Friday, February 22, 2013

Krugman and the NY Times: Consuming Wealth Actually is the Same as Producing Wealth

With the Big, Bad Sequester looming as the Crisis of the Week and all of the media and political angst accompanying it, I have come to understand that how one responds to the prospect of the government being forced to cut back on spending also helps to define how one sees government spending as it relates to the economy. Not surprisingly, Paul Krugman and his part-time employer, the New York Times, believe that government spending is the very key to wealth itself.

In an unsigned editorial calling for higher taxes, the NYT declares:
Democrats and Republicans remain at odds on how to avoid a round of budget cuts so deep and arbitrary that to allow them now could push the economy back into recession. The cuts, known as a sequester, will kick in March 1 unless Republicans agree to President Obama’s demand to a legislative package that combines spending reductions and tax increases. As of Thursday, with the deadline a week off, Republicans seemed determined to say no to any new tax increases.

“Spending is the problem,” declared the House speaker, John Boehner. “Spending must be the focus.” Reflecting the views of many of her Republican colleagues, Representative Martha Roby said Wednesday that Mr. Obama “already got his tax increase” as part of the January agreement over the “fiscal cliff” and that no further increases were necessary. (Emphasis mine)
Now, I'm sure that Gail Collins actually believes what either she or one of her underlings has written, that a small cut in the increase of government spending will be so catastrophic that the entire economy will fall over the cliff. But the next paragraph is even more over-the-top, and demonstrates without a doubt that the editors of the "Newspaper of Record" are out of touch with reality:
Both are wrong. To reduce the deficit in a weak economy, new taxes on high-income Americans are a matter of necessity and fairness; they are also a necessary precondition to what in time will have to be tax increases on the middle class. Contrary to Mr. Boehner’s “spending problem” claim, much of the deficit in the next 10 years can be chalked up to chronic revenue shortfalls from the Bush-era tax cuts, which were only partly undone in the fiscal-cliff deal earlier this year. (Wars and a recession also contributed.) It stands to reason that a deficit caused partly by inadequate revenue must be corrected in part by new taxes. And the only way to raise taxes now without harming the recovery is to impose them on high-income filers, for whom a tax increase is unlikely to cut into spending. (Emphasis mine)
This one calls for some analysis. First, the notion that almost the entire federal deficit is due to the fact that the Bush administration pushed through a reduction in the top tax rate from 39.6 percent to 35 percent is beyond laughable. It is dishonest, but what else can we expect from the newspaper that tried to convince its readers that prosecutor Mike Nifong had in his possession what literally would have been a "magic towel" that would prove those bad Duke lacrosse players raped Crystal Mangum?

Second, we see the real goal of Progressives, and that is to stick the middle class with even more burdens, with the idea that the poorer Progressive government makes people, the more they will have to depend upon government and, of course, Progressive politicians. But, as I read through this editorial along with Krugman's post, "Sequester of Fools," I realize that Krugman and those editors of his part-time employer are True Believers when it comes to the idea that government spending -- no matter what kind of spending it might be -- creates wealth.

This is not an argument about government building roads and bridges, and I'm not about to say that all government roads and bridges constitute economic waste. But the vast amount of government spending is not on constructing things or even providing the delivery system for formal education, but rather for wealth transfers, subsidizing public works boondoggles, and fighting wars of aggression.

It is this spending especially that Austrians see as a burden, but Keynesians see as wealth creation itself. In the Keynesian view, government consumption really is production. This is not the same as saying the end of production is consumption, which is fundamental to Austrian theory. No, this is a way of thinking that sees production as an end in itself (i.e., a "jobs" recovery) and holds that government spending (along with government money creation) is a source of wealth.

In Austrian theory, government spending generally is a burden upon taxpayers and the economy, but we also see that as an economy grows, government spending will grow in real terms along with it. The important thing to keep in mind, however, is that government spending grows with economic growth, not the other way around. The causality chain begins with the growing economy, not the government.

Keynesians would have you believe that it is government spending that triggers economic growth, and that private enterprise is the real burden. After all, individuals and businesses save money or they invest for the future instead of spending everything right now. Households and businesses balance budgets as opposed to governments that engage in deficit spending.

To buttress that point, I present the following from Krugman's column:
Meanwhile, we have a weak economy that is recovering far too slowly from the recession that began in 2007. And, as Janet Yellen, the vice chairwoman of the Federal Reserve, recently emphasized, one main reason for the sluggish recovery is that government spending has been far weaker in this business cycle than in the past. We should be spending more, not less, until we’re close to full employment; the sequester is exactly what the doctor didn’t order. (Emphasis mine)

"Weak" government spending (a relative term if ever there was one) has come about because the economy and the recovery have been weak. This lack of spending has not occurred because Washington is beholden to an alien ideology that claims less government spending is a good thing; no the "lack" of spending is happening because the revenues are not there.

