Friday, December 28, 2012

Krugman: Capital Stalls Economic Growth and Creates Inequality

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

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

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

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

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

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

Krugman then lets loose with this gem:
So machines may soon be ready to perform many tasks that currently require large amounts of human labor. This will mean rapid productivity growth and, therefore, high overall economic growth.

But — and this is the crucial question — who will benefit from that growth? Unfortunately, it’s all too easy to make the case that most Americans will be left behind, because smart machines will end up devaluing the contribution of workers, including highly skilled workers whose skills suddenly become redundant. The point is that there’s good reason to believe that the conventional wisdom embodied in long-run budget projections — projections that shape almost every aspect of current policy discussion — is all wrong.
Yeah, it is capital creating mass unemployment across the economy just as capital is responsible for the high cost of medical care. True, if it is malinvested capital, then in the long term, the malinvestments direct investment away from truly productive uses, and after the inevitable bust occurs, we see unemployment rising.

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

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

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

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

Tuesday, December 25, 2012

Merry Christmas to All KIW Regulars!

I want to wish all of you who contribute comments to this blog a most Merry Christmas and Happy New Year, and that includes EVERYONE. Part of the fun of a blog is to have people disagree and have others disagree with them.

So, thanks to everyone who contributes, whether or be in agreement or disagreement. And the very best to all of you.

Monday, December 24, 2012

The Prophecy Game

If Americans today did what Israelites were commanded to do back in Bible times -- stone false prophets to death -- there would be a lot of dead economists, and that would include Paul Krugman. Krugman has been wrong in the past (claiming that if Japan borrowed and spent enough money during the 1990s, that it would come out of its economic funk, with Japan doing the former but the latter not occuring), but he also knows that a good defense is a good offense.

Thus, he centers on an editorial that is more than three years old to claim that EVERYONE who might disagree with his wisdom is a false prophet. No, he doesn't want them stoned to death, just removed from any meaningful social contact with anyone. His theme is simple: anyone who predicted that the massive expansion of the Fed's balance sheets and attempts to monetize U.S. debt and deficits would lead to an increase in interest rates is an idiot:
...we cannot and will not persuade these people to reconsider their views in the light of the evidence. All we can do is stop paying attention. It’s going to be difficult, because many members of the deficit cult seem highly respectable. But they’ve been hugely, absurdly wrong for years on end, and it’s time to stop taking them seriously.
 Krugman points out that as long "as the economy is depressed," interest rates will remain low. Unfortunately, he wants to claim that this is a market phenomenon instead of something that is being done by Ben Bernanke, an effect of the bad economy. Yet, what should help revive the economy? You guessed it: low interest rates.

So, what is it? Are interest rates an effect of a bad economy, or do they ward off a bad economy? There is a problem of causality, as Krugman wants it both ways. We shall see in the coming year what actually happens. If Krugman is correct, the government's vast intervention into the economy is finally going to bear real fruit, as most sectors will rebound nicely and President Obama will have that real recovery that he deserves.

On the other hand, Krugman has been wrong before, not that he ever admits it. The Krugman paradigm is this: when the economy is depressed, government should suppress interest rates, create lots of new money, try to initiate inflation, and then borrow and spend lots of money. This will bring about a real recovery.

Since the financial crisis became painfully obvious in 2008 (and, really, more than a year before that), government has done all of these things, including bailing out banks, financial houses, and much of the domestic auto industry. The Fed's balance sheet has grown exponentially, and it seems that if nothing else, Bernanke is hellbent on making sure that no big bank goes out of business.

On the other hand, the real economy is not doing so well. If we see the kind of recovery Krugman predicts in the next four years, then Krugman will be able to claim victory, although he has a habit of claiming victory even when he is wrong. The problem is that, like most Progressives, he believes that leftist government is so magical that it can do away with the Law of Opportunity Cost by printing money.

I don't believe that economics is an "empirical" science. Instead, economic theory must submit to the laws of nature, not the laws made up by a British sexual pervert. That means a priori, and anything else is metaphysics, as far as I am concerned. So, we shall see in the end who is the false prophet.

Friday, December 21, 2012

On Second Thought...

I do have a brief commentary about Krugman's latest political column masquerading as Serious Economic Analysis. Like all Progressives, Paul Krugman believes that the State can create an economy by coercion. If it is ordered into being, then it is so.

Furthermore, political victories by the Democratic Party always make the economy better. That is why the economy has done so well in the past four years. (Don't forget that Democrats had absolute majorities in both houses for two years with Obama being permitted to do anything he wanted, but unemployment went up, not down.)

Of course, this notion that government can order anything into being via coercion has tragic results. In writing about the Sandy Hook massacre, Jeff Tucker writes:
In the days that followed the killing, my browser kept taking me back to a Wikipedia link about the Gun-Free School Zones Act of 1990. The law, still intact after many challenges and rewrites, reads: “It shall be unlawful for any individual knowingly to possess a firearm that has moved in or that otherwise affects interstate or foreign commerce at a place that the individual knows, or has reasonable cause to believe, is a school zone.”

