Wednesday, May 30, 2012

Will this be Paul Krugman's Next Blog Post?

Wow! Nearly 80 years ago, Hollywood was channeling Paul Krugman! In this MGM propaganda video, we see how inflation -- yes inflation -- would be the savior of the country! (Note to people who actually believe this propaganda: deflation is an effect, not a cause.)

The announcer praises FDR, declaring, "What a leader!" all because the president wanted inflation. Since we have had inflation with ALL presidents since then, I guess that all of the pass the MGM propaganda standard for being "great leaders."

Tuesday, May 29, 2012

Krugman's New Political Correctness: Entrepreneurs are Parasites (Because anyone who has wealth is a parasite)

There is a new Political Correctness going about, and that is the claim that anyone whose income is above a certain level (say the upper one percent) only can be evaluated as a parasite, and Paul Krugman is one of the forces behind it. You see, the wealthy -- which include Krugman, since his annual income is in the millions of dollars -- have value ONLY in the amount of money that government takes from them via taxation.

When one views the world in Keynesian terms, then government is the only force that can create demand, since all good Keynesians know that Say's Law is wrong and that the source of consumption is not production, but rather printed money. True, inflation did not work well for Zimbabwe, but it will work for us because Krugman says it will.

Let us take Steven Jobs, for example. Some will mistakenly (according to the Holy Doctrines of the Church of Krugman) claim that by anticipating what consumers would want and then directing the production of goods that consumers readily purchased, Jobs ultimately made our economy wealthier. The profits he made were garnered because his entrepreneurial decision-making was correct.

Obviously, such a viewpoint no longer is Politically Correct. Jobs made more money than anyone else at Apple, so that makes him a parasite. His only value to society lay in the amount of taxes he paid, and the government should have taken more.

An economy, in Keynesians-Speak, is only about aggregates, and whenever government inflates the currency or takes huge chunks of income from the rich, it is "creating demand," and creation of demand ultimately creates jobs, and jobs are the source of wealth. (Note that I have not said "productive services" help create wealth; no, the only value that a job has is the income one earns and then spends.)

As I have said before, Krugman needs to begin with himself. If he were to give all of his income to the government, then there would be more income equality and more aggregate demand. A long journey, we know, begins with a single step.

Sunday, May 27, 2012

The Aliens are Coming! We MUST Build High-Speed Rail!

We now know what it will take to end the current depression: A few lies from American scientists (taking a break from claiming the seas are going to rise 20 feet) to get us ready to prepare for the vaunted invasion of "space aliens" and...high-speed rail.

Yes, in that world known as Wonderland, boondoggles will make us rich!

Said The Great One on a recent appearance with his soulmate, Bill Maher:
This is hard to get people to do, much better, obviously, to build bridges and roads and healthcare clinics and schools. But my proposed, I actually have a serious proposal which is that we have to get a bunch of scientists to tell us that we're facing a threatened alien invasion, and in order to be prepared for that alien invasion we have to do things like build high-speed rail. And the, once we've recovered, we can say, “Look, there were no aliens.”

But look, I mean, whatever it takes because right now we need somebody to spend, and that somebody has to be the U.S. government.
Actually, this is Keynesianism in its purest form, for only in that world can one base a recovery on real-live boondoggles such as high-speed rail and claim to be speaking wisdom. No doubt, Maher was applauding every word.

Friday, May 25, 2012

Egos and Economists Who Yearn for the Nonexistent Past

One of the constant themes of Paul Krugman's writings these days, other than shilling for Barack Obama and Democrats in general, is the walk down memory lane to the nation's idyllic past where tightly-regulated industries wisely governed by The Great Eye Of Washington grew and grew until those Bad And Greedy Ideologues Led By Ronald Reagan completely overturned the Perfect System and replaced it with Greed And Chaos.

Now, I always find it interesting that people like Krugman claim that "turning back the clock" is a foolish and reprehensible thing to do -- except when people Krugman do it. Progressivism, as they see it, means that ANY new government regulation or regulatory system ALWAYS is an improvement over the previous chaotic regime when Evil Private Enterprise was in charge. Thus, any attempt to change anything can be borne only from evil intentions, as each law, each regulation, each encroachment by the State is another step toward the Perfect Society.

In a recent column, Krugman once again takes us down memory lane, telling us that Mitt Romney must have been the Second Coming of Oliver Stone's fictional character Gordon Gekko, the takeover specialist who bought healthy, profitable firms, gutted them, drove them into the ground, and ultimately made a profit from destroying companies. Now, this is quite interesting, coming from an economist, given that the scenario, while nicely fitting for Hollywood, describes an impossible set of events.

In Krugman's Wonderland, it is entirely plausible that a corporate raider only can make money if he drives a profitable company into bankruptcy. After all, in the Real World, if the parts (i.e. physical assets) of a firm are more valuable than the firm itself, then we know that the firm already was headed for doom.

