The hijacking of economic logic

As the U.S. economy continues to crumble and as the USA's debt situation deteriorates, Paul Krugman demands that we play the role of the band in "Animal House" and march forward as though there were no brick wall in front of us. (Who is playing the role of Stork? Is it Obama, Krugman, Stiglitz, "Bad" DeLong?)

Echoing Rahm Emmanuel's infamous "Never let a crisis go to waste" line, Krugman bemoans the fact that the Fed has not created enough of a paper blizzard to put overall inflation past six percent. (That commodity prices, not to mention prices that we are paying for food, fuel, medicine, and other goods, are in double-digit increase land is to be ignored, according to Krugman. Those price increases have nothing to do with Bernanke's policies; it's all "volatility," and anyone who disagrees is an Enemy of the People.)

Apparently, Krugman, like Rahm, must have believed that this crisis would trigger a "New New Deal," in which government would increase its reach over everything, and out of it would come jobs, jobs, and more jobs. That the scheme has failed miserably only heightens Krugman's rage, as he insists that just the very ideas that people have which disagree with his own are the cause of this misery. (Krugman never is wrong. Ask him.)

When Obama took office, accompanied by insurmountable Democratic majorities in the House and Senate, the government went on a spree of spending, new regulations, and massive entitlement increases. The Obama administration not only continued the destructive bailout policies of the Bush administration, but also added to them. By appointing a number of industry "czars," Obama even reached back to the days of the infamous National Industrial Recovery Act, as harebrained FDR scheme to organize the entire U.S. economy into a series of cartels. (Yes, the idea was that if we could produce less and force up prices of goods and commodities, the higher prices would translate into higher incomes and lead to recovery.)

However, Krugman wants us to believe that the administration from 2009 to 2011 actually engaged in "austerity" spending. And why, according to Krugman, did the Obama government reject his advice? The very presence of people who disagreed and said that they disagreed with Obama's claim that we were going to spend our way out of the recession. (I am not agreeing with Krugman, but rather am pointing out that Krugman is making the unreal claim that the tiny Republican numbers in Congress actually controlled nearly all White House and Congressional policymaking. Right.)

So, Krugman's great plan is for the U.S. Government to borrow into oblivion, bail out failed industries, subsidize "alternative energy" schemes, with the result being that jobs arise out of the economy. No country ever has inflated itself to prosperity, and the fact that the U.S. Dollar has served as the world's "reserve" currency for a while only will make the real crisis even worse when the rush to abandon the dollar increases. And it will increase, with the results being very, very ugly.

************************************

For the next several days, future posts will be spotty, as my wife Johanna, Sintija, and I are traveling to Latvia, where we will be living for the next 3-4 weeks. The adoption process is slow, but it continues.

Our apartment in Riga has wireless, and the Internet speed in Latvia is faster than it is in the USA, so I anticipate some time for future posts. Krugman and others will make outrageous claims, and I will try to answer them when I can.

Debt and Delusion

I have stayed away from doing commentary on the whole debt ceiling "crisis" because nothing bugs me more than watching a bunch of hypocrites and frauds prattle around as though they were doing something important. Furthermore, we are dealing with a situation in which the contrived "crisis" is given more play than the real crisis that government has brought to us.

Nonetheless, we were supposed to have been transfixed with the dog-and-pony show in Washington, and now that the Political Classes have papered over yet another yawning hole, the pundits now are looking at winners and losers. In today's commentary, I deal with the angst emanating from the "Newspaper of Record," the editorial writers and, of course, Paul Krugman.

Like me, both entities consider the final decision to be a Really Bad Deal, but for reasons that demonstrate their own delusions about the economy. For all of the bad prose that these commentaries provide, I think that I can describe them in one sentence: We believe that government must spend and tax us into prosperity.

This is not possible, period. One can be of a socialist or Keynesian ideology and spout to the heavens that this time, such a scheme will work. It won't. Yet, Krugman gives us the same old delusion:

The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.

Indeed, slashing spending while the economy is depressed won’t even help the budget situation much, and might well make it worse. On one side, interest rates on federal borrowing are currently very low, so spending cuts now will do little to reduce future interest costs. On the other side, making the economy weaker now will also hurt its long-run prospects, which will in turn reduce future revenue. So those demanding spending cuts now are like medieval doctors who treated the sick by bleeding them, and thereby made them even sicker.

Krugman would be correct if assets were homogeneous, but they are not. Furthermore, he provides NO causal path as to how this continued government spending is going to lead to future prosperity. No, in Krugman's world, is just happens.

We are seeing a dearth of current private capital investment in this country, and no wonder. Krugman can ridicule business confidence all he wants by calling it the "confidence fairy," but when we have a government that has shown it is utterly hostile to investment that either is not directly subsidized or falls outside the president's view of what is right and proper (i.e. energy investments), then it is not hard to understand why businesses lack confidence to throw their money within U.S. shores.

