Krugman-in-Wonderland

Jobs, jobs and wealth creation

2012-01-26T23:19:00.000-05:00

Mainstream economists like Paul Krugman have an administrative view of an economy, as though it can be managed centrally. All that matters in this viewpoint is the number of "jobs" that are created, and to Krugman and others like him, a hundred jobs "created" by government borrowing would be equivalent (and probably superior) to jobs created by a profitable business firm.

(And, since we are in a "liquidity trap," there is no opportunity cost, at least where government is concerned. One dollar of wealth creation is a dollar of spending, and so goes the circle.)

Furthermore, because he holds that an economy is basically a circular mechanism, he really cannot see beyond the number of employees a company might have employed in this country to see the value of what a firm produces. In his latest column, Krugman makes the point that Apple does not create many jobs, which is very, very short-sighted. He writes:

A big report in The Times last Sunday laid out the facts. Although Apple is now America’s biggest U.S. corporation as measured by market value, it employs only 43,000 people in the United States, a tenth as many as General Motors employed when it was the largest American firm.

In other words, in Krugman's view, Apple has no usefulness as a firm beyond how many people it employs. Its economic contribution stops at that point.

Firms do not exist to employ people; people are employed in the process of creating goods that are useful to others, and if one were to gain a sense of the real economic contribution of Apple, it would be safe to say that the company has created hundreds of billions of dollars of wealth, and Apple products and the technologies they have spun off have impacted the lives of billions of people. That's right, billions.

As for the point about "clusters," Krugman is correct at that point. Unfortunately, he shows his Keynesian colors here:

The point is that successful companies — or, at any rate, companies that make a large contribution to a nation’s economy — don’t exist in isolation. Prosperity depends on the synergy between companies, on the cluster, not the individual entrepreneur.

ut the current Republican worldview has no room for such considerations. From the G.O.P.’s perspective, it’s all about the heroic entrepreneur, the John Galt, I mean Steve Jobs-type “job creator” who showers benefits on the rest of us and who must, of course, be rewarded with tax rates lower than those paid by many middle-class workers.

In other words, entrepreneurs don't matter in the Krugman view of an economy. Of course, he forgets that one of this country's most important places of synergy, Silicon Valley, came about because of the vision of a few entrepreneurs who turned their ideas into the creation of huge amounts of wealth. Furthermore, he seems to forget that most of the great entrepreneurs of recent times have been...Democrats. From Steven Jobs to Bill Gates to Michael Milken to the founders of Google, liberal Democrats have made a huge economic impact because they had great ideas and how to put them together to create new products.

So, what is Krugman's idea of a Really Big Economic Success? The auto industry bailout. He writes:

...this vision helps explain why Republicans were so furiously opposed to the single most successful policy initiative of recent years: the auto industry bailout.

The case for this bailout — which Mr. Daniels has denounced as “crony capitalism” — rested crucially on the notion that the survival of any one firm in the industry depended on the survival of the broader industry “ecology” created by the cluster of producers and suppliers in America’s industrial heartland. If G.M. and Chrysler had been allowed to go under, they would probably have taken much of the supply chain with them — and Ford would have gone the same way.

Fortunately, the Obama administration didn’t let that happen, and the unemployment rate in Michigan, which hit 14.1 percent as the bailout was going into effect, is now down to a still-terrible-but-much-better 9.3 percent. And the details aside, much of Mr. Obama’s State of the Union address can be read as an attempt to apply the lessons of that success more broadly.

First, Krugman assumes that there are no other auto producers in this country, and I am sure that many of the assets of Chrysler and GM would have been put to good use. Second, Krugman forgets that the bailout did not occur in order to save "clusters," but rather to force taxpayers to pony up to save the United Auto Workers.

The reason that GM and Chrysler were bankrupt was that they were producing goods that consumers were not willing to purchase, and neither company was willing to do what was necessary to turn around the situation. Yes, they had intransigent unions and delusional managers, but that did not mean that the rest of us should have been forced to cover for them. Chrysler and GM were destroying wealth, not creating it, and by rewarding their actions, the Obama administration sent a strong message that the only thing that matters in this economy is a political connection.

Krugman has no idea how markets work and he certainly does not understand a price system. (Sorry, aggregate supply and aggregate demand models have nothing to do with price systems or even economics.) Once again, we see that he really does not know what wealth creation means and cannot differentiate between a job that creates wealth and a job that destroys it.

Krugman changes his tune (in time to shill for Obama)

2012-01-25T21:52:00.000-05:00

I have said many times that Paul Krugman is much more a political operative than an economist, and while that makes people mad, it also is true. And the day before President Obama's State of the Union Speech, suddenly the gloomy, "We-Are-Practicing-Austerity" Krugman was singing the praises of Obama the Great.

Yes, this is the same Obama that recently Krugman was claiming was not spending enough and was going to throw us into another downturn because of his policies of "austerity." But now that we are in a political campaign, Krugman is singing, "Happy Days are Here Again."

He claims that he was abused when he pointed out the housing bubble, and I find it interesting that in his blog posts and elsewhere, he has attacked Peter Schiff, yet it was Schiff who was the most vocal about the bubble and its meaning. Furthermore, Mark Thornton in 2004 had made the point about the bubble, and Ron Paul was playing Paul Revere on the subject in 2003. However, since Krugman thinks Austrians are idiots and don't know any economics, he throws the Austrian warnings down the Orwellian Memory Hole.

(Now, don't forget that Krugman's good friend Ben Bernanke also missed the bubble, but Krugman isn't about to jump on his ally for being wrong. No, Krugman is much too smart a political operative to do that.)

Yet, there are a couple things in this column that are puzzling. First, he claims that somehow we can revive the economy with...more housing:

But the economy is depressed, in large part, because of the housing bust, which immediately suggests the possibility of a virtuous circle: an improving economy leads to a surge in home purchases, which leads to more construction, which strengthens the economy further, and so on. And if you squint hard at recent data, it looks as if something like that may be starting: home sales are up, unemployment claims are down, and builders’ confidence is rising.

And why might housing be a bright spot in the future? He writes:

Furthermore, the chances for a virtuous circle have been rising, because we’ve made significant progress on the debt front.

That’s not what you hear in public debate, of course, where all the focus is on rising government debt. But anyone who has looked seriously at how we got into this slump knows that private debt, especially household debt, was the real culprit: it was the explosion of household debt during the Bush years that set the stage for the crisis. And the good news is that this private debt has declined in dollar terms, and declined substantially as a percentage of G.D.P., since the end of 2008.

Krugman is talking apples and oranges. No one has claimed that government debt brought about the recession; instead, they are saying that adding trillions of dollars of government debt only exacerbates the problem. Moreover, he is saying that housing has bottomed and maybe things will get better.

Why didn't housing bottom sooner? It did not bottom because Krugman and others argued that the government should continue to pump huge amounts of money into those failing sectors in order to prop them up, as though higher prices bring prosperity. So, the government did just that and housing fell, albeit more slowly, but it fell, so the pain was stretched out.

So, in order to avoid a worse recession, the government created a depression. But now that Obama is up for re-election, suddenly he is Mr. Job Creator. Yes, the man who has pumped hundreds of billions of dollars into "green energy" and other such boondoggles suddenly is responsible for bringing back prosperity. Somehow, I doubt that is happening, but political operatives are not exactly known for their truth telling.

As for Krugman's claim that more inflation and more government debt will give us recovery, Frank Shostak, who is a much better economic analyst than Krugman, says that recovery will come only when the government ends its jihad against savings. No, Shostak doesn't have a Nobel, but he does actually understand economics.

Should capital gains tax rates reflect ordinary income tax rates? Maybe in Wonderland

2012-01-19T09:44:00.002-05:00

[Update]: In his column today, Krugman continues the theme that capital gains taxes should be higher, although he does not say HOW high. His reference toward Ronald Reagan invokes another logical fallacy, as though whatever Reagan did regarding taxes always should be acceptable to people who hold to free-market principles.

Krugman also fallaciously assumes that wealthy people pay ONLY 15 percent of their entire income in taxes. However, this interesting chart appeared today in the Wall Street Journal that lists ALL federal taxes paid by people in different income groups, and it tells a much different story. (Of course, Krugman is well-known for making up history, whether it be tax or regulation history. One might expect such behavior from a political operative.)

Now, why would Krugman try to be deceptive here? Why is Krugman nearly always deceptive? It is because he has traded whatever academic integrity he had to be a political operative. It is one thing to argue about tax rates and quite another to present a false picture of a situation -- when accurate information is available. [End Update]

In his post on the post-war history of capital gains taxes, Paul Krugman points out that the rates have been higher in the past than they are now. That obviously is true, but it opens up other arguments. For example, he declares this:

Here’s how Romney’s low taxes will be defended by smarter conservatives (the less smart ones will just shout “class warfare”): they’ll claim that there are compelling reasons to have low taxes on capital gains, and that there is therefore nothing wrong with having very high-income people paying lower tax rates than the middle class.

Like Barack Obama, he is slippery with his language, for even with lower rates, people who gain most of their income via investment are going to pay significantly higher amounts in taxes than others. Unfortunately, in a speech the other day, Obama first mentioned tax rates and then he claimed that the wealthy thus pay "lower taxes" than do people in the middle class. That simply is false, but a president who claims that paying unemployment benefits will "create more jobs" than the construction of an oil pipeline (and, by insinuation, more wealth) simply is delusional about the economy. Keynesianism will do that to people. The U.S. economy did well relative to the rest of the world (which was recovering from World War II) at this time, so does Krugman also believe, in the name of "fairness," that the capital gains rates also should have been 91 percent? I don't know, but I don't see, using his own logic, how he can argue against that modest proposal.

In fact, during that time, even some of the LOWEST rates were higher than 25 percent or slightly under 25 percent. Thus, will Krugman and Obama complain that the capital gains rates in the 1950s were unjust because they were lower than tax rates that people earning small incomes were paying? I don't know, although it seems that Krugman seems to be fixated on the current situation while claiming that the 1950s were prosperous years, and I suspect he believes that the high tax rates were part of the reason for the prosperity.

(He certainly has not made any statements in public to the contrary except to tell me in a 2004 Q&A at the Southern Economic Association meetings that the 70 percent rates of 1980 were "insane." I have not seen him making any similar statements in any of his writings since then.)

If Paul Krugman believes that capital gains taxes always should be at the top rate, since it would be unfair for investors to pay the same rates (or less) than the middle class, perhaps we need to look at the various marginal rates of income taxation to see if Krugman is trying to pull a fast one. For example, during the time in the 1950s when capital gains rates were 25 percent, the top income tax rate in the USA was 91 percent.

