Our Children ARE the “Ourselves”

Samuel Johnson wrote that “patriotism is the last refuge of a scoundrel,” but in modern America, being “for the children” now has taken that august refuge of the rogue. Thus it is that Paul Krugman has decided to join such company as he appeals to us to think of “our children.”

Krugman doesn’t have any children, but he is such a collectivist that I am sure that he would claim as much “ownership” over my kids as I might do (although no one “owns” kids). I doubt Krugman’s concern for my children would extend to helping pay the substantial bills that accompany their presence.

The normal “cheating our children” has to do with the belief that through government, Americans of my generation (and Krugman’s too, since he and I were born in the same year) have borrowed such huge amounts of money that the debts either will be paid through inflation or through another means that will place a lot of the younger generation in poverty.

Krugman, however, sees it differently. Our “crime” against the children is not borrowing and spending beyond our present means so that we dump huge financial burdens on them in the future. No, our “crime” is that we are not borrowing and spending enough beyond our present means. That’s right; Krugman claims that by seeking to lessen the future financial burdens on our children, we are cheating them.

Why? Because, according to Krugman, if the government borrows lots of money and then spends it immediately, there actually is no effective opportunity cost. He writes:

Contrary to almost everything you read in the papers or see on TV, debt doesn’t directly make our nation poorer; it’s essentially money we owe to ourselves. Deficits would indirectly be making us poorer if they were either leading to big trade deficits, increasing our overseas borrowing, or crowding out investment, reducing future productive capacity. But they aren’t: Trade deficits are down, not up, while business investment has actually recovered fairly strongly from the slump. (emphasis mine)

He goes on to explain how the lack of current spending is depriving young people of teachers, more aid to college, and, of course, he mentions the “I” word, infrastructure. In Krugman’s view, it is a simple thing; just borrow, print and spend, and a strong economy will appear out of the mixture. Malinvestments? No problem. Just spend enough and the economy will expand to the point where there are no malinvestments.

So, there we have it. Borrow, spend, run up the credit card. We "owe it to ourselves," which means that government borrowing also manages to cheat the Law of Scarcity. Borrow now and the kids won't owe anything at all. The Inflation Fairy will do the rest. Just believe and do it for the children. For the children.

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.

"Deficit Hawk Down," Financial Delusion Up

Yes, readers, I do agree with Paul Krugman when he says that the federal budget deficit is not the central fiscal issue that the U.S. Government and the U.S. economy face today. However (and you KNEW there would be a "however" coming), we disagree for opposing reasons.

In his latest column, Krugman attacks what he calls the "deficit hawks" (thus, the clever title for the column) who he says have always been wrong on the real effects of federal budget deficits:

Mr. Obama’s clearly deliberate neglect of Washington’s favorite obsession was just the latest sign that the self-styled deficit hawks — better described as deficit scolds — are losing their hold over political discourse. And that’s a very good thing. Why have the deficit scolds lost their grip? I’d suggest four interrelated reasons.

His reasons are as follows:

• A true Greece-style meltdown has not happened; therefore, it cannot happen here;
• Deficit spending as a share of GDP supposedly has started to decline, and the "deficit hawks" had predicted a reverse secular trend, i.e. recent deficits have become slightly smaller than previous years;
• Advocates of government "austerity" are wrong because "austerity" did not immediately bring about full economic recovery where it was practiced;
• The anti-deficit agenda really was a not-so-secret attempt by Evil Republicans to impose an unrelated evil political agenda.

 There is what I would call a "fifth reason" that Krugman says is a reason why the deficit hawks should not worry: the deficit is a good thing, not bad:

...it was, in fact, a good thing that the deficit was allowed to rise as the economy slumped. With private spending plunging as the housing bubble popped and cash-strapped families cut back, the willingness of the government to keep spending was one of the main reasons we didn’t experience a full replay of the Great Depression.

Whether or not one believes that the government's bank bailouts and subsequent "stimulus" spending prevented a return to 1933 is not answerable because one would have to prove a negative. What we are supposed to believe, however, is that "trickle-down" economics works when the government is in charge.

What happens? The government gives money or financial credits to politically-connected financial institutions and everyone pretends that the market values of the assets of those institutions are higher than what everyone understands is the case. (If you try to do this in private, the government will charge you with "fraud." However, if it is done by the government, it is called "saving the economy.")

Under outright stimulus, the government directly issues funds to politically-favored groups and the individuals then spend the money with the idea being that the good effects will "trickle down" to the rest of us who do not have the same political connections. Somehow, after we spend what money is left over, the effects will be such that the economy will magically have "traction" and it will move forth on its own.

Moreover, as Krugman argues, since the Fed has managed to push interest rates for U.S. securities to near-zero, then there is almost no opportunity cost for borrowing (and more borrowing). As he declared in a blog post a while back, it is "free money." Because the Fed and the Social Security Administration own the largest single blocs of U.S. debt, we "owe it to ourselves" which apparently means that there are no problems associated with the high debt of the U.S. Government.

What puts the USA in the "catbird's seat" (as opposed to other countries like Greece) is that this country has its own currency, which means that the government essentially can pay its bills with printed money, and since the U.S. Dollar effectively has been the "world currency" for a long time, we can get away with it, while countries like Zimbabwe could not. Unlike Greece, which is on the euro, we can print and devalue forever, and the rest of the world simply has to take it.

The federal deficit is not the problem in and of itself; instead, it is a symptom of a much larger fiscal problem, and that is that the U.S. Government is spending at rates that impose huge burdens on everyone else. In Krugman's Wonderland, government spending always is a net plus, especially when the economy is down.

(Yes, I know that Krugman calls for "austerity" during a boom, but in reality, politicians spend even more if they think the funds are available. Furthermore, I don't recall hearing Krugman call for massive cuts in government spending during the last few years of the Clinton Stock Bubble or during the Bush Housing Bubble.)

Furthermore, in Wonderland, those who are productive are the real "takers," entrepreneurs are irrelevant to a growing economy, the most desired industries are those that receive massive subsidies, and it is the people receiving direct government benefits that are most likely to take the entrepreneurial risks that our economy needs to grow. (Face it, that was the gist of Barack Obama's "Progressive" inauguration speech, and Krugman himself declared that there was "a lot for progressives to like" in that speech.

So, if the government spends enough money, if enough people can receive new benefits that they will spend quickly, if the spending "trickles down" to those not receiving the direct benefits, if the government continues to massively subsidize politically-favored "green energy" firms and "green" research, if the Fed continues to keep interest rates low, if the government continues to print money, if the "Inflation Fairy" does its magic, and if everyone just believes in the Greatness of Barack Obama, we someday will have real prosperity. That is the financial delusion that apparently rules in "elite" academic and political economics these days.

The Dwindling Truth

Leave it to Paul Krugman to use his New York Times column to shade the truth. (The NYT's former public editor, Daniel Okrent, hardly a right-wing conservative, complained that Krugman's columns often had numerous factual errors. Why am I not surprised?)

In his latest column, Krugman promotes a number of false points and I will deal with some of them. Before looking at the substantive claims (the federal budget deficit has been "solved"), I'd like to begin with one his use of a deceitful term, "nonpartisan." He writes:

Recently the nonpartisan Center on Budget and Policy Priorities took Congressional Budget Office projections for the next decade and updated them to take account of two major deficit-reduction actions: the spending cuts agreed to in 2011, amounting to almost $1.5 trillion over the next decade; and the roughly $600 billion in tax increases on the affluent agreed to at the beginning of this year. What the center finds is a budget outlook that, as I said, isn’t great but isn’t terrible: It projects that the ratio of debt to G.D.P., the standard measure of America’s debt position, will be only modestly higher in 2022 than it is now.(Emphasis mine)

Sorry, Paul, but even your employer, the NYT, describes the CBPP as "left-leaning," the Times is not the only one to make that claim.Let's try Time, The Washington Post, and The National Journal, with none of them being considered "right-wing." What Krugman means by "nonpartisan" is that the CBPP does not officially endorse political candidates, but it clearly shills for Barack Obama and the Democrats in general.

