Monday, May 13, 2013

Blog on Hiatus

[Update]: Things are much better and there is some real healing going on in this family, and for that I can be grateful to God. It still will be a while before I can resume the blog, as there is much repair work to be done and my family needs my complete attention.

Due to a serious family situation, I have decided to put this blog on hiatus for the time being. That is all I can say at the present time, but we do need your prayers.

Bob Murphy has been doing battle with Krugmanism for a while, so make sure you visit his blog.

Monday, May 6, 2013

Chutzpah Economics

It is nice to see that Paul Krugman learned his Yiddish as a young man, although I'm afraid that he is accusing the wrong people of having chutzpah. You see, when an economist claims that the cause of economic malaise is the lack of "enough" inflation, it seems to me that we are seeing chutzpah on steroids.

His latest column declares:
At this point the economic case for austerity — for slashing government spending even in the face of a weak economy — has collapsed. Claims that spending cuts would actually boost employment by promoting confidence have fallen apart. Claims that there is some kind of red line of debt that countries dare not cross have turned out to rest on fuzzy and to some extent just plain erroneous math. Predictions of fiscal crisis keep not coming true; predictions of disaster from harsh austerity policies have proved all too accurate.
I'm not sure what Krugman means by claiming that the world is in "austerity" when national governments across the globe have accelerated spending and especially borrowing. But then, I have to remember that according to Krugman, the difference between this recovery and other recoveries that actually were "recoveries," is the lack of spending by state governments. State governments cannot print money, and there are borrowing restrictions (state and municipal governments cannot pay back bonds by issuing other bonds -- it's called fraud). Thus, when the economy is weak, state revenues are relatively lower than they are in good times.

As anyone can see, such a situation is the result of an economic downturn, not its cause, yet Krugman insists on turning cause-and-effect upon its head, at least when it suits his point of view. Governments as a whole create little economic wealth, and instead are huge consumers of wealth. Yet, as I read Krugman, he seems to believe that the very act of spending is, in fact, a form of production. In his view, when governments borrow huge amounts of money for consumption purposes, and when governments impose taxes upon private economic production, such things are the epitome of government responsibility.

True, Krugman writes that during "good" times, governments should pay down debt, but he never explains how it is that we will sustain such "good" times for any length of time. Krugman's hostility toward private enterprise is evident (unless the private firm is being subsidized by the government and engaged in outright crony capitalism). I cannot understand how he believes that private enterprise activity could keep an economy going for more than five minutes, given the Keynesian viewpoint that private enterprise creates underconsumption.

I do need to add the following point: Krugman is right in saying that the Republican conservatives are hypocrites in the worst kind of way. The Reagan and Bush (both) administrations were profligate, and none of them were "austerians" in any meaningful way. This did not keep Progressives from claiming that they were running "austere" governments. I remember the howling from the New York Times and CBS News (especially Bill Moyers and Dan Rather) about Ronald Reagan's supposedly austere budgets, even though welfare spending grew in real terms while Reagan was president.

And who can forget the "three million homeless" hoax during the Reagan years. We were told that the spending cuts were so severe that millions of people were on the streets, out of work and living in shelters or worse. My favorite line on this came during one of the Dukakis-Bush debates when Dukakis declared, "There are three million homeless people in America, and a third of them are Vietnam veterans."

I quickly checked some sources and found that about 4.25 million people served in that war, so Dukakis wanted us to believe that nearly a quarter of Vietnam vets were on the streets. And the reason given was that the Reagan administration allegedly was spending less on public housing, as though there suddenly were three million fewer public housing units in the country.

No one is making those claims today, but the idea that the Obama administration is an "austerity" government is a howler. Furthermore, the proclivity of politicians is to spend, and Krugman wants us to believe that politicians all over the world are closely watching the "90-percent threshold" set by that space alien himself, Ken Rogoff, and then spending less.

Although Krugman's words may seem to be hyperbole, there is true method in what he is saying. No matter how much money the government borrows, prints, and spends in search of a fiscal policy that Krugman will accept, it never will be enough spending. Why? Because this spending is not going to bring about a real economic recovery, and according to Krugman's logic, the economy in a "liquidity trap" will recover only if government spends enough. The Debt Fairy will be successful only if the fairy can be given enough steroids.

On the monetary end, the economy can recover only if the Inflation Fairy is summoned and given enough money (magic) dust to break the "liquidity trap" logjam. And when will inflation be high enough? When Krugman says it is.

If this looks like heads-I-win-tails-you-lose logic, then move to the head of the line. If Krugman is claiming that it takes chutzpah to claim that governments cannot spend a country into prosperity, then he truly has redefined the meaning of that word.

You see, by invoking his third fairy, the Spending Fairy, Krugman is the one showing chutzpah. Why? He is the one who truly believes that we can totally uncouple government spending from any constraints that an economy lays upon it.

Thursday, May 2, 2013

Yes, Krugman, Empower the Inflation Fairy

Lest anyone think that Paul Krugman is an economist, his latest column bemoaning the lack of hardcore inflation presents every reason as to why he is a crank, although a famous crank. Yes, the Inflation Fairy has the answer: sprinkle magic dust and watch it turn into money, lots of money. We'll all be rich!

Let us read Krugman in his own words: this point, inflation — at barely above 1 percent by the Fed’s favored measure — is dangerously low.

Why is low inflation a problem? One answer is that it discourages borrowing and spending and encourages sitting on cash. Since our biggest economic problem is an overall lack of demand, falling inflation makes that problem worse.

Low inflation also makes it harder to pay down debt, worsening the private-sector debt troubles that are a main reason overall demand is too low.
But it gets better:
So why is inflation falling? The answer is the economy’s persistent weakness, which keeps workers from bargaining for higher wages and forces many businesses to cut prices. And if you think about it for a minute, you realize that this is a vicious circle, in which a weak economy leads to too-low inflation, which perpetuates the economy’s weakness.

And this brings us to a broader point: the utter folly of not acting to boost the economy, now.
One can surmise that Krugman really believes that if Ben Bernanke were to unload his proverbial helicopter and shower Americans with lots of money to the tune of, say, a million dollars apiece, then the economy would have plenty of demand and everyone would be rich. It would be so easy. Granted, the Inflation Fairy would have a beard and her wings would look like helicopter rotors, but she still could turn magic dust into money.

There is another reason I say Krugman is no economist, and the following statement demonstrates my point:
From the beginning, it was or at least should have been obvious that the financial crisis had plunged us into a “liquidity trap,” a situation in which many people figure that they might just as well sit on cash. America spent most of the 1930s in a liquidity trap; Japan has been in one since the mid-1990s. And we’re in one now.

Economists who had studied such traps — a group that included Ben Bernanke and, well, me — knew that some of the usual rules of economics are in abeyance as long as the trap lasts. Budget deficits, for example, don’t drive up interest rates; printing money isn’t inflationary; slashing government spending has really destructive effects on incomes and employment.
Perhaps the most important "rules" of economics to be "suspended" by a "liquidity trap" is the Law of Opportunity Cost and the Law of Scarcity, or so Krugman would have us believe. Interestingly, he wants us to believe that by the simple act of printing lots of money, government essentially is creating real wealth, as in Krugman's view, governments self-generate wealth.

For all of the Keynesians out there who believe that the real problem is "idle resources" that can be "stimulated" by government doling out lots and lots of new cash, one must remember that after the new money has been farmed out to the economy, people will act, whether they pay down debts or use it to spend on consumption goods.

However, what they want us to believe is that after the Inflation Fairy unloads her magic dust and people have gone on a spending spree, somehow the economy then will magically arise and move forward. All that was needed was some "pump priming"!

But why should that be the case. Why should the act of dumping a lot of new money on people give long-term revival to the economy? How is it that a bunch of new money the first time around would awaken the owners of those "idle resources" but not be needed for round two and beyond? Krugman writes of the economy "gaining traction," but he never explains what it means.

This last point is important, for Krugman and his followers want us to believe that after a massive round of distributing new money (and the new money always goes to those most in need), the prosperity that follows will move into ever-widening circles and spreads employment to the unemployed. In other words, Krugman wants us to believe at least a little bit more inflation will bring hope:
I wrote recently about how, by allowing long-term unemployment to persist, we’re creating a permanent class of unemployed Americans. The problem of too-low inflation is very different in detail, but similar in its implications: here, too, by letting short-run economic problems fester we’re setting ourselves up for a long-run, perhaps permanent, pattern of economic failure.
It has been a long time since an economist was publicly willing to claim that inflation would bring prosperity, give that a lot of us still remember the huge inflation that occurred around 1980, and it was not a wonder drug. (Krugman would argue that we were not in a liquidity trap, so the laws of economics were different.)

But here is the problem: over time, a new bounce in the economy becomes dependent upon yet another round of inflation. At first, inflation seems to be a miracle cure, as no doubt a bunch of new money in the hands of at least some people will make them better off relative to others. They will spend or maybe pay off some debts and be able to purchase things at prices that reflect the time before the surge of new money. (It takes a while for the money to work its way through the economy and finally push up prices, although the process of increasing prices will be uneven.)