The following table that lists inflation-adjusted income tax brackets since 1913 might make things a bit more clear:

Partial History of Marginal Income Tax Rates Adjusted for Inflation
	Income	First	Top Bracket
Year	Brackets	Bracket	Rate	Income	Adj. 2011	Comment
1913	7	1%	7%	$500,000	$11.3M	First permanent income tax
1917	21	2%	67%	$2,000,000	$35M	World War I financing
1925	23	1.5%	25%	$100,000	$1.28M	Post war reductions
1932	55	4%	63%	$1,000,000	$16.4M	Depression era
1936	31	4%	79%	$5,000,000	$80.7M
1941	32	10%	81%	$5,000,000	$76.3M	World War II
1942	24	19%	88%	$200,000	$2.75M	Revenue Act of 1942
1944	24	23%	94%	$200,000	$2.54M	Individual Income Tax Act of 1944
1946	24	20%	91%	$200,000	$2.30M
1954	24	20%	91%	$200,000	$1.67M
1964	26	16%	77%	$400,000	$2.85M	Tax reduction during Vietnam war
1965	25	14%	70%	$200,000	$1.42M
1981	16	14%	70%	$212,000	$532k	Reagan era tax cuts
1982	14	12%	50%	$106,000	$199k	"
1987	5	11%	38.5%	$90,000	$178k	"
1988	2	15%	28%	$29,750	$56k	"
1991	3	15%	31%	$82,150	$135k
1993	5	15%	39.6%	$250,000	$388k
2003	6	10%	35%	$311,950	$380k	Bush era tax cuts
2011	6	10%	35%	$379,150	$379k

In the end, I don't think Krugman is making much of an argument. For example, as one who was in college in the early 1970s and then being in the workplace for more than half the decade, the 40 percent capital gains rates also coincided with an era of high inflation and high unemployment. If Krugman believes that capital gains rates should reflect normal income tax rates, then he is saying that we need 40 percent capital gains rates again.

For that matter, the 1970s were a time of economic stagnation, not unbridled prosperity, as Krugman wants us to believe. He might hate the 1980s, but that also was a time of huge private investments in the high-tech sector and telecommunications, and Daniel Henninger of the Wall Street Journal has an excellent column about that era, including the corporate raiders that Krugman claims did so much damage. The article deals with the actual state of business entrepreneurship at that time, something that Krugman is incapable of understanding, since all of his economic analysis is done with the crude aggregates of the Keynesian models, and there is no way to fit entrepreneurship into those contraptions.

There is a larger issue, however, and that is private investment as a whole. Krugman, being a good Keynesian, holds that economically speaking, government "investment" is just as good as private investment, so it doesn't matter if the government is building nuclear weapons or a farmer is growing crops. If the GDP numbers of both are equal, then both are equal in their wealth component.

Is this a ridiculous example, since even Krugman would admit we cannot eat nuclear weapons? In one way, yes, but in the Keynesian structure, it is not ridiculous. And given that Krugman has given us his "confidence fairy" ditty numerous times, it is clear that he does not hold private investment to be anything but another form of spending, and if government can spend in equal amounts, then it is just as well and perhaps better, since in Wonderland, State Power equals freedom and prosperity.

Higher taxes on investment income = more investment, Krugman claims

2012-01-18T09:58:00.000-05:00

In reading Paul Krugman for more than a decade, I have come to the following conclusions about his economic beliefs:

State-sponsored investment is both morally and economically preferable to private investment;

Higher tax rates on investment return will result in more private investment;

These are mutually-exclusive beliefs, but nonetheless he expresses them both, but if there is to be a choice, it always is in favor of more state power.

Of course, Krugman also seems to believe that the greater the scope and scale of government police power, the freer people will be, at least if the Democratic Party controls the apparatus of government. In other words, the Police State in which government tells us what we can eat, what we should think, where we should live, what income we are permitted to keep, the form of transportation we should have, and so on, is a State of Freedom. (And if any dissenters can point out where Krugman publicly has stated otherwise, please let me know, but for now, I cannot say honestly that I ever have seen Krugman complain about the expansion of the Police Powers of the State.)

Krugman's recent blog post which I want to examine is the one on taxes on investment income, where he writes:

As Ezra Klein says, the real issue raised by Romney’s maybe-revelation — are we sure that his tax rate is even as high as 15 percent? How much is shielded in tax havens? We need the returns — is the way our system allows those with very high income to pay substantially lower taxes than the upper middle class. If capital gains and other investment income didn’t receive special treatment, we’d be getting substantially more revenue. Why does our political elite talk only about cuts to social insurance, and not at all about raising more revenue from the upper tail of the income distribution? (Emphasis mine)

Given that Krugman and President Obama have called for a return to the 39.6 percent upper-income tax brackets (and Krugman on many occasions has intimated that it should be even higher), one can assume that Krugman also wants a near-40 percent levy on investment income. Now, given that his Keynesian beliefs permit him to assume that the Law of Opportunity Cost does not exist when government is involved, we safely can assume that Krugman believes that if investment income were taxed at about 40 percent, then there would be exactly the same amount of overall investment income that would be taxed.

In other words, a 40-percent tax rate would not discourage investors from putting even a penny less of investment, and that investment returns would not change. My sense is that Krugman believes that even if private investment were to fall, government could make up the difference with investing. Of course, everyone knows that government investments are made in "wise" things like "high-speed rail" in California (a true boondoggle if ever there was one), Solyndra, corn-based ethanol, electric windmills, auto industry bailouts in order to prop up the United Auto Workers, and so on. By moving resources from higher-valued uses to lower-valued uses, government works is "magic," making us poorer, but apparently that is what Krugman believes is morally and economically preferable to anything that might advance private investment.

Furthermore, Krugman deftly changes "tax rates" to "taxes" themselves, which is what Obama also has been doing. No, Warren Buffet does not pay less in taxes than his secretary, and Mitt Romney does not pay less in taxes than do I. For that matter, I am sure that Krugman himself pays more taxes than do most of us. But there is a difference in tax rates and taxes, even if Krugman wants to confuse us on that subject.

The more I read of Krugman, the more I realize that he is just a pure statist. The corporatism that he espouses (government funnels money to politically-connected firms, with the financial markets essentially carrying out state-sponsored directives) has been seen before, whether in Mussolini's Italy, Hitler's Germany, and Peron's Argentina. We know how those regimes went down, and ours will fare no better, and in the end, Krugman will blame private enterprise and call for even more statism.

Do savings really cause depressions?

2012-01-16T08:50:00.000-05:00

One of the constant themes in Keynesian (and Krugmanian) economics is the evil of savings, and how government must manipulate the currency and the banking system in order to discourage people from saving money. On a number of occasions in his columns and blog posts, Krugman has invoked the hoary "paradox of thrift" which uses the Fallacy of Composition to declare that while it might be OK for a few individuals to save a few bucks here and there, it is disastrous if everyone saves at once.

In a recent blog post, Krugman once again claims that if the rate of savings goes up, GDP automatically goes down and the economy plunges into recession. (The post is primarily about the methodology of comparative statics, which all economists use in one way or another, but nonetheless his example is very telling. It is one thing to use comparative statics to demonstrate the effects of a tax on coffee and quite another to use the same method for savings and GDP, as they are not the same thing even though Krugman wants us to believe that we examine these things in exactly the same way.)

This example "proves" that if people save money, then GDP must fall. When people save money, Keynesians argue, not all of it is invested immediately, so when some current spending is eliminated but is not immediately spent as investment, there is a lull in which the economy is dragged down. Furthermore, they argue, once the economy starts to plunge, unless government immediately disrupts the pattern by spending and also inflating (which undermines savings), then aggregate demand will fall and investors will fail to create new capital, since they don't anticipate demand for the products it will help produce.

The Keynesian Multiplier, along with graphs such as what Krugman trots out, are shown as "proof" of this point. The Multiplier is expressed as 1/savings rate (Marginal Propensity to Save) which also can be expressed as 1/(1 - Marginal Propensity to Consume).

For example, say the MPC is 80 percent (or 0.8) and the MPS, then would be 20 percent (or 0.2). In other words, people in an economy would spend 80 percent of their income and save 20 percent. Thus, the Multiplier would equal 1/0.2 or 5. However, if people saved only one percent of their income, then the Multiplier would be 1/0.01 or 100, which "proves" that the less we save, the more prosperous we will be.

(I must admit that this reminds me of the saying we had when I was in high school, which began with "The more you study, the more you know," and finally was able to end, after some "logical" progressions, to "The less you study, the more you know. So why study?")

An obvious questions arises: If savings is bad, why not have a zero savings rate, which then would give us a multiplier of infinity? Keynes, when faced with that same question, declared that at that point, inflation would skyrocket, although he did not explain why that would be a bad thing, given that Keynesianism is based upon the "magic" of inflation, anyway.

This economic viewpoint, however, is based upon a nuanced view of capital, that it is homogeneous AND that the value of capital formation is in the spending that takes place, not with capital itself. And, Keynesians argue, because increased savings lower the value of the Multiplier, that the "solution" is for people not to save (or save as little as possible) and depend upon government or the central bank (or both) to manufacture the money needed for capital investment out of thin air.

All of this crashes, however, if capital is heterogeneous. Furthermore, if capital can be malinvested -- and Austrians argue that will be the case when capital is created via inflation -- then the Keynesian scheme is destined to end in disaster.

That is what we are seeing now. For more than two decades, the government has followed the pattern of inflating, running into malinvestments, inflating the economy into "recovery," and then dealing with future crashes that are larger. We have seen the Tech Bubble and collapse, the Housing Bubble and collapse, and now the governments around the world have created the Sovereign Debt Bubble which is destined to collapse.

Krugman can use all of the graphs and math that he wants, but he cannot get around the sticky problem of heterogeneous capital, nor does he have an answer for malinvestments. His M.0. has been to state his case and then attack anyone who disagrees, claiming that their disagreement is based upon their fundamental desire for people to suffer and to be out of work. That is not economics, but then Keynesianism is not economics, either.

Jonathan Macey schools Krugman on private equity

2012-01-12T23:38:00.000-05:00

There is life imitating art, art imitating life, and then there is make-believe. Not surprisingly, Paul Krugman chooses the third option, at least when it comes to his belief that Oliver Stone's "Wall Street" gave an accurate picture of how private equity firms work.

