Freedom From Fear: A Reply To Paul Krugman

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

“Fiscal scare tactics” says the conscience of a liberal in The New York Times. The fiscal liberals are free from fear. After all, FDR had asked them to be so. But FDR may have been misunderstood because freedom from fear is not fiscal foolhardiness.

In a world of making monetary policy with government debt, raising government debt to borrow dollars for government expenditures to soak them up is the equivalent of financing government budgets through the central bank. It is a circuitous, circumlocutory charade of economic management, so obviously economists do not worry that much about the budget deficits. And this is worrisome.

It is worrisome because the rational emotion of fear, albeit the arithmetic of higher government expenditures and lower revenues in a recession causing the higher budget deficits, does not seem to be portending the rational expectation that the higher level of government expenditures, even if held constant at the current level (an improbability), will not go down once the economy improves to increase the tax revenues. This means, the budget deficit as a percentage of the gross domestic product (GDP) and the national debt as a percentage of the GDP will only continue to rise.

“So what?” might ask the conscience of a liberal. “That is the whole point. The trajectory of the policy is to increase redistribution through government by gradually making taxation more progressive, raising the top marginal rate of taxation itself to fund a larger welfare state and to tolerate a permanently higher-level of structural unemployment. Clean energy and more food production will hold inflation down as in France. It is that transition cost which is being funded by monetary policy through higher government debt. The whole world is going to go that way. So, there is little to worry about exchange rates, which are relative. First we will set in place the direction and then we will make government more efficient, as in Germany and France. Once, it settles down, perhaps in about a decade or two, the government debt will gradually begin to come down because the world will be as efficient as the enlightened federation of Star Trek. Enlightened government is better than counting on enlightened self-interest. In a corner of my heart I thank my Russian and Chinese friends Vladimir and Hu. The point of Milton Friedman was socialism. They are transitioning right and we must transition left. This is why you are not an economist, and I am. I begin my day with Keynes and you begin yours with God. More so, I am a Nobelist.”

All neat, logical system constructions, in the tradition of Hegel, sound beguiling and compelling: those on the left of enlightened governments and mixed economies and those on the right of individual human beings lighting night streets simply with their bright halos rather than street lights. The reality is that both governments and individuals are human beings. System constructions are philosophical abstractions. The enlightenment (or lack thereof) of the government is just as probable as the enlightenment of the individuals (or lack thereof) constituting it. If the government can be enlightened it logically implies that we don’t need it.

The phenomenology of the spirit is what it is, both in its nobility and in its knavery. Not its unfolding to some unknown perfect truth. Its condition is the truth. Enlightenment is coming to terms with the human condition: to be comfortable being human in its elemental commonality and rich diversity and in its capacity to will and in its incapacity to be constrained to the limitations of human will. The human condition is neither divine nor savage, but still both. It is neither the asceticism of metaphysics nor the materialism of modernity, both intending to destroy the other. America is about learning to live with it through the structural mechanisms of checks and balances to trust neither entirely the government nor the individuals who constitute it. Competition keeps people honest. And civility makes competition bearable, the purpose of competition being self-perpetuation. Let us keep it what it is. Anthropocentric morals do not apply to creation. It is what it is.

Does it matter for inflation if one prints money or debt? If the central bank has to fund government debt, monetary policy can directly engage in forward-looking industrial policy while reducing government debt. Why introduce the inefficiency and rent-seeking of a larger and more indebted government in the middle?