Friday, July 30, 2010

The Nobel Prize of Outright Silliness

Yes, Paul Krugman calls himself a "liberal" and a "progressive," but nonetheless I have higher expectations from someone who has won the Nobel Prize in economics. Having met a number of previous winners of that prize, I can say that the people I met always had a healthy skepticism about politicians and the role of the state in economic affairs.

However, Krugman seems to be one of those True Believers who apparently really thought that Obama was the Second Coming of Hope. I remember that incredibly silly video that Obama briefly had on his campaign website in which children in Hollywood are singing songs of Obama while their parents look on adoringly. (Another woman claimed Obama would be paying her mortgage and everything else, as though suddenly the Great One would abolish the Law of Scarcity.) The man campaigned as a Messiah, complete with having his acceptance speech in a stadium with Greek columns as a backdrop, and Krugman really believed this hype?

In 1980, the leftist Catholic publication Commonweal had an "open letter" to GOP conservatives which reminded them that Ronald Reagan would disappoint them just as Lyndon Johnson had disappointed liberals, and it seems that Krugman now is at that point. Not only is Krugman utterly disappointed that this administration is not the Second Coming of FDR (not that FDR had any answers other than to help create a world war in which Americans could be "employed" by being shot, gassed, and bombed overseas), but he really seems bewildered by ANY contact at all between President Obama and anyone else Krugman doesn't like.

When most of us read George Orwell's 1984, we recognize that Goldstein is a fictional character, but to Krugman, he is real. He writes:
...Mr. Obama has delivered in important ways. Above all, he managed (with a lot of help from Nancy Pelosi) to enact a health reform that, imperfect as it is, will greatly improve Americans’ lives — unless a Republican Congress manages to sabotage its implementation.
So, if The Law of Unintended Consequences kicks in (read Mondale Act of 1974 and subsequent "child abuse" legislation that has resulted in thousands of false accusations and hundreds -- maybe thousands -- of wrongful criminal convictions), it must be the fault of Goldstein, er, Republicans. Having talked to people who actually are going to be on the front lines of implementing this legal monstrosity -- small business owners and the owner of a small accounting firm -- ObamaCare is going to force up costs to people who can least afford them.

However, to a Keynesian like Krugman, higher costs are good, because that means that people being paid will have more money in their pockets, and if the government can make them spend, the economy will blossom. That does not make real economic sense, but it makes sense to a Keynesian. Of course, why worry when the Fed can print lots of new money and directly buy government bonds, so the federal government can spread the wealth?

Obama came into office claiming that he would "revitalize" the economy by "spending our way out of the recession" and by forcing up costs to business owners, curbing trade (to keep unions happy), and generally making everything more difficult. To an economist, this is a prescription for further destruction, but to a Keynesian, it is like hearing beautiful music.

So, when the economy naturally gets worse and there is no real recovery on the horizon, Krugman concludes that the reason is that Obama did not spend enough, tax enough, borrow enough, browbeat enough, and...immediately appoint Elizabeth Warren to head the "consumer protection" agency that supposedly will be the center of All Wisdom in financial regulation.

While I have some problems with the latter part, I do recommend this essay on the modern American "ruling class," of which Krugman clearly is a part. (I also would add that the Republican establishment has attacked Ron Paul as well as Reagan and Barry Goldwater.) This portrayal is much more accurate than Krugman's claim that the Democrats represent All that is Good versus the Republicans who represent All that is Bad, or as Krugman writes, the Republicans have "taken the side of the bad guys...."

The problem is simple; Krugman really believes that state power can overcome the Law of Opportunity Cost and the Law of Scarcity. He really seems to believe that if the left-wing state orders something into being, it will be. No doubt, that must be why North Korea has the highest standard of living in the world.

Tuesday, July 27, 2010

Yeah, We Needed Just a Few Trillion More Dollars of "Stimulus"

I had no idea that Ezra Klein is a brilliant economist, but apparently he agrees with Paul Krugman, so he needs no more qualifications. Granted, he had his flash of brilliance more than a year after Krugman's epiphany, but nonetheless he still is brilliant.

Klein's "insight" is that the government did not spend enough money this past year. Krugman, on the other hand, said last year that the "stimulus" was not generous enough and would fail to stem the economic downturn. Here is Klein:
The original stimulus package should've been bigger. Rep. David Obey, chairman of the House Appropriations Committee, says the Treasury Department originally asked for $1.4 trillion. Sen. Kent Conrad, chairman of the Senate Budget Committee, wanted $1.2 trillion. What we got was a shade under $800 billion, and something more like $700 billion when you took out the AMT patch that was jammed into the package. So we knew it was too small then, and the recession it was designed to fight turned out to be larger than we'd predicted. In the end, we took a soapbox racer to a go-kart track and then realized we were competing against actual cars.

This was a mistake, of course. But the mistake may not just have been the size of the stimulus package. I wonder if it wasn't fed by a belief that there'd be other chances. If all we needed was the $700 billion package, then great. But if unemployment remained high and the recovery had trouble taking hold, surely there would be the votes for further stimulus and relief spending. No one in the political system could possibly look at 10 percent unemployment and walk away from it, right?

Wrong. Ten percent unemployment and a terrible recession ended up discrediting the people trying to do more for the economy, as their previous intervention was deemed a failure. That, in turn, empowered the people attempting to do less for the economy. So rather than a modestly sized stimulus leaving the door open for more stimulus if needed, its modest size was used to discredit the idea of more stimulus when it became needed.
So, for lack of an extra $400 billion, all we got was this lousy depression. Krugman last year declared:
...many economists, myself included, actually argued that the plan was too small and too cautious. The latest data confirm those worries — and suggest that the Obama administration’s economic policies are already falling behind the curve.

To see how bad the numbers are, consider this: The administration’s budget proposals, released less than two weeks ago, assumed an average unemployment rate of 8.1 percent for the whole of this year. In reality, unemployment hit that level in February — and it’s rising fast.
So, if I am to interpret this stuff correctly, had Obama had Tim Geithner sell just another $400 billion of Treasuries to the world, the economy would have gained "traction" (Krugman's favorite term) and we would be bouncing toward recovery as we speak.

Sorry, folks, that dog won't hunt. The problem was not that we spent too little; the problem was that the government refuses to understand that credit-fed booms are unsustainable and that this Keynesian "hair of the dog" strategy (in which we don't take just a little whiskey, but drink an entire case) is doomed to failure.

Ironically, in the name of "avoiding the mistakes of the 1930s," our government is taking us down the same path that Hoover and FDR took us. Happy Unemployment, America.

Monday, July 26, 2010

Can Krugman Give Us Better Weather?

One of the criticisms I have had with Paul Krugman's columns has been his use of logical fallacies, like post hoc ergo propter hoc and the non sequitur. In his column today, he manages to use both of them, all the while slashing and burning anyone who might disagree with the Great Nobel Laureate.

Turning from advocating his mechanistic and circular Keynesian economic views (we eat breakfast so we can go to work and we go to work so we can eat breakfast), today he goes after those evil people who want to "cook" the earth. He begins by using yet another post hoc fallacy:
Never say that the gods lack a sense of humor. I bet they’re still chuckling on Olympus over the decision to make the first half of 2010 — the year in which all hope of action to limit climate change died — the hottest such stretch on record.

Of course, you can’t infer trends in global temperatures from one year’s experience. But ignoring that fact has long been one of the favorite tricks of climate-change deniers: they point to an unusually warm year in the past, and say “See, the planet has been cooling, not warming, since 1998!” Actually, 2005, not 1998, was the warmest year to date — but the point is that the record-breaking temperatures we’re currently experiencing have made a nonsense argument even more nonsensical; at this point it doesn’t work even on its own terms.

But will any of the deniers say “O.K., I guess I was wrong,” and support climate action? No. And the planet will continue to cook.
So, let us see. Krugman says that the temperatures for the first half of this year are the hottest on record (that is, the records begun in the late 1800s), yet that is not proof of global warming. However, in the next paragraph, he basically says this is proof of global warming.

