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.

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's Snow Job on Economics

Thirty years ago, I saw a local TV debate in Chattanooga between the late William H. Peterson and a Marxist professor at the University of Tennessee-Chattanooga, Phillip Giffin. Peterson had just returned from a trip to Romania, which then was living in the era of the execrable Nicolae Ceaușescu, and spoke about the poverty and misery he observed.

"But," interrupted Giffin, "There's no unemployment there."

Indeed, that is the mentality of much of the economics profession, or at least the left side of the profession, including Krugman. (No, Krugman is not a Marxist, but his Keynesian analysis is built upon many of the same foundations Marx used, including the overproduction/underconsumption paradigm.) So, I see once again that Krugman is killing trees this week to once again preach that if Barack Obama is elected, he will "create more jobs" than will Mitt Romney.

Notice that this really has nothing to do with economics per se. The Romanian regime "created jobs," although in reality, many jobs were nearly useless and the vast majority or Romanians lived in grinding poverty. Yet, we continue to hear the "creating jobs" arguments given by economists who should know better.

For most people, a job carries a transmission of income, which is why we obviously think about our jobs. However, if one thinks that a job's only use is that of an income transmitter, then one clearly does not understand employment. After all, the government could mail everyone checks for whatever amount a job would pay, and that would substitute for the income transmission.

Obviously, there would be a problem if everyone stayed home and just received a check, and it would become abundantly clear that a job is NOT just a means of providing income, but jobs also are the mechanism through which we have labor services throughout the economy, and without those service, there IS no economy. At one level, I am sure that even Paul Krugman would understand that point, but it also is clear to me that he seems to think that the importance of work really is in the income that individuals receive, and not the wealth creation itself that a job can help achieve.

For example, when interviewed about the Keystone Pipeline that Obama blocked, Krugman approved the president's actions, using environmental criteria. (Note that Krugman also praises the building of wind farms, which have their own negative environmental effects and, unlike Keystone, stay alive only through massive subsidies, tax breaks, and government requirements that electric utilities purchase power from those farms, so if one thinks that Krugman is being selective in his environmental concern, one might be correct.)

However, after announcing his opposition to Keystone, Obama then declared that increased government payments to the unemployed would have a more powerful and important economic effect than the building of an oil pipeline, and I do not recall reading a word of criticism from Krugman about that statement. Keep in mind that what Obama is saying is that essentially borrowing or printing money creates more wealth than does the application of capital in moving resources from lower-valued uses to higher-valued uses. This is stunning, for it demonstrates just how economically-illiterate Obama really is, and it also exposes people like Krugman who apparently can see no difference in printing money and creating wealth or, even worse, seem to believe that printing money actually creates wealth.

In his latest column, Krugman accuses Mitt Romney of snowing voters on jobs, asking: "But does he have a plan to create any?" That is not the right question. Instead, Krugman should be asking whether or not Romney -- or Obama, for that matter -- have any "plans" to encourage capital formation, and to let entrepreneurs and entrepreneurial firms move resources from lower-valued to higher-valued uses. Krugman's claim that Obama's record can be defended, yet Obama has done almost nothing to encourage the things I have mentioned.

(I forgot. Like Obama, Krugman believes that government can print, borrow, and subsidize an economy into a real recovery. In the end, the "plan" is called by another name: inflation.)

And what is a Paul Krugman column without at least one real howler? How about this?

Just for the record, one study concluded that America might gain two million jobs if China stopped infringing on U.S. patents and other intellectual property; this would be nice, but Mr. Romney hasn’t proposed anything that would bring about that outcome. Another study suggested that growth in the energy sector might add three million jobs in the next few years — but these were predicted gains under current policy, that is, they would happen no matter who wins the election, not as a consequence of the Romney plan.

Notice that there is no cost assumed to enforcing the intellectual property laws, and I don't know how one can extrapolate the kind of wealth creation needed for two million new jobs by the use of increased police powers, but when one is spouting rhetoric, careful thought need not intervene. Furthermore, the only significant wealth-producing portion of the energy sector is in fossil fuels, and Krugman already is on the record as saying those are evil and should be abandoned altogether. As for "creating jobs" through subsidies, apparently Krugman cannot understand that subsidies ultimately must come from those sectors of the economy that are profitable, which means that jobs are lost elsewhere.

Oh, I forgot. Being a Keynesian means that one believes government can do away with the Law of Scarcity and the Law of Opportunity Cost by fiat and with a printing press.

The Inflation Fairy

One of the most repeated themes in Paul Krugman's columns has been the ridicule of what he calls "The Confidence Fairy," which is in reference to Robert Higgs's theory that says "regime uncertainty" has a real effect upon present economic growth. However, because Krugman has no conception of capital investment (other than it brings spending) and does not have any understanding of the difference between the long and short run, he is intellectually ill-equipped to refute the Higgs thesis.

I bring this up because Krugman's latest column is more of the same: inflation and massive borrowing will solve all of our economic ills, and anything else is just something out of fairy tales. Now, I realize that Krugman is working with the Obama campaign to write columns critical of Mitt Romney, and part of his ridicule is of Romney's recent statements about market confidence; in other words, his primary goal is to attack Romney, not to increase public economic knowledge. However, he does bring up his whole "Confidence Fairy" line, and I think it is worth a look. He writes:

Back in 2010, as European nations began implementing savage austerity programs to placate bond markets, it was common for policy makers to deny that these programs would have a depressing effect. “The idea that austerity measures could trigger stagnation is incorrect,” insisted Jean-Claude Trichet, then the president of the European Central Bank. Why? Because these measures would “increase the confidence of households, firms and investors.”

At the time I ridiculed such claims as belief in the “confidence fairy.” And sure enough, austerity programs actually led to Depression-level economic downturns across much of Europe.

Yet here comes Mitt Romney, declaring, in effect, “I am the confidence fairy!”

 Where I agree with Krugman is that confidence, and especially any "confidence" that Romney could bring to the table, is a relative thing. Just because a supposed "pro-business" president is in the White House is not going to resurrect long-term capital investment and provide a lift for private enterprise. Business investors would have to see that there not only is a strong possibility of return on their investments, some of which may take years to come to fruition, but that there will not be the kind of "regime change" in Washington that either would forcibly confiscate those returns or change the rules of the game to where that original investment now becomes worthless. Robert Higgs says:

"Regime uncertainty" is the name I give to widespread fears that the nature of the economic order will be changed. This has to do mainly with fear that private-property rights will be altered for the worse by higher taxes, more costly regulation, more hostile treatment by government functionaries of all kinds, and perhaps outright confiscation of private property. When investors feel regime uncertainty, they are reluctant to make long-term investments, because they fear that they will be unable to receive the income those investments will generate and may even lose the capital itself. Between 1935 and 1940, many US investors feared that the market-oriented US economy was being transformed into fascism, socialism, or some other system dominated by the government.