Guns of all sorts are banned anywhere near schools. If the government’s laws had worked, this killer would have realized that his plan was unachievable. After all, the world’s most powerful government had banned the whole idea of guns at school.
To put this in an economic context, Krugman actually seems to believe that if Democrats have enough political power and Barack Obama orders the economy to improve, then it will improve. Raising taxes will have no effect except to allow for more spending, and everyone knows that government spending is the key to economic recovery, as there can be no downside to expanding the government checkbook.

Should prices be "sticky," then government can inflate, which cuts the real prices and creates prosperity, since everyone knows that printing money is the key to making us richer.

The problem is that politics generally is the enemy of prosperity. Politicians see no problem in destroying businesses and throwing sand in the gears of entrepreneurship, since the media then will be the megaphone for trumpeting the message of the politicians: See? Businesses always fail! That is why you need us to help you!

Well, Krugman, Obama definitely has won the political PR battle (given the love affair the media has with him), and he has the numbers. We shall see how this turns out. Although I do not believe that the "fiscal cliff" can throw us into recession, nonetheless it will impede the recovery, but that is OK, since in the end, the politicians will win.

Krugman: Playing Fantasy Economics

I originally started out critiquing Paul Krugman's latest political screed, but decided, instead to defer to Bob Murphy and others. After all, unlike Krugman, Murphy is an economist.

If Krugman has a column Monday, then I will have commentary. If not, Merry Christmas, everyone!

Monday, December 17, 2012

Deficit Economics

Thirty years ago, I published an article in The Freeman entitled, "Deficits are Not the Only Problem," and in it I challenged the notion that federal budget deficits in and of themselves are the major economic problem in our society. The deficits, I argued were symptoms of the larger problem of out-of-control government expansion and the spending that accompanies that expansion.

On the surface, it seems that Paul Krugman agrees with me that the federal deficit by itself is not THE economic problem. Furthermore, I will go further and agree with him that much of the current deficit is due to the depressed state of the U.S. economy, and that a stronger economy would, in fact, provide more tax revenues from current tax rates than is now the situation.

Like always, however, I disagree vehemently with Krugman on (1) the role of federal deficits in "providing" or at least enabling economic recovery, and (2) the efficacy of government spending itself. Krugman believes that we need large deficits so that the government spending generated by them can help jump-start the economy; I believe that the very spending he believes provides overall economic benefits actually hampers economic recovery.

Krugman says that out of the current trillion-dollar deficit, about $600 billion of it is due to the depressed economy, and that the remaining $400 billion is "sustainable." (Funny, he wasn't making that claim when George W. Bush was running large deficits. Then Krugman claimed that the cut in the top income tax rate from 39.6 percent to 35 percent was causing huge economic problems and was dragging us into economic hell. Yes, a relatively small cut in tax rates was destroying the economy, which would have been a first in economic history.)

He writes:
First of all, the weakness of the economy has led directly to lower revenues; when G.D.P. falls, the federal tax take falls too, and in fact always falls substantially more in percentage terms. On top of that, revenue is temporarily depressed by tax breaks, notably the payroll tax cut, that have been put in place to support the economy but will be withdrawn as soon as the economy is stronger (or, unfortunately, even before then). If you do the math, it seems likely that full economic recovery would raise revenue by at least $450 billion.

Meanwhile, the depressed economy has also temporarily raised spending, because more people qualify for unemployment insurance and means-tested programs like food stamps and Medicaid. A reasonable estimate is that economic recovery would reduce federal spending on such programs by at least $150 billion.

Putting all this together, it turns out that the trillion-dollar deficit isn’t a sign of unsustainable finances at all. Some of the deficit is in fact sustainable; just about all of the rest would go away if we had an economic recovery.

He continues:
And the prospects for economic recovery are looking pretty good right now — or would be looking good if it weren’t for the political risks posed by Republican hostage-taking. Housing is reviving, consumer debt is down, employment has improved steadily among prime-age workers. Unfortunately, this recovery may well be derailed by the fiscal cliff and/or a confrontation over the debt ceiling; but this has nothing to do with the alleged unsustainability of the deficit.

Yes, we are supposed to believe that things are just fine, and if President Obama is permitted to stick it to some taxpayers (with the middle class to be stuck at a future date) and spend a few billion here and there, that the economy will recover because of it. Furthermore, if the so-called Fiscal Cliff (yet another idiotic slogan from Washington that the media recites in its usual Pavlovian style) kicks into action, then the economy will tumble down the hill like Sisyphus's boulder.

Notice that this contradicts what Krugman claimed a couple of years ago when the tax cuts were supposed to expire and the government extended them. Back then, Krugman said that if it were up to him, he would allow all of the rates to go back to their pre-2003 levels and use the newfound revenues for more current spending projects. For that matter, he claimed in 2010 that even if all rates were raised, the negative effect would be minimal to the economy.

Today, he sings a different tune. If the Republicans don't give Obama everything he wants, then the Republicans will solely be responsible for plunging the economy into something akin to the Dark Ages. Why he claims that Obama's prescription for recovery -- tax, borrow, print, and spend -- will be effective it beyond my comprehension.

When George W. Bush was president, Krugman claimed over and over that the economy was moribund because Bush got Congress to cut the top rate from 39.6 percent to 35 percent, and that the marginal tax rates for everyone else were cut as well. A while back, he was claiming that these tax cuts were "unaffordable" to the tune of four trillion dollars. With Obama in the White Hosue, he has claimed that it doesn't matter how much the government borrows, since interest rates are at "historic lows" and we "owe it all to ourselves," anyway.