For example, the value of Apple does not rest in its physical assets such as inventory, parts, building, and the like. Instead, the value of that firm lies in the ability of its people to move factors of production from lower-valued to higher-valued uses, as ultimately determined by consumers. If a corporate raider or any other company were to try to purchase Apple, it would have to buy the "whole," not the "sum of its parts," something that would make Apple's purchase price prohibitively expensive.

All of this is lost in Wonderland, where life is static, and the capital that served companies in 1950 (when the rest of the world was recovering from the devastation of World War II, as the USA was not a physical battleground and did not have destroyed factories and bombed-out cities) is still working perfectly 30 years later and produces exactly the same returns. This is the state of mind that brought Krugman's mentor, Paul Samuelson, to claim that socialism in the Soviet Union was a "powerful engine for economic growth" that sooner or later would overtake the capitalist world in economic strength.

After all, in Wonderland, an economy is little more than a graph of aggregate supply and aggregate demand (with a Keynesian Cross thrown in for good measure) in which government stirs in new money and out of the mixture comes full employment (as long as the "right people" are in charge of the apparatus of the state). Anything that might upset this picture always is portrayed as evil.

Now, what I find interesting, beyond Krugman's partisan shilling, is the following statement, which tells me more about Krugman's grasp of the current economy than it does even about his politics:
In the wake of a devastating financial crisis, President Obama has enacted some modest and obviously needed regulation; he has proposed closing a few outrageous tax loopholes; and he has suggested that Mitt Romney’s history of buying and selling companies, often firing workers and gutting their pensions along the way, doesn’t make him the right man to run America’s economy.
First, I had no idea that presidents "run America's economy," but there it is. Second, I find it quite interesting that he uses Obama as his stellar example of attacking capitalism. As Kimberly Strassel recently noted:
President Obama is no fan of Mitt Romney-style "vulture" capitalism. So what's his alternative?

All those Republicans grousing about the president's attacks on private equity might instead be seizing on this beautiful point of contrast. Mr. Obama, after all, is no mere mortal president. Even as he's been busy with the day job, he's found time to moonlight as CEO-in-Chief of half the nation's industry. Detroit, the energy sector, health care—he's all over these guys like a cheap spreadsheet.

Like Mr. Romney, Mr. Obama has presided over bankruptcies, layoffs, lost pensions, run-ups in debt. Yet unlike Mr. Romney, Mr. Obama's C-suite required billions in taxpayer dollars and subsidies, as well as mandates, regulations, union payoffs and moral hazard. Don't like "vulture" capitalism? Check out the form the president's had on offer these past three years: "crony" capitalism.(Emphasis mine)
Strassel looks at Obama's record, and I find it quite interesting that Krugman refuses to apply the same standards to the President of the United States that he does private enterprise. Barack Obama as "Master of the Universe." Who would have thought it?

Now, one might remember the Solyndra debacle, and when one combines Solyndra's $500 million implosion with the other bankruptcies that Obama-financed firms have contributed (along with their millions in political contributions to Obama), the numbers are greater than J.P. Morgan's $2 billion trading loss, that has sent Krugman into apoplexy.Then there is General Motors, Obama's economic centerpiece:
Speaking of cars, Detroit is the business venture Mr. Obama's team has been most flogging as a success. True, General Motors and Chrysler are still turning their lights on, though they'd have arguably been doing the same had they been left to go through normal, orderly bankruptcies like those that helped the steel and airline industries restructure to become more competitive.

To get to the same place, Mr. Obama's crony capitalism handed $82 billion in taxpayer dollars to the two firms. That bailout money went to make sure the unions that helped drive GM to bankruptcy (and helped elect Mr. Obama) did not have to give up pay or pension benefits for current workers. They were instead rewarded with a share of the new firm. The UAW at GM meanwhile used the government-run bankruptcy to bar some 2,500 nonunion workers who had been laid off from transferring to other plants. How truly vulture-like.

Contract law was shredded, as unions were given preference over other creditors, such as pension funds for retired teachers and police officers. Congressmen used political sway to keep open their weak auto dealerships, forcing layoffs at stronger ones (vulture . . . vulture . . . vulture). Political masters obliged the industry to pour resources into unpopular green cars. The political masters were obliged to offer $10,000 tax credits to convince Americans to buy them. (They still won't.) And the message to every big industry? Go ahead, run your business into the ground. The Capitalist-in-Chief has your back (especially if you are unionized).
I have my doubts that Krugman's future columns will deal with any of these sticky issues. (The Washington Post has an interesting column about Obama's "Public Equity" record.) He already is on the record as supporting the vast "green energy" subsidies in part because he believes coal is evil and in part because subsidies mean spending, and every Keynesian knows that spending, even if for financial turkeys, is the lifeblood of an economy.

As for GM and Chrysler, Krugman also has thrown in with the Obama administration on its action, yet in the "restructuring" of GM, the government pretty much forced massive layoffs and the like, the very things that Krugman claims make private equity to be the Very Spawn of Satan. The difference is that when private equity firms are in charge of layoffs, they tend to be done for economic reasons.

