Monday, July 2, 2012

Krugman's Great Illusion

Paul Krugman is in Spain this week, most likely telling the Spaniards what they want to hear: The European Central Bank can end the country's unemployment miseries painlessly by buying near-unlimited amounts of Spain's government bonds and then floating massive amounts of new euros around the world. Yes, for the umpteenth time, Krugman insists that if Europeans print money and spend it as though they are rich -- they can become rich!

Once upon a time, Krugman would have been classified as a "crank," someone who believes that wealth is cranked up on printing presses. Today, he is seen as a prophet, a "lonely voice" crying in the wilderness with the message that economic salvation is easy. Repent and be baptized in a flood of inflation, and all will be well.

He uses the analogy of Norman Angell's 1910 book, The Great Illusion, in which Angell claimed that because of the economic advances that had been made up to then, nations plundering nations via wars no longer seemed necessary:
Trade and industry, he pointed out, not the exploitation of subject peoples, were the keys to national wealth, so there was nothing to be gained from the vast costs of military conquest.

Moreover, he argued that mankind was beginning to appreciate this reality, that the “passions of patriotism” were rapidly declining. He didn’t actually say that there would be no more major wars, but he did give that impression. 

We all know what came next. 
Krugman then claims he knows the REAL lessons to be garnered in modern times. (No, it is not the lesson that wars are utterly destructive. After all, "Military Keynesianism" makes us rich, right?) It is that government hubris keeps governments from borrowing and spending as though they had the resources to do it:
The point is that the prospect of disaster, no matter how obvious, is no guarantee that nations will do what it takes to avoid that disaster. And this is especially true when pride and prejudice make leaders unwilling to see what should be obvious.
 And what is that "obvious" lesson?
It comes as something of a shock, even for those of us who have been following the story all along, to realize that more than two years have passed since European leaders committed themselves to their current economic strategy — a strategy based on the notion that fiscal austerity and “internal devaluation” (basically, wage cuts) would solve the problems of debtor nations. In all that time the strategy has produced no success stories; the best the defenders of orthodoxy can do is point to a couple of small Baltic nations that have seen partial recoveries from Depression-level slumps, but are still far poorer than they were before the crisis.

Meanwhile the euro’s crisis has metastasized, spreading from Greece to the far larger economies of Spain and Italy, and Europe as a whole is clearly sliding back into recession. Yet the policy prescriptions coming out of Berlin and Frankfurt have hardly changed at all.
One would think from that statement that European governments had massively cut back spending and allowed entrepreneurs to pursue profitable lines of production without the kind of government interference for which European governments have been famous. Think again.

No, the past four years have been characterized by governments expanding their regulatory and tax reaches, along with the massive implementations of "security" measures and other mechanisms of state power. The "austerity" programs also have brought huge tax increases and efforts by governments to stop the free flow of capital and trade. In other words, governments have used the financial crises to increase the power of governments.

To read Krugman over the past few years, one would think that the U.S. and European governments have embarked on a large-scale experiment in free markets, free trade, and measures to lesson the impact and burden of the Warfare-Welfare State, and have been the epitome of fiscal and monetary restraint. That hardly is the case.

What is needed? Once again, Dr. Krugman offers his advice to governments: pretend that you are rich and borrow and spend as though there is no tomorrow.
What would it really take to save Europe’s single currency? The answer, almost surely, would have to involve both large purchases of government bonds by the central bank, and a declared willingness by that central bank to accept a somewhat higher rate of inflation. Even with these policies, much of Europe would face the prospect of years of very high unemployment. But at least there would be a visible route to recovery.
Yes, another Krugman howler. We are supposed to believe that governments need to suck up the "courage" to borrow, print, tax, and spend on a level never seen before outside world wars. This brings the obvious question to mind: Since when did governments ever have to employ "courage" in order to do these things?

No, governments do them as a matter of course. The euro was supposed to impose a certain amount of fiscal discipline of the governments of the member states, just as the U.S. Dollar is supposed to have similar effects upon state governments. Yet, what have we seen over the last decade? I can tell you that "fiscal discipline" has not exactly been the watchword of the U.S. Government, the U.S. states, and European states.

Being that he is a good Keynesian, fiscal "discipline" is the last thing that Paul Krugman ever would want to see in government. Anyone who claims that the USA still is in depression because state governments are not spending enough money is not someone who has a handle on the reality of the current situation.

