Yes, Krugman, Empower the Inflation Fairy

Lest anyone think that Paul Krugman is an economist, his latest column bemoaning the lack of hardcore inflation presents every reason as to why he is a crank, although a famous crank. Yes, the Inflation Fairy has the answer: sprinkle magic dust and watch it turn into money, lots of money. We'll all be rich!

Let us read Krugman in his own words:

...at this point, inflation — at barely above 1 percent by the Fed’s favored measure — is dangerously low.

Why is low inflation a problem? One answer is that it discourages borrowing and spending and encourages sitting on cash. Since our biggest economic problem is an overall lack of demand, falling inflation makes that problem worse.

Low inflation also makes it harder to pay down debt, worsening the private-sector debt troubles that are a main reason overall demand is too low.

But it gets better:

So why is inflation falling? The answer is the economy’s persistent weakness, which keeps workers from bargaining for higher wages and forces many businesses to cut prices. And if you think about it for a minute, you realize that this is a vicious circle, in which a weak economy leads to too-low inflation, which perpetuates the economy’s weakness.

And this brings us to a broader point: the utter folly of not acting to boost the economy, now.

One can surmise that Krugman really believes that if Ben Bernanke were to unload his proverbial helicopter and shower Americans with lots of money to the tune of, say, a million dollars apiece, then the economy would have plenty of demand and everyone would be rich. It would be so easy. Granted, the Inflation Fairy would have a beard and her wings would look like helicopter rotors, but she still could turn magic dust into money.

There is another reason I say Krugman is no economist, and the following statement demonstrates my point:

From the beginning, it was or at least should have been obvious that the financial crisis had plunged us into a “liquidity trap,” a situation in which many people figure that they might just as well sit on cash. America spent most of the 1930s in a liquidity trap; Japan has been in one since the mid-1990s. And we’re in one now.

Economists who had studied such traps — a group that included Ben Bernanke and, well, me — knew that some of the usual rules of economics are in abeyance as long as the trap lasts. Budget deficits, for example, don’t drive up interest rates; printing money isn’t inflationary; slashing government spending has really destructive effects on incomes and employment.

Perhaps the most important "rules" of economics to be "suspended" by a "liquidity trap" is the Law of Opportunity Cost and the Law of Scarcity, or so Krugman would have us believe. Interestingly, he wants us to believe that by the simple act of printing lots of money, government essentially is creating real wealth, as in Krugman's view, governments self-generate wealth.

For all of the Keynesians out there who believe that the real problem is "idle resources" that can be "stimulated" by government doling out lots and lots of new cash, one must remember that after the new money has been farmed out to the economy, people will act, whether they pay down debts or use it to spend on consumption goods.

However, what they want us to believe is that after the Inflation Fairy unloads her magic dust and people have gone on a spending spree, somehow the economy then will magically arise and move forward. All that was needed was some "pump priming"!

But why should that be the case. Why should the act of dumping a lot of new money on people give long-term revival to the economy? How is it that a bunch of new money the first time around would awaken the owners of those "idle resources" but not be needed for round two and beyond? Krugman writes of the economy "gaining traction," but he never explains what it means.

This last point is important, for Krugman and his followers want us to believe that after a massive round of distributing new money (and the new money always goes to those most in need), the prosperity that follows will move into ever-widening circles and spreads employment to the unemployed. In other words, Krugman wants us to believe at least a little bit more inflation will bring hope:

I wrote recently about how, by allowing long-term unemployment to persist, we’re creating a permanent class of unemployed Americans. The problem of too-low inflation is very different in detail, but similar in its implications: here, too, by letting short-run economic problems fester we’re setting ourselves up for a long-run, perhaps permanent, pattern of economic failure.

It has been a long time since an economist was publicly willing to claim that inflation would bring prosperity, give that a lot of us still remember the huge inflation that occurred around 1980, and it was not a wonder drug. (Krugman would argue that we were not in a liquidity trap, so the laws of economics were different.)

But here is the problem: over time, a new bounce in the economy becomes dependent upon yet another round of inflation. At first, inflation seems to be a miracle cure, as no doubt a bunch of new money in the hands of at least some people will make them better off relative to others. They will spend or maybe pay off some debts and be able to purchase things at prices that reflect the time before the surge of new money. (It takes a while for the money to work its way through the economy and finally push up prices, although the process of increasing prices will be uneven.)

But then what? Because it was the inflation that produced the temporary surge in activity, the only way to replicate the economic bounce is to inject another round of new money. This time, the "good" effects are not quite as good and the "bad" effects become a little more pronounced. One can understand what happens as this process is repeated time and again.

When the 1960s began, even though the economy was in a recession, nonetheless times overall were pretty good and inflation was low. As the government began to grow massively during the next decade and the American military venture into Vietnam metastasized, the government, through the Fed, turned to more and more inflation. By 1965, all silver coins were gone (although the government insisted that the new "sandwich" coins were just as valuable as the old silver ones), and by 1971, there was a monetary crisis.

The theme of Krugman's column is that inflation itself can bring prosperity to an economy languishing in a "liquidity trap." I have no doubt that a massive injection of money into the hands of people like me would have a stimulative effect -- at first. As I noted before, this would not be real prosperity, but rather a trap. Unfortunately, Krugman really does believe that inflation -- the debasing of the marginal unit of money -- is the key to a new prosperity.

And it all comes out in three words: not enough inflation. It is better spoken in two words: Inflation Fairy. Or maybe it is better spoken in one word: insanity.

Is Krugman's Price Wrong? My Reply on the Mises Page

I have this article today on the daily page of the Ludwig von Mises website in which I discuss Krugman's recent blog post, "The Price is Wrong."

Krugman Supports Capital Controls

In reading Paul Krugman for more than a decade, it seems that he has established a firm ideological pattern: Markets evil, government good. Thus, he has decided the solution for the crisis in Cyprus: capital controls.

Now, Krugman will not admit that capital controls are essentially an act of police-state theft, although that is exactly what they are. Instead, he promotes capital controls as the epitome of “responsible” government trying to beat back the evils of capitalism. He writes:

Whatever the final outcome in the Cyprus crisis — we know it’s going to be ugly; we just don’t know exactly what form the ugliness will take — one thing seems certain: for the time being, and probably for years to come, the island nation will have to maintain fairly draconian controls on the movement of capital in and out of the country. In fact, controls may well be in place by the time you read this. And that’s not all: Depending on exactly how this plays out, Cypriot capital controls may well have the blessing of the International Monetary Fund, which has already supported such controls in Iceland.

That’s quite a remarkable development. It will mark the end of an era for Cyprus, which has in effect spent the past decade advertising itself as a place where wealthy individuals who want to avoid taxes and scrutiny can safely park their money, no questions asked. But it may also mark at least the beginning of the end for something much bigger: the era when unrestricted movement of capital was taken as a desirable norm around the world.

But it gets better:

It wasn’t always thus. In the first couple of decades after World War II, limits on cross-border money flows were widely considered good policy; they were more or less universal in poorer nations, and present in a majority of richer countries too. Britain, for example, limited overseas investments by its residents until 1979; other advanced countries maintained restrictions into the 1980s. Even the United States briefly limited capital outflows during the 1960s.

Over time, however, these restrictions fell out of fashion. To some extent this reflected the fact that capital controls have potential costs: they impose extra burdens of paperwork, they make business operations more difficult, and conventional economic analysis says that they should have a negative impact on growth (although this effect is hard to find in the numbers). But it also reflected the rise of free-market ideology, the assumption that if financial markets want to move money across borders, there must be a good reason, and bureaucrats shouldn’t stand in their way.

As a result, countries that did step in to limit capital flows — like Malaysia, which imposed what amounted to a curfew on capital flight in 1998 — were treated almost as pariahs. Surely they would be punished for defying the gods of the market!