For that matter, given Krugman's definition of "nonpartisan," he would have to claim the Heritage Foundation and Cato Institute are "nonpartisan," given that neither of them endorse actual candidates. Of course, one already knows what he thinks of those two organizations and considers them to be shills for the Republican Party. Yes, this is a small point, but once again we see how Krugman likes to play fast-and-loose with the truth.

On to the meat of the column itself. He writes:

Consider, for example, the case of Social Security. There was a case for paying down debt before the baby boomers began to retire, making it easier to pay full benefits later. But George W. Bush squandered the Clinton surplus on tax cuts and wars, and that window has closed. At this point, “reform” proposals are all about things like raising the retirement age or changing the inflation adjustment, moves that would gradually reduce benefits relative to current law. What problem is this supposed to solve?

 Assume that Al Gore had taken the office (and I am sure that Krugman would claim that he rightfully won it) and had left tax rates where they were. Would there have been deficits in the next few years? I suspect the "Clinton surplus" still would have disappeared for one important reason: the Tech Bubble popped in 2000 and a recession followed in 2001. Krugman writes: "It’s true that right now we have a large federal budget deficit. But that deficit is mainly the result of a depressed economy...." However, he wants us to assume that the reason we had deficits in 2001 and 2002 was that Congress lowered the top income tax rate from 39.6 percent to 35 percent...in 2003.

This is more of the "head I win, tails you lose" method that Krugman uses for his arguments. Now, I agree with him that Bush's wars cost this economy plenty (I don't believe that the economy will "benefit" from "weaponized Keynesianism" and spoke out against these wars from the beginning), but there also is another point that Krugman does not make: the source of larger tax revenues in the late 1990s versus the Housing Boom.

The Tech Bubble centered upon the stock markets and, not surprisingly, we saw a huge increase in the nominal amounts of taxes coming from capital gains during the second Clinton presidential term. In fact, at the end of 2000, capital gains receipts were $80 billion more than they were at the end of 1996. The following financial post also makes it clear that capital gains receipts fell sharply during the Bush years. (Capital gains rates were cut during the second Clinton term, yet they still rose, which surely must vex Keynesians, since they seem to believe such things are not possible.)

You'd better believe we pay careful attention to capital gains here. Friday, the Congressional Budget Office released an analysis of the rise and fall of federal individual income tax revenues from 1994 through 2004. It showed that capital gains accounted for half of the non-legislative changes to individual income tax revenues over the period. Ironically, capital gains revenues increased 0.7% of GDP from 1994 through 2000 under President Clinton, and they fell 0.6% of GDP from 2000 to 2004 under President Bush.

 They didn't fall because rates were cut; rather, they fell because people were not getting huge gains from "flipping" stocks after the Tech binge came to an end. Furthermore, a much different tax regime falls upon capital gains from the sale of houses, which means that the government was not able to cash in on the Fed's recycled dollars during the Housing Boom as it had done a decade earlier when the Clinton Bubble was on the rise.

Krugman, not surprisingly, leaves out that tidbit because it doesn't fit his narrative. Now, I will agree that deficit reduction should not be at the top of the agenda, but for different reasons than Krugman gives. He correctly points out that the depressed economy is responsible for much of the current deficit, although to him that is a good sign:

It’s true that right now we have a large federal budget deficit. But that deficit is mainly the result of a depressed economy — and you’re actually supposed to run deficits in a depressed economy to help support overall demand.

Unfortunately, throughout the piece Krugman trots out his "heads I win, tails you lose" logic. Government spending now is good; but cutting tax rates during a downturn is bad. (The economy was in recession shortly after Bush took office, and Democrats tried to claim that his talking about the recession and his campaign to cut tax rates was the cause of the recession.) The deficit is bad, but not so bad, and if the government inflates the currency, creates more jobs for bureaucrats and keeps entrepreneurs from starting new enterprises, and if the government continues to pay vast subsidies to politically-favored businesses (especially those in "green energy"), then out of that will come a real recovery.

I'm not sure how that will happen, but Krugman believes it will. Enough said.

Moral Obligation Fraud

One of the hallmarks of Keynesian "economics" is the view that one does not differentiate between a real and a paper asset. Paper currency is just as valuable as, say, gold coins and a heck of a lot better, since one can more easily reproduce paper money. Likewise, Keynesians are quick to jump on the "print-money" bandwagon as a quick fix for dealing with a real economic crisis, including the demand that governments essentially defraud its citizens.

Paul Krugman has done this whole thing one better as he calls for the Obama administration to engage in financial fraud under the guise of "moral obligation bonds." Yes, this is the same Paul Krugman who in the past has called for criminal investigations for Wall Street executives (except for Jon Corzine, who was a Democrat politician, so it doesn't matter how badly he defrauded his clients), but the amount of financial fraud in Krugman's proposal would dwarf anything that the most dishonest people in the financial markets had done. Indeed, Bernie Madeoff has slain his thousands and Krugman his tens of thousands.

Before I explain why I believe Krugman is demanding financial fraud, let us examine his own words. He writes:

Don’t like the platinum coin option? Here’s a functionally equivalent alternative: have the Treasury sell pieces of paper labeled “moral obligation coupons”, which declare the intention of the government to redeem these coupons at face value in one year.

It should be clearly stated on the coupons that the government has no, repeat no, legal obligation to pay anything at all; you see, they’re not debt, and therefore don’t count against the debt limit. But that shouldn’t keep them from having substantial market value. Consider, for example, the fact that the government has no legal responsibility for guaranteeing the debt of Fannie and Freddie; nonetheless, it is widely believed that there is an implicit guarantee (because there is!), and this is very much reflected in the price of that debt.

One must admit that this is rich, calling a bond upon which the government legally could default a "moral obligation" security. (And don't forget that the government, even if it paid back this loan, would essentially default via the "magic" of inflation.) This from a person who in past columns has marveled that governments in the past actually took financial obligations and financial treaties seriously.

But it gets even better, as Krugman writes:

And maybe the coupons wouldn’t have to be sold on the open market; why not just have the Fed buy them? Bear in mind that the Fed doesn’t always buy safe assets; it’s buying a lot of mortgage-backed securities (from Fannie and Freddie; see above), and during the worst of the financial crisis it bought lots of commercial paper. So why not slightly speculative pieces of paper sold by the Treasury?

 In other words, the Fed can pretend that what essentially are political securities has real value. That is financial fraud, period. People have gone to prison for much less. And lest one think I have misread Krugman, he gives us this gem:

If there is a legal problem even with selling these coupons, there are still alternatives, such as paying suppliers with these coupons and then having the Fed buy them. The mechanics really don’t matter; as long as we’re in a liquidity trap, printing money, printing conventional debt securities, or printing funny money with no legal standing that nonetheless lets the government pay its bills are all equivalent.

 So, instead of facing the hard reality that the government cannot spend at current levels given the ability of the U.S. economy to produce enough tax revenues, Krugman claims that we can fix our problems by having Treasury and the Fed pull more rabbits from their proverbial hats. Call it what you wish, but this is fraud by every legal and moral definition. It also is the hallmark of Keynesian "economics."

Krugman: Debt? What Debt?

On occasion, I find myself partially agreeing with Paul Krugman and his most recent column attacking Republicans (yeah, I know, that's a rare thing) on their "concern" about the federal budget deficit deserves at least one cheer. I am wearied of Republicans expressing concern about deficits at a time when they are calling for massive increases in military spending.

Now, Krugman does not mention that point at all in his column, instead claiming that the deficit hawks only want to starve the poor and elderly, deny them any medical care, and force them to sleep under bridges. He does not put things in quite that language, but that is the gist of what he is saying. But, then, this is someone who actually believes that government welfare programs increase wealth because they bring about instant spending, and everyone knows that saving money and investing in capital is evil and brings down the economy.

(Krugman's capital theory seems to be another rendition of "Capital Happens" in which capital magically appears in our economy.)

So, let us look at Krugman in his own words:

At a time of mass unemployment and record-low borrowing costs, a time when economic theory said we needed more, not less, deficit spending, the scolds convinced most of our political class that deficits rather than jobs should be our top economic priority.

