Monday, July 30, 2012

Krugman: "Save" the Euro by Creating Another Unsustainable Boom

In his latest column, Paul Krugman explains why he believes that the euro has been crashing, and in part, I agree. Europe, he says, is not like the United States which actually is a unified country which also has a federal government that spreads its own spending programs throughout those states. (This is not in praise of those programs, but rather an admission that there is more tying the USA together than what we see in the European Union.)

Furthermore, I agree with Krugman that the housing boom especially covered the underlying flaws of the EU and its currency. Krugman writes:
Why did the euro seem to work for its first eight or so years? Because the structure’s flaws were papered over by a boom in southern Europe. The creation of the euro convinced investors that it was safe to lend to countries like Greece and Spain that had previously been considered risky, so money poured into these countries — mainly, by the way, to finance private rather than public borrowing, with Greece the exception.

And for a while everyone was happy. In southern Europe, huge housing bubbles led to a surge in construction employment, even as manufacturing became increasingly uncompetitive. Meanwhile, the German economy, which had been languishing, perked up thanks to rapidly rising exports to those bubble economies in the south. The euro, it seemed, was working.
I even agree with Krugman's next statement:
Then the bubbles burst. The construction jobs vanished, and unemployment in the south soared; it’s now well above 20 percent in both Spain and Greece. At the same time, revenues plunged; for the most part, big budget deficits are a result, not a cause, of the crisis. Nonetheless, investors took flight, driving up borrowing costs. In an attempt to soothe the financial markets, the afflicted countries imposed harsh austerity measures that deepened their slumps. And the euro as a whole is looking dangerously shaky.
At that point, however, the agreement stops, as Krugman then decides that the best way to "fix" the crisis is essentially to engage in an economic version of "hair of the dog." He writes:
What could turn this dangerous situation around? The answer is fairly clear: policy makers would have to (a) do something to bring southern Europe’s borrowing costs down and (b) give Europe’s debtors the same kind of opportunity to export their way out of trouble that Germany received during the good years — that is, create a boom in Germany that mirrors the boom in southern Europe between 1999 and 2007. (And yes, that would mean a temporary rise in German inflation.) The trouble is that Europe’s policy makers seem reluctant to do (a) and completely unwilling to do (b).
I must admit that even though I have read Krugman for many years, something like this shocks me. The European and U.S. economies have been suffering in the aftermath of the collapse of the housing bubble, and the response of governments and central banks has been to try to recreate boom conditions somewhere else via easy credit and monetary expansion. We see how well that has worked.

So now Krugman claims that Europe and the euro will be saved if the EU Central Bank can do in Germany pretty much what it did in Greece, Ireland, Spain, and Portugal. And what happens when that boom/bubble in Germany collapses, as it inevitably would?

That's easy. Krugman will demand that the authorities create a bubble somewhere else. Maybe he wasn't joking in 2003 when he called for the creation of a housing bubble in the USA. And when the bubble crashes, then he can blame private enterprise.

Saturday, July 28, 2012

Krugman: Free Nonsense

There is a reason that Keynesianism is popular with politicians and academic Progressives: Government can step into a crisis with its omniscience and perform magic tricks -- at no cost! Thus, Paul Krugman gives us that theme in a recent column and a blog post.

Government, argues Krugman, should be borrowing even more money because interest rates have been pushed to near-zero and it should use that money to "invest" in propping up public employee unions. No, he didn't say that last part, but the very people he is claiming should be rehired by governments pretty much are represented by unions.

Why the situation exists is because of a mysterious lack of "aggregate demand," or so we are to believe:
So what is going on? The main answer is that this is what happens when you have a “deleveraging shock,” in which everyone is trying to pay down debt at the same time. Household borrowing has plunged; businesses are sitting on cash because there’s no reason to expand capacity when the sales aren’t there; and the result is that investors are all dressed up with nowhere to go, or rather no place to put their money. So they’re buying government debt, even at very low returns, for lack of alternatives. Moreover, by making money available so cheaply, they are in effect begging governments to issue more debt. 
And governments should be granting their wish, not obsessing over short-term deficits. 
Yes, irresponsible Americans are paying debts, which is driving us into depression. If we were willing to stop paying our mortgages, car payments and credit card payments, then we could have prosperity. But since Americans are foolish, the government needs to rescue us by ramping ujp the spending.