Yes, when the socialist Labor government of Great Britain following World War II was seizing property and “nationalizing” industry after industry, the government also made sure that those people who were the victims of this theft could not legally get their money out of the country. (And, as we know, the great British experiment in socialism was a disaster as the nationalized industries became famous for poor quality goods and declining productivity, leading to high rates of inflation and even an IMF bailout.)

As I read this Krugman column, I get the sense that he is claiming that governments are financially and fiscally responsible, but it is those evil people in private enterprise that are making things worse, and the only reason that they might want to get their money out of the country is that they are being selfish. So, when Argentina and Bolivia installed capital controls in the middle of their hyperinflations, no doubt Krugman would claim that it was no big deal. Hey, they had more money than ever, right?

Lest it looks as though I am exaggerating, here is Krugman in his own words:

It’s hard to imagine now, but for more than three decades after World War II financial crises of the kind we’ve lately become so familiar with hardly ever happened. Since 1980, however, the roster has been impressive: Mexico, Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina again in 2002. And, of course, the more recent run of disasters: Iceland, Ireland, Greece, Portugal, Spain, Italy, Cyprus.

What’s the common theme in these episodes? Conventional wisdom blames fiscal profligacy — but in this whole list, that story fits only one country, Greece. Runaway bankers are a better story; they played a role in a number of these crises, from Chile to Sweden to Cyprus. But the best predictor of crisis is large inflows of foreign money: in all but a couple of the cases I just mentioned, the foundation for crisis was laid by a rush of foreign investors into a country, followed by a sudden rush out.

To read Krugman, one would think that people just dumped money into a country and then took it out for no good reason, and THAT was the cause of the crises. In other words, the flow of capital was not a response to what was occurring, but rather was a cause. This would be consistent with Krugman’s statist ideology, and to be honest, I am not surprised to see him embrace the policies that once were the staple of banana republics.

Notice what never receives blame in a Krugman piece: central banks. No, in Wonderland, the only sin that a central banker can commit is not inflating enough. We are supposed to believe that the rapacious capitalists flinging their money around the globe create the financial crises and then responsible governments and central bankers must come in and clean up the mess.

It never seems to occur to Krugman that the various austerity packages that governments are imposing exist for the purpose of propping up the banks, or if Krugman actually acknowledges that fact, he then claims that such policies exist because of a mystical bout of ideology. The ties between bankers, politicians, and central bankers never are explored as though these people all operate in separate spheres of life.

I have no doubt that the vast amounts of movement of capital around the globe can exacerbate a crisis, but not create it. However, capital controls are a form of theft, period, although it is a theft that Krugman supports. He wants us to think that because Great Britain had capital controls and imposed socialism, those were the good old days, and there was no economic price to pay for such policies.

Margaret Thatcher and Ronald Reagan did not come to power because a mystical ideology suddenly appeared in books and in newspapers, an ideology that convinced people who were living in great and prosperous times that things really were terrible. When Thatcher took office, inflation in Great Britain was more than 20 percent and it was 13 percent in Jimmy Carter’s last year in office in 1980. The very policies that Krugman currently endorses came to fruition in the late 1970s. Just because he wants to rewrite history and try to convince us that it was conservative Republicans who pushed through most deregulation does not mean the guy is telling the truth.

Ben Bernanke, Inflationist

Hail, Ben Bernanke! He has received praise from on high, or at least from someone on the Princeton faculty (lavishing accolades upon the former chair of the economics department). Paul Krugman has taken notice that Bernanke isn't about to be the skunk at the party. No, Uncle Ben wants us and our government to spend as though there is no tomorrow. (And with Bernanke running things at the Fed, there very well might not be a tomorrow.)

Krugman compares Bernanke's call for more inflation and expansion of government spending with the earlier opposition some people had to the war in Iraq. (The idea here is that having the courage to speak out against a war in its early stages when the war was popular is the same as having the "courage" to call for the Fed to print more money.)

That's right. Krugman wants us to believe that it takes real courage for someone to demand that the government pretend as though the economy is doing well by borrowing, taxing, printing, and, of course, spending. (Of course, wars entail government spending, lots of government spending, so how could a Keynesian be against that?) Yes, yes, Ben Bernanke also believes in the Inflation Fairy.

In reading Krugman and now Bernanke, I have come to understand that these men see no downside at all in runaway government spending. There is no transfer of wealth from individuals to the state and then to politically-connected people; no. government spending in and of itself creates wealth. Thus, when governments spend money, they actually are producing consumption (or something like that).

Krugman gives all of the usual accolades to government spending (We don't have near enough of it), but my favorite portion of his column is what follows:

The point is not that Mr. Bernanke is an unimpeachable source of wisdom; one hopes that the collapse of Alan Greenspan’s reputation has put an end to the practice of deifying Fed chairmen. Mr. Bernanke is a fine economist, but no more so than, say, Columbia’s Joseph Stiglitz, a Nobel laureate and legendary economic theorist whose vocal criticism of our deficit obsession has nonetheless been ignored. No, the point is that Mr. Bernanke’s apostasy may help undermine the argument from authority — nobody who matters disagrees! — that has made the elite obsession with deficits so hard to dislodge.

And an end to deficit obsession can’t come a moment too soon. Right now Washington is focused on the idiocy of the sequester, but this is only the latest episode in an unprecedented run of declines in public employment and government purchases that have crippled our economy’s recovery. A misguided elite consensus has led us into an economic quagmire, and it’s time for us to get out.

So,there you have it. The CAUSE of the current economic malaise is the lack of government spending. Now, since government spending comes the wealth government confiscates from private individuals who actually produce it might lead us to think that the reason government spending is not as high as Krugman wants it to be is that the economy is depressed. If the economy were doing better, government would be able to take more in taxes and, thus, increase its spending.

In Wonderland, however, things are backward. Government spending creates the wealth that comes from private firms. The more government spends, borrows, prints, and takes in taxes, the wealthier all of us become. Why? Because Krugman, Joe Stiglitz, and now Ben Bernanke tell us that is so.

Austrians and Predicted Inflation: My Reply to John Carney

Your points in the November 29 column on Paul Krugman and the Austrians makes good points, and I would like to make a few comments of my own.

I do believe that when one makes apocalyptic comments, one gets what he deserves if the predictions don't pan out. As you said, that does not mean the Austrians are wrong regarding money and inflation, but expansions of money, especially in the way that the Fed has gone about doing so, are going to have a number of effects, rising consumer prices being only one of them.

I also believe that some of the Austrians, when they predicted near-instant hyperinflation, should have known better. An expansion in the monetary base can lead to what Milton Friedman called the "pushing on a string" effect, as an expansion of bank reserves will not increase the amount of money in circulation (at least not significantly) if businesses and individuals are not borrowing.

This is not to say that the Law of Marginal Utility, as applied to money, is somehow invalidated. An expansion of money in circulation will mean that the value of the marginal unit – in this case, the dollar – will fall, which means more money will be necessary to complete monetary transactions. That is the straight Law of Marginal Utility, and it applies to money as much as it would to anything else that is scarce.

As Murray Rothbard points out in his book, America's Great Depression, the amount of money in circulation during the 1920s grew, and he terms that as "inflation." However, according to the Consumer Price Index of that time, consumer prices fell by roughly one percent a year, which the late Jude Wanniski used as "proof" that Rothbard was wrong when he claimed that the 20s was an inflationary period. What we witnessed was an apples-and-oranges kind of comparison, as most people (including most economists) generally are used to defining inflation as an increase in the government's CPI, but the Austrians would say that changes in the CPI would be the result of inflation and in our case, the result of the monetary policies of the Fed.