I certainly believe that President Obama has firmly placed himself into the "Crony Capitalism" camp in which his government will subsidize and protect those business firms that are loyal to his administration, but will use tax laws, regulations, and verbal (and legal) bullying against anyone else who does not recognize the Greatness of Obama. Whether or not Mitt Romney can end such an order is an empirical question, although I don't think I would be willing to take a bet that he would.

Yet, Krugman does not even address that point. No, what Krugman claims will create confidence in the economy is inflation, which is why I call his "plan" to end the depression one that is based upon the Inflation Fairy. The claim by Krugman and his supporters is that should the Federal Reserve System link its efforts with the U.S. Government to directly inject new money via government spending, the new money magically will flow only to those industries that are depressed and bypass those areas of production that currently are producing at higher capacities.

I'm not sure how this is possible, but Krugman believes that the Inflation Fairy will be able to pull it off. You see, when the Inflation Fairy is at work, there never is any dislocation within price systems, as all factors automatically adjust perfectly to the changing conditions. Moreover, whenever business investors realize that inflation is on the horizon, they automatically will produce more goods and engage in capital investment because inflation always equals more aggregate demand, and aggregate demand means that everyone wants to buy everything.

When the Obama administration demands that capital gains tax rates be raised to the highest levels in four decades, the Inflation Fairy will ensure that such calls for widespread confiscation of property will have absolutely no effect upon business investment. Furthermore, if greedy private investors are put off by the fact that government is going to take nearly all of their economic profits, then the Inflation Fairy will ensure that government spending will take up the slack and employ everyone in meaningful jobs with high pay.

And so on. I marvel that Krugman continues either to create caricatures of the Higgs assertion of "Regime Uncertainty" while making wild claims about the Wonders and Greatness of the Inflation Fairy. The problem with Paul Krugman is not that he has become a partisan shill who coordinates his columns with the Obama presidential campaign.

No, the problem is that Krugman wants us to believe that when depression conditions occur, the Law of Scarcity and the Law of Opportunity Cost become irrelevant. Economics is based upon those two things, and when one declares they no longer are relevant, one no longer is an economist. In short, Paul Krugman tells us that government under the correct people (read that left-wing Democrats) can magically make scarcity and opportunity cost disappear.

Why? The Inflation Fairy says so.

The Economics Killers

Before I look at some aspects of Paul Krugman's column today, I need to tell readers that, no, I did not watch any of the Republican National Convention, and I don't support Mitt Romney or the Republican Party, which officially has set itself up as nothing more than the political faction of the Neoconservatives. If Romney is elected, he still won't be president; no, Bill Kristol and Dick Cheney still will be the men behind the curtain.

It always is amazing to me to see how certain narratives continue to exist, even after real-live experience has debunked them time and again. Krugman always is claiming that the Republicans (including Romney and Paul Ryan) really are Radical Free Marketeers in action and if elected, will work to make government so small it "can be drowned in a bathtub." We have had six Republican presidents in my lifetime, and I cannot recall one time that government was smaller in spending and in scope than it was when that person took office. When writing of Keynesian economics, Krugman claims that the critics are blind to the facts, but when he writes about politics, he is as blind as anyone from the Washington Times or Fox News regarding the rhetoric and the facts.

Nonetheless, in today's column, he goes off on Republicans and Medicare, claiming:

But back to the big lie. The Republican Party is now firmly committed to replacing Medicare with what we might call Vouchercare. The government would no longer pay your major medical bills; instead, it would give you a voucher that could be applied to the purchase of private insurance. And, if the voucher proved insufficient to buy decent coverage, hey, that would be your problem.

I have no idea if the Republicans can impose the Next Wonkish Measure or not, or if they would give a real-live effort. I just don't know, but given the rhetoric and reality of the past, I cannot imagine that they will do what Krugman breathlessly claims they will do. But, hey, the guy is a master of regurgitating Democratic Party Talking Points, and that is the perspective that I take. After all, he is first and foremost a political operative.

What does interest me is what he says next, for it reflects his "knowledge," or lack thereof, about markets and how they work. Take his following points regarding insurance and Medicare:

Why would anyone think that this was a good idea? The G.O.P. platform says that it “will empower millions of seniors to control their personal health care decisions.” Indeed. Because those of us too young for Medicare just feel so personally empowered, you know, when dealing with insurance companies. Still, wouldn’t private insurers reduce costs through the magic of the marketplace? No. All, and I mean all, the evidence says that public systems like Medicare and Medicaid, which have less bureaucracy than private insurers (if you can’t believe this, you’ve never had to deal with an insurance company) and greater bargaining power, are better than the private sector at controlling costs. 

I know this flies in the face of free-market dogma, but it’s just a fact. You can see this fact in the history of Medicare Advantage, which is run through private insurers and has consistently had higher costs than traditional Medicare. (Emphasis mine) You can see it from comparisons between Medicaid and private insurance: Medicaid costs much less. And you can see it in international comparisons: The United States has the most privatized health system in the advanced world and, by far, the highest health costs.

Since I don't have the cost numbers in front of me, I won't dispute what he has said, and furthermore, I will answer using the assumption that his numbers are correct. Instead, I ask this simple question: Why would a private firm create a bureaucracy and then voluntarily engage in practices that force up its costs? After all, as economists since 1871 will note, the value of the final product is not determined from the value of the factors of production, but the other way around.

In other words, firms would gain nothing from engaging in activities that are more costly than necessary to provide a final product. When we do see something as Krugman describes, we need to know why private insurance costs would be higher than government bureaucracy costs.

Krugman does not give an answer, except to claim that what we are seeing is a free market in action. To me,  this is a non-explanation, given that I never have seen an economist -- including Krugman -- claim that firms can be more profitable by imposing higher costs upon themselves. So why would the insurance companies do it, especially since they operate in what Krugman seems to claim is a near-unregulated free market?

I think anyone who has worked for an insurance firm or for any regulated industry can tell you that government "oversight" is costly. Furthermore, what Krugman does NOT say is that Medicare and Medicaid officials are not subject to many of the same regulations that are laid down on private firms. Certainly no firm would create a bureaucracy that is unnecessarily costly as in free markets, higher costs do not lead to higher profits. I also would like to add that the regulatory process also serves as a domestic protectionist device that keeps out competition -- and leads to higher prices for consumers.

Now, if Krugman really wants to claim that the pre-1871 theories -- that the cost of production is what determines the cost of the final product -- he is free to do so. However, he just might be rejecting the price theory that has been taught for more than a century. If he wishes to turn back the clock to David Ricardo's theory of value, so be it.

Krugman: Free Nonsense

There is a reason that Keynesianism is popular with politicians and academic Progressives: Government can step into a crisis with its omniscience and perform magic tricks -- at no cost! Thus, Paul Krugman gives us that theme in a recent column and a blog post.

Government, argues Krugman, should be borrowing even more money because interest rates have been pushed to near-zero and it should use that money to "invest" in propping up public employee unions. No, he didn't say that last part, but the very people he is claiming should be rehired by governments pretty much are represented by unions.