 Keep in mind that in Wonderland, when the Federal Reserve System pushes down interest rates to artificially-low levels, that has ONLY good effects. After all, the Laws of Wonderland dictate what we should believe about economic growth and the economy in general:

• Saving is evil and only suppresses economic growth
• We should use all means to confiscate savings either through inflation or outright taxation because we need to spend everything we make in the present
• Don't worry about capital formation because "Capital Happens"
• Anything that encourages present spending is good, and anything that requires any present abstinence from spending right now is evil and must not be permitted
• The only real benefit we might get from capital formation is in present spending for capital goods.

Given that Krugman already has called for the Fed to finance present government spending via Fed purchases of federal debt in the primary market, we know where this whole thing is headed. In fact, as Krugman says, our problem right now is that the federal debt needs to be greater, as we need to borrow trillions of dollars more:

And just to be clear, the danger for next year is not that the deficit will be too large but that it will be too small, and hence plunge America back into recession.

 The last statement really should leave us in a quandary, for earlier in this column, Krugman attacked the "tax cuts for the wealthy" (or what we call Democratic talking points) as helping to create deficit conditions. However, given that we need larger deficits, why raise tax rates at all? If we can borrow at no appreciable opportunity cost -- And what self-respective Keynesian ever would think that government spending always trumps the Law of Scarcity? -- why should we worry if tax rates are "too low"?

As Krugman declares:

This wouldn’t be hard if they had been making a more honest case on the budget: the truth is that deficits are actually a good thing when the economy is deeply depressed, so deficit reduction should wait until the economy is stronger. As John Maynard Keynes said three-quarters of a century ago, “The boom, not the slump, is the right time for austerity.”

 So, Krugman seems to be operating at cross purposes with himself. Using his own logic, it would be stupid to raise income taxes on anyone or to jack up taxes on investment because deficits during a depression are "a good thing." But we have to remember that "Krugman Logic" is not based upon economics, but rather on left-wing politics.

Krugman: Free Nonsense

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

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

Why the situation exists is because of a mysterious lack of "aggregate demand," or so we are to believe:

So what is going on? The main answer is that this is what happens when you have a “deleveraging shock,” in which everyone is trying to pay down debt at the same time. Household borrowing has plunged; businesses are sitting on cash because there’s no reason to expand capacity when the sales aren’t there; and the result is that investors are all dressed up with nowhere to go, or rather no place to put their money. So they’re buying government debt, even at very low returns, for lack of alternatives. Moreover, by making money available so cheaply, they are in effect begging governments to issue more debt. 

And governments should be granting their wish, not obsessing over short-term deficits. 

Yes, irresponsible Americans are paying debts, which is driving us into depression. If we were willing to stop paying our mortgages, car payments and credit card payments, then we could have prosperity. But since Americans are foolish, the government needs to rescue us by ramping ujp the spending.

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

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

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

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

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

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

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

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

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

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

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

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

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

Spend and pretend

[Update]: Don Boudreaux today has commentary about Krugman's insistence that Herbert Hoover was an "austerity" president. (Remember that it was Hoover in his memoirs where Andrew Mellon's "liquidate" quote was found, and that Hoover writes that he rejected Mellon's advice.)

Writes Boudreaux:

Describing "austerity policies" as "the insistence that governments should slash spending even in the face of high unemployment" in the hope that such spending cuts will restore business confidence, Paul Krugman remarks: "If this sounds to you like something Herbert Hoover might have said, you're right: It does and he did" ("Pain Without Gain," Feb. 20).

Easily accessed evidence prove Mr. Krugman wrong.

Here, for example, is economist Steven Horwitz: "the real size of government spending in 1933 was almost double that of 1929. The budget deficits of 1931 and 1932 represented 52.5 percent and 43.3 percent of total federal expenditures. No year between 1933 and 1941 under Roosevelt had a deficit that large." Also contrary to Mr. Krugman's claim, Hoover proudly trumpeted his administration's high-spending and interventionist policies. On the campaign trail in 1932 Hoover bragged that "We might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and the Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic."**

Mr. Krugman's unfamiliarity with history is disturbing.

[End Update]

The eternal downturn continues and no real recovery is in sight, yet the advice from Paul Krugman always is the same: borrow, spend, pretend. Pretend what? Pretend that borrowing and essentially printing new dollars is the same thing as actually having a productive, prosperous economy. Print money and get rich!

The Keynesian view of the economy is pretty simple. Factors of production are homogeneous, production and consumption are not related except to say that the purpose of consumption is to clear the shelves so that producers can make new goods to put on the shelves. The sole purpose of a "job" is to put income in the hands of workers so that they can spend and in order to make way for new production. In other words, it is a model-driven, mechanistic view of economics in which human action is not purposeful, but rather robotic.

In dealing with the situation with the European countries such as Greece, Spain, Ireland, and Portugal, he rightly condemns the policies that the European Central Bank has imposed, but for all of the wrong reasons. You see, Krugman really believes that if the ECB simply slashed its interest rates and loaned near-infinite amounts of money to these countries, that they soon would spend themselves into prosperity and that somehow there would be so much economic activity and new tax revenues that the extra loans would pay for themselves.

Austerity, according to Krugman, is bad but not because it imposes unjust tax and regulatory burdens upon people in order to pay the debt service for loans that profligate governments took out in order to spend beyond their means. No, austerity is bad because it cuts government spending.

Furthermore, the real reason that these countries are forced into austerity measures is because the banks that made these foolish loans (with the promise of being backstopped by central banks) are now calling the policy shots. Yet, we now see the ridiculous scenario of banks lending money to these governments so they can pay their debt service for previous loans although everyone knows that these countries cannot generate enough economic activity to pay back these loans in full.

In other words, we are looking at default. Now, the USA, which Krugman holds as a model of how to properly deal with the recession (or at least has not engaged in European-style "austerity"), is defaulting through inflation. I believe that it would be much better for Greece and the other European states that are facing these crises to default on their loans, and reduce their payments or suspend them altogether.

Unfortunately, Krugman prefers the game of "Let's Pretend We're Rich." He urges Congress to borrow even money to give to states for their own spending, with the idea that we can worry about the unpayable debt tomorrow, a Scarlett O'Hara approach.

Even Krugman knows that this cycle of debt cannot continue forever, but he seems consumed with the belief that sooner or later the perpetual motion machine that is the economy will gain "traction" and move on its own, paying down the debt as it goes. That is nonsense, but unfortunately it is nonsense that is being passed off as sophisticated economic thinking.

Krugman's Fed Road Map: Print Money, Buy Government Bonds!

In reading Paul Krugman, I am struck by the man's chutzpah, his willingness to accuse others of being immoral while simultaneously claiming that his money-printing schemes are moral. Yeah, it's confusing, but to Krugman and his followers, it all makes sense.

Krugman's latest morality play, however, even outdoes himself, and at the same time, he unwittingly presents the "road map" he believes that governments should use when they get into financial trouble. It is hard for me to believe that America's supposed "best" economist is recommending a scheme in which he both calls for governments simply buy their own bonds with their own newly-printed money, and declares that anyone who might oppose such financial trickery as being immoral, but there it is.

Krugman writes:

Here’s how such a run works: Investors, for whatever reason, fear that a country will default on its debt. This makes them unwilling to buy the country’s bonds, or at least not unless offered a very high interest rate. And the fact that the country must roll its debt over at high interest rates worsens its fiscal prospects, making default more likely, so that the crisis of confidence becomes a self-fulfilling prophecy. And as it does, it becomes a banking crisis as well, since a country’s banks are normally heavily invested in government debt.

Now, a country with its own currency, like Britain, can short-circuit this process: if necessary, the Bank of England can step in to buy government debt with newly created money. This might lead to inflation (although even that is doubtful when the economy is depressed), but inflation poses a much smaller threat to investors than outright default.

Before tackling what really is a mind-boggling proposition, let me say that "for whatever reason" is really not economic analysis. Instead, it is Krugman once again demonstrating that he does not understand what Carl Menger called the Law of Cause and Effect.

You see, there is no real reason for this sudden unwillingness for investors to purchase government bonds except for maybe changes in "animal spirits" or maybe just whatever. It is like his "under consumption" theme that under girds his theme in which there is no real cause for this sudden change of mass consumer preferences for buying anything. Blame it on "whatever."

