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.