Given the Keynesian mentality, the NYT can editorialize that cutting a few government jobs here and there would devastate the economy and throw it back into recession and not surprisingly, the Obama administration will make sure that the job cutting will be done in the most public way possible, as the White House will work hand-in-hand with the adoring press to ensure that there will be maximum coverage of long lines at airports and elsewhere, as the government will make sure that individuals are inconvenienced or worse as much as can be done.

The purpose of this very public display of job cutting will be to make it seem as though the economy really is being destroyed, and no doubt Krugman and the NYT will be willing partners with the White House to write and distribute propaganda about what might be coming down the pipe. Since they have managed to convince a lot of people that economies grow because governments spend money, I'm sure they will be up to the task to help the Obama administration claim that those mean and nasty Republicans have trashed our fragile economy.


Anonymous said...

What's laughable is your reading comprehension. The NYT OP piece attributed a revenue shortfall to tax cuts that affected every bracket, among other things (wars and a recession). To misrepresent their position stating "the entire federal deficit is due to the fact that the Bush administration pushed through a reduction in the top tax rate from 39.6 percent to 35 percent is beyond laughable" and then level charges of dishonesty based on this fabrication is absurd. What is the worth of mental gymnastics to get to an end failing to use a single shred of data? I'm not sure, but not the 5 minutes it took me to read this and respond.

William L. Anderson said...

The NYT listed the wars and recession as being secondary, and like all Progressives, generally refers to the Bush tax cuts as "tax cuts for the rich."

When have you read any Democrats or Progressive entities calling for repeal of all of the Bush tax cuts? The only repeal they wanted was the raising of the top rate, and now they are demanding even more taxes on the highest-income Americans.

Read that passage again, especially the first part (and wars and such are explained parenthetically, which is saying they are an afterthought). Here it is:

Contrary to Mr. Boehner’s “spending problem” claim, much of the deficit in the next 10 years can be chalked up to chronic revenue shortfalls from the Bush-era tax cuts, which were only partly undone in the fiscal-cliff deal earlier this year.

As I said before, I've not heard any Democrats (and the NYT editorial page is a Democrat and Liberal Republican page) say that cutting tax rates on middle or lower-income people was the problem. No, they always declare: "Tax cuts for the rich."

William L. Anderson said...

For further emphasis, read what Charles Blow wrote in the NYT today:

Does he call for tax increases for everyone? No, just a few. True, the NYT sees raising the top rates as a stalking horse to jack up taxes on everyone, but the Progressive rhetoric always has concentrated on tax cuts at the top.

Bob Roddis said...

"Progressives" are the same people who denied that Stalin and Mao were mass murderers. They cheered when the North Vietnamese and Pol Pol conquered Vietnam and Cambodia.

They believe that government spending per se CAUSES prosperity. They are irrational lying insecure neurotic narcissistic know-it-alls with an unbreakable emotional attachment to their evil and barbaric policies. The proof is in. Additional evidence is fun but unnecessary.

Jane Austen said...

The question is -- what do we do about this?

Some context for the question: I am a fairly well educated person, who until recently, did not care much for politics. Before I studied any economics, my bent was liberal (after all, if you are a decent person, you do care about others -- therefore you leaned democrat). Some economics education (at the right school) blew away some of my old thinking and made me lean conservative on fiscal policy, but I still was very split on various issues. It is only in the recent times, after vehemently disagreeing with a number of recent policies, I started studying history of government in the US in earnest (and revisited a lot of my economics learnings). And now I am really beginning to separate classical liberal thinking (which promotes both social and economic freedom) from leftist views that actively curb economic freedom (and that currently appear to be the dominant voice in the country).

My POV -- most reasonably intelligent people who don't have a chip on their shoulders, if they truly studied some basic economics and American History, would not go along with progressive economic policies (at the very least, they would begin to seriously question them). Our education system is doing a terrible job of providing citizens with this basic education. The media is extremely biased. Most conservative outfits get branded very negatively in the media. There is a dire need for re-engaging and educating people on these two topics -- just some basic economic principles (which are not a matter of opinion) and the amazing American History. I keep thinking there has to be a way.

Bitter Clinger said...