In other words, Krugman gives us mixed signals that on the surface seem to be confusing. There is an easy translation, however: Democrats (and especially Obama) always good, Republicans always bad. If Republican administrations borrow and spend, they are dragging us into Hades; if Democrat administrations borrow and spend, they are bringing economic recovery.

So, in his attempt to be the world's most politically-partisan economist, Paul Krugman calls for the very things that in the long run are economically destructive, but claims that if a Democrat implements those things, then the result will be prosperity. I'm not sure how all of this will take place, but I must say that following Krugman does prove to be an interesting ride.

Friday, December 14, 2012

There is Plenty of Delusion to Go Around

Paul Krugman writes that the Republican Party is delusional, and who could disagree with him? The USA spends more on "defense" than the rest of the world put together, yet Republicans still are claiming that it is not enough. Moreover, few Republicans left in office are willing to admit that the current rates of spending by the federal government are not sustainable without massive money printing that will turn the dollar into worthless paper.

Unfortunately, the Republicans are not the only party that is defined by delusion, and the number one academic shill for the Democrats -- Krugman himself -- has penned a column that truly is breathtaking its own web of fantasies. But first his attack on the Republicans. Krugman writes:
By all accounts, Republicans have, so far, offered almost no specifics. They claim that they’re willing to raise $800 billion in revenue by closing loopholes, but they refuse to specify which loopholes they would close; they are demanding large cuts in spending, but the specific cuts they have been willing to lay out wouldn’t come close to delivering the savings they demand.
I have no reason to doubt his claim, although one also has to understand that President Obama and the Democrats have no intention of cutting any spending of their own, so we really do have an example of the worst kind of hypocrisy in which each side's accusations against the other are nothing more than mirrors held up to themselves. In fact, Krugman seems to revel in the huge expansion of the welfare state that has occurred with the Obama presidency.

One would think this to be a problem, given the state of the economy, but Krugman has an answer: We don't need to worry about paying for all of this because we can borrow-and-print our way to prosperity. He writes:
We are not having a debt crisis.

It’s important to make this point, because I keep seeing articles about the “fiscal cliff” that do, in fact, describe it — often in the headline — as a debt crisis. But it isn’t. The U.S. government is having no trouble borrowing to cover its deficit. In fact, its borrowing costs are near historic lows.

Yep. We can just borrow and spend, and if the markets per chance won't readily accept U.S. paper in the future, then the Federal Reserve System can borrow U.S. bonds in the primary market, provided that Krugman's "clever lawyers" can find a way around the Federal Reserve Act that forbids such practices. The financial well is bottomless.

This is delusion, and it is even more delusional than anything we are hearing from Republicans, if that is possible. Yes, Krugman knows that maybe some day in the future, we might have to rein in the spending, but for now, we can pretend we are rich, and if we pretend long enough, we will become rich.

This is nothing more than the MMT nonsense that we have been hearing from James Galbraith and others, that we can take advantage of the fact that the dollar is a reserve currency, so we can print to our heart's content and beyond. It is a free pot of gold.

I don't have to say what nonsense this is. One cannot inflate the dollar forever, and the damage that is being done to the economy right now is such that we will not be able to climb out of this hole at all.
Whether the Republicans are having an "existential crisis," I don't know. However, I do know that if the U.S. Government continues to follow Krugman's advice, an existential crisis will be the least of our worries. Krugman may believe that he is so clever and so brilliant that he can find ways to circumvent the laws of economics, but those laws have a way of asserting themselves in the end.

Tuesday, December 11, 2012

Back to the Socialist Calculation Debates

This week, Paul Krugman has been arguing that in some circumstances, the mysterious path of at least some capital investment can lead to lower wages, unemployment, and general misery. Furthermore, if the economy is not in "perfect competition," then a lot of the advantages of capital development are lost.

Likewise, he is arguing, at least some capital development can lead to monopoly in which capital is receiving large rents at the expense of workers and everyone else. There are a few things to remember as one goes through these two Krugman posts that he is not pointing out, yet do have significance.

These are interesting arguments, and they bring us back to the Socialist Calculation Debates that took place in the 1930s and 40s between socialists like Oskar Lange and Ludwig von Mises and Friedrich A. Hayek.

The first is that there is no such thing as an "aggregate production function." I remember several years ago attending a Paul Craig Roberts lecture in which he was arguing that if capital could move beyond national borders, then factors would revert to "absolute advantage," and one country would produce everything and make everyone else poorer. The disappearance of comparative advantage, of course, would mean that the Law of Opportunity Cost would also disappear, since comparative advantage is built upon the idea that there always is opportunity cost in producing anything.

He "proved" his point by using aggregate production functions, i.e. "Britain has this production function" and "China has THIS production function," and so on. That is nonsense. An attempt to aggregate something like numerous productions functions within an economy into One Big Function truly has no meaning; it is a fictitious concept like "aggregate demand" or "aggregate supply." In reality, one cannot reproduce any of these things. (Yeah, I know. This last statement will send the Keynesians into a frenzy.)