(I do agree with Krugman's contention that government is not a business and that a businessman is any more capable of being an effective president than a career politician. Nonetheless, Krugman then wants us to believe the same tired song that government creates prosperity by spending, while businesses create recessions by becoming more efficient and by employing more capital. I can see a politician making such a statement, but an academic economist is supposed to understand something about the Law of Opportunity Cost.)

In his most recent column, Krugman quotes Gordon Gekko's famous "greed is good" speech as though that actually were accurate economics -- that corporate raiders could make money by buying healthy firms and then destroying their value.

What Krugman wants us to believe is that companies like Bain Capital would target successful, healthy, profitable firms, purchase them, and then make money either by running them into bankruptcy and then selling their assets. Now, perhaps at Princeton University, they teach that firm owners become wealthy by driving their firms into insolvency, but I would like to know how the market value of a company would INCREASE when it is careening into failure.

In an excellent article in the Wall Street Journal, Yale law professor Jonathan Macey explains how the private equity system actually works (as opposed to how Krugman says it works). (I don't have the full article available, and if I am able to do it later, I will post it.)

Macey's point is simple; a firm like Bain Capital purchases a firm that is underperforming relative to similar companies, restructures it, and then sells it. In order to profit, the private equity firm must be able to sell the firm (or its assets) for more than it paid for the company at the beginning.

Some common sense is in order, as Macey notes. A company cannot purchase a healthy company, run it into the ground, and then sell it for more than for the purchase price. While Krugman might believe that business people are utterly stupid (as opposed to professors and politicians), they are not so stupid as to buy high and sell low and do it consistently -- and remain in business.

If the Bain Capitals of the world are going to make profits, then they have to sell businesses or their assets (or both) for more than what they paid for the company, and they are NOT going to be able do that by looting a company. That simply makes no sense, which is why I hardly am surprised that both Krugman and Newt Gingrich seem to share the belief that businesses can profit by buying healthy companies, destroying them, and then getting even more value from their sale.

None of this means I am endorsing Mitt Romney for president. I hardly am enamored with his candidacy, but when people like Krugman and Gingrich demonstrate that they are utterly ignorant of how the leveraged buyout process works while condemning the whole practice, I'm going to speak up for the simple reason that someone needs to be able to explain some of the simple yet profound tools of economics without the political baggage.

Krugman: Capital creates recessions

2012-01-11T12:52:00.001-05:00

I see that Paul Krugman has moved into yet another economic dimension in which he declares that capital creates layoffs and layoffs are responsible for...layoffs. He writes:

...the fact is that running a business is nothing at all like making macro policy. The key point about macroeconomics is the pervasiveness of feedback loops due to the fact that workers are also consumers. No business sells a large fraction of its output to its own workers; even very small countries sell around two-thirds of their output to themselves, because that much is non-tradable services.

This makes a huge difference. A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods. Nothing in business experience prepares one for the paradox of thrift, or even the inflationary impact of increases in the money supply (which is real when the economy isn’t in a liquidity trap.)

This is yet another example of the fallacy of "buy back the product" in which production and consumption are regarded as two independent and unrelated things, except that unless workers can "buy back" what they have produced, then the economy will plunge into recession.

In other words, what an economy produces really means nothing in terms of wealth. The production of goods is seen as an impediment to employment. Now, it is one thing when President Obama declares that capital creates unemployment; he is a politician and cannot be held responsible for saying anything of economic intelligence.

However, Krugman is supposed to know better. Economists actually are supposed to understand that when capital is created within a free market system, permitting people to create more goods, that this ultimately creates new opportunities for others.

So there you have it. Capital creates recessions; savings creates recessions. More brilliant economic analysis from Princeton University.

Sintija now officially is an Anderson!

2012-01-09T17:20:00.001-05:00

A Latvian court today granted our adoption petition for Sintija, so she now officially is our daughter! Johanna and Sintija are in Latvia this week and will return to the USA on Thursday and come home on Friday.

They will travel back to Latvia in about a month to obtain the permanent resident visa from the U.S. Embassy, and then we will go about doing the re-adoption here in Maryland.

This is a wonderful day, and we are thankful to all of you who have supported us.

NYT: Forcing up labor costs creates more wealth

2012-01-09T00:10:00.000-05:00

It always is interesting to see how the "elite" media also seems to produce the most number of economic fallacies, and a trip to the New York Times, and especially its editorial page, never disappoints. In this editorial, we find that laws that force up the price of labor create wealth.

I would suggest you try this at home. If you get two bids for work and you are assured that the quality of work would be the same, take the higher bid because the higher costs will create more wealth. Yeah, you will be using more resources, economically speaking, to do what could have been done with fewer resources, but who are we to argue with the brilliant minds at the NYT?

Krugman: Economic efficiency makes us poorer

2012-01-05T23:27:00.000-05:00

Several years ago, I wrote that Paul Krugman really is not an economist, but rather is a political operative, and he has done his level best since then to prove my point. He does it again in his latest column.

According to Krugman's writings on the subject of employment, he begins with jobs first, or, to be more specific, the number of jobs. To Krugman, there is no difference in jobs, economically speaking, if they are created because Apple expands its operations or if the government subsidizes a Solyndra. If Apple's expansion meant a thousand extra jobs, but the government payments to Solyndra resulted in 1,100 new (and, obviously, temporary) jobs, Krugman's logic would say that the Solyndra gig would be better for the economy, even if Apple were profitable and Solyndra was hemorrhaging cash.

(As I read Krugman, I get the sense that he agrees with the Left that economic profits really consist of funds "taken from the community" and that lower profits would mean more wealth is being created. Yes, it is convoluted, but Keynesian "economics" is convoluted, folks.)

In attacking Mitt Romney (which is fine with me, given I won't vote for him even if he wins the Republican nomination), Krugman claims that Barack Obama actually has been a net creator of jobs. That's right, Obama is good for the economy even though it is in depression, and has become worse since he took office. Krugman writes:

Americans have jobs now than when Mr. Obama took office. But the president inherited an economy in free fall, and can’t be held responsible for job losses during his first few months, before any of his own policies had time to take effect. So how much of that Obama job loss took place in, say, the first half of 2009?

The answer is: more than all of it. The economy lost 3.1 million jobs between January 2009 and June 2009 and has since gained 1.2 million jobs. That’s not enough, but it’s nothing like Mr. Romney’s portrait of job destruction.

Incidentally, the previous administration’s claims of job growth always started not from Inauguration Day but from August 2003, when Bush-era employment hit its low point. By that standard, Mr. Obama could say that he has created 2.5 million jobs since February 2010.

Now, given that a lot of these "jobs" either have been government jobs or jobs that came through government-subsidized industries, perhaps we should be asking if the Obama administration's policies have made it easier or more difficult for businesses to create new wealth. After all, if you want to create "full employment," it is easy: just tell everyone they only can do agricultural work but cannot use any tools in the process other than your hands. I can assure you that people will be busy, at least until they starve to death, but, hey, they will be employed.

Robert Higgs has some answers, writing:

Private net investment is currently running far below the rate required to sustain a rapid rate of economic growth. Real consumer spending, in contrast, peaked in the fourth quarter of 2007, fell only slightly (about 2.5 percent) to the second quarter of 2009, and by the fourth quarter of 2010 exceeded its previous quarterly peak (by almost 1 percent). Despite the wailing and gnashing of teeth among Keynesian economists and politicians with regard to allegedly inadequate consumption, a collapse of consumption is not to blame for the economy’s anemic recovery to date. However, looking elsewhere for the cause, we find that the economy’s true engine of growth – private business net investment – continues to sputter, running in the most recent quarter at less than a third of its previous peak rate and, for the entire year 2010, at only 40 percent of its rate for the entire year 2007.

Higgs adds:

Investors continue to view the future with major misgivings, owing to the unsettled condition of the government’s future actions with regard to health care, financial regulations, energy regulations, taxation, and other matters that have serious implications for business costs and the security of private property rights in business capital and its returns. Although ObamaCare and the Dodd-Frank bill have already been enacted, these massive statutes leave scores of important details awaiting determination by administrative agencies and courts whose actions will be fiercely contested at every step. Future tax rates also remain up for grabs in Congress.

Krugman might call it the "Confidence Fairy," but government cannot make up for lost investment and, in fact, bears huge responsibility for the current lag in private investment.

Yes, Obama can throw money at "green energy" and create some temporary jobs and Krugman will claim that this is superior to any kind of economic restructuring that enables entrepreneurs to create more wealth while using fewer resources. In Krugman's mind, such a thing is anathema. Lest one think I am off-base, I believe Krugman exposes that view in this declaration:

At this point, some readers may ask whether it isn’t equally wrong to say that Mr. Romney destroyed jobs. Yes, it is. The real complaint about Mr. Romney and his colleagues isn’t that they destroyed jobs, but that they destroyed good jobs.

When the dust settled after the companies that Bain restructured were downsized — or, as happened all too often, went bankrupt — total U.S. employment was probably about the same as it would have been in any case. But the jobs that were lost paid more and had better benefits than the jobs that replaced them. Mr. Romney and those like him didn’t destroy jobs, but they did enrich themselves while helping to destroy the American middle class.

Paul Krugman demonstrates his utter ignorance at what happens in business restructuring and leveraged buyouts. When a firm like Bain purchases a firm and then sells its assets and makes money in the process, the Krugmans in the academic and political world scream that Bain is DESTROYING JOBS.

However, let us think about this and ask the obvious question: How can Bain do this in the first place? It can do it because when a business is successful, the whole is greater than the sum of its parts. However, a failing business is going to find itself in the opposition situation: the sum of the parts is greater than the whole.

For example, would any capital firm try to purchase Apple today and then make money selling off the company's assets? Hardly, as the strength of the company is entrepreneurship, and that is not a commodity that can be bought and sold. Unfortunately, Krugman wants us to believe that Bain and other corporate raiders took perfectly healthy firms and then destroyed them, and that the markets were so twisted and so incapable of seeing that good firms unjustifiably were being taken apart that they stupidly purchased the assets for more than the raiders paid for the entire company.

Krugman never explains how this is possible, but perhaps it is because he simply cannot comprehend the simple aspects of Opportunity Cost. Whatever the reason, he clearly does not even begin to understand how markets work, not to mention the role of the price system. You see, Krugman actually believes that markets DESTROY wealth, but governments create it through vast networks of subsidies and regulations. He never has explained how and why this is so, but perhaps he believes that since he is Paul Krugman, he doesn't have to explain anything. ENTREPRENEURS? We don' need no stinkin' entrepreneurs!