No doubt, the message that government spending essentially offers only benefits and no costs is very popular in Washington and at Princeton. Just think; the government by simple declarations can repeal the Law of Opportunity Cost. It's magic, I tell you! Magic!

Robert Higgs notes that the Progressivism to which Krugman subscribes has the following tenets of faith:

1. If a social or economic problem seems to exist, the state should impose regulation to remedy it.

2. If regulation has already been imposed, it should be made more expansive and severe.

3. If an economic recession occurs, the state should adopt “stimulus” programs by actively employing the state’s fiscal and monetary powers.

4. If the recession persists despite the state’s adoption of “stimulus” programs, the state should increase the size of these programs.

5. If long-term economic growth seems to be too slow to satisfy powerful people’s standard of performance, the state should intervene to accelerate the rate of growth by making “investments” in infrastructure, health, education, and technological advance.

6. If the state was already making such “investments,” it should make even more of them.

7. Taxes on “the rich” should be increased during a recession, to reduce the government’s budget deficit.

8. Taxes on “the rich” should also be increased during a business expansion, to ensure that they pay their “fair share” (that is, the great bulk) of total taxes and to reduce the government’s budget deficit.

9. If progressives perceive a “market failure” of any kind, the state should intervene in whatever way promises to create Nirvana.

10. If Nirvana has not resulted from past and current interventions, the state should increase its intervention until Nirvana is reached.

And Paul Krugman is there to give us this road map to Nirvana!

Wednesday, July 25, 2012

How far will Paul Krugman go to suppress speech that he does not like?

This is not a post about "climate science" or "global warming." I'm not a meteorologist nor am I a climate scientist -- and neither is Paul Krugman.

Instead, as I read Krugman's recent column on climate change and James Hansen, I realize that Krugman is sending signals about his view on people who dissent from viewpoints that he supports, and it tells me that Krugman down the road is going to support things that not long ago we did not think would be possible in this country. He writes:
Making things much worse, of course, is the role of players who don’t have the best will in the world. Climate change denial is a major industry, lavishly financed by Exxon, the Koch brothers and others with a financial stake in the continued burning of fossil fuels. And exploiting variability is one of the key tricks of that industry’s trade. Applications range from the Fox News perennial — “It’s cold outside! Al Gore was wrong!” — to the constant claims that we’re experiencing global cooling, not warming, because it’s not as hot right now as it was a few years back.
One can argue about the question as to whether or not a trace gas, carbon dioxide, which is less than 0.04 percent of the total atmosphere around earth, has such alleged huge effects upon climate. Also, one can argue whether or not human contribution to CO2 makes any kind of difference at all.I believe that these are legitimate questions, but I certainly am not prepared to answer them myself.

However, by bringing in James Hansen as his "hero" while also attacking ExxonMobile and the Kochs, there is something that I believe we need to point out: Hansen and his followers are not satisfied with shouting louder. No, they want anyone who dissents publicly from their viewpoint to be thrown into prison.

I think that we need to understand what is happening. Hansen publicly has called for people who disagree with him to be charged with crimes for which the penalty is death, the same charges that the leaders of the Nazi party faced at Nuremberg.

Furthermore, I believe something else is in order here: the amount of money spent in this debate. One one side, government money for any research or climate modeling goes ENTIRELY to those who want more government environmental controls. Western governments alone have given hundreds of billions of dollars to "climate scientists" to promote that human economic activity is causing the earth to warm to dangerous levels. That number I give is not in dispute. Speak to anyone on any university science faculty and that person will tell you that all of the government grant money goes to one side.

On the other side, the total amount that Exxon has given to scientists who dissent from the "orthodoxy" is about $20 million, which is less than what some individual climate change projects have received from the government. Likewise, I doubt seriously that the Kochs have given anywhere near that amount.

So, one side, we have an industry that not only receives huge amounts of government funding, but also seeks to silence anyone who disagrees. When James Hansen and others call for the maximum penalty against "dissenters," and when governments continue to fund people who are so imperialistic about their viewpoints that they want to imprison and kill "heretics," then I think we safely can say that the line has been crossed.

While Krugman so far has not called for the extreme measures favored by Hansen, his silence on the matter also is instructive. Furthermore, his missives against anyone who disagrees with him on Keynesianism are alarming when combined with his views on Hansen and others.