As for the bond-buying scheme, apparently it never occurs to Krugman that once a government resorts to this kind of financial trickery -- and no other term will suffice -- that it is sending the message to investors that its bonds essentially are worthless. I simply cannot see how a contrivance would lead to anything but disaster.

If a government were to do what Krugman recommends, then there would be no constraint at all in its spending, as politicians would claim that it had "free money." Why worry about taxes? Investor confidence? We don't need no stinkin' CONFIDENCE FAIRY! Just print the money and spend!

By the way, this is exactly how Zimbabwe financed its government and it brought ruinous inflation. Yet, Krugman not only recommends this nefarious financing as a "solution," but he also has the gall to claim that anyone who might oppose it is a "moralizer," as though there were something wrong with pointing out that when governments engage in this kind of madness, they also destroy the wealth of every citizen who uses that government's currency.

Since a number of European countries are using the euro, Krugman claims that the European central bank should be printing more euros to buy the debt of countries like Spain and Italy (and I am sure he believes likewise for Greece). Here he is in his own words:

What Mr. (Jean-Claude Trichet) Trichet (the president of the European Central Bank or E.C.B.) and his colleagues should be doing right now is buying up Spanish and Italian debt — that is, doing what these countries would be doing for themselves if they still had their own currencies. In fact, the E.C.B. started doing just that a few weeks ago, and produced a temporary respite for those nations. But the E.C.B. immediately found itself under severe pressure from the moralizers, who hate the idea of letting countries off the hook for their alleged fiscal sins. And the perception that the moralizers will block any further rescue actions has set off a renewed market panic.

Notice that anyone who might point out that this "pull-the-rabbit-out-of-the-hat" finance sows its own seeds for disaster is nothing but a "moralizer" who apparently is bent on inflicting pain on others for no good reason. It doesn't take training in economics for someone to see where such a scheme would lead -- and I have no doubt that government employee unions would demand such a "fix" in order to prop up their own bloated trickery -- but from what I have read of Krugman, he seems to think that these unions really are creating wealth.

At least we see Krugman's road map for the USA: Have the Fed directly purchase short-term U.S. bonds. For now, such a scheme would be illegal, given that the Federal Reserve Act of 1913 expressly forbids exactly what Krugman has proposed for other countries to do. (No doubt, the people who wrote the original act were "moralizers," too.)

As I said before, it does not take training in economics to see where such actions would lead. However, if one has "economics" training from a lofty U.S. university, then one apparently is free to discard all laws of economics -- and all rules of common sense.

Say what? Issue more debt to relieve a debt crisis? Only in Wonderland!

The name of this blog came from a commentary I wrote for Forbes nearly three years ago, but I would add that the writers and editors of the New York Times seem to be living in their own Wonderland. This is a newspaper that took the confabulated "evidence" in the Duke Lacrosse Case and insisted that it all made sense when people living in the Reality World saw it and wondered how in the heck a D.A. managed to find a rape case wrapped up on that nonsense.

Unfortunately, the delusion that is the NYT is not limited to imaginary crimes being committed by "young men of privilege." No, the NYT still is insisting that we can and should "spend our way" out of this financial crisis. In today's editorial, we see yet another plea for central banks and governments to unleash another round of debt in order to enable sinking governments to...repay debt.

(Remember that the NYT was all over Karl Rove for his "reality-based world" comments when he was the de facto political officer for the Bush administration. While I agreed with the editors' assessment of Rove's comments then, I only can conclude that Rove Disease has overtaken the NYT editorial offices.)

The editorial is insisting that governments don't cut back on borrowing and spending (and increasing taxes) because if they stop borrowing, then won't be able to repay their debts:

Excessive indebtedness is a real, long-term problem. But Europe’s broad downward trajectory can only be turned around if governments — both those of lenders and debtors — spend more in the near term to put people back to work and get consumers back to spending.

The proper interpretation of those words is as follows: "We need to stop drinking, but in the interim, another round for the house! Let us make a toast to ending toasts...in the future!"

This is not, of course, what the editors actually seem to believe. Like Hitler's generals in the Berlin bunker who were insisting to the bitter end that they could win World War II, the editors are insisting that another round of borrowing and spending (and more taxation) THIS time will take hold and that economic growth will be just around the corner:

As the crisis quickens, more enlightened voices struggle to be heard. Christine Lagarde, the new managing director of the International Monetary Fund, is calling for balancing long-term debt reduction with “short-term support for growth and jobs.” The financier George Soros this week renewed his pleas for more growth-friendly policies, as has Gordon Brown, the former British prime minister.

What do the editors mean by "growth-friendly policies"? They mean more borrowing, more government spending, more subsidies, higher marginal tax rates, higher fuel taxes, more regulation, destruction of industries such as energy industries that still are profitable, more criminal penalties for normal business transactions, and broader welfare policies.

Yes, I am sure that all of these things will enable the economies of the USA and Europe to grow. Increase burdens upon individuals and businesses, make it easier to throw people into prison, print money, increase government borrowing, increase anti-business rhetoric, and expand the police powers of the state, and out of this is going to come that unicorn known as "economic growth." Create a little boom now and we will figure later how to deal with the inevitable bust.

Only in Wonderland.

Downgrades, Debt, and More Delusion

So, Standard & Poors has downgraded the mighty U.S. Government bond to less than AAA status, and Paul Krugman is upset. Now, he is not upset that the government now has more than $14 trillion in debt, nor that government spending continues apace without the capability of this economy to create the kind of wealth needed to pay down this monstrosity.

No, Krugman is upset because he is of the belief that things were just going fine, at least debt-wise, until those mean, nasty Republicans engaged in debt-limit brinksmanship. In other words, his only beef is that the government is not taxing us enough. (Remember, he already has declared that the government "is not broke." Yes, according to Krugman, as long as the government can borrow money, its finances are in solid shape.

Krugman declares:

...there is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency (Emphasis mine).

I really must admit to being dumbfounded here. Does he really believe that had some of the Republicans not demanded budget cuts, everything would have been just fine? Does he really believe that hitting the borrowing-and-spending accelerator somehow would magically have transformed this economy and federal budget and pushed us into the black? I'm sorry, but this is astounding.

One does not have to support the Republicans to know that things are in desperate shape. The government's insistence that everything is just fine, and that prosperity is just around the corner, and that all the sick patient needs is just another "fix" of cheap credit is utterly delusional.

Whether or not one can quibble with S&P for downgrading U.S. Government debt, one thing is for certain: the U.S. Government is not solvent, not by a long shot. It is able to pay back bonds by borrowing money, something that is ANY other entity were to do would be considered criminal fraud. Borrowing from Peter to pay Paul is not an economic program; it is a de facto admission of bankruptcy.

Massive federal spending, face it, is "ludicrous and cruel"

In his column today, Paul Krugman takes his cue from the Democratic National Committee and writes yet another one of his partisan screeds on the Republicans' federal budget proposals, calling it "ludicrous and cruel." Actually, he is right, but I think for reasons other than what he might admit.

First, he demonstrates that he really is little more than a political operative because he aims much of his vitriol against Rep. Paul Ryan, the House Budget Committee Chairman. In fact, as he often does, Krugman spends as much time with personal attacks on an individual as he does with the ideas that the individual is espousing. To me, that is ironclad proof that the focus of his column is that of a partisan political operative, NOT an economist.

Second, he then goes into yet another tizzy to claim that a 4.96 percent cut in tax rates somehow has triggered every other evil that one can imagine, and he really wants us to think that if only the "rich" could be taxed at 39.6 percent instead of 35 percent, that all would be well. Only a political operative would say that, because a real economist would understand that the scenario Krugman presents is nonsense.

Third, the idea that our economy can support massive welfare spending and subsidies at home and military adventures abroad is plain delusional. Now that the Obama administration has decided to follow in the footsteps of its predecessor and continue the fiction of Empire Forever, Krugman no longer raises the objections to military adventures and its requisite spending as he did when George W. Bush was president.

Instead, he promotes the delusion that because Ben Bernanke is keeping interest rates artificially low, the USA can continue to borrow and spend into perpetuity. (No, we will borrow and spend into oblivion.)