In the case of GM and Chrysler, however, it was quite clear from the start that the purpose of the bailout was to reward political contributors to the president and Democrats and to punish anyone who had the temerity not to bow down to Obama and his White House gang. This is what the ancients once called "Crony Capitalism," but when the cronies are Obama and company, then suddenly what was once a scourge now becomes an asset.

None of this is should be read as a defense for the current presidential candidacy of Mitt Romney. He has provided nothing in his campaign that tells me he has a clue of what is happening to this country and what needs to be done. Instead, he simply claims that he will "manage" the economy better than Obama has done.

The idea that Romney is running as a "Manager-in-Chief" should give anyone pause, and I don't think he will have any more economic success than did Richard Nixon, who presided over price controls, inflation, and economic stagnation. However, it seems that Krugman is clueless as to what Romney's real weaknesses might be. Instead, he shills for Obama because he believes that the president is the Right Man to lead us back to that era when government created cartels in banking, telecommunications, cartels, and energy and all was perfect and right with the world. Except that it wasn't.

Wednesday, May 23, 2012

Bob Murphy on Krugman and Job Losses

Bob Murphy proves again that there is no better critic of Paul Krugman and Voodoo Economics, as he uses Krugman's own data to point out flaws in the analysis of The Great One. I'll let readers go through the various quotes and charts that Murphy employs, but will add that once again, we see Krugman employing some sleight-of-hand in mixing the way he portrays job and wage numbers in order to cloud the picture.

What Krugman has been saying is that the current depression is due to an overall general lack of "demand," as opposed to structural imbalances in the economy. Thus, the way to "cure" the problem is for the government to throw trillions of dollars at it, and magically, things will turn around. However, as Murphy demonstrates, Krugman's own numbers, when presented in a normalized fashion, seem to support the Austrian argument.

Not that Krugman ever would admit it.

Tuesday, May 22, 2012

What Kind of Regulation Do We Need?

One of the reasons I gave this blog the name it has is because many of Paul Krugman's claims seem to have originated in Wonderland, and his recent column on financial regulation proves once again that Krugman is a master of the half-truth and is more political operative than economist. He begins:
Sometimes it’s hard to explain why we need strong financial regulation — especially in an era saturated with pro-business, pro-market propaganda. So we should always be grateful when someone makes the case for regulation more compelling and easier to understand. And this week, that means offering a special shout-out to two men: Jamie Dimon and Mitt Romney.
 Given that we have a leftist president who hates capitalism (or at least capitalism that is not based upon giving him campaign contributions and requires political connections), and given that the leading media organizations tend to be anti-capitalist, I'm not sure where this "pro-business, pro-market propaganda" can be found. Nonetheless, because Krugman makes this claim, his followers will say that his very words make his point true.

Before I deal directly with Krugman's claim -- that the financial industry in the USA is unregulated, despite its too-big-to-fail status -- I would like to point out something that I believe is ironic: the hypocrisy of the screams about J.P. Morgan losing two billion dollars when the NYT and Krugman are demanding that taxpayers pony up many billions of dollars in order to prop up the politically-connected "green energy" business. As I see it, if Krugman is so wanting to prevent huge financial and business losses in the economy, then I have a perfect place for him and his cohorts to begin: pulling the plug on "green energy" subsidies.

I will let the NY Times speak for itself (and I have no doubt that Krugman is in agreement, given his earlier support for such subsidies):

The federal government has given generously to the clean energy industry over the last few years, funneling billions of dollars in grants, loans and tax breaks to renewable power sources like wind and solar, biofuels and electric vehicles. “Clean tech” has been good in return. (Indeed, since they have contributed "generously" to Obama's re-election campaign. That is the only "good" return I can surmise would be the case.)

During the recession, it was one of the few sectors to add jobs. Costs of wind turbines and solar cells have fallen over the last five years, electricity from renewables has more than doubled, construction is under way on the country’s first new nuclear power plant in decades. And the United States remains an important player in the global clean energy market.

Yet this productive relationship is in peril, mainly because federal funding is about to drop off a cliff and the Republican wrecking crew in the House remains generally hostile to programs that threaten the hegemony of the oil and gas interests. The clean energy incentives provided by President Obama’s 2009 stimulus bill are coming to an end, while other longer-standing subsidies are expiring.
If nothing changes, clean energy funding will drop from a peak of $44.3 billion in 2009 to $16 billion this year and $11 billion in 2014 — a 75 percent decline.

This alarming news is contained in a new report from experts at the Brookings Institution, the World Resources Institute and the Breakthrough Institute. It is a timely effort to attach real numbers to an increasingly politicized debate over energy subsidies.
I must admit that even someone as cynical as I is stunned by this nonsense. Here are Krugman and his employer screaming about a firm losing two billion while at the same time claiming that losses of close to $100 billion by a single industry are somehow "good" for the economy. (The NYT also commits the "Broken Window Fallacy" by claiming that the "clean energy" industry "was one of the few sectors to add jobs." The addition of these "jobs" did not add wealth, but rather destroyed it, but that little bit of logic is anathema to the likes of NYT editors and Paul Krugman.)