Governments -- and central banks -- do not create wealth on their own. They confiscate the wealth produced by individuals and then transfer it to others. Yes, I admit that roads and bridges can help create wealth, provided they are located in places other than the furthest reaches of "Nowhere," but the funding for those projects still must be garnered via confiscation of wealth created by others. 

(Keynesians can claim "social contract" or anything else, but taxes are a confiscation of wealth. One can argue whether or not they are "proper" confiscations, but nonetheless they are taken from people via threats. That is, unless one actually believes that the IRS never uses coercion and implied threats along with outright brutality to take money.)

I'm sure that Krugman's message will be well-received in Spain, and I am sure that he will not mention how Spain's very strict employment laws (it pretty much is impossible to fire workers, no matter how unproductive they might be) contribute mightily to that country's high-unemployment rate. Instead, he will claim that the only thing that is needed is for the other European states -- and especially Germany -- to understand that the economic version of "Hair of the Dog" is the True Pathway to Recovery.

To be sure, Krugman's scheme will not create new wealth, nor will it help economies move toward those structures of production that are sustainable. After all, Krugman is a graduate of MIT, a program made famous by Paul Samuelson and his belief that a doctrine of "Schmoo Capital" really would be appropriate for setting up working models to describe the economy.

What Krugman really is endorsing, however, is not creation of wealth or allowing entrepreneurs to move resources from lower-valued to higher-valued uses. No, what he is saying is that the Germans, the Dutch, and others in the European Union should be forced to transfer massive amounts of resources from their countries to Spain, which then will use those resources in a way that will frustrate the creation of new wealth, with the whole scheme masked by central bank borrowing and essentially the printing of money.

That this scheme actually will result in widespread prosperity is a huge illusion, but in desperate times, people especially buy into that kind of mental deception. However, it is Krugman who is delusional, for he really wants us to believe that the answer to our economic needs is for governments to spend recklessly, borrow, and print, something that governments have done as long as governments have been in existence.

Krugman wants us to believe that preparation for an imagined invasion of "space aliens" would bring back prosperity. One only can wonder if he can sell the Europeans on the same kind of scheme. Maybe there really is enough illusion to go around, after all.

27 comments:

Lord Keynes said...

"Once upon a time, Krugman would have been classified as a "crank," someone who believes that wealth is cranked up on printing presses. "

This lazy straw man argument is your stock in trade, isn't it?.

The private sector creates wealth and new employment as demand for their products via stimulus.

"The "austerity" programs also have brought huge tax increases ."

Well, duh... Tax increases to balance budgets - contractionary fiscal policy, as in Ireland, England, and Greece - are standard austerity policies.

"Keynesians can claim "social contract" or anything else, but taxes are a confiscation of wealth. One can argue whether or not they are "proper" confiscations, but nonetheless they are taken from people via threats. That is, unless one actually believes that the IRS never uses coercion and implied threats along with outright brutality to take money"

And by what moral theory do you proclaim taxes as theft? You've been challenged again and again to say what ethical theory you support but refuse too.

"Krugman wants us to believe that preparation for an imagined invasion of "space aliens" would bring back prosperity.

Only in the fevered mind of libertarians does a facetious remark get transformed into an actual call for any such thing.

Anonymous said...

Lord Keynes,

Prof. Anderson's Alexa rank:
1,800,000

Rank for your joke of a blog:
4,800,000

This blog > Yours (big time)

Despite your troll-ish tactics such as your recent baseless attack on Robert Murphy, nobody goes to your blog. Think about all the 1000s of hours you have wasted on your blog and others. NOBODY CARES ABOUT YOUR OPINION. Just give up, loser.

William L. Anderson said...

Actually, I don't mind LK's comments because they permit a range of discussion afterward. Furthermore, any comments he directs at me really are tied to the material. (He does not call me a racist or whatever, unlike some others who have posted here.)

I'm not sure what the Alexa rating is, but the number for me does not seem to demonstrate that Krugman has much to fear from this blog! But that is OK, too.

Anonymous said...

I truly admire your tolerance, sir!

Actually, I don't mind the substance of what LK says either, but he is truly the most ill-mannered economics blogger out there. Differences of opinion are fine, but he rarely finishes a blog post or comment without tossing in the words "fool," "idiot," or "laughable." It's too bad LK hasn't mastered the basic politeness that most of us learned as children.