I'll go out on a limb here, but I believe that there will come a time in the near future when people like Krugman -- and maybe Krugman himself -- will call for anyone who dissents from Keynesian thinking to be put on trial and either imprisoned or killed. Keep in mind that government policies have been following the line that humans are causing disastrous global warming. The Obama administration openly wants even more restrictions.

The same goes for what we are seeing in Europe and Great Britain. In other words, governments are on Krugman's side.

Yet, that is not good enough for Krugman. The idea that ANY person out there might make a public statement that contradicts his viewpoint is too much. As I read this column, I realize that what he is demanding is the total silencing by force of anyone who disagrees.

People who disagree with the Krugmans and Hansens are not in prominent or influential positions in universities and government or the mainstream media. This does not mean they are wrong, but it does mean that for policy purposes, Hansen has won. But what Krugman and others demand is that no one be permitted even to speak dissent.

Don't kid yourselves about where this is going. There no longer is a constituency in the academic world for free speech, and governments throughout history have murdered people simply for disagreeing with the government line. I believe that Paul Krugman wants that future for us, too, and he will not stop with just "climate change" or even economics.

Sunday, July 22, 2012

Krugman: Turn Back the Clock!

One of the favorite lines from American Progressives that is used whenever someone speaks of something good that occurred in the past is: "You want to turn back the clock." To get a sense of how often the phrase is used in just the New York Times, I did a Google search on the phrase and NYT editorials and found that the editors love to use "turn back the clock" as a derisive term.

Yet, one of the enduring themes from Paul Krugman's columns and blogs has been that we need to "turn back the clock" on regulations and high marginal tax rates (rates that he told a number of economists in answering a question I asked him in 2004 were "insane") and return to the 1950s. He does it again in a recent blog post in which he refers to a Brad DeLong piece about executives from that era:
Brad DeLong points us to an amazing Fortune reprint: a portrait of American executives in 1955, back when inequality was much lower and tax rates at the top much higher than they are today. The business leaders of the time led straitened lives by historical standards — they were substantially poorer than the previous generation of executives.
The article goes on to quote from the Fortune piece:
The executive’s home today is likely to be unpretentious and relatively small–perhaps seven rooms and two and a half baths. (Servants are hard to come by and many a vice president’s wife gets along with part-time help. So many have done so for so long, in fact, that they no longer complain much about it.)
The large yacht has also foundered in the sea of progressive taxation. In 1930, Fred Fisher (Bodies), Walter Briggs, and Alfred P. Sloan cruised around in vessels 235 feet long; J. P. Morgan had just built his fourth Corsair (343 feet). Today, seventy-five feet is considered a lot of yacht. One of the biggest yachts launched in the past five years is the ninety-six-foot Rhonda III, built and owned by Ingalls Shipbuilding Corp., of Birmingham, Alabama. The Rhonda III cost half a million dollars to build, and the annual bill for keeping a crew aboard her, stocking her, and fueling her runs to around $130,000. As Chairman Robert I. Ingalls Jr. says, only corporations today can own even so comparatively modest a craft. The specifications of the boat that interests the great majority of seagoing executives today are “forty feet, four people, $40,000.” In this tidy vessel the businessman of 1955 is quite happily sea-borne.
So, what are we to make of this particular set of circumstances? Krugman explains:
According to modern conservative dogma, this kind of punishment of “job creators” should have brought economic progress to a screeching halt. Yet according to Fortune, executives continued to work hard — and the postwar generation was actually a period of economic progress that has never been matched.

Somehow, John Galt never made an appearance.
I'm not sure what Krugman wants to claim, but it seems he is saying that the 90 percent tax rates and the fact that all forms of finance, transportation, and communications were heavily regulated and operated in what essentially were cartels apparently was the optimal state of the world. So, why didn't this happy state of affairs go on forever?

Krugman's answer is that conservative ideologues suddenly captured American politics and turned America into a hellish nightmare by deregulating finance, deregulating transportation and communications, and lowering the top tax rates. In previous posts, I have pointed out that many of the deregulation initiatives came from "conservative Republicans" like Ted Kennedy, Alfred Kahn, and Ferdinand St. Germain.

Yes, I am supposed to believe that conservative Republicans were in charge when JFK pushed for lower marginal tax rates, even though Democrats dominated the House and Senate, and controlled the White House and U.S. Supreme Court. The Krugman rhetoric simply does not match what happened during that time.

