Friday, March 5, 2010

Is Jim Bunning Immoral?

Paul Krugman today has chosen to write about Sen. Jim Bunning's recent attempt to hold up the extension of unemployment benefits, and it is clear his column could have been written by a DNC ghostwriter or by an editorial writer at the New York Times. What also is clear that this column was not written by an economist; it is pure political partisanship created by a political operative.

However, there was one difference between Krugman's column and the many other pieces of undisguised partisanship that has filled the airwaves and editorial pages: Krugman claims that the extension of benefits aids the economy. Don't take my word for it; here is the Nobel Laureate in his own words:
What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment. That’s because the economy’s problem right now is lack of sufficient demand, and cash-strapped unemployed workers are likely to spend their benefits. In fact, the Congressional Budget Office says that aid to the unemployed is one of the most effective forms of economic stimulus, as measured by jobs created per dollar of outlay.
This is classic textbook Keynesianism with some political partisanship included. We are in recession, according to Krugman, because we are not spending enough money. Give money to people, let them spend it, and out of this comes economic recovery.

Lest one think I exaggerate, here is Krugman in his own words, displaying both his partisanship and his Keynesianism:
But that’s not how Republicans see it. Here’s what Senator Jon Kyl of Arizona, the second-ranking Republican in the Senate, had to say when defending Mr. Bunning’s position (although not joining his blockade): unemployment relief “doesn’t create new jobs. In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.”
Krugman goes on to call this position "immoral," so the only way to interpret that is to say that according to the Economics of Paul Krugman, the only moral position one can take today is that of John Maynard Keynes. (I guess this is Krugman's version of a Keynesian theocracy.)

I would like to provide some counterarguments. First, Bunning said forthrightly that not only was he not against extension of benefits, but that he also was following President Barack Obama's dictum that we "pay as we go," and that there had been no budget allocation for this $10 billion expenditure. While Krugman and the Democrats (and most of the media) were declaring, "It's only $10 billion," Bunning replied that if Democrats could not even demonstrate some fiscal discipline in a relatively small amount of money, then they were incapable of dealing with the larger budget issues that threaten to swamp our entire country in a sea of unpayable debt.

Second, Kyle is correct; studies have demonstrated that indefinite extension of unemployment benefits also keep people from finding new jobs and ending their term of unemployment. Furthermore, as Murray N. Rothbard wrote in America's Great Depression, which clearly runs counter to Krugman's inflationary Keynesianism, that continued government spending only extends the downturn and makes it worse. He writes:
If government wishes to see a depression ended as quickly as possible, and the economy returned to normal prosperity, what course should it adopt? The first and clearest injunction is: don't interfere with the market's adjustment process. The more the government intervenes to delay the market's adjustment, the longer and more grueling the depression will be, and the more difficult will be the road to complete recovery. Government hampering aggravates and perpetuates the depression. Yet, government depression policy has always (and would have even more today) aggravated the very evils it has loudly tried to cure.
He goes on to list the various ways that government makes things worse, and it is a textbook description of everything that Krugman claims will end this economic nightmare:
1. Prevent or delay liquidation. Lend money to shaky businesses, call on banks to lend further, etc.

2. Inflate further. Further inflation blocks the necessary fall in prices, thus delaying adjustment and prolonging depression. Further credit expansion creates more malinvestments, which, in their turn, will have to be liquidated in some later depression. A government "easy money" policy prevents the market's return to the necessary higher interest rates.

3. Keep wage rates up. Artificial maintenance of wage rates in a depression insures permanent mass unemployment. Furthermore, in a deflation, when prices are falling, keeping the same rate of money wages means that real wage rates have been pushed higher. In the face of falling business demand, this greatly aggravates the unemployment problem.

4. Keep prices up. Keeping prices above their free-market levels will create unsalable surpluses, and prevent a return to prosperity.