But then what? Because it was the inflation that produced the temporary surge in activity, the only way to replicate the economic bounce is to inject another round of new money. This time, the "good" effects are not quite as good and the "bad" effects become a little more pronounced. One can understand what happens as this process is repeated time and again.

When the 1960s began, even though the economy was in a recession, nonetheless times overall were pretty good and inflation was low. As the government began to grow massively during the next decade and the American military venture into Vietnam metastasized, the government, through the Fed, turned to more and more inflation. By 1965, all silver coins were gone (although the government insisted that the new "sandwich" coins were just as valuable as the old silver ones), and by 1971, there was a monetary crisis.

The theme of Krugman's column is that inflation itself can bring prosperity to an economy languishing in a "liquidity trap." I have no doubt that a massive injection of money into the hands of people like me would have a stimulative effect -- at first. As I noted before, this would not be real prosperity, but rather a trap. Unfortunately, Krugman really does believe that inflation -- the debasing of the marginal unit of money -- is the key to a new prosperity.

And it all comes out in three words: not enough inflation. It is better spoken in two words: Inflation Fairy. Or maybe it is better spoken in one word: insanity.

Tuesday, April 30, 2013

Murphy on Rogoff and Krugman

Bob Murphy always has interesting points on his blog, and he has a couple of posts that make for good reading and thinking.

In this one, he takes a hard look at the whole kerfuffle regarding Rogoff's nonexistent endorsement of "austerity," and in this one, he exposes Keynesian Logic (an oxymoron if ever there was one) for the fraud that it is.

I would like to add that Krugman really wants us to believe that Europe has been imposing an "unprecedented" policy of "austerity," although from what I can tell, Krugman defines "austerity" as not massively increasing government spending.

Monday, April 29, 2013

The Fairy Tale of Our Time

Paul Krugman is nothing if not consistent. Once again, we are told that Kenneth Rogoff is the main reason that our economy is not roaring along like boom times, and that massive consumer spending is what fuels an economy, and that by employing the Debt Fairy and the Inflation Fairy, or, more specifically, putting them on steroids, we can lick this thing and have yet another boom.

Writes Krugman:
Families earn what they can, and spend as much as they think prudent; spending and earning opportunities are two different things. In the economy as a whole, however, income and spending are interdependent: my spending is your income, and your spending is my income. If both of us slash spending at the same time, both of our incomes will fall too.

And that’s what happened after the financial crisis of 2008. Many people suddenly cut spending, either because they chose to or because their creditors forced them to; meanwhile, not many people were able or willing to spend more. The result was a plunge in incomes that also caused a plunge in employment, creating the depression that persists to this day.

Why did spending plunge? Mainly because of a burst housing bubble and an overhang of private-sector debt — but if you ask me, people talk too much about what went wrong during the boom years and not enough about what we should be doing now. For no matter how lurid the excesses of the past, there’s no good reason that we should pay for them with year after year of mass unemployment.
Thus, the Twin Fairies should make their grand entrance:
So what could we do to reduce unemployment? The answer is, this is a time for above-normal government spending, to sustain the economy until the private sector is willing to spend again. The crucial point is that under current conditions, the government is not, repeat not, in competition with the private sector. Government spending doesn’t divert resources away from private uses; it puts unemployed resources to work. Government borrowing doesn’t crowd out private investment; it mobilizes funds that would otherwise go unused.

Now, just to be clear, this is not a case for more government spending and larger budget deficits under all circumstances — and the claim that people like me always want bigger deficits is just false. For the economy isn’t always like this — in fact, situations like the one we’re in are fairly rare. By all means let’s try to reduce deficits and bring down government indebtedness once normal conditions return and the economy is no longer depressed. But right now we’re still dealing with the aftermath of a once-in-three-generations financial crisis. This is no time for austerity.
(I can envision the debate in the halls of government around the world in which politicians declare their utter fealty to Ken Rogoff and tremble in fear at the prospect of violating his "90 percent" Rule. Yes, politicians that invariably benefit from spending schemes meant to gain votes are going to tremble in fear lest they disturb The Rogoff.)

Understand that Krugman defines "austerity" as anything short of a massive increase in government spending, with debt and inflation leading the charge, since the economy is not producing enough in order to pay for this spending with taxes. Whatever increases in spending that have come from the Obama administration, they are not enough, not nearly enough.

In Krugman's view, money coming from the sources of borrowing and creating new money is a near-perfect substitute for real wealth, as money borrowed at low interest rates essentially is "free" money and more spending will bring about more capital investment, although Krugman has made it clear elsewhere that capital investment is pretty much irrelevant in the scheme of things, except for the spending that comes with that investment.

Krugman also seems to believe that money borrowed essentially for consumption purposes really is no different than money borrowed for private capital investment. (J.M. Keynes in The General Theory surmised that changes in investment spending were what caused ups and downs of the business cycle, and those changes centered around the "animal spirits" of investors.) In the end, it is the spending and only the spending that matters.

Furthermore, as Krugman wrote last week, the real villains behind supposed austerity are the wealthy "one percent" who benefit from others being out of work. He continues today with that theme:
Is the story really that simple, and would it really be that easy to end the scourge of unemployment? Yes — but powerful people don’t want to believe it. Some of them have a visceral sense that suffering is good, that we must pay a price for past sins (even if the sinners then and the sufferers now are very different groups of people). Some of them see the crisis as an opportunity to dismantle the social safety net.
There really is no way to bridge the intellectual gap between Austrians and Keynesians. In the Keynesian view, the "social safety net," massive subsidies for "green energy," and other instances of government spending are the economic equals of private investment. Perhaps Obama said it best when he announced he was delaying action on the Keystone Pipeline and declared that an increase in unemployment benefits actually would be economically superior to investment in an oil pipeline, since new benefits (which would be financed by new borrowing) would fuel immediate consumer spending, as opposed to the spending that would accompany creation of Keystone.

(This is not an endorsement of the pipeline itself. Instead, I am demonstrating how Keynesians and fellow travelers like Obama see an entire economy in terms of nothing but current spending.)

In contrast to the Keynesian position, Bill McNabb of the Vanguard Group writes that what Robert Higgs has called "regime uncertainty" is behind the dearth of private capital investment:
Companies and small businesses are also dealing with the same paradox. Many are in good shape and have money to spend. So why aren't they pumping more capital back into the economy, creating jobs and fueling the country's economic engine?

Quite simply, if firms can't see a clear road to economic recovery ahead, they're not going to hire and they're not going to spend. It's what economists call a "deadweight loss"—loss caused by inefficiency.

Today, there is uncertainty about regulatory policy, uncertainty about monetary policy, uncertainty about foreign policy and, most significantly, uncertainty about U.S. fiscal policy and the national debt. Until a sensible plan is created to address the debt, America will not fulfill its economic potential.
Yes, Krugman derides such thinking as the "Confidence Fairy," but Krugman and the Keynesians want us to believe that as long as government borrows and spends, business investors are going to ignore the heated anti-enterprise rhetoric from the administration, and are not going to be affected at all by hostile regulators from the EPA and Department of Labor, and the new burdens of ObamaCare, not to mention all of the new taxes that Obama is demanding as part of any budget deal. Keynesians can speak all they want about businesses simply waiting for people to spend, but if they believe that the president wants to impose new policies that will negate any future profits, they are not going to invest at all.

As I see it, the biggest fairy tale of all is that government can bring back prosperity by borrowing, printing and spending and substituting Crony Capitalism for the real thing. There is a reason this economy wallows in depression, and empowering the Twin Fairies and a president who believes private enterprise is evil will magically turn around our fortunes. It is more likely that a poor maid can spin straw into gold.

Friday, April 26, 2013

Krugman's 1 Percent Fallacy

I know all readers are shocked, SHOCKED that Paul Krugman still is going off on the Reinhart-Rogoff paper, but today he ups the ante. Anyone who believes that setting off yet another unsustainable boom is not good policy actually is a people-hating moralist who sides with the Evil 1 Percent.

In other words, folks, it's Goldstein (or maybe "Scoldstein") time again. Yes, everyone knows that the way to "fix" the economy is for the government to borrow vast sums of money for consumption goods, and the spending that comes with that and printing money will give the economy enough "traction" to move on itself -- at least until the next boom runs out of steam and government has to repeat the process.

Krugman goes on to explain that anyone who might question this economic "wisdom" does so out of malevolence and (maybe) some ignorance or a false belief in some sort of economic "morality," writing:
...austerity maintained and even strengthened its grip on elite opinion. Why?

