Friday, December 31, 2010

Krugman's Voodoo Economics: Tax, Spend, and Inflate Ourselves Into Prosperity

Paul Krugman is in his element again. The Republicans control the U.S. House of Representatives and the Democrats no longer have a filibuster-proof majority in the Senate. A very liberal Democrat occupies the White House and is governing via executive orders (winning Krugman's approval, although executive orders are good only when Democrat presidents issue them).

So, even though Democrats still have the upper hand, in Krugman's mind the Republicans rule. Why? Because tax rates are not even higher than they are now. Furthermore, because the top individual income tax rate remains at 35 percent instead of being raised to 39.6 percent, all is lost because, in Krugman's view, that 4.96 difference is the difference between having a manageable federal budget and having large deficits. (Well, that 4.96 AND "death panels.")

All of this leads to a very interesting view of the Economy According to Krugman. As he wrote earlier this year, if it were up to him, ALL tax rates would rise, which would give the government more money (supposedly), lead to more spending, and give the economy a boost. (I'm not sure that Krugman's scenario would follow; when Herbert Hoover got Congress to raise taxes in 1932, revenues actually fell, but, then, Hoover was a Republican and did not have the requisite magical Krugmanian touch that Democrats have when it comes to taxes and spending.)

In his column today, Krugman accuses the Republicans of "hypocrisy," because they both support tax cuts and give lip service to balancing the federal budget. Actually, I agree with Krugman on this point, but I'm not sure the guy who accused Sarah Palin of "lying" on "death panels" and then glowingly spoke of "death panels" before denying he had claimed he really didn't mean what he just had said is someone who should call others "hypocrites."

Nonetheless, I think that we have a pretty clear picture of what Krugman believes will "revitalized" the American economy: higher taxes, more government spending, and inflation. On top of that, Krugman wants to bring back the old financial cartels that existed from the New Deal until the 1980s, not to mention other economic cartels that were prevalent under the federal government's regulatory schemes.

Those of us where were adults in 1980 can remember the outright stagflation that accompanied the government's economic policies, when inflation was in double-digits, unemployment was rising, and we saw no way out. Yet, Krugman wants to bring back those days via the resurrection of the old regulatory regimes and bursts of government spending and inflation.

Step back, folks, and take a hard look at what Krugman is recommending. This is a recipe for stagflation and lots of it. It is NOT a recipe for revitalizing our economy, period.

Economic laws have not changed. Government cannot repeal the Law of Scarcity nor can it order an economy into prosperity no matter what Krugman tells us. Indeed, what Krugman is recommending is nothing short of True Voodoo Economics.

29 comments:

AP Lerner said...

So just to clarify, your views have gone from expecting hyperinflation, to now expecting stagflation? Very interesting.

Anonymous said...

Personal consumption in real terms has now exceeded the peak before the big recession. Nothing, it seems, nothing can stop the American consumer from their birthright - consuming more. I am amazed at this supposed deleveraging episode. Where is the extra consumption coming from? If the government transfers are part of it, and they are, they cant be big enough to raise it so much. When, if not now, are we to expect a rebalancing of consumption in this world - this surely can not go on, can it?

William L. Anderson said...

AP, please show me where I ever have predicted hyperinflation. You continue to claim I have made such a prediction, so either find that prediction or admit that I have not said these things.

Places that have had hyperinflation have had a large government sector in which people were paid directly with printed money, i.e. Bolivia and Zimbabwe. In our system, new money arrives through the banking system -- unless the Fed directly purchases government bonds, enabling the government to borrow and spend without limits. That has not yet happened, and I hope it does not.

AP Lerner said...

Well, in this post, you re-post what Guido Hulsmann writes, and I have to assume you agree with Mr. Hulsman, since you did re-post what he said on your blog. And he clearly states: "Then the only remaining alternative will be between (I) US and German government default, entailing a deflationary meltdown of world financial markets, and (II) monetizing T-bills and bonds, which will very quickly bring us on the road of world hyperinflation."

Do you disagree with Mr. Hulsmann?

Bob Roddis said...

Since there isn't enough stuff to satisfy all of this unpayable debt, absent some policy changes or an explicit default, we're always "on the road" of world hyperinflation. Whether this is likely to occur in the short run is another question.

Austrians disagree with each other all of the time when predicting the future (which is hard to predict).

Austrian Robert Wenzel thinks we're on the brink of a fed-induced artificial mini-boom and disagrees with Austrian Mish Shedlock:

http://tinyurl.com/2988avb

This says nothing at all regarding basic Austrian theory, about which neither Dr. Hut Tax nor LK have the slightest familiartiy.

Another Anonymous said...

