Paul Krugman: A Rawlsian Look at the Budget Deficit

November 29, 2011

Political economy, Political Theory


Krugman Channeling Rawlsian Principles

In the past few months, the budget deficit has been a top headline in the news.  The government has faced a near-shutdown multiple times, and the super-committee created in hopes to alleviate our debt woes failed to come to any sort of agreement by last week’s deadline.  Enter Paul Krugman, a Nobel Laureate in the field of economics who proposed his own solution to the problem Sunday in an op-ed in the New York Times.  In his article, Krugman argued for higher taxes on vary high incomes and on financial transactions.

According to the Internal Revenue Service, the top .1 percent of taxpayers in the United States collectively made over one trillion dollars during 2007.  If taxes were to have been raised for this income bracket to pre-1980 levels, $78 billion in tax revenue could have been collected that year.  By Krugman’s calculations, enforcing such a tax on the uber-wealthy of our nation could shave over a trillion dollars from the budget deficit over the next decade.

He also argues that taxing financial transactions, due to their prevalence and relative inelasticity, could raise several hundred billion dollars of revenue for the national government in the next ten years.  If anything, Krugman argues, such a tax would serve as a deterrent for many financial transactions that might be risky in nature without any sort of solid positive outlook.

Krugman’s approach to relieve the budget deficit in many ways parallels the ideas expressed by John Rawls.  Rawls was a strong advocate of fairness.  According to him, all inequalities stemmed from contingencies and luck–both of which individuals had no control over.  Because of this, Rawls was a champion of the difference principle, or the idea that all social and economic inequalities should be put to work for the least-advantaged members of society.  By Rawls’ standards, the most well-off members of society can justify their wealth by nothing more than random consequence and good fortune.  His ideas would support the implementation of a progressive tax system, even if that would mean taking significantly large chunks of money from the extra-wealthy.

Similarly, Krugman states that we would be better off if the amount of “wheeling and dealing,” as Krugman puts it, was curbed.  Krugman seemed to be implying in the article that such transactions are to no one’s benefit other than the financial institutions.  Rawlsian principles would similarly be against the completion of such transactions.

Rawlsian theory, thus, fully supports Krugman’s proposal.  I personally find it interesting that one of the most influential economists of our time–an individual whom one would think would be in favor of capitalism and the free market–would be in favor for such intervening policies.  I actually happened to come across the above image online, with a quote of Krugman himself stating that his “vision of economic morality is more or less Rawlsian.”  His New York Times op-ed, it seems, is simply an example that further corroborates Krugman’s statement.

While I personally agree with both of his suggestions, I could easily see myself looking the situation in a different light were I in the top .1 percent or if I was a part of the financial industry.  I would find it hard to part with such a major portion of my income simply because some third party thought that others deserved it more.  What do you think?  Is Krugman’s call to action justified?  Should Congress take heed of his words?  What do you think the government should do to help relieve the debt crisis?

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2 Comments on “Paul Krugman: A Rawlsian Look at the Budget Deficit”

  1. ianbaker2041 Says:

    I am a political conservative in the modern sense. I tend to believe in small government and less spending. With that said, I can accept some of what he says.

    I have nothing against raising taxes to balance the budget deficit. Leading economists on both sides of the political spectrum have pointed, definitively, to increased revenue as part of the solution. We’re talking about a very small percentage of SUPER rich Americans here, not just the well off (for my purposes, I’ll say income of $120,000 or more). I don’t have a problem with raising taxes on the wealthy. The problem is that spending cuts need to come with it.

    Sometimes more than dollars and cents, this is a matter of principle. I want a government that protects my liberty, provides a military, offers education, and deals with infrastructure. I don’t want Social Security, Medicare, Medicaid, and a host of other social programs that do cost a lot of money. Make no mistake about it-we spend a huge majority of our money on Medicare, Medicaid, Social Security, and the military every single year. I want a small government, and so I think the most obvious way to balance the budget is to start cutting programs. Increase the retirement age on Social Security. Scale back Medicare and Medicaid. Want $150 billion right now, today? Get out of Iraq and Afghanistan, and in a year, it’s ours. We overlook simple things in favor of complex tax systems that only punish those who have made good for themselves.

    Of course, I understand that my vision will not work. People rely on government programs; I get it. We can’t just take an axe to these things because too much change too quickly is dangerous. We need a balanced, bipartisan strategy. We raise taxes AND cut spending. Shared sacrifice at its finest. The rich give some in higher taxes, and the poor give some in fewer programs. That is as fair as it can possibly get. A plan to just raise taxes on the rich isn’t fair because it takes nothing from the other parts of society-just from one very small sector. It narrows a national problem into just a tiny fraction of the population, and I cannot see why a nation focused on equality and ‘shared sacrifice’ would support something like that.

    • ymsyed Says:

      I definitely see where you are coming from, but I personally don’t agree that the spending should be cut from programs so that the poor can sacrifice just like the rich. I guess I’m a little Rawlsian in thinking that the poor don’t really choose to be poor, and to punish them for being as such–in my opinion–is unfair.

      While cutting Medicare and Medicaid would save us a lot of money, I don’t think it’d be good for the overall welfare of society. The rich, in my opinion, have a higher threshold for sacrifice than the poor. Even if we imposed billions of dollars of taxes, the rich would remain relatively unscathed. On the other hand, cutting programs that the poor need would have devastating consequences for some individuals. I simply don’t see it fair to see a scenario of equal sacrifice as fair.

      However, despite all of this, I agree that–in order for anything to be done at all–a bipartisan agreement must be reached, one that would entail both revenue generation and cost cutting. While it might not be what I personally agree with, I do believe that it is the best and only chance at a solution that we can get.

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