The Big Shill

Readers of this blog know that I believe academic economists ought not to be shills for politicians and bureaucrats and let one's writings and pronouncements be infected with political partisanship. I have made that point many times and try to hold to it myself with everything that I write. (And that includes Ron Paul, even though I agree with him on many things. Nonetheless, academic economists should be willing to keep their distance, even from people they like.)

Second, academic economists ought to be able to differentiate between political "victories" by a politician and the economic outcomes. Unfortunately, Paul Krugman in this column manages to violate to principles and once again identifies himself as a shill, a lowly political operative.

It is no secret that Krugman worships Franklin Roosevelt and the New Deal, holding it to an almost mystical standard. That FDR's New Deal attempted to organize the entire U.S. economy into a series of cartels, destroyed agricultural products despite widespread hunger (the destruction financed by a tax on agricultural products), criminalized the kosher killing of chickens, and unleashed petty bureaucrats to burden entrepreneurs with useless rules is utterly irrelevant to Krugman. In fact, he wants us to believe that the New Deal -- which actually kept unemployment higher than it would have been had FDR just stuck to engaging in his adulterous liaisons -- in essence created an economic miracle: "...the New Deal had a revolutionary impact, empowering workers and creating a middle-class society that lasted for 40 years...."

In other words, Krugman wants us to believe that no U.S. "middle class" existed before the New Deal and that by empowering the state to move well beyond previous boundaries, FDR accomplished what no one ever before was able to do. Now, I have no idea how the New Deal could have done that, except that Krugman thinks that empowering labor unions and vastly expanding what truly is an unproductive bureaucracy managed to increase overall wealth in the U.S. economy.

This defies the imagination. The New Deal, from its inception, openly attempted to throw sand in the wheels of production and, thus, result in less wealth in the form of goods and services. Destruction of crops destroyed wealth; creating and maintaining cartels destroyed wealth. This is fundamental, yet Krugman turns the whole thing upside down by claiming that the use of violence (which enabled unions to gain higher wages for themselves -- at the expense of non-union workers) and the expansion of the bureaucracies, which are funded by taxpayers who are forced to give up some of their own wealth, somehow made all of us wealthier.

Krugman's gives himself away by telling readers that making some people poorer somehow is good for the economy. He writes:

That said, health reform will provide substantial aid to the bottom half of the income distribution, paid for largely through new taxes targeted on the top 1 percent, and the “fiscal cliff” deal further raises taxes on the affluent. Over all, 1-percenters will see their after-tax income fall around 6 percent; for the top tenth of a percent, the hit rises to around 9 percent. This will reverse only a fraction of the huge upward redistribution that has taken place since 1980, but it’s not trivial.

There is a huge problem here; Krugman explains that the new tax laws will make a portion of our population less well-off, but he does not adequately explain how that benefits the rest of us. Yes, ObamaCare allegedly will make it easier for some people to have access to health insurance, but ObamaCare itself, with all of its new rules, regulations, and criminal penalties, will result in less medical care overall being made available. Even Krugman admits that the health care law created a "Rube Goldberg device of regulations and subsidies...."

Is it my imagination, or is Barack Obama a magician? One would think that by adding rules and procedures (which, according to the Law of Opportunity Cost will increase overall costs), the government is going to force the medical care "supply curve" to the left (to use economists' jargon). How this is a "victory" for the economy, I have no idea.

In Krugman's view, making one group of people less-well-off is the same thing as making everyone else better off, yet he offers no mechanism other than pure transfer payments. However, transfer payments only distribute existing wealth and they create no new wealth. This is the classic "Zero-Sum Economy," and if that is Krugman's view of things, then how does he explain the fact that overall standards of living for everyone are substantially higher than they were during the New Deal. For that matter, they are substantially higher for everyone than they were during Ronald Reagan's presidency.

I would ask anyone to explain how Paul Krugman's theory of political economy actually demonstrates any causal relationship between New Deal and "Big Deal" policies and an overall rising standard of living. Krugman never has explained how an economy might grow in the first place, except to claim that inflation somehow creates economic miracles. (But even there, he does not explain a causal relationship between inflation and real economic growth.)

Furthermore, his explanation of "capital theory" really is nothing more than a spending theory. The new Apple iPhone, he surmised, might boost the economy because people will buy new ones. Come again? Does the iPhone do away with the Law of Opportunity Cost?

In the end, what Krugman is reduced to shilling for Barack Obama because he is a Democrat who has vastly expanded the reach of the State. And according to Krugman, an expanded and more powerful State through coercion makes us all richer. I'm not sure how that happens, but maybe Krugman will explain everything in a future column.

Who is to blame for the coming downturn?