While both Austrians and the Monetarists would see inflation as a monetary phenomenon where changes in relative prices of goods and services occur because the value of money, which is used to denote those relative price relationships, changes as the supply expands and contracts. The Austrians take one step further, however, as they go beyond the quantity effects of increases in the amount of money and look at how these monetary increases change the relative prices of real goods. In other words, the significant effect of changing the amount of money in circulation is not necessarily the changes in consumer prices (although they will change over time relative to the money in circulation), but rather the effect that monetary changes will have upon the relationships of the value of real goods to each other.

This point is vital, for the Austrians hold in their business cycle theory that when the central bank manipulates the banking system to increase the amount of money in circulation, the larger effect is not in consumer price changes but rather the fact that relative values of real goods are changed in a way that directs longer-term investment into lines of production that would seem to be profitable but over time turn out not to be. We certainly saw that in the housing boom and in the tech boom a decade earlier. Investments were directed into production lines that could not be sustained, given the preferences of consumers and their own financial constraints.

In the meantime, the actions of the central bank, when added to various policy initiatives by government, can create these booms that are unsustainable within a market setting and sooner or later are exposed by the markets themselves. When the meltdown became absolutely apparent in September 2008, we were seeing a situation where the market was declaring the mortgage securities held by Wall Street firms to be near-worthless.

(I would like to add a separate point here. Why is it that when a firm tries to manipulate the market to make an asset look more valuable than the market would say it is, authorities view that as being illegal, but when the Fed does it, as it is doing with its QE policies, that is considered "good for the economy"? After all, by purchasing billions of dollars of mortgage securities, the Fed is manipulating their values, given that the sheer purpose of Ben Bernanke's actions is to artificially raise security prices, which is deemed criminal behavior if a private firm does it.)

Krugman has explained that these bubbles were due to nothing more than the failures of private markets, and that unless government regulators intervene, markets always will go over the cliff because, well, because markets are just like that. Yet, if one holds that price signals really do matter, then one would ask why all markets do not behave in the manner we saw. Why not an automobile bubble or a bubble gum bubble or a firewood bubble? Instead, Krugman wants to absolve the Fed, Freddie and Fannie, and the various government agencies that were pushing home ownership and refinancing through policies of having played any part whatsoever in the housing bubble, as he wants us to believe that the problems were due solely to what he and other Keynesians believe to be the inherent failures that automatically accompany market transactions.

Austrians, on the other hand, look for the cause-and-effect. Carl Menger, the original Austrian Economist, begins his classic 1871 Principles of Economics with: "ALL THINGS ARE SUBJECT to the law of cause and effect. This great principle knows no exception, and we would search in vain in the realm of experience for an example to the contrary." Why the "irrational exuberance?" Krugman holds to the Keynesian line of "animal spirits" of investors, but that is no cause at all. Why shouldn't "animal spirits" bid down the values? Do they believe that investors are irrational when bidding up asset prices, but are rational when bidding them down? The Austrians would say that Fed policies of driving down interest rates where they would greatly affect mortgage markets, along with the drive-people-into-home-ownership policies of the Federal government created huge incentives for the creation of the housing boom, which ultimately turned into a bubble, and then a huge bust.

Regarding the consumer price effects of the Fed's policy of spreading dollars around the world, we can see some price increases in various commodities, i.e. food and fuel. Those of us who purchase gasoline or go to the grocery story can attest to some very large price increases over the past five years, and farmers where I live tell me they are having to absorb large increases in the price of animal feed, fertilizer, and diesel fuel. While Krugman wants to explain away these changes as being driven purely by inherent "volatility" and economic growth in places like China, it would seem to me that large increases in the money prices of those things denominated worldwide in dollars just might be due to large increases in the amount of money being poured into these assets and lines of production.

There is one more point. The Fed has vastly increased its balance sheet and has been spreading dollars around the world, mostly to purchase "assets" that essentially have little or no value so that the holders of those assets do not have to take the necessary financial bath. Such actions would not necessarily result in a huge increases of consumer prices overall, but they would have the effect of directing real investment away from those lines of production that would be both profitable and sustainable. Whether it is protecting the banks or the "green investors" or governments that have spent themselves into financial oblivion, the Fed has stymied the recovery by forcing assets into production areas that are doomed to failure. The result is what we see around is in the anemic economic growth.

Where some of the Austrians went wrong was in assuming that all of the Fed's new money pumping would be channeled into the purchase of consumer goods, thus driving up their prices. We have to look at where the new money is going, not where we might think it is going.

Yes, Inflation is our Savior

One of Paul Krugman's repeated themes in his columns and blog posts is that inflation is a wonderful thing, and apparently we never can have enough of it. Inflation wipes out debt, transfer wealth from creditors to debtors, and makes all of us feel rich.

Hyperinflation? No problem. It might make things inconvenient for a while, but it really doesn't do any damage. The only damage comes if we stop inflating and even have the dreaded and evil deflation.

In a recent blog post, "It's Always 1923," Krugman once again accuses others of rewriting history. This is rich from the guy who wants us to believe that all of the major deregulatory initiatives of 30+ years ago were the product of Ronald Reagan, despite the fact that many of the major initiatives already had passed or were in the hopper before Reagan even won the 1980 presidential election. (As I have said many times before, Krugman wants us to believe that Jimmy Carter and Ted Kennedy were conservative Republicans.)

While praising a recent piece by David Glasner that praises (What else?) "easy money," Krugman writes about the famous German hyperinflation of 1923:

...the 1923 hyperinflation didn’t bring Hitler to power; it was the Brüning deflation and depression. Hard money and a gold standard obsession, not excessive money printing, was the proximate disaster.

Technically, he is correct. Hitler came to power nine years after the hyperinflation during the Great Depression (which hit Germany very hard). However, one gets the sense that Krugman does not take that inflation very seriously, and that any policy other than "easy money" will bring an economy to ruin.

That should not surprise anyone, given Krugman's constant drum-beating for more inflation today. While extolling the government's own inflation index, Krugman wants us to believe that only the rich are inconvenienced by inflation, and that the rest of us are better off because of it.

What he does not say is that most middle and lower-economic class Americans have not seen increases in their incomes in years, but the prices they have had to pay for food, gasoline, and other commodity-based goods have gone up substantially. (Of course, Krugman has claimed that THOSE price increases have nothing to do with the massive money-printing operation at the Fed, and that they are due entirely to the fact that commodity prices are "volatile" -- his words.)

Furthermore, he is in a quandary when he praises inflation. If inflation does no economic damage -- other than to supposedly transfer wealth from rich to poor and middle-class people, something that Henry Hazlitt pointed out decades ago is simply not true -- then hyperinflation also would be a good thing. In Wonderland, there is no such thing as inflation distorting structure of production or encouraging lines of production that are unsustainable.

In fact, in Wonderland, inflation does the opposite: it encourages more capital formation and investment in everything, since it supposedly increases "demand," and "aggregate demand" is the key to prosperity. If that be the case, then we have discovered the secret for Haiti to become more prosperous: print money and lots of it.

Keynesians are not free to claim here that Haiti's problems lie elsewhere, since they have debunked any arguments that say capital formation and production structures don't matter. All that matters is demand, so if Haiti's government wants to print "demand," it should do so and then investors will flock to Haiti to build more things, given the "demand" for goods, all courtesy of the printing press.

Hazlitt made a very good analogy when he wrote that inflation is like the "Dead Sea Fruit," which "turns to ashes" when one puts it in one's mouth. I'm not surprised that yet another economics faculty member at Princeton has praised that economic wonderdrug, inflation.

Japan Steps in It

What do you know? Japan now is out of Paul Krugman's doghouse, and all it took was some inflation. Writes Krugman:

For three years economic policy throughout the advanced world has been paralyzed, despite high unemployment, by a dismal orthodoxy. Every suggestion of action to create jobs has been shot down with warnings of dire consequences. If we spend more, the Very Serious People say, the bond markets will punish us. If we print more money, inflation will soar. Nothing should be done because nothing can be done, except ever harsher austerity, which will someday, somehow, be rewarded.