There are a few things he doesn't mention. First, while there was economic and financial regulation, the other kinds of regulations that Krugman cherishes, such as environmental regulation, were in their infancy. Second, the 1950s also was the decade that produced John Kenneth Galbraith's virulent anti-capitalist books, along with the view that companies like General Motors actually were a threat to our well-being, and that the model Krugman praises was creating horrors like "The Organization Man" and the like. Third, there is the problem called Detroit.

During the 1950s, Detroit was the model U.S. city. It boasted the best-paid industrial workers in the world, its unions controlled city and state politics. If anything, Detroit was the model of what Krugman would consider to be the ideal society.

Yet, today the city literally is in ruins. Its unions still control the politics, but they cannot control economics and Detroit is a ward of the federal government. So-called conservative Reaganites never have gained control of the politics of Detroit, so how does Krugman explain the city's slide into oblivion?

So, if "turning back the clock" is the answer, then why did the clock move in the first place?

Oh, and Michael Milken was and is a liberal Democrat. Really.

Thursday, July 19, 2012

Pathos of the Political Operative

This post will be brief, but to the point. Paul Krugman no longer discusses economics in his column, as apparently the hard work of coordinating his writing with Barack Obama's re-election campaign means that "economics" will be passed off as little more than a demand that the government go on a tax-borrow-print-spend binge.

In his latest column, he vociferously defends Obama's latest "you didn't build that" speech, which really was nothing less than a declaration of war against entrepreneurship. (Oh, I forgot. Many, many years ago, Krugman had a post on entrepreneurship in which he tried to interpret it from a macro viewpoint, claiming that there was little or no entrepreneurship during the 1980s.Gee, I wonder if Krugman is just trying once again to be a political operative, not an economist.)

Reading Krugman's caricature of how people have responded (he wants us to believe that entrepreneurs and the "superrich" are one and the same) to Obama's attack on free markets (his claim that any success is always the result of some sort of government-enforced collectivism), I wonder how Krugman then is justified in claiming that Obama has "created jobs." Please explain to me how that is done. Did Obama risk his own financial capital? No. He took money from taxpayers and gave it to political contributors, and then called it "job creation," and Krugman is right there with him. (Anyone who will defend the taxpayer-funded fiasco called Solyndra really is no economist.)

No one is going to say that a single individual builds an entire business; however, success comes about through mutually-beneficial cooperation, but that is not what Obama and Krugman are saying. Instead, they are appealing to collectivist thinking. Furthermore, his comments about Hoover Dam and the Golden Gate Bridge demonstrated his own ignorance about the private firms that actually built these projects.

Unfortunately, neither Obama nor Krugman understand even a whit about the role entrepreneurs have played in the economic growth of this country and in the world. But, then, Krugman's MIT mentor, Paul Samuelson, believed that communism was producing a magnificent economy in the Soviet Union. Like Krugman, Samuelson never let facts get in his way.

Monday, July 16, 2012

Krugman and the Keynesian View of Entrepreneurship

Since Krugman has another column that he has coordinated with the Obama re-election campaign, a column that claims (once again) that the presence of a bank account in another country is proof that one is destroying  the economy at home, I won't make any comments except to say it proves once again that Paul Krugman is not an economist, but simply a political operative. Instead, I want to deal with some issues that have popped up through the comments section.

Someone cleverly sent me this link in response to my saying that Krugman never says anything about entrepreneurship. Yes, the guy is serious. He mentions the word more than four years ago, and that is "proof" that Krugman is an expert on the entrepreneur or something like that. As I went through my own search process through Google, the only other link I could find was Krugman's defense of the GM bailouts in which he claimed that "industrial clusters" really were more important than anything entrepreneurs do.

His comments on the bailouts are especially instructive because the Obama administration essentially wiped out the bondholders, gave the United Auto Workers what they wanted, and then dunned taxpayers to make it all happen. While Krugman might claim that the auto bailout was "the single most successful policy initiative of recent years," what occurred was pretty much a simple wealth transfer.

