Thursday, January 26, 2012

Jobs, jobs and wealth creation

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

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

Furthermore, because he holds that an economy is basically a circular mechanism, he really cannot see beyond the number of employees a company might have employed in this country to see the value of what a firm produces. In his latest column, Krugman makes the point that Apple does not create many jobs, which is very, very short-sighted. He writes:
A big report in The Times last Sunday laid out the facts. Although Apple is now America’s biggest U.S. corporation as measured by market value, it employs only 43,000 people in the United States, a tenth as many as General Motors employed when it was the largest American firm.
In other words, in Krugman's view, Apple has no usefulness as a firm beyond how many people it employs. Its economic contribution stops at that point.

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

As for the point about "clusters," Krugman is correct at that point. Unfortunately, he shows his Keynesian colors here:
The point is that successful companies — or, at any rate, companies that make a large contribution to a nation’s economy — don’t exist in isolation. Prosperity depends on the synergy between companies, on the cluster, not the individual entrepreneur.

ut the current Republican worldview has no room for such considerations. From the G.O.P.’s perspective, it’s all about the heroic entrepreneur, the John Galt, I mean Steve Jobs-type “job creator” who showers benefits on the rest of us and who must, of course, be rewarded with tax rates lower than those paid by many middle-class workers.
In other words, entrepreneurs don't matter in the Krugman view of an economy. Of course, he forgets that one of this country's most important places of synergy, Silicon Valley, came about because of the vision of a few entrepreneurs who turned their ideas into the creation of huge amounts of wealth. Furthermore, he seems to forget that most of the great entrepreneurs of recent times have been...Democrats. From Steven Jobs to Bill Gates to Michael Milken to the founders of Google, liberal Democrats have made a huge economic impact because they had great ideas and how to put them together to create new products.

So, what is Krugman's idea of a Really Big Economic Success? The auto industry bailout. He writes:
...this vision helps explain why Republicans were so furiously opposed to the single most successful policy initiative of recent years: the auto industry bailout.

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

Fortunately, the Obama administration didn’t let that happen, and the unemployment rate in Michigan, which hit 14.1 percent as the bailout was going into effect, is now down to a still-terrible-but-much-better 9.3 percent. And the details aside, much of Mr. Obama’s State of the Union address can be read as an attempt to apply the lessons of that success more broadly.
First, Krugman assumes that there are no other auto producers in this country, and I am sure that many of the assets of Chrysler and GM would have been put to good use. Second, Krugman forgets that the bailout did not occur in order to save "clusters," but rather to force taxpayers to pony up to save the United Auto Workers.

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

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

24 comments:

Dan said...

You really do have to wonder about Krugabee's economic training when he doesn't understand the basic principles of microeconomics at all. It's like he ditched that class completely in college, cheated on the final to get a C- and then took macroeconomics and discovered a mechanism in which he thought he could control the world.

Joseph Fetz said...

What the heck? Somehow, because old and inefficient managers are essentially "fired" by the market, this automatically assumes that the capital disappears? That new, more efficient managers won't use that capital for good use?

This doesn't require taxpayers to foot the bill any more than it would if I chose to buy one product over the other, that is how goods reach their most desired ends. Prices of capital adjust, like any other good, until there is a marginal buyer. Whats more, that buyer of the capital puts it to productive use. Somehow, I am to believe that just because there is new management, that this destroys the entire structure? BS!

What does destroy the structure is taking sides with politically connected parties and floating them the money to keep prices high, so that you're almost assured of less productivity for the same amount of investment-- all socialized, which deepens the burden.

In Krugman, I feel like I am reading the ramblings of a child.

Lord Keynes said...

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

"In other words, entrepreneurs don't matter in the Krugman view of an economy."

What pathetic caricatures.

The point of Krugman's post is

(1) addressing the question of how many people Apple does in fact employ in the US and

(2) noting that China's highly successful industrialization has involved "synergies" of co-dependent industries and services - an historical characteristic of industrialization seen in nation after nation after nation, as noted by Erik S. Reinert, How Rich Countries Got Rich and Why Poor Countries Stay Poor (2007).

"Second, Krugman forgets that the bailout did not occur in order to save "clusters," but rather to force taxpayers to pony up to save the United Auto Workers."

Yet it did prevent the collapse of the clusters, and that is point Krugman was making, not your absurd straw man.

William L. Anderson said...

If these "clusters" are part of an industry that loses money, then they are destroying wealth and bringing down the economy. With Krugman, profits (or profits earned in a relatively free economy) actually are a drain on the system while profits made by subsidized firms somehow make us wealthier.