But, this one gets better. He then claims that there really was nothing to all of those emails between the noisiest climate scientists, called "Climategate," and that everyone was exonerated:
You’ve probably heard about the accusations leveled against climate researchers — allegations of fabricated data, the supposedly damning e-mail messages of “Climategate,” and so on. What you may not have heard, because it has received much less publicity, is that every one of these supposed scandals was eventually unmasked as a fraud concocted by opponents of climate action, then bought into by many in the news media. You don’t believe such things can happen? Think Shirley Sherrod.
First, the "investigation" was carried out by the very people who have a vested interest in receiving the government and foundation grants to promote their own version of climate science. The institutions were East Anglia University in Great Britain and Penn State University, and both of them stood to lose millions of dollars in grants if it could have been demonstrated the scientists either committed fraud or abused the system.

Second, I doubt seriously that Paul Krugman would endorse an in-house investigation in which the "investigators" had a vested interest in the outcome, and then declared that their own scientists had acted properly, if it involved people with whom he disagreed. In fact, he then claims that anyone else who might have a contrary view has that view ONLY because of the funding source of his or her research. He writes:
Look at the scientists who question the consensus on climate change; look at the organizations pushing fake scandals; look at the think tanks claiming that any effort to limit emissions would cripple the economy. Again and again, you’ll find that they’re on the receiving end of a pipeline of funding that starts with big energy companies, like Exxon Mobil, which has spent tens of millions of dollars promoting climate-change denial, or Koch Industries, which has been sponsoring anti-environmental organizations for two decades.
First, I am not sure that all of the so-called skeptics fall into that category, but when Krugman is smearing someone he considers to be evil and dishonest (that is, anyone who might have the audacity to disagree with him), he will use evil and dishonest means. Second, Krugman is saying that if someone is privately funded by certain entities, then their work automatically is a lie; however, he then seems to be making the counter-claim that those funded by leftist governments speak only the truth and always practice the most honest and capable science.

So, an in-house "investigation" by people who have a financial stake in the outcome is an "honest" investigation. Oh, no, Paul Krugman never engages in "political science."

There is one more point: the people Krugman supports have made sure that science journals publish papers with which they (and Krugman) are in agreement, shutting out any other discourse. I remember nearly 20 years ago when the Environmental Protection Agency destroyed the career of a scientist who developed the now-accepted theory of how lakes become acidic. (Hint: "acid rain" was not the culprit, which, while true, nonetheless was not the politically-correct answer.)

One of the truisms of scientific research is that we always should be skeptical of the herd mentality. Time and again, we have seen situations in which things people "knew" to be true were not, from spontaneous generation to continental drift, where the established views were challenged successfully.

True, there always are vested interests in any point of view, and a vested interest in and of itself does not mean something is false. However, when we see Krugman claiming that leftist government funding of science does not create its own sets of conflicts of interest, I am going to object.

Friday, July 23, 2010

Consumption and Spending, and Other Links

In my latest column for the Freeman Online, I differentiate (in 700 words) between consumption and spending. The Keynesians (and Krugman groupies) see spending as mechanistic and necessary so we can repeat the circular "economy" in which we make stuff, put it on the shelves, and then "spend" so that we can clear the shelves so that people will have something to do: make more stuff to put on the shelves.

There are a number of other excellent articles as well. Wendy McElroy looks at the attempts by Sen. Harry Reid to effectively "federalize" the local police, thus making them even less accountable than they are now. Sheldon Richman comments on the latest "re-regulation" of the financial sector, and Steven Horowitz examines Austrian capital theory.

Have a great weekend.

Tuesday, July 20, 2010

Is There Really a "Keynesian Case"?

Despair overtakes Paul Krugman. It is so bad that he wants "to stick a pencil" in his eye, which not only would hurt a lot, but also just might blind him and make him even more despairing.

Why this deep, dark depression? It seems that pundits do not "understand" the so-called Keynesian Case, that special set of circumstances which, according to all True Believing Keynesians, justifies government spending sprees, printing of money, and borrowing into oblivion. As Krugman writes:
I’ll be frank: the discussion of fiscal stimulus this past year and a half has filled me with despair over the state of the economics profession. If you believe stimulus is a bad idea, fine; but surely the least one could have expected is that opponents would listen, even a bit, to what proponents were saying. In particular, the case for stimulus has always been highly conditional. Fiscal stimulus is what you do only if two conditions are satisfied: high unemployment, so that the proximate risk is deflation, not inflation; and monetary policy constrained by the zero lower bound.

That doesn’t sound like a hard point to grasp. Yet again and again, critics point to examples of increased government spending under conditions nothing like that, and claim that these examples somehow prove something.
In other words, Krugman is demanding that we meet him on what he considers to be HIS ground. He then takes issue with Tyler Cowen's criticism of "fiscal stimulus" when Cowen uses the experience of Germany in the early 1990s:
1. This was not an effort at fiscal stimulus; it was a supply policy, not a demand policy. The German government wasn’t trying to pump up demand — it was trying to rebuild East German infrastructure to raise the region’s productivity.

2. The West German economy was not suffering from high unemployment — on the contrary, it was running hot, and the Bundesbank feared inflation.

3. The zero lower bound was not a concern. In fact, the Bundesbank was in the process of raising rates to head off inflation risks — the discount rate went from 4 percent in early 1989 to 8.75 percent in the summer of 1992. In part, this rate rise was a deliberate effort to choke off the additional demand created by spending on East Germany, to such an extent that the German mix of deficit spending and tight money is widely blamed for the European exchange rate crises of 1992-1993.

In short, it’s hard to think of a case less suited to tell us anything at all about fiscal stimulus under the conditions we now face.
While Krugman never is going to admit that one can legitimately criticize his positions, nonetheless I do believe it is instructive to look into this "special Keynesian Case," better known as the "Liquidity Trap." Because I include Krugman's explanation above about this particular set of circumstances, and even though he does not identify it as a "Liquidity Trap," that is what he is describing.

My counter arguments will feature Murray N. Rothbard, who was the best-known Austrian economist of the late 20th Century after F.A. Hayek. In fact, Rothbard deals directly with the "Liquidity Trap" theories both in America's Great Depression and his tome, Man, Economy and State. In America's Great Depression, he has this to say about the "Keynesian Case":
What, then, does an expectation of rising interest rates really mean? It means that people expect increases in the rate of net return on the market, via wages and other producers' goods prices falling faster than do consumer goods' prices. But this needs no labyrinthine explanation; investors expect falling wages and other factor prices, and they are therefore holding off investing in factors until the fall occurs. But this is old-fashioned "classical" speculation on price changes. This expectation, far from being an upsetting element, actually speeds up the adjustment. Just as all speculation speeds up adjustment to the proper levels, so this expectation hastens the fall in wages and other factor prices, hastening the recovery, and permitting normal prosperity to return that much faster. Far from "speculative" hoarding being a bogy of depression, therefore, it is actually a welcome stimulant to more rapid recovery.
Understand that Rothbard and Krugman are arguing from two very different vantage points. Krugman sees deflation as tragic because he believes that it will lead to a downward spiral in which falling factor prices mean lower absolute incomes, and lower incomes mean less aggregate demand, and the beat goes on.

Rothbard, on the other hand, believes that deflation can be positive because it means that the true relative values of the factors are getting into balance, and are shaking off the distortions that occurred during the inflationary booms. Deflation, in Rothbard's view, means that the previous malinvestments are being cleansed from the system, and that a recovery based upon real values of factors can begin.

