Friday, July 13, 2012

Krugman Endorses Insanity (His Own Words)

On the Sunday before Thanksgiving in 2004, I attended a session at the Southern Economics Association annual meeting, held in New Orleans, and the speaker was Paul Krugman. Joseph Salerno and I sat next to each other to hear the Great Wisdom from The Master. To be honest, I cannot remember anything he said, but I do remember his answer to my question during the Q&A.

My question dealt with tax rates. I asked that since he was critical of the current tax setup, would he endorse the 70 percent rates that existed before 1981? "Oh, no!" he exclaimed, "Those rates were insane!"

Since that time, Krugman seems to be doing everything he can to endorse insanity, and he does it again today in a column that totally misses the mark on the issue of economic growth. To be honest, the question he seems to be raising is a fair one -- Can we have both strong economic growth and high marginal tax rates? -- but his view of economic growth is so skewed that one hardly can answer it on his terms.

He writes:
The first thing you need to know is that America wasn’t always like this. When John F. Kennedy was elected president, the top 0.01 percent was only about a quarter as rich compared with the typical family as it is now — and members of that class paid much higher taxes than they do today. Yet somehow we managed to have a dynamic, innovative economy that was the envy of the world. The superrich may imagine that their wealth makes the world go round, but history says otherwise.
He is correct in that in the early 1960s, the U.S. economy was still the strongest in the world even though its highest marginal rate was about 90 percent. Thus, he reasons, tax rates really don't matter and we can raise rate much higher than they are today and still have lots of economic growth. In past columns, he has noted that a number of key sectors such as rail, truck, and air transportation all were organized into regulated cartels (though he does not use "cartels" even though that is what they were), and banking and finance were tightly organized into similar kinds of cartels. Things were so good back then, he argues, that any change in such legal arrangements could not have had any overall economic benefits and, in fact, the only reason things were changed was because people with the wrong ideology took power.

(Nowhere does Krugman acknowledge the Elephant In The Living Room. In 1961, the other economies of the world were recovering from that destruction of World War II. Japan's economy was in its infancy of productivity, Great Britain had moved to socialism and stagnation, Eastern Europe was walled off by the U.S.S.R., most of Asia was still in its ancient agricultural mode. The U.S. economy was in a position that would be changing, even if Krugman refuses to acknowledge that simple fact.)

Krugman seems to be saying that since this arrangement seemed to be successful in 1961, it ALWAYS would be successful, and he also seems to hint that the economy was successful BECAUSE of the tax and regulatory environment. For Krugman, it is post hoc, ergo propter hoc. Thus, if we were to return to such arrangements, we could then emulate the success of that era.

This brings me to the subject of his column, and that is his discussion of "the rich." If I read Krugman correctly, he is saying that Mitt Romney and his supporters are claiming that those who are wealthy really are the "engines" of a market economy, and that to raise taxes on them would stifle economic growth. Those supporters, Krugman, argues, are wrong because we had high marginal rates before along with economic growth.

Unfortunately, Krugman's entire analysis is based upon a very typical Keynesian "snapshot" view of the economy in which, to quote Robert Higgs, the individual factors of the economy are treated as just "goo" in which the only relevant analysis is to use pure aggregates. This has much political usefulness, as one can see, for Krugman does not have to deal with long-term trends or any underlying weaknesses within the economy. Furthermore, in his views, changes to the legal and regulatory structure have nothing to do with problems that  came about because of the structures of incentives and relationships created by tax laws and regulation. Instead, any changes to what had been a near-perfect system came about ONLY because of "conservative ideology."

Notice a word that never appears in any of Krugman's columns; never. It is "entrepreneurship." I have come to believe that Krugman thinks than an economy is totally administrative and very mechanistic: producers know the production function and then they produce things based upon their projections of how future spending patterns will go. The only things needed for a "successful" economy, then, are productions functions and spending.

The Krugman Economy is one in which economic growth would be due to changes in technology (and government researchers can "invent" anything that is necessary and innovative) and spending, lots of spending. Markets are useful only if they fit the pattern of "perfect competition" in which each firm is tiny and it faces a horizontal demand curve. Firms are simple production functions with given cost curves, with the sole decision by managers being where to set output.