Furthermore, in his Keynesian style, Krugman assumes that capital and whole structures of production simply exist and that entrepreneurship has nothing to do with it. (Yes, he says the "individual entrepreneur," but in that he is creating the straw man, for he fails to understand the larger role of entrepreneurship in the economy.)
The point is that successful companies — or, at any rate, companies that make a large contribution to a nation’s economy — don’t exist in isolation. Prosperity depends on the synergy between companies, on the cluster, not the individual entrepreneur.
Yet, it was entrepreneurship over time that created this cluster, but to admit that would mean that perhaps his collectivized view of economics might not fit reality. Furthermore, entrepreneurship is not limited to people who (in Krugman's words) start their businesses in garages. (Notice that he leaves out Steven Jobs and how Apple was started, but that would mess up his narrative.)
The point is that the quintessential business figures of the 80s weren’t creative entrepreneurs. They were big-corporation executives (Lee Iacocca) and takeover artists (Michael Milken, Ivan Boesky). The gazillionaires who started in garages came later.
By limiting entrepreneurship to people "in garages," Krugman leaves out the larger understanding of what entrepreneurship is or what entrepreneurs do. Michael Milken WAS a financial entrepreneur, as he gained funding for a number of enterprises that the banks in the cartelized system that Krugman praises to much would not touch. It was Milken who secured start-up funding for CNN, which helped revolutionized how the news is brought into our homes. The creation of MCI, which did an end run around the way long distance calling was done via the AT&T government-created monopoly, came through Milken's funding.

It was Milken that secured the start-up money for McCaw Cellular, which took an idea and laid the foundation for the vast cellular networks we have now. And there were many more enterprises, NONE of which would have received funding from the banking system that Krugman insists was perfectly fine and should have remained in place.

You see, Paul Krugman wants us to believe that modern telecommunications "just happened" or that government would have created a wonderful system on its own. Like the industry "clusters" that really are the source of wealth (and we know that the clusters just appeared on their own -- or were the result of government action along with the farsightedness of the labor unions) in Krugman's view, there really is no need for the entrepreneur, who is just a sideshow, a freak in a garage who takes advantage of what government in its infinite wisdom already has created.

In Krugman's world the telecommunications that we enjoy now would have happened anyway because, well, just because. New technologies just happen and their application to the economy just happen, too. Furthermore, even things like the pre-existent "supply chain" are not subject to entrepreneurial ideas. No, they simply exist and if a company like Wal-Mart is able to change the way that supply chains work, well, that was not entrepreneurship; it was just fate.

I would urge readers to look at what Peter Klein has written in his book The Capitalist and the Entrepreneur. Unlike Krugman, Klein actually is an economist who knows something about entrepreneurs and entrepreneurship, and who does not feed partisan political propaganda to readers. (Unlike Krugman, Klein does not coordinate his writing efforts with partisan political campaigns.)

Anyone who does take the time to read Klein will see that the scope of entrepreneurship is much, much larger than anything Krugman can imagine. But, then, Klein is not going to tell readers that government spending, borrowing, and printing is the Source of All Wealth.

On another note, I would urge readers to look at this recent Wall Street Journal editorial that lists a number of aspects of labor law in Spain that create barriers to employment. According to the editorial, 99 percent of Spanish businesses have 49 or fewer employees. Why?
Once a Spanish business reaches 50 employees, its workers must also elect five workplace reps to bargain on wages and conditions. These delegates must each receive at least 15 paid hours off monthly for their duties, and the quotas rise as companies grow. By the time a business hires its 751st staffer, it must have at least 21 workplace reps, each getting a minimum of 40 paid hours off per month.
No doubt, Krugman would claim that such measures will increase "aggregate demand" because governments create new wealth by forcing up wages. That the Spanish employment laws prevent larger enterprises from enjoying the economies of scale from large-scale capital funding simply gets beyond the thinking of a Keynesian.

Friday, July 13, 2012

Krugman Endorses Insanity (His Own Words)

On the Sunday before Thanksgiving in 2004, I attended a session at the Southern Economics Association annual meeting, held in New Orleans, and the speaker was Paul Krugman. Joseph Salerno and I sat next to each other to hear the Great Wisdom from The Master. To be honest, I cannot remember anything he said, but I do remember his answer to my question during the Q&A.

My question dealt with tax rates. I asked that since he was critical of the current tax setup, would he endorse the 70 percent rates that existed before 1981? "Oh, no!" he exclaimed, "Those rates were insane!"