Those of us where were adults in 1980 can remember the outright stagflation that accompanied the government's economic policies, when inflation was in double-digits, unemployment was rising, and we saw no way out. Those of us can remember a much healthier, honester and more equitable economy and society. Unfortunately, Reagan, Thatcher and governments worldwide saw the way out of the greatest prosperity the world had ever seen, the postwar world created by FDR, the New Deal, the Marshall Plan and Keynesian economics. The response was like amputating a limb and injecting oneself with AIDS in response to the mild sniffles of the 70s "stagflation". Anyone sane would like to have those stagflation days back.

Don't know what is meant by "financial cartels" - but anything would be better than the current system with a bloated, cancerous financial sector bleeding the real economy white, run by criminals who are puppet-masters of the government.

Austrians go on and on about "The Law of Scarcity" (which doesn't seem to apply to things which actually are scarce - money and jobs) They complain about others' ignorance of Austrian concepts - but they never say what they are in their own words, but just intone them like religious mantras.

William L. Anderson said...

If the scenario went according to what Guido says, then hyperinflation could be a possibility. However, I never have made that prediction and anyone who has read my blog knows that.

In fact, I have chided the Austrians for being too quick on the hyperinflation trigger. It could happen, but a lot of things would have to occur between now and then.

Bob Roddis said...

If you want to understand the basics of Austrian theory, read “The Essential Von Mises” by Murray Rothbard (it's free, we're not hiding it). Human beings are purposeful but ignorant (and not necessarily rational). Value is subjective with each individual. Economic calculation by individuals is essential and the only way to provide such information for purposes of economic calculation is through free market pricing. Funny money dilution results in the significant impairment of economic calculation. The Keynesian aggregates are not real and do not exist. Their purpose is to confuse and obfuscate. The free market does not naturally slow down and does not require government funny money to provide “traction”. About the only purposes of funny money are the illicit transfer of wealth and purchasing power and the artificial lowering of wages and prices without the victims understanding what hit them.

http://mises.org/resources.aspx?Id=3081&html=1

Stagflation in the 1970s was real and a real problem. The problems we now face were caused by the unconstrained funny money regime. which causes an artificial boom followed by an inevitable bust.

paul from texas said...

Bob Roddis says the Keynesian aggregates are not real. Not sure what he means. They are an accounting construct, so they are as "real" as any other accounting construct presumably.
He then talks about something called "the free market" which never naturally slows down.
Talk about obfuscation. I have no idea what he is talking about here.
Seems to be a very confused individual.

Bob Roddis said...

It's a new year and the opponents of freedom and life are still as dumb as a crate of anvils.

Anonymous said...

Another Anonymous makes a mistake typical of most interpretations of the postwar era.

Reagan and Thatcher did not do a single thing to remove postwar social democracy. Social spending tripled under Margaret Thatcher, who kept universal medical care and several nationalised industries intact. The biggest privatizations occured before she came to power, by a Labour government out of circumstances they could not help. In the United States, Reagan multiplied all government spending, be it military, administrative, or social, created new regulatory agencies like OHSA, reduced TAX RATES while inflation brought people with same real incomes into higher tax brackets. There was no deregulation, but only replacement of old regulators with new ones, and that was merely a continuation of what Labour and Democrats did.

Postwar prosperity was a continuation of 1900-1920s prosperity, which was a continuation of 1830-1860s prosperity and so on. Western industrial nations do well no matter what, and their long run progress has always been upwards. Rich nations provide the best investments, which in turn make rich nations richer and so on. All prosperity in the West is a result of 2,500 years of capital accumulation. End of story.

The most honest, equitable society was pre-democracy Britain, where the entire country was run by a tiny honest civil service that never embezzled or took a single bribe or lied to the public, where the Conservative government improved safety conditions for coal miners and allowed more decent living for the working class. Lord Salisbury, the last of the anti-democracy front, was right when he said that democracy allows debtors to outvote creditors because they outnumber them.

Anonymous said...

Another Anonymous makes a mistake typical of most interpretations of the postwar era.

Reagan and Thatcher did not do a single thing to remove postwar social democracy. Social spending tripled under Margaret Thatcher, who kept universal medical care and several nationalised industries intact. The biggest privatizations occured before she came to power, by a Labour government out of circumstances they could not help. In the United States, Reagan multiplied all government spending, be it military, administrative, or social, created new regulatory agencies like OHSA, reduced TAX RATES while inflation brought people with same real incomes into higher tax brackets. There was no deregulation, but only replacement of old regulators with new ones, and that was merely a continuation of what Labour and Democrats did.

Postwar prosperity was a continuation of 1900-1920s prosperity, which was a continuation of 1830-1860s prosperity and so on. Western industrial nations do well no matter what, and their long run progress has always been upwards. Rich nations provide the best investments, which in turn make rich nations richer and so on. All prosperity in the West is a result of 2,500 years of capital accumulation. End of story.