When Barack Obama took office, Paul Krugman urged him to emulate Franklin Roosevelt, and it looks as though Obama might just achieve what FDR did: have a depression within a depression.

As the economy begins another long and sad slide, Krugman is claiming that our government just did not spend enough money the past few years, and that is why we are headed south:

Back when the original 2009 Obama stimulus was enacted, some of us warned that it was both too small and too short-lived. In particular, the effects of the stimulus would start fading out in 2010 — and given the fact that financial crises are usually followed by prolonged slumps, it was unlikely that the economy would have a vigorous self-sustaining recovery under way by then.

Krugman's retrospective is his usual self-aggrandizing nonsense, the idea being that had Obama borrowed and spent an extra trillion, dollars, Krugman then would have argued for two trillion, and had the administration dumped two trillion, Krugman would have demanded four. And so it goes.

What Krugman does not say is that like FDR, Obama went on a regulatory rampage, and on top of that, the government continues to pursue wars abroad and now openly admits to having CIA-sponsored death squads roaming the globe in search of the "bad guys." Obama has openly demonstrated himself to be quite hostile to private enterprise (of the non-subsidized variety), and the government through the Federal Reserve System is showering the world with dollars, yet he wonders why U.S. business firms do not engage in long-range capital planning and expenditures.

As Robert Higgs notes in this excellent essay, the Roosevelt administration created huge amounts of "regime uncertainty," which led to a slowdown of private investment. It seems that Obama, through his rhetoric, his initiatives, and the brazen hostility of Washington toward private investment, we are seeing a repeat.

Krugman, of course, won't mention this point, and why should he? Keynesians believe that all we need to do is to shower an economy with money and everything else follows. Well, it doesn't.

Fallacy of Composition, or a Non Sequitur?

Of all of the things that Paul Krugman has written demanding that the government engage in even more massive borrowing and spending to "give the economy traction," perhaps this September 3 post is the most fallacious. Ironically, Krugman is claiming that his opponents are engaging in an informal fallacy, the Fallacy of Composition.

He writes:

Whenever the issue of fiscal stimulus comes up, you can count on someone chiming in to say, “Only a moron could believe that the answer to a problem created by too much debt is to create even more debt.” It sounds plausible — but it misses the key point: there’s a fallacy of composition here. When everyone tries to pay off debt at the same time, the result is contraction and deflation, which ends up making the debt problem worse even if nominal debt falls. On the other hand, a strong fiscal stimulus, by expanding the economy and creating moderate inflation, can actually help resolve debt problems.

So, what is his example? It is World War II. He goes on:

From 1929 to 1933, everyone was trying to pay down debt — and the debt/GDP ratio skyrocketed thanks to contraction and deflation. During and immediately after WWII, there was massive borrowing — but GDP grew faster than debt, and the debt burden ended up falling.

Yes, it seems paradoxical — but that’s the kind of world we’re living in. And the refusal of so many people to face up to the fact that we’re in a world where conventional rules don’t apply makes it likely that we’ll stay in that world for a long time come.

Here is the problem. As Robert Higgs wrote nearly 20 years ago, to say that World War II was a time of "prosperity" is an obscenity. It is true that the GDP numbers were high, but Prof. Higgs points out that the economy mainly was producing war goods. He writes:

In fact, conditions were much worse than the data suggest for consumers during the war. Even if the price index corrections considered above are sufficient, which is doubtful, one must recognize that consumers had to contend with other extraordinary welfare-diminishing changes during the war. To get the available goods, millions of people had to move, many of them long distances, to centers of war production. (Of course, costly movements to areas of greater opportunity always occur; but the rate of migration during the war was exceptional because of the abrupt changes in the location of employment opportunities.) After bearing substantial costs of relocation, the migrants often found themselves crowded into poorer housing. Because of the disincentives created by rent controls, the housing got worse each ear, as landlords reduced or eliminated maintenance and repairs. Transportation, even commuting to work, became difficult for many workers. No new cars were being produced; used cars were hard to come by because of rationing and were sold on the black market at elevated prices; gasoline and tires were rationed; public transportation was crowded and inconvenient for many, as well as frequently pre-empted by the military authorities. Shoppers bore substantial costs of searching for sellers willing to sell goods, including rationed goods, at controlled prices; they spent much valuable time arranging (illegal) trades of ration coupons or standing in queues. The government exhorted the public to “use it up, wear it out, make it do, or do without.” In thousands of ways, consumers lost their freedom of choice.

Furthermore, Krugman seems to be claiming that the "high GDP" numbers between 1941 and 1945 came as a result of all of the heavy borrowing done by the Roosevelt administration. This is nonsense. It is as though World War II came about because of "investments" by FDR and his "Brain Trust" when, in fact, the war had nothing to do with the New Deal per se.