We are seeing a period of outright political delusion that dwarfs even the delusion that accompanied Lyndon Johnson's pursuit of the "Great Society" AND the war in Vietnam. Both then and now, the politicians have imagined that they can pretend the U.S. economy can continue to carry the heaviest burdens of government in the history of the world.

So, we have reached yet another episode of the dog-and-pony show known as the government shutdown. It is all political theater, while the rest of us will learn the very hard lesson that just because economists like Paul Krugman and his friends claim that this government can spend us into prosperity does not make it so.

No doubt, when inflation begins to really catch fire -- and there is no avoiding it now -- Krugman will call for price controls and claim everything as its cause but the truth: out-of-control borrowing and spending creates disasters, not prosperity.

Krugman: Dumbing Down Economics

I must admit that I look forward to reading Paul Krugman's Friday column, as he generally produces something with enough howlers to last a weekend. Today, he does not disappoint, and I should thank him for providing some fodder for me.

(I am sitting in a session of the Austrian Scholars Conference in Auburn, which means I am not exactly sitting with members of the Paul Krugman Fan Club. Tomorrow, I present a paper in which Dave Kiriazis and I argue that the Jim Crow laws were not a "blind spot" of the Progressives that historians always present as "reformers," but rather they were part and parcel to the system that was created.)

Anyway, back to Krugman. In a screed against House Republicans today, he declares that the U.S. Government really is in no fiscal danger at all, so no budget cutting is necessary. Second, he once again tells us that "costs" are purely administrative affairs, and that central government planning can lower costs of medical care.

But first, he starts out with a bit of interesting hubris, writing:

Like anyone who writes regularly about what passes for economic and fiscal debate in American politics, I’ve developed a strong tolerance for nonsense. After all, if I got upset every time powerful people were illogical and/or dishonest, I’d spend every waking hour in a state of raging despair.

Funny, but a lot of his columns and blog posts really do look like episodes of "raging despair." But, there is more:

Yet there are still moments when I find myself saying, “They can’t really be that stupid,” or maybe, “They can’t really think the rest of us are that stupid.”

Now, while he is talking about Republicans -- who really do manage to say Really Stupid Things -- I cannot help but apply Krugman's words to his following declaration:

...you have to realize two things about the fiscal state of America. First, the nation is not, in fact, “broke.” The federal government is having no trouble raising money, and the price of that money — the interest rate on federal borrowing — is very low by historical standards. So there’s no need to scramble to slash spending now now now; we can and should be willing to spend now if it will produce savings in the long run.

This is worthy of an entire blog post itself, but nonetheless, you have to understand what Krugman is saying. Interest rates for government bonds are low because the opportunity cost of investment also is very, very low. The very policies of bailing out banks, housing, the U.S. auto industry, and numerous other entities, along with the government's other policies have ensured that the economic "recovery" will be anemic at best.

To put it another way, the non-government sector of the economy is not producing enough goods and services to be able to fund the current rate of government spending, so the Obama administration then runs gargantuan deficits. According to Krugman, this is due to the fact that the government does not have high enough taxes and because government needs to spend, spend, spend in order to end the depression.

So, Krugman claims that we can "pretend" that everything is just fine, as though this blizzard of government spending will create "future savings." It is mind-boggling to me, and maybe IT will drive me to "a state of raging despair."

Krugman then turns to medical care:

Second, while the government does have a long-run fiscal problem, that problem is overwhelmingly driven by rising health care costs. The Congressional Budget Office expects Social Security outlays as a percentage of G.D.P. to rise 30 percent over the next quarter-century, as the population ages, but it expects a near doubling of the share of G.D.P. spent on Medicare and Medicaid.

So if you’re serious about deficits, you shouldn’t be pinching pennies now; you should be looking for ways to rein in health spending over the long term.

On the surface, this seems to make sense. However, what Krugman actually is saying is that the spread of bureaucracy over ALL medical exchanges and procedures somehow will result in lower costs AND better medical care. This is madness, as I see it.

Bureaucracies do not make things less costly. At the present time, our family is pursuing an overseas adoption, and over the past decade (we last adopted in 2001), the bureaucratic tentacles over international adoptions have greatly expanded. I can tell you from personal experience that bureaucrats are vastly raising the costs that we have to incur.

Keep in mind that these bureaucracies are operating on the premise that they are lowering the probability that a child will be taken from a foreign children's home to a worse situation with another family. That does happen, but it is pretty rare.

However, by forcing up costs on the adoptive family's end, the government is vastly increasing the probability that a child won't be adopted at all, which means that when these children turn 16, they are booted out into the streets. Thus, the bureaucrats are GUARANTEEING that there will be more fodder for international prostitution rings. All in the name of "making people better off."

Talk to a doctor and find out just how ObamaCare has vastly increased the paperwork and bureaucratic oversight which govern their practices. Any doctor will tell you that this has raised his or her own costs, and doctors must now direct resources to satisfying the bureaucratic monsters.

Yet, Krugman claims that this will "lower" costs. Well, I will tell you how this will work, just as it has "worked" elsewhere: governments will "lower" medical costs by increasingly denying care, which is nothing more than passing off costs to the consumers of medical care. The costs don't go away; they just are shifted.

In economics, we speak of costs as "opportunity costs." However, in Krugmanland, costs simply are administrative numbers that the state can manipulate. That is fantasy, not economics.

This is Fiscal Responsibility?

Since Paul Krugman's column and blog have become little more than propaganda for the Democratic Party, I thought today that I would feature something written by an economist who actually does real economics: Robert Higgs. But first, let us look at a recent blog post by Krugman.

In critiquing a recent blog post by Tyler Cowen of George Mason University, Krugman notes that Cowen did not zero in on the rise of U.S. Government debt levels during the Reagan administration. He also writes this:

Bear in mind, too, that the signature initiatives of Republican presidents — the Reagan tax cut, the Bush tax cut, the Medicare drug benefit — have all been unfunded deficit-raisers; the signature initiatives of Democratic presidents — the Clinton tax hike, Obamacare — have all been deficit-reducing.

I find his attack on the tax cuts started in 1981, in which the top rates were dropped, including the one from 70 percent to 50 percent. At the Southern Economic Association meetings of 2004 in New Orleans, where Krugman was a featured speaker at a Sunday session, I asked Krugman if he believed that we should go back to the 70 percent rates, since he had been on the attack against Reagan.

His reply? "Oh, no! Those rates were insane!" (He really emphasized the word "insane.") Now, given Krugman's selective memory, I doubt he will recall having said such things, but it was in a room full of economists and I am sure that more than a few of them will remember what Krugman said.

There also is Krugman's claim that ObamaCare is "deficit-reducing." I had to pick myself off the floor at this one. Krugman is saying that the creation of a VAST new entitlement will result in lower levels of government spending, and that simply is a joke, a very bad joke.

Don't forget what ObamaCare has done in its thousands of pages of just the law, not to mention the hundreds of thousands of new regulations that will be kicking in over the years, will make the very thing that we need -- entrepreneurship in the field of medicine (real entrepreneurship, not trying to beat the system) -- will be criminalized. If Krugman really believes that making ALL medical care simply something that falls under government administration is going to reduce the opportunity costs that come with medical care, then he has totally rejected economics for something else.

More than four decades ago, the Democrats under Lyndon Johnson passed a vast array of new laws that created the very entitlements that, along with empire-preserving military spending, are eating the budget. As Professor Higgs notes, these new entitlements never were projected to eat the U.S. economy; instead, they were supposed to be a small appendage funded by our productivity.

Economics deals in the areas of costs and benefits. However, to economists (or at least those economists who are not part of the "elite" system, anyway), costs are opportunity costs. They are not simple administrative numbers.

Yet, when Krugman refers to medical costs, that is exactly what he means. Entrepreneurs over the years have reduced real costs by moving resources from lower-valued to higher-valued uses, as ultimately determined by consumers.

In Krugman's world, however, real cost reduction is nothing more than an edict from the state: You will cut costs. That is not economics, people; that is fantasy.

Krugman is Deep in the Heart of Taxes

Paul Krugman loves those "Aha!" moments in which he believes (or at least wants US to believe) that an economy can thrive only if government tax heavily and have lots of union workers on the payroll. In his Friday column, he claims to have discovered one of those moments in his supposed expose of Texas.