In his own self-interest, he would probably increase the number of hits and exposure for his blog if he treated readers who make comments with the slightest bit of courtesy. He also has a regrettable habit of not uploading comments that don't fit his ideological mold.

Please keep up the good work, Professor. I for one appreciate it.

Dune said...

Anderson, your usual lack of curiosity has led you to mix up Spain's employment laws with stricter ones in countries like France...again. I've lived in Spain and my spouse is from Spain...so I know.

In fact, employers in Spain have incredible leverage to hire workers on temporary contracts and fire them at will (even after their contracts become permanent they only have to pay 30 days severance).

If Spain's economy is as flawed as you claim...why is unemployment today after the financial shock twice as high as it was in the late 90s...before the real estate bubble even began?

Is this because gov't spending caused false prosperity in the 90's? No..gov't spending was less than today. Is this because labor laws were more lenient in the 90's? No, labor laws have increasingly favored business owners.

Obviously, there is something else at work which Krugman is astute enough to comment on which your intellectual laziness and lack of empirical rigor has missed yet again.

William L. Anderson said...

Hmmm. So you are claiming that Spain's labor laws are not strict at all. I found this in a quick search:

http://business.time.com/2010/06/14/the-problem-with-too-much-labor-protection/

The commenter is writing about the 30-day probation period, NOT what happens if someone is permanently employed. There is a difference that the commenter fails to recognize.

Some quotes from the article. (I guess the writer also suffers from "lack of empirical rigor" and the like.)

It’s not that there aren’t enough available workers in Spain. With an unemployment rate at a staggering 20%, there’s no shortage of people who hotels, restaurants and other companies could hire. But they don’t. And that isn’t just a factor of the current economic downturn. Unemployment in Spain is traditionally higher than in the U.S. Even during the so-called boom years of the mid-2000s, the unemployment rate never sank below 8%.

The reason is that employers don’t want to create jobs. It’s simply too costly. Blame the country’s overly strict labor laws. Mandated severance payments – of as much as 45 days per year of service – make laying off employees prohibitively expensive, and that makes firms reluctant to hire them in the first place. Managers do have the option of taking on temporary staff on fixed-term contracts. If those workers get dismissed, they don’t receive the same giant severance payments as permanent employees, allowing companies to downsize at reduced cost. But that choice has its own downside. With workers around for only a short time, they have little commitment to their jobs, and employers have even less reason to train them properly. That affects company performance and competitiveness.

The labor laws in Spain have created a distorted economy, where those workers in permanent positions almost have jobs-for-life, while the remainder can’t find stable employment, or jobs period. That may be good for the protected workers, but nobody else. Not companies, not young people (who, as new entrants to the workforce, have the hardest time finding regular jobs), and not the overall economy. If Spain can’t put people to work, it’s going to have a rough time rebounding from the Great Recession and its own disastrous housing bust. The government has to make labor laws more flexible.

I FOUND THIS in a legal blog:

http://www.spanish-living.com/jobs-employment-spain/employment-law



Companies have traditionally avoided giving indefinite contracts because of the difficulties in laying off such employees, and the high compensation package involved. Consequently, the Spanish mentality is such that receiving an indefinite contract is almost as important as what salary they will actually receive.

You can't be too careful about employee issues. Spain is not at all a litigious country EXCEPT when it comes to an employee who has been fired.

GEE, THIS LACK of "rigor" seems to be epidemic.

William L. Anderson said...

I found this one in another legal blog:

http://corporatelaw.jdsupra.com/post/17388892693

“In Spain the Labor Jurisdiction is quite protective for workers. It’s difficult to obtain a favorable ruling defending investor’s rights against the worker. Likewise, there are no court costs before the Labor Jurisdiction, so suing the employer is easy in Spain because no legal costs are incurred if the worker is defeated by the Company.” (International Law Compendium 2011-2012 by Carlos Marcin Pallares)

MY GOODNESS!! These lawyers sure have a "lack of empirical rigor," do they not? Hey, why call a lawyer when Mr. Anonymous here can give you the real scoop!

Dune said...

Where is the rigor in the first article you cite? The writer walks into some cafes and makes a baseless assumption...sounds like your kind of research!

I never stated that Spain's labor laws are perfect...but to point to them as the MAIN driver of depression level unemployment, I believe you have a higher bar to cross than the articles you just cited.

Indeed, Spain is 5 ranks higher than Norway, 30 ranks above France, and only 10 ranks below Germany on the Heritage Foundation's economic freedom index. Funny then how their unemployment rate is about 10% higher than all of those countries.