Obviously, the two cannot be farther apart. Krugman sees everything in aggregates (Y = C + I + G + [X-M]), while Rothbard views the economy as being a complex web of capital, labor, and other factors in which entrepreneurs are moving resources in ways that they anticipate consumers will desire. For good measure, Rothbard also attacks the entire Keynesian concept of "Liquidity Preference," which is a nice way of saying that during deflation, money increases in value relative to other factors, so that people want to hold more money. Rothbard writes:
The final Keynesian bogey is that people may acquire an un­limited demand for money, so that hoards will indefinitely in­crease. This is termed an “infinite” liquidity preference. And this is the only case in which neo-Keynesians such as Modigliani be­lieve that involuntary unemployment can be compatible with price and wage freedom. The Keynesian worry is that people will hoard instead of buying bonds for fear of a fall in the price of securities. Translating this into more important “natural” terms, this would mean, as we have stated, not investing because of expectation of imminent increases in the natural interest rate. Rather than act as a blockade, however, this expectation speeds the ensuing adjustment. Furthermore, the demand for money could not be infinite since people must always continue consum­ing, whatever their expectations. Of necessity, therefore, the de­mand for money could never be infinite. The existing level of consumption, in turn, will require a certain level of investment. As long as productive activities are continuing, there is no need or possibility of lasting unemployment, regardless of the degree of hoarding.
Indeed, Rothbard believes (and so do I) that there really is an alternative explanation for what Krugman calls a "Liquidity Trap," and that further borrowing and spending by government only will exacerbate the current situation. Like Krugman, I tend to despair, but I am fearful because I believe government is spending and borrowing too much, not to little.

Saturday, July 17, 2010

Yeah, I Kind of Agree With Krugman Here

Last March on my other blog (just before the Tonya Craft case basically took over its subject matter), I had a post on recent statements by James K. Galbraith. Professor Galbraith took umbrage and made a post, which I was glad to see him do.

His point was this: We don't have to worry about the government going bankrupt as long as it has legal control over what is called "money." Thus, government always will pay its bills because it can print the currency by which the bondholders receive payment. Thus, the size of deficits does not matter because government cannot (by definition) go bankrupt.

Obviously, if one stops to think about what Galbraith claims, it is almost mind-boggling. However, keep in mind that, like his late father, he is partial to socialism and even the more virulent forms of communism, in which governments used murder and imprisonment to try to force people into behavior that they otherwise would not want to follow. In other words, like John Kenneth Galbraith, James Galbraith believes that governments can do what they want as long as (1) they have a printing press and monopoly over money, and (2) they employ whatever coercive methods they wish.

Now, in his criticism of Galbraith today, Paul Krugman does not go as far as I do, but I do find myself in agreement with much of what he writes. First, Krugman outlines Galbraith's position fairly and accurately, so if you wish to get a good interpretation, read Krugman's post.

Second, he creates a mathematical model that reminds me of some of the things I saw in grad school (and is easy to follow) in which he sets up a scenario in which the government runs up against its limits of borrowing (what can be borrowed by others who have a "surplus" to lend). What he concludes is that at some point, the rate of inflation takes off into the empty space of hyperinflation.

How might that play out in our system? At some point, the Federal Reserve becomes the primary purchaser of U.S. debt (as opposed to its current role of purchasing debt in the secondary market), so government is directly spending newly-printed dollars which quickly move through the economy (as velocity increases). In fact, I think that if there is a weakness in this model (and any model which simply acts on the pure quantity of money theory has fundamental weaknesses in explaining economic behavior on behalf of individuals), it is the assumption that velocity (V) remains constant throughout.

One of the characteristics of a hyperinflation is the quickening of velocity -- how quickly money changes hands in an economy. The other thing -- and Krugman accurately mentions this -- is that people will get out of money altogether and use substitutes that either hold or increase in value (relative to money).

My sense is that Galbraith believes that government simply can "crack down" and force people to accept money (On pain of death, if need be?). Krugman does not go that far, but he is a True Believer in coercion, at least "progressive" style.

Nonetheless, Krugman's point here is well-taken, and I would agree that there is the danger of hyperinflation, given the government's path. Galbraith argues that government can exercise its powers to the point where people are forced to use the government's money, while Krugman simply says that we are not near any point of hyperinflation, given that the current Consumer Price Index is pointed downward.

There is much more I would like to say here, but I wanted to point out that when I believe Krugman is at least partially right, I will give him credit.

Friday, July 16, 2010

Krugman: Post Hoc Ergo Propter Hoc

The Post Hoc Ergo Propter Hoc Fallacy is an important tool in Paul Krugman's arsenal of arguments that he presents from his page in the New York Times. In his column today, he argues in a roundabout fashion that if the Congress permits the so-called Bush Tax Cuts to expire in 2011, that we can expect economic recovery to follow.

No, he does not say that, but he does make this point:
When Bill Clinton raised taxes on top incomes, conservatives predicted economic disaster; what actually followed was an economic boom and a remarkable swing from budget deficit to surplus. Then the Bush tax cuts came along, helping turn that surplus into a persistent deficit, even before the crash.
Everything he says there is true, but he also leaves out some important things. First, the economic boom of the 1990s did not happen until the latter part of the decade, with the nation's rate of unemployment dipping below five percent in 1997. That boom, of course, produced a huge stock market bubble, something Krugman leaves out (since it does not fit his narrative), and Americans found out in 2001 that much of that "prosperity" was phony.

Second, when Krugman refers to the "crash," he is not speaking of the crash of the stock market (and especially the NASDAQ) in late 2000 and early 2001, which was part of the Clinton presidency. Indeed, even had tax rates remained the same as they were before Congress cut the rates in 2001, the phony surplus quickly would have morphed into deficit, which is what happens during recessions.

Just as Krugman indicates (in a backdoor approach) that had tax rates not been cut in 1981, that there would have been no recession, Krugman now is trying to tell us that there only will be positive effects when the Bush tax cuts expire next year.

Since he insists upon using partisan political talking points ("tax cuts for the wealthy"), perhaps some perspective is in order. When the tax cuts expire, we are not looking at just the top rates going back to 39.6 percent. No, we are looking at ALL rates going back up, as the lowest rate jumps from 10 percent to 15 percent and so on.

In other words, every person reading these words today will see his or her federal income taxes go up next year, and you can bet that the tax increases for some of you will be much higher than you had believed. After all, Krugman has insisted that ONLY the wealthy received tax relief, and you are going to find out that Krugman was wrong.

Now, I must add that I am not defending the talking points from Republicans. When we have a federal government invading other countries and jacking up spending (when Republicans controlled the White House AND Congress) at levels that would have made Lyndon Johnson proud, we are not talking about a "low tax" environment. There really is no free lunch, and higher government spending equates to people bearing a greater burden of deadweight losses imposed by the state. There is no way around it, and I have no intention of repeating Republican talking points about "dynamic scoring" or anything else about cutting tax rates.

One of my graduate school professors, Robert Ekelund, wrote this article six years ago about the record of Republicans in office, and it is instructive to anyone who believes that even if Congress changes hands next year that we are going to see any relief. I have no confidence in the current Congress, and will have none in the next, no matter what the political rhetoric might be.

So, will higher taxes lead to more prosperity, as Krugman seems to insist? We shall see, but the last major tax increase during a depression took place in 1932 under Herbert Hoover. We know how that move turned out.

Thursday, July 15, 2010

Tax Cuts, Revenues, and Trends of the 1970s

During the 1980 Presidential campaign, we can say that it was the last time that we heard actual issues being discussed, as opposed to the slick media campaigns today complete with the hard-core negative attack ads (with black-and-white photos, etc.). (We don't have TV reception, and I have not watched political ads on a regular basis since 2000. I don't miss them, and I don't miss most television.)

One feature of the campaign was the debate between people who called themselves Supply Siders and what Robert Higgs would call Vulgar Keynesians. The Supply Siders claimed that cutting marginal tax rates (the highest rates then were at 70 percent) would generate so much new economic activity that the rate cuts would "pay for themselves."