I have not created a straw man. Krugman approaches the economy the same way that mercantilists did it 400 years ago. As a Progressive, he hates real profits and he cannot conceive that a market actually can move resources from lower-valued uses to higher-valued uses.

Instead, he believes that because he is "smarter" than other people, it should be up to him and other elites to determine what is higher-valued and what is lower-valued. The notion that the Great Unwashed should be deciding such things is anathema to him and other elites.

Again, this is not a caricature. LK and Krugman both believe that when governments are printing money, they actually create wealth, and that somehow government through coercion and orders can "create" a prosperous economy.

Lord Keynes said...

"With Krugman, profits (or profits earned in a relatively free economy) actually are a drain on the system while profits made by subsidized firms somehow make us wealthier."

The auto bailout plan was a grant of loans with interest (in 2008 and 2009), not free money, and Chrysler (in May 24, 2011) just repaid repaid the last of its loan.

So you've got no idea what you're talking about, ranting about "subsidized firms".

"If these "clusters" are part of an industry that loses money, then they are destroying wealth and bringing down the economy. "

The US car industries in question were losing money largely because of

(1) not investing in new fuel-efficient car models

(2) the credit crunch and great recession itself and

(3) rise in the cost of factor inputs.

These were nothing but temporary factors that could and were in fact overcome.

Allowing them to go bankrupt just for these reasons above is just Hayek's liquidationist insanity reborn.

Ford, General Motors, and Chrysler are now making profits, and the US economy is wealthier for having saved them, not poorer, contrary to your Austrian cultism.

http://online.wsj.com/article/SB10001424052970203363504577185231066443106.html

"LK and Krugman both believe that when governments are printing money, they actually create wealth,

That tired nonsense has been refuted here a long time ago:

http://socialdemocracy21stcentury.blogspot.com/2011/05/william-l-anderson-flunks-keynesian.html

Zachriel said...
This comment has been removed by the author.
Zachriel said...

William L. Anderson: As a Progressive, he hates real profits and he cannot conceive that a market actually can move resources from lower-valued uses to higher-valued uses.

No.

Krugman & Wells, Economics 2009: "Factor markets, like goods markets, play a crucial role in the economy: they allocate productive resources to producers and help ensure that those resources are used efficiently."

William L. Anderson: LK and Krugman both believe that when governments are printing money, they actually create wealth, and that somehow government through coercion and orders can "create" a prosperous economy.

Not quite. It can, under certain circumstances, create economic activity.

Bala said...

"Not quite. It can, under certain circumstances, create economic activity."

Please explain how it can create economic activity in one portion of the economy without destroying economic activity in another portion of the economy. Do back it up with the theoretical justification for your claim.

Daniel Hewitt said...

LK,

The New Chrysler (aka Chrysler Group LLC) paid the loans back. The Old Chrysler did not and will not.

GM loans were paid back with taxpayer funds. Also, the GM restructuring happened at the expense of the bondholders and stockholders.

The argument that transfers from taxpayers to corporations will yield net benefits for taxpayers is really just "trickle-down economics".

Sam said...

Also, the government still owns stock in GM. In order for the taxpayers to break even, the stock price needs to be around $50/share. As of today, GM is trading around $25/share.

William L. Anderson said...

With Krugman, profits can be useful ONLY under conditions of perfect competition, and if a firm is profitable for a long time, that is because of monopoly, which is bad, bad, bad.

In other words, Krugman has no view at all of a firm being entrepreneurial over time. His take on profits, like everything else in economics, is mechanistic.

Anonymous said...

@LK: Ford did not receive any bailout money and made it through just fine. In fact, it is viewed as the strongest of the big 3 right now.

http://www.bearingdrift.com/2011/09/16/refusing-to-take-bailout-money-ford-continues-to-stay-on-top/

Eric said...

Krugman (and Keynesians) understand the importance of entrepreneurs, they just don't think they are anything that can be encouraged or discouraged. They are random variables in the system; they'll appear and try to create wealth and innovation no matter what. Krugman wants to focus on the environment, so that entrepreneurs have the tools they need to flourish. No matter how brilliant and innovative Steve Jobs was, he couldn't build ipods himself, he needed an advanced, integrated "industrial cluster" to make his products, and Krugman is talking about what we can do to create that cluster in the US for the next Steve Jobs.

Furthermore, doesn't the success of China and Germany in the manufacturing industry demonstrate the benefits of government participation in the economy? I mean you have us giving very little encouragement to manufacturing, very little support to education to train new workers, and then you have the governments of China and Germany, who give huge subsidies to encourage manufacturing and almost free education to their citizens, and all the manufacturing jobs are going to China and Germant. If a non-participatory government is better for business than a participatory one, why have China and Germany's intervention in their economies been so successful?