Funny also how you quote the ease of firing contract workers as a weakness of the labor market...

You also never addressed my question about why Spain's unemployment rate is twice as great today as in the late 90's despite labor reforms and higher gov't spending.

William L. Anderson said...

Spain's labor laws are the kind that would make depression conditions worse. Furthermore, you confuse the rules governing a 30-day contract and rules for employees that are considered permanent.

Are you saying that the answer to Spain's situation is for Europe to have a lot of inflation?

Dune said...

Again, what do labor laws have to do with 25% unemployment..a rate that is unprecedented in the country's history? I have no problem with a statement like "Spanish labor laws account for its historic structural 12% unemployment rate." But you have no story to account for the other 13%.

You obviously are aware that the goal of inflation here is not to print wealth...it is to restore the wage competitiveness that Spain lost when it became part of a single currency zone. Want wages to correct downward instead? How does about 10 more years of suffering and misery sound to you?

Edward said...

Dune,

"Again, what do labor laws have to do with 25% unemployment..a rate that is unprecedented in the country's history? I have no problem with a statement like "Spanish labor laws account for its historic structural 12% unemployment rate." But you have no story to account for the other 13%.

You obviously are aware that the goal of inflation here is not to print wealth...it is to restore the wage competitiveness that Spain lost when it became part of a single currency zone. Want wages to correct downward instead? How does about 10 more years of suffering and misery sound to you?"

EXACTLY!.

Austrians like professor Anderson prefer to engage in straw men than take on the actual argument. If you want to convince us skeptics about the drawbacks of inflationism using the ":distortions in the capital structure argument" fine, but don't attribute to Keynesians, or to MONETARISTS views that they don't have- money creates wealth. Do you understand the meaning of the words, necessary but not sufficient. The economists had a good analogy for people like you- who want to paint a house my moving the entire house back and forth, versus the monetarists/ Keynesians, who want it to be done via the nominal exchange rate and money inflation. Our way is cheaper, faster and doesn't have any mythical "distortions of the capital structure" which I'll be glad to debate you on in another post

Mike M said...

Edward and Dune "How does about 10 more years of suffering and misery sound to you?"

And monetary debasement doesn't create suffering and misery? Worse it tends to create the most pain most in the classes of people least able to protect themselves from it.

You are both under the naïve assumption that reconciliations from years of bad policy, mismanagement and unprincipled conduct can be accomplished without pain. How delusional and child like.

Tel said...

http://www.heritage.org/index/country/spain

The two WORST scoring attributes for Spain on the Heritage list are government spending and labor freedom. These are very significantly below the other categories.

Dinero said...

It is not quite true to say that government projects are always funded by confiscation of wealth. There is no confiscation if a government borrows the money to build a toll bridge and then repays the loan from the tolls.

Anonymous said...

Edward, yeah, I know, you don't say that money printing creates wealth, you say that money printing is necessary when there is not enough aggregate demand or to restore the "labor competitiveness", etc. However, in practice, this means that you believe that money printing does create wealth.

I am Brazilian, and I would NOT want inflation. You probably never had to face real inflation in your whole life. Trust me, it's horrible, specially for people who aren't rich. You have to take your salary and the same day buy absolutely everything you can. Yeah, the reality-bubble Keynesians and people alike think this will "boost aggregate demand". For people who live in the real world, not the wonderland, inflation destroys wealth and destroys the ability of people to build up their savings so they can coup with emergencies or even buy a house or a car.

So, the reality is: unless you are rich, inflation is tragic. And to anyone who defends inflation, I say: fuck you. You are an economist who lives in a bubble and doesn't have a clue about how inflation affects people. You just want the world to fit your ridiculous, precious economic models.

Dennis said...

"Want wages to correct downward instead?"

What do you think inflation does? By gutting the purchasing power of your currency, it effectively gives all workers a wage "haircut".

Dune said...

Dennis,

Obviously, but wages are sticky so inflation would achieve this more quickly and efficiently than the market.

Also, we are not talking Brazilian style inflation here. Krugman has advocated about 5% in the Euro core I believe.

Again, in all these arguments no one has answered why it is necessary that Spain endure years of unemployment that is twice its historical norm. Whining about labor laws and lack of competitiveness just does not cut it. No real answers from the Austrians as usual...

Mike M said...