Nonetheless, Krugman makes a number of fallacious claims in his column, and I would like to briefly deal with them. First, he wants us to believe that "too-big-to-fail" is a natural consequence of a market system. One has to remember that in order to get to that kind of a size, a firm must outgrow external markets, and if that were to happen, then the firm would lose its ability to engage in economic calculation, something pointed out by Murray N. Rothbard in Man, Economy and State.

Firms don't do that on their own, as that same market that Krugman despises quickly would discipline the company for the inevitable economic errors it would be committing. Second, Krugman makes some heroic assumptions regarding economic and financial regulation, the most obvious being that somehow, a risk-averse regulator always or nearly always would know exactly what kind of decisions to make for the firm that is being regulated.

Instead, what we would see would be a replay of what happened over the years as the banking system set up during the New Deal evolved into a system that would fund only those established industries that also had close relationships with banking and the government. This effectively would be socialized banking without the official title of socialism, and anyone who has seen a socialist country knows a time warp that such risk-averse systems create.

Many of the things that we enjoy today came about because of entrepreneurs both in finance and in the creation of new products, and I will say unequivocally that the system that Krugman demands to be in place would not be capable of taking the kinds of risks that were necessary to create modern telecommunications, home computers, cell phones, the Internet as we know it, and numerous things that simply did not exist three decades ago and would not have existed at all had Krugman had his way.

One has to remember that nowhere in Krugman's formal economic training did he learn anything about entrepreneurship. His program at MIT was heavily into mathematical models and it is impossible to model entrepreneurship as such. Instead, the models will assume "a new technology" or some other "shock" and then the math is applied from there. 

Thus, I will contend that because Krugman is hostile to anything outside the mathematical realm, and because the Austrians are the ones that really have integrated entrepreneurship into their entire economic analysis (and Krugman already has demonstrated his utter hostility to all things Austrian), that he really is incapable of intellectually understanding entrepreneurship. Furthermore, he maintains a childlike belief in the Progressive view of economic regulation, as though all one has to do is to have enough faith in the regulators and the system they represent, and the regulators will make omniscient decisions.

It is not that the financial system does not need regulation; indeed, it does need regulation, but the kind that only the markets can apply. Instead, we get the kind of regulation that depends upon political relationships, implied bailouts, and moral hazard on steroids. 

Oh, and then people like Krugman tell us that a Really Good Deal is subsidized energy, which destroys wealth while it drains taxpayers and makes them poorer. Maybe we ought to be putting these regulatory burdens upon the Solyndras and making the banks and financial houses account for their own losses.

Friday, May 18, 2012

Krugman and the "Magic" of Inflation

I remember reading a book 30 years ago in which the author said that in the end, Keynesians have one arrow and only one in their quiver: inflation. While they might deny that to be true (Hey! We have FISCAL policy!! We borrow a lot of money that is created by the Fed!)

But Paul Krugman certainly seems anxious to prove the author's point, as once again he calls for the "solution" of printing money as salvation for Europe. For that matter, he has long advocated the same "salvation" for this country, continuing that fallacy that our economy is exactly like the so-called babysitting co-op in Washington.

Today's column is pretty typical of Krugman. While I agree that the bank-imposed "austerity" measures put on the regimes of Greece and Spain are not helpful to economic growth, my differences with Krugman are substantial. To Krugman, the entire thing is spending; the more a government spends, the richer everyone becomes, end of discussion. And if the government does not have enough to spend in tax revenues, then print money or borrow, but spend, spend, spend.

As I see it, restructuring any economy in order to place its debt service at the top (which means high tax rates) is likely to be counterproductive in the short run AND long run. Like it or not, governments usually are an impediment to economic growth and certainly not an engine of the same.

For Krugman, financial bubbles ARE the soul of capitalism, period. In his view, investors are a bunch of lemmings that always run over the cliff unless wise government agents steer them otherwise. As Austrians see it, the culprit is going to be the central bank or government in one form or another.

(For those people who claim that the housing bubble was SOLELY the result of private investment, they ignore the role of the Federal Reserve System, Freddie and Fannie, and a government that demanded that more people be put into home ownership, damn the consequences.)

So, what is Krugman's "solution"? He provides it here:
Italy and, in particular, Spain must be offered hope — an economic environment in which they have some reasonable prospect of emerging from austerity and depression. Realistically, the only way to provide such an environment would be for the central bank to drop its obsession with price stability, to accept and indeed encourage several years of 3 percent or 4 percent inflation in Europe (and more than that in Germany).

Both the central bankers and the Germans hate this idea, but it’s the only plausible way the euro might be saved. For the past two-and-a-half years, European leaders have responded to crisis with half-measures that buy time, yet they have made no use of that time. Now time has run out.