But now it seems that one major nation is breaking ranks — and that nation is, of all places, Japan.  

Even though Japan's massive Keynesian spending plan in the 1990s did not prevent the "lost decade," nonetheless it seems that the Japanese are ready for their own version of Phase II. (True to form, Krugman claims that Japan's trouble was that it did not build enough roads and bridges to nowhere to have a sustained recovery.)

I'll let Krugman go on with his newest version of the magic of inflation, but I would like to share a great article on the Japanese experience, written by Doug French. Japan, says French, engaged in massive amounts of malinvestment during the 1980s, but the government did everything it could to keep the necessary liquidations from happening:

Between 1992 and 1995, the Japanese government tried six stimulus plans totaling 65.5 trillion yen and they even cut tax rates in 1994. They tried cutting taxes again in 1998, but government spending was never cut. Also in 1998, another stimulus package of 16.7 trillion yen was rolled out nearly half of which was for public-works projects. Later in the same year, another stimulus package was announced, totaling 23.9 trillion yen. The very next year an ¥18 trillion stimulus was tried, and, in October of 2000, another stimulus for 11 trillion was announced. As economist Ben Powell points out, "Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession," with Japan's nominal GDP growth rate below zero for most of the five years after 1997.

 That, folks, means a lot of bridges to nowhere. Unfortunately for Japan, when this latest experiment with inflation and new government spending provides results similar to what happened before, Krugman will claim that the problems was a lack of spending and inflation. I doubt seriously that the Inflation Fairy will grant Japan or Krugman their wishes: a booming economy.

A Barbarous Inflation

So, Paul Krugman comes clean about money, or at least his view of it, writing:

For many people on the right, value is something handed down from on high It should be measured in terms of eternal standards, mainly gold; I have, for example, often seen people claiming that stocks are actually down, not up, over the past couple of generations because the Dow hasn’t kept up with the gold price, never mind what it buys in terms of the goods and services people actually consume.

And given that the laws of value are basically divine, not human, any human meddling in the process is not just foolish but immoral. Printing money that isn’t tied to gold is a kind of theft, not to mention blasphemy.

For people like me, on the other hand, the economy is a social system, created by and for people. Money is a social contrivance and convenience that makes this social system work better — and should be adjusted, both in quantity and in characteristics, whenever there is compelling evidence that this would lead to better outcomes. It often makes sense to put constraints on our actions, e.g. by pegging to another currency or granting the central bank a high degree of independence, but these are things done for operational convenience or to improve policy credibility, not moral commitments — and they are always up for reconsideration when circumstances change. (Emphasis mine)

In other words, the supposed "greatest" economist in the world cannot even articulate an Austrian theory of value without slipping into insults, caricatures, and straw men. Actually, Austrians believe that value is subjective and depends upon what individuals are willing to give up in order to obtain something.

Now, we do believe that laws of economics are immutable because they are based upon human action. Is Krugman about to say that the Law of Marginal Utility, the Law of Scarcity, and Opportunity Cost are nothing but mere human constructs that can be changed at the whim of a legislature or a president? Does the Law of Demand hold only when Krugman wants it to do so?

Austrians have favored gold as money not for any "religious" reasons, but rather because over time gold supplies are not easily manipulated, which means governments find it harder to debase the money that people are holding. Now, according to Krugman, this makes me "anti-Enlightenment" because I don't think that one group of people should be able to use covert means to take property from one person and give it to someone else who is politically-favored.

Let's face it. That is exactly what inflation does: it transfers wealth. Krugman can write about "better outcomes" all he wants, but he really is saying that it is better for government agents to have the power at any time to make political decisions that will negatively affect the property and monetary holdings of individuals. Furthermore, when Krugman declares that money "should be adjusted, both in quantity and in characteristics, whenever there is compelling evidence that this would lead to better outcomes," he really means "adjusted" in just one way: expansion of the amount of money in circulation. After all, there can be nothing worse than deflation, at least in the Krugman-Keynesian view.

I would like to turn toward Krugman's insults toward those who do favor gold. I first link readers to what Carl Menger wrote about money in his 1871 Principles of Economics:

Money is not the product of an agreement on the part of economizing men nor the product of legislative acts. No one invented it. As economizing individuals in social situations became increasingly aware of their economic interest, they everywhere attained the simple knowledge that surrendering less saleable commodities for others of greater saleability brings them substantially closer to the attainment of their specific economic purposes. Thus, with the progressive development of social economy, money came to exist in numerous centers of civilization independently. But precisely because money is a natural product of human economy, the specific forms in which it has appeared were everywhere and at all times the result of specific and changing economic situations. Among the same people at different times, and among different peoples at the same time, different goods have attained the special position in trade described above.

There is nothing "anti-Enlightenment" in that paragraph, or in Menger's entire section on money. So, let us turn to Rothbard, since he was much more libertarian than Menger or Ludwig von Mises, to see if he writes from a religiously-mystical viewpoint:

A most important truth about money now emerges from our discussion: money is a commodity. Learning this simple lesson is one of the world's most important tasks. So often have people talked about money as something much more or less than this. Money is not an abstract unit of account, divorceable from a concrete good; it is not a useless token only good for exchanging; it is not a "claim on society"; it is not a guarantee of a fixed price level. It is simply a commodity. It differs from other commodities in being demanded mainly as a medium of exchange. But aside from this, it is a commodity, and, like all commodities, it has an existing stock, it faces demands by people to buy and hold it, etc. Like all commodities, its "price" is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. (People "buy" money by selling their goods and services for it, just as they "sell" money when they buy goods and services.)

In fact, the Austrians have not written about money or gold in any sort of mystical way, as Krugman claims. Yes, they have said that inflation does involve a form of "theft," since government is using it to quietly transfer wealth from one group of people to another, but claiming simultaneously that it is not engaging in such activity. I suspect that if I entered Paul Krugman's house and took some of his possessions without his permission, he also might accuse me of "theft," even if I vociferously protested by claiming that I was simply engaging in an act of "social justice," since he is wealthier than I am.

Of course, Krugman ends with his usual insults posing as an intellectual contribution to monetary theory:

And I do find myself thinking a lot about Keynes’s description of the gold standard as a “barbarous relic”; it applies perfectly to this discussion. The money morality people are basically adopting a pre-Enlightenment attitude toward monetary and fiscal policy — and why not? After all, they hate the Enlightenment on all fronts.

The bottom line is that we aren’t really having a rational argument here. Nor can we: rationality has a well-known liberal bias.

I'm not sure which of the "Enlightenment" figures advocated inflation, including Jeremy Bentham. However, Bentham did call for governments to arrest and imprison people who "might" commit crimes one day, and he favored the surveillance society that we have today. Certainly, the all-encompassing State is a product of post-Enlightenment thinking.

However, when one points out that people are hurt by inflation, and that inflation over time distorts the structure of production and wreaks havoc on an economy, then according to Krugman, those people are wrong because someone before the Enlightenment might have believed the same thing.

Furthermore, Krugman is claiming, apparently, that all systems of thought and all writings and laws produced before the Enlightenment were wrong. Does that include laws against theft and murder? Does that mean Aristotle and Plato were idiots? Who knows. After all, we are not having a "rational discussion," since Krugman now is claiming that any system of thought produced before the Enlightenment automatically is wrong. Somehow, I think that is an irrational way of looking at things.

No, Paul, Wealth Transfers are NOT a "Free Lunch"

One of the first principles that supposedly is taught in formal economic study is the Law of Opportunity Cost, with the simple acronym being TANSTAFL: "There ain't no such thing as a free lunch." From that hallowed halls of Princeton University, the Land of Privilege, the view is different.