Keynesians, on the other hand, said that tax cuts would increase the rate of inflation (I remember a Bill Maudin cartoon which had an evil-looking Ronald Reagan pouring gasoline on a fire, the gasoline labeled "tax cuts"). So, what happened?

Paul Krugman claims to know, and he gives us a revisionist view of the 70s and beyond with this diagram:

He explains his point:
A couple of points. First, the Carter years, contrary to legend, were not a period of economic stagnation and falling revenue because high tax rates were strangling the economy; there was a nasty recession starting in 1979, largely thanks to an oil shock, but overall growth was respectable and revenue growth reasonably high.

Second, the revenue track under Reagan looks a lot like the track under Bush: a drop in revenues, then a resumption of growth, but no return to the previous trend.

This is exactly what you would expect to see if supply-side economics were just plain wrong: revenues are permanently reduced relative to what they would otherwise have been.
As usual, one has to do some re-interpreting of Krugman's remarks. First, and most important, I believe that the issue of revenue is a red herring. After all, if the government wishes to raise more revenue today, all it has to do is to confiscate everything we have, and I suspect that the government budget would almost be balanced, at least for one year (but not beyond that).

Now, not even a Keynesian True Believer like Krugman would advocate such a thing, although there are plenty of people in Washington who probably think this move by the government would be great. Furthermore, I never have been comfortable with the contention by Supply Siders that we could have our cake and eat it, too. Many of them were trying to claim that all that was needed by politicians was to cut tax rates, and everything else would fall into place.

However, there is yet another problem that neither Krugman nor the Supply Siders have addressed, and that was the Recession of 1982. As you can see in Krugman's graph, he assumes that ALL of the fall in revenues around 1982 was due to the lowering of the top rate from 70 percent to 50 percent. In other words, according to Krugman, had there been no tax cuts, apparently there would have been no recession.

(Note to the Krugman groupies: No, he does not say it directly, but the red trend line he created certainly implies it.)

Krugman's explanation for the recession of 1979 was the "oil shock," but other "oil shocks" have not started recessions. Whenever Keynesians try to bring in oil shocks or bad crops as explanations for recessions, I think about the mutually-exclusive set of excuses Jake Blues gave the Carrie Fisher character (his fiance) in "The Blues Brothers."

Yet, why did the recession occur in the early 1980s? Krugman has claimed elsewhere that it simply was the result of the Fed under Paul Volcker putting the stop to inflation, and certainly the double-digit inflation that infected the economy through 1981 (that Krugman fails to mention in this post). The Austrians have noted that a decade of boom and bust and massive inflation was certain to end in a recession, which is what we had.

However, in reading Krugman's post, I guess I am to assume that had the old regime of 70 percent tax rates and inflation been permitted to go on, there would have been no recession, the economy would have been great, and the government would be balancing its budget. However, if the recession of 1982 was inevitable (and Austrians believe that it was), then revenues would have fallen drastically, even had the 70 percent rates been in place. Krugman fails to mention that point, but I think it is relevant.

I have no idea whether or not cuts in tax rates "pay for themselves;" I do believe that high tax rates will hamper entrepreneurs and economic growth. Since Krugman is a Keynesian, and in that world, capital and other assets are homogeneous, economic growth is the simple function of money spent, and it matters not whether it is spent by individual consumers or the government.

By the way, as I have noted before, when I asked Krugman at a session of the Southern Economic Association meetings in New Orleans on Sunday, November 21, 2004, if he favored going back to the old 70 percent rates, he exclaimed, "Oh, no! Those rates were insane." Guess he is redefining insanity these days.

Wednesday, July 14, 2010

Krugman Causality

According to Paul Krugman's latest blog post, the key to prosperity is for the government to raise taxes. To prove his point, he has two graphs that cover the Clinton and Bush administrations, and on a cursory level, they seem to make his point:

First, the jobs:

Now, the tax revenues:

So, there it is, end of argument. But, not exactly. Since the Bush tax cuts expire next year, which means that ALL readers of this blog are going to see their tax rates increase (not just the "rich"), then we should expect an explosion of new jobs and revenue. Will Krugman make that claim?

No, he won't. Krugman will argue that the economic conditions are different now than they were during the 1990s, when "Depression Economics" rules had not kicked in. However, it seems to me that he wants it both ways. He is claiming the following syllogism:
  • Clinton raised taxes during the 1990s, and Bush cut tax rates in 2001;
  • Job growth was greater during the 1990s than during Bush's presidency, and tax revenues increased at a faster rate during the 1990s than they did a decade later;
  • Therefore, raising taxes is better than cutting taxes.
Please don't claim that Krugman would not say that now. After all, it was Krugman who put those graphs up for everyone to see, and he is the one touting them as "proof" of his claim that cutting taxes is bad, bad, bad.

Furthermore, Krugman totally ignores the economic background (which he likes to bring in when he is discussing his view of "Depression Economics"). In 2000, the Clinton stock bubble burst, and shortly thereafter, there were the 9/11 attacks. As soon as he took office, George W. Bush had to deal with a recession (that Krugman's political allies were claiming was the result of the proposed tax rate cuts), which definitely would have changed the economic landscape.

There is another point. Whenever Krugman brings up tax revenues during the Bush administration, he fails to note that there was a recession when Bush took office, a recession that would have cut into what taxes would have been collected. What he does is to claim that the ENTIRE fall in the collection rates of revenues in those early Bush years was due to cuts in tax rates, and that job growth during that time was not as good as it was during the Clinton years because of the tax rate cuts. That is a most curious omission, and I wonder why he does not do the same thing for the current Obama administration.

So, Krugman uses the current economic situation to justify the government's imposing a mountain of debt on taxpayers, but then he ignores the economic background when discussing the Clinton and Bush years. This is classic "Heads I Win, Tails you Lose" argumentation. Not that Krugman nor his groupies care.

Tuesday, July 13, 2010

An Now, Another Look at "Climategate" and the NY Times

Like most people on the left, Paul Krugman is a True Believer in human-caused "global warming" and believes that the way to "save the planet" is for the government to order us to use inferior fuels like ethanol and unreliable windmills to create electricity. (Of course, one must manufacture these windmills, which uses energy, but Krugman discounts all that and, like a true Keynesian, believes that new windmills and other "alternative energy" projects are a "given.")

In this post, I compare two opinion pieces. The first is a recent editorial in the New York Times, which glosses over some recent "investigations" of "Climategate," and declares them to be perfectly legitimate. The second is a Wall Street Journal op-ed by Patrick Michaels that looks at the specifics of the "investigations" and their aftermath. Generally, people (including me) are going to be predisposed to a point of view, but as one who has read the NYT for many years, I do notice that the paper has a disturbing trend of ignoring the obvious whenever the paper's own points of view are being challenged.

I often use the infamous Duke Lacrosse Case as an example, because the NYT had such a dismal performance in that whole situation. This problem was not due to a lack of information that journalists could obtain. Indeed, the information was there and bloggers such as K.C. Johnson seized on it and had the story correct from the beginning.

The NYT, however, which probably had the most dismal record of any news publication in this case, twisting the facts in ways that made it obvious that the it was interested in only one result: trial and conviction of people who clearly were innocent. (The NYT's August 25, 2006, front-page article was so bad that even the paper itself was forced to distance itself from its own work after the North Carolina Attorney General Roy Cooper dismissed the charges and declared the accused to be "innocent.")

I bring this up because the leadership of the NYT long ago decided that party politics and leftist ideology trump the facts. Thus, I hardly am surprised to read this editorial in the NYT about the "Climategate" investigations. In part, the editorial declares:
Perhaps now we can put the manufactured controversy known as Climategate behind us and turn to the task of actually doing something about global warming. On Wednesday, a panel in Britain concluded that scientists whose e-mail had been hacked late last year had not, as critics alleged, distorted scientific evidence to prove that global warming was occurring and that human beings were primarily responsible.