Part of the answer surely lies in the widespread desire to see economics as a morality play, to make it a tale of excess and its consequences. We lived beyond our means, the story goes, and now we’re paying the inevitable price. Economists can explain ad nauseam that this is wrong, that the reason we have mass unemployment isn’t that we spent too much in the past but that we’re spending too little now, and that this problem can and should be solved. No matter; many people have a visceral sense that we sinned and must seek redemption through suffering — and neither economic argument nor the observation that the people now suffering aren’t at all the same people who sinned during the bubble years makes much of a dent.
However, we find that this brand of economic fundamentalism really is nothing more than a dastardly plot hatched by the Evil 1 Percent (or maybe just the Evil One himself, namely Scoldstein):
What, after all, do people want from economic policy? The answer, it turns out, is that it depends on which people you ask — a point documented in a recent research paper by the political scientists Benjamin Page, Larry Bartels and Jason Seawright. The paper compares the policy preferences of ordinary Americans with those of the very wealthy, and the results are eye-opening.

Thus, the average American is somewhat worried about budget deficits, which is no surprise given the constant barrage of deficit scare stories in the news media, but the wealthy, by a large majority, regard deficits as the most important problem we face. And how should the budget deficit be brought down? The wealthy favor cutting federal spending on health care and Social Security — that is, “entitlements” — while the public at large actually wants to see spending on those programs rise.

You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do.
Could Krugman be engaging in...conspiracy theories? Read on:
Does a continuing depression actually serve the interests of the wealthy? That’s doubtful, since a booming economy is generally good for almost everyone. What is true, however, is that the years since we turned to austerity have been dismal for workers but not at all bad for the wealthy, who have benefited from surging profits and stock prices even as long-term unemployment festers. The 1 percent may not actually want a weak economy, but they’re doing well enough to indulge their prejudices.

And this makes one wonder how much difference the intellectual collapse of the austerian position will actually make. To the extent that we have policy of the 1 percent, by the 1 percent, for the 1 percent, won’t we just see new justifications for the same old policies?

This is a most interesting position he is taking. There are two sets of policies in which government policy directly enriches that "1 percent." The first involves the massive bank and financial bailouts that have been at the heart of the "austerity" policies imposed upon countries like Greece, Ireland, Portugal, and Spain, not to mention the continuing bailouts being pushed by the central banks of Europe, the USA, and Japan.

And guess what? Krugman supports the bailouts, even though he believes that they should be financed, at least in Europe, via booms, the very kind of booms that collapsed and created the financial crises in the first place. To put it mildly, Krugman demands another round of "hair of the dog" economics.

The second enrichment-of-the-wealthy policy is crony capitalism, but when David Stockman speaks out against this get-rich-by-being-politically-connected set of schemes, Krugman lambasts him for being a "scold." So, it seems that The Great One wants it both ways: cry crocodile tears about how government policies hurt the poor, and then endorse economic schemes that...hurt the poor.

What about the so-called morality play of which Krugman speaks? He is saying that Austrians believe that somehow booms are "sinful," and that if Wall Street and the rest of the economy get drunk, then it is time to hide the alcohol and everything else. No soup for you!!

Yet, what is it that Austrians have been saying? We hold that credit-fed booms, and especially the credit-fed booms that involve heavy borrowing for purchasing consumption goods, are going to run aground because they are not sustainable. The borrowing and investment patterns do not match consumer spending and saving preferences, which means that the boom runs out of steam on its own.

If the economy is to have a real recovery, then entrepreneurs must be able to find those assets that are potentially profitable and be able to move resources from lower-valued uses to higher-valued uses. But, the Krugman plan is to have government subsidize moving resources from higher-valued uses to lower-valued uses, and keep doing it until one day things magically turn around.

The housing boom crashed when it became apparent that most Americans could not afford the super-high prices created by the boom and when a wave of mortgage defaults hit the system, it went down. Krugman, apparently not appreciating the hard fact that a family making $50K a year probably cannot afford the payments on a house selling for $500K, says that trying to keep an asset bubble alive not only is economically feasible, but also the only moral policy that can be implemented.

Austrians are not calling for "austerity" for austerity's sake or because they want people to be thrown out of work, but rather because they believe the current sets of policies are not economically sustainable. The American economy cannot subsidize itself into prosperity via "green energy," nor can the economy continue to exist as a series of asset bubbles. Furthermore, while the Fed can mask the problems by purchasing financial instruments like mortgage securities in order to prop up their prices, it cannot repeal the Law of Demand or the Law of Scarcity.

And Austrians certainly are not "austerians" of the European variety. We simply are saying we don't believe in the Debt Fairy or the Inflation Fairy, and we don't need Scoldstein to convince us that we cannot rebuild an economy by having Ben Bernanke pull financial rabbits from his hat.

Krugman, on the other hand, fervently believes that even though debt piled up during the last boom, which finally ran aground, the way to create a stronger economy -- and somehow magically pay down some of the debt, at least in the future -- is for more of the same. So, who is practicing a religious fundamentalism?

Monday, April 22, 2013

All Hail the Debt Fairy! All Hail the Inflation Fairy!

In September 2008, if it had not been obvious before, it had become abundantly clear since that the borrow-and-spend party has been over for nearly five years, yet Paul Krugman is becoming even more shrill about the need to a large dose of the fiscal equivalent of "hair of the dog." Yet, governments, including that of the USA, have been attempting to appeal to the Debt Fairy and the Inflation Fairy to wave their magic wands and heal the economies with more of the same.

In his latest column, Paul Krugman combines a relatively true statement about the current state of economic affairs -- long-term joblessness is becoming chronic -- with a non-sequitur. First, he comments upon the desperate situation that has become normal for many people, and second, he then blames it on a paper published a few years ago by a couple of economists:
Well, the famous red line on debt, it turns out, was an artifact of dubious statistics, reinforced by bad arithmetic. And America isn’t and can’t be Greece, because countries that borrow in their own currencies operate under very different rules from those that rely on someone else’s money. After years of repeated warnings that fiscal crisis is just around the corner, the U.S. government can still borrow at incredibly low interest rates.

But while debt fears were and are misguided, there’s a real danger we’ve ignored: the corrosive effect, social and economic, of persistent high unemployment. And even as the case for debt hysteria is collapsing, our worst fears about the damage from long-term unemployment are being confirmed.
Understand what Krugman is saying. As long as the USA can print money and borrow from the Federal Reserve, then Americans don't have to worry about how much debt the government piles up and how much money the Fed prints. The Debt Fairy and the Inflation Fairy will sprinkle magic dust and do what no fairy before has been able to do: conjure up a real economic recovery by encouraging the very kind of economic behavior that put this country into the mess in the first place.

Lest anyone think I exaggerate, Krugman himself qualifies the points I have made:
And let’s be clear: this is a policy decision. The main reason our economic recovery has been so weak is that, spooked by fear-mongering over debt, we’ve been doing exactly what basic macroeconomics says you shouldn’t do — cutting government spending in the face of a depressed economy.

It’s hard to overstate how self-destructive this policy is. Indeed, the shadow of long-term unemployment means that austerity policies are counterproductive even in purely fiscal terms. Workers, after all, are taxpayers too; if our debt obsession exiles millions of Americans from productive employment, it will cut into future revenues and raise future deficits.

Our exaggerated fear of debt is, in short, creating a slow-motion catastrophe. It’s ruining many lives, and at the same time making us poorer and weaker in every way. And the longer we persist in this folly, the greater the damage will be.
First things first. U.S. debt today stands at roughly 105 percent of current GDP, and only about 40 percent of current spending is financed via taxation. This is not "austerity" by any definition of the word, and one can bet that the next time the debt ceiling issue comes to the fore, Congress and the president -- after yet another dog-and-pony show complete with the Usual Suspects giving their usual talking points -- will come to an agreement. This number will grow, although it won't grow fast enough for Krugman.

Furthermore, Krugman fails to point out that the Obama administration has been relentless in trying to drive the U.S. economy in a direction in which vast amounts of resources are being used to push economic frauds like "green energy" and even another housing boom. In other words, it is more of the same. The government places huge burdens upon entrepreneurs who wish to operate in a relatively free market and drives resources into destructive "Crony Capitalism," as though policies that enrich contributors to Obama and the Political Classes will translate into general prosperity.

Keynesians are fond of claiming that as long as we have "idle resources," this is a wise policy, as at some point, if the Debt Fairy and Inflation Fairy sprinkle enough magic dust, all of these "idle resources" will awaken like Snow White after the kiss from the prince and come to life again. This is an amazing claim, for it is saying that when the economy is depressed, the Law of Scarcity can be ignored.

Yes, Keynesians believe that if only government spends enough and borrows enough, that we can emerge from this morass, and that the only thing standing in the way of progress is the presence of Goldstein -- I now dub him "Scoldstein" -- telling us we need to put something in our piggy banks. We can spend our way into another boom, and when that boom collapses -- as it surely will -- we just invoke the incantations of the Twin Fairies and begin another ride into the sunrise.