At Princeton University, economists (and probably people in all of the other departments) teach that government is magic, and that financial trickery is the same thing as creating wealth and bringing about legitimate economic growth. Or, to put it another way, Paul Krugman claims that at certain times (when the "lower bound" of interest rates is zero -- the Keynesian "Liquidity Trap"), that financial tricks can create the "free lunch." (Those are his words, not mine.)

In a recent blog post, Krugman once again claims that tricks can create the "free lunch," which matches what he claims in his book, The Return of Depression Economics. (Once assigned the book as reading for my MBA students, and even many of them were able to see the holes in Krugman's arguments. But, then, The Great One is not known for arguing, preferring the insult and the appeal to academic privilege instead.)

He lays out some scenarios, such as outright printing money or having the Treasury mint a three-trillion-dollar platinum coin and deposit it at the Federal Reserve System, but says they are not feasible? Why? There is a legal debt ceiling set by Congress, which I gather from this post is the only thing keeping these schemes from being realistic. He writes:

In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back. So this is all a gimmick — but since the debt ceiling itself is crazy, allowing Congress to tell the president to spend money then tell him that he can’t raise the money he’s supposed to spend, there’s a pretty good case for using whatever gimmicks come to hand.

Krugman's next comment is even more puzzling, given what he has written in the past:

It’s true that printing money isn’t at all inflationary under current conditions — that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. So even though right now that debt is just a claim by one more or less governmental agency on another governmental agency, it will eventually turn into debt held by the public.

But why should that matter, given Krugman's earlier statements that (1) the Fed should be permitted to purchase short-term Treasury paper in the primary market, thus monetizing the federal debt directly, and (2) that public debt is not much of a problem, since "we owe it to ourselves."

He goes on:

We are living in weird economic times, where many of the usual rules don’t apply and there are big free lunches to be had. But not everything is a free lunch, even now.

 'Tis true, we are in weird times. But those times are better explained by the Austrian Business Cycle Theory than the contradictory madness that comes from Krugman who apparently was for printing money before he was against it.

The vast pull-the-rabbit-out-of-the-hat schemes by the Fed in the end are little more than naked wealth transfers. By propping up the financial institutions that made bad decisions, the Fed is disregarding price signals and rewarding the people who made bad decisions at the expense of those that didn't. Wealth transfers might perform political miracles -- the last election proved that point -- but they are not free lunches. Indeed, they are very expensive lunches, much more costly than should be the case.

The Prophecy Game

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

Thus, he centers on an editorial that is more than three years old to claim that EVERYONE who might disagree with his wisdom is a false prophet. No, he doesn't want them stoned to death, just removed from any meaningful social contact with anyone. His theme is simple: anyone who predicted that the massive expansion of the Fed's balance sheets and attempts to monetize U.S. debt and deficits would lead to an increase in interest rates is an idiot:

...we cannot and will not persuade these people to reconsider their views in the light of the evidence. All we can do is stop paying attention. It’s going to be difficult, because many members of the deficit cult seem highly respectable. But they’ve been hugely, absurdly wrong for years on end, and it’s time to stop taking them seriously.

 Krugman points out that as long "as the economy is depressed," interest rates will remain low. Unfortunately, he wants to claim that this is a market phenomenon instead of something that is being done by Ben Bernanke, an effect of the bad economy. Yet, what should help revive the economy? You guessed it: low interest rates.

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

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

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

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

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

The Capitalists are Coming! The Capitalists are Coming!

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

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

Krugman, apparently not wanting to go quite as far as his forebears like John Kenneth Galbraith, says that maybe a different explanation is needed, writing:

Why is this happening? As best as I can tell, there are two plausible explanations, both of which could be true to some extent. One is that technology has taken a turn that places labor at a disadvantage; the other is that we’re looking at the effects of a sharp increase in monopoly power. Think of these two stories as emphasizing robots on one side, robber barons on the other.

First, the attack language is the type of thing that one has come to expect from Krugman whenever he speaks of private enterprise. He cannot explain how it might be that people who cannot coerce anyone into making an exchange are engaging in acts of theft, but if the government forces someone to do something at the point of a gun, that is "community" or "caring for the poor."

Second, his overall explanation of why we have higher rates of unemployment among college-educated workers harkens back to the days of FDR when the government was claiming that "automation" or "capital" was the cause of the employment problems. He continues:

About the robots: there’s no question that in some high-profile industries, technology is displacing workers of all, or almost all, kinds. For example, one of the reasons some high-technology manufacturing has lately been moving back to the United States is that these days the most valuable piece of a computer, the motherboard, is basically made by robots, so cheap Asian labor is no longer a reason to produce them abroad.

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

Still, can innovation and progress really hurt large numbers of workers, maybe even workers in general? I often encounter assertions that this can’t happen. But the truth is that it can, and serious economists have been aware of this possibility for almost two centuries. The early-19th-century economist David Ricardo is best known for the theory of comparative advantage, which makes the case for free trade; but the same 1817 book in which he presented that theory also included a chapter on how the new, capital-intensive technologies of the Industrial Revolution could actually make workers worse off, at least for a while — which modern scholarship suggests may indeed have happened for several decades.

This reminds me of the Paul Craig Roberts's claim that if capital is mobile across international borders, the Law of Opportunity Cost no longer applies (which is a way of saying that mobile capital eliminates the Law of Scarcity). Actually, the actual "law" is the Law of Comparative Advantage, but in truth, comparative advantage is just a restatement and application of opportunity cost.

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

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

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

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

But Krugman is not satisfied there. No, the evil capitalists not only are using robots and permanently displacing workers, but they also are engaging in creating monopolies:

What about robber barons? We don’t talk much about monopoly power these days; antitrust enforcement largely collapsed during the Reagan years and has never really recovered. Yet Barry Lynn and Phillip Longman of the New America Foundation argue, persuasively in my view, that increasing business concentration could be an important factor in stagnating demand for labor, as corporations use their growing monopoly power to raise prices without passing the gains on to their employees.

Earth to Krugman: every academic economist should know that wages and salaries are not "passed on" by employers; they are payments to owners of the factor of production known as labor. Second, while economists like Krugman (and, of course, the usual places like the leftist Daily Kos) make the assumption that profits exist at the expense of workers, the truth is that in a free market, profits are what an entrepreneur will earn if he or she makes the correct assumption regarding present prices for factors of production versus perceived future prices for final goods. Without the possibility of profits, those jobs and, more important, the quality of the goods people can purchase, would not exist.

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

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

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

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

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

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

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

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

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

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

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

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

Are the Austrians Wrong?

Paul Krugman is at it again with the Austrians, creating straw men and then shooting down the arguments that they never made in the first place. Today, he goes after Peter Schiff, who actually did a very good job warning people about the housing bubble. Of course, in the process of supposedly discrediting Schiff, he discredits himself, too.

Krugman writes:

Now, the thing about Schiff and all the other Austrians predicting runaway inflation is that they were right to make this prediction given their model. If you believe that a recession is caused by a failure on the production side of the economy, the result of past malinvestment or something, you should also believe that any attempt to correct this decline by expanding credit will simply result in too much money chasing too few goods, and hence a lot of inflation.

By the same token, the failure of high inflation to materialize amounts to a decisive rejection of that model. (And no, it’s not because the numbers are fudged; independent estimates don’t differ significantly from official inflation.)

First, I agree that since the increase in the monetary base has come about by expanding bank reserves, the only way the new money will move into the economy will be through a huge expansion of loans, which has not happened. Yes, much of that new money has gone into government bonds, but we have to remember that much of what is raised through government bond auctions is used to pay off previous bonds. (This is something the ancients once called "robbing Peter to pay Paul.") Even Austrians know that the new money has to circulate before it affects asset prices.

However, Krugman misses something that is obvious: The Austrians, including Schiff, recognized the housing bubble for what it was, a huge set of malinvestments. After all, if there are no malinvestments, there is no bubble. So, how could a theory that actually predicted the meltdown also be a bad theory, if we are to use Krugman's criteria for determining if a theory has validity or not.