It was the fifth such review of hundreds of e-mail exchanges among some of the world’s most prominent climatologists. Some of the e-mail messages, purloined last November, were mean-spirited, others were dismissive of contrarian views, and others revealed a timid reluctance to share data. Climate skeptics pounced on them as evidence of a conspiracy to manipulate research to support predetermined ideas about global warming.

The panel found no such conspiracy. It complained mildly about one poorly explained temperature chart discussed in the e-mail, but otherwise found no reason to dispute the scientists’ “rigor and honesty.” Two earlier panels convened by Britain’s Royal Society and the House of Commons reached essentially the same verdict. And this month, a second panel at Penn State University exonerated Michael Mann, a prominent climatologist and faculty member, of scientific wrongdoing.

Dr. Mann, who was part of the e-mail exchange, had been accused of misusing data to prove that the rise in temperatures over the last century was directly linked to steadily rising levels of carbon dioxide. His findings, confirmed many times by others, are central to the argument that fossil fuels must be taxed or regulated.
Compare those words to what Prof. Michaels has written:
Now a supposedly independent review of the evidence says, in effect, "nothing to see here." Last week "The Independent Climate Change E-mails Review," commissioned and paid for by the University of East Anglia, exonerated the University of East Anglia. The review committee was chaired by Sir Muir Russell, former vice chancellor at the University of Glasgow.

Mr. Russell took pains to present his committee, which consisted of four other academics, as independent. He told the Times of London that "Given the nature of the allegations it is right that someone who has no links to either the university or the climate science community looks at the evidence and makes recommendations based on what they find."

No links? One of the panel's four members, Prof. Geoffrey Boulton, was on the faculty of East Anglia's School of Environmental Sciences for 18 years. At the beginning of his tenure, the Climatic Research Unit (CRU)—the source of the Climategate emails—was established in Mr. Boulton's school at East Anglia. Last December, Mr. Boulton signed a petition declaring that the scientists who established the global climate records at East Anglia "adhere to the highest levels of professional integrity."

This purportedly independent review comes on the heels of two others—one by the University of East Anglia itself and the other by Penn State University, both completed in the spring, concerning its own employee, Prof. Michael Mann. Mr. Mann was one of the Climategate principals who proposed a plan, which was clearly laid out in emails whose veracity Mr. Mann has not challenged, to destroy a scientific journal that dared to publish three papers with which he and his East Anglia friends disagreed. These two reviews also saw no evil. For example, Penn State "determined that Dr. Michael E. Mann did not engage in, nor did he participate in, directly or indirectly, any actions that seriously deviated from accepted practices within the academic community."

Readers of both earlier reports need to know that both institutions receive tens of millions in federal global warming research funding (which can be confirmed by perusing the grant histories of Messrs. Jones or Mann, compiled from public sources, that are available online at Any admission of substantial scientific misbehavior would likely result in a significant loss of funding.
He further notes:
Then there's the problem of interference with peer review in the scientific literature. Here too Mr. Russell could find no wrong: "On the allegations that there was subversion of the peer review or editorial process, we find no evidence to substantiate this."

Really? Mr. Mann claims that temperatures roughly 800 years ago, in what has been referred to as the Medieval Warm Period, were not as warm as those measured recently. This is important because if modern temperatures are not unusual, it casts doubt on the fear that global warming is a serious threat. In 2003, Willie Soon of the Smithsonian Institution and Sallie Baliunas of Harvard published a paper in the journal Climate Research that took exception to Mr. Mann's work, work which also was at variance with a large number of independent studies of paleoclimate. So it would seem the Soon-Baliunas paper was just part of the normal to-and-fro of science.

But Mr. Jones wrote Mr. Mann on March 11, 2003, that "I'll be emailing the journal to tell them I'm having nothing more to do with it until they rid themselves of this troublesome editor," Chris de Freitas of the University of Auckland. Mr. Mann responded to Mr. Jones on the same day: "I think we should stop considering 'Climate Research' as a legitimate peer-reviewed journal. Perhaps we should encourage our colleagues . . . to no longer submit to, or cite papers in, this journal. We would also need to consider what we tell or request our more reasonable colleagues who currently sit on the editorial board."

Mr. Mann ultimately wrote to Mr. Jones on July 11, 2003, that "I think the community should . . . terminate its involvement with this journal at all levels . . . and leave it to wither away into oblivion and disrepute."

Climate Research and several other journals have stopped accepting anything that substantially challenges the received wisdom on global warming perpetuated by the CRU. I have had four perfectly good manuscripts rejected out of hand since the CRU shenanigans, and I'm hardly the only one. Roy Spencer of the University of Alabama, Huntsville, has noted that it's becoming nearly impossible to publish anything on global warming that's nonalarmist in peer-reviewed journals.

Of course, Mr. Russell didn't look to see if the ugly pressure tactics discussed in the Climategate emails had any consequences. That's because they only interviewed CRU people, not the people whom they had trashed.
I can assure readers that had the situation been reversed, the NYT would have been all over it. Somehow, I am not surprised that Paul Krugman is employed by an outfit that believes that "truth" is whatever the NYT says it is.

Monday, July 12, 2010

Is Deflation the Enemy, or Is It Inflation?

Like all Keynesian True Believers, Paul Krugman believes that the worst enemy of the economy is deflation. In his view, deflation causes unemployment and inflation reduces it, and he repeats that canard in this recent column.

Not surprisingly, Krugman claims that unless the Fed under Ben Bernanke engages in massive new money creation (and, of course, spending), the economy is doomed:
Today, Mr. Bernanke is the Fed’s chairman — and his 2002 speech reads like famous last words. We aren’t literally suffering deflation (yet). But inflation is far below the Fed’s preferred rate of 1.7 to 2 percent, and trending steadily lower; it’s a good bet that by some measures we’ll be seeing deflation by sometime next year. Meanwhile, we already have painfully slow growth, very high joblessness, and intractable financial problems. And what is the Fed’s response? It’s debating — with ponderous slowness — whether maybe, possibly, it should consider trying to do something about the situation, one of these days.

The Fed’s fecklessness is, to be sure, not unique. It has been astonishing and infuriating, as the economic crisis has unfolded, to watch America’s political class defining normalcy down. As recently as two years ago, anyone predicting the current state of affairs (not only is unemployment disastrously high, but most forecasts say that it will stay very high for years) would have been dismissed as a crazy alarmist. Now that the nightmare has become reality, however — and yes, it is a nightmare for millions of Americans — Washington seems to feel absolutely no sense of urgency. Are hopes being destroyed, small businesses being driven into bankruptcy, lives being blighted? Never mind, let’s talk about the evils of budget deficits.
In response, I will include material from Murray N. Rothbard's America's Great Depression, a recent article by Robert Higgs, and something I wrote for the Mises Institute two years ago. First, we look at what Rothbard has to say regarding deflation:
With the supply of money falling, and the demand for money increasing, generally falling prices are a consequent feature of most depressions. A general price fall, however, is caused by the secondary, rather than by the inherent, features of depressions. Almost all economists, even those who see that the depression adjustment process should be permitted to function unhampered, take a very gloomy view of the secondary deflation and price fall, and assert that they unnecessarily aggravate the severity of depressions. This view, however, is incorrect. These processes not only do not aggravate the depression, they have positively beneficial effects.

There is, for example, no warrant whatever for the common hostility toward "hoarding." There is no criterion, first of all, to define "hoarding"; the charge inevitably boils down to mean that A thinks that B is keeping more cash balances than A deems appropriate for B. Certainly there is no objective criterion to decide when an increase in cash balance becomes a "hoard." Second, we have seen that the demand for money increases as a result of certain needs and values of the people; in a depression, fears of business liquidation and expectations of price declines particularly spur this rise. By what standards can these valuations be called "illegitimate"? A general price fall is the way that an increase in the demand for money can be satisfied; for lower prices mean that the same total cash balances have greater effectiveness, greater "real" command over goods and services. In short, the desire for increased real cash balances has now been satisfied.