Thursday, April 18, 2013

Krugman: We Need a Debt Fairy to Accompany the Inflation Fairy

Paul Krugman has become the master of picking up the stray phrase and claiming that it is standard policy. The Wall Street Journal, for example, years ago used "bond vigilantes" in an editorial warning about taking on more debt, and now Krugman wants us to think that every editorial in the WSJ repeats the same error.

Someone in the Austrian camp said that large-scale inflation could be in our future, so now every Austrian is predicting hyperinflation all of the time. And since we don't have hyperinflation, why then every aspect of Austrian Economics must be totally wrong.

Today, Krugman is claiming that an error in an influential paper written by Carmen Reinhart and Kenneth Rogoff of Harvard is responsible for "destroy(ing) the economies of the Western world." According to the paper, if a government's debt exceeds 90 percent of a nation's GDP, then economic growth will tail off "sharply." However, some researchers looking at the data have concluded that the paper's methodology was fatally flawed and that there was no real 90 percent threshold, although higher levels of debt did correlate with lower growth rates.

According to Krugman, this paper was the deciding factor in "austerity" plans for governments in the West, and since "austerity" is bad, the paper played an important role in economic destruction. However, there is only one problem with that thesis: Krugman's commentary itself undercuts the paper's influence. He writes:
For the truth is that Reinhart-Rogoff faced substantial criticism from the start, and the controversy grew over time. As soon as the paper was released, many economists pointed out that a negative correlation between debt and economic performance need not mean that high debt causes low growth. It could just as easily be the other way around, with poor economic performance leading to high debt. Indeed, that’s obviously the case for Japan, which went deep into debt only after its growth collapsed in the early 1990s.

Over time, another problem emerged: Other researchers, using seemingly comparable data on debt and growth, couldn’t replicate the Reinhart-Rogoff results. They typically found some correlation between high debt and slow growth — but nothing that looked like a tipping point at 90 percent or, indeed, any particular level of debt.
OK, here is the problem. If economists from the start doubted its accuracy, then how can one also say that this paper -- THIS paper -- had such a powerful impact that most of the political leaders of the western world fully embraced everything these economists claimed and then designed their economic plans accordingly. This just does not make sense.

The U.S. Government continues to borrow at an astounding rate, Japan is openly attempting to print jillions of yen, and the European Central Bank and the Federal Reserve System are flooding the world with euros and dollars. Furthermore, as Bob Murphy already has pointed out, the only thing Krugman and other Keynesians deem to be acceptable as economic recovery is another boom, yet it was the unsustainable boom that got us into trouble in the first place.

Does Krugman think that this time governments will be better able to manage future financial bubbles or that booms won't run aground if Krugmanites are calling the shots? Somehow, I doubt seriously that another unsustainable boom is the answer.

So, we have Krugman claiming that what the world economies needed was more debt and, thus, also more printing of money. To put it another way, what Paul Krugman is claiming is that an Inflation Fairy is not enough. No, we also need a visit from the friendly Debt Fairy.

Is Krugman's Price Wrong? My Reply on the Mises Page

I have this article today on the daily page of the Ludwig von Mises website in which I discuss Krugman's recent blog post, "The Price is Wrong."

Wednesday, April 17, 2013

Will Krugman Blame Sarah Palin for the Boston Bombing?

So far, there has not been any commentary from Paul Krugman on the bombing at the Boston Marathon Monday, and given his incendiary remarks from previous tragedies, I admit to being surprised.

When Gabby Giffords was seriously wounded and a number of others killed in the shooting in Arizona in January, 2011, Krugman made this declaration:
A Democratic Congresswoman has been shot in the head; another dozen were also shot.

We don’t have proof yet that this was political, but the odds are that it was. She’s been the target of violence before. And for those wondering why a Blue Dog Democrat, the kind Republicans might be able to work with, might be a target, the answer is that she’s a Democrat who survived what was otherwise a GOP sweep in Arizona, precisely because the Republicans nominated a Tea Party activist. (Her father says that “the whole Tea Party” was her enemy.) And yes, she was on Sarah Palin’s infamous “crosshairs” list.

Just yesterday, Ezra Klein remarked that opposition to health reform was getting scary. Actually, it’s been scary for quite a while, in a way that already reminded many of us of the climate that preceded the Oklahoma City bombing.

You know that Republicans will yell about the evils of partisanship whenever anyone tries to make a connection between the rhetoric of Beck, Limbaugh, etc. and the violence I fear we’re going to see in the months and years ahead. But violent acts are what happen when you create a climate of hate. And it’s long past time for the GOP’s leaders to take a stand against the hate-mongers.

Update: I see that Sarah Palin has called the shooting “tragic”. OK, a bit of history: right-wingers went wild over anyone who called 9/11 a tragedy, insisting that it wasn’t a tragedy, it was an atrocity.

Update: I’m going to take down comments on this one; they would need a lot of moderating, because the crazies are coming out in force, and it’s all too likely to turn into a flame war.
When the shooting turned out to have been done by a hardcore leftist with a history of mental illness, Krugman apologized to no one. Instead, he found a way to blame his political adversaries, anyway:
It’s true that the shooter in Arizona appears to have been mentally troubled. But that doesn’t mean that his act can or should be treated as an isolated event, having nothing to do with the national climate.
However, even Krugman (so far) has not blamed Sarah Palin or Ron Paul for the Boston bombing, although I suspect that if the perpetrators do turn out to be from a right-wing group, he will find a way to put it on Palin's shoulders.

I also would like to point out some words of wisdom from Jesse Walker of Reason Magazine, a person I am sure that Krugman would think of as a violent right-winger because his economic and political views do not line up with the editorial page of the NYT or the Princeton faculty. Writes Walker:
As I write, no one has claimed responsibility for the blasts. The police, meanwhile, are keeping their suspicions close to the vest. This could turn out to be a right-wing or Islamist attack, but it could easily turn out to be something completely different. A movement doesn't need to be big or famous to commit murder. It doesn't even need to have a membership larger than a single disgruntled asshole. The history of domestic terrorism is filled with figures like George Metesky, the generator wiper who was injured in a boiler explosion and denied workman's compensation, and who then spent 16 years planting bombs around New York to get his revenge. For now I have no idea who committed this crime and, more to the point, neither do any of the alleged experts speculating on television.
I have commented not only on the bombing but also the larger point that American officials have engaged in what clearly are terrorist bombings in places like Pakistan with their infamous drone strikes, including the tactic of firing a first missile, and then waiting until the "first responders" came onto the scene to deal with survivors.

I also wrote these comments, which I am sure would infuriate people like Krugman, but I believe that they should be said:
Anyone reading this post right now almost certainly does NOT know who was responsible for the despicable bombing today at the Boston Marathon. Yet, given that the USA is a hopelessly-politicized country, I am sure that accusations already are being thrown about like so much else of the ignorance that is spewed on various venues these days.

I AM sure, however, that the people at the Southern Paranoia Law Center (SPLC) are hoping, HOPING! that the perpetrators were "white supremacists" so that the SPLC immediately can send out fund-raising letters to turn this sad event into a cash cow. (And I am sure that Paul Krugman would love to be able to blame the Tea Party or maybe even Ron Paul supporters.)
I have made similar comments on my Facebook page, including a reminder not to jump to any conclusions about the "Saudi national" who was detained and (I am sure) falsely accused by police officers before they came to realize the guy had nothing to do with it. Perhaps people just need to step back and see what transpires.

Unfortunately, the USA is so hopelessly politicized that people like Krugman, Glenn Beck, the Fox News and MSNBC crews, and others are hoping and hoping and hoping that people associated with the political groups and individuals that they hate will be responsible. And no doubt, someone, someplace will find a way to blame Sarah Palin or Ron Paul.

I will add one more thing. Whoever did this thing committed a despicable act. Many of us had friends who participated in the Boston Marathon, and they had loved ones and friends with them. In 1972, when Palestinian militants engaged in their infamous massacre of Israeli athletes at the Olympic Games in Munich, I had teammates and coaches (University of Tennessee) in the Olympic Village who were placed in harm's way.

There is no political cause that justifies violence against the innocent. But I also will add that there is nothing that permits governments to attack the innocent, either. Sometimes we forget that latter point or are so enmeshed with a "cause" that we seek to find ways to justify the unjustifiable.

Sunday, April 14, 2013

Paul Krugman Hates Money

I used to think that Paul Krugman just misunderstood money, but now I realize that he really hates the stuff. Hates it.

His recent blog post on Adam Smith and Bitcoin pretty much says it all:
There have been many good pieces written on the dubious economics of Bitcoin; I especially liked this one by Neil Irwin. One thing I haven’t seen emphasized, however, is the extent to which the whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression — a retrogression that Adam Smith would have scorned.

Smith actually wrote eloquently about the fundamental foolishness of relying on gold and silver currency, which — as he pointed out — serve only a symbolic function, yet absorbed real resources in their production, and why it would be smart to replace them with paper currency....
This is not so much a defense of Bitcoin, given I have not followed it and most likely will not be following it, but I do find that his post demonstrates his disdain for money itself. Why do I say that? I say it because he actually believes that mining for gold and silver which were used as money (and for other uses, too) was foolish and wasteful.