5. Stimulate consumption and discourage saving. We have seen that more saving and less consumption would speed recovery; more consumption and less saving aggravate the shortage of saved-capital even further. Government can encourage consumption by "food stamp plans" and relief payments. It can discourage savings and investment by higher taxes, particularly on the wealthy and on corporations and estates. As a matter of fact, any increase of taxes and government spending will discourage saving and investment and stimulate consumption, since government spending is all consumption. Some of the private funds would have been saved and invested; all of the government funds are consumed. Any increase in the relative size of government in the economy, therefore, shifts the societal consumption-investment ratio in favor of consumption, and prolongs the depression.

6. Subsidize unemployment. Any subsidization of unemployment (via unemployment "insurance," relief, etc.) will prolong unemployment indefinitely, and delay the shift of workers to the fields where jobs are available.
Why the great divide between Rothbard and Krugman? Krugman believes that recessions simply are episodes of reduced spending while Rothbard and the Austrians hold that recessions are the inevitable result of massive malinvestment of capital and resources. To Krugman, a recovery simply happens, and that in the interim, government needs to replace private spending by any means possible.

Austrians, on the other hand, recognize that there can be no substantive recovery until the original malinvestments are liquidated and the economy returned to a structure of production that is sustainable. Thus, if anyone is being dishonest, it is Krugman, who really, according to the Austrians, is advocating that the depression be extended and deepened.

Now, I am sure that Krugman and his Keynesian (and leftist) supporters would argue that Krugman wants the depression to end and that the Austrians want it to continue so they can enjoy watching people suffer. For years, Krugman has framed his arguments in such a manner to which anyone who disagrees with him does so because of innate hatred for humanity.

Yet, as we enter what is a third year of this depression with no end in sight and with the government continuing to prop up malinvestments through borrowing and printing money, just who is being immoral? Krugman is advocating a Big Lie. Had presidents Bush and Obama listened to the Austrians instead of the Keynesians, we would be out of this downturn and headed for a real recovery. Instead, the economy flounders and will continue to flounder.

So, whether or not Krugman and his allies want to claim that Bunning took his stand because he is evil, nonetheless, Bunning was right; the extension of these benefits, paid by money that will be borrowed or printed, only will extend the problem. Thus, Krugman is advocating the very policies that make our situation worse. Who is being immoral?


Andy Katherman said...

Good column William. One thing that always fascinates me with the "we gotta keep spending" argument is... what do these overlords want the unemployed to spend their money on? Do they wish the citizens to keep paying on that house, car, credit cards or any of the other good that they can no longer afford? Isn't this preventing people from looking elsewhere in maybe another city, county, or state that might be growing and fit their skill set?

Maybe we need to find that "textbook" and insert this blog post into the appendix.

Daniel said...

Bunning's actions could be a test to see how the public might react to cuts of these sorts in the future.
There are many ways to take a stand, but stopping the payments for the unemployed is pretty cruel on the surface.

The question is what will all the insolvent states do???

Zach Bush said...

Funny how Krugman does not remind his readers that Bunning was one of the few Senators that voted 'NO' for TARP and bailing out rich bankers.

I guess that is just an inconvenient fact.

I would also give him credit for pointing out the hypocrisy of the Republicans in that they had no problem with large, unfunded spending bills during Bush.

But that only begs the question, "Mr. Krugman, you often assert that the Republicans are to blame for the current depression and that insufficient spending leads to depressions. But if you admit that Republicans increased government spending under Bush, then how can they and insufficient spending be responsible for the current depression?"

To which I'm sure he would reply, "they didn't spend enough!"

SirThinkALot said...


From what I understand of Kenesian theory, it doesnt matter WHAT the spending is on, so long as we keep the 'circular flow' of money going. Indeed after WWII Kensian economists warned that we would face a major depression unless the Government kept spending money to make planes, tanks, and ships. Never mind the fact that they would be useless, actually worse than usless once you figure in the opportunity cost to build them.