So, in claiming that he is ferreting out the "Fallacy of Composition," Krugman engages in yet another non sequitur. Not exactly good economic analysis.

Krugman (Sort Of) Responds to "Regime Uncertainty" Arguments

Although Paul Krugman does not want to use the term "regime uncertainty," nonetheless, he seems to be referring to that argument in a July 7 post on business investment. He writes:

Truly, we live in a time of mass delusion — or maybe make that elite delusion — where there are lots of things that everyone believes, without a shred of evidence to back that belief. Here’s one more: everywhere you go, you encounter the claim that businesses aren’t investing, they’re just sitting on piles of cash, because they’re worried about future government policies.

There is, of course, a much more prosaic alternative: businesses aren’t investing because they have lots of excess capacity. Why build new structures and buy new machines when you’re not using the ones you already have?

So is there anything in the data suggesting that we need to invoke fear of government to explain low investment? Not a bit.

He goes on to present a graph that contrasts business investment with the CBO's estimate of the gap between potential GDP and real GDP. Since the pattern of the investment follows the CBO's "gap," according to Krugman, that is the end of the argument.

Krugman's argument is based upon the following sets of questions and answers:

Q: Why is the economy bad?

A: Because businesses and individuals are not spending as much as they used to spend.

Q: Why aren't businesses and individuals spending like they used to spend?

A: Because the economy is bad.

Q: What would make the economy recover?

A: Businesses and individuals have to start spending again.

As you can see, this is a circular argument, and Krugman bases much of his analysis upon such "logic," yet he claims that people who disagree with him are suffering from "mass delusion." Now, I don't doubt that businesses as a whole are going to invest less during a recession, but Krugman is leaving out some important matters.

The "capacity" argument is not really an economic argument at all. First, it operates on what Austrian economists call the view that factors of production (for analytic purposes) are homogeneous. Second, "capacity" is a theoretical term for the capability of a firm to create output provided that all factors were operating at "full employment."

The idea behind the Keynesian emphasis on "capacity" is that government can "stimulate" the economy to a point where all firms are operating at full capacity, which then signals that we have arrived at a full-employment Nirvana. Of course, this argument contains the assumption that "stimulus" spending affects all sectors of the economy equally, as though an economy is a homogeneous mass of factors.

I have read a number of Robert Higgs' articles and papers, and never once have I seen him resort to the straw man characteristic of Barack Obama as a "socialist." For that matter, he did not call FDR a "socialist" in his "regime uncertainty" paper published 13 years ago.

If, indeed, government spending is what drives a successful economy, then why was there not a "Great Depression of 1946-48" following the end of World War II, when real prosperity returned. Higgs writes:

Finally, this way (regime uncertainty interpretation) of understanding the Great Duration meshes nicely with a proper understanding of the Great Escape after the war. The Keynesians all expected a reversion to depression when the war ended. Most businesspeople, in sharp contrast, “did not think that there was any threat of a serious depression” after the war (Krooss 1970, 217). The businesspeople forecasted far better than the Keynesian economists: the private economy blossomed as never before or since. Official data, which understate the true increase because of mismeasurement of the price level, show an increase of real nongovernment domestic product of 29.5 percent from 1945 to 1946 (U.S. Council of Economic Advisers 1995, 406). Private investment boomed and corporate share prices soared in 1945 and 1946 (Higgs 1992, 57–58). None of the standard explanations can account for this astonishing postwar leap, but an explanation that incorporates the improvement in the outlook for the private-property regime can account for it.

From 1935 through 1940, with Roosevelt and the ardent New Dealers who surrounded him in full cry, private investors dared not risk their funds in the amounts typical of the late 1920s. In 1945 and 1946, with Roosevelt dead, the New Deal in retreat, and most of the wartime controls being removed, investors came out in force. To be sure, the federal government had become, and would remain, a much more powerful force to be reckoned with. But the government no longer seemed to possess the terrifying potential that businesspeople had perceived before the war. For investors, the nightmare was over. For the economy, once more, prosperity was possible.

One does not have to believe Obama is a socialist to understand that the anti-business rhetoric coming from the White House and Congress is having a chilling effect upon long-term business investment. For example, Obama's claim that his administration would "create 700,000 'green' jobs" does not point out that government subsidies to companies not capable of turning a profit ultimately must come from the hides of presently "healthy" companies, and one can be assured that this "plan" actually would destroy more wealth (and jobs) than it would create. 

Yet, instead of trying to understand a differing point of view, we see vengeful politicians now being urged to seize the funds of individuals and businesses in order that government "may better spend it." No doubt, that will create real prosperity.