Money is a productive asset contra Krugman, for it enables exchanges to occur that would not have happened under a pure barter system. No one things it foolish to dig for silica or for copper or to expend resources to create capital. Yet, money being productive means that one can apply a marginal cost/marginal benefit analysis to it.

Krugman, quoting Smith, argues that paper money is better because one uses fewer resources to create it, but he fails to admit that it is much easier to inflate paper money than it is gold or silver. Yes, yes, all of the Keynesians will point out the Wonder and Majesty of Inflation, and how the Inflation Fairy will save our economy if we just crank out enough dollars.

Yet, inflation lowers the value of the marginal unit of money, and enough of that will lead to the demise of money altogether. (Zimbabwean dollar, anyone?) So, Krugman is saying that in order for money to be useful, governments need to print a lot of it and debase the whole thing, and if governments debase it enough, then the Inflation Fairy will wave her magic wand and make our economy whole again.

Update: Krugman continues his Bitcoin rant in his latest column. Paper money is superior to gold or anything else:
...paper currencies have value because they’re backed by the power of the state, which defines them as legal tender and accepts them as payment for taxes.
In other words, according to Krugman, things have value because government declares they have value. Furthermore, Krugman declares that Ben Bernanke's money printing is not "irresponsible" because we have not yet had hyperinflation. While it is true that the USA has not become Bolivia in the 1980s, nonetheless we are seeing big increases in the prices of food and fuel, two things that are sensitive to monetary changes, and we are witnessing what seem to be twin bubbles in housing and the stock market.

Once again, we are seeing the Krugman insistence that the Inflation Fairy is all we need. Just print money, borrow, and spend ourselves into prosperity. So far, it hasn't worked very well.

Friday, April 12, 2013

Lust for Lying

As I have written many times before, Paul Krugman no longer is an economist, if he ever was one. Instead, he is a political operative, someone who gives partisan political rants and pawns it off as Deep Economic Thinking.

His recent column on gold and people who favor it is more of the same, and he once again impugns the character of anyone who might disagree with him on the subject. It is not enough for Krugman to have an intellectual disagreement; no, to disagree with him is to be evil:
Conservative-minded people tend to support a gold standard — and to buy gold — because they’re very easily persuaded that “fiat money,” money created on a discretionary basis in an attempt to stabilize the economy, is really just part of the larger plot to take away their hard-earned wealth and give it to you-know-who.
No doubt, the "you-know-who" would be African-Americans or some other minority. You see, according to Krugman, to favor gold as money is to be a racist, someone who hates others. (Krugman is permitted to hate and spew out hatred because he is part of the Favored Political Classes that have the NYT stamp of approval.)

Also, anyone who does not believe in Krugman's Inflation Fairy does so out of hatred, prejudice, and evil.

Furthermore, to oppose Federal Reserve money printing and its QE Forever programs is also to be racist and diabolical. Why? Because Krugman says so.

Tuesday, April 9, 2013

Intellectual Honesty and Great Britain

Bob Murphy has a post on Free Advice that deals with the intellectually dishonest way that Paul Krugman portrays Herbert Hoover and the Andrew Mellon quote, "Liquidate the farmers, etc." Krugman clearly tries to claim that Hoover followed what Mellon said to do when, in fact, Hoover was dead set against it.

(David Henderson further exposes Krugman's dishonesty in posts here and here. Because of the intellectual environment in which he operates, Krugman does not have to worry about telling whoppers, as they fit the narratives that the people who surround him hold. Why bother with the truth when the narrative is more popular?)

Krugman no doubt would argue that because the results of the Hoover presidency saw a lot of business and farmer liquidation, that Hoover somehow must have been a closet Mellonite. After all, had Hoover actually intervened in the economy, then it would not have fallen so far, right?

Actually, this post is not about Hoover. Instead, it is about Krugman's recent blog post on Margaret Thatcher and Great Britain. Krugman asks whether or not Thatcher's policies actually had any positive effect on the British economy and concludes in a backhanded way (of course) that they did not.

Krugman's "proof" is shown on two graphs, the first showing Great Britain's GDP relative to France from 1950 to the present and the second a comparison of unemployment between the two countries from 1978 to now.

Contrary to what Krugman claims, the British economy relative to France did in fact see a GDP jump in the early 1980s following a steep recession. And while Krugman admits that when Thatcher took power in Britain in 1979, the country had "huge economic problems," but does not go on to explain what was the situation: 20 percent inflation, a huge and bloated government sector, and numerous nationalized industries better known for strikes and shoddy products. Andrew Sullivan writes:
To put it bluntly: The Britain I grew up in was insane. The government owned almost all major manufacturing, from coal to steel to automobiles. Owned. It employed almost every doctor and owned almost every hospital. Almost every university and elementary and high school was government-run. And in the 1970s, you could not help but realize as a young Brit, that you were living in a decaying museum – some horrifying mixture of Eastern European grimness surrounded by the sculptured bric-a-brac of statues and buildings and edifices that spoke of an empire on which the sun had once never set. Now, in contrast, we lived on the dark side of the moon and it was made up of damp, slowly degrading concrete.
Krugman political logic demands that once a politician takes office, the economy must immediately improve, with the rate of unemployment falling. Oh, I forgot, that didn't happen with Barack Obama's presidency, but Krugman has been willing to give a myriad of excuses for his beloved president. (And don't forget that Goldstein always has lurked in the background trying to destroy the economy and undermining Obama's efforts to subsidize more "green" industries, reflate the housing bubble, and print money out the wazoo.)

Indeed, we do see an upturn in the British economy during the early-to-mid 1980s with British unemployment falling. (The interesting thing about the unemployment graph is that during the 1980s, France was governed by a socialist government, yet unemployment also rose in that country during the early 1980s. I guess Francois Mitterand must not have believed enough in government.)

Krugman also fails to point out something that is painfully obvious in the first graph, and that is the rapid decline of the postwar British economy. Now, that should surprise any Krugman fans, given the British governments (and especially the Labor governments that Krugman so favors) were seizing industries, nationalizing medical care, and printing lots of money. The government still rationed food into the mid-1950s despite the fact that the other economies in Europe already were well on the way to recovery even though many countries had received much more physical damage from warfare. (In 1976, Great Britain received a bailout from the IMF and "60 Minutes" asked in one episode, "Will there always be an England?")

Furthermore, as invariably happens under socialism, capital deteriorated, the society became even more stratified, and many enterprising Brits left the country in hopes of doing better elsewhere. The numbers are clear, and one can see steady progress upward after Thatcher took office (with the exception of the 1990 recession, which also hit the USA).

Yet, Krugman wants us to believe that most likely Britain would have been better off with the old order in place, or at least wants us to think that nothing improved in the country until the Blair government took power in the mid-1990s. (And, don't forget that Blair did not follow his labor predecessors in nationalizing everything and reimposing socialism. His policies were not much different than those of the Tories, something that Krugman would ignore, of course.)

Like all strong politicians, Margaret Thatcher had a mixed record. Yet, she steered Great Britain away from an economic course that was strangling its once-magnificent economy. Great Britain is not the world power it was more than a century ago, but neither is it spinning off into irrelevancy as it was in 1979. That Krugman cannot recognize that fact should not surprise any reader.

Saturday, April 6, 2013

Keynesians Gone Wild (or at least Unhinged)

When it comes to debating the whole issue of extending the boom via money printing and borrowing or allowing the malinvested assets to be liquidated or changed to other, more profitable uses, Paul Krugman has become unhinged (like most Keynesians). This is what Keynesians insist upon proclaiming:
  • Booms run aground because people mysteriously stop spending;
  • Some booms are bubble-based like the Tech Bubble of the 1990s and the Housing Bubble of the last decade;
  • Even though the asset prices for the things in the bubble are out-of-kilter and it is apparent that the economic fundamentals are out of balance (like trying to put people with $50K incomes into $500K houses), the boom can be continued if the government borrows, prints, and spends enough because government spending is a perfect -- actually, superior -- substitute for spending by individuals and private firms. In fact, Keynesians claim that the REAL problem is that those out-of-kilter asset prices are falling, and that is what causes the economic downturn.
(Keynesians believe that effect is cause, and cause is effect. So, if prices fall, that is what causes a recession, and the way out is to reflate those prices.)
In other words, a boom can be sustained and nurtured by the government and then one day, the economy will be so recovered that private spending can mostly make up the difference until that day when people mysteriously stop spending again.

If anyone suggests to Krugman that the above scenario is fantasy, he becomes absolutely unhinged, as he has with the publication of David Stockman's new book and Stockman's recent NYT op-ed. Of course, Krugman insists that anyone who would hold views that differ from his holds them because that person wants others to suffer and die of starvation.

