Say What?

While I set up this blog because of fundamental disagreements I have with Paul Krugman on economics and political economy, nonetheless I did not set it up for the purpose of disagreeing with him. In other words, I don't disagree with Krugman for the sake of disagreement.

More than once, I have read through one of his columns and found myself in agreement (if not total, certainly agreeing with most of what I was reading), but then he comes up with something to which I ask myself, "Say what?" Thus it is today with his column on education: after making some sense, Krugman then gives readers the classic non sequitur.

The column points out that going to college might not provide the automatic financial boost for individuals that it once did, and he gives some examples. Unfortunately, Krugman approaches the entire subject from a purely administrative point of view, as though an economy were something run by a political board of directors.

In fact, most of Krugman's columns and articles do rest upon the viewpoint that an economy is something to be administered by the state, and in that point, it hardly differs from what used to be the case in the former U.S.S.R. and China. The U.S.S.R. used to have the highest per capita ratio of Ph.D.s to the rest of society, but the economic results were less-than-satisfying.

(When I was in graduate school, my math econ teacher, Henry Thompson, once pointed out that the Soviets led the world in developing the application of matrix algebra to solving simultaneous equations in putting together the economic Five-Year Plans. After telling us that fact, he added, "Of course, it didn't do them any good.")

As I read through the column, I realize that Paul Krugman the economist hasn't a clue about the role of entrepreneurship in an economy. None. Instead, we get this:

So if we want a society of broadly shared prosperity, education isn’t the answer — we’ll have to go about building that society directly. We need to restore the bargaining power that labor has lost over the last 30 years, so that ordinary workers as well as superstars have the power to bargain for good wages. We need to guarantee the essentials, above all health care, to every citizen.

In other words, "prosperity" is something that just happens (provided that the government "stimulates" the economy with enough "spending"), and that the government then must ensure that the benefits of a productive economy be spread throughout the population. Furthermore, the process must be one of, frankly, coercion. We must force employers to pay more, we must force taxpayers to purchase medical services for others, and so on.

In other words, in Krugman's view, an economy is something that is administered, supported by government spending and monetary creation, and everything forced upon others either through outright violence or threats of violence and property confiscation. Not once in any of his columns have I read anything that even was close to recognizing that entrepreneurship is the key to a growing economy.

Instead, Krugman seems to believe that an economy just "happens," and that the role of government is to keep the perpetual motion machine running. To be honest, there is nothing in his viewpoint that would be any different than what was done in the U.S.S.R. during the communist era. Education, then, is nothing more than a mechanism to put people in certain predetermined slots in which they would receive an income because, well, they are supposed to receive an income. There is no matching of any position with what contribution it actually makes to that thing called an economy.

(Actually, in Krugman's view, the usefulness of any position is in how much the person employed spends on goods. Likewise, the usefulness of capital is the spending required to create it. Spending, spending, spending.)

I also would add that Paul Krugman really would have no way of explaining why it was that the Soviet economy was primitive compared to what existed in the West. And we should not be surprised, given that one of his most important mentors, Paul Samuelson, actually believed that communism and central economic planning someday would result in a Soviet economy that would be more productive and prosperous than that in this country.

In the end, there really is no difference between MIT economics and what existed in the U.S.S.R. Everything either is administered or simply happens. All production functions are known, and all that is needed is for administrators to act according to "efficient" means. We see how well that worked in the Soviet Union.

Krugman Strikes Out

I have come to expect wooly-headed partisanship from Paul Krugman instead of economic analysis, and that is one reason I started this blog. The other reason was that I want to have another source that attacks and exposes the Keynesian fallacies for what they are: dangerous nonsense.

Nonetheless, even Krugman has managed to go where few economists have gone before: into total partisan fantasyland. I figured he would be crowing in his Monday column, and I am correct. Krugman's utterings in the aftermath of the passage of the healthcare nationalization legislation are not worthy of anyone who has a doctorate from one of the most prestigious economics programs in the world. He has given talking points that I would expect to read on the Daily Kos or in one of the ubiquitous emails I receive from the Democratic Party.

Krugman has entitled his column, "Fear Strikes Out," but in reality, Krugman has struck out, demonstrating not only his outright partisanship, but also his dishonesty. Let me begin.

He begins the column with a long quote from President Obama. Now, I generally don't like to begin any of my articles with quotes from politicians unless I am taking the scalpel to their words, as we can figure that however lofty the rhetoric might be, there is an iron fist inside a velvet glove, and this is no exception.

