Natural Born (Economy) Killers

When it comes to the use of certain kinds of fuels, myths abound and especially myths created and nurtured by Progressives in academe, government, and the media. Given that Paul Krugman is a card-carrying Progressive, one might expect him to propagate such myths, and he does in his usual Pavlovian style.

Some months ago, he claimed that the use of oil and coal creates such huge negative externalities that the very use of these fuels actually destroys overall wealth. In other words, according to Krugman, if we stopped using coal and oil, we would be wealthier than we are now, our economy more productive, and we would be healthier. Granted, that might sell in the salons of the Progressives, but if one steps back and applies simple logic to what he is saying, the outcome might be different.

(One is reminded of Sen. Harry Reid's "Oil makes us sick. Coal makes us sick," line a few years back. Reid makes us sick.)

In his recent column, Krugman makes the claim that Republicans claim that if the Obama administration were to allow more drilling, the economy would boom. He writes:

...Mitt Romney claims that gasoline prices are high not because of saber-rattling over Iran, but because President Obama won’t allow unrestricted drilling in the Gulf of Mexico and the Arctic National Wildlife Refuge. Meanwhile, Stephen Moore of The Wall Street Journal tells readers that America as a whole could have a jobs boom, just like North Dakota, if only the environmentalists would get out of the way.

Since I am not following the political speeches by the Republicans, I don't know if Romney has made such claims or not, and I have no idea of Moore is saying what Krugman says he is. (Yes, I have reason to doubt the veracity of Krugman's claims, given that the guy has told us that the late 1970s were a golden age of the American economy, that Teddy Kennedy, the authors of a lot of deregulation, actually were conservative Republicans, and that World War II brought prosperity to America.)

Now, if Romney and Moore actually said those things and in the context of which Krugman makes his claims, then I would agree in part with Krugman. Even a much larger energy boom (with coal, oil, and natural gas) than what we see now would not lower unemployment levels across the country by all that much, but certainly we would be better off economically than we are now.

Unfortunately, Krugman makes two major errors involving simple opportunity cost, neither of which surprise me, given that Keynesians want us to claim that in a liquidity trap, the opportunity cost of using factors of production is near-zero (yet, those factors are well-paid when a government "stimulus" magically brings them to employment).

The first is something that Krugman has ignored throughout his writings on energy: the rapid expansion of the dollar. Oil worldwide is priced in U.S. dollars, and when the Federal Reserve System "fights" the downturn by showering the world with that money, one should expect oil prices to rise regardless of how much turmoil there is in the Middle East.

Yes, the saber-rattling HAS made oil markets more unstable and more volatile, but when Krugman declares that the two-ton elephant in the living room really is a tea cozy, he is not being honest. For that matter, I find it interesting that an economist of Krugman's stature is claiming that supply issues matter in oil but don't matter in money.

Krugman's second problem comes with the following statement:

And this tells us that giving the oil companies carte blanche isn’t a serious jobs program. Put it this way: Employment in oil and gas extraction has risen more than 50 percent since the middle of the last decade, but that amounts to only 70,000 jobs, around one-twentieth of 1 percent of total U.S. employment. So the idea that drill, baby, drill can cure our jobs deficit is basically a joke.

Why, then, are Republicans pretending otherwise? Part of the answer is that the party is rewarding its benefactors: the oil and gas industry doesn’t create many jobs, but it does spend a lot of money on lobbying and campaign contributions. The rest of the answer is simply the fact that conservatives have no other job-creation ideas to offer.

The impact of ANY industry is not simply the number of jobs that are directly created within that industry. Does Krugman argue that agriculture is insignificant in this country because only about two percent of the population is involved directly in farming? For that matter, he recently argued that higher education is extremely vital to our society, yet the number of people employed in that field is tiny.

No, what he is saying is that he does not like the energy industries, so he is free to apply different standards to them than he does elsewhere. That is not economic analysis; it is political hackery, period.

Will Krugman join the Democrats' "It's the speculators!" chorus?

One of my main contentions with Paul Krugman is that I don't believe the man understands even the basics of Price Theory. Yes, I am sure he can dazzle anyone with mathematical models on the subject, but nonetheless he represents the Progressive Wing of modern academic economics, and I have yet to meet a Progressive that can give me a clear explanation of what happens when prices change.

A number of prominent Congressional Democrats are publicly claiming that "speculation" is responsible for rising gasoline prices. (I guess that their claims are even worse than those of Krugman, who has written in his blog that gasoline prices have gone up because of economic activity in China, and because commodity prices are "volatile.")

Of course, those same speculators were at work when gasoline prices went down, and especially nearly four years ago when prices dropped from more than $4 a gallon in the summer of 2008 to about $1.50 near Christmas that same year. One wonders, if speculation occurs, how it seems that speculators are involved ONLY when gas prices go up.