Dune, here is a partial answer for you. Because the malinvestment and excesses MUST be cleared. What part of there is no way to reset the system without pain escapes you?

" Krugman has advocated about 5% in the Euro core I believe."

As if the economy is a science experiment that the omnipotent ones can just turn dials to make the cake mix "just right". Listen to yourself. You honestly believe its possible for some self appointed elite "manage" the economy. You're as delusional as they are. Your premise is flawed, thus everything flowing from it is flawed.

Dune said...

"Dune, here is a partial answer for you. Because the malinvestment and excesses MUST be cleared. What part of there is no way to reset the system without pain escapes you?"

How does the clearance of malinvestments during the boom require an unemployment rate that is twice as high as before the boom began? What is the evidence that the boom caused that much collateral damage to previously healthy sectors of the economy? Again, your story just does not clear the bar here.

Anonymous said...

How does the clearance of malinvestments during the boom require an unemployment rate that is twice as high as before the boom began?

It doesn't need permanently high unemployment, but you know, resources need to be reallocated, and there's no magic, it takes some time. Unfortunately, the resource reallocation is not happening precisely because the government is refusing to let the production structure rebuild and adapt to the new reality. People obviously don't want to be unemployed, but it's quite difficult for people and enterpreneurs to start over when they fail if the government is still trying to bail out and give shitloads of money to their friends (eg: JP Morgan). Real productive people have to battle for resources while useless people and bureaucrats get lots of free money.

What is the evidence that the boom caused that much collateral damage to previously healthy sectors of the economy? Again, your story just does not clear the bar here.

You need further evidence? What about the MASSIVE debt, rock-bottom housing prices and an economy that's shattering by your eyes?

jason h said...

How does the clearance of malinvestments during the boom require an unemployment rate that is twice as high as before the boom began?

The artificial boom makes the economy poorer than before the boom, because capital is consumed perusing what would normally be unprofitable endeavors.

Edward said...

Anonymous,

I don't want Brazilian style hyperinflation. I know its horrible. Thats another typical thing Austrians do, exaggerate. 5% inflation is not 5 million percent! And inflation can be reversed. in the United States what do you think Paul Volcker did? But you know whats also horrible? demand deflation. workers incomes are gutted in those situations as well. In it was not the Weimar hype inflation that led to Adolf Hitler, but Chancellor Bruning's hard money policies in the 1930's. And what Dune is saying makes sense. The Austrian story is all about malinvestments and "distortions in the capital structure" (mythical b.s. if I've ever heard it. ) The fact that housing is correcting makes sense. But the facts that other non-housing sectors, sectors that had nothing to do with the housing boom, does not. I asked Major Freedom/Pete this on Scott Sumner about this on the money illusion website. All he could come up with was a load of B.S., and the fact that housing feel more than other sectors. sectors, which doesn't make any difference, because those other sectors still fell

Dune said...

"The artificial boom makes the economy poorer than before the boom, because capital is consumed perusing what would normally be unprofitable endeavors."

Well, I'm not gonna get into the gritty details of your ideology to argue about this. I already proved that Anderson is a hack that has to Google "Spanish labor laws" post hoc in order to try and defend his original baseless arguments.

I'll agree with the commenter above that to assume capital and labor distortions on a scale that would cause a 16% swing in the unemployment rate seems to be grasping at ideological straws.

Mike M said...

Edward,

The US no longer has the luxury of pulling a Volcker again. That ship has sailed. And to assume housing operates in a vacuum indicates you don't have a grasp of how capital markets work.

Dune,

You've proved nothing other than your ignorance of he subject matter at hand.

William L. Anderson said...

I'm no sure what you mean, Dune (or whatever you are, since you are afraid for anyone to know your real name), regarding "baseless" claims. You asked for some "proof" and I found it for you.

Spanish labor laws and their effects are quite well known. That I went to Google does not invalidate what I wrote. Instead, the material invalidated your claims.

As for production, if you really believe that there is no thing as heterogeneous capital, and that all assets, economically speaking, are what Robert Higgs derisively calls "goo," then you really don't understand economics at all.

Meng Hu said...

Dune -> "What is the evidence that the boom caused that much collateral damage to previously healthy sectors of the economy?"

For the empirical evidence, see here. For the theoretical explanation see here.

Anonymous said...

http://www.youtube.com/watch?v=EX55BH97quk

At 35.30 Krugman gets lashed . At 48 mins in he goes pop , pretty funny