Why Paul Krugman Is Wrong About Social Security And Public Goods

On Apr. 10, economist Paul Krugman wrote an opinion piece called “Where Government Excels” in which he praises some Democrats who are calling for the expansion of Social Security and defends a role of government in the provision of so-called “public goods.” In this rebuttal, I will attempt to show that these ideas are unsound.

Krugman claims that “We …know that some things more or less must be done by government. Every economics textbook talks about ‘public goods’ like national defense and air traffic control that can’t be made available to anyone without being made available to everyone, and which profit-seeking firms, therefore, have no incentive to provide.” First, let us ask how it might be known that some things must be done by government. There is no logical proof that government must provide certain services, as this would require one to show that every possible effort of private enterprise to provide said services must fail. This requires one to not only examine every historical effort, but to predict every conceivable future effort. This is an inexhaustible proof by exhaustion, and therefore cannot be proven.

The specific examples that Krugman gives are national defense, air traffic control, healthcare, and retirement security. To a person who believes in some degree of central planning and has an empirical rather than rational understanding of economics, this may make sense. But let us examine the true nature of these services.

National defense is largely a myth, as nations do not exist apart from the individual people that comprise them. The valid concept is that of individual defense. The purpose of government police and military forces is not the objective protection of the civilian population, but the protection of the rulers from the civilian population, the protection of the statist system should the civilian population overthrow the rulers, and the presentation of a deterrent to rulers of other nations elsewhere in the world who might seek to take over the tax base for themselves. Moreover, individual defense is made impossible by the presence of a government because governments force their subjects to rely upon their armed forces for defense, use said armed forces to destroy any competitors who may wish to offer defense services, and force their subjects to pay taxes to fund said armed forces. All of these activities are incompatible with protecting the citizenry, as true protection from violence must include protection from violence done by the state as well, so objective defense requires anarchy.

As for the provision of military defense in a stateless society, the private sector actually has every incentive to provide it. This is a service which all people want for themselves, and which everyone except for criminals wants for everyone else in the society as well. We know that the demand for this service is very high because people are willing to endure all of the oppressions of statism just to obtain the counterfeit version of it described above. It therefore stands to reason that many people will be willing to meet this demand and be paid for doing so, with competition driving down prices far below what defense budgets of governments currently cost.

Finally, Krugman raises the “free rider” objection, that military defense cannot be provided to anyone if it is not provided to everyone. If true, then the argument must apply to governments as well, which would mean that governments can “free ride” on the military defense provisions of other governments, which fails to explain why all governments field militaries and seek a strong national defense. Secondly, a private defense agency could simply tell any aggressors who would seek to invade an area who is not under their protection. (Although without any gun control laws to stop such people from acquiring military-grade weaponry and lower costs for defensive weapons due to the free market in defense technologies, an aggressive militant group would have a much tougher time attacking the average person than they would now.) Also note that because the “free rider problem” has no solution, it is not really a problem, but a possibly negative fact of life that must be tolerated. It is not certainly negative because money spent on one thing cannot then be spent on another, meaning that eliminating free ridership by making everyone who benefits from a service pay for it will eliminate some other economic activities that were occurring. To ignore this is to commit the broken window fallacy.

The case against air traffic control as a public good is much simpler because the idea that profit-seeking firms have no incentive to ensure the safety of their customers (as well as those on the ground who may be hit by falling aircraft) is sheer lunacy. If the goal of a company is to maximize profits, then civil lawsuits and criminal investigations for wrongful deaths and injuries that occur as a result of a lack of safety precautions that reasonable people would expect to be in place will certainly be detrimental to that goal. The losses would be exacerbated by customers fleeing from less safe airlines to more safe airlines.

Next, Krugman claims that government is better than the market at providing health insurance and that while conservatives agitate for privatization, this will make healthcare less efficient and more expensive. What conservatives agitate for is not true privatization, as this would mean an end to government involvement. Instead, they seek a sort of fascism where healthcare industry leaders and government officials work together to set policies that protect each other at the expense of smaller competing companies and the average person. This fake privatization would move us in the wrong direction, as it would magnify the worst of both worlds by capitalizing risks and socializing losses as well as combining the efficiency of the market with the evil of the state. But real privatization is quite different. Striking down barriers to entry, such as the restriction on buying health insurance across state lines as well as individual and corporate licensing requirements, would give consumers more choices and thereby force companies to either provide better insurance policies or be outcompeted.

Last, Krugman makes a case for Social Security. He argues that it is necessary because people are not rational actors and therefore cannot be trusted to save and invest based on a realistic assessment of what they will need in retirement and an intelligent understanding of risk and return. But what comprises the state? Is it run by a super-intelligent race of aliens who can centrally plan everyone’s lives? Of course not. Those who wield state power are people as well, subject to the same shortcomings as everyone else. He then says that people are losing billions of dollars because investment advisors are looking out for themselves first and their customers second, but if this is a surprise to anyone who uses their services, then they are paying the price for failing to observe caveat emptor.

Some will say, and Krugman does, that people should not be at fault for saving too little and making poor investment decisions. But the essence of liberty is the freedom to take one’s own risks, reap one’s own rewards, and suffer one’s own consequences without external molestation. While Krugman is correct to say that the economy “should not be an obstacle course only a few can navigate” and “is supposed to work for real people leading real lives,” the obstacle courses that few can navigate are arranged with state power on behalf of those who can buy political favor, and this prevents the economy from working for the average person.

Social Security is not the shining example of a working system that Krugman says it is. Since its inception, it has been worse than a Ponzi scheme, as Ponzi schemes at least spare the unborn and only take money from those who willingly enter them. Since the Reagan administration, the trust fund for Social Security has routinely been looted by politicians to fund their pet projects without raising the budget deficit as much as it would otherwise be raised. This sleight of hand would not be possible if people were allowed to completely manage their own retirement funds. While Krugman claims that expanding Social Security is necessary because of the replacement of private pensions with 401(k) plans, the reality is that pension plans for life are both economically unsustainable and logically indefensible, as they amount to paying people for not producing something of value just because they once did produce something of value.

Ultimately, there is no such thing as a right to a retirement. Until relatively recently, a period of relative relaxation and unproductivity between an arbitrary age and death was unheard of unless a person had earned the means to engage in such. Those who did not earn such means either had to continue working or be cared for by other family members. With government interference, the responsibility of a particular children paying for particular parents as well as full responsibility for one’s own financial affairs were erased, thereby creating moral hazards that have led to malinvestments. Krugman asks why we should not make Social Security bigger. The short answer is that malinvestments ultimately cause recessions, and the entitlement bubble is a potential killer of the economy as we know it. The impact of the collapse of this unsustainable system will be large enough without efforts to make it even larger.

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