Krugman condemns himself

2012-01-05T09:39:00.001-05:00

Paul Krugman wants us to believe that he first looks at the situation, and then tries to determine what theory would apply to it (or make up a new theory). He, dear reader, never comes into a situation with preconceived notions, unlike someone like, say, Tyler Cowen.

Yes, this someone who believes that a babysitting co-op in Washington provides the appropriate "model" for an entire complex economy. The co-op printed more coupons (money) and that allegedly fixed everything (although it didn't), so if the Fed prints more "coupons," then our economy will recover.

Yes, the perfect model. Krugman condemns in others what he does himself.

Krugman: Government debt is no burden because "we owe it to ourselves"

2012-01-02T10:15:00.000-05:00

In his latest missive, "Nobody Understands Debt," Paul Krugman proves that he does not know debt, or at least government debt, either. While there is much to dislike in the column, I am going to deal with his claim that government debt is different because it is "money we owe to ourselves."

Now,I will agree with Krugman that government debt is different than typical "family debt," but not for the reasons he gives. Krugman writes:

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves. (Emphasis mine)

Krugman's reasoning, however, can apply to private debt as well, since he decides to use collective terms. In the case of private debt, individuals borrow from banks or other individuals, and bank loans are created by individual deposits. Therefore, when individuals don't pay back their debt, someone has to take a haircut.

Government loan guarantees tend to cloud this picture, but even when a guaranteed loan falls into default, individuals -- taxpayers and consumers -- are forced to give up some of their real income either through taxation or inflation. There really is not a free lunch, even if Krugman wants to claim there is.

(Because of government loan guarantees -- and deposit "insurance" falls into this category -- a lot of moral hazard is built into the private lending system. Defenders of this system say that it promotes worthy "investments" -- such as "green energy" -- that would not be funded otherwise by private lending, while critics such as the Austrians say that it promotes malinvestments and reckless behavior by lenders that ultimately leads to a crisis.)

Most Americans borrow from other Americans, so using the standards for public debt that Krugman has given, it would seem that most private lending also involves money "we owe to ourselves." One is not free to apply a collective term to government and then claim that it is not applicable to private activity, given there is nothing magical about government that can create a "collective" by fiat.

After all, individuals and institutions hold government debt, and if Krugman is claiming that an individual is not harmed when he or she lends money to the government and is not paid back, then he is dead wrong. (In other words, it is business as usual.)

Adding to that point, Murray Rothbard writes:

The ingenious slogan that the public debt does not matter because “we owe it to ourselves” is clearly absurd. The crucial question is: Who is the “we” and who are the “ourselves”? Analysis of the world must be individualistic and not holistic. Certain people owe money to certain other people, and it is precisely this fact that makes the borrowing as well as the taxing process important. For we might just as well say that taxes are unimportant for the same reason.

Even Krugman does admit that there can be problems with debt:

Now, the fact that federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion. But these costs are a lot less dramatic than the analogy with an overindebted family might suggest.

And that’s why nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s conventional wisdom would lead you to believe. Britain, in particular, has had debt exceeding 100 percent of G.D.P. for 81 of the last 170 years. When Keynes was writing about the need to spend your way out of a depression, Britain was deeper in debt than any advanced nation today, with the exception of Japan.

In other words, more government debt is good when government is trying to "spend (our) way out of a depression," but the act of more borrowing does have its opportunity costs, but the costs are not all that great, or at least Krugman assures us of that. Of course, if the problem becomes too great, then the Federal Reserve, through the workings of "clever lawyers," can find a way to directly purchase U.S. Government debt on the primary "market," which Krugman touts as a "solution." (One wonders why Krugman does not recommend what would be the Ultimate Fix to our problems to have the Fed purchase ALL government bonds, and that the bonds encompass ALL federal spending. Then the Fed could forgive the debt, monetize everything, and the government would have limitless funds to spend and to bring us into prosperity.)

In the Keynesian world, there is no opportunity cost. As Keynes wrote in 1943, credit expansion by the central bank performs the "miracle" of "turning stones into bread." Because Keynesians believe that a market economy is destined to implode because individuals save some of their income, not spending all of it instantly, it is up to government, to paraphrase Krugman, to "fill the hole" left by the loss of private spending.

There is one more issue to cover, and that is my earlier statement in which I agreed with Krugman that government debt was "different" than private debt, but for different reasons. In this area, I turn to Rothbard:

The public debt transaction, then, is very different from private debt. Instead of a low-time preference creditor exchanging money for an IOU from a high-time preference debtor, the government now receives money from creditors, both parties realizing that the money will be paid back not out of the pockets or the hides of the politicians and bureaucrats, but out of the looted wallets and purses of the hapless taxpayers, the subjects of the state. The government gets the money by tax-coercion; and the public creditors, far from being innocents, know full well that their proceeds will come out of that selfsame coercion. In short, public creditors are willing to hand over money to the government now in order to receive a share of tax loot in the future. This is the opposite of a free market, or a genuinely voluntary transaction. Both parties are immorally contracting to participate in the violation of the property rights of citizens in the future. Both parties, therefore, are making agreements about other people's property, and both deserve the back of our hand. The public credit transaction is not a genuine contract that need be considered sacrosanct, any more than robbers parceling out their shares of loot in advance should be treated as some sort of sanctified contract.

Any melding of public debt into a private transaction must rest on the common but absurd notion that taxation is really "voluntary," and that whenever the government does anything, "we" are willingly doing it. This convenient myth was wittily and trenchantly disposed of by the great economist Joseph Schumpeter: "The theory which construes taxes on the analogy of club dues or of the purchases of, say, a doctor only proves how far removed this part of the social sciences is from scientific habits of mind."

Rothbard was writing in favor of repudiation of government debt (which then would discourage individuals from lending to the government in the future), but the larger point still stands. All taxpayers are on the hook for repaying government debt, but the terms are decided by others. It is the ultimate "loan guarantee" in which people who don't participate in the process still are forced to pay for it.

Krugman calls it a "social contract." I think it should be called something else.

Keynes was and always will be wrong

2011-12-30T10:11:00.000-05:00

Here we go again. Paul Krugman not only attacks the Law of Cause and Effect (substituting Effect for Cause), but also manages to fracture history a bit. However, given that he has claimed that Ronald Reagan was the architect of business and financial deregulation -- thus confusing Reagan with Jimmy Carter and Ted Kennedy -- it is safe to say that Krugman is not a particularly good economic historian.

Apparently, Krugman believes that governments are not running large enough deficits and are not spending enough money, although much of the spending he is demanding comes from accumulation of massive debt (which Krugman believes later can happily be inflated away). In his own words:

“The boom, not the slump, is the right time for austerity at the Treasury.” So declared John Maynard Keynes in 1937, even as F.D.R. was about to prove him right by trying to balance the budget too soon, sending the United States economy — which had been steadily recovering up to that point — into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.

Governments around the world, claims Krugman, could have had us in recovery had they just borrowed and spent enough. Of course, the massive borrowing ONLY could have been financed by central banks, and especially the Federal Reserve System, and the only way such a scheme could have been hatched was the central banks creating "money" from thin air. In other words, Krugman is excoriating governments for not getting their finance arms -- central banks -- to print enough money, as though printing money is the key to economic success.

(If that were true, then the USA should not prosecute counterfeiters but actually encourage them. Maybe Krugman can write a future column on why counterfeiters are an economic blessing and why every household should have its own money printing press.)

Thus, if one is to understand Krugman, the European Central Bank and the Fed should be lending billions of dollars to Greece not so that Greece can use the money to pay its previous debts, but rather to spend itself into prosperity, with the idea that a future Greek economy -- yes, that economy that features bloated government unions and low productivity -- will produce so much wealth that it can pay back the debts or, better still, have the central banks just write off the debt because, after all, it was just funny money in the first place.

However, let us get back to Krugman's Fractured Fairy Tales. According to Krugman, Franklin D. Roosevelt's New Deal government slashed spending after 1936 and THAT was the cause of the recession of 1938 in which the rate of unemployment went to nearly 20 percent, a recession within a depression.

In looking at the numbers from that time, however, I must admit to a very nagging question. Indeed, the federal deficit fell during that time and unemployment rose. However, earlier in that decade, deficits rose and so did unemployment, so to claim that falling deficits would create unemployment is to ignore the earlier record.

It also is true that in that time period, taxes rose and government spending fell, although I remember a year ago Krugman calling for the end of ALL of the "Bush tax cuts," which would have significantly increased the tax bill not only for the wealthiest of American taxpayers, but also for people in lower income groups. Krugman said that if he were president, he would let ALL of the cuts expire and then spend the extra revenue, his words, not mine.

Government spending as a percentage of Gross Domestic Product fell from 10.5 percent in 1936 to 7.7 percent in 1938, and I find it hard to believe that a decrease of less than three percent would be the sole cause of this massive slide back into high unemployment.

You see, Krugman ignores other developments during that time, developments which Robert Higgs chronicled in his paper on the New Deal. Higgs notes that FDR was becoming increasingly shrill in his anti-business rhetoric at this time, and federal legislation aimed at crippling business investment came forth in the latter parts of the 1930s.

Since Krugman seems to believe that federal legislation raising business costs and hostile rhetoric from Congress and the executive branch have nothing to do with business investment (he calls all of this the "Confidence Fairy"), what happened outside of government spending in the late 1930s is completely irrelevant. Yet, as Higgs adptly showed in his paper, that clearly was not the case, and he cites a number of historians to back up his claims.

While I am sure that True Believers would claim the Higgs paper is nonsense, others who actually believe that economic success depends upon wealth that is created, not the amount of money printed, are going to see things differently. Government spending is a very poor substitute for sustainable business investment, and businesses are not going to do long-term investment and capitalization while a hostile government that threatens to confiscate their earnings and dumps trainloads of new and costly regulations on them is in power.

We should not forget that Barack Obama never has had to meet a payroll and never has worked in anything but settings in which at very best, business enterprises existed in order to give campaign contributions to politicians. This is a president who has no idea how an economy works, how entrepreneurs create wealth, and what is needed to bring the economy back from this depression.

Unfortunately, his most influential critic is someone who actually believes that money-printing and government-spending schemes are going to overcome everything else and create prosperity and full employment. Or, to paraphrase the book of I Kings, if Obama wants to bring about economic recovery, he should not chastise us with whips, but rather with scorpions.