William L. Anderson said...

What Eric is trying to say is that government agencies that "support" manufacturing make decisions ONLY on their economic, not political merits.

Uh, are you saying we don't have "free" (or government) education? I had no idea that we didn't have public schools. That is why I read the comments -- to learn things.

callahan auto said...

LK - you clearly don't know what you are talking about. The #1 reason GM was losing money was because they weren't making fuel-efficient cars? Entire wrong...that is a canard statists who know nothing about the auto industry like to throw out but have no grounding in reality. If they weren't making money hand over fist on SUVs, they would have went bankrupt a lot earlier.

The financial crisis caused a massive liquidity drain on them but they were losing money for years before the crisis hit and it had nothing to do with not making fuel efficient vehicles.

The 2 reasons above all others they went bankrupt were: 1) having entirely too much capacity for the volume they were selling and 2) higher costs, primarily due to uncompetitive union contracts including massive retiree pension and healthcare obligations. There are other contributing factors, but these 2 are the overriding ones.

Now I know this is tough for you to swallow because it flies directly in the face of you view that capital is hogoneous and that high wages for labor is good (hey they get to buy the products that they makes and the wheel keeps on turning) but if you had an honest bone in your body, you would readily recognize this.

callahan auto said...

LK - and another thing, why didn't you mention the status of the government "loans" to GM that were subsequently converted to equity? Convenient omission There is virtually no chance the government gets all its money back (small chance it happens on even on a nominal basis and a slightly greater chance than 0% that it earns any sort of reasonable equity return).

I tell you what, give me an $80 billion blank check and I could "save" a lot of industries. Real tall order there.

Tel said...

Does Krugman strangely think that Steve Jobs was sitting in the back room strumming a guitar to make all those iTunes songs?

Of course, as an entrepreneur he was perfectly capable of signing contracts with other businesses and thus coordinating his actions. Apple made a profit, the music industry got to sell more songs, and the consumers enjoyed the convenience.

I'm coming to the conclusion that there's a lot of macro-economists who don't actually understand how a business operates.

Eric said...

What Eric is trying to say is that government agencies that "support" manufacturing make decisions ONLY on their economic, not political merits.

I don't really understand what you are trying to say here. Are you saying that China and Germany support manufacturing for political reasons? I don't see how that's bad. I mean, their citizens want jobs, and the government helps create jobs.

Uh, are you saying we don't have "free" (or government) education? I had no idea that we didn't have public schools. That is why I read the comments -- to learn things.

i was talking about secondary education, I'm sorry I thought that was obvious. If you read that article Krugman refers to in his column, it mentions that the Chinese factories apple uses requires workers with 2 year vocational degrees, and that those types of workers aren't available in the US. China and Germany heavily subsidize secondary education to help produce these workers, and that's what I was referring to.

Anonymous said...

Since Krugman picked on Ayn Rand's character (John Galt) out of context, it is important to note that Ayn Rand never suggested that individuals become successful in isolation in a capitalist economy; that capitalism is successful because it is able to maximize cooperation without sacrificing individual rights or privacy.

The goal of the they-didn't-build-it-alone argument is to hide the existence of the individual behind whatever abstraction they give to individuals who have agreed to cooperate. And for every successful cooperation, there is an "opportunity cost" in cooperations -- "clusters" -- *not* formed: clusters not formed because individuals refused to enter into them in favor of other, more successful associations.

Dan said...

LK is completely full of it, for the US Government to just breakeven on the "loan" as you like to call it, the stock price of GM has to appreciate to $50 per share, currently GM is trading at $24 per share after it's new IPO opened at $32 per share. Keep lying buddy, keep lying.

Bob Roddis said...

The US car industries in question were losing money largely because of

(2) the credit crunch and great recession itself

Keynesian and "progressive" government policies certainly caused the credit crunch and the great recessision itself.

macroman said...

On the contrary William Andesen, a great deal of whAt you say about Krugman is a straw man. Where did you get the idea tha Krugman thinks profits are a drain on the economy. I am starting to understand why you call this blog Wonderland.

macroman said...

What do you mean by "managed centrally"? You try to make sound like Krugman believes in soviet style central planing, when the only evidence you have is some comments about the jobless rate in the US.

Joseph Fetz said...

Whether the means of production are centrally owned and managed is only a matter of degree. If one, such as Krugman, favors the redistribution of productive profit, it is still a centrally planned operation, only it attempts to keep the ownership of the means of production is private hands, albeit with a greater degree of government/corporate cooperation.

Same system, just not quite as imbedded. Rather than collectivist socialism, you get collectivist fascism with a social-democratic welfare state as a side-dish. Both being a dramatic waste of both resources and capital.