However, after quoting Obama, he then turns to Newt Gingrich:

And on the other side, here’s what Newt Gingrich, the Republican former speaker of the House — a man celebrated by many in his party as an intellectual leader — had to say: If Democrats pass health reform, “They will have destroyed their party much as Lyndon Johnson shattered the Democratic Party for 40 years” by passing civil rights legislation.

Notice that "passing civil rights legislation" was not what Gingrich said. No, Krugman inserted those words to imply that anyone who opposed the legislation was a racist.

Now, I don't like to defend the loathsome Gingrich, and I don't forget that for all of his lofty "limited government" rhetoric, he was just another politician grabbing what he could from the till. However, one has to understand the tactics that Krugman is using, and they are absolutely despicable.

He points out that someone from the Tea Party protests called John Lewis the "N-word," which is "proof" that opposition to the medical care legislation was undergirded with racism. While I also condemn the use of such language, nonetheless, Krugman uses the incident in a way that promotes a non sequitur. Do you have difficulties with the legislation? Do you think that it is going to pile on trillions of dollars of unfunded liabilities on our present and future generations at a time when the government of this country is essentially bankrupt?

Well, if you believe that, or even think it, then you also are a racist. Lest you think I am exaggerating, read on:

Instead, I want you to consider the contrast: on one side, the closing argument was an appeal to our better angels, urging politicians to do what is right, even if it hurts their careers; on the other side, callous cynicism. Think about what it means to condemn health reform by comparing it to the Civil Rights Act. Who in modern America would say that L.B.J. did the wrong thing by pushing for racial equality? (Actually, we know who: the people at the Tea Party protest who hurled racial epithets at Democratic members of Congress on the eve of the vote.

However, what if you are someone who says that the Law of Scarcity was not repealed, no matter what Krugman says? Well, you, too, are a cynical racist. Why? The Congressional Budget Office has declared this legislation to be fiscally sound, and we know that the CBO always gets it right, and that it is "nonpartisan" and never affected by politics:

Yes, a few conservative policy intellectuals, after making a show of thinking hard about the issues, claimed to be disturbed by reform’s fiscal implications (but were strangely unmoved by the clean bill of fiscal health from the Congressional Budget Office) or to want stronger action on costs (even though this reform does more to tackle health care costs than any previous legislation). For the most part, however, opponents of reform didn’t even pretend to engage with the reality either of the existing health care system or of the moderate, centrist plan — very close in outline to the reform Mitt Romney introduced in Massachusetts — that Democrats were proposing.

Ah! We have proof! Mitt Romney pushed what Krugman claims is a similar plan in Massachusetts, and Romney is a Republican, so any opposition to the government's newest edict can only be made on the basis of racism! Don't you see the logic? It is all there!

Krugman, however, is not done. He finishes with this benediction:

This is, of course, a political victory for President Obama, and a triumph for Nancy Pelosi, the House speaker. But it is also a victory for America’s soul. In the end, a vicious, unprincipled fear offensive failed to block reform. This time, fear struck out.

Yes, if you think that legislation that essentially nationalizes medical care, promises price controls, has new provisions that will criminalize actions that once fell into the category of voluntary, peaceful trade, and imposes coercive measures along with empowering the Internal Revenue Service, then you are on the side of the demons. You are a vicious, lying racist who wants everyone to get sick and not have healthcare.

Am I exaggerating? Read the column and see for yourself. You cannot both take a hard look at the fiscal provisions of this legislation and ask questions about it, for if you do, then you are a vicious racist.

There is more in this column and I will take a future look at some other points he makes, but for now, I leave readers with this sobering thought: The 2008 Nobel laureate in economics has declared that questioning this legislation through the lens of the simple laws of economics is an act of racism.

Krugman's Logic Death Spiral

One of the fundamental tenets of economic logic is that the farther away one gets from the simple relationship of a consumer paying directly for a good, the more the economic calculation for such exchanges becomes muddled. Thus it is with health insurance.

Think of it; most of us receive insurance from our jobs. We pay a premium, our employer pays part of it, which goes to the insurer, and then the insurer pays the doctors, does the negotiations, sets the standards, etc. This is a recipe for permitting costs to get out of control.

One of the fundamental tenets of Austrian economic theory is that the factors of production gain their value from the value that consumers place upon the final product. (Carl Menger spends a lot of time on this point in the first two chapters of his ground-breaking 1871 classic, Principles of Economics.) It is not hard to see that the way health insurance today is structured, that it is a recipe for out-of-control costs.