I will be watching to see if Krugman joins this bandwagon, or if he writes something to the contrary. If he says nothing at all, then he is proving that as a political hack, he will protect the Democrats, even when they wallow in utter economic ignorance.

And, yes, I believe that when we have a commodity that is priced world-wide in dollars, and when the chairman of the Federal Reserve System openly attempts to shower the world with dollars, we are going to see price increases in things like crude oil and gasoline. Oh, and Krugman already has discounted that possibility.

Are the Republicans Killing the Recovery, or is Krugman Killing Economic Logic?

Once upon a time, economists were taught logic, as they had to use it in presenting their material. Over time, the study of logic -- and the attendant fallacies that good students learn in order to recognize good arguments over fallacious ones -- was replaced by multi-variable calculus and statistics.

Places like MIT (where Paul Krugman received his Ph.D.) promoted a mathematically-rigorous economics graduate program, and most everywhere else followed at one level or another. "Doing economics" became creating mathematical models that either were supposed to emulate either what individuals do (microeconomics) or an entire economy (macroeconomics) and then "solving" the mathematical equations and presenting one's results as an economic application.

The most famous of the MIT professors was Paul Samuelson, who not only was successful in transforming academic economics from one of logical constructs to aping the "language of physics," but also promoting Keynesian "economics" in the United States. Like his student after him, Samuelson also received the Nobel in economics.

Why the long introduction? I do it because Krugman once again abandons economics for circular logic in his latest column. We get such gems as:

So we’ve gone through years of high unemployment and inadequate growth. Despite the pain, however, American families have gradually improved their financial position. And in the past few months there have been signs of an emerging virtuous circle. As families have repaired their finances, they have increased their spending; as consumer demand has started to revive, businesses have become more willing to invest; and all this has led to an expanding economy, which further improves families’ financial situation.

Before the Doctrines of Samuelson had taken hold, such a statement immediately would have been recognized as an example of circular logic, or, more specifically, the informal logical fallacy of "begging the question." Today, unfortunately, this is what passes for economic wisdom.

Every once in a while Krugman has a column full of such economic gems, and this is one of them. At the present time, the Republicans are proposing about $60 billion in cuts -- this with a proposed budget deficit of approximately $1.5 TRILLION -- and Krugman is claiming that such cuts will "kill" the current economic recovery.

I'd like to say that on its face, such a statement falls into the "howler" category, but this gives authentic howlers a bad name. This comes from the same guy who still wants us to believe that had the "stimulus" passed in 2009 been $1.2 trillion instead of $800 billion, that we would have had a full recovery. Yeah, all it took was another $400 of paving roads, and we would have been in clover.

However, when Krugman writes a Really Rich Column, he throws in lots and lots of howlers. So, we get this one:

But it’s (the recovery) still a fragile process, especially given the effects of rising oil and food prices. These price rises have little to do with U.S. policy; they’re mainly because of growing demand from China and other emerging markets, on one side, and disruption of supply from political turmoil and terrible weather on the other. But they’re a hit to purchasing power at an especially awkward time. And things will be much worse if the Federal Reserve and other central banks mistakenly respond to higher headline inflation by raising interest rates.

Yep, Krugman pulls his best Jake Blues act by trying to claim that the rise in oil and food prices has nothing to do with the fact that Ben Bernanke has been showering the world with dollars. Yeah, commodity prices are volatile and we have had bad weather, and so on and so on.

The fact that the currency used to pay for oil worldwide is the dollar is irrelevant in Krugman's political world, but it is relevant in the real world. When there is a movement afoot to use something other than the dollar to pay for international oil sales, I don't think it is because the Republicans want to cut 1.7 percent from Obama's current budget.

However, we are supposed to ignore this and accept Krugman's politically-convenient "bad weather and everyone else is getting richer" explanation. That is not economics, nor is it even mediocre economic logic. No, it is the application of pure, political partisanship in an attempt to circumvent sound economic thinking. Yep, that's Paul Krugman.

Is "Volatility" the Last Refuge of a Scoundrel? (Or At Least a Keynesian?)

To "prove" his argument that commodity prices and inflation have no relationship, Krugman has a blog post in which he uses the graph below.

The problem is this: Which commodities? We have seen prices of gold skyrocket, although Krugman would regard gold as passe or even evil. But an even more important bellwether would be oil prices, since oil worldwide is denominated in U.S. Dollars. Thus, oil might well be more sensitive to changes in the value of the dollar than might other commodities.

In other words, de-homogenization might be something worthwhile here. Just a thought.

The second problem I see is that once again, Krugman uses the deus ex machina explanation of "volatility" to explain away anything that might be uncomfortable. Are oil and gold prices going up? Well, so what? They are volatile; that explains everything.