Since entrepreneurship really is not necessary in the Krugman Economy, anyone who gains wealth via entrepreneurial activities is no different than a person who has inherited wealth, like the Kennedys. High marginal tax rates would have no effect upon production or wealth creation, since a government-run firm would be just as productive as a private one and probably more socially useful, since government agents and regulators -- at least if they are Democrats -- always govern with the best of intentions, and everyone know that intentions are all that matters. (Thus, if government agents intend to have high-quality "universal" medical care, then such a program is both morally superior to anything else and also will have the intended results.)

In the Krugman Economy, a Steven Jobs is no more useful than someone living in the Hamptons who lives off a huge trust fund, with the only real social use of either being the potential for government to take large portions of their incomes via taxation, which then can be converted into government spending, which is the REAL source of economic growth. There are no such things as incentives; corporations and entrepreneurs will not change their behavior or outlook a whit if the top rates go back up to 90 percent. Like the band in "Animal House," they will continue to march forward even if a wall blocks their way.

As I see it, Krugman argues that high tax rates will not hurt economic growth because entrepreneurs are both economically and socially unnecessary. He has not gone as far as John Kenneth Galbraith, who argued that entrepreneurs were parasites because they produced useless "private" goods that took away from "needed public investment," although is clearly is in Galbraith's neighborhood.

I would argue that Krugman is much closer to the views of his former professor, Paul Samuelson, who depended solely upon GDP models which permitted him to claim that the planned economy of the former Soviet Union was superior to that of a market economy because the U.S.S.R.'s aggregate numbers showed high growth. That the economy of the U.S.S.R. was primitive, blocked by massive shortages, poor quality of goods, and outright idiocy. Instead, people like Samuelson look at the overall production of goods, such as automobiles and then assumed that, for the purposes of economic analysis, a clunky, 1948-style East German Wartburg was no different than the superior cars made in the West and in Japan. All that mattered were aggregates.

Since entrepreneurship in the old communist bloc economies was illegal and those economies were growing rapidly, Samuelson and his followers reasoned that entrepreneurship at best was a dinosaur, historically interesting but unneeded in the modern, "sophisticated" economies in which wise planners armed with MIT doctorates could run via the creation and solving of simultaneous equations.

In a word, Krugman really does not understand the role of the entrepreneur, nor will he ever understand it. All he sees is someone with money who isn't spending enough of it at the present time. Furthermore, he cannot tell the difference between an entrepreneur and someone who lives on inherited wealth, nor can he tell the difference between market entrepreneurship and political entrepreneurship (i.e. Solyndra).

So, in the Wonderland of Krugman's economy, 90 percent tax rates make perfect sense. It might be "insanity," but in Wonderland, the insane is sane.

34 comments:

American Patriot said...

Krugman never concerns himself with entrepreneurs. Don't you know that it is all about aggregate demand? Just pay workers higher and higher wages, and poof...the economy will magically lift up. Entrepreneurs are simply static in the background who are at the mercy of consumers. Innovativeness, productivity, nothing, nothing matters in the Keynesian dream world.

Dune said...

Strawman alert! Again!

Anderson your tendency to use extreme examples to characterize Krugman's positions is at its best in today's manifesto.

Obviously, given your black and white view of the world, you work better in extremes. However, nowhere in Krugman's column does he advocate raising marginal rates to 90%. He has consistently advocated something more along the lines of Clinton era tax rates. And, as we know, the success of the Clinton years does not fit your narrative very well does it?

William L. Anderson said...

The "success" of the Clinton era was an unsustainable boom that ended with the stock market crashing, and especially the tech sector. I always find it interesting that those who effusively praise the Clinton "prosperity" claim that it came BECAUSE (in Jim Carville's words) the government raised the top rate to 39.6 percent.

Krugman many times has claimed that the U.S. economy performed better when tax rates were 90 percent than it has at lower rates. So, I am not creating any straw men at all.

Dune said...

Anderson, so you wave away a decade of major innovation and productivity gains because the decade ended with a stock market bubble? I have news for you...when that bubble burst, a number of solid firms and technologies were left standing. I am not claiming that high marginal rates led to these gains, but they sure did not seem to hinder them.

Another question: in your world, it seems that some entrepreneurs are more equal than others.