The second thing is Krugman's idea of "perfect competition" being some sort of Holy Condition. Remember that the assumptions necessary for "perfect competition" include perfect homogeneity of goods produced within an industry and small-scale capital, not to mention all firms being tiny and having no effect upon the overall supply of goods within a particular market.

Even the idea of homogeneity being the necessary ingredient for "competition" is laughable on its face. This kind of perfect homogeneity is not a basis for competition at all, but rather a basis for no competition, for if every good is exactly the same, an important mechanism for choice disappears and an economy then simply becomes little more than an exercise in randomness.

More important, socialists have argued that heterogeneity of goods then leads to inefficiency and "spatial monopolies" (to quote Joan Robinson). However, the concept of "efficiency" that Robinson and others were promoting (and I suppose Krugman believes it, too) is mathematical, not economic. The entire platform upon which these ideas are built is that everything discussed follows functions that are smooth, continuous, and twice-differentiable. While I have no problem with creating mathematical functions to use in parallel models to explain some aspects of an economy, the idea that an economy MUST follow exactly the constructs of mathematical models or it is creating great harm and must be smashed by the state is ludicrous.

It is obvious, then, that the entrepreneur in this whole Brave New Economy is a parasite, someone who disturbs the Holy Production Function, and creates heterogeneity, which then takes the economy down the Path of Perdition. There is a problem here that Krugman and others cannot answer: Why were the socialist economies of the U.S.S.R. and its satellites much more primitive than the economies of the "monopolistic" capitalists when the Soviet Union collapsed in 1991?

After all, the aggregate planning mechanism of the socialist world followed what Robinson, Lange, and others claimed would create "efficiency." Lange argued that if planners had access to (1) production functions and (2) prices of goods (which could be found on financial pages in western newspapers), then planning an economy was as easy as solving a whole slew of simultaneous equations.

In fact, the Soviets were very good at solving these equations. As my math econ professor in grad school put it, the Soviets created a number of advancements in using matrices to solve these equations. However, he added, "It didn't do the economies any good."

Krugman, in trying to explain why corporate profits might be high at a time of high unemployment, simply reverts to the arguments used by Lange and Robinson and others: the U.S. economy is not in "perfect competition," monopolies abound everywhere, and the capitalists have managed to create aggregate production functions that don't benefit the workers, only the capitalists.

Salvation, in this view, lies in the omniscience of the monopolistic state. Yes, that huge monopoly known as government also contains the Very Secrets of how to create the perfectly-competitive economy that always operates at the point of efficiency. Bureaucrats and elite academic economists can collaborate to impose efficiency because they know exactly where the points of efficiency exist and they have the wisdom and foresight to move us to that point of Nirvana.

Krugman always is lambasting "faith-based" economics. I would contend that the economics of Paul Krugman requires the kind of religious faith that is not found in even the most fundamentalistic aspects of any religion. In the end, we get Faith-Based Keynesianism.

(To further demonstrate the whole idiocy of the Soviet economy, here is the link to a video on some of the automotive masterpieces produced by the Soviets back in the days when Paradise ruled.)

Monday, December 10, 2012

The Capitalists are Coming! The Capitalists are Coming!

There is a new specter on the horizon, a blood-sucking monster that will destroy the lives of people even as it makes goods that improves their lives! Yes, the capitalists are coming, but Paul Krugman is ever vigilant against these evil ones!

According to Krugman, the evil robber barons have made a comeback, benefiting from monopolies, and it is up to the government to save us -- and make the economy more "efficient" at the same time. He asks how it is that the economy can be depressed even while corporate profits are at high levels. Is the old Marxist "capital versus labor" argument back in play?

Krugman, apparently not wanting to go quite as far as his forebears like John Kenneth Galbraith, says that maybe a different explanation is needed, writing:
Why is this happening? As best as I can tell, there are two plausible explanations, both of which could be true to some extent. One is that technology has taken a turn that places labor at a disadvantage; the other is that we’re looking at the effects of a sharp increase in monopoly power. Think of these two stories as emphasizing robots on one side, robber barons on the other.
First, the attack language is the type of thing that one has come to expect from Krugman whenever he speaks of private enterprise. He cannot explain how it might be that people who cannot coerce anyone into making an exchange are engaging in acts of theft, but if the government forces someone to do something at the point of a gun, that is "community" or "caring for the poor."

Second, his overall explanation of why we have higher rates of unemployment among college-educated workers harkens back to the days of FDR when the government was claiming that "automation" or "capital" was the cause of the employment problems. He continues:
About the robots: there’s no question that in some high-profile industries, technology is displacing workers of all, or almost all, kinds. For example, one of the reasons some high-technology manufacturing has lately been moving back to the United States is that these days the most valuable piece of a computer, the motherboard, is basically made by robots, so cheap Asian labor is no longer a reason to produce them abroad.

In a recent book, “Race Against the Machine,” M.I.T.’s Erik Brynjolfsson and Andrew McAfee argue that similar stories are playing out in many fields, including services like translation and legal research. What’s striking about their examples is that many of the jobs being displaced are high-skill and high-wage; the downside of technology isn’t limited to menial workers.