Why the situation exists is because of a mysterious lack of "aggregate demand," or so we are to believe:

So what is going on? The main answer is that this is what happens when you have a “deleveraging shock,” in which everyone is trying to pay down debt at the same time. Household borrowing has plunged; businesses are sitting on cash because there’s no reason to expand capacity when the sales aren’t there; and the result is that investors are all dressed up with nowhere to go, or rather no place to put their money. So they’re buying government debt, even at very low returns, for lack of alternatives. Moreover, by making money available so cheaply, they are in effect begging governments to issue more debt. 

And governments should be granting their wish, not obsessing over short-term deficits. 

Yes, irresponsible Americans are paying debts, which is driving us into depression. If we were willing to stop paying our mortgages, car payments and credit card payments, then we could have prosperity. But since Americans are foolish, the government needs to rescue us by ramping ujp the spending.

No doubt, the message that government spending essentially offers only benefits and no costs is very popular in Washington and at Princeton. Just think; the government by simple declarations can repeal the Law of Opportunity Cost. It's magic, I tell you! Magic!

Robert Higgs notes that the Progressivism to which Krugman subscribes has the following tenets of faith:

1. If a social or economic problem seems to exist, the state should impose regulation to remedy it.

2. If regulation has already been imposed, it should be made more expansive and severe.

3. If an economic recession occurs, the state should adopt “stimulus” programs by actively employing the state’s fiscal and monetary powers.

4. If the recession persists despite the state’s adoption of “stimulus” programs, the state should increase the size of these programs.

5. If long-term economic growth seems to be too slow to satisfy powerful people’s standard of performance, the state should intervene to accelerate the rate of growth by making “investments” in infrastructure, health, education, and technological advance.

6. If the state was already making such “investments,” it should make even more of them.

7. Taxes on “the rich” should be increased during a recession, to reduce the government’s budget deficit.

8. Taxes on “the rich” should also be increased during a business expansion, to ensure that they pay their “fair share” (that is, the great bulk) of total taxes and to reduce the government’s budget deficit.

9. If progressives perceive a “market failure” of any kind, the state should intervene in whatever way promises to create Nirvana.

10. If Nirvana has not resulted from past and current interventions, the state should increase its intervention until Nirvana is reached.

And Paul Krugman is there to give us this road map to Nirvana!

"The Great Abdication" -- Of What?

Perhaps the most constant theme in Paul Krugman's recent columns has been his unwavering belief that the only way out of this depression is for governments to borrow and spend, and for central banks to inflate, and he repeats this theme again in his latest column. The way out, he believes, is easy and painless: borrow, spend, and inflate:

So what should European leaders — who have an overwhelming interest in containing the Spanish crisis — do? It seems obvious that European creditor nations need, one way or another, to assume some of the financial risks facing Spanish banks. No, Germany won’t like it — but with the very survival of the euro at stake, a bit of financial risk should be a small consideration. 

But no. Europe’s “solution” was to lend money to the Spanish government, and tell that government to bail out its own banks. It took financial markets no time at all to figure out that this solved nothing, that it just put Spain’s government more deeply in debt. And the European crisis is now deeper than ever. 

Yet let’s not ridicule the Europeans, since many of our own policy makers are acting just as irresponsibly. And I’m not just talking about Congressional Republicans, who often seem as if they are deliberately trying to sabotage the economy. 

Let’s talk instead about the Federal Reserve. The Fed has a so-called dual mandate: it’s supposed to seek both price stability and full employment. And last week the Fed released its latest set of economic projections, showing that it expects to fail on both parts of its mandate, with inflation below target and unemployment far above target for years to come. 

This is a terrible prospect, and the Fed knows it. Ben Bernanke, the Fed’s chairman, has warned in particular about the damage being done to America by the unprecedented level of long-term unemployment. 

So what does the Fed propose doing about the situation? Almost nothing. True, last week the Fed announced some actions that would supposedly boost the economy. But I think it’s fair to say that everyone at all familiar with the situation regards these actions as pathetically inadequate — the bare minimum the Fed could do to deflect accusations that it is doing nothing at all.

 And why are governments (and especially the Federal Reserve System) "abdicating" their responsibility to borrow, spend, and inflate? In a word, Goldstein:

Why won’t the Fed act? My guess is that it’s intimidated by those Congressional Republicans, that it’s afraid to do anything that might be seen as providing political aid to President Obama, that is, anything that might help the economy. Maybe there’s some other explanation, but the fact is that the Fed, like the European Central Bank, like the U.S. Congress, like the government of Germany, has decided that avoiding economic disaster is somebody else’s responsibility. 

None of this should be happening. As in 1931, Western nations have the resources they need to avoid catastrophe, and indeed to restore prosperity — and we have the added advantage of knowing much more than our great-grandparents did about how depressions happen and how to end them. But knowledge and resources do no good if those who possess them refuse to use them. 

And that’s what seems to be happening. The fundamentals of the world economy aren’t, in themselves, all that scary; it’s the almost universal abdication of responsibility that fills me, and many other economists, with a growing sense of dread. 

 To be honest, I am filled with dread, too, but it is not because governments have not been spending enough. Central Banks have been piling new reserves into banks, purchasing government securities, mortgage securities, and other assets and pretending that they actually have real value (as opposed to the paper value of "governments always can print money to pay for these 'assets'"). At home, federal borrowing accounts for 40 cents of every dollar the government spends, yet Krugman claims that this is not enough. 

If governments are abdicating anything, it is responsibility and understanding of the basic creation of wealth. Keynesians have this view that if government increases spending, the new money will trickle down to all of the various factors of production in perfectly proportional amounts so that those factors that are unemployed or underemployed will get a boost, and the factors running at higher rates of employment will not be negatively affected. Not even the University of Chicago financial economists ever came up with a Perfect Market Hypothesis to match this one!

(Krugman now is championing a new cause for the current downturn: not enough spending by state governments. His point is that the projected "job growth" of state employees is not where it is "supposed" to be right now, so the federal government must borrow more and give to the state governments, while taxes in the states need to be raised so that there can be more state spending. You see, there is no such thing as opportunity cost when governments borrow, tax, and spend.)

To buttress Krugman's points, I found another blog which worships FDR and also professes the same kind of thinking that Krugman gives us: government spending is the SOURCE of all wealth. The blog declares:

If I were the head of the US government, the first thing I would do would be to introduce a Job Guarantee program and set about restoring jobs and a living income to those who are without either. This would immediately boost aggregate demand and give business firms a reason to start investing and producing. You can’t do this by “internally deflating” your economy a la Ireland or Estonia.

Franklin Delano Roosevelt understood this better than any of our current leaders. He knew that workers’ wages are not just a cost but a source of INCOME. The mainstream economics profession continues to ignore the income side of the wage deal. Supply and demand are not independent variables, just as fiscal policy cannot be viewed outside the broader construct of the economy as a whole. Mass unemployment occurs when there are not enough jobs and hours of work being generated by the economy to fully employ the willing labor force. This is because there is insufficient aggregate spending. Government spending is the one obvious remedy.