Given that 90%+ of small business owners fall below the top marginal rate that Obama has proposed raising, wouldn't policies aimed at increasing demand actually benefit this segment of entrepreneurs? I know, apparently these entrepreneurs are too stupid to understand how to generate real value for their customers and will inevitably make boneheaded investments mistakes correct?

TheRightRadical said...

Anderson, so you wave away a decade of major innovation and productivity gains because the decade ended with a stock market bubble?""

Like Slick Willie had anything to do with that.
That POS hillbilly, and his dike wife, other then raising what appears to be a decent kid (and I use the term "decent" loosely) haven't done a damn thing to advance human progress, in fact all they have done in their ignorant power is retard it.

I am not claiming that high marginal rates led to these gains, but they sure did not seem to hinder them.""
You're a fool if you think making things harder and more expensive didn't hinder them. Things are never going to be as good as they could be, because of aholes like you love to pile on, and change the rules all the time. You progress, killing jerk.

Given that 90%+ of small business owners fall below the top marginal rate that Obama has proposed raising, wouldn't policies aimed at increasing demand actually benefit this segment of entrepreneurs?""

He hasn't raised demand in over three years, and now you think he can do it fool? I am sure you and your politically connected friends have benefitted from the largess of the Bush/Obama regime, but the vast majority have not. Of course that is what being a fascist is all about.

Anonymous said...

I have news for you...when that bubble burst, a number of solid firms and technologies were left standing.

So, if solid firms are left standing, everything is A-Okay, even if the overall situation got much worse. This is a wonderful thought. I can waste all of my money on several companies, but hey, if one of them makes 1 million dollars a year, I am fine, even if the combined losses are 100 million dollars! Woohoo!

Thanks, you made it much clear to anyone why "demand-boosting" policies are catastrophic in the long run. The politician in charge gets all the credit for the boom, and the next politician will get all the blame for the burst. Obviously, no politicians want any bursts, so they will always deseperately try to create a new boom, leaving an even bigger burst to the future.

Given that 90%+ of small business owners fall below the top marginal rate that Obama has proposed raising, wouldn't policies aimed at increasing demand actually benefit this segment of entrepreneurs?

Yeah, because if it benefits a segment of enterpreneurs it's a good thing. Okay.

Anonymous said...

"That POS hillbilly, and his dike wife, other then raising what appears to be a decent kid (and I use the term "decent" loosely) haven't done a damn thing to advance human progress, in fact all they have done in their ignorant power is retard it."

And this passes for valid posting in your wonderland Anderson?

Dune said...

Last Anon,

Forgive them...the assertion (backed by evidence from the American 20th century) that a country can have relatively high marginal tax rates, decades of explosive growth, and a fairer society tends to make their heads explode.

William L. Anderson said...

Yeah, right, Dune. It's all about "fairness." In other words, if someone makes more money than you, then "fairness" demands that you employ violent means to take money from them. Yeah, that makes my head explode, too.

Anonymous said...

So is Krugman asserting causality between high tax rates and economic growth? Every time I wear blue pajamas to bed the night before my favorite team plays, my team wins. I guess I'm causing my team to win through my clothing selection then.

If Krugman isn't asserting that there is causality, then why bring it up? And if we can find instances showing low growth with high rates, will he concede his analysis is dead wrong? Doubtful. And did Krugman mention how many people actually paid this top rate? The guy is a fraud.

Anonymous said...

Geez Anderson. I still just do not understand this radical rejection of the modern state and democratic politics. I usually don't think that arguing from hypocrisy necessarily invalidates your argument, but for crying out loud why not put your money where your mouth is and quit that nice public job you have in favor of a benevolent private sector college?

I also noticed that once again you have no comment about the vile and incendiary comments posted here by your sycophants.

Bala said...

"I still just do not understand this radical rejection of the modern state and democratic politics."

Yeah!! Some people can never understand the difference between violent and voluntary actions.

Dune said...

Anderson...our moral compasses must point in different directions. Your main concern is protection of the wealthiest and most fortunate among us while mine is for the most vulnerable. This isnt just a fuzzy progressive fantasy...how do you respond to the fact that state budget cuts to child protective services in my state has led to a tripling of abuse related child deaths over the past two years? In your world this is perfectly fine as long as the economic incentives of the 1% arent skewed.

William L. Anderson said...