So will Europe finally rise to the occasion? Let’s hope so — and not just because a euro breakup would have negative ripple effects throughout the world. For the biggest costs of European policy failure would probably be political. 
Yes, salvation through inflation, as though a central bank can "manage" rates of inflation over time. Krugman's love affair with inflation totally ignores the underside of such a policy, and ignores the fact that over time, the corrosive effects of inflation grow and any "positive" effects (i.e. "deleveraging") tend to diminish.

You see, Krugman truly seems to believe that the only "bad" effects of inflation would be higher prices, although those higher prices would be offset by higher incomes. Inflation, at least in Wonderland, has no effect upon investors' choices, it does not direct money into lines of production that are unsustainable, and it has no destructive effects at all unless it gets out of hand, and even then, the results are not very bad.

Like the Bourbons who, in the words of Tallyrand, "learned nothing and forgot nothing," the Keynesians never learn from inflation, and in the end always reach for that last arrow. Like Krugman, who apparently believes that the Obama administration can subsidize the economy into recovery (see "green energy" and other such nonsense), Keynesians truly believe that all assets are homogeneous, and that an economy is a mixture into which one stirs money and if one stirs in enough money and forces everyone to spend, out of it comes prosperity.

That is a Wonderland view of economics, but apparently that is what our economic and political elites are trying to claim is the truth. So print and spend yourselves into prosperity, Europeans! It must be so, it must be so!

Tuesday, May 15, 2012

Enemies of the People: This Group of Hawaiians Undermines Government Stimulus

If Keynesians are to be consistent, then they would have to say that the significance of production is not in the particular goods being created, or how they meet human needs, but rather the amount of spending that accompanies the production. Obviously, if what recently happened in Hawaii were to proliferate, Keynesians would go bananas.

This group of determined people got together and fixed a road that government authorities said would cost $4 million to repair. It is pretty clear from this story that the residents spent much less than that, which means (if one applies Krugmanian logic) that they reduced potential wealth by $4 million minus what they actually spent. (Sooner or later, I supposed, Hawaii would have received the "stimulus" money to fix the road.)

After all, it is not the road that creates the wealth. Instead, it is the money that is spent. Right? That is a constant theme from Krugman and other Keynesians, and everyone knows that the Keynesians cannot possibly be in error.

Given that these evil residents depleted the economy of wealth, I would say that they MUST be classified as "enemies of the people." Hey, maybe they might even make President Obama's infamous "Enemies List."

Update: Poster Jeff has provided this gem from Krugman: projects are not about what is created, but rather the spending. So, I guess this means that if the government pays people to dig holes and then fill them again, it is creating wealth because people will spend the money.

Monday, May 14, 2012

Krugman, Bank Regulation, and a Bit of History

Everyone now knows about the infamous trading losses suffered recently by JP Morgan, but leave it to Paul Krugman to claim that a bank that operates within a heavily-regulated system somehow is "unregulated." Oh, I know, Krugman actually is claiming that even Dodd-Frank does not regulate enough and that we need to "turn back the clock" when it comes to banking and reinstall what we had in the 1970s.

Now, I agree with Krugman that banks should not be able to use depositors' money to engage in risky trades and the like, but the problem is not regulation or the lack of regulation per se. Krugman is correct; banks ARE different, but they are different because they legally can operate on the principle of fractional reserves.

As I teach my economics students, if someone deposits money into a bank and the bank lends out a large portion of that deposit, the original depositor still has an immediate claim to ALL of the money he or she has placed in the bank. (I am speaking of demand deposits here, not necessarily time deposits, some of which have penalties for early withdrawal.) When banks place themselves in precarious situations in which a large portion of their loan portfolios become shaky, they invite "bank runs" in which nervous depositors demand their entire share of deposits in the bank.

Obviously, a bank cannot survive a run if enough depositors make withdrawals and the bank cannot raise the requisite cash by calling loans or raising money some other way. However, the government has attempted to create ways to prevent runs. (Before the creation of the Federal Reserve System, banks would appeal for "bank holidays" in which they would close for a time being until the run died down, and banks also would make agreements among themselves, as they did during the Panic of 1907.)

The first in modern times was the creation of the Fed in 1913, with the central bank supposedly serving as the "lender of last resort." During a run, the Fed would loan money to member banks, and the presence of new money was expected to calm nervous depositors and ultimately end the run. Now, before the Civil War, depositors legally could ask for "specie" when making withdrawals. After the war, they got paper money for the most part, and today, that is all we are allowed to have.

While Krugman claims to be a liberal, nonetheless, he is an out-and-out reactionary when it comes to finance, and you have to remember that if Krugman were to have had his way, you would not be reading this, as computers as we know them along with the Internet as we know it and other forms of modern communications would not have existed because their start-ups would not have been financed by the banking system Krugman so admires. He writes:
So what can be done? In the 1930s, after the mother of all banking panics, we arrived at a workable solution, involving both guarantees and oversight. On one side, the scope for panic was limited via government-backed deposit insurance; on the other, banks were subject to regulations intended to keep them from abusing the privileged status they derived from deposit insurance, which is in effect a government guarantee of their debts. Most notably, banks with government-guaranteed deposits weren’t allowed to engage in the often risky speculation characteristic of investment banks like Lehman Brothers. 