Yes, Texas is having a budget shortfall in state government which is supposed to be shocking to anyone who believes that governments during a recession should cut back upon the burdens they place on others. As usual, Krugman depends not only upon a left-wing "think tank" to supply ideology masquerading as analysis, but also upon the kinds of stereotypes that really are not acceptable in academic thinking.

Krugman writes:

These are tough times for state governments. Huge deficits loom almost everywhere, from California to New York, from New Jersey to Texas.

Wait — Texas? Wasn’t Texas supposed to be thriving even as the rest of America suffered? Didn’t its governor declare, during his re-election campaign, that “we have billions in surplus”? Yes, it was, and yes, he did. But reality has now intruded, in the form of a deficit expected to run as high as $25 billion over the next two years.

Gee, I'm shocked. The country is mired in a depression and tax revenues are down everywhere. If anyone would think (or declare publicly) that Texas could be exempt from this problem because of its policies, I would also want to sell them a nice railroad tunnel that runs between New Jersey and Manhattan.

He continues:

And that reality has implications for the nation as a whole. For Texas is where the modern conservative theory of budgeting — the belief that you should never raise taxes under any circumstances, that you can always balance the budget by cutting wasteful spending — has been implemented most completely. If the theory can’t make it there, it can’t make it anywhere.

Once again, Krugman gives us a caricature of analysis versus serious thinking. In theory, obviously, if one cuts any budget enough, be it a state, national, municipal, or home budget, one can balance it. The issue, however, is the opportunity cost of raising taxes, and Krugman has been saying throughout the economic crisis that there is no opportunity cost when it comes to government spending. (In fact, while he has not openly said he believes in the Keynesian balanced budget multiplier -- in which higher taxes lead to more spending, which revitalizes the economy -- he writes as though he believes in it.)

As I see it, there is no "theory" here, unless one brings in the balanced budget multiplier "theory." Instead, we are dealing with an accounting problem: How does a state -- which is required by law to have a balanced budget each year -- deal with the problem in which its projected spending outstrips its projected revenues?

In fact, it seems to me that Krugman discredits his earlier statement in the next paragraph:

How bad is the Texas deficit? Comparing budget crises among states is tricky, for technical reasons. Still, data from the Center on Budget and Policy Priorities suggest that the Texas budget gap is worse than New York’s, about as bad as California’s, but not quite up to New Jersey levels.

First, the CBPP is a left-wing organization that is not exactly going to be objective in this situation. My guess is that if someone who were publicly disagreeing with Krugman were to use something from the Heritage Foundation, Krugman immediately would claim that the study is "tainted."

Second, Krugman includes three states that have followed pretty much the Krugman Policy Standards of spending and raising taxes. If Krugman's "theory" were to be applied here -- that militant public sector unions are "good for the economy" and that raising taxes will help stymie a recession -- then California, New York, and New Jersey should be wallowing in surpluses. Yet, they face real crises, and according to Krugman's "theory," that should not be the case.

In other words, Krugman really is saying nothing that is significant. Furthermore, he repeats the canard about education spending, as though it were the key to academic and economic success. If that were true, then Washington, D.C., public schools, which spend more per pupil than any states, would be the best in the country instead of one of the worst systems.

There is a much larger issue here. A welfare state is not an economic plus; it is a financial burden. One can argue as to its necessity, well as debate whether or not it makes things better in the long term, but Krugman is not interested in doing that.

I am not defending Texas or Gov. Rick Perry, or anything about its state government. Being that Texas seems to have this problem about prosecutors being out of control (something with which I deal in my other blog), I have nothing good to say about the issue of governance in that state.

However, if Krugman is wanting to argue that the "theory" of cutting spending is discredited, then one would have to claim that his "alternative hypothesis" (that raising taxes and increasing spending is the way to beat a recession) is true. Yet, we see the "alternative theory" at work in California and New York, and both of those places are bleeding jobs and revenue.

Krugman, not surprisingly, is silent on that point. But I have a better idea: Let us see how the Illinois legislature's current plan works. The Democrats, which control politics in that state (which means they have all of the answers, if one follows Krugman's partisan missives), have proposed a 75 percent increase in the state's income tax rates and a huge increase in the cigarette tax.

If Krugman is correct, then Illinois should be able to solve its budget problems and also create new avenues of prosperity. Perhaps we should revisit the state in a year to see if Krugman's "theory" is correct.

Krugman's Voodoo Economics: Tax, Spend, and Inflate Ourselves Into Prosperity

Paul Krugman is in his element again. The Republicans control the U.S. House of Representatives and the Democrats no longer have a filibuster-proof majority in the Senate. A very liberal Democrat occupies the White House and is governing via executive orders (winning Krugman's approval, although executive orders are good only when Democrat presidents issue them).

So, even though Democrats still have the upper hand, in Krugman's mind the Republicans rule. Why? Because tax rates are not even higher than they are now. Furthermore, because the top individual income tax rate remains at 35 percent instead of being raised to 39.6 percent, all is lost because, in Krugman's view, that 4.96 difference is the difference between having a manageable federal budget and having large deficits. (Well, that 4.96 AND "death panels.")

All of this leads to a very interesting view of the Economy According to Krugman. As he wrote earlier this year, if it were up to him, ALL tax rates would rise, which would give the government more money (supposedly), lead to more spending, and give the economy a boost. (I'm not sure that Krugman's scenario would follow; when Herbert Hoover got Congress to raise taxes in 1932, revenues actually fell, but, then, Hoover was a Republican and did not have the requisite magical Krugmanian touch that Democrats have when it comes to taxes and spending.)

In his column today, Krugman accuses the Republicans of "hypocrisy," because they both support tax cuts and give lip service to balancing the federal budget. Actually, I agree with Krugman on this point, but I'm not sure the guy who accused Sarah Palin of "lying" on "death panels" and then glowingly spoke of "death panels" before denying he had claimed he really didn't mean what he just had said is someone who should call others "hypocrites."

Nonetheless, I think that we have a pretty clear picture of what Krugman believes will "revitalized" the American economy: higher taxes, more government spending, and inflation. On top of that, Krugman wants to bring back the old financial cartels that existed from the New Deal until the 1980s, not to mention other economic cartels that were prevalent under the federal government's regulatory schemes.

Those of us where were adults in 1980 can remember the outright stagflation that accompanied the government's economic policies, when inflation was in double-digits, unemployment was rising, and we saw no way out. Yet, Krugman wants to bring back those days via the resurrection of the old regulatory regimes and bursts of government spending and inflation.

Step back, folks, and take a hard look at what Krugman is recommending. This is a recipe for stagflation and lots of it. It is NOT a recipe for revitalizing our economy, period.

Economic laws have not changed. Government cannot repeal the Law of Scarcity nor can it order an economy into prosperity no matter what Krugman tells us. Indeed, what Krugman is recommending is nothing short of True Voodoo Economics.

Krugman's Economic Advice: Shop Until You Drop

Even when Paul Krugman gets it right, he still manages to get it wrong. Thus it is today that in his column, he starts out on the right track, but then misinterprets what is in front of him and then goes off on yet another Keynesian spiel.

First, I present the good stuff. Krugman writes:

The root of our current troubles lies in the debt American families ran up during the Bush-era housing bubble. Twenty years ago, the average American household’s debt was 83 percent of its income; by a decade ago, that had crept up to 92 percent; but by late 2007, debts were 130 percent of income.

All this borrowing took place both because banks had abandoned any notion of sound lending and because everyone assumed that house prices would never fall. And then the bubble burst.

While he is right as far as he goes, unfortunately, Krugman the economist does not ask why the banks played the "band in 'Animal House'" role in thinking they could march through the wall. Why did banks abandon "sound lending" principles?

Krugman would answer that a Republican administration was full of free-market types that believed banks should not be regulated, and that suddenly, all bank regulators believed that market hype. That does not square with what we know about government and governance.

Krugman fails to point out that the housing market is heavily subsidized and regulated by government and was so even before the mortgage industry essentially was nationalized during the last year of the Bush administration. Indeed, as one real estate attorney told me last year, the government actively was urging banks to abandon lending standards in the name of promoting more and more home ownership.