Since that time, Krugman seems to be doing everything he can to endorse insanity, and he does it again today in a column that totally misses the mark on the issue of economic growth. To be honest, the question he seems to be raising is a fair one -- Can we have both strong economic growth and high marginal tax rates? -- but his view of economic growth is so skewed that one hardly can answer it on his terms.

He writes:
The first thing you need to know is that America wasn’t always like this. When John F. Kennedy was elected president, the top 0.01 percent was only about a quarter as rich compared with the typical family as it is now — and members of that class paid much higher taxes than they do today. Yet somehow we managed to have a dynamic, innovative economy that was the envy of the world. The superrich may imagine that their wealth makes the world go round, but history says otherwise.
He is correct in that in the early 1960s, the U.S. economy was still the strongest in the world even though its highest marginal rate was about 90 percent. Thus, he reasons, tax rates really don't matter and we can raise rate much higher than they are today and still have lots of economic growth. In past columns, he has noted that a number of key sectors such as rail, truck, and air transportation all were organized into regulated cartels (though he does not use "cartels" even though that is what they were), and banking and finance were tightly organized into similar kinds of cartels. Things were so good back then, he argues, that any change in such legal arrangements could not have had any overall economic benefits and, in fact, the only reason things were changed was because people with the wrong ideology took power.

(Nowhere does Krugman acknowledge the Elephant In The Living Room. In 1961, the other economies of the world were recovering from that destruction of World War II. Japan's economy was in its infancy of productivity, Great Britain had moved to socialism and stagnation, Eastern Europe was walled off by the U.S.S.R., most of Asia was still in its ancient agricultural mode. The U.S. economy was in a position that would be changing, even if Krugman refuses to acknowledge that simple fact.)

Krugman seems to be saying that since this arrangement seemed to be successful in 1961, it ALWAYS would be successful, and he also seems to hint that the economy was successful BECAUSE of the tax and regulatory environment. For Krugman, it is post hoc, ergo propter hoc. Thus, if we were to return to such arrangements, we could then emulate the success of that era.

This brings me to the subject of his column, and that is his discussion of "the rich." If I read Krugman correctly, he is saying that Mitt Romney and his supporters are claiming that those who are wealthy really are the "engines" of a market economy, and that to raise taxes on them would stifle economic growth. Those supporters, Krugman, argues, are wrong because we had high marginal rates before along with economic growth.

Unfortunately, Krugman's entire analysis is based upon a very typical Keynesian "snapshot" view of the economy in which, to quote Robert Higgs, the individual factors of the economy are treated as just "goo" in which the only relevant analysis is to use pure aggregates. This has much political usefulness, as one can see, for Krugman does not have to deal with long-term trends or any underlying weaknesses within the economy. Furthermore, in his views, changes to the legal and regulatory structure have nothing to do with problems that  came about because of the structures of incentives and relationships created by tax laws and regulation. Instead, any changes to what had been a near-perfect system came about ONLY because of "conservative ideology."

Notice a word that never appears in any of Krugman's columns; never. It is "entrepreneurship." I have come to believe that Krugman thinks than an economy is totally administrative and very mechanistic: producers know the production function and then they produce things based upon their projections of how future spending patterns will go. The only things needed for a "successful" economy, then, are productions functions and spending.

The Krugman Economy is one in which economic growth would be due to changes in technology (and government researchers can "invent" anything that is necessary and innovative) and spending, lots of spending. Markets are useful only if they fit the pattern of "perfect competition" in which each firm is tiny and it faces a horizontal demand curve. Firms are simple production functions with given cost curves, with the sole decision by managers being where to set output.

Since entrepreneurship really is not necessary in the Krugman Economy, anyone who gains wealth via entrepreneurial activities is no different than a person who has inherited wealth, like the Kennedys. High marginal tax rates would have no effect upon production or wealth creation, since a government-run firm would be just as productive as a private one and probably more socially useful, since government agents and regulators -- at least if they are Democrats -- always govern with the best of intentions, and everyone know that intentions are all that matters. (Thus, if government agents intend to have high-quality "universal" medical care, then such a program is both morally superior to anything else and also will have the intended results.)

In the Krugman Economy, a Steven Jobs is no more useful than someone living in the Hamptons who lives off a huge trust fund, with the only real social use of either being the potential for government to take large portions of their incomes via taxation, which then can be converted into government spending, which is the REAL source of economic growth. There are no such things as incentives; corporations and entrepreneurs will not change their behavior or outlook a whit if the top rates go back up to 90 percent. Like the band in "Animal House," they will continue to march forward even if a wall blocks their way.