This system gave us half a century of relative financial stability. Eventually, however, the lessons of history were forgotten. New forms of banking without government guarantees proliferated, while both conventional and newfangled banks were allowed to take on ever-greater risks. Sure enough, we eventually suffered the 21st-century version of a Gilded Age banking panic, with terrible consequences. 

It’s clear, then, that we need to restore the sorts of safeguards that gave us a couple of generations without major banking panics. 
 Ever hear of CNN and much of cable TV? The banking system that Krugman wants to bring back would not finance these things because they were new and untested and risky. Cell phones? Fuhgeddaboudit! McCaw Cellular was financed by Michael Milken and junk bonds, along with a whole host of other businesses based upon new technologies that really began to blossom in the 1980s.

What would the banking system have favored? Well, Apple certainly would not have been on the list. Instead, the bankers would have listened to the executives of IBM who bet the farm that the future was in mainframes. 

You see, the system that Krugman wants to re-impose, complete with a new version of Regulation Q, was very risk-averse, which meant it only stayed with the so-called safest areas of the economy. Now, maybe Krugman would be happy going back to the days of bell-bottoms and polyester clothing, but our economy would be much more primitive than it is now if Krugman were to get what he wants.

For that matter, Krugman has not been able to get his narratives correct. On numerous occasions, he has claimed that financial deregulation of the late 1970s and early 80s came about purely from "free-market ideology" and Ronald Reagan. Funny how history tells us different things.

The major deregulation act, DIDMCA, was passed in 1980. That year, Jimmy Carter (a Democrat) was president, the Democrats had an effective 59-41 majority in the Senate (58 Democrats and one independent who voted with the Democrats) and a whopping 277-158 majority in the House of Representatives. At the time of the act's passage, Carter had a large lead on Reagan in the polls and few people saw the results of November 1980 coming.

In 1982, with passage of the Garn-St. Germaine Act, all of the research I have done into it points to people other than Reagan as being the driving forces behind the changes in laws regulating Savings and Loans. The impetus to those changes did not come from ideology but from the hard fact that S&Ls were losing depositors and that many of their mortgages had low interest rates, but market rates at the time were well above 10 percent. Thus, it either was let them invest elsewhere or collapse altogether. That Krugman deliberately ignores that situation and rewrites history does not surprise me at all.

And, we are supposed to believe that the Greenspan-Bernanke "Put," with its promises of "liquidity," the actions of the Fed during the boom in pushing down interest rates, the political pressure on banks and other lenders to ignore the obvious and loan huge mortgages to people with questionable backgrounds, not to mention the actions of Freddie and Fannie, had NOTHING to do with the housing bubble and the meltdown. Instead, according to Krugman, it was the natural outcome of a pure free-market system that ALWAYS will create systematic errors because all entrepreneurs are like the band in "Animal House" that tried to march through the wall.

So, government creates a huge system of moral hazard, government encourages (and government "encouragement" always has coercion behind it) reckless lending, and we then conclude that all of this was ENTIRELY do to the "free market." Maybe in Wonderland, but not in the real world.

I would like to add one thing. Unregulated governments have floated huge amounts of paper around the world, much of it worthless, and the financial bubbles that government paper has created dwarf what we saw in the housing bubble. Yet, Krugman's answer is for governments to float more paper and resort to financial trickery to give this stuff "value."

One might have to assume that Krugman believes government agents, at least when it comes to finance, to be omniscient. Gee, if they are so smart, then why are they not leading Wall Street firms to new and glorious heights?

Friday, May 11, 2012

Easy Useless Keynesianism

When it became clear in 2007 and beyond that the housing bubble was breaking up and the bills for the national spending spree were coming due, the Bush administration shifted into "stimulus" mode. (It was nice getting an extra $2,100 in my checking account, but I defied the government and paid some bills instead of buying that big-screen HD TV. Yeah, I'm a bad example to all of you.)

Barack Obama came into Washington with Big Plans For A Big Stimulus, and the Federal Reserve System has been spreading dollars everywhere. However, the economy remains mired in depression, and Paul Krugman believes he has the solution: more stimulus. Lots more stimulus.

In his recent column, Krugman claims that the problem is that we don't have enough government spending, and if we don't spend, expand the state, and employ more people as bureaucrats, our economy never will recover. Actually, if we continue to spend, expand the state, and employ more people as bureaucrats, indeed, our economy never will recover. Krugman writes:
Of course, structuralistas say they are not making excuses. They say that their real point is that we should focus not on quick fixes but on the long run — although it’s usually far from clear what, exactly, the long-run policy is supposed to be, other than the fact that it involves inflicting pain on workers and the poor. 

