Friday, July 6, 2012

Is Mitt Romney a Magician? Paul Krugman Believes He Is

I see that Paul Krugman definitely is coordinating his column with the Obama re-election campaign, and he has a number of howlers in his latest concoction. Before dealing with his notion that Mitt Romney and Bain Capital could purchase perfectly healthy company, run them into bankruptcy, and then sell them for a profit, let me first look at Krugman's opening salvo:
In a better America, Mitt Romney would be running for president on the strength of his major achievement as governor of Massachusetts: a health reform that was identical in all important respects to the health reform enacted by President Obama. By the way, the Massachusetts reform is working pretty well and has overwhelming popular support.
I have no idea if anything Krugman says is true regarding the program's "success" and its "overwhelming popular support," but I ran across this interesting exchange the other day about "Romneycare" from someone living in Massachusetts:
When we file our annual income tax returns in Massachusetts, there's a multi-page form on which we're required to specify the type of medical insurance we have, whether or not our coverage is "substantially compliant" (which the insurance plans have to tell us by sending us an annual form) and then, if our coverage isn't "substantially compliant," another form, with a lengthy worksheet, to compute the penalty tax which turns out to be a function of "Modified Massachusetts Adjusted Income"—the computation of which requires the filling out of another lengthy worksheet after adjusting for various deductions and credits (the computation of which requires yet a third worksheet). 
At a dinner party this past Friday evening, I was chatting with a physician friend, a family/primary care physician. I asked him how his practice has been faring under Romneycare and what he thought of Obamacare. He told me that since Romneycare came on board, he and his colleagues, in their office practice, can only hope to make ends meet on volume, scheduling five to ten minute routine appointments, twenty minutes for "serious cases," and annual physicals (which take fifteen minutes) booked up to six months in advance. From 5:00 p.m. to 6:30 p.m. each day, he and his staff sit down to attend to paperwork. Has Romney care led to cost reductions and better care for patients, I asked him. No way, he told me. It's only been better for the insurance companies. What about Obamacare? He rolled his eyes. "We've been sold a bill of goods." He and his family live modestly. He's certainly not getting rich from his medical practice. His wife works to make ends meet. She's a nurse. At your office? I asked him. No, at one of the public clinics where she does better than she could do at his practice, "no fooling."
Granted, the doctor probably is evil to the core, since he doesn't share Krugman's enthusiasm for "Romneycare," and certainly not for Obamacare. I'm sure that Krugman would write off such comments as being straight from Goldstein's headquarters and, besides, doctors really should not be making the same amount of money as Keynesian economists!

But Krugman only is getting warmed up, and then treats the readers to more interesting theories of economics, such as one that holds that the more damage one does to a business firm, the more valuable that firm becomes. I never would have known had it not been for this column, given that I was foolish enough to think that a firm would become more valuable the more profitable and productive it is. He writes:
In any case, however, Mr. Romney wasn’t that kind of businessman. Bain didn’t build businesses; it bought and sold them. Sometimes its takeovers led to new hiring; often they led to layoffs, wage cuts and lost benefits. On some occasions, Bain made a profit even as its takeover target was driven out of business.

So, if we are to correctly read Krugman, he is saying that poor management and unsound practices resulted in Bain's being profitable. Romney is a magician! And what, according to Krugman, is a sound business practice? According to Princeton's Finest, a business becomes more valuable as its real costs of production increase. You know that diagram that one learns in Microeconomics in which higher real costs of production cause the supply curve to shift to the left (or the cost curves that a firm faces shift upward and to the left)? Obviously, that cannot be correct because Krugman's Keynesian analysis declares that more real spending on production actually increases overall wealth:
Why, for example, do many large companies now outsource cleaning and security to outside contractors? Surely the answer is, in large part, that outside contractors can hire cheap labor that isn’t represented by the union and can’t participate in the company health and retirement plans. And, sure enough, recent academic research finds that outsourced janitors and guards receive substantially lower wages and worse benefits than their in-house counterparts. 
Just to be clear, outsourcing is only one source of the huge disconnect between a tiny elite and ordinary American workers, a disconnect that has been growing for more than 30 years. And Bain, in turn, was only one player in the growth of outsourcing. So Mitt Romney didn’t personally, single-handedly, destroy the middle-class society we used to have. He was, however, an enthusiastic and very well remunerated participant in the process of destruction; if Bain got involved with your company, one way or another, the odds were pretty good that even if your job survived you ended up with lower pay and diminished benefits.
So, there it is. If American firms had forced up their own costs of doing business and made themselves uncompetitive with firms overseas, then our economy would be better off. (No doubt, a dose of protectionism and some capital controls would work wonders, I'm sure.)

