Krugman: Capital Stalls Economic Growth and Creates Inequality

One of the differences between mainstream Keynesian (and neoclassical) economists and the Austrians is the view that both sides have of capital. On the Keynesian-socialist side, capital is useful mostly in the spending that is done in capital creation, and future capital improvements and repairs are useful only if these things require more spending.

Before going further, I need to emphasize that Austrians do not endorse all capital expansion, as we do see expansion based upon aggressive efforts by the government via the Fed pushing down interest rates or the government offering all sorts of subsidies and tax benefits (see "green energy") as promoting malinvestment. Since Keynesians such as Krugman do not recognize malinvestment as an economic issue (except for rare times when they think it might aid their arguments, and even then they will not use malinvestment as an economic term), they can endorse things like the massive subsidies for "green energy," since those sectors allegedly "create jobs."

If one ignores the Law of Opportunity Cost, then "green energy" is a great investment. Except, as the Wall Street Journal recently pointed out in an editorial, the Algore Sector of the economy is a disaster, an investor's version of the black hole. If Paul Krugman is interested in the relationship between capital formation and inequality, he need look no further that what has happened to the economic sector that President Barack Obama promised would lead us out of the economic downturn. Time and again we see the government transferring wealth to those who already are wealthy via this unjustified program of capital malinvestment.

(Al Gore, by the way, has managed to become fabulously wealthy living off these taxpayer subsidies while the investors who have helped provide the up-front money that he pockets have taken a financial bath. That is a story for another time and another posting, but I do find it instructive that Krugman never has gone after Gore the way that he has gone after people who actually might be productive.)

So it is today that Krugman takes on the capital bogey, first repeating (with some skepticism) yet another version of David Ricardo's pessimistic "steady state" plateau to be reached at an unnamed time. Ricardo's insistence of decreasing marginal returns to capital is there, as well as the view that at some point, capital formation will run into the proverbial brick wall. To his credit, Krugman disagrees, although not for the right reasons.

For Krugman, growth occurs only if government spending increases. One should not forget his preposterous claim that the recovery was faltering because state government spending was not rising at rates comparable to previous economic recoveries. (It never occurs to Krugman that because states must balance their budgets, they are heavily dependent upon real economic growth from private firms, so if anything, the financial problems in states and municipalities should be the "canary in the coal mine" warning that maybe Obama's policies are not promoting growth.)

Krugman then lets loose with this gem:

So machines may soon be ready to perform many tasks that currently require large amounts of human labor. This will mean rapid productivity growth and, therefore, high overall economic growth.

But — and this is the crucial question — who will benefit from that growth? Unfortunately, it’s all too easy to make the case that most Americans will be left behind, because smart machines will end up devaluing the contribution of workers, including highly skilled workers whose skills suddenly become redundant. The point is that there’s good reason to believe that the conventional wisdom embodied in long-run budget projections — projections that shape almost every aspect of current policy discussion — is all wrong.

Yeah, it is capital creating mass unemployment across the economy just as capital is responsible for the high cost of medical care. True, if it is malinvested capital, then in the long term, the malinvestments direct investment away from truly productive uses, and after the inevitable bust occurs, we see unemployment rising.

On the subject of "inequality," Krugman is insinuating that unless government steps in to limit investment returns to capital, then those returns will enrich some, but at the expense of others. Thus, Krugman reasons, capital that actually might be profitable in a market setting actually helps to create poverty. This is an amazing conclusion, but then we live in amazing time.

Krugman does not address the fact that maybe, just maybe, people purchase goods because they believe use of those goods will make themselves better off. In other words, he recognizes only the returns to investors as having anything to do with economics, while the actual uses of these goods and their economic effects either are ignored or are devalued.

During the 1930s, the New Dealers that Krugman so often praises claimed that the economy was in depression in part because ours was a "mature economy." I remember reading a 1980 Daniel Patrick Moynihan newsletter in which he made essentially the same claim. If that really were true, then I would challenge readers to go back to those eras and see who has a higher standard of living, Americans then or Americans now.

One one last point, Krugman continually claims that our present policies are starving Washington of wealth and that Washington really is on an "austerity" plan. If that is true, then why is the economy of the D.C. area booming at a time when the economy elsewhere is stagnant? Seven of the top 10 wealthiest counties either are contiguous to D.C. or are contiguous to counties that touch the D.C. borders, and the pattern continues. But if D.C. is booming, then why is the rest of the country doing poorly?