 Notice that the writer does acknowledge that workers wages really are a "cost," but then ignores that fact when he goes into the rest of his spiel. As for causality, that is, why this situation occurs in the first place, fuhgeddaboudit. All of a sudden, people stop spending enough money to keep the Perpetual Motion Machine known as the "circular flow economy" going at "full employment," so government must step in and fill the hole.

Murray Rothbard understood these arguments quite well when he wrote in 1969:

The currently fashionable attitude toward the business cycle stems, actually, from Karl Marx. Marx saw that, before the Industrial Revolution in approximately the late 18th century, there were no regularly recurring booms and depressions. There would be a sudden economic crisis whenever some king made war or confiscated the property of his subject; but there was no sign of the peculiarly modern phenomena of general and fairly regular swings in business fortunes, of expansions and contractions. Since these cycles also appeared on the scene at about the same time as modern industry, Marx concluded that business cycles were an inherent feature of the capitalist market economy. All the various current schools of economic thought, regardless of their other differences and the different causes that they attribute to the cycle, agree on this vital point: that these business cycles originate somewhere deep within the free-market economy. The market economy is to blame. Karl Marx believed that the periodic depressions would get worse and worse, until the masses would be moved to revolt and destroy the system, while the modern economists believe that the government can successfully stabilize depressions and the cycle. But all parties agree that the fault lies deep within the market economy and that if anything can save the day, it must be some form of massive government intervention.

 Unfortunately, we have learned nothing. In the past decade, both the spending and regulatory burdens -- yes, burdens -- of the state have multiplied immensely. Entrepreneurs are finding it more and more difficult to negotiate the legal steps in cities across this country to simply start businesses. In an experiment, John Stossel looked at what it would take for a kid to legally open a lemonade stand in New York City, and he found it would take about 65 days, not to mention the opportunity cost of going through all of the legal procedures.

This is the situation across the country, yet we hear from people like Krugman is that (1) there is not enough regulation of business, (2) increasing the financial and regulatory burdens of government will help create prosperity, and (3) government spending will fill all of the holes and overcome the vast numbers of barriers that governments place in front of entrepreneurs. In fact, if I read Krugman correctly, entrepreneurs are predators, while government regulators protect us, and the income that we are taxed to pay these regulators contributes to prosperity.

The cart truly is before the horse, but Keynesians always will be in denial. Instead, they claim that if government borrows and prints new money in massive amounts, somehow all of this will translate into prosperity. I don't see how that is possible, but I guess everything is possible in Wonderland.

State-administered medical care: not exactly a low-cost panacea

I have a lot of arguments with Keynesians, the first being that they are not really speaking of economics, per se, but rather concentrate upon the administration of state power. To a Keynesian, there are no real costs, no real prices, and money simply is something to be manipulated by state authorities in order to facilitate wealth transfers.

Keynesians, from what I can tell, really have no idea how wealth is created, and in the advocating of the "euthanasia of the rentier," they really mean the doing away with entrepreneurship altogether and replacing it with a form of central planning. When Keynes wrote in the German edition to The General Theory that it would be easier to implement his ideas in a dictatorship than is a democratic state, he was not giving his stamp of approval to Hitler, but rather was saying that government economic planning would be easier when people did not get in the way.

Although much of the economy does not have the hardcore central planning that Keynes and his followers might have wanted, one area where socialism effectively has been implemented has been medical care. In fact, American medical care is one portion of the economy in which the staples of a free economy -- free prices and private property -- pretty much do not exist. Yes, there are things we call prices and there are some privately-owned portions of the medical system, but they are controlled or monitored by state authorities to a point where a market hardly is recognizable.

To Paul Krugman, this is a wonderful state of affairs, except that the government really should have even more control, all in the guise of reform. In his most recent column, he claims that Obamacare somehow is making the medical system better, controlling costs, and proving that socialism really does work in medical care.

I'm not going to get into a spitting match over the Republicans versus the Democrats or the latest numbers from the Congressional Budget Office. There is a larger issue here, one that Krugman and the rest of Washington, D.C., ignores, and that is the fact that state-sponsored medical care always will be more costly and less-effective than medical that is not state-run.

Now, I don't mean the present system with third-party payments, strict licensing requirements, price controls, allocation controls, and a horde of bureaucrats poring over every decision and second-guessing doctors. I am not speaking of a system that is full of government mandates, from certain kinds of screenings, mandatory injections of children with Lord-knows-what, government favortism, and requirements that taxpayers fund birth control so that college students can have a subsidized hookup culture.

Look at those industries which have been relatively free. Over time, quality and service improve, and prices to consumers go down. Now, Krugman will argue that medical care is DIFFERENT, and that it is not subject to the laws of economics. Hmmm, in other words, medical care is not an economic good, which only could mean that it is not scarce. Or, he might argue, government regulatory burdens and government price controls and mandates somehow can overcome or eliminate the reality of scarcity.

When Krugman writes of costs, he means administered numbers, not opportunity costs. When he calls for mandates, he means that consumers should not have free choice and that the state should choose, since a Progressive state is wise, as long as it is populated by people who "believe in government."

So, we will have the forever spitting matches in which people like Krugman will claim that things are getting better and that one day, we can be like Europe. That the state can magically do away with scarcity is just one more Keynesian fantasy.

$8.50 an hour? Why be stingy? What about $85 an hour? $850 an hour?

Once upon a time, the editors of the New York Times used to editorialize against the establishment of the minimum wage, as they appealed to the arguments centering around the Law of Opportunity Cost. However, soon after Paul Krugman joined the NYT team as a columnist, the paper reversed its stance and decided to champion government-set price floors on wages.

Thus, the NYT today has demanded that the state of New York raise its minimum wage to $8.50, a measure the paper says should "not be controversial." Why? Because when it comes to minimum wage, according to the paper, opportunity cost does not exist. The editorial declares:

Gov. Andrew Cuomo supports an increase, as does Mayor Michael Bloomberg. Only Republican state senators are resisting, using the same stale argument that a minimum wage increase is bad for business. The Senate Republican leader, Dean Skelos, argues that the measure “could be a job killer rather than a job promoter.” That contention has been proved wrong time and again.

There is plenty of evidence showing than an increase can actually help the economy, because people with lower incomes spend a larger share of their paycheck immediately on clothes, food and other goods and services. That money often goes right back into the local economy.

I guess that the editors of the NYT think so highly of themselves that they don't have to adhere to the rules of logic; the use of logical fallacies is perfectly acceptable when the fallacies are employed to promote something the editors (and Paul Krugman) support. So, let us take a look at what is being said.

The first is the fallacy of Appeal to Authority. Hey, Mayor Bloomberg and Gov. Cuomo support this, so it has to be good! Now, unless these two men are omniscient and never wrong about anything, it is irrelevant to whether or not they support the measure, and since neither makes minimum wage, neither person has to worry about being priced out of the market.