Instead, Krugman wants us to believe that businesses automatically will invest when they see that the government is committed to showering the economy with new dollars. Well, government has been doing that for the past four year, and so far we are not seeing any results, and we won't see results, either.

What we are seeing is utter delusion in Washington, something I recently likened to the view from "Hitler's bunker" at the end of World War II. (I made the remarks while being interviewed on RT.)

So, Krugman and his employer can give us the Keynesian fairy tales all they want, but they are just as delusional as their friends in Washington. Krugman believes this madness is sustainable; it is not.

Say What? on the Debt

I have read bizarre stuff from Paul Krugman before -- heck, here is a guy who believes prosperity is created by the government printing press -- but I must admit this latest blog post of his comes close to being the most bizarre of all. First, and most important, he declares that the gargantuan public debt really is not much of a big deal.

Second, he wants us to take the word of the Obama administration on the budget numbers up to 2020. Yes, now that the profligate politicians he likes are in power, we are supposed to believe whatever the administration tells us. Right.

However, it gets better. After mentioning that other "independent sources are moderately more pessimistic" (they believe the federal deficit will be five or six percent of GDP instead of the Obama prediction of 3-4 percent), he writes this:

That’s not, in economic terms, a huge number. We could raise taxes that much and still be one of the lowest-tax nations in the advanced world. Or we could save a significant share of that total by not being totally prepared for the day when Soviet tanks sweep across the North German plain.

And it gets better:

The only reason to doubt our ability to get things under control a decade from now is politics: if we’re still deadlocked, if sane Republicans are cowed by the Tea Party, then sure, we can have a fiscal crisis. And longer term, we’ll be in a mess unless we get health care costs under control — which is exactly what we’re trying to do, in the face of cries about death panels.

Yeah, it is those dastardly tea-partiers that are going to cause a fiscal crisis. Why? Well, they oppose "healthcare reform," and everyone knows that a huge combination of new taxes, draconian regulations, mandates and subsidies are going to vastly cut medical costs and help revive the economy.

I will agree that the "War on Terror" has eaten a portion of our nation's production that is equal or greater than any set of costs associated with medical care, and there seems to be no end in sight. What is just as bizarre to me as Krugman's assertion that the Obama numbers are honest is the campaign of the Heritage Foundation, "Four Percent for Freedom," that claims we are not adventurous enough when it comes to military spending and wars abroad.

You see, it never has occurred to the people at Heritage that the financial ruin that has come about in large part because of the "War on Terror" and the vaunted "Ownership Society" initiative of the Bush administration (pushed by Heritage and the Cato Institute) which deteriorated into "let's put everyone into home ownership whether or not they can afford it." Because the Bush administration was profligate, it created a crisis that helped lead to the current political situation, and ultimately to, yes, the real ascension of Krugman to his current "superstar" status. By creating a fiscal crisis, the "conservatives" gave credibility to Krugman, who became well-known in large part because of his public criticism of the Bush administration.

So, we have few voices for fiscal sanity, anymore. On the one hand, Krugman claims that we are supposed to believe Obama's budget numbers as though they came from God, and the "conservatives" want even more war and military spending abroad. Neither side can come to grips with the fact that this government is broke, broke, broke.

Don't kid yourselves. We are on the same path as was Argentina in the mid-20th Century, when a rich and proud nation morphed into poverty and political chaos. Those "advanced" countries of Europe Krugman so praises are headed in the same direction, brought down by the cold hard reality that in order to have a high standard of living, a country must produce something other than paper money. It is unfortunate that the USA is being destroyed by a tag team of the Left and the Right, but here it is.

Only in Wonderland Will "Healthcare Reform" Reduce the Deficit

Paul Krugman is at it again, trying to convince us that this monstrosity of a bill is going to produce all sorts of financial "savings" for Americans, and he claims to have brought out the heavy intellectual artillery. Krugman pulls out a figure from that great economic soothsayer, Ezra Klein of the Washington Post which "proves" that revenues from this new bill will well-outstrip expenses:

Lest one be a doubter, the Center on Budget and Policy Priorities makes similar claims, and we know that the Left never is wrong on economic policy. However, before we sit back and cheer the good fortune we have before us (you know, "world-class" healthcare and those rich people will pay for all of it), perhaps some wise words from Robert Higgs, an economist whom I respect infinitely more than Krugman or Klein, might be in order:

What has this gargantuan statute wrought? To this question, there can be only one answer: Nobody knows.