Second, while we have seen significant price increases in food and fuel, and these increases come in part because of the continual debasing of the dollar. What we have not seen has been hyperinflation and I agree with Krugman that this is because the economy is depressed. No one in the Austrian camp would deny this.

Third, the very fact that we have had massive malinvestments that cannot be supported by the market certainly is going to bring a downward effect on the economy and on prices. Furthermore, with government moving vast amounts of money to prop up the failing housing market, not to mention subsidizing "green energy" and banks, why should we be surprised that there is a huge lack of economic growth?

However, understand that Krugman also has called for government measures that would vastly expand the rate of inflation, that being his call for the Federal Reserve System to be the primary buyer of U.S. short-term securities, something that for now is prohibited by law. (Krugman claimed that a "clever lawyer" could find a way to re-interpret the law, and I am sure he is right, given how the government has re-interpreted other laws to fit the interests of politicians.)

If that were to take place, then there is no doubt we would see massive inflation as the bond sales would be financed almost entirely by new money, which then would be spent by the government. Krugman pretty much said the same thing in his Monday column, claiming that government can just print its way out of this morass without any real consequences, since inflation would "be good for the economy."

There is one thing that troubles me whenever Krugman claims that Austrians are willfully blind because they have not bowed to Krugman's demands that they declare the Austrian Theory of the Business Cycle to be invalid, and it is this: If real increases in government spending, massive Fed purchases of both private and public securities, and vast subsidies given to "green" industries, along with a huge auto industry bailout have not produced a robust recovery, then should not Krugman also take a hard look at his model?

(Yes, yes, I know. Krugman says that the problem is we have not had enough government spending, enough taxation, enough printing, enough borrowing, and, of course, enough inflation. After all, Krugman is a strong believer in the post hoc ergo propter hoc fallacy of inflation and economic growth, and despite historical evidence to the contrary, Krugman is not going to abandon what seems to be his real religion.)

Britain and Post-War France

In his never-ending quest to sanitize inflation, Paul Krugman now compares Great Britain and France in the 1920s, claiming that Britain chose the route of "virtue" while France inflated away its postwar debt, with France coming out the better. As is his M.O., Krugman does not tell the entire truth, but when one is bashing so-called virtue, I guess not telling the truth is to be expected.

He writes:

The two countries dealt with their debts very differently. Britain was a model of orthodoxy, returning to the gold standard and running huge primary surpluses to pay its debts; France, with a weaker political system, ended up inflating away much of its debt and accepting a big devaluation of the franc.

He then shows graphs that show a bigger gain in postwar GDP growth, which I guess is proof that inflation confers wonderful general economic benefits. (I am not putting the graphs on this page, so if you want to see them, go to his blog.)

First, Krugman overdoes it with the whole "virtue" thing. There was no "virtue" in Great Britain overvaluing its Pound Sterling following the war; virtue, after all, requires honesty and the Brits were not being honest about what World War I had done to its economy. (Like Krugman, they were in the "let's pretend we still are rich" mode of thinking.) Murray Rothbard in America's Great Depression noted that British financial policy was a disaster:

Great Britain, in particular, faced a grave economic problem. It was preparing to return to the gold standard at the pre-war par (the pound sterling equaling approximately $4.87), but this meant going back to gold at an exchange rate higher than the current free-market rate. In short, Britain insisted on returning to gold at a valuation that was 10-20 percent higher than the going exchange rate, which reflected the results of war and postwar inflation. This meant that British prices would have had to decline by about 10 to 20 percent in order to remain competitive with foreign countries, and to maintain her all-important export business.

However, notes Rothbard, because of the political power of Britain's labor unions, the needed wage contractions did not take place:

But no such decline occurred, primarily because unions did not permit wage rates to be lowered. Real-wage rates rose, and chronic large-scale unemployment struck Great Britain. Credit was not allowed to contract, as was needed to bring about deflation, as unemployment would have grown even more menacing—an unemployment caused partly by the postwar establishment of government unemployment insurance (which permitted trade unions to hold out against any wage cuts).

.As a result, Great Britain suffered from high unemployment during the 1920s. Indeed, had the Brits been "virtuous" instead of, well, British, they would have been willing to be honest about the real value of the pound and let it fall to market levels. To make matters worse, the USA through the actions mostly of the New York Federal Reserve Bank, actively increased the U.S. money supply, an action which did stabilize the pound at the higher price -- but at a high cost both to the British economy and ultimately to the USA itself.

Postwar France suffered from both inflation and political instability, as outlined by Benjamin Anderson in Economics and the Public Welfare. Anderson notes that by late July 1926, the French franc had fallen in value to about two cents. He writes:

Every day the housewife of Paris found that her bread and her herring and her wine were rising in price. A German housewife in the late autumn of 1925, speaking of the French housewife, said "Poor thing." The German housewife had been there herself.

That is the side of inflation Krugman claims does not exist, or is reluctant to admit. But when one writes that printing money will bring back prosperity, one is not going to admit the downside of inflation.

Krugman Channels His Inner Crank

For many years I have said that Paul Krugman, academically-decorated as he is, really is not an economist but rather is a political operative with an academic pedigree. Today, I must add another description: crank. Yes, with his column today, Paul Krugman demonstrates beyond a doubt that he is a crank, a pure inflationist on the same level with that most famous crank, Silvio Gesell.

For all those who claim I exaggerate, I will let Krugman's own words speak for him:

For we have our own currency — and almost all of our debt, both private and public, is denominated in dollars. So our government, unlike the Greek government, literally can’t run out of money. After all, it can print the stuff. So there’s almost no risk that America will default on its debt — I’d say no risk at all if it weren’t for the possibility that Republicans would once again try to hold the nation hostage over the debt ceiling.

But if the U.S. government prints money to pay its bills, won’t that lead to inflation? No, not if the economy is still depressed.

Now, it’s true that investors might start to expect higher inflation some years down the road. They might also push down the value of the dollar. Both of these things, however, would actually help rather than hurt the U.S. economy right now: expected inflation would discourage corporations and families from sitting on cash, while a weaker dollar would make our exports more competitive.

This hardly is out of place with Krugman's other writings on the subject. Like all cranks, Krugman looks only at one side of inflation, the "deleveraging" side in which inflation in essence repudiates debt. He absolutely is correct when he says that since U.S. Government debt is denominated in dollars, should the government make its payments via newly-created money (ostensibly done by the Fed directly purchasing U.S. Government short-term debt from the Department of the Treasury), it will have fulfilled its paper obligations.

And he is right that such actions would create future inflationary expectations, but that also is good because that would force more investment or spending, and we could export more. You see? There is no downside to this scheme! Print, print, print, and print some more!

Yet, there IS a downside, and it is huge. First, let us deal with the "little guy," the one who Krugman claims will benefit most from inflation. Krugman assumes that this person, who ostensibly has little or nothing in savings, will not be hurt as prices rise. Yet, it is precisely the "little guy" who does not get the new money first, who does not receive the benefit of getting pay raises that allow him to keep up with the rising prices.

Instead, this person is faced with the prospect of becoming poorer in real terms. Certainly the Obama administration has pursued a policy of inflation, and I wonder how many readers have seen their incomes go up proportionally to their expenses for food, fuel, and other necessities. I doubt seriously that most readers can say that has happened, but that many more will say that prices for goods and services have gone up faster than their incomes.

Second, Krugman really wants us to believe that an inflationary climate will improve investment conditions. I'm not sure how that would happen, given that when there is noticeable inflation, people will put their money into things like gold, silver, and other items that tend to hold their value, something we saw during the late 1970s when we had double-digit inflation.

The other thing that would happen would be people getting out of the dollar, which also was the case during the late 1970s. No doubt, if such things happened, Krugman would call for capital controls, a prohibition on buying gold, and a general investment police state, as though such coercion and prosperity go hand-in-hand.