In February 2005, Richard Parker, a liberal economist and a Keynesian sycophant of John Kenneth Galbraith, wrote an article in the Boston Globe titled, The Pragmatist and the Utopian, in which he blamed Milton Friedman and the free market advocates for every economic misfortune since the 70’s. Parker’s criticism is that in no way is the country safer, requires less effort, or achieved more equality than it had 25 years ago. I don’t know if I agree, but note, each of these goals is reflected by a characteristic human value. Safety is important to the cowards, lazy people think life should be easy, and egalitarianism is of course is about irresponsibility (equality of outcome). Cowardice, lazy, and irresponsible are Parker’s most important human values. If you build a system that aggrandizes the cowards, the lazy, and the irresponsible are you in any way surprised you end up with Zimbabwe or worse? You must ask yourself what is the goal of government. Is it to secure the Blessings of Liberty to ourselves and out Posterity or is it to make out lives safer, easier, and more egalitarian? If it is the latter, you are in the position of Prof. Anderson arguing that the only path to safer, easier, and more egalitarian is through a society that is LESS safe, LESS easy, and LESS egalitarian. Milton Friedman was challenged to make the argument in his book, Free to Choose and most modern economist and writers find it impossible. I won’t even try.

Lord Keynes said...

"Progressives" are the same people who ... cheered when the North Vietnamese and Pol Pol conquered Vietnam and Cambodia.

lol.. You mean just as Rothbard praised the Vietnamese and Cambodian communists?:

Murray Rothbard, during the undertaking by the Viet Minh of a grievous blow to American commercial and security interests in South Asia in 1975, praised “the will and determination of the mass of Vietnamese (and Cambodians)” against which “none of America’s superior might and firepower could in the end prevail.” The murders of forty million “counterrevolutionaries” by Stalin, the gruesome anti-intellectual purges of the Khmer Rouge, the barbaric war crimes of the Viet Minh, all pale in comparison to the “bellicose imperialism” of the United States, contends Rothbard

You've shot yourself in the foot there, bob.

Bob Roddis said...

I was aware in 1975 of Rothbard saying dumb things about the collapse of Saigon and I thought they were inappropriate then. I've never defended that. I recall he was cheering on "the death of a state" or something like that. However, I don't think he ever minimized the barbarity of Marxists in action or the inevitability and source of their barbarism. He was trying to make a point about the barbarity of the US warfare state.

The left, on the other hand, enthusiastically cheered on the NVA, NLF and the Khmer Rouge on the merits.

Bob Roddis said...

Rothbard's statements in 1975 are like the themes he encouraged in Ron Paul's newsletter trying to appeal to rednecks -- a really dumb strategy that always comes back to bite. It's silly to appeal to one group to the exclusion of other groups because ALL groups will have the same right to live their lives according to their ideals in peace from other groups. The leftists will not be allowed set upon the rednecks and the rednecks will not be allowed to set upon the leftists.

KSB said...

"With the Big, Bad Sequester looming as the Crisis of the Week..."

I'm still trying to figure out how a 2.5%* cut to a budget measured in trillions is going to result in the complete collapse of the US economy.

*Roughly 1.25% if you take out military cuts. Not sure how the army not getting new tanks results in seniors not getting their social security check.

"...with the adoring press to ensure that there will be maximum coverage of long lines at airports and elsewhere, as the government will make sure that individuals are inconvenienced or worse as much as can be done."

Give us the money or else - I guess it's not extortion when the state does it.

Anonymous said...

Any thoughts on this brilliant post?

William L. Anderson said...

Rothbard's 1975 statement was vintage Rothbard, as he cheered the demise of a government. (Murray also liked to shock.)

However, unlike John Kenneth Galbraith, who praised Mao and the murderous Chinese regime ("A China Passage"), Rothbard never supported summary executions, torture, and imprisonment. Rothbard realized that governments engage in this thing.

Bob Roddis said...

Rothbard said actually said:

This brings us finally to Vietnam and Cambodia. With its unfortunate and vicious nationalization of the merchants in the South last year, Vietnam has now taken its place as a typical Stalinist country. But Cambodia (“Democratic Kampuchea”) was something else again. It was undoubtedly the most horrendous regime of this century anywhere in the world. Not only did the Cambodian Communists quickly murder millions after taking power, and forcibly evacuate the cities at one blow; not only was death the penalty for the slightest infraction or disobedience to the regime: the key to its diabolic control was its abolition of all money, abolition it also enforced through murder and terror. Even Stalin, even Mao, retained the use of money; and so long as money exists, there is some sort of price system, and people are able to buy goods of their choice and move from place to place, even if in black markets or in disobedience to government regulations. But if money is abolished, then everyone is helpless, dependent for his very subsistence on the meager rations grudgingly handed to him by the regime in power. From the abolition of money came compulsory rural communalism, including the abolition of private eating, the institution of compulsory marriages, and the eradication of learning, culture, the family, religion, etc. Cambodia was horror incarnate.