The word "liquidation" seem to be like waving the proverbial red flag in front of the bull, and I address that issue in my recent article on Lew Rockwell's page. (I have an error in the opening sentence; the Greider article was published in 1981, not 1982. I have notified the page manager and hope for a correction today.)

Thursday, April 4, 2013

Borrowing and Spending: The Way to Wealth

Hey, big spenders! It's Paul Krugman to the rescue! In the aftermath of David Stockman's recent New York Times article, Krugman is assuring his faithful readers that the massive debt financing of the Obama administration's spending spree is no big deal and that it is not real debt at all, figuratively speaking.

Why? According to Krugman: "...debt does not directly impoverish us, because it’s money we owe to ourselves."

What does he mean by that?
...think about the macroeconomics; did America really put itself $30 trillion in hock to someone else? No, some Americans lent to other Americans, which is a very different issue.

In other words, it essentially is free money, and the government can engage in this financial trick indefinitely without there being any negative consequences. Essentially, what Krugman is saying is that internal bond finance (mostly by the Federal Reserve System) essentially gets rid of the Law of Scarcity. Government, through money printing and issuance of bonds, is an unlimited fountain of wealth creation, and if there is inflation with all this, all the better, according to Krugman, because inflation will help U.S. exports, creating jobs and making us wealthier. (That is Krugman's Inflation Fairy at work.)

(Gee, I wish whoever is holding my mortgage would buy into this: I don't have to repay you! Don't you see, WE OWE IT TO OURSELVES!! Any harm that would accrue by my default would be perfectly internalized into a zero-sum outcome. I gain, you lose, America is not harmed at all!)

Understand that Krugman is the most decorated academic economist of our time. His face is all over the talk shows, and he is treated with the kind of reverence in academe once reserved for someone like Einstein. Yet, his central message is this: internal bond finance of government trumps scarcity. Yes, the guy actually believes this, or at least one can say he provides the Obama administration with cover for its destructive policies.

Remember, Obama declared that unemployment payments from the government create more wealth than does an oil pipeline, and that a welfare system actually makes the economy stronger and is not an economic burden, but a provider of wealth. Yes, for all of the supposed sophistication of American Progressives (and especially the ones that worship Krugman and Obama), it seems that in the end they confuse financial trickery with wealth creation.

Wednesday, April 3, 2013

That Fax Machine Must Have Had Some Kind of Impact!

It seems that Paul Krugman's past statements continue to crop up. His 2003 call for Alan Greenspan to create a housing bubble certainly has dogged him, but something he wrote in 1998 exposes even more of his economic ignorance: He claimed that the Internet would not have much effect on commerce and the economy, or at least be no more powerful than the fax machine.

Specifically, he wrote:
The growth of the Internet will slow drastically, as the flaw in "Metcalfe's law" -- which states that the number of potential connections in a network is proportional to the square of the number of participants -- becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's. (Emphasis mine)

As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase information economy will sound silly.
At one level, his statement is understandable. There are diminishing returns to any kind of technological progress and diminishing returns to capital. Even Keynesians like Krugman can grasp the concept of the margin, even if they cannot apply that concept to money and government spending.

My sense also is that Krugman was responding to some of the "New Economy" rhetoric that was floating about at the time. (Although Democrats were claiming then that pushing the top tax rate to 39.6 percent was the real reason the economy was doing well.)

However, it is quite clear now that the Internet has had a huge impact upon the economy, and that is because it not only has changed how people receive economic information, it also has vastly changed the extent of what we would call "the market." For example, a local bookstore in Frostburg now does not have to depend upon walk-in traffic for all its revenue, as it can market its products to almost anyone on the Internet.

Like most academic economists, Krugman depends upon static models that give us the four kinds of "competition," models that over time will slowly morph into every industry turning into an intractable monopoly. Unless the government steps in to stop this inevitable slide, economic competition will disappear.

Those models were what enabled Oskar Lange and others who were debating Ludwig von Mises and Friedrich A. Hayek in what is called the "Socialist Calculation Debate." Lange and his allies were claiming that all anyone needed were the four models, and that a government, through central planning, essentially could recreate a market that would be better than what currently existed because governments could enforce those things that would better allow the economy to remain in a state of virtual perfect competition.

That is where Krugman and most other academic economists are today. They cannot fully articulate the role of private property and even prices in an economy, and they certainly cannot fully understand the role of information and even those things they call "market failures" because they cannot comprehend the entrepreneur and the economic role of the entrepreneur.

To Paul Krugman, the entrepreneur is someone who starts a business in the garage, but over time has little economic impact because all the important economic decisions are made by big companies that bear little resemblance to any competitive models. Instead, like many academic economists, he is stuck in the mentality exhibited by John Kenneth Galbraith when he likened the economy to consisting of a few monopolies that competed in a death match with labor unions. Prices don't mean anything because they are administered and because the economy does not exactly match the model of perfect competition and all its inherent assumptions.

Furthermore, Krugman's regulatory models are purely Pigovian in which the wise, omniscient regulator (if the regulator is a Democrat) knows exactly what lines of production are going to be profitable and sustainable (Industrial Policy), so the fact that the Internet could have a huge impact upon information costs is irrelevant.

In short, Paul Krugman sees the economy as a mechanistic entity that is oiled by a circular flow of money. As long as government regulators and central bankers have a free hand, that machine can go on forever, but if private enterprise gets in the way -- as it invariably does -- then disaster strikes.

Thus, a person who views the economy that way is not going to be able to understand the impact of something like the Internet, which to him is a static entity that will be giving decreasing returns to scale. His 1998 statement was his economic logic in action.

Monday, April 1, 2013

Krugman's California Fantasies (Or are They Hallucinations?)

For many years, I have written that Paul Krugman is not so much an economist as he is a political operative, but I was wrong. He is not just a political operative, but also is just another leftist who believes that government debt and government spending actually are wealth-creating things. However, his latest column on California's supposed "comeback" proves my original point that he is no economist.

California, in Krugman's view, has been the victim of Republicans who blocked tax increases and kept the state from building the Ultimate Lefty Pipedream: High-Speed Rail. Now that the Republicans no longer have any political influence or power there, the Golden State can now tax and spend itself into a glorious future, and if that future of massive government spending turns sour, I am sure that Krugman will be able to blame Paul Ryan or Goldstein or Seinfeld or Blowfeld.

Writes Krugman:
...reports of the state’s demise proved premature. Unemployment in California remains high, but it’s coming down — and there’s a projected budget surplus, in part because the implosion of the state’s Republican Party finally gave Democrats a big enough political advantage to push through some desperately needed tax increases. Far from presiding over a Greek-style crisis, Gov. Jerry Brown is proclaiming a comeback.

Needless to say, the usual suspects are still predicting doom — this time from the very tax hikes that are closing the budget gap, which they say will cause millionaires and businesses to flee the state. Well, maybe — but serious studies have found very little evidence either that tax hikes cause lots of wealthy people to move or that state taxes have any significant impact on growth.
Now, even Krugman is not quite ready to proclaim Paradise Regained, although the lack of any opposition to an accelerated tax-and-borrow-and-spend certainly should speed its arrival:
I’m not suggesting everything in California is just fine. Unemployment — especially long-term unemployment — remains very high. California’s longer-term economic growth has slowed, too, mainly because the state’s limited supply of buildable land means high housing prices, bringing an era of rapid population growth to an end. (Did you know that metropolitan Los Angeles has a higher population density than metropolitan New York?) Last but not least, decades of political paralysis have degraded the state’s once-superb public education system. So there are plenty of problems.
The fact that California has the highest taxes in the country, has a virulent anti-business governmental culture, and has rules that increase the cost of just about everything has nothing to do with it. After all, in Wonderland, higher costs translate into more spending, and more spending creates more wealth, so these "problem" to which Krugman refers actually are opportunities for more government spending, which means a brighter future.

Given the leftist fetish regarding the evils of population growth, I'm not sure why Krugman even would cite the end of such growth as a bad thing. After all, as Matt Yglesias writes in Slate:
I'm reasonably certain that California's deteriorating public services aren't really driving the declining population growth. That's because if you look at someplace in California where it would be nice to live—Santa Monica, say, or Palo Alto—it turns out to be incredibly expensive. All the best land is occupied and the people in those communities don't want it to get filled up with more density and California's environmental legislation gives them powerful tools with which to block new residents.
Given that Krugman can afford to live in places like Santa Monica or Palo Alto, and given his strong environmental credentials, I am sure that he would approve of those laws that keep the Great And Beloved Unwashed far away from himself and others who love these folks who help keep Democrats in office but who really should try to live somewhere else. But California has another problem, and for all of Krugman's Greece I Tell You! fetishes, it seems that there really is a Greece connection.