Anyway, John Maynard Keynes had these peoples’ number more than 80 years ago. “But this long run,” he wrote, “is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the sea is flat again.” 

I would only add that inventing reasons not to do anything about current unemployment isn’t just cruel and wasteful, it’s bad long-run policy, too. For there is growing evidence that the corrosive effects of high unemployment will cast a shadow over the economy for many years to come. Every time some self-important politician or pundit starts going on about how deficits are a burden on the next generation, remember that the biggest problem facing young Americans today isn’t the future burden of debt — a burden, by the way, that premature spending cuts probably make worse, not better. It is, rather, the lack of jobs, which is preventing many graduates from getting started on their working lives. 

So all this talk about structural unemployment isn’t about facing up to our real problems; it’s about avoiding them, and taking the easy, useless way out. And it’s time for it to stop. 
 And what constitutes "doing something"? According to Krugman, it is having governments increase their borrowing and monetary creation supposedly to start employing idle resources. Unfortunately, we are not dealing with idle resources per se; we are dealing with malinvested resources and every one of Krugman's schemes to deal with the problem only will make that problem worse.

Whether it is propping up the housing industry or creating new bureaucracies or subsidizing pet Obama-favored "clean energy" firms, the end result is expanding the malinvestments and ensuring that those still-healthy industries are unable to lead the recovery. Unfortunately, Krugman truly is stuck in 1939, refusing to acknowledge that the very things he claims will give us recovery are leading us into the abyss.

There is one more outrageous point that he makes. Earlier in the article, he writes:
O.K., there’s something I didn’t tell you: The paper in question was published in June 1939. Just a few months later, World War II broke out, and the United States — though not yet at war itself — began a large military buildup, finally providing fiscal stimulus on a scale commensurate with the depth of the slump. And, in the two years after that article about the impossibility of rapid job creation was published, U.S. nonfarm employment rose 20 percent — the equivalent of creating 26 million jobs today. 
 As Robert Higgs noted in his paper on the alleged "prosperity" of World War II, the notion that World War II was "good for the economy" and made Americans prosperous is fraudulent, period. Today, prosperity will come if Americans prepare for an invasion of space aliens.

Tuesday, May 8, 2012

John Stossel on liberty and private enterprise

Because I have a very busy schedule over the next two weeks, my posting will be spotty and I will depend upon others to do my writing for me. John Stossel provides a very good article on why private enterprise always is painted as the enemy and government as the rescuer.

I will note that every time government really screws up something, the solution ALWAYS is to give more power to the government agency that performed poorly. After every financial and economic crisis which the Fed helps to create, the answer is to give the Fed even MORE authority, which it gladly takes.

In the early 1970s, the government created the Food Pyramid in which it emphasized lots and lots of carbs. Americans doubled their intake of wheat and "fat-free" but sugar-laden foods became the norm. The government also forced corn syrup on us while forcing up the price of sugar, all in the name of helping people.

Today, we have an obesity epidemic and the "solution" is to give the government more power to tell us what we can and cannot eat. And so it goes. The government helps to create a problem, and then is called upon to "fix" it. The best description I can give is that we have the firefighters who start fires and then are called heroes when they bravely put them out. (Except government seems to make the fires burn even brighter and hotter, all the while claiming it needs more authority to fight the very fires it is breeding.)

Friday, May 4, 2012

Krugman: More inflation and higher taxes will end the depression

In recent months, Paul Krugman has become an out-and-out cheerleader for inflation, claiming that throwing out more dollars somehow will revive the economy because people will quickly spend their depreciating money and such actions will enable more goods to sell. If a problem develops with that strategy -- and with inflation, the bad effects come later -- well, we can solve that with price controls and activist government.

Today, he repeats his claim that the REAL problem is that we don't have enough inflation because the Evil Republican Party doesn't want it. In fact, he argues, most Republicans want a gold standard. This time, he cites some allies, Thomas Mann and Norman Ornstein, who say that the Republicans today are “dismissive of the legitimacy of its political opposition.”

I must admit that while I see the Republicans historically as being destructive, nonetheless this is a real howler, given the fact that Democrats never could accept their losses in the 1980 election of Ronald Reagan as legitimate, and the opposition to Reagan's presidency was savage. You see, Krugman and other Democrats really believe that the one-party state that existed in this country during the 1960s and 1970s (and in many ways, Nixon's policies mirrored those of Democrats) was the only legitimate state of affairs. For example, Krugman writes:
If something like the financial crisis of 2008 had occurred in, say, 1971 — the year Richard Nixon declared that “I am now a Keynesian in economic policy” — Washington would probably have responded fairly effectively. There would have been a broad bipartisan consensus in favor of strong action, and there would also have been wide agreement about what kind of action was needed. 
 Krugman's memory might be a bit spotty, but I remember that what we had was a dollar crisis because the game of paying for the Vietnam War and the vast expansion of government during the Lyndon Johnson years by essentially printing more dollars had blown up. The response was...print  more dollars, but slap down price controls to make the ensuing inflation not look so bad.