Gee, maybe we need those space aliens after all

2011-12-28T08:47:00.000-05:00

Our economy is in depression, but there is nothing like preparing for those "space aliens" of which Krugman spoke last August 14 to put us back in the pink. An "adequate-sized fiscal stimulus" appears and we are there. Maybe we need yet another war, although the current ones have not kept our economy from going into the toilet -- but since they were not started by Democrats, perhaps they don't have the proper inflationary mix.

He writes:

All around, right now, there are people declaring that our best days are behind us, that the economy has suffered a general loss of dynamism, that it’s unrealistic to expect a quick return to anything like full employment. There were people saying the same thing in the 1930s! Then came the approach of World War II, which finally induced an adequate-sized fiscal stimulus — and suddenly there were enough jobs, and all those unneeded and useless workers turned out to be quite productive, thank you.

He goes on:

There is nothing — nothing — in what we see suggesting that this current depression is more than a problem of inadequate demand. This could be turned around in months with the right policies. Our problem isn’t, ultimately, economic; it’s political, brought on by an elite that would rather cling to its prejudices than turn the nation around.

First, as Robert Higgs has duly pointed out, World War II did NOT create prosperity, unless one calls "prosperity" being men getting shot to pieces, bombs destroying cities and millions of lives, and people having to make do with rationed food and fuel.

And if Krugman insists that he only is talking about "full employment," then one can argue that slavery also creates "full employment," although I doubt seriously that Krugman believes we should bring back the "peculiar institution." (However, Krugman DOES believe that people should be forced to work for several months out of the year in order to support government employee unions and to pay for the employment of people whose sole job it is to make their lives more difficult. That may not officially be "slavery," but it is something close to it.)

Second, when Krugman is talking about "adequate demand," he means the creation of new money or the injection of newly-borrowed money into the system, as though that creates wealth. I think it is instructive that Keynesians commit the error of separating consumption and production, as though they were two wholly-unrelated things.

If creation of new money or new borrowing alone can make us prosperous, then there is no reason -- using Krugman's own logic -- that Zimbabwe was not the most prosperous nation on the earth. Should North Korea's newest "Dear Leader" or whatever he will be called wish to turn his wretched country into a citadel of wealth, all he needs is to issue bonds and have his own government purchase them with newly-printed money.

However, I will give Krugman this important point: in the end, the problem IS inadequate "demand," but in the world of economics, demand ultimately comes from what we produce. Going back to Zimbabwe or North Korea, their currencies only can be used to purchase the meager produce that comes from their terrible economies.

Therein lies the problem of the Keynesian "stimulus." Right now, where does the government spending go? Well, it goes to prop up banks, "green energy," pay regulators to ensure that we produce even less, fund left-wing political groups, and, of course, the president's multi-million-dollar vacations. The president and his Keynesian minions, however, are doing everything they can to throttle things like the oil industry, the coal industry, production of electricity, and entrepreneurship in general.

These are things that are profitable, yet do not meet the political "standards" of those in power, so the government uses resources in order to quash production of things that would be profitable, and are necessary to help lead a recovery. Instead, Obama and Krugman believe that government can subsidize an economy into recovery, as though economic losses are nothing more than mere bookkeeping entries.

In the end, it is demand, but it is HOW we are able to demand that makes a difference. For the time being, the rest of the world will accept dollars, but as the Fed and the government create more and more of them, driving down their value, this does not provide the mechanism by which entrepreneurs can create sustainable avenues of production. Instead, everything is channeled into short-term avenues via which people are trying to find hedges against inflation.

Why is the economy in depression? It is depression because the Keynesian U.S. Government insists upon strangling profitable lines of production which don't meet the political approval of those people with power and influence and channeling resources into those areas that clearly are unprofitable. This is a "transfer economy" and, contra Krugman, wealth transfers do not create wealth.

Krugman's toxic environmentalism

2011-12-26T13:01:00.001-05:00

Over the past several years, Paul Krugman has become extremely predictable in his columns. First, the mantra is, "Democrats good, Republicans bad," as though a decorated academic economist should have such a childish view of the world. (Anyone who disagrees with the Great One, according to Krugman, does so out of malice toward anything that is good.)

In economics, he tells us that government spending is the cure-all for all ills, and he has endorsed what essentially is a money-printing scheme by calling for the Fed to purchase U.S. Government paper directly on the primary market. (He cleverly claims that we are mistaken about "money printing," since the Fed mostly expands bank reserves. If the Fed were to directly monetize federal debt, as Krugman recommends, this WOULD be real-live printing that essentially would be no different than what has been done in places like Argentina and Bolivia.)

And then there is environmentalism. In his recent column, Krugman again presents his environmental views, which pretty much can be contained in the following statements:

Any statistics that the Environmental Protection Agency gives us regarding costs and benefits of new environmental regulations always are true, at least when Democrats control the White House;

All fossil fuels are evil and burning them always gives us net costs. There can be no exceptions to this viewpoint;

All government environmental regulations are good and necessary and anyone who questions them does so ONLY because he or she wants others to suffer and die. There can be no exceptions to this viewpoint.

Krugman's latest salvo deals with the new EPA standards for mercury and other toxins released by coal-fired power plants. Obviously, mercury is bad when absorbed by humans (all of us agree on that), so anyone who might question the latest from Obama's environmental chief, Lisa Jackson, does so because he or she wants children to suffer from mercury poisoning, or at least that is what Krugman is saying.

However, Krugman claims, don't take his word for it; no, the numbers, according to the EPA, tell the story:

The new rules would also have the effect of reducing fine particle pollution, which is a known source of many health problems, from asthma to heart attacks. In fact, the benefits of reduced fine particle pollution account for most of the quantifiable gains from the new rules. The key word here is “quantifiable”: E.P.A.’s cost-benefit analysis only considers one benefit of mercury regulation, the reduced loss in future wages for children whose I.Q.’s are damaged by eating fish caught by freshwater anglers. There are without doubt many other benefits to cutting mercury emissions, but at this point the agency doesn’t know how to put a dollar figure on those benefits.

Even so, the payoff to the new rules is huge: up to $90 billion a year in benefits compared with around $10 billion a year of costs in the form of slightly higher electricity prices. This is, as David Roberts of Grist says, a very big deal.

Actually, the cost that EPA gives is about $11 billion a year, although I will say that EPA is notorious for underestimating the costs and overestimating benefits. In this one, Krugman repeats the claim that just the "quantifiable" numbers regarding supposed gained future wages from children that won't suffer from mercury poisoning is an astounding $90 billion per year. Wow. One only can wonder at what kind of methodology the EPA used to come up with this fantastic figure.

First, the agency claims it KNOWS the future IQs of American children before and after the regulations. Anyone who believes this deserves to be sold the Brooklyn Bridge. However, it gets better. Not only does EPA know IQs, but it also claims to know exactly how much money these smarter children are going to make.

This is pure nonsense, for no one, no statistician, no economist, no biologist, no one can know what these numbers were, even if the underlying premise were true, that children were going to be smarter in the future because there will be less mercury in fish. That an academic economist is quick to showcase the numbers that have been politically-created says more about what Krugman is willing to swallow than the accuracy of these numbers themselves.

I can tell readers that I had my own experience with the EPA and its magic numbers. In 1991, I was doing research for a paper on the EPA and the 1990 Clean Air Act Amendments and came across a claim by the EPA that acid rain was killing more than 100,000 Americans each year, so that the proposed legislation would then effectively save more than 100,000 lives annually.

The late Warren Brookes also was researching those numbers, and he asked EPA officials where they had found such astounding numbers, and he was told that they came from researchers at the American Lung Association. Brookes then asked the ALA how it got those numbers, and ALA officials told him that they came from the EPA.

That's right; numbers that environmentalists were repeating in the media, and the media was repeating to Americans, had no official source at all. No one had done any such research; the numbers were created from whole cloth, but that did not deter the EPA and its allies from trumpeting them around the country.

Without looking into the methodology, all I can say is that those mercury numbers are highly suspicious, and the notion that we would be looking at $90 billion of ANNUAL benefits is utterly fanciful, I believe.

Second, let us understand that the $10-$11 billion numbers also are well understated. The reason is that most of the costs will be applied to older power plants that do not have the official command-and-control devices that newer plants have, so the costs of compliance for these regulations will be concentrated upon those plants, not across the electric power industry as a whole. The correct application of these numbers is not to compare them to all electricity revenues, but rather the revenues that come from the electricity produced at the plants that will be affected.

Most likely, many of those plants would not produce enough revenues to justify the huge costs of compliance, so they would be shut down, and this is EXACTLY what Obama, Jackson, and Krugman want to happen. We are speaking of large portions of the U.S. electricity grid that come from the burning of "demon coal," and there is nothing more than Obama would love to see than Americans to face blackouts, brownouts, and soaring costs for electricity. (That's right; I believe Obama wants this to happen, as he is perhaps the most radical environmentalist -- at least in the Algore category -- to occupy the White House.)

What the EPA and Krugman don't include in the cost category is what happens when people have no electricity at all or are forced to pay substantially more for it. Electricity in a modern society and a modern economy is not a luxury; it is a necessity, and the government's attempts to deprive us of it only will wreak more economic havoc.

Third, what is an EPA directive on attacking "brown energy" without an appeal to the Broken Window Fallacy? Krugman's columns are full of the stuff, and, according to the EPA, this newest directive won't destroy jobs. No, it will create them. The following article notes:

American Electric, based in Columbus, Ohio, said in June that proposed EPA rules would force it to close parts or all of 11 power plants, eliminating 600 jobs. Complying with the rules would cost $8 billion, most of it on cleaning up or shutting plants that lack pollution-control equipment, it said.

The EPA says the rule would save lives and create 9,000 more jobs than would be lost, as power plants invest billions of dollars to install pollution scrubbing systems or build cleaner natural gas plants. It estimates the regulation could prevent 17,000 premature deaths from toxic emissions. (Emphasis mine)

Of course, the EPA has plenty of propagandists in both academe and the media to trumpet this nonsense that these new regulations will create "net jobs," not to mention net wealth. (George Soros is a major funder of Media Matters, and where would a vast network of lies be without his guiding hand?)

Yes, what Krugman and others want us to believe is that if we are forced to use more resources to create LESS wealth, that somehow makes us wealthier and creates more employment opportunities and, thus, creates more income streams for individuals. (Where is that bridge again?)

Krugman's column itself operates on the assumption that mercury is an unregulated toxin, as though there are no rules at all governing the release of mercury into the environment. That clearly is not true. First, mercury discharges into American waterways have been substantially reduced in the past four decades. Yes, I know, Krugman is speaking of mercury now that might enter the water via atmospheric mercury discharges, but nonetheless important strides have been made in that area.

