Krugman: Break Windows, Help the Economy

OK, so Paul Krugman has decided to be a political shill for Barack Obama, but in today's blog post, he decides to abandon economics all together. Just as Larry Kudlow, Timothy Noah and others jettisoned economic logic for a bizarre "Broken Windows Theory" when they claimed that the 9/11 attacks would be good for the economy,  Krugman (fittingly on September 11) makes a similar claim about the iPhone 5.

Krugman writes:

There’s been some buzz about a report suggesting that the iPhone 5 could, all by itself, give a significant boost to the US economy. I can’t judge how plausible the sales estimates are; but it’s worth pointing out how the economic logic of this suggestion relates to the larger picture.

The key point is that the optimism about the iPhone’s effects has nothing (or at any rate not much) to do with the presumed quality of the phone, and the ways in which it might make us happier or more productive. Instead, the immediate gains would come from the way the new phone would get people to junk their old phones and replace them.

In other words, if you believe that the iPhone really might give the economy a big boost, you have — whether you realize it or not — bought into a version of the “broken windows” theory, in which destroying some capital can actually be a good thing under depression conditions

Of course, it’s nice that the reason we’re junking old capital is to make room for something better, not just for the hell of it. But you know what would also be nice? Building useful stuff like infrastructure employing labor and cash that would otherwise sit idle.

First, it is obvious that Krugman has not a clue about the creation of wealth and he certainly knows nothing about capital. Keynesians believe that the real benefit of capital spending is, well, spending, and Krugman does nothing to dispel that false notion in this post.

Second, the idea that the money spent on buying new iPhones would provide a "significant boost" to the economy is to forget what Keynesians and Krugman always forget: opportunity cost. If someone purchases an iPhone, then that means the person cannot purchase something else. The presence of new iPhones does not mean that suddenly everyone has new reserves with which to spend new money.

Now, Krugman seems at best to give a backhanded endorsement of the "broken windows theory," but nonetheless this "theory" is pure Keynesianism. As every Austrian knows, it is not even the "broken windows theory," but rather the "broken windows fallacy." The concept comes from Frederic Bastiat in his famous "That Which is Seen, and That Which is Not Seen," the first chapter entitled, "The Broken Window."

Defenders of Krugman will point to the last paragraph in the quote in which he essentially calls for more public works spending, but one needs to remember that Krugman sees public works projects as important not because of the roads and bridges that will make transportation more reliable, but because these projects are transmitters of spending via individual incomes.

He has it backward. What we produce is what permits us to consume. Krugman believes that all it takes is for someone to have cash in his hand, and the goods magically appear on the shelves. It might work that way in Wonderland, but not in a real economy.

(Thanks to Scott Ellis for showing me Krugman's post)

Saving the Economy Through Bailouts? Only in Wonderland!

I guess it is good that the Democratic National Convention is over if for no other reason than Paul Krugman can get some sleep, given his heart was pounding with joy and admiration over the brilliance of the speakers. No doubt, all this fall he will coordinate his columns and blog posts with talking points from the Obama campaign and the DNC, and I am sure that some real howlers are in store for us lucky readers.

His latest column of gratitude and worship comes in the form of praising Barack Obama for his Wondrous Works in Giving the Economy Life Eternal, or at least a small recovery. He writes:

On Inauguration Day 2009, the U.S. economy faced three main problems. First, and most pressing, there was a crisis in the financial system, with many of the crucial channels of credit frozen; we were, in effect, suffering the 21st-century version of the bank runs that brought on the Great Depression. Second, the economy was taking a major hit from the collapse of a gigantic housing bubble. Third, consumer spending was being held down by high levels of household debt, much of which had been run up during the Bush-era bubble. 

The first of these problems was resolved quite quickly, thanks both to lots of emergency lending by the Federal Reserve and, yes, the much maligned bank bailouts. By late 2009, measures of financial stress were more or less back to normal. 

This return to financial normalcy did not, however, produce a robust recovery. Fast recoveries are almost always led by a housing boom — and given the excess home construction that took place during the bubble, that just wasn’t going to happen. Meanwhile, households were trying (or being forced by creditors) to pay down debt, which meant depressed demand. So the economy’s free fall ended, but recovery remained sluggish. 

 What Krugman wants us to believe is that by bailing out the banks and financial houses (which was pushed by the Bush administration and continued by Obama's presidency), the economy was saved. No, what happened was that the original downturn was not as great as it would have been had some other Kool-Aide-drinking banks also were forced to face the music -- complete with some executives losing their Connecticut mansions -- and the public find out very quickly which financial institutions were zombies and which were not.

Now, Krugman would argue that had the bailouts not occurred, the entire financial system would have collapsed. Granted, if the best thing the financial system could do was to engineer a housing bubble with more liabilities than the entire wealth of the world, maybe it needed the exit door. However, I suspect that we would have seen something quite less than the Apocalypse as Wall Street figures would have seen it in their interest to find a way out of the mess they had helped to create.