Like Greece, California has great weather, beautiful and rugged mountains, and a magic coastline. Friends of mine who decry the financial madness and out-of-control governments nonetheless do not want to leave because of the quality of life they have enjoyed there. Like Greece, California governments have run up debts that over time cannot be repaid (two of which are discussed below), and like Greece, California is part of a central currency union and cannot print its own money, and sooner or later government employees in California are going to take such a huge chunk of public wealth (as they have in Greece) that the hard choices that are inevitable will create a lot of consternation.

There are two issues that are government budget eaters in California, and while Krugman kind of alludes to one (high-speed rail), the other is even more explosive: municipal and state pension obligations that have come about because of the state's powerful government unions. Steven Greenhut has written a lot about the state's out-of-control government unions which have driven a number of municipalities to bankruptcies.

The issue is quite simple: a number of cities, not to mention state agencies, pay their unionized employees very well and have promised even better pensions. However, paying for these things is another matter, and maybe Krugman is right in that businesses and individuals will allow tax hikes to go on forever to pay for the enrichment of others, but I have my doubts.

 High-speed rail, or what Krugman calls "infrastructure," is another California boondoggle that really could manage to bankrupt the state government. The original idea was that the state, through sale of bonds, federal grants, and tax increases, would build a high-speed rail line to run between San Francisco and Los Angeles. Like all such public projects, the original cost projections started out relatively small and have metastasized into something else. (I doubt seriously that Krugman ever will write a future column about the fiscal foolishness of California high-speed rail projects if for no other reason than he actually believes that higher costs will translate into more spending which then will create more prosperity. The Keynesian Way.)

Keynesians believe that government spending creates its own wealth multipliers, so when governments promise huge pensions, fund rail boondoggles, and block the growth of businesses, they actually are making everyone better off, as though government spending has an internal generator that can create something from nothing. The Law of Scarcity, however, cannot be repealed by government no matter what Krugman declares.

Because California now has a Democrat supermajority and will continue that way indefinitely, Krugman believes that there will be nothing to stop the state and municipal governments there from internally generating wealth through tax increases, borrowing, and spending. Even if high-speed rail costs much more than it could collect in actual revenues, that is good because it will mean more spending, and spending is actually a form of wealth production.

Please understand Krugman's larger point. He is saying that the government of California can make it difficult for businesses to operate in a high-tax, high-regulation environment (except businesses that are politically-connected), and try to make up for the loss of wealth through taxation, borrowing and spending. He is saying that the government can internally produce wealth simply by spending money that first must come from other sources.

So, drink up, California! Your future is unlimited all because your politicians and some "economists" believe they can tax you into Paradise.

Update: The Atlantic has a very interesting article on California about what Progressives can learn about governance, and the Democrat that writes it, Conor Friedersdorf, says this about Krugman's California column:

In California, my home state, Democrats have dominated the capitol since roughly 1970. In the last four-plus decades, they've controlled both houses of the state legislature for all but two years. They dominate the state bureaucracy and the leadership of most major cities. And they've long dominated the vast majority of statewide offices, the governorship excepted: Since Ronald Reagan departed in 1975, it has gone back and forth between Democrats (like current and former governor Jerry Brown) and Republicans, most recently the moderate Arnold Schwarzenegger.

Despite this, Paul Krugman, the Nobel Prize-winning economist and New York Times opinion writer, has managed to write a column that proceeds as if, insofar as partisans can be blamed, Republicans are entirely to blame for the state's woes, which he thinks are exaggerated, while Democrats bear no responsibility. As a Californian who hasn't given up on his place of residence, I'm glad to see Krugman thinks there are good times ahead for the Golden State, but the analysis that precedes his conclusion is causing me to doubt him.

Not that Krugman would take notice or admit to being wrong. No, Goldstein is EVERYWHERE and controls all things, don'tcha know?

Friday, March 29, 2013

Our Children ARE the “Ourselves”

Samuel Johnson wrote that “patriotism is the last refuge of a scoundrel,” but in modern America, being “for the children” now has taken that august refuge of the rogue. Thus it is that Paul Krugman has decided to join such company as he appeals to us to think of “our children.”

Krugman doesn’t have any children, but he is such a collectivist that I am sure that he would claim as much “ownership” over my kids as I might do (although no one “owns” kids). I doubt Krugman’s concern for my children would extend to helping pay the substantial bills that accompany their presence.

The normal “cheating our children” has to do with the belief that through government, Americans of my generation (and Krugman’s too, since he and I were born in the same year) have borrowed such huge amounts of money that the debts either will be paid through inflation or through another means that will place a lot of the younger generation in poverty.

Krugman, however, sees it differently. Our “crime” against the children is not borrowing and spending beyond our present means so that we dump huge financial burdens on them in the future. No, our “crime” is that we are not borrowing and spending enough beyond our present means. That’s right; Krugman claims that by seeking to lessen the future financial burdens on our children, we are cheating them.

Why? Because, according to Krugman, if the government borrows lots of money and then spends it immediately, there actually is no effective opportunity cost. He writes:
Contrary to almost everything you read in the papers or see on TV, debt doesn’t directly make our nation poorer; it’s essentially money we owe to ourselves. Deficits would indirectly be making us poorer if they were either leading to big trade deficits, increasing our overseas borrowing, or crowding out investment, reducing future productive capacity. But they aren’t: Trade deficits are down, not up, while business investment has actually recovered fairly strongly from the slump. (emphasis mine)

He goes on to explain how the lack of current spending is depriving young people of teachers, more aid to college, and, of course, he mentions the “I” word, infrastructure. In Krugman’s view, it is a simple thing; just borrow, print and spend, and a strong economy will appear out of the mixture. Malinvestments? No problem. Just spend enough and the economy will expand to the point where there are no malinvestments.

So, there we have it. Borrow, spend, run up the credit card. We "owe it to ourselves," which means that government borrowing also manages to cheat the Law of Scarcity. Borrow now and the kids won't owe anything at all. The Inflation Fairy will do the rest. Just believe and do it for the children. For the children.

Wednesday, March 27, 2013

Krugman's Cyprus Solution: Seize Property and Print Money

In answer to the "What would you do about Cyprus if you were dictator?" question, Paul Krugman has shared his Nobel-level of economic intelligence with the rest of us, and it comes down to two actions: the Cyprus government should seize as much private property as it can, go off the euro and print its own currency, lots of it. Krugman writes:
...Cyprus should leave the euro. Now.

The reason is straightforward: staying in the euro means an incredibly severe depression, which will last for many years while Cyprus tries to build a new export sector. Leaving the euro, and letting the new currency fall sharply, would greatly accelerate that rebuilding.
He continues:
If you look at Cyprus’s trade profile, you see just how much damage the country is about to sustain. This is a highly open economy with just two major exports, banking services and tourism — and one of them just disappeared. This would lead to a severe slump on its own. On top of that, the troika is demanding major new austerity, even though the country supposedly has rough primary (non-interest) budget balance. I wouldn’t be surprised to see a 20 percent fall in real GDP.

What’s the path forward? Cyprus needs to have a tourist boom, plus a rapid growth of other exports — my guess would be agriculture as a driver, although I don’t know much about it. The obvious way to get there is through a large devaluation; yes, in the end this probably does come down to cheap deals that attract lots of British package tours.

Getting to the same point by cutting nominal wages would take much longer and inflict much more human and economic damage.
At one point he is correct in that the boom that Cyprus enjoyed by playing the role of bankster is over, kaput. (The biggest offender of banksterism, the government-owned bank Laiki, does seem to contradict Krugman's belief that government usually is a responsible entity and only private enterprise is reckless.) But the party is over, truly over, although Krugman seems to want us to believe that Cyprus can avoid consequences by engaging in yet more financial tricks and that a Cyprus with its own government-issued scrip will be just fine.

By the way, Krugman (as a true Keynesian) believes that no one will notice that by getting out of the euro and printing its own money (and converting the deposits in its banks into Cyprus-scrip) that Cyprus has gone bankrupt. In reality, everyone there still will be getting a major head-shaving. We are talking about a currency that would be as popular in world markets as the Zimbabwe dollar at the height of that country's hyperinflation. Imports would fall to near-zero, to be paid only by the euros and other currencies in the seized bank accounts.

In other words, we are not looking for a happy ending. On one side, Cyprus and its people could face the truth, take the up-front medicine, and then try to create a real economy producing things people actually might want to purchase. On the Krugman side, Cyprus goes on with its "let's pretend" game of slashing real wages through inflation and continuing the Big Lie that the only problem there is a currency problem.

My sense is that Krugman's easy solution might be less attractive than what he might predict. First, given the proclivity of the government there to seize the property of others, I doubt seriously that the government would offer a true market exchange rate when those hordes of British tourists invade Cyprus looking for the Good Deal. Instead, we will see the infamous Third World "dirty rates" that are notorious elsewhere.

Second, people who are the victims of outright theft -- and that is what Krugman has been advocating -- are not going to take their situations lightly. Tourists are not going to want to come to a place where mobs are pillaging and burning -- and robbing tourists. (Well, completing the robbery process that would start when the government cheated on the exchange rates.)