The Vietnamese lightning thrust that smashed the Cambodian regime was not solely or even primarily caused by ideological considerations. Undoubtedly uppermost were ancient ethnic hostility between the more prosperous Vietnamese and the more backward Khmers (inhabitants of Cambodia); the desire of the Vietnamese rulers to dominate all of Indochina; anger at long-repeated border incursions by Cambodian troops; and the Vietnamese fear of growing encirclement by the combined forces of the U.S. and China, supporting Cambodia on its southwestern flank. But there is no denying the horror that even the Vietnamese Stalinists felt for the Cambodian monstrosity. When they entered the Cambodian capital of Phnom Penh, the Vietnamese described the desolation of that city, and spoke of the deliberate mass murders, the forced evacuations. A top Vietnamese Communist official, Phan Trong Tue, spoke of the late Cambodian regime as having killed masses of people “with hammers, knives, sticks and hoes, like killing wee insects.


As I tried to make clear about the collapse of the Thieu dictatorship in South Vietnam, one can hail the death of a State without implying approval of the State that replaces it. ”

You shot yourself in the kneecap again, LK.

Bob Roddis said...

The murders of forty million “counterrevolutionaries” by Stalin, the gruesome anti-intellectual purges of the Khmer Rouge, the barbaric war crimes of the Viet Minh, all pale in comparison to the “bellicose imperialism” of the United States, contends Rothbard.

Rothbard never said or implied any such thing. That's nothing more than a defamatory misrepresentation from the warmonger Neocon "Free Republicans".

Bob Roddis said...

LK's silly 70% of GDP "example" was discussed by others here on Bob Murphy's blog:

I would add that the attainment of such a percentage of wealth is unlikely in a free market and that monopolists require state favors and "progressive" legislatation to attain such massive and/or monopoly control of wealth. So proved Gabriel Kolko in 1963:

Further, if what this guy is doing is considered so horrible, there are many alternatives to the initiation of force available to deal with him. The most obvious is to ostracise him. The fact that he allegedly can find people to hire at market wages to build his stupid pyramid suggests that most people don't much care what he does with his wealth. Further, if he's going to waste his wealth, he probably won't be wealthy for long.

LK whine about what to do about getting out of a depression. Depressions are caused by fractional reserve banking and fiat funny money distorting the pricing process. Without those, there would not be depressions. Further, LK still does not understand the Austrian concept of economic calculation and/or the informational function of unadulterated prices. LK's Keynesian "cures" are always the cause of our economic problems.

Bob Roddis said...

Doesn't LK's stupid pyramid example amount to an almost total shift of his wealth from the rich guy's bank accounts and savings to all the people who help construct his stupid pyramid? He's trading away his valuable savings to others and replacing those savings with a worthless unmarketable structure.

Let's kill ourselves.

John Dunham said...

I have been reading this blog for some time and I do enjoy the discussion between the doctrines. As a classical economist I find much to agree with on both the Keynesian and Austrian sides of the debate, as well as much to disagree with.

I wanted to finally jump in here because I have come to believe that the idea that spending creates wealth comes from the way we teach (or fail to teach) economics both to the general public and to economists themselves. I cringe every time I hear a newspaper reporter suggest that consumer spending make up 70 percent of the economy. While it is true that consumer spending makes up 70 percent of what the Bureau of Economic Analysis MEASURES as the economy, it has nothing to do with GDP. This is actually an indicator of production, not consumption. The same is true of government spending (or government transfers) which again are recorded as a measure of GDP.

This is more than simple semantics. It can be found throughout the economics literature and in textbooks. It also encourages people to believe that consumption can be equated with production- which is obviously not true.

While I agree with this blog that Mr. Krugman is at best misinformed and at worst a party shill, I don't believe that the same is true of Keynesian economic theory in and of itself. However, I do belive that we teach economics so poorly that many Keynesians (and most economist are) are actually taught to believe that production and consumption are equivalents.

Just one economist's two cents.

Bob Roddis said...

It seems to have dawned on the GDP-obsessive "Lord Keynes" that GDP does not messure the majority of the economy. Of course, he does not understand the Austrian concept of economic calculation or unadulterated prices as the essential source of economic information. Thus, he cannot understand how his beloved funny money and government spending regime induces and produces the distorted relative prices that make asset speculation possible and inevitable.

William L. Anderson said...

Thanks, John. Indeed, people forget that the end of production is consumption. Now, Keynesians will make the claim that no one will produce without at least the possibility of consumption of whatever is made, and that is correct, but it is a non sequitur to claim that such a situation justifies so-called stimulus policies.

Why? Keynesians are speaking of a "general" stimulus, while individual investors are looking at the prospect of their product actually being a hit with consumers. Keynesians want us to believe that if the government prints and borrows enough, then every "idle" firm will be up and running, but that assumes uniform preferences and homogeneous capital.

(Yes, Keynesians have claimed that capital can be heterogeneous, but there still is no way to connect Keynesian theories and heterogeneous capital.)