But there is more. Economist Mario Rizzo had a most interesting and insightful post this morning on Facebook, writing:

The Democrats say that we cannot go back to the policies that caused the financial crisis and recession. Ok. So what were those policies: The irresponsible expansion of Fannie and Freddie? The excessively easy monetary policy of the Fed? Inadequate regulation of securities? I do not remember a single Democrat objecting to these policies during the period before the crisis. I do remember Barney Frank pushing more and more expansion of Freddie and Fannie, though. Oh, the Bush tax cuts. No economist I have heard of says that the tax cuts caused the crisis and recession. So what are they talking about? 

In fact, what do we have today? For one, it is a financial system full of zombie institutions with the bailouts obscuring which institutions are healthy and which are not. Furthermore, we have the clashing policies of easy money and picky regulations. Yes, the Obama administration is demanding that banks lend money out the wazoo, but the regulators don't want anyone to get those loans. One might want to try a policy in which the banks actually have to bear the consequences of bad and even reckless loans without having the Federal Reserve and the taxpayers standing behind to clean up the mess. I suspect that we would see some civilized behavior on Wall Street; instead, we see what, frankly, is a rigged game in which the government pushes down interest rates, limits the loan choices for banks via strict regulation, and then holds out the prospect of small-but-near-guaranteed returns from federal paper. Gee, I wonder where the banks will send their money.

And then there is the GM bailout. Krugman writes:

But, that said, Mr. Obama did push through policies — the auto bailout and the Recovery Act — that made the slump a lot less awful than it might have been.

 There is a bit of a problem here; the General Motors and Chrysler bailouts did not help the economy; they hurt it. Yes, they kept the United Auto Workers in cash, which was the real purpose, anyway. (More on this below.) However, they also diverted huge amounts of capital away from more productive sectors in order to fund a venture in Crony Capitalism or maybe even Crony Socialism.

I doubt that Krugman is familiar with Frederic Bastiat, and reasonably so, since Bastiat really emphasized opportunity cost and Krugman really seems to believe that by printing money, government can do away with that pesky little economic law. The GM and Chrysler bailouts not only were politically-motivated, but also were carried out with a political calculus, all the way down to determining which dealerships would be closed and which would stay open. (It seems that campaign contributions had something to do with the calculus of decision making.)

Bastiat was a master of understanding the larger picture, something that Keynesians are not able to comprehend. (Sorry, folks, the use of aggregates does not constitute a view of a "big picture" of economics.) Instead of looking to the UAW members who kept their jobs, Bastiat would have looked at the opportunities that were lost and the entrepreneurs who could not see their own ideas fulfilled because the UAW needed a bailout.

I notice another trend in Krugman, writings, and that is a very sneaky theme that goes something like this: The economy is going to recover very well, anyway, so we should re-elect Obama to "validate his record." Furthermore, Krugman wants us to believe that if Mitt Romney were elected and the recovery occurred, that would be very bad because he would wrongly get the credit for recovery. (Actually, I think it will be bad if either man wins the election, but that is another story.)

If Obama is re-elected and the economy slides down, then I am sure that Krugman simply will blame the Goldstein Republicans or even George W. Bush. Of that we can be sure.

While I did not watch the DNC (or RNC) conventions, I did see a hilarious Youtube of former Michigan Governor Jennifer Granholm claiming that Obama's auto bailout saved the entire U.S. manufacturing sector and with it, the whole economy. Not only is she completely unhinged, but the notion that forcing taxpayers to underwrite a horribly-unproductive industry is not the way to save anyone except for those who were politically-connected. Furthermore, her claim that the "entire auto industry" would have collapsed without the bailout is simply false.

I do find it instructive that Krugman never mentioned this mangling of the facts, but as I have said before, the guy is a political operative, not an economist. A real economist would not claim that throwing money into a political rathole constitutes a stimulus that leads to recovery.

Krugman Now Is a Full-Time Political Operative

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

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

Frederick Bastiat noted that one of the most fundamental errors made in economic analysis is that people (including people like Krugman who should know better) make judgments only on what is seen without understanding what is not seen. Bastiat writes:

In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause - it is seen. The others unfold in succession - they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference - the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, - at the risk of a small present evil.

Krugman looks at the people employed via subsidies to "green energy" producers and real subsidies given to "Government Motors" and concludes that wealth MUST be created, otherwise these people would not be employed. He literally cannot tell the difference between politically-based subsidies and the actual process of how a market economy produces wealth. Thus, he becomes the perfect prophet for an utterly-politicized age.

Now, if government would concentrate on the weather, we would have no more hurricanes....