Anyway, Krugman gives yet another prescription for the economy, one that curiously mirrors what the Juan Peron regime did in Argentina in the 1950s and 60s. Inflation, protectionism, and capital controls all were part of Peron's plan, and we know how well that turned out. No doubt, Krugman would consider Argentina to be a huge success.



9 comments:

HiddenBait said...

"Krugman's Keynesian analysis declares that more real spending on production actually increases overall wealth"

LOL..this blog is truly hilarious.

I have been reading this for some months now.

You clearly have a narrow idea about Keynesian economics, and its premises, and like to extend its proposals to holding universal application.

Keynesians support government spending only in times when the economy is short of full capacity, or full employment. This is done to put money into people's pockets, mobilizing labor and increasing production.

When the economy reaches full employment, only then would further spending crowd out private investment, leading to inflation.

It is at this time that a Keynesian would support cutting back.

"So, if we are to correctly read Krugman, he is saying that poor management and unsound practices resulted in Bain's being profitable."

What Bain did is endemic of today's capitalism; busting labor contracts and pensions to reap a profit, while throwing workers out into the cold.

Is that "productive?"

William L. Anderson said...

So, you are saying that the way to make a firm more valuable is to destroy it. Very interesting.

Are you also claiming that union contracts never have bad effects upon firms?

Yes, I am very familiar with the Keynesian view on spending, but there is no causality on why spending suddenly falls. Furthermore, according to Keynesians, capital development mainly is useful because of present spending on capital, not because capital might make productivity more efficient.

William L. Anderson said...

By the way, please explain how Krugman's prescription for the economy differs in substance from what Peron did to Argentina's economy.

Dan said...

I would love to see Krugman actually try to run a business, I really would. I know somewhere in his life the concept of make vs. buy has come up right, I mean that's a very basic microeconomic concept that all businesses face.

I would hate to explain to him that businesses usually like to focus on core competencies and outsource those items which are not core competencies like payroll, janitorial services and the like. By dedicating less resources to those items, the business has more resources freed up for investment and production, you know the reason why it's in business in the first place. Quite sad when the hand out noble prizes to people who would utterly fail in the private sector but I shouldn't be surprised from Krugman.

Pulverized Concepts said...

"Keynesians support government spending only in times when the economy is short of full capacity, or full employment. This is done to put money into people's pockets, mobilizing labor and increasing production."

I have a hard time remembering when Keynesians ever cautioned the government to cut back on spending because there was full employment. Any references to such? And the "increasing production"? Of what? What is it that the government should print or borrow money to increase? Pinocchia Pelosi says that unemployment insurance benefits are spent on consumer goods. I say they're spent on existing obligations, like mortgage and car payments and insurance premiiuims.

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

"please explain how Krugman's prescription for the economy differs in substance from what Peron did to Argentina's economy."

Lol, you assume that Krugman is calling for protectionism and capital controls...what a stereotype and overblown caricature.

We are talking about spending to mobilize private sector productive capacity, as we've done time and again.

Jim said...

So, how much spending will be necessary to mobilize private sector productive capacity? I hear this said often but never hear a concrete figure or how such a figure would be calculated.

Hiram J Goldstein II said...

If bankrupting a firm makes it more valuable, why sell it to a PE firm at all? Just drive it into bankruptcy yourself and reap the massive profits that are sure to be waiting.