Furthermore, the demand for money will decline again as soon as the liquidation and adjustment processes are finished. For the completion of liquidation removes the uncertainties of impending bankruptcy and ends the borrowers' scramble for cash. A rapid unhampered fall in prices, both in general (adjusting to the changed money-relation), and particularly in goods of higher orders (adjusting to the malinvestments of the boom) will speedily end the realignment processes and remove expectations of further declines. Thus, the sooner the various adjustments, primary and secondary, are carried out, the sooner will the demand for money fall once again. This, of course, is just one part of the general economic "return to normal."
In other words, Rothbard says that deflation will help the adjustment process in which the economic fundamentals get back into balance. Given that Krugman operates on the theory that all assets are homogeneous, he is incapable of understanding anything else.

Prof. Higgs notes this about Keynesians and inflation and deflation:
With their great, simple faith in the efficacy of government spending as a macroeconomic balance wheel, vulgar Keynesians disregard malinvestment, past and future, and support government spending in excess of the government’s revenues, the difference being covered by borrowing. Of course, they favor central-bank actions to make such borrowing cheaper for the government. In fact, they chronically prefer “easy money” to more restrictive central-bank policies. As noted previously, they prefer easy money not only because it lowers the cost of financing the government’s deficit spending, but also because it induces individuals to borrow more money and spend it for consumption goods ― such increased consumption spending being viewed as always a good thing, notwithstanding the recent near-zero rate of saving by individuals in the United States. Reflecting on the vulgar Keynesian attitude toward Fed policy, I keep recalling a old country song whose refrain was: “older whiskey, faster horses, younger women, more money.”

Vulgar Keynesians do not spend much time worrying about potential inflation; on the contrary, they are obsessed with an irrational fear of even the slightest hint of deflation. If inflation should become an undeniable problem, we may count on them to support price controls, which, they are convinced on the basis of sketchy knowledge of such controls during World War II, can be made to work well.
In this article, I noted that the current crisis came about because of the Fed's reckless money creation, so it certainly is NOT possible that the Fed can SOLVE the problem with more inflation:
The central issue is that the Fed pushed a policy of inflation, with much of the new money going into the mortgage markets; there is no way to avoid the painful and terrible corrections that must follow such fiscal foolishness. (Now we finally see massive commodity-price increases, which have occurred because there is nowhere for the new money to go but directly into commodities and consumer goods.)

Anyone who believes that the Fed can pretend that heavily damaged mortgage securities are worth more than toilet paper and literally build a $200 billion loan portfolio upon them does not understand finance. Just because Ben Bernanke declares something to be "valuable" does not bestow value upon it.

The simple issue is not lack of liquidity. It is the fact that billions — make that trillions — of dollars were malinvested in markets where the increasing values could not be sustained. To pump near-worthless dollars into this mix does not solve anything; it only ensures that the coming day of reckoning will be even more unpleasant than it would have been otherwise.
So, if the Fed follows Krugman's demands, we can look forward to even more secondary contractions and more malinvestments. The "day of reckoning" won't arrive all at once; it will become a permanent part of our economic landscape.

Sunday, July 11, 2010

Krugman Takes on Hayek? Spare Me!

Well, it seems that Paul Krugman is taking on F.A. Hayek, but, as usual, Krugman really has no idea as to what Hayek was saying in 1932, and what Austrians are saying now. First, let us look at Krugman's argument:
...going back to Hayek: attributing the failure to recover to trade restrictions was, in a way, characteristic. Hayek, like his modern followers, never could get his mind wrapped around the fact that the key problem in depressions, and the key observation his theory needed to explain, wasn’t misallocation of labor and other resources — it was mass unemployment. It’s not surprising to see that in the depths of depression he was focused on removing what was, in the end, a minor source of allocative inefficiency. But it’s a stark reminder of the extent to which he really, truly, didn’t get it. (Emphasis mine)
Now, I have read a lot more of Hayek than has Krugman, and never once does Hayek blame the Great Depression on either Smoot-Hawley OR "allocative inefficiency." Hayek, instead, looks at the Great Depression in two stages.

First, there is the original crisis in which the monetary authorities forced down interest rates and allocated resources into lines of production which could not be sustained. THAT is the misallocation of resources of which Krugman speaks.

However, there is NO reason that this misallocation or series of malinvestments should LEAD TO A GREAT DEPRESSION. Hayek NEVER said that, so Krugman is misrepresenting him. (Gosh, I'm shocked, SHOCKED. Krugman is misrepresenting what someone is saying.)

Second, the Great Depression came about because of government RESPONSES to the original crises caused by the malinvestment of resources. Smoot-Hawley was one of the causes, but there were others, which Murray N. Rothbard lays out in his classic America's Great Depression.

Unfortunately, Krugman never will understand that point, not that the guy cares.

Friday, July 9, 2010

Krugman: More Spending will Solve All Business Ills

Paul Krugman continues with his theme that there is nothing wrong with American business that some government borrowing and spending, along with confiscatory legislation, won't solve. Are businesses not engaging in long-term investment? Government should spend more money, and that will "stimulate" the economy and businesses will invest.

Are people "hoarding" their money and not spending it? No problem. The new across-the-board tax increasing coming in January will confiscate lots of new cash, which the government will "wisely" spend, leading to more prosperity. (A lot of people who are fond of the term "tax increases for the rich" are going to find that THEY are the "rich" when the Bush tax cut rates expire at the end of this year.)

Government spending trumps all ills, or at least that is how a Keynesian like Krugman sees it. Forget the fables of "regime uncertainty" or the levying of price controls (which always "lower costs," according to Krugman).

Krugman's attacks on business owners and managers come from a perspective of someone who never has had to meet a payroll and who never has had to deal seriously with any government regulations. Krugman pretty much has been employed in elite academic settings in which his employers have huge endowments that mitigate a lot of problems that ordinary people must face. He earns millions of dollars as a writer and speaker, so the only regulations he must meet are tied to tax rates, and Krugman already believes his taxes are too low.

To Krugman, any complaint from the business sector always is the crying of wolf. He writes:
So why are we hearing so much about the alleged harm being inflicted by an antibusiness climate? For the most part it’s the same old, same old: lobbyists trying to bully Washington into cutting taxes and dismantling regulations, while extracting bigger fees from their clients along the way.

Beyond that, business leaders are, as I said, feeling unloved: the financial crisis, health insurance scandals, and the catastrophe in the Gulf of Mexico have taken a toll on their reputation. Somehow, however, rather than blaming their peers for bad behavior, C.E.O.’s blame Mr. Obama for “demonizing” business — by which they apparently mean speaking frankly about the culpability of the guilty parties.

Well, C.E.O.’s are people, too — but soothing their hurt feelings isn’t a priority right now, and it has nothing at all to do with promoting economic recovery. If we want stronger business spending, we need to give businesses a reason to spend. And to do that, the government needs to start doing more, not less, to promote overall economic recovery. (Emphasis mine)
So, there you have it. More spending will solve all economic ills. Let the government borrow into oblivion, let the Fed print more money, and this upside down world will right itself and we can return to full employment.

As I have said before, Krugman's main error is seeing an economy as a mass of homogeneous "stuff." Just add new money and the mixture comes to life. That is not an economy; it is a classroom model that fails to take in account the real-live and complex organism of the economy and its various structures of production. By claiming otherwise, Krugman once again demonstrates that while he might have a Nobel prize in economics, he knows very little about a real economy.

S.M. Oliva and DOJ's New War on Doctors

I have come across an excellent commentary by S.M. Oliva, one of the country's most knowledgeable people on anti-trust law regarding recent action by the Obama administration's Department of "Justice" against doctors in Idaho. The government contends that the doctors' refusal to accept Medicare patients at rates that would force them to deliver care at prices less than their own costs is a form of "price fixing," which is a very "creative" way of looking at such matters.