There is one other inconsistency to which I would like to call the reader's attention: If Krugman really does believe that printing money is a permanent solution to our budget problems, then why raise tax rates? For that matter, why have taxes at all, since we can print our way to prosperity?

I doubt he has a good answer for these questions other than to say that he doesn't want hyperinflation, just enough inflation to repudiate debts and cover the government's budget shortfalls. After all, Warren Buffett on the same editorial page has made the incredible claim that tax rates have absolutely no effect at all on investment. (I challenge readers to find anywhere in Buffett's article where he says tax rates matter.)

Those of us who were adults during the last wave of double-digit inflation remember that most people did not see inflation as a solution, but rather an outright crisis. Certainly, Jimmy Carter did not run for re-election on a platform of even more inflation. I guess he should have had Paul Krugman as his chief economic adviser.

Krugman's Twinkie Economic Myths

I remember when Dan White, the former San Francisco city supervisor employed the infamous "Twinkie Defense" in his 1979 trial for the murder of the city's mayor, George Moscone, and fellow supervisor Harvey Milk. Apparently, the jurors were bamboozled by this nonsense and convicted him not of first-degree murder but rather voluntary manslaughter, leading to a sentence of seven years (for which he served five).

Most of us had not thought much about Twinkies and their supposed threat until Hostess recently announced its intention to shutter its operations because of an ongoing strike and its inability to compete in the present economy. However, in recent years, Twinkies supposedly had become famous because of their long shelf life, something that was exaggerated with people claiming the sugar-laden snacks could survive nuclear holocaust.

Well, the company that created them has not survived Barack Obama's economic holocaust, but the economic myths of the era in which Hostess cakes did very well also have outlasted the combination of sugar and chemicals, and who better to perpetuate these myths than Paul Krugman? In a recent column, Krugman harkens back to the 1950s -- the "Golden Era" for Twinkies -- and claims that the economy then was strong because of high taxes and union workforce dominance. He writes:

Needless to say, it wasn’t really innocent. But the ’50s — the Twinkie Era — do offer lessons that remain relevant in the 21st century. Above all, the success of the postwar American economy demonstrates that, contrary to today’s conservative orthodoxy, you can have prosperity without demeaning workers and coddling the rich.

Consider the question of tax rates on the wealthy. The modern American right, and much of the alleged center, is obsessed with the notion that low tax rates at the top are essential to growth. Remember that Erskine Bowles and Alan Simpson, charged with producing a plan to curb deficits, nonetheless somehow ended up listing “lower tax rates” as a “guiding principle.”

Yet in the 1950s incomes in the top bracket faced a marginal tax rate of 91, that’s right, 91 percent, while taxes on corporate profits were twice as large, relative to national income, as in recent years. The best estimates suggest that circa 1960 the top 0.01 percent of Americans paid an effective federal tax rate of more than 70 percent, twice what they pay today.

Nor were high taxes the only burden wealthy businessmen had to bear. They also faced a labor force with a degree of bargaining power hard to imagine today. In 1955 roughly a third of American workers were union members. In the biggest companies, management and labor bargained as equals, so much so that it was common to talk about corporations serving an array of “stakeholders” as opposed to merely serving stockholders.

Furthermore, Krugman argues that the road to prosperity is for the government to have massive tax increases and a unionized workforce:

Along the way, however, we’ve forgotten something important — namely, that economic justice and economic growth aren’t incompatible. America in the 1950s made the rich pay their fair share; it gave workers the power to bargain for decent wages and benefits; yet contrary to right-wing propaganda then and now, it prospered. And we can do that again.  

So there it is. The economy was prosperous because of high tax rates (the same rates Krugman told me in response to a question in 2004 that were "insane") and because labor unions were driving up the cost of doing business. Capital had nothing to do with it. The fact that the USA was the one industrialized nation that had not been on the receiving end of mass bombing and artillery attacks had nothing to do with it.

No, the prosperity of the 1950s (when at least a third of Americans officially lived in poverty) was due to massive wealth transfers. However, Krugman fails to point out that during this era, business owners and entrepreneurs did not have to deal with the massive influx of  government regulations at all levels, although I am sure that he would tell readers that had government been even more restrictive at that time, the economy would have prospered even more because higher costs of business translate into more wealth for owners of factors of production, and higher costs are the real source of prosperity.

Not surprisingly, Krugman misses a bit of history along the way. By the end of the 1970s, as these unsustainable policies of high taxes and inflation continued, the U.S. economy was in crisis, and the 1980 election occurred in that atmosphere. Far from creating the prosperity of the 1950s, these policies which Krugman praises led to less capitalization down the road, and when they reached their natural end, it was clear that much of the capital stock of this country was still stuck in the postwar decade while Japan and other nations had moved well past the ruins of the aftermath of World War II.

Paul Krugman's economic missives are full of fallacies, and his latest column is no exception. He employes the Post Hoc Ergo Propter Hoc Fallacy, not to mention the Broken Window Fallacy along with his belief that government policies can eliminate the Law of Opportunity Cost.

Yes, Krugman wants to do what all good Progressives claim is heresy -- "Turn Back the Clock" -- and his views are as mistaken as the notion that Twinkies really constitute health foods. I doubt seriously that if the government were to slap down even higher tax rates and force unionism on every firm that out of that would rise prosperity.

No, out of that would rise Argentina of the 1950s and 1960s, and we know how well that little experiment worked.

Krugman: Actually PRODUCING a High Standard of Living is a "Zombie" Idea

Like most Keynesians, Paul Krugman has no idea of how societies prosper. In his view, governments borrow, print, and then spend money and out of that comes, like magic, a prosperous economy. If times are hard, then spend even more and, like the Great Pumpkin, prosperity will rise out of the pumpkin patch.

Take his view of what should be done in Europe, for example, and especially for Greece and Spain. As he has written on numerous occasions, instead of facing the fact that the economies of those two nations cannot produce enough wealth in order to support their bloated unionized government workforces and sustain their ridiculous work rules for private employers. Greece and Spain are in trouble not because they are on the euro, but rather because they used the financial and monetary arrangements of the European Union in a way that was not sustainable.

Now, I agree that most "austerity" packages are wrongheaded because the state swallows much of the GDP of the affected nation and then directs that money to the banks (or, as some libertarians call them, "banksters") that foolishly lent money to those nations for things that ultimately went bust, or to pay for simple operating expenses of the various governments. However, there is another aspect of economics and economies that Krugman not only refuses to admit, but belittles it at every turn: societies that consume much also produce much, and that production is the source of their consumption.

To Paul Krugman, such a notion -- that an economy actually has to produce a standard of living -- is a "zombie idea." Every good Keynesian knows that consumption actually creates production, that one consumes first and then produces later. And, no, Keynesian "demand" is NOT the same kind of demand which entrepreneurs anticipate as they try to move resources from lower-valued to higher-valued uses. Keynesian "demand" is nothing more than new money or wealth transfers being directed to politically-connected people who ostensibly will "spend" that money, and out of which is supposed to come general prosperity. Anything to the contrary is nothing more than "Say's Law," which everyone knows has been discredited. (I mean, people really believe that we can have consumption without production? Get real!)

And so, he demands that Congress, the president, and governments at state and local levels ratchet up their spending, and if the economy is not producing enough wealth to pay the taxes necessary to support this blizzard of spending, no worry. Why? The government can manipulate the Federal Reserve Act of 1913 to permit the Fed to purchase U.S. treasuries in the primary market, so if need be, there would be no barriers at all to vast new amounts of spending and if the shower of new money creates an inflationary environment, all the better! Inflation, as Krugman has written, is a great tool for "deleveraging," which in his view would transfer wealth from rich to the poor.