Second, the whole issue of atmospheric discharges is fraught with false numbers. Pat Moffitt and I co-authored an article in Regulation that looks at how environmental groups, along with the EPA, have falsified numbers and claims about nitrogen being released via burning of coal. The misconduct and outright lies we uncovered were massive, and I have no doubt that the EPA is doing the same thing in regards to mercury and burning of coal.

In the end, we see a uniting of environmentalists and Keynesians claiming that wealth destruction is good for the economy, and that all we need to do is have less electricity -- and more freshly-printed money. This is a recipe for disaster.

I need to add that Paul Krugman, along with people like Ben Bernanke and Tim Geithner, are high-IQ people who apparently have not had their brains addled by mercury. Nonetheless, I cannot imagine anyone who is doing more damage to the economies around the world than these Really Intelligent Men who want us to believe that wealth destruction really is wealth creation. Maybe a few doses of mercury might have done them some good.

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I also am reporting very sad news about the recent death of Siobhan Reynolds, the most important voice against the government's war on painkillers, doctors who prescribe them, and those who suffer from chronic pain. I have posted something here.

This is more than just the loss of an ideological partner. Siobhan was my friend and she and her son recently visited us here in Finzel. I am going to miss her very, very much.

Krugman, Keynesianism, and Post-Truth Economics

2011-12-24T02:00:00.000-05:00

In his column attacking Mitt Romney, Paul Krugman says that Romney is engaging in "post-truth politics," and maybe he is right. Mitt Romney, after all, is a politician, although I would also say that Barack Obama has been engaging in a post-truth presidency, something Krugman never will admit because, after all, he is first and foremost a partisan Democrat.

(You see, we are supposed to believe, if we read Krugman, that Obama can pour hundreds of billions of dollars into "green energy" projects like corn-based ethanol, and out of all this spending will come "clean energy" and prosperity. This literally is impossible, but being that Krugman is a "post-truth economist," I guess everything is possible in Wonderland and at Princeton.)

Keynesian economics promises us a permanent economic boom just as long as governments have the courage to spend money. (I say "economics" although economic analysis actually comes from the fact of scarcity, something that Keynesians deny, if not in word, then certainly in action.) Furthermore, as we have seen from Krugman these past few years, empirics are for people who don't believe in Keynesian Truths. Other theories must be set up for falsification, but Keynesianism is Truth in its Own Right.

Why do I say this? For more than three years, Krugman has insisted that had the Obama "stimulus" been $1.2 trillion instead of a chintzy $800 billion, we would have been in a full-blown recovery by now. How do we know that it is true? Because Keynesian economics is true, and therefore, the Keynesian "stimulus" always works, and since this stimulus did not work, the problem was that the government did not spend enough money.

This is what one calls the informal fallacy of "Begging the Question," and it provides the sandy foundations for Keynesian thought. But Krugman and the Keynesians are not satisfied with just committing informal fallacies; no, they also are champions of promoting the infamous "Broken Window Fallacy" first given us by the great Frederic Bastiat, who understood the Law of Opportunity Cost far better than anyone today at Princeton University's economics department.

And, no, government really isn't Santa Claus and, no, someone who questions the out-of-control spending in Washington is not a Scrooge. But given that we are in an age of politicized Post-Truth Economics, I guess one can score more political points if one really claims that when governments print money, they are showering us with wealth.

The "stimulus" that failed to "fix" the economy

2011-12-21T12:38:00.000-05:00

Paul Krugman is at it again, claiming that the Obama "stimulus" of 2009 would be too weak to push the U.S. economy back to full employment. Why? The government did not "spend" enough money.

From what I have read of Krugman's commentary on this particular issue, he is trying to claim that he was some sort of prophet, and that had Obama listened to him instead of his unworthy "advisers," the government would have pumped another $400 billion into the economy and that new money magically would have transformed everything. Yes, out of the trillions and trillions of dollars that have been spread around the world since 2008, it all came down to a measly $400 billion.

While it is true that Krugman accurately noted that this downturn would last for a long time, he got his reasoning wrong. The problem is that Krugman, as a Keynesian macro guy, cannot see anything but aggregates, which is not economics at all. There is no such thing as "aggregate demand" and "aggregate supply," or at least something with such terms that can be represented in the crude "Keynesian Cross" or an AD-AS graph.

With the Keynesians, spending is spending, period, and it does not matter where the spending occurs, just as long as someone somewhere is SPENDING. This is the crudest form of analysis, and I can say forthwith that anyone who believes this is not an economist.

In a couple of links, Sheldon Richman explains first why the "stimulus" did not turn around the economy, and, why more "stimulus" money would fail to have made a difference.

Richman understands something that Krugman and his followers do not: that the creation of new money does not create real wealth, but rather serves to transfer wealth:

But it’s more than that. Since the new money gets into some hands rather than others first, monetary expansion — that is, inflation — changes the pattern of prices and production that would have resulted from voluntary exchange under sound money. Among the prices distorted are interest rates. By doing so, inflation transfers resources from those who produce wealth to others.

Inflation, therefore, is one more government income-distribution program. The lucky early recipients of the fresh fiat money gain purchasing power — command over scarce resources — at the expense of everyone else.

Economies do not grow because government showers them with new money; they grow when people can take existing resources and use them in ways to create more wealth than they did before, or they find new ways to use these resources, often turning them into new kinds of resources. For example, before entrepreneurs found a way to turn crude oil into a useable fuel, kerosene, and to make it widely available at a good price, petroleum was seen as a nuisance, not a resource.

This is something that I have concluded Krugman and others are incapable of understanding. To these people, entrepreneurs are nothing more than parasites, people who somehow profit at the misery of others. In their minds, the State is the creator of all wealth, period.

Under this kind of thinking, production and consumption are two separate and unrelated things. More production does not enable people to consume more; in the Krugman-Keynesian view, more production actually is bad, because then it means that consumers have to find ways to "buy back" the goods that have been created.

Krugman also confuses consumption, which is purposeful activity, with "spending," which is activity that exists not to satisfy the needs and wants of individuals, but rather is a mechanism to "buy back" that which was produced and to enable producers to make more stuff, and so on.

As I said before, this is not economics. It is the creation of mechanistic models that fail to reflect human action. Unfortunately, it is what dominates the thinking in government and academe and even Wall Street, and as long as policies are being made under such direction, this depression not only will continue, but get worse.

Krugman takes on the Austrians and Ron Paul (and, as usual, misrepresents what they are saying)

2011-12-16T11:34:00.000-05:00

Gee, hoodathunkitt? Paul Krugman hates Ron Paul. It is not enough for Dr. Paul to want to leave abortion to state legislatures (where the U.S. Constitution would place it), but the very fact that Dr. Paul is personally opposed to abortion and would not perform one is enough to send Krugman into a rage.

Furthermore, Krugman attacks Dr. Paul on the matter of civil rights. Now, keep in mind that Dr. Paul is not against civil rights per se, given that no other person on the scene, Democrat or Republican, that is running for president that openly opposes the police state that both parties have created. (Sorry, Krugman. One cannot support both civil rights AND a police state. So, who is against civil rights?)

Anyway, Krugman is not referring to Dr. Paul's views on race, but rather Dr. Paul's view of the 1964 Civil Rights Act. Like all Progressives, Krugman holds that any law or regulation that is created in the name of something like civil rights is in itself the very essence of those rights. As Frederic Bastiat wrote in The Law in 1848, socialists (and I should add, Progressives) always couched beliefs within a specific government action:

Socialism, like the ancient ideas from which it springs, confuses the distinction between government and society. As a result of this, every time we object to a thing being done by government, the socialists conclude that we object to its being done at all.

We disapprove of state education. Then the socialists say that we are opposed to any education. We object to a state religion. Then the socialists say that we want no religion at all. We object to a state-enforced equality. Then they say that we are against equality. And so on, and so on. It is as if the socialists were to accuse us of not wanting persons to eat because we do not want the state to raise grain.

Likewise, according to Paul Krugman, the only reason one could oppose sections of the Civil Rights Act which give government huge swaths of control over private property is racism. (Likewise, if one thinks that ANY environmental regulation is bad or unnecessary, then one is in favor of having feces wash up on beaches, to paraphrase Anthony Lewis, who also wrote his columns at the NYT.)

But Krugman was only getting warmed up when he accused Ron Paul of being a racist and a misogynist. (And why else would one be opposed to abortion than out of hatred for women? Gloria Steinem has declared such, and so it is an established truth, at least at Princeton University and the NYT.)

Ron Paul, writes Krugman:

...(ignores) reality, clinging to his ideology even as the facts have demonstrated that ideology’s wrongness. And, even more unfortunately, Paulist ideology now dominates a Republican Party that used to know better.

Given the open opposition that Republican stalwarts have exhibited toward Dr. Paul, the idea that his "ideology" is dominating the GOP is a very sick joke, but Krugman seems to be full of humor these days. Unfortunately, he totally misstates the position that Austrians have on money, and he further writes that all Austrians believe that the monetary base is exactly the same as money that is circulating.

First, as he points out in the article, the Fed massively increased the monetary base and some Austrians have said that sooner or later if that base is turned into large-scale lending, we are going to have inflation. That is a no-brainer. However, because some Austrians have said that maybe inflation will occur sooner rather than later, according to Krugman, that means that all Austrian theory on money is wrong. (This is what the ancients once called a non sequitur, but without the non sequitur, Krugman would not have any columns.

Second, Krugman continues in that insistence:

Austrians, and for that matter many right-leaning economists, were sure about what would happen as a result: There would be devastating inflation. One popular Austrian commentator who has advised Mr. Paul, Peter Schiff, even warned (on Glenn Beck’s TV show) of the possibility of Zimbabwe-style hyperinflation in the near future.

So here we are, three years later. How’s it going? Inflation has fluctuated, but, at the end of the day, consumer prices have risen just 4.5 percent, meaning an average annual inflation rate of only 1.5 percent. Who could have predicted that printing so much money would cause so little inflation? Well, I could. And did. And so did others who understood the Keynesian economics Mr. Paul reviles. But Mr. Paul’s supporters continue to claim, somehow, that he has been right about everything.

Austrians are not shocked at what has transpired. The economy, thanks to the bailouts, explosion of regulations, and incendiary rhetoric from the White House, is mired in depression, just as Austrians predicted it would be if the policies of the past four years were followed. As long as the monetary base remains just that -- a base -- and the money does not circulate, the official rate of inflation will be low. What I do find interesting, however, is Krugman's insistence that commodity prices have nothing to do with inflation, that the only reason they rise and fall is because of demand from "emerging economies" and "volatility." (Of course, "volatility" is an effect, not a cause, but since Keynesians regularly confuse cause and effect, we should not be surprised at Krugman's conclusions.)