Excuse me, Dune. How do you know that cuts in the CPS budget has resulted in more children being killed? And you claim that I approve of the murder of children?

Your personal comments toward me really are getting out of hand. Paul Krugman never permits people to attack him directly. I pretty much have let people do that to me, but like the "Alaska" guy who called me a racist, when you claim that I support child murders, you are stepping over the line.

Yes, I think that high marginal tax rates over a period of time will discourage capital investment. So that makes me a supporter of child murders?

And when I have I claimed that the "rich" need special treatment? Do you support the bank bailouts and the bailouts at Wall Street? I never have done that. Second, do you support the billions of dollars in "green energy" subsidies, given to people much wealthier than you or I?

So, I will say that if you step over the line again, I will delete your comments.

For a while, I have allowed anonymous comments and sometimes people go too far. Nonetheless, you have gone much further than any of the people you condemn.

By the way, if you support giving CPS the huge power and latitude that it has, then would it be safe for me to say that you support the wrongful accusations and convictions of people falsely accused of child molesting? I'd tell you to check my other blog on that subject, but I'm sure you would then claim I am a child molester.

Bala said...

"Your main concern is protection of the wealthiest and most fortunate among us"

Ha Ha Ha!!! That's quite a ton of lipstick you are trying to put on the pig that is your approach. It is not protection of "the wealthiest and most fortunate among us" but protection of that institution that even makes civilisation and a voluntary exchange economy possible - the institution of property. What Prof. Anderson (and every other Austrian commenter on this board) is advocating is a social order that recognises the absolute and inviolate nature of property rights. "Progress" is not always good because what is "progress" for one man could be retrogression for another. But then how are thugs to ever recognise this?

Bala said...

Prof. Anderson,

Why are you getting worked up? Here's Dune's offending statement.

"how do you respond to the fact that state budget cuts to child protective services in my state has led to a tripling of abuse related child deaths over the past two years?"

Here's my simple response. Dune - A occurred and B occurred does not mean that A caused B or B caused A or that the non occurrence of one would necessarily lead to the non occurrence of the other.

You have just failed Logic 101. Typical of a retrogressive attempting to take the moral high ground by taking on a positive sounding label like "progressive".

Dune said...

Oh the outrage!

Bala, thanks for pointing out to Prof. Anderson that I did not attack him directly. I do not understand his defensive attitude towards a simple question. If he advocates reducing taxes on the wealthy, he must acknowledge that it comes at the expense of programs that exist to protect the most vulnerable in our society (be it minorities, children, women). Law of opportunity costs, Anderson. This is in no way to say that Anderson advocates child abuse, but it must be a tradeoff he has accepted in order to advocate his policies.

I also do not think its healthy to question a correlation with a fairly obvious explanation. Questioning causality ignores the fundamental question and allows you to keep your ideological blinders on.

However, if you cut CPS caseworks and triple the caseload of existing workers, they are slower to respond to reports of child abuse. This inevitably means that some at-risk children will either be lost in the cracks or not reached on time...which is exactly what has happened in AZ.

Dune said...

By the way, Anderson, judging from the ferocity of your response to my fairly innocuous post...I have to assume there is some deep underlying discomfort with some of the collateral damage caused by the policies you advocate.

There's an obvious reason for this. Your ideology only allows you to be outraged when the abuse is a function of the state. Abuses on behalf of individuals seem to play little role because you have no answer for them.

Mike M said...

Dune

Why don't you step up and address Bala's point. It's about property rights. Period. Not amount of rationalizing "fairness" or providing sob stories negates that fact.

Dune said...

Mike, his point is an ideological one with which I disagree. If your position is that it's always and only about property rights and you value that regardless of the messy details it involves...at least acknowledge the details. No need to shout me down in outrage or use the old "correlation != causation" argument.

Anonymous said...

Dune, then do your accept responsibility for the millions of dead Russians and Chinese at the hands of their very own governments? I mean if you don't agree with him on his view of individual property rights, then how much blame should you shoulder because of those deaths of innocents that occurred precisely because their property rights were violated by the State? There's a lot more blood on your hands than on Prof. Andersen's if we want to start using your logic. Oceans more.

Bala said...

"I also do not think its healthy to question a correlation with a fairly obvious explanation."