Paul Krugman has been writing on health insurance and economics for many years, and from what I have been able to tell, his main points are as follows:

• Health insurers are greedy and raise premiums because they are greedy;
• Health insurers can only make money by denying coverage;
• Medical costs rise because doctors and insurers are greedy;
• Only government price controls and regulation can ensure that medical costs will be low and medical care will be abundant for everyone.

Now, if one sees some internatl contradictions in this whole scenario, well, that person is applying simple logic, something that is missing from most Krugman columns. However, instead of making accusations against Krugman, let him say things in his own words:

Sky-high rate increases make a powerful case for action. And they show, in particular, that we need comprehensive, guaranteed coverage — which is exactly what Democrats are trying to accomplish.

Here’s the story: About 800,000 people in California who buy insurance on the individual market — as opposed to getting it through their employers — are covered by Anthem Blue Cross, a WellPoint subsidiary. These are the people who were recently told to expect dramatic rate increases, in some cases as high as 39 percent.

Why the huge increase? It’s not profiteering, says WellPoint, which claims instead (without using the term) that it’s facing a classic insurance death spiral.

Bear in mind that private health insurance only works if insurers can sell policies to both sick and healthy customers. If too many healthy people decide that they’d rather take their chances and remain uninsured, the risk pool deteriorates, forcing insurers to raise premiums. This, in turn, leads more healthy people to drop coverage, worsening the risk pool even further, and so on.

Now, what WellPoint claims is that it has been forced to raise premiums because of “challenging economic times”: cash-strapped Californians have been dropping their policies or shifting into less-comprehensive plans. Those retaining coverage tend to be people with high current medical expenses. And the result, says the company, is a drastically worsening risk pool: in effect, a death spiral.

So the rate increases, WellPoint insists, aren’t its fault: “Other individual market insurers are facing the same dynamics and are being forced to take similar actions.” Indeed, a report released Thursday by the department of Health and Human Services shows that there have been steep actual or proposed increases in rates by a number of insurers.

In economics, we have another term for what is being described: adverse selection. That is a common problem with insurance, and there are no perfect solutions, since people either will become sick or have accidents or have their houses burned down. That is life. Furthermore, with insurance, any insurer that does not try to control its costs is going to go bankrupt. (The Great Chicago Fire of 1973 was a classic example of the Worst Case Scenario, as a number of insurance companies went under because they had so many claims.)

Now, at one level, Krugman is correct. If we are going to use health insurance as a payment plan for nearly ALL health-based activities, and if health insurance is going to be the gateway for most care, then those who don't have insurance are going to find it more difficult (but certainly not impossible) to receive medical care.

However, what does Krugman suggest? It is something akin to taking the "hair of the dog" when one has had too much to drink. His "hair of the dog" theory of health insurance goes like this: Health insurance is too expensive and is not readily available, so the cure is to have the government impose price controls and provide "insurance" itself, and then everyone will have abundant care.

I don't think so. If, as the Austrians note, the problem is one of economic calculation, throwing even more distance between the consumers and providers of medical care will not solve anything, but, rather, make the problem worse. Yet, that is precisely what Krugman is demanding:

What would work? By all means, let’s ban discrimination on the basis of medical history — but we also have to keep healthy people in the risk pool, which means requiring that people purchase insurance. This, in turn, requires substantial aid to lower-income Americans so that they can afford coverage.

And if you put all of that together, you end up with something very much like the health reform bills that have already passed both the House and the Senate.

What about claims that these bills would force Americans into the clutches of greedy insurance companies? Well, the main answer is stronger regulation; but it would also be a very good idea, politically as well as substantively, for the Senate to use reconciliation to put the public option back into its bill.

Let me translate. The "solution" is more coercion and government-induced price controls. I think that "solution" speaks for itself.

Krugman's Magic Bullet: Coercion

Paul Krugman calls himself a "liberal," but it certainly is not of the "government-leave-us-alone" liberalism. Instead, it is a belief that no one should be able to be left alone, especially in the area of medical care.

In his January 21 posting, Krugman rightly (yes, I give him some credit) notes that by itself banning discrimination on purchasing insurance will create "an adverse-selection death spiral, in which healthy people opt out and premiums soar." Krugman's solution? Coercion, of course:

You can’t solve that without both requiring that healthy people buy insurance and helping those with lower incomes afford the premiums.

I think this is something the ancients once called "rule of force." Remember, the government wanted to send you to prison for a few years if your refused.

Once upon a time, liberalism meant something else other than having the government force you to purchase a product you did not want. That liberalism is dead today. Perhaps Krugman should name his blog, "A liberal with no conscience."