As I see it, Krugman argues that high tax rates will not hurt economic growth because entrepreneurs are both economically and socially unnecessary. He has not gone as far as John Kenneth Galbraith, who argued that entrepreneurs were parasites because they produced useless "private" goods that took away from "needed public investment," although is clearly is in Galbraith's neighborhood.

I would argue that Krugman is much closer to the views of his former professor, Paul Samuelson, who depended solely upon GDP models which permitted him to claim that the planned economy of the former Soviet Union was superior to that of a market economy because the U.S.S.R.'s aggregate numbers showed high growth. That the economy of the U.S.S.R. was primitive, blocked by massive shortages, poor quality of goods, and outright idiocy. Instead, people like Samuelson look at the overall production of goods, such as automobiles and then assumed that, for the purposes of economic analysis, a clunky, 1948-style East German Wartburg was no different than the superior cars made in the West and in Japan. All that mattered were aggregates.

Since entrepreneurship in the old communist bloc economies was illegal and those economies were growing rapidly, Samuelson and his followers reasoned that entrepreneurship at best was a dinosaur, historically interesting but unneeded in the modern, "sophisticated" economies in which wise planners armed with MIT doctorates could run via the creation and solving of simultaneous equations.

In a word, Krugman really does not understand the role of the entrepreneur, nor will he ever understand it. All he sees is someone with money who isn't spending enough of it at the present time. Furthermore, he cannot tell the difference between an entrepreneur and someone who lives on inherited wealth, nor can he tell the difference between market entrepreneurship and political entrepreneurship (i.e. Solyndra).

So, in the Wonderland of Krugman's economy, 90 percent tax rates make perfect sense. It might be "insanity," but in Wonderland, the insane is sane.

Monday, July 9, 2012

Krugman Now Is a Full-Time Political Operative

It seems to me that Paul Krugman's latest surge of columns is based upon Democratic Party talking points, and the most recent one stays with the same theme: Mitt Romney made money by making everyone poorer. While I have no personal defense of Romney, don't plan to vote for him, and do not think his policies would differ much in substance from what Barack Obama has been doing, nonetheless I would hope that a decorated academic economist would not just be another version of James Carville or Paul Begala.

Of course, one can argue that Krugman gave up economics a long time ago. He claims that Bain destroyed wealth, while at the same time telling us that the billions in taxpayer subsidies spent to prop up "green energy" create wealth and make us better off.

Frederick Bastiat noted that one of the most fundamental errors made in economic analysis is that people (including people like Krugman who should know better) make judgments only on what is seen without understanding what is not seen. Bastiat writes:
In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause - it is seen. The others unfold in succession - they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference - the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, - at the risk of a small present evil.
Krugman looks at the people employed via subsidies to "green energy" producers and real subsidies given to "Government Motors" and concludes that wealth MUST be created, otherwise these people would not be employed. He literally cannot tell the difference between politically-based subsidies and the actual process of how a market economy produces wealth. Thus, he becomes the perfect prophet for an utterly-politicized age.