There is nothing obvious about it except for people who want to see it so badly that they imagine it. Once again, A happened and B happened does not mean A caused B. There could be a third C causing both A and B. Unless you are ready to recognise this basic point, it is you who is wearing the ideological blinder.

"Questioning causality ignores the fundamental question and allows you to keep your ideological blinders on."

Assuming causality where none has been demonstrated can lead to the throwing of virgins into the volcano.

"This inevitably means that some at-risk children will either be lost in the cracks or not reached on time"

In a free market society, you will be free to run an establishment that takes care of these children and free to collect voluntary donations to fund the same while the donors in turn will be free to make these donations. I know thugs will find this point difficult to understand as they never put their money where their mouth is, but then there lies the problem.

Zachriel said...

William L. Anderson: Notice a word that never appears in any of Krugman's columns; never. It is "entrepreneurship."

January 2008, "Entrepreneurship" by Paul Krugman.

Mike M said...

Dune said
“… reagardless of the messy details…”
The implication in that statement is a faulty premise that is the State doesn’t extract resources from the people by force that bad things happen to people. And that if I vigorously assert the right to property by the individual that by default that must mean “I don’t care” about the less fortunate. If that implication is wrong, reject it.
I suspect additional study about the very essence of what property rights are would serve you well. Then you would understand better the nuances here when people raise them.

Mike M said...

Zachriel
You’re funny. So Krugman uses Entrepreneurship, as defined by him in a narrow statistical manner, as a vehicle to castigate Regan. I don’t think that’s what Anderson was referring to.

Zachriel said...

Mike M: You’re funny.

It's always best to start with facts.

William L. Anderson: Notice a word that never appears in any of Krugman's columns; never. It is "entrepreneurship."

His claim is quite clear. The word "never appears". Yet, not only does the word appear, but it's the title of the column. It's not really Anderson's fault, though. This discovery could only have been made through extensive research by an army of scribes.

Mike M said...

Hey you know what? I’ve never used the word “Thermodynamics” in any article I’ve written. I think I’ll make it the title of my next article chastising progressives. That way I’ve covered the bases with the "facts."

Anonymous said...

sarcasm and economics do not mix well. dickish. So Zachriel disproved the 'fact', but did not disprove the point... perhaps the point was clumsily mad? seems pretty standard on this blog. does this Anderson guy actually teach? yikes.

Anonymous said...

*made sorry.

Mike M said...

Mr Anderson can defend himself and does so quite well.

What I find annoying on this reader response as well as the greater context of life is people who sit in the cheap seats, who have accomplished nothing, and yet become petty and throw rocks at the producers of society.

You want to criticize or disagree? Fine. Do it with substance from a position of credibility. Otherwise you are a small minded simpleton pretending to be something you're not.

BTW Anonymous you better learn to integrate a sense of humor in all aspects of life. Because based on what's coming you're going to need it to maintain some sanity or else you're not going to get through the reconciliation very well.

Bala said...

Zach,

What a wonderful discussion of entrepreneurship that was!!!! I now owe you a lifetime of gratitude.

Anonymous said...

Dune,

I work for a county prosecutor's office in AZ. We work directly with CPS, and we have not seen an increase or a decrease in child abuse crimes. What data are you using to support your claims? I'd love to know.

PS. How would we know if child abuse had increased always, since you claim CPS isn't around to record it?

Dune said...

Here you go...AZCentral has an entire website devoted to the issue...page about 3/4s down and they have charts showing the increase.

http://www.azcentral.com/news/child-abuse/

"There is nothing obvious about it except for people who want to see it so badly that they imagine it. Once again, A happened and B happened does not mean A caused B."

Well, to take this to its logical extreme, there should be no such thing as murder. There happens to be a strong correlation between someone getting shot in the head and them dying, but who knows maybe they died of a heart attack instead.

Mike M said...

Dune,

Seriously, did you ever have a basic Logic class in college?

Go back to your original:

"that state budget cuts to child protective services in my state has led to a tripling of abuse related child deaths over the past two years"

I guess by your logic child abuse must have been rampant prior to the establishment of the Arizonia CPS. I mean when they didn't exist to address abuse issues, it must have been out of control?

Your inability to incorporate independent causal elements is lazy or disingenuous thinking.