With the latest employment numbers looking bleak, the Usual Suspects are out in droves explaining why after spending trillions of dollars, the economy continues to sink. Leading the way is Paul Krugman, who insists that this continuing downturn exists because the government has been “concentrating” on the wrong thing: budget deficits.

Krugman writes:

I don’t mean to dismiss concerns about the long-run U.S. budget picture. If you look at fiscal prospects over, say, the next 20 years, they are indeed deeply worrying, largely because of rising health-care costs. But the experience of the past two years has overwhelmingly confirmed what some of us tried to argue from the beginning: The deficits we’re running right now — deficits we should be running, because deficit spending helps support a depressed economy — are no threat at all.

And by obsessing over a nonexistent threat, Washington has been making the real problem — mass unemployment, which is eating away at the foundations of our nation — much worse.

The Keynesian explanation of what is happening is pretty straightforward, and Krugman does it on a regular basis (along with Brad DeLong and, to a lesser extent, Robert Reich). Details include:

• The economy operates in a circular motion, with consumer spending propping up business activity, which in turn provides jobs for consumers so that they can continue to spend and give themselves jobs (so that they can continue to spend);

• If marginal taxes on the wealthiest people are not high enough to confiscate much, if not most, of their income, then the rich will “hoard” the money and not spend enough, which slows and ultimately breaks what Reich calls the “virtuous circle” of spending;

• When that happens, government must raise tax rates on the “rich” (Reich calls for a return of the 70 percent marginal rates that existed in 1981) in order to get money into the hands of the “middle class” (which apparently is a creation of the State) so that the spending circle can be revived;

• At the present time, interest rates are very low, which means that the economy is in a “liquidity trap” in which the only way that the spending circle can move is via more government spending, which should be financed by borrowing, and since interest rates are low, the borrowed money essentially is “free;”

• If a person makes a point of discussion that deviates from what has been presented, that person is motivated by hatred of the unemployed and wants people to lose their jobs and wants the economy to tank;

• Thus, in the end, the debate on Keynesian “solutions” ultimately is a debate on good and evil. Those who support Keynesianism are “good” and those who disagree are evil.

In the numerous columns and blog posts Krugman has written in the past few months, the theme is consistent: there can be no intellectual disagreement with Keynesian analysis because the truth of the Keynesian position is self-evident. Anything else is evil and delusional. For example, the “Regime Uncertainty” position that Robert Higgs and others have taken is nothing more than a figment of one’s imagination:

O.K., I know what the usual suspects will say — namely, that fears of regulation and higher taxes are holding businesses back. But this is just a right-wing fantasy. (Emphasis mine) Multiple surveys have shown that lack of demand — a lack that is being exacerbated by government cutbacks — is the overwhelming problem businesses face, with regulation and taxes barely even in the picture.

For example, when McClatchy Newspapers recently canvassed a random selection of small-business owners to find out what was hurting them, not a single one complained about regulation of his or her industry, and few complained much about taxes. And did I mention that profits after taxes, as a share of national income, are at record levels?

So short-run deficits aren’t a problem; lack of demand is, and spending cuts are making things much worse. Maybe it’s time to change course?

While all of this seems to be self-evident to Krugman, there are some important things that are left out. The first is the role of the economist, who is supposed to be able to look beyond the rhetoric and the “man on the street” view that ultimately leads to the “Broken Window Fallacy.” For example, the marginalist position on value is one that is not easily seen or understood by the typical layperson, who is more likely to believe that the value of a final product is determined by its cost of production.

The second is that the typical small business owner is not going to be able to relate how government “job-saving” programs like the subsidizing of corn-based ethanol or the bailout of General Motors has diverted resources from productive to unproductive uses. Instead, the business owner is going to see how people directly are purchasing products and what it costs to make them, and then make decisions from that vantage point.

As I said before, economists are supposed to be able to take in the whole picture, or to contemplate not only what is “seen,” but also what is “unseen,” to quote Frederic Bastiat. In other words, one should expect a journalist to concentrate on what is “seen,” and to miss the aspects of the larger picture. That is excusable, even if it is irritating.

However, it is unexcusable for an economist, and especially one who has the stature of a winner of the Nobel Prize, to concentrate only on what is seen and not only to ignore those important things not seen, but then to personally attack other economists who do their real duties to examine the entire picture and declare that their motivation for doing so is that they are evil and want Americans to lose their jobs.

The truth is that Krugman’s argument is a red herring; had the Obama administration and Congress done nothing but talk about jobs and launch one employment program after another, the rate of joblessness still would be high, and the fiscal picture of this government and this country would be as bad as it is now. The U.S. economy is not doing poorly because of lack of “concentration” by government officials, but because the government stands in the way of an economic recovery.