The second argument -- that Republicans oppose it, so it must be bad -- is another version of the Appeal to Authority. Democrats support it (conversely), so it must be good. Again, this is fallacious reasoning, although I realize that the NYT editors believe that they are incapable of such foolishness. (Yes, this is an ad hominem, and I mean every word of it.)

Republicans, according to the NYT, are using a "stale argument that a minimum wage increase is bad for business." Actually, not. They are saying that raising the minimum wage will jack up the price of unskilled labor, and that at the margin, some workers will lose their jobs. This is not a "bad for business" argument, but rather a "bad for some workers" statement. Nonetheless, why is this argument "stale"? Is mentioning the First and Second Laws of Thermodynamics "stale," or referring to the Law of Gravity? Of course not, but then why is the Law of Opportunity Cost a "stale" argument? Because the NYT says it is.

It gets even better. In the next paragraph, the editors commit the Fallacy of Composition when they declare that raising the minimum wage will raise the income of workers, who then will spend it and make all of us better off. Sorry, but it does not work that way, for the NYT editors (like Paul Krugman) are mistaking a marginal increase in pay for some workers (who don't lose their jobs) as a total increase in pay for all workers currently making minimum wage.

In other words, government by fiat can raise the total real income of all workers just by ordering it to be so. If that is the case -- and one can draw only that conclusion from the editorial -- then why stop at $8.50 an hour? Why not $85 an hour or even $850? If government can make small increases in total income by fiat, then why not large increases?

Now, if the editors wish to say that an increase to $8.50 would not cause economic harm but that an increase to $85 would, what would be the source of their explanation? If the Law of Opportunity Cost is off the table -- and that generally is the case on the NYT editorial page -- then what would substitute?

But what is an editorial from the NYT without piling on more economic fallacies? In the last paragraph we read:

Mr. (Sheldon) Silver (NY Speaker of the House) said he also plans to expand tax reductions for married couples earning less than $30,000 a year as another way to give incomes a boost. But he is starting with a minimum wage increase because, as he puts it, “People who work full time should not be poor.” That makes good sense for working families and their communities.

What is the definition of poor? Furthermore, is Silver saying that work causes poverty? Would a lot of these people be better off not working at all?

One would like to see all occupations being productive enough to where anyone who worked could live comfortably off that pay, but that never has been the case in all of human history, and I doubt seriously that the State of New York by fiat can change economic history, at least for the better. Again, we see the fantasy world that exists at the NYT. It really is the perfect home for Paul Krugman.

Krugman: Economic efficiency makes us poorer

Several years ago, I wrote that Paul Krugman really is not an economist, but rather is a political operative, and he has done his level best since then to prove my point. He does it again in his latest column.

According to Krugman's writings on the subject of employment, he begins with jobs first, or, to be more specific, the number of jobs. To Krugman, there is no difference in jobs, economically speaking, if they are created because Apple expands its operations or if the government subsidizes a Solyndra. If Apple's expansion meant a thousand extra jobs, but the government payments to Solyndra resulted in 1,100 new (and, obviously, temporary) jobs, Krugman's logic would say that the Solyndra gig would be better for the economy, even if Apple were profitable and Solyndra was hemorrhaging cash.

(As I read Krugman, I get the sense that he agrees with the Left that economic profits really consist of funds "taken from the community" and that lower profits would mean more wealth is being created. Yes, it is convoluted, but Keynesian "economics" is convoluted, folks.)

In attacking Mitt Romney (which is fine with me, given I won't vote for him even if he wins the Republican nomination), Krugman claims that Barack Obama actually has been a net creator of jobs. That's right, Obama is good for the economy even though it is in depression, and has become worse since he took office. Krugman writes:

Americans have jobs now than when Mr. Obama took office. But the president inherited an economy in free fall, and can’t be held responsible for job losses during his first few months, before any of his own policies had time to take effect. So how much of that Obama job loss took place in, say, the first half of 2009?

The answer is: more than all of it. The economy lost 3.1 million jobs between January 2009 and June 2009 and has since gained 1.2 million jobs. That’s not enough, but it’s nothing like Mr. Romney’s portrait of job destruction.

Incidentally, the previous administration’s claims of job growth always started not from Inauguration Day but from August 2003, when Bush-era employment hit its low point. By that standard, Mr. Obama could say that he has created 2.5 million jobs since February 2010.

Now, given that a lot of these "jobs" either have been government jobs or jobs that came through government-subsidized industries, perhaps we should be asking if the Obama administration's policies have made it easier or more difficult for businesses to create new wealth. After all, if you want to create "full employment," it is easy: just tell everyone they only can do agricultural work but cannot use any tools in the process other than your hands. I can assure you that people will be busy, at least until they starve to death, but, hey, they will be employed.

Robert Higgs has some answers, writing:

Private net investment is currently running far below the rate required to sustain a rapid rate of economic growth. Real consumer spending, in contrast, peaked in the fourth quarter of 2007, fell only slightly (about 2.5 percent) to the second quarter of 2009, and by the fourth quarter of 2010 exceeded its previous quarterly peak (by almost 1 percent). Despite the wailing and gnashing of teeth among Keynesian economists and politicians with regard to allegedly inadequate consumption, a collapse of consumption is not to blame for the economy’s anemic recovery to date. However, looking elsewhere for the cause, we find that the economy’s true engine of growth – private business net investment – continues to sputter, running in the most recent quarter at less than a third of its previous peak rate and, for the entire year 2010, at only 40 percent of its rate for the entire year 2007.

Higgs adds:

Investors continue to view the future with major misgivings, owing to the unsettled condition of the government’s future actions with regard to health care, financial regulations, energy regulations, taxation, and other matters that have serious implications for business costs and the security of private property rights in business capital and its returns. Although ObamaCare and the Dodd-Frank bill have already been enacted, these massive statutes leave scores of important details awaiting determination by administrative agencies and courts whose actions will be fiercely contested at every step. Future tax rates also remain up for grabs in Congress.

Krugman might call it the "Confidence Fairy," but government cannot make up for lost investment and, in fact, bears huge responsibility for the current lag in private investment.

Yes, Obama can throw money at "green energy" and create some temporary jobs and Krugman will claim that this is superior to any kind of economic restructuring that enables entrepreneurs to create more wealth while using fewer resources. In Krugman's mind, such a thing is anathema. Lest one think I am off-base, I believe Krugman exposes that view in this declaration:

At this point, some readers may ask whether it isn’t equally wrong to say that Mr. Romney destroyed jobs. Yes, it is. The real complaint about Mr. Romney and his colleagues isn’t that they destroyed jobs, but that they destroyed good jobs.

When the dust settled after the companies that Bain restructured were downsized — or, as happened all too often, went bankrupt — total U.S. employment was probably about the same as it would have been in any case. But the jobs that were lost paid more and had better benefits than the jobs that replaced them. Mr. Romney and those like him didn’t destroy jobs, but they did enrich themselves while helping to destroy the American middle class.