The most honest, equitable society was pre-democracy Britain, where the entire country was run by a tiny honest civil service that never embezzled or took a single bribe or lied to the public, where the Conservative government improved safety conditions for coal miners and allowed more decent living for the working class. Lord Salisbury, the last of the anti-democracy front, was right when he said that democracy allows debtors to outvote creditors because they outnumber them.

Bob Roddis said...

Murray Rothbard eviscerates Reagan again and again here:

http://tinyurl.com/25wnoyo

I fail to see what Reagan has to do with Austrian economics or libertarian policy.

Tel said...

"Rich nations provide the best investments, which in turn make rich nations richer and so on. All prosperity in the West is a result of 2,500 years of capital accumulation. End of story."

I predict that story will change rather dramatically within the next decade.

2500 years ago, Greece was the pinnacle of civilization. The Macedonian phalanx (backed up by Alexander the Great's leadership and deft light cavalry charges) was the unstoppable war machine of its day. Where is Greece now? A corrupt backwater, up to their eyeballs in debt and social unrest, getting bailed out by China. Why isn't Athens the great capital of Europe now?

If not Athens, then why not Rome? Rome was the pioneer of mass production, professional soldiers, eclectic acquisition of technology, brilliant logistics, massive infrastructure investment, and an excellent central administration system. Why is Rome not the capital of Europe, or the world?

Besides, how do you explain the modern day power of the US military and trade empire? There hasn't been anywhere near 2500 years of capital accumulation in the USA -- maybe a few hundred years worth. Sure the US got a bit of a boost with both capital and labor fleeing from WWII, let's consider that event worth an extra hundred years of normal capital accumulation... still a long way short of the centuries that Europe had to get ahead.

Lord Keynes said...

Those of us where were adults in 1980 can remember the outright stagflation that accompanied the government's economic policies, when inflation was in double-digits, unemployment was rising, and we saw no way out. Yet, Krugman wants to bring back those days via the resurrection of the old regulatory regimes and bursts of government spending and inflation.

The fundamental cause of double-digit stagflation was (1) two oil shocks, and (2) wage-price spirals, owing to the higher labour union power back then.

Your knowledge of history is laughably defective.

Bob Roddis said...

"Wage/price spirals" cannot exist without diluting the funny money supply. Unions have COLA allowances (which should be called diluted funny money allowances) so they can try to keep up with inflation, which, of course, is caused by diluted funny money.

The "oil shocks" were induced by the diluted funny money supply.

Keynesianism is the cause of most of the evil in the world.

A new year. Same old Keynesian BS, doubletalk and obfuscation.

Anonymous said...

Lord Keynes admits to exogenous factors causing economics slowdown?

What laughable irony. You should try reading General Theory again.

Anonymous said...

Lord Keynes said

"The fundamental cause of double-digit stagflation was (1) two oil shocks, and (2) wage-price spirals, owing to the higher labour union power back then"

You must have been one of those children left behind. What you are referring to are the wage-price controls by Nixon, which would have been a government intervention.

Your lack of knowledge in history is laughable.

P.S. - Keynes didn't acknowledge the real possibility of Stagflation. Keynesians were forced to after being destroyed by monetarists. You should read up on your own theories before posting.

Bob Roddis said...

Ah yes, 1973. Having become an Austrian in January, 1973, I was able to watch the madness with new insight.

Newsweek couldn't figure out that wage and price controls cause shortages. It had a cover claiming we were running out of everything:

http://tinyurl.com/24dhoxj

Those controls along with Tricky Dick forcing us onto a pure diluted funny money system were something to behold.

Lord Keynes said...

The "oil shocks" were induced by the diluted funny money supply.

This is most idiotic statement yet.

The first oil shock was induced by US support for Israel's Yom Kippur war.

The second by the fall of the shah and the resulting loss of Iranian oil output.

David said...

LK,

If you're right (not saying you are, but let's play along), then the oil shocks were caused by government intervention. Kudos to you for finding the origin of market failures.

Bob Roddis said...

End of Bretton Woods
On August 15, 1971, the United States pulled out of the Bretton Woods Accord taking the US off the Gold Exchange Standard (whereby only the value of the US dollar had been pegged to the price of gold and all other currencies were pegged to the US dollar), allowing the dollar to "float". Shortly thereafter, Britain followed, floating the pound sterling. The industrialized nations followed suit with their respective currencies. In anticipation of the fluctuation of currencies as they stabilized against each other, the industrialized nations also increased their reserves (printing money) in amounts far greater than ever before. The result was a depreciation of the value of the US dollar, as well as the other currencies of the world. Because oil was priced in dollars, this meant that oil producers were receiving less real income for the same price. The OPEC cartel issued a joint communique stating that forthwith they would price a barrel of oil against gold.

