possible. But we’ve now reached the point where what’s fun for the campaign isn’t at all the same as what’s good for America.

That too is a paragraph that exemplifies the true meaning of April Fools’ Day.  I’ll start with the “conflict of interest.”  Under Krugman’s idiosyncratic definition of “conflict of interest” any candidate behind in an electoral contest should drop out, or at least praise his or her opponent.  Krugman’s claim is self-refuting – and Hilary or Bill Clinton were both “guilty” of a “conflict of interest” under Krugman’s preposterous definition of that term.

The term “conflict of interest,” however, has a real meaning in political office.  Bob Rubin, for example, while acting as Bill Clinton’s Secretary of the Treasury, intervened on behalf of (then) Citicorp and Travelers Insurance’s illegal merger – by setting the wheels in gear to destroy Glass-Steagall.  Rubin immediately departed – for a lucrative position at what became Citigroup.  That is a “conflict of interest.”

Politicians who take money from corporations and their leaders, whether in the form of contributions, speaking fees, or book deals (like Speakers Wright and Gingrich) create myriad “conflicts of interest.”  Here is how one scholar taught about this process in his powerpoint slides:

Most influential approach: Grossman-Helpman

Think of politicians as maximizing weighted sum of overall welfare and campaign contributions

Contributions give an extra “weight” to organized groups

Or, as the public has aptly phrased this process for millenia – contributions “put a thumb on scale.”  Today, we say “the system is rigged.”  The scholar whose presentation I quoted is Krugman.  Krugman’s position on how contributors deliberately create a conflict of interest to sway officials’ policies is well-supported in the literature.

As Nicholas O. Stephanopoulos, an assistant law professor at the University of Chicago, put it in an article last year in the Columbia Law Review: “There is near consensus in the empirical literature that politicians’ positions more accurately reflect the views of their donors than those of their constituents.”

Krugman, over a decade ago, stressed the inherently “corrupt[ing]” influence created by crafting perverse private and public sector financial incentives designed to create conflicts of interest.

The Enron debacle is not just the story of a company that failed; it is the story of a system that failed. And the system didn’t fail through carelessness or laziness; it was corrupted.

The truth is that key institutions that underpin our economic system have been corrupted. The only question that remains is how far and how high the corruption extends.

On December 17, 2015, Krugman published a review, entitled “Challenging the Oligarchy,” of Robert Reich’s new book.  Krugman’s review makes clear that he agrees with Senator Warren and Senator Sanders’ fundamental critique that the system is in fact rigged and that the “the corruption extends” to the highest office in the land.  Krugman describes Reich’s book as urging “an uprising of workers against the quiet class war that America’s oligarchy has been waging for decades.”

Krugman endorses Reich’s critique (which Bernie shares) that the key to the success of the oligarch’s economic war on the American people is “power.”

Economists struggling to make sense of economic polarization are, increasingly, talking not about technology but about power. This may sound like straying off the reservation—aren’t economists supposed to focus only on the invisible hand of the market?—but there is actually a long tradition of economic concern about “market power,” aka the effect of monopoly. True, such concerns were deemphasized for several generations, but they’re making a comeback….

Krugman supports and explains Reich (and Sanders’) analysis that the rise of massive economic power has led to crippling political power which is used to further rig both the economic and political system for the benefit of the plutocrats – a “vicious circle of oligarchy.”

Furthermore, focusing on market power helps explain why the big turn toward income inequality seems to coincide with political shifts, in particular the sharp right turn in American politics. For the extent to which corporations are able to exercise market power is, in large part, determined by political decisions. And this ties the issue of market power to that of political power.

Reich makes a very good case that widening inequality largely reflects political decisions that could have gone in very different directions. The rise in market power reflects a turn away from antitrust laws that looks less and less justified by outcomes, and in some cases the rise in market power is the result of the raw exercise of political clout to prevent policies that would limit monopolies—for example, the sustained and successful campaign to prevent public provision of Internet access.

Similarly, when we look at the extraordinary incomes accruing to a few people in the financial sector, we need to realize that there are real questions about whether those incomes are “earned.”

As Reich argues, there’s good reason to believe that high profits at some financial firms largely reflect insider trading that we’ve made a political decision not to regulate effectively. And we also need to realize that the growth of finance reflected political decisions that deregulated banking and failed to regulate newer financial activities.

Meanwhile, forms of market power that benefit large numbers of workers as opposed to small numbers of plutocrats have declined, again thanks in large part to political decisions. We tend to think of the drastic decline in unions as an inevitable consequence of technological change and globalization, but one need look no further than Canada to see that this isn’t true.

But why has politics gone in this direction? Like a number of other commentators, Reich argues that there’s a feedback loop between political and market power. Rising wealth at the top buys growing political influence, via campaign contributions, lobbying, and the rewards of the revolving door. Political influence in turn is used to rewrite the rules of the game—antitrust laws, deregulation, changes in contract law, union-busting—in a way that reinforces income concentration. The result is a sort of spiral, a vicious circle of oligarchy. That, Reich suggests, is the story of America over the past generation. And I’m afraid that he’s right.

Krugman’s review is most critical of Reich’s book in terms of a remedy for this “vicious circle of oligarchy.”  Krugman asks, rightly, how such a corrupted system can escape the “spiral” towards ever greater corruption.  It would take someone wildly improbable who would refuse to take funds from the oligarchs and who would fundamentally transform the American economy to end the rigged system.  Under Krugman’s own logic, it would take Bernie Sanders.

If Krugman believes that Hilary has the race sewed up, why is she still taking political contributions from the oligarchs?  Under Krugman’s logic Bernie is the one acting “responsibly” – and courageously.