In other words, the "broad bipartisan consensus" never existed in large part because of Democratic hatred for Nixon and the belief that no Republican ever should be in the White House post-FDR. But even if there had been that "consensus," the policy response to the crisis would have been a disaster.

Krugman, you see, claims that we can solve this whole crisis by printing more dollars and raising tax rates on wealthy people. He writes:
For the past century, political polarization has closely tracked income inequality, and there’s every reason to believe that the relationship is causal. Specifically, money buys power, and the increasing wealth of a tiny minority has effectively bought the allegiance of one of our two major political parties, in the process destroying any prospect for cooperation.

And the takeover of half our political spectrum by the 0.01 percent is, I’d argue, also responsible for the degradation of our economic discourse, which has made any sensible discussion of what we should be doing impossible.
 He goes on:
Many pundits assert that the U.S. economy has big structural problems that will prevent any quick recovery. All the evidence, however, points to a simple lack of demand, which could and should be cured very quickly through a combination of fiscal and monetary stimulus.(Emphasis mine)

No, the real structural problem is in our political system, which has been warped and paralyzed by the power of a small, wealthy minority. And the key to economic recovery lies in finding a way to get past that minority’s malign influence. 
 In other words, this depression could end if only -- if only -- there were a way to raise taxes on investment (thus, we would have less private investment so government or subsidized "investment" like what we saw with Solyndra would take its place) and spread even more dollars around the world while re-establishing the One-Party State. That is not a prescription for recovery, folks. It is a prescription for disaster.

I'm not going to carry the water for Republicans by any means. They are utterly blind to the destruction that their wars have created, and I will say unequivocally that Republican support for the Drug War and the fetish on immigration have helped to create a gulag of prisons that rivals what Stalin created in his worst days.

(Yes, I am a registered Republican, but that is because I had to do so in order to be able to vote for Ron Paul in the primaries. I'll keep that registration in hopes that future "Ron Paul" candidates will be on primary ballots down the road. This fall, I will vote -- if I vote at all -- for the Libertarian presidential candidate.)

Nonetheless, Democrats in the Obama administration have proven beyond a doubt that they are quite happy with the Surveillance State and the Police State and want to expand it, unionizing all of those government employees in the meantime, and turning them into a political force that will further destroy our few liberties we have left. (In California, for example, the powerful prison guard union -- a mainstay of the Democratic Party there -- successfully destroyed any attempts to lower the state's record number of inmates. The prison guards also are staunch lobbyists against any attempt to weaken our draconian drug laws.)

However, none of this matters to Krugman. To him, all that is needed is a return to the high tax rates of the New Deal along with further socialization of the economy. What he forgets is that when a government destroys the incentives for entrepreneurs and effectively undercuts the ability of entrepreneurs to operate without government subsidies, that government also dooms its economic future. Krugman might claim that our current problems are due to an economic plutocracy, but don't kid yourself. What Krugman wants is a political plutocracy based in Washington to run all of our affairs, a plutocracy that essentially would be answerable to no one but itself.

Of course, as a good Keynesian, Krugman has no use for the entrepreneur. Just tax, inflate and spend, and governments will create a good economy. That is his message, and it is utterly destructive, but also popular. But, then, Juan Peron destroyed Argentina's economy and he was a hero, too. I guess that Krugman wants Barack Obama to ape Peron or maybe even Hugo Chavez. What he does not say is how those men have ensured through their hyper-Keynesian policies that the economies of their nations will be basket cases into the foreseeable future.

Wednesday, May 2, 2012

Wenzel at the Fed

Bob Wenzel recently spoke at the New York Federal Reserve Bank and I include both his speech, which is a classic, and his remarks about the background of the speech. One thing I find interesting is that none of the economists there had any inkling of what the Austrians actually said versus what they "believed" the Austrians had said.

(One economist actually believed that the Austrians were the Chicago School and that the Austrians had invented the equation of exchange. I must admit to being floored by that one.)

I still have not watched the Krugman-Paul "debate," although I did read Krugman's snarky comments on his blog in which he accuses Dr. Paul of babbling. I especially find this quote to be interesting:
If Ron Paul got on TV and said “Gah gah goo goo debasement! theft!” — which is a rough summary of what he actually did say — his supporters would say that he won the debate hands down; I don’t think my supporters are quite the same, but opinions may differ. (Emphasis mine)
Yeah, Krugman believes that Really Smart and Serious People are his followers. I know one of his followers. He told me in the 1980s that the reason that the socialist economy of the Soviet Union was backward and chaotic was that the U.S.S.R. had not been a country as long as the United States. Chew on that one for a while.

Nonetheless, I love how Krugman sets himself up not only to be intellectually superior, but superior in every way to those mundanes who might believe that inflating money just might create long-term harm. Yeah, I know. Anyone who believes that really should be herded onto a farm somewhere and fed grass and oats.