Oliva makes an important point regarding how the government is likely to engage doctors who might balk at the new restrictions that ObamaCare is going to put on them, and that is by bringing criminal charges against them:
First, until now the Federal Trade Commission, not the Justice Department, has taken the lead in prosecuting physicians. Since 2000, the FTC has brought about three dozen cases against physicians (all but one of which settled without any trial). But the FTC only has civil and administrative jurisdiction; the Antitrust Division has civil and criminal jurisdiction. The Sherman Act makes no distinction between civil and criminal “price fixing,” so in a case like this, it’s entirely a matter of prosecutorial discretion whether to charge the doctors with a civil or criminal offense.

Based on the descriptions in the Antitrust Division’s press release, there’s certainly no reason they couldn’t have prosecuted the doctors criminally and insisted upon prison sentences — and there’s little doubt such threats were made or implied to obtain the physicians’ agreement to the proposed “settlement.”

The second reason this is a landmark case is that the Justice Department has unambiguously stated that refusal to accept government price controls is a form of illegal “price fixing.”

The FTC has hinted at this when it’s said physicians must accept Medicare-based reimbursement schedules from insurance companies. But the DOJ has gone the final step and said, “Government prices are market prices,” in the form of the Idaho Industrial Commission’s fee schedule. The IIC administers the state’s worker compensation system and is composed of three commissioners appointed by the governor. This isn’t a quasi-private or semi-private entity. It’s a purely government operation.

What’s more, the Antitrust Division has linked a refusal to accept government price controls with a refusal to accept a “private” insurance company’s contract offer. This lives little doubt that antitrust regulators consider insurance party contracts the equivalent of government price controls — and physicians and patients have no choice but to accept them.
At the present time, the USA leads the world in the number of people incarcerated in prison. Apparently, the Obama administration is going to try to make sure in the future, the upcoming prison clientele is going to be higher-income professionals with M.D. by their names. Don't kid yourselves; this administration means to enforce ObamaCare by throwing people into jail.

Thursday, July 8, 2010

Krugman (Sort Of) Responds to "Regime Uncertainty" Arguments

Although Paul Krugman does not want to use the term "regime uncertainty," nonetheless, he seems to be referring to that argument in a July 7 post on business investment. He writes:
Truly, we live in a time of mass delusion — or maybe make that elite delusion — where there are lots of things that everyone believes, without a shred of evidence to back that belief. Here’s one more: everywhere you go, you encounter the claim that businesses aren’t investing, they’re just sitting on piles of cash, because they’re worried about future government policies.

There is, of course, a much more prosaic alternative: businesses aren’t investing because they have lots of excess capacity. Why build new structures and buy new machines when you’re not using the ones you already have?

So is there anything in the data suggesting that we need to invoke fear of government to explain low investment? Not a bit.
He goes on to present a graph that contrasts business investment with the CBO's estimate of the gap between potential GDP and real GDP. Since the pattern of the investment follows the CBO's "gap," according to Krugman, that is the end of the argument.

Krugman's argument is based upon the following sets of questions and answers:

Q: Why is the economy bad?

A: Because businesses and individuals are not spending as much as they used to spend.

Q: Why aren't businesses and individuals spending like they used to spend?

A: Because the economy is bad.

Q: What would make the economy recover?

A: Businesses and individuals have to start spending again.

As you can see, this is a circular argument, and Krugman bases much of his analysis upon such "logic," yet he claims that people who disagree with him are suffering from "mass delusion." Now, I don't doubt that businesses as a whole are going to invest less during a recession, but Krugman is leaving out some important matters.

The "capacity" argument is not really an economic argument at all. First, it operates on what Austrian economists call the view that factors of production (for analytic purposes) are homogeneous. Second, "capacity" is a theoretical term for the capability of a firm to create output provided that all factors were operating at "full employment."

The idea behind the Keynesian emphasis on "capacity" is that government can "stimulate" the economy to a point where all firms are operating at full capacity, which then signals that we have arrived at a full-employment Nirvana. Of course, this argument contains the assumption that "stimulus" spending affects all sectors of the economy equally, as though an economy is a homogeneous mass of factors.

I have read a number of Robert Higgs' articles and papers, and never once have I seen him resort to the straw man characteristic of Barack Obama as a "socialist." For that matter, he did not call FDR a "socialist" in his "regime uncertainty" paper published 13 years ago.

If, indeed, government spending is what drives a successful economy, then why was there not a "Great Depression of 1946-48" following the end of World War II, when real prosperity returned. Higgs writes:
Finally, this way (regime uncertainty interpretation) of understanding the Great Duration meshes nicely with a proper understanding of the Great Escape after the war. The Keynesians all expected a reversion to depression when the war ended. Most businesspeople, in sharp contrast, “did not think that there was any threat of a serious depression” after the war (Krooss 1970, 217). The businesspeople forecasted far better than the Keynesian economists: the private economy blossomed as never before or since. Official data, which understate the true increase because of mismeasurement of the price level, show an increase of real nongovernment domestic product of 29.5 percent from 1945 to 1946 (U.S. Council of Economic Advisers 1995, 406). Private investment boomed and corporate share prices soared in 1945 and 1946 (Higgs 1992, 57–58). None of the standard explanations can account for this astonishing postwar leap, but an explanation that incorporates the improvement in the outlook for the private-property regime can account for it.

From 1935 through 1940, with Roosevelt and the ardent New Dealers who surrounded him in full cry, private investors dared not risk their funds in the amounts typical of the late 1920s. In 1945 and 1946, with Roosevelt dead, the New Deal in retreat, and most of the wartime controls being removed, investors came out in force. To be sure, the federal government had become, and would remain, a much more powerful force to be reckoned with. But the government no longer seemed to possess the terrifying potential that businesspeople had perceived before the war. For investors, the nightmare was over. For the economy, once more, prosperity was possible.
One does not have to believe Obama is a socialist to understand that the anti-business rhetoric coming from the White House and Congress is having a chilling effect upon long-term business investment. For example, Obama's claim that his administration would "create 700,000 'green' jobs" does not point out that government subsidies to companies not capable of turning a profit ultimately must come from the hides of presently "healthy" companies, and one can be assured that this "plan" actually would destroy more wealth (and jobs) than it would create. 

Yet, instead of trying to understand a differing point of view, we see vengeful politicians now being urged to seize the funds of individuals and businesses in order that government "may better spend it." No doubt, that will create real prosperity.

Wednesday, July 7, 2010

Krugman, Business Spending, and "Regime Uncertainty"

Paul Krugman has laid down a challenge in his latest blog post, claiming that much of the current joblessness is the result of businesses "sitting on a lot of cash, but not spending it." Indeed, he likens this situation to the extreme cautiousness of Gen. McClellan during the Civil War, which brought about the ire of President Lincoln.

At one level, Krugman claims that the reluctance of businesses to spend is understandable, given what he calls "huge excess capacity." (More on the "capacity" argument later.) He declares:
(Reluctance to spend) then raises the question: how can you believe that, and not also believe that if the U.S. government were to borrow some of the cash corporations aren’t spending, and spend it on, say, public works, this would also create jobs? (Brad DeLong has tried to make this argument repeatedly).

Which brings me to Lincoln and McClellan. General McClellan had raised a powerful army, but seemed disinclined to actually seek battle. So Lincoln sent him a letter: “My dear McClellan: If you don’t want to use the Army I should like to borrow it for a while.” (Yes, there are various versions of the quote).

So shouldn’t that be our response to all that idle corporate cash? We don’t literally have to borrow from the corporations; they’re parking their funds in the money market, and the feds would borrow from that market. But the end result would be to put some of that idle cash to work — and, ultimately, to give the corporations a reason to start investing, too, so that the deficit spending would crowd investment in, not out.
First, the government IS borrowing a lot of cash from businesses and especially from the banks. Second, Krugman is not advocating that businesses seek better deals; no, he is quietly but obviously demanding that government confiscate this "excess cash" if businesses don't increase their spending.

