I bring this up because Krugman's latest column is more of the same: inflation and massive borrowing will solve all of our economic ills, and anything else is just something out of fairy tales. Now, I realize that Krugman is working with the Obama campaign to write columns critical of Mitt Romney, and part of his ridicule is of Romney's recent statements about market confidence; in other words, his primary goal is to attack Romney, not to increase public economic knowledge. However, he does bring up his whole "Confidence Fairy" line, and I think it is worth a look. He writes:
Back in 2010, as European nations began implementing savage austerity programs to placate bond markets, it was common for policy makers to deny that these programs would have a depressing effect. “The idea that austerity measures could trigger stagnation is incorrect,” insisted Jean-Claude Trichet, then the president of the European Central Bank. Why? Because these measures would “increase the confidence of households, firms and investors.”Where I agree with Krugman is that confidence, and especially any "confidence" that Romney could bring to the table, is a relative thing. Just because a supposed "pro-business" president is in the White House is not going to resurrect long-term capital investment and provide a lift for private enterprise. Business investors would have to see that there not only is a strong possibility of return on their investments, some of which may take years to come to fruition, but that there will not be the kind of "regime change" in Washington that either would forcibly confiscate those returns or change the rules of the game to where that original investment now becomes worthless. Robert Higgs says:
At the time I ridiculed such claims as belief in the “confidence fairy.” And sure enough, austerity programs actually led to Depression-level economic downturns across much of Europe.
Yet here comes Mitt Romney, declaring, in effect, “I am the confidence fairy!”
"Regime uncertainty" is the name I give to widespread fears that the nature of the economic order will be changed. This has to do mainly with fear that private-property rights will be altered for the worse by higher taxes, more costly regulation, more hostile treatment by government functionaries of all kinds, and perhaps outright confiscation of private property. When investors feel regime uncertainty, they are reluctant to make long-term investments, because they fear that they will be unable to receive the income those investments will generate and may even lose the capital itself. Between 1935 and 1940, many US investors feared that the market-oriented US economy was being transformed into fascism, socialism, or some other system dominated by the government.I certainly believe that President Obama has firmly placed himself into the "Crony Capitalism" camp in which his government will subsidize and protect those business firms that are loyal to his administration, but will use tax laws, regulations, and verbal (and legal) bullying against anyone else who does not recognize the Greatness of Obama. Whether or not Mitt Romney can end such an order is an empirical question, although I don't think I would be willing to take a bet that he would.
Yet, Krugman does not even address that point. No, what Krugman claims will create confidence in the economy is inflation, which is why I call his "plan" to end the depression one that is based upon the Inflation Fairy. The claim by Krugman and his supporters is that should the Federal Reserve System link its efforts with the U.S. Government to directly inject new money via government spending, the new money magically will flow only to those industries that are depressed and bypass those areas of production that currently are producing at higher capacities.
I'm not sure how this is possible, but Krugman believes that the Inflation Fairy will be able to pull it off. You see, when the Inflation Fairy is at work, there never is any dislocation within price systems, as all factors automatically adjust perfectly to the changing conditions. Moreover, whenever business investors realize that inflation is on the horizon, they automatically will produce more goods and engage in capital investment because inflation always equals more aggregate demand, and aggregate demand means that everyone wants to buy everything.
When the Obama administration demands that capital gains tax rates be raised to the highest levels in four decades, the Inflation Fairy will ensure that such calls for widespread confiscation of property will have absolutely no effect upon business investment. Furthermore, if greedy private investors are put off by the fact that government is going to take nearly all of their economic profits, then the Inflation Fairy will ensure that government spending will take up the slack and employ everyone in meaningful jobs with high pay.
And so on. I marvel that Krugman continues either to create caricatures of the Higgs assertion of "Regime Uncertainty" while making wild claims about the Wonders and Greatness of the Inflation Fairy. The problem with Paul Krugman is not that he has become a partisan shill who coordinates his columns with the Obama presidential campaign.
No, the problem is that Krugman wants us to believe that when depression conditions occur, the Law of Scarcity and the Law of Opportunity Cost become irrelevant. Economics is based upon those two things, and when one declares they no longer are relevant, one no longer is an economist. In short, Paul Krugman tells us that government under the correct people (read that left-wing Democrats) can magically make scarcity and opportunity cost disappear.
Why? The Inflation Fairy says so.