At the same time, the Heritage Foundation and Cato Institute were promoting the "Ownership Society" mantra and the Bush administration was bragging that it had put more minorities into home ownership than ever before. I'll go further. The "subprime market" never would have taken off in a free market, not without real safeguards built into the system, which contrasts with the moral hazard that existed as the government told lenders directly and indirectly that the taxpayers had their backs.

That part never makes it into Krugman's narrative, and no wonder. If government played a role by pushing vast amounts of resources into unsustainable markets and promised to make good on bad loans, then no one should be surprised at what happened. Furthermore, there is no such thing as a free market in which those taking the risks don't have to bear losses, which clearly became the perception.

Unfortunately, that is the soundest argument Krugman makes in this column, and from there he goes off the Keynesian deep end. He writes:

What we’ve been dealing with ever since is a painful process of “deleveraging”: highly indebted Americans not only can’t spend the way they used to, they’re having to pay down the debts they ran up in the bubble years. This would be fine if someone else were taking up the slack. But what’s actually happening is that some people are spending much less while nobody is spending more — and this translates into a depressed economy and high unemployment.

What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained: we’re not talking about a brief burst of aid; we’re talking about spending that lasts long enough for households to get their debts back under control. The original Obama stimulus wasn’t just too small; it was also much too short-lived, with much of the positive effect already gone.

How, pray tell, does the government get the money to make up for all that lost consumer spending? As Krugman has said earlier, he believes that ALL of the Bush tax cuts should be permitted to expire, and that if he were in charge of the government, he would take that extra revenue and spend it.

Of course, taking money from people just makes them poorer, and the idea that government spending would make up for their loss is a howler. Contra Keynes and Krugman, governments make sure that friends are benefited and enemies punished. The second way for government to get money, according to Krugman, is to borrow (and borrow and borrow).

Here is where it gets interesting. Who is on the hook for all of this money? Obviously, the debt must be repaid or there has to be a default. Obviously, the government chooses default by inflation, with Americans being told they can have their cake and eat it, too. I hate to be the bearer of bad tidings this Christmas season, but paying back the debt by inflation is not the "free lunch" Krugman claims it to be.

(Remember, he declares in The Return of Depression Economics that there really is a "free lunch," and that all we have to do is to find it. The "free lunch" is the taking on of huge debt, and then quietly repudiating it by destroying the U.S. Dollar. Yeah, as if there are no consequences from so doing.)

In Krugman's economy, we move seamlessly from the housing bubble to continued full employment, just as long as government, people -- someone -- is spending money. This is a view that says resources don't matter, that factors of production are homogeneous, and that there really are no consequences at all for driving entire markets into a big hole via malinvestments.

In other words, it is economics as though the Law of Scarcity did not exist.

Krugman Freezes Out Obama

When Paul Krugman won the Nobel Prize in economics in 2008, blogger Don Luskin wrote tongue-in-cheek that it was the first time that the Swedish central bank had given the award to a "dead economist." Luskin was joking, of course, as everyone knows that Krugman is a living and breathing human being, but his point was that Krugman long ago had given up economics for political partisanship and for what Robert Higgs calls "vulgar Keynesianism."

Lest anyone think that Krugman actually tries to make an economic argument from his New York Times perch, well, think again. Here is someone supposedly of intellectual stature trying to claim that if governments only spend enough money, that the spending somehow will permanently revitalize the economy. In other words, we spend ourselves rich.

When Barack Obama was elected President of the United States two years ago, Krugman was among those shouting the "hosannas" and throwing palm branches at the feet of the Messiah. (Of course, Obama did not ride into Washington on the back of a donkey colt, but rather in a gas-guzzler limo.)

Today, however, the hosannas have stopped, at least on Krugman's page, and while he is not yet in the mob shouting, "Crucify him!" nonetheless, I can see that the Messiah already has lost favor and most likely Krugman will be looking elsewhere -- perhaps to Hillary Clinton. In today's column, Krugman essentially rejects Obama because he thinks that the president is not doing enough to spend ourselves into recovery.

This is couched in the language of the federal deficit of course, and Krugman's view that the government under Obama is not confiscating enough income from everyone else:

After the Democratic “shellacking” in the midterm elections, everyone wondered how President Obama would respond. Would he show what he was made of? Would he stand firm for the values he believes in, even in the face of political adversity?

On Monday, we got the answer: he announced a pay freeze for federal workers. This was an announcement that had it all. It was transparently cynical; it was trivial in scale, but misguided in direction; and by making the announcement, Mr. Obama effectively conceded the policy argument to the very people who are seeking — successfully, it seems — to destroy him.

So I guess we are, in fact, seeing what Mr. Obama is made of.

Now, given that millions of Americans have lost their jobs or taken pay cuts, the fact that federal employees will not be receiving pay raises for a couple of years is pretty mild stuff, and Krugman's over-the-top reaction tells us more about his priorities and agenda than it does about anything Obama has done. He goes on:

The truth is that America’s long-run deficit problem has nothing at all to do with overpaid federal workers. For one thing, those workers aren’t overpaid. Federal salaries are, on average, somewhat less than those of private-sector workers with equivalent qualifications. And, anyway, employee pay is only a small fraction of federal expenses; even cutting the payroll in half would reduce total spending less than 3 percent.

So freezing federal pay is cynical deficit-reduction theater. It’s a (literally) cheap trick that only sounds impressive to people who don’t know anything about budget realities. The actual savings, about $5 billion over two years, are chump change given the scale of the deficit.

Of course, it is political theater, as though anything a president does these days is anything but. However, Krugman goes to his own political theater in his insistence that we pretty much can cure all of our economic ills if the tax rate for families making $250K or more a year goes from 35 percent to 39.6 percent, and we steeply raise capital gains taxes and inheritance taxes.

I have no idea as to the tax revenue that would be "lost" if the current tax rates are made permanent (although "permanent" in federal budget language is rather a fluid concept), but I do think that the political theater that Krugman is making is rather telling. You see, Paul Krugman really does want us to believe that we don't need capital investment (other than "massive public works"), and that our economy can prosper just as long as the government spends and spends and spends.

For that matter, I wonder why Krugman does not advocate a 100 percent tax on all of our income, and just let the government spend money, given that the "multiplier" would be at its highest level with such a scenario. Given that governments are not "income constrained," we can end this recession immediately.

Krugman's "no tax cuts for the rich" rhetoric largely is symbolic, as his real beef with Obama is that the government has not confiscated enough of our wealth. As he has written before, if it were up to him, he would let ALL tax rate cuts expire and then have the government go on a spending spree.

So, to follow Krugman's chain of logic, Obama is now out-of-favor because he is not spending and taxing enough. Maybe Hillary Clinton will be the Chosen One. Or maybe Krugman himself.

There Will Be Hypocrisy

On a recent appearance on ABC's "This Week," Paul Krugman spoke glowingly of what he called "death panels." In fact, he referred to "death panels" as a "real solution" in helping to get a "real solution" to federal budget problems. He really did say that, but Krugman being Krugman quickly made a posting on his blog that declared that he really did not mean exactly what he said even though, frankly, he meant exactly what he said.

What was significant about that whole affair was that Krugman and his friends and admirers for the last two years have called Sarah Palin a liar because she said that federalizing medical care ultimately will feature what she called "death panels." Krugman called the idea a "complete fabrication," except that he obviously understood all along that a U.S. government medical care program, which would be responsible for determining who receives medical care, would emulate those Europeans Krugman so much admires, and those countries have death panels.

The reason I bring up last week's incident is that Krugman now takes a stray quote from Alan Simpson as "proof" that there is some sort of GOP conspiracy to shut down the federal government and destroy the world:

Now, you might think that the prospect of this kind of standoff, which might deny many Americans essential services, wreak havoc in financial markets and undermine America’s role in the world, would worry all men of good will. But no, Mr. Simpson “can’t wait.” And he’s what passes, these days, for a reasonable Republican.

Now, I am no fan of Alan Simpson and really don't take anything he says very seriously. Yes, he and Erskine Bowles co-chaired a "Deficit Commission," which also was nothing less than one of the dog-and-pony shows that Washington brings out once in a while to dazzle the media and to tell the taxpayers that Washington Is Serious About Cutting The Deficit.