You see, if Austrians are wrong in their belief that an expansion of money in circulation will force up prices (and that is what Krugman insinuates), then all of monetary theory is turned upside down. For that matter, Krugman already is on the record in calling for the Fed to directly purchase U.S. Government securities on the primary market, which in essence would be financing government via the printing press. Does Krugman also believe that such an action would not have a huge effect upon prices of goods, or does he want us to believe that any predictions of inflation here would be wrong?

Krugman's insistence that Austrians are ignorant about money is, well, ignorant. Austrians say that money is a secondary good which has a primary use to facilitate exchanges, and its productivity exists in the fact that it allows exchanges to occur that would not happen in a barter economy. Austrians further hold that money is subject to all of the laws of economics, including the Law of Marginal Utility (no, we don't hold that it simply is a quantity variable).

However, one of the most important aspects of Austrian thinking on money is that Austrians emphasize the transmission mechanism of new money being injected into the economy, and that transmission is non-neutral, for those receiving the new money first will be able to pay for goods at the old prices, but with new incomes. This view contrasts with the Keynesian viewpoint that monetary transmission is neutral, and that the only thing which matters is that money get put into the economy so that someone can spend it.

Moreover, Austrians also point out that the injection of new money into the economy also will have an effect upon the relative prices of goods, and that the relations will change as more money pours in. This contrasts with Krugman's view that new money has no such effect, and that everyone benefits equally from monetary injections. (In Krugman's view, while inflation benefits debtors at the expense of creditors, that is OK because he falsely assumes that all creditors are the "one percent" and that all debtors are in the other category.)

So, because hyperinflation has not hit, Austrians are totally ignorant about money, and that includes Ron Paul. We are dealing with timing, not monetary theory, and Krugman by confusing the former and latter, demonstrates his own ignorance about monetary matters.

Krugman: Save "democracy" via inflation

2011-12-12T07:02:00.000-05:00

Paul Krugman is sounding the alarm on Europe and to a certain extent, I agree with him. Economic collapses tend to bring out the worst in people, and invariably, they will turn to the worst politicians who appeal to resentment, envy and hatred.

Invoking the rise of the political lunatics that took power in the 1930s, Krugman writes that "democratic values are under siege," and says that worse things are down the road. Furthermore, when "austerity" measures involve actually empowering the State to grab more in taxes in the name of "balancing budgets," I agree that "austerity" is a bad thing, but, ironically, the only thing Krugman seems to like about austerity measures is raising taxes.

I also agree with him that we are in a depression, but we fully disagree on how we got here and what must be done to get out. Krugman believes that governments should take more power, inflate the currency, borrow heavily (thus, creating new financial bubbles in sovereign debt that cannot ever be repaid with future tax revenues), confiscate more income from wealthy people, and engage in Crony Capitalist measures like funding "alternative energy."

In a nutshell, everything that Krugman demands the European and U.S. governments do will worsen this depression. Everything. From his scheme of having central banks purchase sovereign debt in the primary markets (which are no markets at all) to government bailing out failing firms and giving huge subsidies to "green" industries, Krugman is calling for putting malinvestments on steroids, in the belief that flooding the economies of the world with even more paper money will save us.

This is not something that will lead to recovery; instead, it is not just "hair of the dog," but rather a call to consume the entire dog itself. And, invoking the "babysitting cooperative" as "proof" that he is right might work at the NY Times and with fellow Keynesians, but it makes no sense in the real world.

Europe seems to be on the brink and so is the USA. And if Krugman really does believe that the "solution" involves more sovereign debt, more subsidies, and more malinvestments, then I would like to sell him some real estate in Princeton.

Do leveraged buyouts destroy the economy? Krugman thinks so

2011-12-09T13:35:00.000-05:00

It is interesting to watch the millionaire Paul Krugman turn into a populist, as the more he goes off on "taxing the rich," the more he demonstrates his own economic ignorance. In a recent column, he attacks Mitt Romney for being a "job destroyer" because Romney's firm, Bain Capital, engaged in leveraged buyouts, likening him to the villain of Oliver Stone's move, "Wall Street."

Not having seen "Wall Street" or its sequel, I'm not particularly interested in Oliver Stone's view of the world, especially since Stone worships dictators such as Fidel Castro and Hugo Chavez, both of whom have reduced their respective countries, Cuba and Venezuela, into economic basket cases. Nonetheless, the theme that Krugman wants to portray is that leveraged buyouts usually are bad and that they "destroy jobs."

The problem is that Krugman (once again) does not understand the simple Law of Opportunity Cost, which is pretty common among Keynesians. He writes:

So Mr. Romney made his fortune in a business that is, on balance, about job destruction rather than job creation. And because job destruction hurts workers even as it increases profits and the incomes of top executives, leveraged buyout firms have contributed to the combination of stagnant wages and soaring incomes at the top that has characterized America since 1980.

It is hard to know where to begin, but I will start by saying that the official rate of unemployment by itself is no measure of prosperity or even the health of the economy. I recall watching two economists debate each other on television about 30 years ago, with one of the economists having come back from a trip to Romania and talking about the poverty that he witnessed there.

"But there's NO unemployment there," the other economist shot back. (The second economist is a Marxist and teaches at a university where I used to live.) To the Marxist, "unemployment" was the trump card: "Aha! You claim Romania is a bad place to live, BUT EVERYONE THERE HAS A JOB! SO THERE!!"

Indeed, after the communist regime fell there, the curtain was lifted and people found out just how poor Romania was and how even the government's official "we have no unemployment" line was fraudulent. Nonetheless, people on the left still hold that unemployment really is the only variable that matters, economically speaking.

When it comes to issues of leveraged buyouts, Krugman's logic goes south, especially on the employment situation. First, we have to remember that a viable firm is one in which the value of the whole is greater than the sum of its parts. This is important, because Krugman wants us to believe that firms like Bain buy healthy and viable companies, destroy them from within, and then pocket the money and throw people out of work. Furthermore, it is the creation of unemployment, according to Krugman, that creates the "wealth" for people like Romney.

Now, we have to understand that the ONLY way for Bain or any other firm in this situation to make money is for the standard "buy low, sell high" and the only way that such a thing can happen with a leveraged buyout is for the sum of the parts of the firm be greater than the value of the firm as a whole. In other words, the firm has to be in trouble, whether it be mismanagement or something else that has made the company decline in value.

For example, Bain could NOT have purchased Apple for a leveraged buyout, since the value of Apple as a firm would be greater than all of the individual assets that Apple possesses. Yet, if one reads Krugman's column, he wants to paint a picture of Bain purchasing a company that is doing great, and it just destroys it so that some rich guy can walk off with money in his pocket.

Logically speaking, that is not possible. One cannot purchase a viable, healthy firm, sell off its assets, lay off its workforce, and make money. For that matter, the kind of cost-slashing measures that might occur if a corporate raider actually tries to save the firm are not arbitrary; they are done because the value of the sum of the parts is greater than the value of the whole.

Employees who go through such buyouts generally don't have happy stories to tell about it, but one should remember that if a firm is in a situation in which it finds the value of the sum of its parts to be greater than the value of the whole, the hard truth is that those employees most likely are going to lose their jobs, anyway. Why? A firm in that condition is not likely to last long, as it has an illness that either can be fixed only with new management or entrepreneurial ideas, or is going out of business (where its assets will be sold at a bankruptcy auction).

An analogy is the junkyard for cars. Many of the cars that are brought to junkyards still can be operated, and many of them could be fixed to the point where they might work. Junkyards, however, don't make money from fixing the cars on the lot. Instead, they make money by selling the parts taken off the junked cars to mechanics and dealers or selling the components as scrap to be recycled.

That is the hard reality of the world of leveraged buyouts. A firm is not a candidate for such a fate unless buyers perceive either that the company is going out of business or is so mismanaged or has unnecessarily-high costs of production. As everyone knows, leveraged buyouts are risky in that the raiders sometimes don't get what they anticipated, and when people lose their jobs, there are hard feelings.

However, Krugman would have us believe that leveraged buyouts are the CAUSE of unemployment, as opposed to the fact that job losses in such situations come about because the firm no longer was as viable as it once was. True, I realize that Keynesians probably are incapable of thinking of something in terms of opportunity cost, and they certainly can find no value in someone breaking up a firm and selling off the assets when the conditions allow them to do so.

In Wonderland, economies grow because of the nebulous thing called "aggregate demand," which is created by governments creating money. There is no such thing as opportunity cost in that world, and the entrepreneurial processes of creating more goods while using fewer resources does not spell growth to them, but rather unemployment.

Krugman wants us to believe that people get rich in a market economy by causing large-scale unemployment. In a market economy, people become wealthy by providing something that others want and are willing to give up something scarce that has value to others in order to obtain that new good or service. In the process of doing so, entrepreneurs create employment opportunities that enable more and more people to be able to obtain things that they previously could not.

Unfortunately, Krugman has chosen another path of explanation and the end result of governments following his advice is more poverty, inflation, and, in the end, more unemployment.

Well, Hayek DID win a Nobel Prize

2011-12-08T13:24:00.000-05:00

Paul Krugman has announced it: Hayek is not important, and his views have been "discredited," although he did win the Nobel in 1974 for those "discredited" views.

Now, Krugman did not mention Hayek's Nobel, claiming instead that the only reason Hayek was well-known was for The Road to Serfdom which, of course, was nothing more than a right-wing screed, at least according to Krugman. He also says that in the early 1930s, Hayek "made a fool of himself" and that "his ideas vanished from the professional discussion."

Contra Krugman, Keynes did not do anything more than to rewrite Mandeville's "Fable of the Bees," claiming that the less savings that occurs in an economy, the better the economy will perform. (Capital, as we all know, simply appears like magic.) As for the Austrian Theory of the Business Cycle, Krugman constantly refers to it as a "Hangover Theory," which it is not, and then claims Austrians are saying that artificial expansion of credit leads to "overinvestment" when, in truth, Austrians say there is "malinvestment," which is much different.

Let us not forget that Krugman is claiming that this "liquidity trap" which he claims is in play also means that there is no opportunity cost to more government borrowing, and that when governments print money, they actually are creating more wealth. That is the real meaning of Keynesianism.