The best way to avoid a crisis is not to create one in the first place. Booms created through monetary tricks and inflation have a way of blowing up, and starting a second boom to replace the first is not as easy as Krugman thinks it is.

Robert Murphy notes that Krugman's "solution" is to "ignite a boom" in place of the boom that has crashed. Of course, Krugman does not come clean and tell us what will happen when that boom inevitably crashes. No doubt, his "solution" is to create yet another boom, but in reality, financial trickery has a way of being exposed and at some point, not only is the party over, but people who have been fed a diet of inflation become so addicted to it that they cannot and will not do what is necessary to fix their economies.

In the end, Keynesianism is not about long-term solutions. It is about monetary manipulation in hopes that something -- Anything! -- can hide the fact that inflation is destroying the economic fundamentals. But to the homogeneous-factors Keynesians, there are no fundamentals, just the printing press and government, lots of government. Krugman's Inflation Fairy turns out to be a wicked witch after all.

Sunday, March 24, 2013

Krugman Supports Capital Controls

In reading Paul Krugman for more than a decade, it seems that he has established a firm ideological pattern: Markets evil, government good. Thus, he has decided the solution for the crisis in Cyprus: capital controls.

Now, Krugman will not admit that capital controls are essentially an act of police-state theft, although that is exactly what they are. Instead, he promotes capital controls as the epitome of “responsible” government trying to beat back the evils of capitalism. He writes:

Whatever the final outcome in the Cyprus crisis — we know it’s going to be ugly; we just don’t know exactly what form the ugliness will take — one thing seems certain: for the time being, and probably for years to come, the island nation will have to maintain fairly draconian controls on the movement of capital in and out of the country. In fact, controls may well be in place by the time you read this. And that’s not all: Depending on exactly how this plays out, Cypriot capital controls may well have the blessing of the International Monetary Fund, which has already supported such controls in Iceland.

That’s quite a remarkable development. It will mark the end of an era for Cyprus, which has in effect spent the past decade advertising itself as a place where wealthy individuals who want to avoid taxes and scrutiny can safely park their money, no questions asked. But it may also mark at least the beginning of the end for something much bigger: the era when unrestricted movement of capital was taken as a desirable norm around the world.

But it gets better:
It wasn’t always thus. In the first couple of decades after World War II, limits on cross-border money flows were widely considered good policy; they were more or less universal in poorer nations, and present in a majority of richer countries too. Britain, for example, limited overseas investments by its residents until 1979; other advanced countries maintained restrictions into the 1980s. Even the United States briefly limited capital outflows during the 1960s.

Over time, however, these restrictions fell out of fashion. To some extent this reflected the fact that capital controls have potential costs: they impose extra burdens of paperwork, they make business operations more difficult, and conventional economic analysis says that they should have a negative impact on growth (although this effect is hard to find in the numbers). But it also reflected the rise of free-market ideology, the assumption that if financial markets want to move money across borders, there must be a good reason, and bureaucrats shouldn’t stand in their way.

As a result, countries that did step in to limit capital flows — like Malaysia, which imposed what amounted to a curfew on capital flight in 1998 — were treated almost as pariahs. Surely they would be punished for defying the gods of the market!

Yes, when the socialist Labor government of Great Britain following World War II was seizing property and “nationalizing” industry after industry, the government also made sure that those people who were the victims of this theft could not legally get their money out of the country. (And, as we know, the great British experiment in socialism was a disaster as the nationalized industries became famous for poor quality goods and declining productivity, leading to high rates of inflation and even an IMF bailout.)

As I read this Krugman column, I get the sense that he is claiming that governments are financially and fiscally responsible, but it is those evil people in private enterprise that are making things worse, and the only reason that they might want to get their money out of the country is that they are being selfish. So, when Argentina and Bolivia installed capital controls in the middle of their hyperinflations, no doubt Krugman would claim that it was no big deal. Hey, they had more money than ever, right?

Lest it looks as though I am exaggerating, here is Krugman in his own words:
It’s hard to imagine now, but for more than three decades after World War II financial crises of the kind we’ve lately become so familiar with hardly ever happened. Since 1980, however, the roster has been impressive: Mexico, Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina again in 2002. And, of course, the more recent run of disasters: Iceland, Ireland, Greece, Portugal, Spain, Italy, Cyprus.

What’s the common theme in these episodes? Conventional wisdom blames fiscal profligacy — but in this whole list, that story fits only one country, Greece. Runaway bankers are a better story; they played a role in a number of these crises, from Chile to Sweden to Cyprus. But the best predictor of crisis is large inflows of foreign money: in all but a couple of the cases I just mentioned, the foundation for crisis was laid by a rush of foreign investors into a country, followed by a sudden rush out.

To read Krugman, one would think that people just dumped money into a country and then took it out for no good reason, and THAT was the cause of the crises. In other words, the flow of capital was not a response to what was occurring, but rather was a cause. This would be consistent with Krugman’s statist ideology, and to be honest, I am not surprised to see him embrace the policies that once were the staple of banana republics.

Notice what never receives blame in a Krugman piece: central banks. No, in Wonderland, the only sin that a central banker can commit is not inflating enough. We are supposed to believe that the rapacious capitalists flinging their money around the globe create the financial crises and then responsible governments and central bankers must come in and clean up the mess.

It never seems to occur to Krugman that the various austerity packages that governments are imposing exist for the purpose of propping up the banks, or if Krugman actually acknowledges that fact, he then claims that such policies exist because of a mystical bout of ideology. The ties between bankers, politicians, and central bankers never are explored as though these people all operate in separate spheres of life.

I have no doubt that the vast amounts of movement of capital around the globe can exacerbate a crisis, but not create it. However, capital controls are a form of theft, period, although it is a theft that Krugman supports. He wants us to think that because Great Britain had capital controls and imposed socialism, those were the good old days, and there was no economic price to pay for such policies.

Margaret Thatcher and Ronald Reagan did not come to power because a mystical ideology suddenly appeared in books and in newspapers, an ideology that convinced people who were living in great and prosperous times that things really were terrible. When Thatcher took office, inflation in Great Britain was more than 20 percent and it was 13 percent in Jimmy Carter’s last year in office in 1980. The very policies that Krugman currently endorses came to fruition in the late 1970s. Just because he wants to rewrite history and try to convince us that it was conservative Republicans who pushed through most deregulation does not mean the guy is telling the truth.

Monday, March 18, 2013

Marches of the Non Sequitur

I really was ready to shout, "Hallalujah!" when I saw the title of Paul Krugman's latest column on the 10-year anniversary of the U.S. invasion of Iraq. When I met Krugman in 2004 at the Southern Economic Association meetings in New Orleans, we were discussing Iraq and I told him that I was afraid we would live the results of that war for the rest of our lives, and he agreed. I hated the war then and always will hate what the U.S. Government has done there.

Had he left things at that, I would have written a post filled with hosannas for Krugman's good judgment. Alack and alas, The Great One was using Iraq as a warmup for claiming that since the war was bad and the media did a terrible job in dealing with it, then any media criticism of the current federal budget deficit also is bad. Don't you get it? Media wrong then; therefore, media wrong now.

This is what the ancients once called the non sequitur (Latin for "it does not follow") in which the conclusion is not supported by the premises. If Washington was "wrong" on Iraq, then Washington certainly must be "wrong" on anything regarding the federal budget. Everyone knows that!

Even beyond Krugman's logical fallacy, there is another problem with his argument: Washington hardly is a place where "austerity" is being practiced, much less preached. The Republicans hardly were "austere" during their days of controlling all branches of the federal government and when people talk of "draconian budget cuts," they really are referring to alleged "cuts" in the INCREASE of spending. In other words, any slowdown in the rate of increase in spending is termed "austerity" by people who should know better.

Then there are statements like the following in which Krugman wants to claim that the mainstream media is on the side of "austerity": as then we have the illusion of consensus, an illusion based on a process in which anyone questioning the preferred narrative is immediately marginalized, no matter how strong his or her credentials. And now as then the press often seems to have taken sides. It has been especially striking how often questionable assertions are reported as fact. How many times, for example, have you seen news articles simply asserting that the United States has a “debt crisis,” even though many economists would argue that it faces no such thing?

To be honest, I cannot recall reading anything recently in the mainstream press recently that referenced a "debt crisis." However, I would add that the U.S. Government is not paying its debts via any methods other than financial trickery, something that cannot continue forever without serious consequences. The U.S. Government pays its debts either by borrowing more money or essentially printing the payments, neither of which is sustainable.

No, we are not in a current "debt crisis," as one might define the term. Not even the Austrians are making that claim. The Austrians do say, however, that the real financial damage that the government and the Federal Reserve System has been doing is not going to have a happy ending. Krugman and his True Believers may believe that printed money essentially is real wealth (and that ultimately is what they are claiming), but the laws of economics have a way of making themselves known, and there will come a time when Ben Bernanke has no more rabbits to pull out of his hat.