Paul Krugman demonstrates his utter ignorance at what happens in business restructuring and leveraged buyouts. When a firm like Bain purchases a firm and then sells its assets and makes money in the process, the Krugmans in the academic and political world scream that Bain is DESTROYING JOBS.

However, let us think about this and ask the obvious question: How can Bain do this in the first place? It can do it because when a business is successful, the whole is greater than the sum of its parts. However, a failing business is going to find itself in the opposition situation: the sum of the parts is greater than the whole.

For example, would any capital firm try to purchase Apple today and then make money selling off the company's assets? Hardly, as the strength of the company is entrepreneurship, and that is not a commodity that can be bought and sold. Unfortunately, Krugman wants us to believe that Bain and other corporate raiders took perfectly healthy firms and then destroyed them, and that the markets were so twisted and so incapable of seeing that good firms unjustifiably were being taken apart that they stupidly purchased the assets for more than the raiders paid for the entire company.

Krugman never explains how this is possible, but perhaps it is because he simply cannot comprehend the simple aspects of Opportunity Cost. Whatever the reason, he clearly does not even begin to understand how markets work, not to mention the role of the price system. You see, Krugman actually believes that markets DESTROY wealth, but governments create it through vast networks of subsidies and regulations. He never has explained how and why this is so, but perhaps he believes that since he is Paul Krugman, he doesn't have to explain anything. ENTREPRENEURS? We don' need no stinkin' entrepreneurs!

Do economic conditions make opportunity cost disappear?

With the flavor-of-the-week being blaming China for the economic depression this country caused, Paul Krugman is at it again. At least the theme is constant: a "liquidity trap" changes all the "rules" of economics.

This is a nice way of saying that if Paul Krugman believes the economy is in that "liquidity trap," then he gets to say what the "new rules" of economics are, and the first thing to go is that oppressive Law of Opportunity Cost. He writes:

Now, some people will ask, didn’t I used to be a free-trader? Yes, and under normal circumstances I still mostly am. But these are not normal circumstances! In an economy that isn’t in a liquidity trap, one can reasonably assume that jobs lost due to Chinese exports will be offset by jobs gained elsewhere, although that may be small comfort to the workers affected. Under current conditions, however, there is absolutely no reason to believe that there are offsetting gains — on the contrary, the losses to import competition are magnified through multiplier effects.

Like everything in economics, support for free trade should be based on analysis, not slogans. And if you’re in a situation where the analysis says normal rules don’t apply, then they don’t apply.

The idea of "free trade" is nothing more than a rendition of opportunity cost. One's production decisions are based upon the opportunity costs involved, period.

What Krugman is saying is that our situation today repeals the Law of Opportunity Cost and with it the Law of Scarcity. Thus, we are left with the head-scratching notion that goods no longer are scarce, even as people are being deprived.

(I am sure I will have a host of angry readers claiming I am putting words into Krugman's mouth. All I can say is that by debunking the Law of Comparative Advantage, which is based upon the Law of Scarcity and the Law of Opportunity Cost, Krugman is doing away with those things. There is no way around it, even if Krugman's fans don't like it.)

Do we need jobs, or do we need real economic growth?

In my criticisms of Keynesians in general and Paul Krugman in particular, I have said that the Keynesians tend to ignore simple Opportunity Cost. For example, in his best-seller, The Return of Depression Economics, Krugman declared that printing money in the face of a so-called "liquidity trap" provided what he called a "free lunch."

Well, it turns out that Alan Blinder has rejected the notion of a "free lunch," or at least he claims to reject it. In a recent article in the Wall Street Journal, Blinder, while calling for a new "jobs" program, admits that his suggestion is "mitigation," not a "cure," as "there is no such thing as a free lunch." Of course, he then goes and lays out the plans for what essentially is a "free lunch" when it comes to dealing with the economy, as we shall see shortly.

Krugman, on the other hand, takes a more "bold" approach. Unlike Blinder, who advocates a "jobs tax credit" to employers, Krugman wants massive new borrowing and spending by the government in order to create a vast federal employment apparatus. He asks, in a rejoinder to those who say the "stimulus" did not work:

Everybody knows that President Obama tried to stimulate the economy with a huge increase in government spending, and that it didn’t work. But what everyone knows is wrong.

Think about it: Where are the big public works projects? Where are the armies of government workers? There are actually half a million fewer government employees now than there were when Mr. Obama took office.

Krugman further claims that most of the "stimulus" actually "consisted of tax cuts, not spending," and the government's attempt for mortgage relief has failed because the government has not tried it, spending only $2 billion of the $46 Congress set aside for the program. Even if that is true, Krugman has not explained how mortgage relief would jump-start the economy.

If there is a difference between Blinder and Krugman (even though they both teach at Princeton University), however, I would say that Blinder believes that any "jobs program" would provide temporary relief while Krugman seems to be a True Believer that new government jobs would promote new spending which would give the economy what he calls "traction" to move on by itself. What neither person seems to understand, however, is that unemployment is a symptom of the current economic problems, not a cause.

Now, to a certain extent, Krugman kind of understands this, but only on a most superficial and, frankly, circular basis. In Krugman's analysis, spending creates jobs, but then people with jobs also spend, so if the economy suffers from a lack of spending which causes people to lose their jobs, then the government should start spending so that people can get their jobs back so they can spend.

Neither person seems to have a clue as to what an economy really is, and neither seems to understand even the most fundamental basis of production. To them, an economy is something that just happens; spend the money and an economy magically appears. And if an "economist" cannot even understand an economy or only can explain its workings in the most superficial and mechanistic fashion (Y = C + I + G), then he or she pretty much is incapable of understanding that a "job" is not an independent and random creation of the state, but rather the employment of factors of production that is purposeful in nature.

To Keynesians such as Krugman and Blinder, factors of production really are homogeneous; as long as money is spent, it will flow evenly to all of those factors that currently are unemployed and lift them back into employment at the same time. Yet, one cannot understand the dynamics of a recovery unless one understands the simple fact that factors of production are heterogeneous.

This goes back to the Keynesian view of the boom, which Keynesians see as a good thing. When the bust occurs, argue Keynesians, government must spend to "fill the hole" (in Krugman's words) in order to keep boom conditions flowing. However, the booms do not go off the rails because of a lack of spending per se, but rather because the boom is based in large part upon spending and investment that is directed toward lines of production that cannot be sustained because consumer spending is trying to move in a different direction.

The contraction, or recession, actually is a corrective action in which the malinvested resources no longer are receiving the same amounts of investment money, with entrepreneurs looking for those lines of production that are sustainable, given consumer preferences and choices. The bitter irony is that the government's "stimulus" actions, along with its regulatory initiatives, are trying to keep resources in those unsustainable lines of production and actually are blocking a recovery.