By bailing out the banks, by bailing out companies, by spending at record levels, and by holding down interest rates, the U.S. Government is preventing resources from moving from lower-valued to higher-valued uses. Furthermore, the government through political intimidation (see the recent raid on Gibson Guitars) and hostile rhetoric against firms that are legitimately profitable is sending the message that private enterprise is the enemy that ultimately must be replaced by state-sponsored enterprise.

There is another problem to this “oversight” issue, and that is the promotion of the wrong view of a “job” itself. As I read the Progressives on jobs, I have come to realize that they (and that includes “economists” such as Krugman) see the “job” solely as a transmission mechanism for income and, therefore, spending.

In other words, the actual services that one provides are irrelevant in and of themselves, or at best are secondary to the income that those providing them receive for their work. In that view, an economy is just one big circle of spending, with “spending” itself taking on a meaning that is quite removed from the actions and desires of consumers.

Spending, according to the Keynesians, is rather impersonal, and it cannot be tied to purposeful behavior by individuals. The value of “spending” is not that individuals are able to purchase goods and services in order to meet their needs, but instead is a mechanism that keeps that “virtuous circle” known as an “economy” moving in the “right” direction.

This is not economics; it is a mechanistic view of the world that ignores individual preferences and the actual movement of resources and factors of production. Unfortunately, people like Krugman add to the tragedy by claiming that those who look to actual economic explanations of this continuing saga by employing the tools of economic analysis do so because they are both stupid and evil. When the “leading lights” of modern academic economics claim that the employment of historically-accepted intellectual instruments is in itself “evil,” then one must wonder about the very future of this discipline.

Krugman and "economic fallacies"

With the job numbers today looking dismal, I figured that the Paul Krugman would call for more borrowing and spending, and he did not disappoint. However, as an added bonus, Krugman also declares certain things to be "economic fallacies," which not only turns upside down any meaning of "economics," but also is built upon that Mother of All Economic Fallacies, the "Fallacy of the Broken Window."

Krugman writes:

One striking example of this rightward shift came in last weekend’s presidential address, in which Mr. Obama had this to say about the economics of the budget: “Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.”

That’s three of the right’s favorite economic fallacies in just two sentences. No, the government shouldn’t budget the way families do; on the contrary, trying to balance the budget in times of economic distress is a recipe for deepening the slump. Spending cuts right now wouldn’t “put the economy on sounder footing.” They would reduce growth and raise unemployment. And last but not least, businesses aren’t holding back because they lack confidence in government policies; they’re holding back because they don’t have enough customers — a problem that would be made worse, not better, by short-term spending cuts.

Notice what Krugman is saying: Government magically can do away with opportunity cost by spending. (Yes, I know, his argument is that government spending will transform "idle resources" and then give the economy "traction" to move on its own.)

Furthermore, he is not listing anything close to an "economic fallacy." Instead, he is dealing with policy issues, while having economic implications, are not economic theories themselves. An "economic fallacy" deals with a violation of either premises or what we might call a "law" of economics.

Perhaps the most famous of the fallacies is about which Frederic Bastiat wrote in "What is seen, and what is not seen" when he described the view that "broken windows" are necessary to keep an economy going:

Have you ever been witness to the fury of that solid citizen, James Goodfellow, when his incorrigible son has happened to break a pane of glass? If you have been present at this spectacle, certainly you must also have observed that the onlookers, even if there are as many as thirty of them, seem with one accord to offer the unfortunate owner the selfsame consolation: "It's an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glaziers if no one ever broke a window?"

Now, this formula of condolence contains a whole theory that it is a good idea for us to expose, flagrante delicto, in this very simple case, since it is exactly the same as that which, unfortunately, underlies most of our economic institutions.

Suppose that it will cost six francs to repair the damage. If you mean that the accident gives six francs' worth of encouragement to the aforesaid industry, I agree. I do not contest it in any way; your reasoning is correct. The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen.

But if, by way of deduction, you conclude, as happens only too often, that it is good to break windows, that it helps to circulate money, that it results in encouraging industry in general, I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.

It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.

What Krugman advocates, of course, is something like the "Broken Window Fallacy" (all in the name of claiming that the BWF is a fallacy in itself), for unless government spending via taxation, monetary creation, and borrowing can create wealth where there was none before, government simply is transferring resources or it is blocking the transference of resources from lower-valued to higher-valued uses.

Now, it is true that if government cuts spending, it will create more unemployment in the short run, but to Krugman, there only is a short run. Because the Keynesian viewpoint holds that resources (for economic purposes) are homogeneous, it does not matter where spending is directed, just as long as "new jobs" are created.

Yet, it DOES matter where spending is directed and it is not a fallacy to emphasize that point. For the past three years, the government has engaged in policies of bailouts, "stimulus" spending, new regulations, and throwing huge amounts of money at "green" energy projects, and we are further away from an economic recovery than when we started.

Yes, Krugman can claim that government spending is falling and that the government already is engaging in "austerity." That is nonsense, but nonsense is what prevails in Washington.