(For those who insist that Krugman is not an apostle of inflation, note that he strongly endorses the views of Mark Thoma, who is a hardcore inflationist. Like so many other Keynesians, Thoma believes that all it takes is for government to inject new money, which will solve problems painlessly and put the economy back on track. The only problem, people like Thoma and Krugman claim, is that governments are too reluctant to aggressively debase their currencies. The "Inflation Fairy" is hard at work.)

So, yes, do you believe that government wealth transfers are a cost and not a boon to the economy? Do you believe that over time, a nation cannot consume more than it produces? Then you, too, are a "zombie." Wear that moniker proudly.

Krugman Tell a Lie? Oh, Surely Not!

In a blog post following the first presidential debate, Paul Krugman insisted that while Obama did rather poorly, he spoke only the truth while Mitt Romney spoke only lies. Given that I cannot imagine the president or his main challenger telling the truth, I would say that Krugman was guilty of speaking only half a lie, but nonetheless, by insisting that Obama tells only the truth, that half was a whopper.

Krugman, being the political operative that he is, insisted in his latest column that the economy is not in any kind of crisis. In a recent speech in Europe, however, Krugman told a different story, warning of impending collapses if Europe continues its present course of what Krugman calls "austerity." What I find most interesting about his speech, however, is his insistence that the European Central Bank engage in what would be nothing more than a pure print-the-euro scheme, as though the "Zimbabwe Solution" would be sustainable. He declared that Europe must

...contain immediately the financial threat to troubled countries and stabilize yields on their borrowing, which in the end requires the ECB to be ready to be the lender of last resort and buy sovereign bonds.

Understand what he is saying. In effect, he is recommending that the European authorities create what would be an inflation crisis -- and that is what pure money printing schemes like this always create -- in order to solve the fiscal crisis. So, I guess that if Europeans are drowning in euros, they will forget that their economies are grinding to a halt. The Krugman "solution," or what we call the "Inflation Fairy."

Hating on the Dollar

The late comedian David Frye, known best for his imitations of Richard Nixon, had an excellent monologue to mock Nixon's various economic programs, better known as Phase I, Phase II, and beyond. Frye's "Nixon" announced "Phase 23," a "going out of business sale." (One only could hope....)

Instead of Phase I and beyond, Ben Bernanke and his friends at the Fed have been giving us QE1, QE2, and now QE3, to go along with stimulus and "Operation Twist," more appropriately named by Peter Schiff as "Operation Screw." However, there are those who believe that the more the Fed tries to prop up worthless financial securities by debasing the dollar, the more the Fed is leading us to prosperity -- and anyone who disagrees is a "hater" or a near-criminal. Not surprisingly, Paul Krugman is in that group. He writes:

Mr. Romney’s (critical) language echoed that of the “liquidationists” of the 1930s, who argued against doing anything to mitigate the Great Depression. Until recently, the verdict on liquidationism seemed clear: it has been rejected and ridiculed not just by liberals and Keynesians but by conservatives too, including none other than Milton Friedman. “Aggressive monetary policy can reduce the depth of a recession,” declared the George W. Bush administration in its 2004 Economic Report of the President.

Being that I don't follow this presidential campaign much, I have no idea what Mitt Romney said in response to the latest Bernanke policy. I doubt seriously that Romney has a "plan" except to listen to his Neoconservative advisers like John Bolton and take us off to war again, with the idea that jacking up military spending will "boost" the economy.

One has to understand, however, that since 2001, the U.S. Government under both Bush and Obama have actively pursued an inflationary course, and in case one has not paid attention to the results, we are in a depression. (Oh, I forgot. The meltdown in 2008 came because the Regulation Fairies had been converted to free-market anarchism and failed to do any regulating. It had nothing to do with government and central bank policies to pump as much money into the housing market as possible, an action that was unsustainable.)

Like all good Keynesians, Krugman believes in the wonder and majesty of inflation. He declares:

The Fed’s response to this problem has been “quantitative easing,” a confusing term for buying assets other than Treasury bills, such as long-term U.S. debt. The hope has been that such purchases will drive down the cost of borrowing, and boost the economy even though conventional monetary policy has reached its limit.

Sure enough, last week’s Fed announcement included another round of quantitative easing, this time involving mortgage-backed securities. The big news, however, was the Fed’s declaration that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.” In plain English, the Fed is more or less promising that it won’t start raising interest rates as soon as the economy looks better, that it will hold off until the economy is actually booming and (perhaps) until inflation has gone significantly higher. 

The idea here is that by indicating its willingness to let the economy rip for a while, the Fed can encourage more private-sector spending right away. Potential home buyers will be encouraged by the prospect of moderately higher inflation that will make their debt easier to repay; corporations will be encouraged by the prospect of higher future sales; stocks will rise, increasing wealth, and the dollar will fall, making U.S. exports more competitive.

In other words, the Fed goes into the markets, purchases securities that the market has declared to be near-worthless, spread dollars all over the place, and out of that will come a booming economy spreading prosperity wherever it may roam. This is about as credible as Aaron's reply to Moses about the shaping of the Golden Calf when Aaron claimed that he threw gold into a fire and the calf magically appeared.

This policy would work if an only if the economy were a mass of homogeneous factors. However, if factors of production are heterogeneous, and that a functioning price system, complete with profits and losses, is the means by which entrepreneurs do economic calculation, then the Keynesian "solution" is only making matters worse in the long run. There is no way around this point, and the longer the Fed and this government try to prop up worthless investments and the longer Bernanke and Obama try to divert scarce resources to those lines of production that are not profitable, then the longer this downturn will last.

Krugman's Keynesianism is based upon a belief that when the economy goes into a downturn, the Law of Opportunity Cost goes into hiatus. That is another way of saying that depressions make scarcity disappear and that the only thing needed is for more spending and more inflation, which will permit us to pretend we are wealthier than we are. Out of that faux wealth will come real wealth.

Get it? Yes, the only thing standing in the way is the dollar, and if we print it into oblivion, we will become rich.

Goldstein and Gold

I had no idea that Ayn Rand and John Gault ruled the Republican Party and Congress, but Paul Krugman claims that is so, and who can doubt what he says, given Krugman is always right about everything. So, today he claims that Paul Ryan is a devoted follower of Ayn Rand and that he is going to try to impose a gold coin standard upon us and destroy the economy.

Given that we have had Republicans talking about gold for decades, including Ronald Reagan and his Gold Commission, and it was a Republican, Richard Nixon, who destroyed the remnants of the American gold standard, somehow I don't think a guy who has read Atlas Shrugged a few times is going to end the paper money standard we have had for a while. However, all of us know that Goldstein is capable of anything, and no one depends more upon Goldstein that Krugman.

Yes, Krugman goes over the Usual Stuff on how Republicans always are going to completely end the Welfare State, even though Republicans in power never have done that. Well, Ryan did read some works by Ayn Rand, didn't he? What other proof do you need? Krugman writes:

Well, it’s right there in that 2005 speech to the Atlas Society, in which he declared that he always goes back to “Francisco d’Anconia’s speech on money” when thinking about monetary policy. Who? Never mind. That speech (which clocks in at a mere 23 paragraphs) is a case of hard-money obsession gone ballistic. Not only does the character in question, a Galt sidekick, call for a return to the gold standard, he denounces the notion of paper money and demands a return to gold coins.

But then Krugman gets into the meat of this column: Ryan will impose a gold standard, and the economy will collapse. This falls into the "Yeah, Right" Category. First, Krugman has been claiming that inflation will lead us into recovery, and he also has claimed that inflation is a wonderful way to transfer money from the wealthy to the poor. (Please tell that to the poor and lower-income people who have been spending more and more money at the gas pump and the grocery store that inflation is their savior.)

Second, Krugman claims that the inflation rate is so low that we really don't need to worry about money, anyway. So, what is it? Is inflation bad or good? If the rate is low, why doesn't he come out and claim that we need much more monetary debasement?