Furthermore, President Obama has painted himself into a corner. By continuing the Bush initiatives to deal with the original crisis and prevent the necessary liquidation of some lines of production, Obama also has guaranteed that an ensuing correction will be much worse than it would have been had the economy been able to take a corrective course four years ago, and I think that he and his advisers know it.

Unfortunately, Obama continues to insist that he can do the impossible: direct investment into lines of production that are unsustainable in a free market (such as "green energy") and blame Bush and the Republicans for everything. (And Bush and the Republicans bear a lot of responsibility, but Obama is in his third year of office and he only has made things worse.)

The sad fact is that the American economy has not yet seen the very necessary economic correction that needs to happen before we can have a real recovery. The political classes have done all they can to block the correction, which means that we are going to have the worst of both worlds: economic stagnation. There is a way out, but neither the "elite" economists nor the people in political power are willing to take that route, and everyone else will pay for their foolish choices.

Paul Krugman: government eliminates opportunity cost

Ever since the Progressive Era, Americans have been bombarded with the notion that all goods really are collective in nature. Thus, we hear about "our food supply" and "our oil," and "our healthcare."

If goods truly are collective, then it ultimately is up to that most collective entity, government, to "distribute" them. Pay no attention to the real problems that arise out of the notion of collective things, which is nothing but socialism using different terms. And even Paul Krugman cannot "solve" the central problem of socialism: economic calculation.

In his column on Medicare, Krugman manages to wrap a falsehood around a central kernel of truth, that being that on paper, Medicare costs less than private insurance. He writes:

...here’s what you need to know: Medicare actually saves money — a lot of money — compared with relying on private insurance companies. And this in turn means that pushing people out of Medicare, in addition to depriving many Americans of needed care, would almost surely end up increasing total health care costs.

The idea of Medicare as a money-saving program may seem hard to grasp. After all, hasn’t Medicare spending risen dramatically over time? Yes, it has: adjusting for overall inflation, Medicare spending per beneficiary rose more than 400 percent from 1969 to 2009.

But inflation-adjusted premiums on private health insurance rose more than 700 percent over the same period. So while it’s true that Medicare has done an inadequate job of controlling costs, the private sector has done much worse. And if we deny Medicare to 65- and 66-year-olds, we’ll be forcing them to get private insurance — if they can — that will cost much more than it would have cost to provide the same coverage through Medicare.

And what causes this problem? Private enterprise, of course:

And then there’s the international evidence. The United States has the most privatized health care system in the advanced world; it also has, by far, the most expensive care, without gaining any clear advantage in quality for all that spending. Health is one area in which the public sector consistently does a better job than the private sector at controlling costs.

I will give Krugman his argument as far as it goes, but I think that a few points just might be in order, points that Krugman conveniently ignores.

The first is that Medicare is NOT subject to state mandates, and that is a huge factor, as mandates drive up the cost of insurance. (I won't ask why Krugman ignores this point except to say that it does not fit with his narrative that socialism is morally and economically superior to private enterprise.)

Second, Medicare sets the payment schedule and doctors that treat Medicare patients have no other choice. Patients can sue insurance companies and the media generally will side with patients and doctors in having the courts order insurers to spend lots of extra money. However, that does not happen (to my knowledge) with Medicare.

Third, there is no way that the advent of third-party payments will NOT result in higher costs, as decisions for care are made by people who do not have a direct interest in the outcomes. Keep in mind that if we had third-party payments for buying other things, like food, then food prices would be higher than they are now.

Fourth, Krugman falls for the silly doctrine that medical care is "different" and not really subject to the laws of economics. Now, keep in mind that when we say that something is subject to economic laws, what we are saying is that it is a scarce good. If economic laws don't apply, then the good cannot be scarce.

I cannot believe for a second that Krugman would claim that medical care is a non scarce item, yet, he writes about medical care as though it is not scarce. For example, take his long-held view that medical capital drives up costs. If that were true, then it would be the first time in economic history that the presence of capital (at least developed in a free market) forced real costs to be higher than they would be in the absence of capital.

Would Krugman ever write that the development of the assembly line made automobile costs higher? If that were true, then the story of how Henry Ford was able to bring down the price of a new car from about $1,000 to less than $300 simply would be non-existent.

If, indeed, capital were to be responsible for higher real medical costs, then one would have to look at other factors to see why this would be so, for it makes no economic sense by itself. Unfortunately, Krugman is not willing to go outside the narrative that medical care is "different."

Moreover, if government by taking over payments can eliminate opportunity cost (or make it substantially lower), then why does not government involve itself in everything else and lower costs? For that matter, if government by simple fiat can create such miracles, then why has socialism failed in places like Cuba, North Korea and the U.S.S.R.?

OK, Krugman really is a mercantilist

One of the supposed great triumphs in economics was the development of an intellectual argument for free trade and against the "mercantilist" doctrines of the day which emphasized the belief that wealth consisted of the money in the government's treasuries. Unfortunately, mercantilist beliefs never quite died, and we see Paul Krugman resurrecting them in his recent column on "making things."

Krugman touts the recent rise in manufacturing employment to the falling dollar and Obama's industrial bailouts, and he may be right. After all, if the government forces Americans to pour resources into certain economic sectors, we should not be surprised when those sectors, at least on paper, are doing better. However, the economic analysis should not be aimed at output, per se, or even employment. No, we in economics, we look at the opportunity cost of the policies that are spurring manufacturing growth to see if they are making us poorer.

Henry Hazlitt, in his classic "Economics in One Lesson," noted that the difference between "good" and "bad" economics was the following:

"The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economsit sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups."

Indeed, one of the constant themes in Krugman's columns has been that only the short-term effects matter. I never have seen him even ask the larger question of whether or not certain policies move resources from lower-valued uses to higher-valued uses, or if we see the opposite occurring.

From what I can read in this column, Krugman really believes that a government can bring an economy into prosperity through financial tricks such as money debasement and industrial subsidies. He writes:

...one potential disaster has been avoided: the U.S. auto industry, which many people were writing off just two years ago, has weathered the storm. In particular, General Motors has now had five consecutive profitable quarters.

America’s industrial heartland is now leading the economic recovery. In August 2009, Michigan had an unemployment rate of 14.1 percent, the highest in the nation. Today, that rate is down to 10.3 percent, still above the national average, but nonetheless a huge improvement.

I don’t want to suggest that everything is wonderful about U.S. manufacturing. So far, the job gains are modest, and many new manufacturing jobs don’t offer good pay or benefits. The manufacturing revival isn’t going to make health reform unnecessary or obviate the need for a strong social safety net.

Furthermore, the GM and Chrysler bailouts, he claims, gave us "net" benefits:

...there’s the matter of the auto industry, which probably would have imploded if President Obama hadn’t stepped in to rescue General Motors and Chrysler. For those companies would almost surely have gone into liquidation, closing all their factories. And this liquidation would have undermined the rest of America’s auto industry, as essential suppliers went under, too. Hundreds of thousands of jobs were at stake.