Still, can innovation and progress really hurt large numbers of workers, maybe even workers in general? I often encounter assertions that this can’t happen. But the truth is that it can, and serious economists have been aware of this possibility for almost two centuries. The early-19th-century economist David Ricardo is best known for the theory of comparative advantage, which makes the case for free trade; but the same 1817 book in which he presented that theory also included a chapter on how the new, capital-intensive technologies of the Industrial Revolution could actually make workers worse off, at least for a while — which modern scholarship suggests may indeed have happened for several decades.
This reminds me of the Paul Craig Roberts's claim that if capital is mobile across international borders, the Law of Opportunity Cost no longer applies (which is a way of saying that mobile capital eliminates the Law of Scarcity). Actually, the actual "law" is the Law of Comparative Advantage, but in truth, comparative advantage is just a restatement and application of opportunity cost.

However, what Krugman does not say is that government regulation -- and especially the spate of regulation that has come about through the Obama administration -- also results in stratification of the workplace. The reason is that regulations tend to try to classify and formalize everything and force requirements of specific areas of formal education for any number of jobs that really should not require that much education.

Furthermore, government regulations tend to make hiring much more bureaucratic and formalized, which makes it more costly to hire workers. Yes, the government says it is trying to keep employers from engaging in certain kinds of discrimination, but the end result is that the regulatory state forces up real costs of production and hiring, and that those costs ultimately are borne by workers.

When one adds the real costs that governments at all levels impose upon people wanting to start up even small businesses, it should not be surprising that the very kinds of laws of which people like Krugman approve are making the entrepreneurial transitions very costly. (Oh, I forgot. When governments effectively mandate higher business costs, that also is a good thing, since higher costs supposedly mean more spending, and everyone knows that more spending brings back recovery.)

There is another problem, and that is that government regulations that pertain to labor also make the addition of capital more attractive than it otherwise might be in a free market. Yes, I know it might be shocking to admit that government regulations just might change the terms of opportunity cost.

But Krugman is not satisfied there. No, the evil capitalists not only are using robots and permanently displacing workers, but they also are engaging in creating monopolies:
What about robber barons? We don’t talk much about monopoly power these days; antitrust enforcement largely collapsed during the Reagan years and has never really recovered. Yet Barry Lynn and Phillip Longman of the New America Foundation argue, persuasively in my view, that increasing business concentration could be an important factor in stagnating demand for labor, as corporations use their growing monopoly power to raise prices without passing the gains on to their employees.
Earth to Krugman: every academic economist should know that wages and salaries are not "passed on" by employers; they are payments to owners of the factor of production known as labor. Second, while economists like Krugman (and, of course, the usual places like the leftist Daily Kos) make the assumption that profits exist at the expense of workers, the truth is that in a free market, profits are what an entrepreneur will earn if he or she makes the correct assumption regarding present prices for factors of production versus perceived future prices for final goods. Without the possibility of profits, those jobs and, more important, the quality of the goods people can purchase, would not exist.

Investor and writer Kel Kelly notes that at the present time, the inflationary policies of the Federal Reserve System have more to do with the present state of corporate profits than any entrepreneurial success of many of these firms. When one adds that the Obama administration actively has promoted what essentially is crony capitalism, or corporatism, we should not be surprised if politically-favored firms tend to do better.

On a larger point, it would seem that high corporate profits would invite more entrepreneurial activity and more competition, but that clearly is not happening. In a free market, there would be nothing out of the ordinary that would would block entrepreneurs and entrepreneurial firms from pursing those opportunities and, in the process, compete for those profits. However, given the overt hostility of the Obama administration to entrepreneurs in general (or at least entrepreneurs that seek to compete in real markets rather than the government's crony markets) and the fact that every year or so, there is a huge political tug-of-war regarding business and individual tax rates, we should not be surprised that there is not more long-term business investment.

Of course, Krugman holds that the best way to deal with this problem is through government coercion and specifically through anti-trust litigation and higher taxes. Now, someone will have to explain to me how we can revitalize the business sector by unleashing regulators, federal prosecutors, and the IRS on business owners and investors, but I guess that since those people drive up costs, we will assume that they will "spend" their largess and make the economy stronger.

Friday, December 7, 2012

The Forgotten "Millions" (and Billions and Trillions) of Government Spending

Yes, millions of people are out of work, and Paul Krugman takes note. Anyone who has lost a job is in the position of losing income, and if a head of household loses a job, the income losses can be a crisis.

In advocating for a new "jobs program," Krugman first gives his pat answer for funding the whole affair:
(D)espite years of warnings from the usual suspects about the dangers of deficits and debt, our government can borrow at incredibly low interest rates — interest rates on inflation-protected U.S. bonds are actually negative, so investors are paying our government to make use of their money. And don’t tell me that markets may suddenly turn on us. Remember, the U.S. government can’t run out of cash (it prints the stuff), so the worst that could happen would be a fall in the dollar, which wouldn’t be a terrible thing and might actually help the economy. 
 In other words, we should not worry about it, as the government can inflate away the debt, and that is a good thing. But there is another issue that Krugman ignores, and that is why there would be the need for a "job" at all. (In other words, just borrow the money and give it directly to anyone who is unemployed.) Hear me out on this.

Krugman writes:
(L)ong-term unemployment remains at levels not seen since the Great Depression: as of October, 4.9 million Americans had been unemployed for more than six months, and 3.6 million had been out of work for more than a year.