I am being quite serious: no single human being knows ― no one can know ― what provisions the statute’s more than 2,000 pages contain. Even if someone had the power to read and remember everything in this massive legislative enactment, he would still harbor a multitude of uncertainties about: how the courts will interpret the law’s general provisions; how the various administrative agencies will flesh out the statute with new regulations; the precise way in which each provision will be implemented; how, when, and in what amounts funds will be made available for carrying out the law’s many stipulated actions; how much resistance the law will meet, both in the courts and among the public, and how these conflicts will be resolved; and countless other matters of critical importance to those directly and indirectly affected by the massive statute ― which is to say, virtually everybody in the United States and a considerable number of people elsewhere, as well.

Already, however, we can say a few things with certainty. One is that this statute, like any other of comparable size, amounts to a Christmas tree for politically favored interests. For months, maybe for years, people will be discovering little provisions tucked into the bill, each of which provides some sort of privilege, protection, subsidy, or other benefit to a particular firm, industry, profession, or other beneficiary. Anyone who has ever toiled through the pages of statutes of comparable length and complexity, as I have for a number of defense authorization and appropriation acts, knows that each such law comprises a host of special-interest provisions.

Higgs makes another point that is well-taken, for Krugman, Klein, and the other cheerleaders for this monstrosity are trying to tell us that a decade from now, no new expenses will be tacked onto this legislation. Right. Higgs says:

We also know that this statute will not be the end of the story of health-care politics in this country. It is, for the current phase, only the end of the beginning. The ink will scarcely be dry in the revised U.S. Code when political factions will undertake to alter or to overturn the provisions just enacted. Thus, within the act’s great expanse, hundreds of little sub-conflicts will rage, as competing interests struggle for control of the state’s coercive power in their area of contention. Politics, in general, is an endless struggle, and the politics of the federal government’s health-care intervention is no exception. Stay tuned.

Finally, because health-care-related economic activity is such a huge part of the overall economy, what happens in this sector will have significant consequences for the operation of other sectors. For example, when Obamacare turns out to be much more costly than the government has claimed it will be, the government’s demand for loanable funds will be greatly increased, with far-reaching effects on interest rates, investment spending, economic growth, and even the U.S. Treasury’s creditworthiness. It is not inconceivable that the burden of supporting this health-care monstrosity will prove to be the (load of) straw that breaks the back of the government camel in the credit markets, where the U.S. Treasury has long been able to borrow the greatest amounts at the lowest rates of interest because its bonds were considered virtually riskless. Indeed, that status as the lowest-risk borrower seems already to be approaching the breaking point, even before the new health-care legislation has taken effect. Implementation of this law can only worsen the Treasury’s plight.

I think that if credibility is an issue, the person with the most in this situation is Professor Higgs.

Should the Deficit and National Debt Worry Us?

In continuing comments on Paul Krugman's February 5 column, I now turn to this statement that he makes:

...there’s no reason to panic about budget prospects for the next few years, or even for the next decade. Consider, for example, what the latest budget proposal from the Obama administration says about interest payments on federal debt; according to the projections, a decade from now they’ll have risen to 3.5 percent of G.D.P. How scary is that? It’s about the same as interest costs under the first President Bush.

As reader Bill Ott reminds us, we still are dealing with devastating numbers. I will quote what he sent me, and I think you will agree that once again, Krugman is not being an economist, but rather a partisan political shill:

My view is that this is a huge deal. The current $450 billion interest payment would normally reside in the hands of tax payers instead of investors. I guess the immediate needs of tax payers will have to wait for the less immediate needs of large investment companies. I realize that Krugman does not believe the "Broken Window Fallacy" so to him it is just money we pay to ourselves. Even assuming the Broken Window Fallacy is completely and totally false, there is still money sent to foreigners in that interest payment.

Does Krugman have any idea of how much capital leaves the country to foreigners? That is $450 billion x .23 = 103.5 billion. With $103 billion you could buy the output of the entire state of Utah! Or that is $103.5 billion / 300 million = $350 per person per year going entirely to foreigners. So every American loses $350 of REAL SAVINGS each year. I find it sad that the $350 of interest per year could provide a small nest egg for the individual Americans and tens of thousands of US jobs in the aggregate when it goes to funding jobs and economic opportunity for the citizens of China, Japan, The Arab Emirates, etc.

This dovetails nicely with the point I made in an earlier post about equating government borrowing to business borrowing. In Krugman's Keynesian view, there is no structure of production, only an amorphous blob known as an "economy." Whether or not spending is the result of borrowing or just printing money, the only thing that matters is spending.

In that view, government borrowing literally has no different effect than does business borrowing. Any serious look at the two will reveal a huge difference that supposedly an economist, of all people, should understand.

(Thanks to Bill Ott for his comments. If any readers have comments that point out things I have missed, please send them my way!)