Friday, July 6, 2012

Is Mitt Romney a Magician? Paul Krugman Believes He Is

I see that Paul Krugman definitely is coordinating his column with the Obama re-election campaign, and he has a number of howlers in his latest concoction. Before dealing with his notion that Mitt Romney and Bain Capital could purchase perfectly healthy company, run them into bankruptcy, and then sell them for a profit, let me first look at Krugman's opening salvo:
In a better America, Mitt Romney would be running for president on the strength of his major achievement as governor of Massachusetts: a health reform that was identical in all important respects to the health reform enacted by President Obama. By the way, the Massachusetts reform is working pretty well and has overwhelming popular support.
I have no idea if anything Krugman says is true regarding the program's "success" and its "overwhelming popular support," but I ran across this interesting exchange the other day about "Romneycare" from someone living in Massachusetts:
When we file our annual income tax returns in Massachusetts, there's a multi-page form on which we're required to specify the type of medical insurance we have, whether or not our coverage is "substantially compliant" (which the insurance plans have to tell us by sending us an annual form) and then, if our coverage isn't "substantially compliant," another form, with a lengthy worksheet, to compute the penalty tax which turns out to be a function of "Modified Massachusetts Adjusted Income"—the computation of which requires the filling out of another lengthy worksheet after adjusting for various deductions and credits (the computation of which requires yet a third worksheet). 
At a dinner party this past Friday evening, I was chatting with a physician friend, a family/primary care physician. I asked him how his practice has been faring under Romneycare and what he thought of Obamacare. He told me that since Romneycare came on board, he and his colleagues, in their office practice, can only hope to make ends meet on volume, scheduling five to ten minute routine appointments, twenty minutes for "serious cases," and annual physicals (which take fifteen minutes) booked up to six months in advance. From 5:00 p.m. to 6:30 p.m. each day, he and his staff sit down to attend to paperwork. Has Romney care led to cost reductions and better care for patients, I asked him. No way, he told me. It's only been better for the insurance companies. What about Obamacare? He rolled his eyes. "We've been sold a bill of goods." He and his family live modestly. He's certainly not getting rich from his medical practice. His wife works to make ends meet. She's a nurse. At your office? I asked him. No, at one of the public clinics where she does better than she could do at his practice, "no fooling."
Granted, the doctor probably is evil to the core, since he doesn't share Krugman's enthusiasm for "Romneycare," and certainly not for Obamacare. I'm sure that Krugman would write off such comments as being straight from Goldstein's headquarters and, besides, doctors really should not be making the same amount of money as Keynesian economists!

But Krugman only is getting warmed up, and then treats the readers to more interesting theories of economics, such as one that holds that the more damage one does to a business firm, the more valuable that firm becomes. I never would have known had it not been for this column, given that I was foolish enough to think that a firm would become more valuable the more profitable and productive it is. He writes:
In any case, however, Mr. Romney wasn’t that kind of businessman. Bain didn’t build businesses; it bought and sold them. Sometimes its takeovers led to new hiring; often they led to layoffs, wage cuts and lost benefits. On some occasions, Bain made a profit even as its takeover target was driven out of business.

So, if we are to correctly read Krugman, he is saying that poor management and unsound practices resulted in Bain's being profitable. Romney is a magician! And what, according to Krugman, is a sound business practice? According to Princeton's Finest, a business becomes more valuable as its real costs of production increase. You know that diagram that one learns in Microeconomics in which higher real costs of production cause the supply curve to shift to the left (or the cost curves that a firm faces shift upward and to the left)? Obviously, that cannot be correct because Krugman's Keynesian analysis declares that more real spending on production actually increases overall wealth:
Why, for example, do many large companies now outsource cleaning and security to outside contractors? Surely the answer is, in large part, that outside contractors can hire cheap labor that isn’t represented by the union and can’t participate in the company health and retirement plans. And, sure enough, recent academic research finds that outsourced janitors and guards receive substantially lower wages and worse benefits than their in-house counterparts. 
Just to be clear, outsourcing is only one source of the huge disconnect between a tiny elite and ordinary American workers, a disconnect that has been growing for more than 30 years. And Bain, in turn, was only one player in the growth of outsourcing. So Mitt Romney didn’t personally, single-handedly, destroy the middle-class society we used to have. He was, however, an enthusiastic and very well remunerated participant in the process of destruction; if Bain got involved with your company, one way or another, the odds were pretty good that even if your job survived you ended up with lower pay and diminished benefits.
So, there it is. If American firms had forced up their own costs of doing business and made themselves uncompetitive with firms overseas, then our economy would be better off. (No doubt, a dose of protectionism and some capital controls would work wonders, I'm sure.)

Anyway, Krugman gives yet another prescription for the economy, one that curiously mirrors what the Juan Peron regime did in Argentina in the 1950s and 60s. Inflation, protectionism, and capital controls all were part of Peron's plan, and we know how well that turned out. No doubt, Krugman would consider Argentina to be a huge success.

Tuesday, July 3, 2012

Those Irresponsible Rich People!

Barack Obama's top economic adviser, Alan Krueger, has uncovered yet another mystery on top of the "discovery" made by Paul Krugman and echoed by the president. Yes, it seems the rich are not spending "enough."

No doubt these rich folks are stuffing their mattresses full of paper money and then sleeping on it. Oh, the humanity! Confiscate everything! Make them spend!

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.