When you see numbers like those, bear in mind that we’re looking at millions of human tragedies: at individuals and families whose lives are falling apart because they can’t find work, at savings consumed, homes lost and dreams destroyed. And the longer this goes on, the bigger the tragedy.

There are also huge dollars-and-cents costs to our unmet jobs crisis. When willing workers endure forced idleness society as a whole suffers from the waste of their efforts and talents. The Congressional Budget Office estimates that what we are actually producing falls short of what we could and should be producing by around 6 percent of G.D.P., or $900 billion a year.

He is correct in his assessment of the human tragedy, but simple spending with government "creating new jobs" is pretty meaningless. First and most important, to a Keynesian, a "job" is important because it is a source of income. People work in order to earn money so that they can consume. Yet, in the real world, a job is a mechanism through which someone produces something that meets the needs of others, and for which that person is compensated.

Keynesian theory separates production and consumption, as though they were two separate and unrelated things. Goods are randomly produced and then one only can hope there is enough money floating around to allow people to purchase those goods and clear the shelves so the circular process can continue. There is nothing purposeful about it; this is just a description of a big production/consumption circle with the chief end of consumption being the creation of an opportunity for more production (so that people can earn incomes and buy more goods so they can support their jobs).

Second, a real economy (as opposed to what Peter Schiff calls our "phony economy") creates employment opportunities out of the natural progression of economic growth. People in a real economy do not have to implore politicians to borrow a few hundred billion dollars to employ people in a new bureaucracy and call it "job creation" or "putting America back to work."

If Krugman is going to write about the "forgotten millions," perhaps he needs to recall those millions of tax-and-borrowed dollars that were spent yesterday to employ people for a while so that the president could be seen as enabling a fake recovery. For that matter, the mirage of recovery continues. At the present time, the government is borrowing 46 cents of every dollar spent (according to the Congressional  Budget Office), and the upshot has been a huge increase in...government jobs.

What Krugman apparently wants is for that rate of borrowing to increase so that we can turn more and more Americans into bureaucrats. Not that bureaucrats produce anything, but I guess they can spend and spend. So, if this is going to be our "employment" future, why not just print a bunch of money, load it into helicopters and dump it. The effect on the economy would be about the same as "creating" fake government occupations.

Thursday, December 6, 2012

Is Government a Bottomless Well of Wealth Creation?

Having essentially adopted the MMT position on "endogenous" monetary creation by the U.S. Government, Paul Krugman goes whole hog in claiming that economies themselves are near-totally dependent upon government spending. To put it another way, government spending (in Krugman's view) is the source of wealth creation.

Now, Krugman does not use terms like "wealth" because, in his view, an economy is a mechanism by which people have jobs, spend money and buy things. Those "things" simply appear on store shelves put there by people who are employed, and as long as people are employed, they will have money to buy those things and clear the shelves so that they can make more things for people to buy in the future.

While macroeconomists might call this the "Circular-Flow" model, I would say it more resembles circular reasoning. As long as people continue to spend, then the model can flow freely, but if people stop spending, then the economy breaks down. So, the argument goes as follows: (1) People quit spending which then causes the economy to slow down, and people then lose their jobs; (2) Why did they quit spending? (3) Because they either lost their jobs or were afraid they would lose their jobs, so they needed to save money.

The reasoning problem here is obvious, but let us move on. When people stop spending, and when the "animal spirits" of investors turn investors from tigers to pussycats, then it is government to the rescue. Government reaches into its own currency well (as in the case of the USA, where its official money is monopolized by the government) and spends (we call it "fiscal policy") until people have jobs again and start spending confidently.

As Krugman and other Keynesians note, this is "counter-cyclical" policy. Government spends a lot when the economy is in the tank and adopts more "austerity" when the economy is doing well.

A lot of Keynesians and fellow-travelers have told me that the real problem is that when times are good, governments still continue free-spending habits. Hey, no joke! When the economy is good, tax takes are higher, and the prospect of more revenue then feeds the spending habits of politicians. Why is this such a surprise?

So the government then is supposed to resort to what essentially are gimmicks, such as "Operation Twist" or QEWhatever, in which the Federal Reserve System purchases assets that the market already has declared worthless in order to try to prop up their prices. The idea is that if the government can prevent prices from adjusting downward (or should I say, correcting downward) the economy won't go bad, since everyone knows that falling prices are not an effect of a downturn, but a cause. (More interesting causal logic from the Keynesians.)

Out of all this comes Krugman's view that government wealth creation is endogenous, that is, economies grow because government spend money. (Because people save money, i.e., don't spend all of their income immediately, Keynesians believe market economies are always in peril of imploding, so the only thing that can keep that from happening is for governments to spend, and that is how economies grow.)

The problem with Krugman's view is that in reality, economies grow when entrepreneurs over a wide scale have the freedom to bring resources from lower-valued uses to higher-valued uses as ultimately determined by consumers. During that process, other resources can be applied to those uses that previously were being neglected.

In the Keynesian view, governments flood the markets with new money (or new spending) and stuff just appears out of thin air. Capital just happens. Investment just happens. All it takes is a new injection of money.

As I read Krugman over and over again, I see that there are three things he clearly does not understand: (1) Opportunity Cost, (2) Capital, and (3) Entrepreneurship. To Krugman, an entrepreneur is someone who makes something in a garage, and his or her actions have little to do with the economy. He already has noted that to him, the real value of capital is the spending required to create it, and anyone who believes governments can create prosperity by printing money does not understand opportunity cost.