Peter Klein on the absurdity of Keynesian Economics

2011-12-06T15:14:00.000-05:00

Peter Klein of the University of Missouri (who wrote his dissertation under Oliver Williamson, who, unlike Paul Krugman, is an actual economist who won the Nobel Prize) takes on Keynesian dogma. Enjoy.

Can we "save" the euro through inflation and outright financial fraud? Good luck!

2011-12-02T14:07:00.000-05:00

It has come to this: all we need is a bit more time to sort out the financial mess that now engulfs Europe (and, by proxy, the United States). In the meantime, the Federal Reserve System, the European Central Bank, as well as four other banks, will resort to the usual "fixes" of inflation and the everlasting game of "Let's pretend that the worthless securities they purchase really are valuable."

The latest reprieve, for all its ballyhoo, is nothing but a stay of execution for the euro and (next) the dollar, but for the moment the central bankers -- and especially Ben Bernanke -- can share the spotlight and have the Usual Suspects praising them for their Great Wisdom and Foresight:

In Europe and the United States, where the announcement broke well ahead of stock market openings, the prospect of more cheap money to ease banks’ operations sent stock indexes soaring. A broad index of German stocks, the DAX, jumped almost 5 percent Wednesday, while the broad measure of American stocks, the Standard & Poor’s 500-stock index, climbed more than 4 percent. Short-term borrowing costs also declined modestly for some European governments and banks.

But policy makers and analysts were quick to caution that the Fed’s action did not address the fundamental financial problems threatening the survival of the European currency union. At best, they said, efforts by central banks to ease financial conditions could allow the 17 European Union countries that use the euro sufficient time to agree on a plan for its preservation.

In other words, the head has been temporarily moved from the chopping block, and that is cause for a party. Keep in mind, however, that the very people who celebrated in the stock and bond exchanges sooner or later will return with very different looks on their faces, as they realize that this lurching from crisis to crisis -- with the "solution" being more "liquidity" (read that, inflation) -- is unsustainable. The debt is unmanageable, period, and these economies are incapable at the present time of generating enough income to pay back these loans, especially given that the current set of "bailout" loans coming from the Fed and elsewhere are nothing more than loans to enable these countries to pay their current debt service.

Now, according to Paul Krugman, there really is a way out for the euro and the dollar. Yes, in response to the Greek crisis and others that follow in its wake, the European and U.S. government must follow policies that resemble...Greece. No, I'm not kidding.

Read for yourself:

I hope, for our sake as well as theirs, that the Europeans will change course before it’s too late. But, to be honest, I don’t believe they will. In fact, what’s much more likely is that we will follow them down the path to ruin.

For in America, as in Europe, the economy is being dragged down by troubled debtors — in our case, mainly homeowners. And here, too, we desperately need expansionary fiscal and monetary policies to support the economy as these debtors struggle back to financial health. Yet, as in Europe, public discourse is dominated by deficit scolds and inflation obsessives.

Yes, what is needed is inflation and more borrowing, the very things that put us in this untenable position in the first place. The U.S. economy is not producing enough to give the tax revenues needed for this burst of spending in the last four years, so borrowing and, essentially, monetizing U.S. debt are the only ways even to continue this spree.

There is another way out, one that is painful but at least will not have the long-term destructive effects of the kind of massive inflation that seems to be on the horizon: default. Yes, default.

First, a real default versus what Krugman is demanding -- default via inflation -- will not have the same distorting economic effects that inflation (and especially if it reaches double-digits...and beyond) would have, and second, a default would provide a much more realistic picture of what the situation really is, as opposed to what happens when inflation undercuts the price system. Yes, there will be a sharp downturn when this happens, but afterward, there will be the real prospect of an economic recovery, something that simply is not going to happen if this borrowing and printing madness continues.

When Krugman calls for "expansionary fiscal and monetary policies," he is not talking about policies that actually will expand the real economy. No, he is talking about more financial trickery, more central bank "pulling rabbits out of hats," more "stimulus" money given to politically-connected groups that are tied to the Obama administration, and so on.

Trickery and inflation won't save the euro. The irony as I see it is that the euro has a lot better chance of surviving if some honesty is permitted to enter the discussion. At the present time, unfortunately, the loudest voices are those that call for further debasement of the euro (and the dollar) and even more borrowing to cover the payments for the last set of loans. Neither option is sustainable, but for now, that is all the Keynesians seem to be offering.

Drowning in Keynesian fallacies

2011-11-29T20:45:00.000-05:00

Whenever a Keynesian, be it Paul Krugman or even the original Keynesian, try to "refute" Say's Law, they generally create a caricature or straw man, and then refute that instead of dealing with Say's basic point. And Krugman does it again in a recent blog post, this time taking on Grover Norquist.

Krugman first takes a quote from Norquist:

The idea that if you take a dollar out of the economy and then — from somebody who earned it, either through debt, or through taxes — and give it to somebody who’s politically connected, that there are more dollars around, that if you stand on one side of the lake and put a bucket into the lake, and walk around to the other side in front of the TV cameras, pour the bucket back into the lake and announce you’re stimulating the lake to great depths. We just wasted $800 billion on stimulus spending that added to debt, that killed jobs.

Krugman then writes, "OK, this is just Say’s Law." As one who has written much on Say's Law, I ask, "It is?"

In dealing with what Krugman insists is a "fallacy," first we have to remind people that Krugman actually believes that printing money CREATES real wealth, or at least it can lead to the creation of real wealth. When criticized, Krugman usually turns to the alleged "baby-sitting co-op" that "solved" its problems by printing more tickets. (You see, the "co-op" is supposed to be a perfect example of an entire economy with all of its complexities.)

Second, Keynes never "discredited" Say's Law. Instead, Keynes created a caricature and refuted that instead, something Henry Hazlitt notes in his book, The Failure of the New Economics, which thoroughly refutes Keynes' General Theory. Furthermore, in denying Say's Law, Krugman is saying in effect that factors of production for purposes of economic analysis can be treated as homogeneous.

Thus, all it takes to get the factors employed is just a monetary or spending transmission, be it via government spending (which is what is "best" in a "liquidity trap"), or by having monetary authorities drive down interest rates. Under this interpretation, inflation does not have a distorting effect upon the economy but, instead, actually stimulates economic activity and creating new wealth.

Thus, what one produces is irrelevant as long as a government can print money. There is a problem, however, and that is that if all it takes is the "courage" to print money (and most governments ALWAYS have the courage to try to produce something from nothing), then Zimbabwe should be the wealthiest nation on the planet.

Krugman would argue that the U.S. Dollar is different, but if real assets mean nothing, or if all assets for purposes of economic analysis considered to be homogeneous, then it would not matter what was produced in the country represented by a particular currency. And as for Say's Law and the Norquist quote, I would argue that Krugman's next quote does not negate the truth of what Norquist is saying, but rather exposes Krugman's fundamental ignorance of simple opportunity cost:

OK, this is just Say’s Law. We don’t know whether Norquist is honest enough with himself to realize that exactly the same logic applies to any spending, that according to his story anyone who borrows to spend, including companies making investments, is just displacing someone else’s spending.

In other words, everything is reduced to just "spending," when, in fact, investment in a free market is profitable when entrepreneurs are able to move resources from lower-valued uses to higher-valued uses as ultimately determined by consumers.

In Wonderland, no such thing happens, as one "investment" is as good as another, since all that matters is spending. Thus, the Obama administration can throw hundreds of billions of dollars at solar energy, windmills, and ethanol and claim that it is "investing in America's future." Indeed, it is diverting resources from higher-valued uses to lower-valued uses and is destroying the economic future of this nation. Furthermore, we are finding that many of the companies receiving these massive subsidies are firms that have contributed money to the Obama campaign, which to me is utter corruption. Contribute to Obama, and have the president then loot taxpayers to throw good money after bad.

The key to understanding what Krugman is saying is to remember that he does not believe resources can be moved from lower-valued to higher-valued uses, at least economically speaking. It is all spending all of the time.

Yes, Krugman, maybe we should have Singapore's tax rates

2011-11-27T22:26:00.000-05:00

In calling for higher taxes, Paul Krugman now is trying to claim that if the U.S. Government increases taxes on some people, that will help lead us out of the depression. Now, it would be the first time in human history that increasing taxes brought economic recovery, but in Wonderland (and the Princeton University economics department), anything is possible.

In his latest column, Krugman demands higher taxes on "the rich" (of which category multi-millionaire Krugman resides), Krugman calls for a financial transactions tax, writing:

And it’s instructive, too, to note that some countries already have financial transactions taxes — and that among those who do are Hong Kong and Singapore. If some conservative starts claiming that such taxes are an unwarranted government intrusion, you might want to ask him why such taxes are imposed by the two countries that score highest on the Heritage Foundation’s Index of Economic Freedom.

It is interesting that he brings up Singapore, where Jim Rogers now lives, for Singapore is NOT in the same depression the USA wallows, and here are some facts about Singapore's taxes:

Singapore has NO taxes on capital gains (and Krugman demands that Congress raise capital gains taxes);
Sinapore's corporate income rate is a flat 17 percent;
Singapore's income tax rates are substantially lower than U.S. rates.

So, Krugman justifies a proposed tax on financial transactions because Singapore does it, but then fails to inform readers that Singapore has tax rates that would enrage any U.S. "Progressive" like Krugman. (Interestingly, the USA has some of the highest corporate income taxes in the world, but they are not low enough for Krugman.) For that matter, tax rates in Hong Kong, both corporate and individual, are substantially lower than U.S. rates. (And Hong Kong has no tax on capital gains.)

So, once again we see Krugman being deceitful, claiming that because Hong Kong and Singapore tax financial transactions, we should do it to. However, Krugman fails to add that neither Hong Kong nor Singapore have the punitive taxes on income, corporate profits, and capital gains that we have in this country -- and Krugman demands that they be made even more draconian.

Perhaps Americans should understand why people like Jim Rogers have moved their families and their money from this country. The USA has political leadership that insists on military adventures, wasteful government spending on "alternative energy," a criminal "justice" system that is out-of-control at both federal and state levels, and an anti-business culture among its "Progressive" elites.

What does this mean? It means that there will be no economic recovery in the years to come. Paul Krugman really wants us to believe that if the U.S. Government both jacks up tax rates and spending (perhaps preparing for that fictitious showdown against Krugman's "space ailens"), that the end result will be prosperity. That simply is not going to happen.

Just because Krugman has made millions of dollars calling for expansion of state power does not mean expansion of state power is a good thing. As we are going to find out in the coming years, the countries where Keynesian economics is practiced are going to be those countries with declining economies and declining standards of living.