This led to the "Oil Shock" of the mid-seventies. In the years after 1971, OPEC was slow to readjust prices to reflect this depreciation. From 1947-1967 the price of oil in U.S. dollars had risen by less than two percent per year. Until the Oil Shock, the price remained fairly stable versus other currencies and commodities, but suddenly became extremely volatile thereafter. OPEC ministers had not developed the institutional mechanisms to update prices rapidly enough to keep up with changing market conditions, so their real incomes lagged for several years. The substantial price increases of 1973-74 largely caught up their incomes to Bretton Woods levels in terms of other commodities such as gold.


I’d agree that immediate trigger of price increase was the Yom Kipper war.

The US then enacted all of the insane wacky controls to deal with “the problem”:

State governments requested citizens not put up Christmas lights, with Oregon banning Christmas as well as commercial lighting altogether.[12] Politicians called for a national gas rationing program.[24] Nixon requested gasoline stations to voluntarily not sell gasoline on Saturday nights or Sundays; 90% of owners complied, which resulted in lines on weekdays. Etc…..

http://en.wikipedia.org/wiki/1973_oil_crisis

If we had been using gold and silver as money and weren’t an foreign interventionist military Keynesian Empire, none of this would have happened.

Further, if it had, the market could have easily corrected itself. By paying more for oil, consumers would have had to cut back on other things, lowering the prices of those things. There would have been no “wage/price” spiral. My 1971 Buick got 10 mpg. The market would have forced changes in energy conservation without regulation. Plus, the cartel probably would not have held up against an unregulated oil market.

To the extent economic anecdotes inform our understanding of economics, the 1970s remain almost a laboratory experiment on the complete idiocy of Keynesian and other statist economic controls.

David said...

Does anyone have a copy of How Capitalism Saved America handy? I remember an excellent section in there on the oil crisis. DiLorenzo is in top form there. I remember that he had quotes from the top scum at the DOE that basically said, "Yeah, looking back on it, everything we did was really stupid and just made the problem worse."

If you can find that quote, I'd really appreciate it. It's quite vicious.

Bob Roddis said...

David:

On page 211, DiLorenzo quotes nominally free market guy William Simon (the first energy czar) saying that the centralized oil and gas allocation system was a complete disaster, with shortages and lines everywhere while there might be lots of gas 10 miles away. Quite the Soviet system.

While we are thinking about the horrors of price controls (which went hand-in-hand with the oil and gas allocations), let's not forget that the most horrific price control of all is the central bank's control of the rate of interest, with typical results. And accompanied by the typical response of the statists to blame the invariable problems create therefrom on "the free market".

David said...

Bob,

Thank you for the follow-up. Would it be fair or more accurate to say that the central bank, rather than engaging in a price control, actual engages in a price manipulation. Do they really have the same level of control that a bureaucrat has in setting the price? I would contend that they are more like manipulators of the price, pushing the rate down as much as possible, but unable to actually control it.

Of course, I guess you could counter that the bureaucrat really doesn't have the control he thinks he has either, since shortages and black market exchanges will force him to abandon his phony control in due time.

But that's just splitting hairs. The point is that they are all a bunch of delusional morons, a conclusion I'm sure you'd agree with. :)

Anonymous said...

Lord Keynes got owned...again

Bob Roddis said...

David:

I agree that the central bank is more of a manipulator. They don't have the power to criminalize the wrong rate of interest you might charge your friends for a loan.

Yet.

Bob said...

Dr. Tibor Machan explains Krugman’s Trashy Debating Style:

One thing does clearly stand out in his approach to making a case for more and more government involvement in the economy. This is that he relies extensively on name calling, on besmirching those with whom he disagrees. In a recent column he went so far as to dismiss all those who hold views opposed to his as zombies! Yes, zombies. That means that people, some very distinguished scholars, who are convinced that a public policy of laissez-faire when it comes to a country’s economic affairs is best are all mindless. They do not merely think mistakenly but cannot think at all.

When a critic of a position needs to resort to this kind of technique with which to attract readers of his missives to his own outlook, it suggests that the intellectual merits of that position are truly hopeless. And that is precisely so. Statism in economics has for a long time been proven and shown to be utterly unsupportable, be this the Draconian sort one found in Soviet Russia and finds in North Korea or the less drastic kind that has just produced the worldwide financial meltdown, namely the more or less interventionist welfare state.


http://tinyurl.com/26jv7pl

Bob Roddis said...

That last comment was mine. My last name was omitted due to this weird laptop keyboard.

We obviously need more government regulation of these weird laptop keyboards to prevent accidents like that.