He then throws down the glove: "I have never seen a coherent objection to this line of argument."

My sense is that Krugman has seen "coherent" arguments against this line of thinking, but simply will not acknowledge that anyone else can fashion anything contrary to his own ex cathedra pronouncements. However, in the spirit of Krugman's challenge, I will fashion my own argument, and will lean heavily upon an economist that I really respect, Prof. Robert Higgs.

First, and most important, the "capacity" argument is a red herring that is based upon circular arguments (one of Krugman's favorite tactics). According to Krugman, businesses have large, unused productive capacity that will only become engaged after businesses start spending again. Thus, businesses are causing their own demise, so it is up to the government to break this circular pattern of job destruction and confiscate business cash and spend it wisely.

Once again, we see Krugman claiming that the CAUSE of a recession is less spending, which he also claims in a recent column. Yet, as I see it, this is a violation of what Carl Menger called "The Law of Cause and Effect." Krugman is confusing effect with cause and is missing the larger picture.

He is right that businesses (and many individuals) are putting money in relatively safe places (all of which Krugman would equate to stuffing money in one's mattress), but his circular argument as to why simply fails on its face. However, Robert Higgs has noted many times that "regime uncertainty" on behalf of the Obama administration's actions, which he equates to what happened during the Great Depression.

In 1997, Higgs published a paper in The Independent Review on the Great Depression in which he blamed the "regime uncertainty" promoted by the Roosevelt administration for the lack of long-term investment by businesses. Higgs writes:
Evidence from public opinion polls and corporate bond markets shows that FDR’s policies prevented a robust recovery of long-term private investment by significantly reducing investors’ confidence in the durability of private property rights. Not until the New Deal/war economy ended and resources became available for peacetime production did private investment—and the nation’s economic health—fully recover.
Higgs elaborates on the Great Depression theme in this piece, using a lengthy quote from a member of FDR's "brain trust," noting that FDR's anti-business rhetoric and his punitive policies toward business kept business owners from making longer-term decisions. Higgs in this column equates the current hostility to business by the Obama administration and the equally anti-business Congress to what happened with FDR and points out that we should not be surprised that the present "regime uncertainty" is not going to bring about recovery. He writes:
Speaking to CNBC in Las Vegas recently, Steve Wynn, the billionaire developer and operator of entertainment properties, said: “Washington is unpredictable these days. No one has any idea what’s next . . . the uncertainty of the business climate in America is frightening, frightening to everybody, and it’s delaying recovery.” Wynn complains of “wild, uncontrolled spending” and “unbelievable, unsustainable debt.”

Wynn also has operations in China, and he remarks that he “has no qualms about dealing with the Chinese government. Macau has been steady. The shocking, unexpected government is the one in Washington.” Not very long ago, such a statement would itself have been shocking.

The gambling and real estate magnate expresses concerns about inflation, FHA’s making the same mistakes Fannie and Freddie have made, and the business costs arising from the new health-care law. “We’re on our way to Greece,” he declares, “in the hands of a confused, foolish government.” Exasperated, he mutters, “It’s got to stop. It’s got to stop.”

These observations remind me of similar statements made by investor Lammot du Pont in 1937: “Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate.” Even members of Franklin D. Roosevelt’s cabinet eventually appealed to him to clear the air in which private investors were finding it difficult to breathe, but he refused to do so, preferring to plunge ahead with the New Deal and to publicly blame “economic royalists” for his policies’ failures.
Now, I am sure that Krugman would claim that the above arguments are nonsense and don't provide a "coherent" argument, but nonetheless I believe Higgs has the much stronger argument than Krugman's claim, which is based upon circular logic.

Saturday, July 3, 2010

Bob Murphy's Tribute To Paul Krugman

Economist Robert Murphy, who has a number of excellent critiques of Krugman's writings, has done it again with a YouTube tribute to Bob's "favorite blogger," The Krugman, which can be seen on this link.

(And, yes, I am old enough to remember the original "Susan" from The Buckinghams)

Friday, July 2, 2010

Will "Austerity" Doom Us? Or Is It a Plot By Bond Buysers?

Paul Krugman is a guy on a mission, and when he writes all of his columns and blogs on a single theme -- "Austerity" is Bad, Really Bad -- then one can tell he is serious about his message. His column today falls into that category (again), but now he also presents the problem as being caused both by ignorance (not agreeing with Krugman is being ignorant) and A Sinister Plot By Bond Buyers To Destroy The World.

Riding in on his steed, Krugman declares:
For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed.

This conventional wisdom isn’t based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the policy elite’s imagination — specifically, on belief in what I’ve come to think of as the invisible bond vigilante and the confidence fairy.

Bond vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts. Now there’s no question that countries can suffer crises of confidence (see Greece, debt of). But what the advocates of austerity claim is that (a) the bond vigilantes are about to attack America, and (b) spending anything more on stimulus will set them off.
But the 2008 Nobel Laureate has declared that the USA can and should continue on its spree of borrowing, printing money, and spending. (Thus, we can pretend we prosperous and rich even when we are broke, since printing money creates wealth, according to this Keynesian acolyte.)

Krugman's poster child for "austerity" is Ireland, which according to him is in the Very Throes of Permanent Destruction:
And current examples of austerity are anything but encouraging. Ireland has been a good soldier in this crisis, grimly implementing savage spending cuts. Its reward has been a Depression-level slump — and financial markets continue to treat it as a serious default risk.
However, according to Financial Times, Ireland is not doing as badly as Krugman claims, and seems to be moving in the right direction:
Ireland climbed out of recession on Wednesday with the economy returning to growth in the first quarter, after suffering one of the deepest downturns of any advanced industrialised economy.

Ireland’s return to growth, in spite of having undertaken a huge fiscal retrenchment over the past two years which prolonged the downturn, will provide encouragement to other European economies facing up to tackling rising public deficits.
Furthermore, FT notes Krugman's recent criticisms of Ireland's policies:
Paul Krugman, the Nobel-laureate economist, argued last week that Ireland had seen little reward for its brave fiscal measures. “Virtuous, suffering Ireland is gaining nothing,” he wrote in the New York Times. He was referring to the reaction in the bond markets, where Ireland is still paying 3 per cent more than Germany to finance its budget. But Irish ministers argue they had little choice but to tackle the deficit.

“Had we not done so, the deficit would have ballooned towards 20 per cent of GDP – a level at which the very financial survival of this country would have been at risk,” Mr Lenihan said at the time of the December budget.

Ireland has slashed public sector salaries by about 15 per cent. Welfare has been cut, including 10 per cent off child benefit. New income and health levies have also been imposed.

The return to growth reflects a buoyant performance by the export sector, particularly the foreign-owned multinationals, who have benefited from the euro’s decline and from Ireland’s falling cost base. Ireland sells close to 60 per cent of its exports outside the eurozone – to the UK, US and other economies.
Now, FT is not claiming that Happy Days Are Here Again on the Emerald Isle, but it is clear that after chasing the same housing bubble as much of the rest of the world, Ireland is putting its house in order, unlike the USA. Krugman's entire analysis depends upon the notion that governments should spend and spend until the economies "recover," but with government continuing to prop up malinvestments and discouraging private investment in healthy sectors due to what economist Robert Higgs calls "regime uncertainty," there is not going to be a recovery in the private sector, period.

In Keynesian analysis, the "end game" is the magical recovery of the private sector. Yet, FDR's New Deal (which Krugman generally praises) clearly did not bring recovery, and it created a huge regime uncertainty. However, given the Obama administration's attacks upon productive people and its attempts to force high-cost, low-output things like "green jobs" upon us, not to mention Obama's own anti-entrepreneurial rhetoric, government spending is likely to be the only game in town.

It won't bring recovery, but it does permit people like Krugman to claim that the state really is our savior when, in reality, it is anything but.

(Hat tip to Chris Westley for the FT article)