So, from where I sit, it seems that Krugman is saying that government endogenously can reignite an entire economy by spending on those things that, frankly, are tied to political connections, such as "green energy," which is nothing more than an industry on federal life supports. Yet, Krugman insists that by draining profitable ventures and redirecting resources into failing industries, the entire economy can be reborn!

Tuesday, December 4, 2012

One Size Fits All "Cost Reduction"

When I recently spoke at a college in Michigan, I met a couple of women from Canada who told me that whenever they need serious medical care, they come across the border to the USA. In fact, they said there are clinics in this country that specialize in treating Canadians who either are denied care in their own country or must wait in long lines.

The reason is simple: in the name of "controlling costs," the Canadian government through its "single-payer" plan simply withholds care through a "one-size-fits-all" system -- and that is what Paul Krugman claims we need to do here. (When he confidently asked an audience of Canadians if they believed they had a great system, he got responses that truly puzzled him, and certainly were not what he expected.)

(After the speech, a woman in the audience whose husband is a doctor told me that her husband spends about six hours a day doing paperwork in order to satisfy the government requirements. Please explain to me how this is any kind of positive change, especially considering that ObamaCare is going to pile on even more bureaucratic procedures into medical care.)

In a recent post, he claims that the way to get budget savings is for the government to withhold care. He doesn't put it that way, of course. Only a Keynesian and fellow-traveling statist could believe that when governments pile administrative procedures in medical care, such actions actually reduce real costs.

Like most statists, Krugman believes that costs are administrative numbers and the way that one reduces real costs is simply to order them to fall. So we get things like:
And the truth is that we know a lot about how to do that — after all, every other advanced country has much lower health costs than we do, and even within the US, the VHA and even Medicaid are much better at controlling costs than Medicare, and even more so relative to private insurance.

The key is having a health insurance system that can say no — no, we won’t pay premium prices for drugs that are little if any better, we won’t pay for medical procedures that yield little or no benefit.
Sorry, but this isn't economics. It is babble. Krugman really does believe that markets behave exactly like bureaucracies, and that one can substitute bureaucracy for market exchanges and actually get superior results.

Every "market" in which government involves itself with massive "oversight" or outright running things is going to have increasing real costs, as careerist bureaucrats find ways to pile on procedures and paperwork. However, in American medical care, we often find that those procedures that neither are covered by insurance or government payments are marked by falling prices. Yes, why is it that things like lasik surgery have been becoming increasingly affordable despite the lack of third-party payments? (Or, maybe I should add that it is because of the lack of third-party payments.)

Like all good Keynesians, Krugman believes that markets over time drive up real costs, and the only way to make things affordable is for government to order costs to fall. That is not the real record of capitalism, of course, but Keynesians ignore that hard fact. Instead, they want us to believe that if government just could provide everything administratively, that we would be able to live in splendor and wealth. Just like they did in the U.S.S.R. WHERE THEY HAD FREE HEALTHCARE!

The "Full Faith and Credit of the United States"? Right!

I remember watching advertisements 30 years ago for U.S. securities in which the narrator asks the prospective buyer, "What stands behind your investment? Why the full faith and credit of these United States!" with a picture of the U.S. Capitol standing behind him.

Even then, I thought that to be a bit excessive, given that he was not speaking of the USA as a collection of people, but rather the federal government, which he was equating to all of us, as though the sum total of our entire lives is the majesty of the American state. In other words, he was saying, "The U.S. Government will extract the money from others in one way or another to pay back these 'investments'."

Unfortunately, Paul Krugman uses the same language, and as an economist, he should know better. Furthermore, he is being knowingly deceptive, for a term like "full faith and credit" means that the borrower will pay back according to the terms of the agreement.

However, that is not what the U.S. Government does or has been doing for decades. When it pays back its loans, it does so with purposely-debased money and also by robbing Peter to pay Paul, an act in which it purchases bonds to pay repay bonds that were issued to pay back previously-issued bonds -- and so on. (This kind of borrowing, by the way, is illegal in the private sector and in municipal trading, although I am sure that states and cities do it more often than they ever will admit.)

Krugman writes: "John Boehner has just declared that he’s going to hold the full faith and credit of the United States hostage every time we hit the debt limit."You see, there can be no discussion at all of where all of this is heading. Instead, we are supposed to simply trust Washington to spend wisely, as though that already were happening.

This is not an endorsement of Boehner, by any means. Boehner cannot even stand debate within his own party, let alone a larger political arena. Instead, we get posturing by President Obama and Boehner as though they really were serious about getting things under control, with Krugman's answer is for the debt ceiling to be removed so that the U.S. Government can continue the delusion that it is creating wealth when, in fact, the government is transferring and destroying it.Yes, Congress and the president have no self-control, so the answer is to pretend that they do. Amazing.

That Krugman actually buys into the notion that the U.S. Government can borrow and print its way into the future without serious consequences is amazing, given his stature within the economics profession. Debasing the currency, crony capitalism (which he endorses via "green energy" subsidies), and preventing the creation of wealth through monopolistic regulation is not an economic plan; it is a plan for destruction.