Yes, I am sure that some Republicans are going to make noise when the debt limit has to be raised this coming spring in order for the U.S. Government to continue borrowing at unsustainable levels. Furthermore, after a few members of Congress engage in The Usual Grandstanding, demand some "concessions" from President Obama (which he will ignore after making public show of concern for the deficit), Congress will vote to extend the debt limit and go on its merry way.

In the past, we even have had to veritable "train wreck" in which the debt limit passes and (horrors) THE GOVERNMENT SHUTS DOWN. Except that it really does not shut down. Yes, they make a big show of closing the Washington Monument, and I am sure that there would be a few other high-profile, low-impact closings in order to try to convince people that Their Savior Is Not Operating, and the Usual Suspects in the media will play Their Usual Role in telling us we're doomed unless Washington can spend more.

As Krugman continues his role as a partisan shill, he gives us this gem:

...the G.O.P. opposes anything that might help sustain demand in a depressed economy — even aid to small businesses, which the party claims to love.

Right now, in particular, Republicans are blocking an extension of unemployment benefits — an action that will both cause immense hardship and drain purchasing power from an already sputtering economy. But there’s no point appealing to the better angels of their nature; America just doesn’t work that way anymore.

I had not realized that he was getting ready to trot out the unemployment benefits canard again. Now, if Krugman really were to believe this "demand" nonsense, I wonder why he does not endorse Washington just creating a few trillion dollars or more and just leaving the sacks of money at our doorsteps just before Black Friday. You want spending? We'll GIVE you spending!

Yes, yes, we know. Had the government spent $1.2 trillion instead of $800 billion for its "stimulus" efforts, we would be in a full-blown recovery by now. All for the want of $400 billion, and now the Evil GOP wants to end any more "stimulus" efforts and destroy the world.

Let's sum it up. Krugman uses the actual term "death panels" but really does not mean "death panels," except we know that he does. Alan Simpson uses "blood bath" and he obviously means every word. Emmanuel Goldstein lives!

Krugman, Brooks, and Hijacked Good Sense

Every once in a while, Washington trots out a "commission" that consists of Very Wise People Who Have Served In Government, happily gobbling up what taxpayers have provided. The "commission" meets (and meets and meets) and after a while, its members stand before the news cameras and announce that they have a Very Wise Pronouncement to make.

Not surprisingly, after the Very Wise Commission declares its Oracle, the Usual Suspects denounce whatever what was said, people go back to work, and the Report of the Very Wise People goes onto a shelf where it remains until the next Very Wise Commission is formed. Thus it is with the latest dog-and-pony show of Washington, the National Commission on Fiscal Responsibility and Reform.

Because nothing can occur in Washington without fanfare and moral theater, the latest Very Wise Commission has its website, photo ops, and even a report. These people -- who helped create the very conditions that we now face -- solemnly have told us that we need to pay higher taxes, cut spending, and live within our means. Obviously, even that (as phony as it might be) is financially and morally intolerable.

In the name of being an equal-opportunity annoyer, I present the side-by-side views of Paul Krugman and David Brooks, to columnists who really deserve each other. On the one side, we have an "economist" who hasn't a clue about capital or factors of production in general, who has no idea as to what entrepreneurship is, and really believes money is nothing more than a quantity variable to be placed within a mathematical algorithm.

On the other side, we have an Apostle of "National Greatness," that code term that comes from the Abbott and Costello of Neoconservatism, Brooks and William Kristol (who apparently is now a close adviser to Sarah Palin, Lord save us) telling us that we have to love "National Greatness" more than ourselves if we want to stay on this side of the cliff. It is hard to know where to begin, my day job beckons, and, dammit, it IS my birthday. However, duty calls....

Krugman is angry not because the commission has recommended this or that, but rather because the commission actually thinks that government should consume less, not more, of the country's wealth. He writes:

Start with the declaration of “Our Guiding Principles and Values.” Among them is, “Cap revenue at or below 21% of G.D.P.” This is a guiding principle? And why is a commission charged with finding every possible route to a balanced budget setting an upper (but not lower) limit on revenue?

Should we make Social Security -- a true Ponzi scheme -- on more solid footing? Perish the thought!

Let’s turn next to Social Security. There were rumors beforehand that the commission would recommend a rise in the retirement age, and sure enough, that’s what Mr. Bowles and Mr. Simpson do. They want the age at which Social Security becomes available to rise along with average life expectancy. Is that reasonable?

The answer is no, for a number of reasons — including the point that working until you’re 69, which may sound doable for people with desk jobs, is a lot harder for the many Americans who still do physical labor.

But beyond that, the proposal seemingly ignores a crucial point: while average life expectancy is indeed rising, it’s doing so mainly for high earners, precisely the people who need Social Security least. Life expectancy in the bottom half of the income distribution has barely inched up over the past three decades. So the Bowles-Simpson proposal is basically saying that janitors should be forced to work longer because these days corporate lawyers live to a ripe old age.

How does one "reform" a Ponzi scheme? I guess raise taxes, which solves everything. But Krugman does not stop there. No, he engages in what I think is a rather bizarre attack that apparently undercuts what he has been claiming on his pages: that ObamaCare actually will cut healthcare costs. Read on:

It’s true that the PowerPoint contains nice-looking charts showing deficits falling and debt levels stabilizing. But it becomes clear, once you spend a little time trying to figure out what’s going on, that the main driver of those pretty charts is the assumption that the rate of growth in health-care costs will slow dramatically. And how is this to be achieved? By “establishing a process to regularly evaluate cost growth” and taking “additional steps as needed.” What does that mean? I have no idea. (Emphasis mine)

It’s no mystery what has happened on the deficit commission: as so often happens in modern Washington, a process meant to deal with real problems has been hijacked on behalf of an ideological agenda. Under the guise of facing our fiscal problems, Mr. Bowles and Mr. Simpson are trying to smuggle in the same old, same old — tax cuts for the rich and erosion of the social safety net.

Anyone who has read Krugman regularly knows that Krugman is a True Believer when it comes to Congressional Budget Office claims about the future of the cost of healthcare, now that the government will be controlling it. (See the chart below to get a better understanding of how this process will work. I'm sure you will conclude that the system is in very, very, very good hands.)

Now, why is it heresy for Krugman to claim that ObamaCare will cut costs, but it is not OK for Alan Simpson and Erskine Bowles to do the same? I don't know, although I do believe that any notion that what Congress passed earlier this year will cut anything but the quality and supply of medical care is ludicrous. Nonetheless, Krugman believes the CBO pronouncements like Jerry Falwell believed in Biblical inerrancy -- except when someone else who Krugman doesn't like says the same thing.

Then there is David "National Greatness" Brooks. What can I say, except to include the following from his latest column:

It will take a revived patriotism to get people to look beyond their short-term financial interest to see the long-term national threat. Do you really love your tax deduction more than America’s future greatness? Are you really unwilling to sacrifice your Social Security cost-of-living adjustment at a time when soldiers and Marines are sacrificing their lives for their country in Afghanistan?

Like the civil rights movement, this movement will ask Americans to live up to their best selves. But it will do other things besides.

It will have to restore the social norms that prevailed through much of American history: when narcissism and hyperpartisanship was mitigated by loyalties larger than tribe and self; when competition between the parties was limited and constructive, not total and fratricidal.

This movement will have to build institutions to support the leaders who make the hard bargains. As in the civil rights era, politicians won’t make big changes unless they are impelled and protected by a social upsurge.

Most important, this movement will have to develop a governing philosophy and a policy agenda. Right now, orthodox liberals and conservatives have their idea networks, and everybody else is intellectual roadkill. This coming movement will have to revive the American System: a governing philosophy that believes in targeted federal efforts to arouse growth, social mobility and responsibility.

Like the chairmen’s report, this movement could demand that Congress wipe out tax loopholes and begin anew. It could protect federal aid to the poor while reducing federal subsidies to the upper-middle class.

The coming movement may be a third party or it may support serious people in the existing two. Its goal will be unapologetic: preserving American pre-eminence. It will preserve America’s standing in the world on the grounds that this supremacy is a gift to our children and a blessing for the earth.

There are some things that simply don't need a reply, as they are ridiculous enough on the face. Brooks' column is one of those things.