So, there is no "full faith and credit of these United States" by any means. Krugman may want us to believe that paying back bonds with depreciating currency has only good effects, but rhetoric and financial trickery is no replacement for the Law of Opportunity Cost.

Sunday, December 2, 2012

Is Rejection of the Liquidity Trap Doctrine an Act of Willful Blindness?

A number of posters write that this blog does not engage in any economic analysis, and while I might disagree with that claim, nonetheless this blog is not as analytical as some others, including Bob Murphy's Free Advice and Robert Wenzel's Economic Policy Journal, both of which are excellent blogs and well worth reading. (Both of them take on Paul Krugman and do it quite well. Murphy's latest devastating salvo is found here.)

Instead of going after Krugman's Monday NYT column, instead I want to deal -- using economic analysis -- with a recent Krugman blog post entitled: "Against Willful Denseness, The Gods Themselves Contend In Vain," in which he declares:
From the very beginning of the Lesser Depression, the central principle for understanding macroeconomic policy has been that everything is different when you’re in a liquidity trap. In particular, the whole case for fiscal stimulus and against austerity rests on the proposition that with interest rates up against the zero lower bound, the central bank can neither achieve full employment on its own nor offset the contractionary effect of spending cuts or tax hikes.

This isn’t hard, folks; it’s just Macro 101. Yet a large number of economists — never mind politicians or policy makers — seems to have a very hard time grasping this basic concept.
He adds:
We’re not talking about stupid people here; clearly, there’s something about the notion that the rules for policy depend on the situation that some economists just don’t want to understand.
In other words, Krugman has explained it, so it must be true, and anyone who might disagree with him either is hopelessly ignorant or, frankly, evil. There can be no honest disagreement, since to disagree with Krugman on this point is dishonest.

Understand, I am taking his words and, I believe, interpreting them fairly.This is what I learned in Logic 101 as the "appeal to authority," which here means that since the term "liquidity trap" is taught in macroeconomics, then there can be no argument against it, any more than one is permitted to claim that FDR's New Deal extended the Great Depression or that high tax rates just might squelch capital investment.

Moreover, just because Krugman appeals to the "liquidity trap" does not mean it is a legitimate economic concept. Murray N. Rothbard 50 years ago took on this doctrine and had a number of criticisms, writing:
The ultimate weapon in the Keynesian arsenal of explanations of depressions is the "liquidity trap." This is not precisely a critique of the Mises theory, but it is the last line of Keynesian defense of their own inflationary "cures" for depression. Keynesians claim that "liquidity preference" (demand for money) may be so persistently high that the rate of interest could not fall low enough to stimulate investment sufficiently to raise the economy out of the depression. This statement assumes that the rate of interest is determined by "liquidity preference" instead of by time preference; and it also assumes again that the link between savings and investment is very tenuous indeed, only tentatively exerting itself through the rate of interest. But, on the contrary, it is not a question of saving and investment each being acted upon by the rate of interest; in fact, saving, investment, and the rate of interest are each and all simultaneously determined by individual time preferences on the market. Liquidity preference has nothing to do with this matter.
Furthermore, interest rates are not low because people's time preferences have changed and they are saving more. No, they are low because the Federal Reserve System has pushed them down to artificially-low levels, while at the same time, the Fed is trying to prop up malinvestments not only  here but also across the globe.

I would add the the "liquidity trap" doctrine also is based upon the economic fallacy that government essentially can do away with the Law of Scarcity by pushing down interest rates and by printing money. If one were to ask Krugman how this is possible, he would counter that there are "idle resources" (including lots of unemployed labor) that are sitting fallow because of a "lack of demand."

If one were to continue the questioning with, "What caused the 'lack of demand'?" he would answer, "Because people stopped spending." And if one asked, "Why did people stop spending," he most likely would answer, "Because of the financial crisis."

Yet, what caused the financial crisis? Malinvestments. That's right, malinvestments, those very things that Keynesians claim can be turned profitable with just a little more "stimulus" money, created the crisis in the first place. (Kind of like the housing market, which the government unsuccessfully has tried to reflate since its collapse in 2008.)

Now, that is interesting, given that malinvestment is an Austrian term, and Austrians are not supposed to know anything about economics. The idea behind "stimulus" and ratcheting up spending is that if the government spends enough money on lots of things, somehow those malinvested items will be resurrected and become profitable again. Now, why these things would supernaturally become profitable is another question, but Krugman and the Keynesians seem to believe that as long as the government is throwing money at something, sooner or later it will become a winner. (Krugman's insistence that massive government subsidies of "green energy" some day will magically transform that industry into something genuinely profitable is an example of the wishful thinking that accompanies Keynesianism.)

I also would add that the "liquidity trap" doctrine assumes that even though mutually-beneficial exchanges would be possible, individuals will act irrationally refuse to act on those opportunities. Why? "Because we are in a liquidity trap," and everyone knows that the liquidity trap overturns logic, the Law of Opportunity Cost, and probably the Law of Gravity.

My larger point is that Austrians really do have a basis for disagreeing with the Keynesian viewpoints, and the basis is grounded in logic and fundamental laws of economics. That Krugman interprets this disagreement as nothing more than yahoos wallowing in their willfulness says much more about Krugman than it does the Austrians.