Yet Mr. Obama was fiercely denounced for taking action. One Republican congressman declared the auto rescue part of the administration’s “war on capitalism.” Another insisted that when government gets involved in a company, “the disaster that follows is predictable.” Not so much, it turns out.

Not surprisingly, Krugman is taking a very narrow approach: the bailouts helped the unions, and with government help, GM is making a comeback, so the move by the government must have been a net benefit to the economy. The problem is that there is a much larger picture that we need to understand.

At the time of bankruptcy, GM and Chrysler were hopelessly in the red. In economic terms, consumers saw them as moving resources from higher-valued to lower-valued uses. Just because the Obama administration declared that GM was to be viable again did not make the consumers' judgment wrong; it just forced consumers and taxpayers to put resources into GM that they would not have made voluntarily.

No doubt, the shuttering of GM and Chrysler would have caused hardships in Michigan, Indiana, and Ohio, but those also are the states (especially Michigan) that have shown themselves to be hostile to capital investment and reasonable business practices. Like New York, Michigan's government actively has driven firms out of the state or tried to regulate them to death, and when the results of their actions become apparent, those same governments then demand that taxpayers from elsewhere bail them out.

We also see manufacturing "growth" in subsidized "alternative or green" energy sectors, yet all of the firms in those sectors basically are wards of the state. The excuse to subsidize them has been that we must keep them alive while they "innovate" and experiment with new capital and ways to deliver their products, yet historically subsidized industries generally have lagged behind those that did not need or seek government largess.

Then there is the situation with the dollar, a currency that Krugman claims must be further debased. He writes:

First, what’s driving the turnaround in our manufacturing trade? The main answer is that the U.S. dollar has fallen against other currencies, helping give U.S.-based manufacturing a cost advantage. A weaker dollar, it turns out, was just what U.S. industry needed.

Yet the Federal Reserve finds itself under intense pressure from the right to make the dollar stronger, not weaker. A few months ago, Paul Ryan, the chairman of the House Budget Committee, berated Ben Bernanke for failing to tighten monetary policy, declaring: “There is nothing more insidious that a country can do to its citizens than debase its currency.” If Mr. Bernanke had given in to that kind of pressure, manufacturing would have continued its relentless decline.

This falls into the Keynesian prescription that government through the monetary authorities can inflate us into prosperity. Now, I have no doubt that Krugman partially is correct; debasing the dollar does make American exports more attractive while raising the costs of imports. I'm even willing to give him the argument that if the Federal Reserve System actually were to end its current policy of deliberate inflation, American manufacturing exports might even fall.

Yet, that is not the larger issue. The larger issue is whether or not entrepreneurs will be able to have the freedom to invest and direct resources from lower-valued to higher-valued resources, and seek investment projects that are economically sustainable.

Subsidies require that government cannibalize healthy sectors in order to prop up unhealthy sectors. That is the bottom line in economic analysis here, yet Krugman continues to insist that if the unhealthiest of manufacturers like GM and Chrysler are kept afloat by government intervention, that the overall effect MUST be good. After all, Michigan's rate of unemployment is falling.

In Krugman's world, there is no such thing as opportunity cost, especially if the economy is in what he calls a "liquidity trap." Yet, economic laws are immutable, and they apply to a world of scarcity, and not even the august Princeton University economics faculty can change that simple fact.

I'm sure that more than two centuries ago, Krugman would have been welcomed by the mercantilists and monetary cranks. Today, it seems that the economic faculties of our most prestigious universities once again are open to those very things Adam Smith and others debunked. I guess that is why these faculty members often refer to themselves as "Progressives."

Trains, Planes, and Krugman

There are times when Paul Krugman seems to play into every stereotype about the wooly-headed liberal, and this is one of them. Now, before I do criticize him for his position, let me add that I, too, love to ride on trains. I really do.

In fact, when I went up to NYC in January, I took the Amtrak from Cumberland to DC, and DC to Newark (where I stayed with friends). For the most part, I enjoyed my trip.

However, as George Will notes in this column, the collectivist mentality that always dominates Krugman's writings seems to manifest itself in the demand that everyone ride trains because it is good for them. Writes Will:

Generations hence, when the river of time has worn this presidency’s importance to a small, smooth pebble in the stream of history, people will still marvel that its defining trait was a mania for high-speed rail projects. This disorder illuminates the progressive mind.

Remarkably widespread derision has greeted the Obama administration’s damn-the-arithmetic-full-speed-ahead proposal to spend $53 billion more (after the $8 billion in stimulus money and $2.4 billion in enticements to 23 states) in the next six years pursuant to the president’s loopy goal of giving “80 percent of Americans access to high-speed rail.” “Access” and “high-speed” to be defined later.

Criticism of this optional and irrational spending—meaning: borrowing —during a deficit crisis has been withering. Only an administration blinkered by ideology would persist.

Florida’s new Republican governor, Rick Scott, has joined Ohio’s (John Kasich) and Wisconsin’s (Scott Walker) in rejecting federal incentives—more than $2 billion in Florida’s case—to begin a high-speed rail project. Florida’s 84-mile line, which would have run parallel to Interstate 4, would have connected Tampa and Orlando. One preposterous projection was that it would attract 3 million passengers a year—almost as many as ride Amtrak’s Acela in the densely populated Boston–New York–Washington corridor.

The latest high-speed-rail caper reminds me of the silly fit that Krugman and his employer threw when Gov. Chris Christie closed the curtain on the mega-billion rail tunnel from New Jersey to Manhattan. Now, Krugman justifies all this by saying that trains are nicer than a drive, trains allow you to avoid traffic, etc.

And, to a point, I agree. I like riding the New York Subway, the New Jersey Transit, and will use the PATH trains when I go to a conference in NYC in two weeks. However, I am not naive about what these things cost, and how heavily each passenger mile is subsidized.

Yes, riding a train is more pleasant than driving, but building and operating them mean a huge opportunity cost that must be paid somewhere by someone. And it does not help to see the Obama administration claiming delusional ridership numbers, as Will notes.

But there is more. Will concludes:

So why is America’s “win the future” administration so fixated on railroads, a technology that was the future two centuries ago? Because progressivism’s aim is the modification of (other people’s) behavior.

Forever seeking Archimedean levers for prying the world in directions they prefer, progressives say they embrace high-speed rail for many reasons—to improve the climate, increase competitiveness, enhance national security, reduce congestion, and rationalize land use. The length of the list of reasons, and the flimsiness of each, points to this conclusion: the real reason for progressives’ passion for trains is their goal of diminishing Americans’ individualism in order to make them more amenable to collectivism.

To progressives, the best thing about railroads is that people riding them are not in automobiles, which are subversive of the deference on which progressivism depends. Automobiles go hither and yon, wherever and whenever the driver desires, without timetables. Automobiles encourage people to think they—unsupervised, untutored, and unscripted—are masters of their fates. The automobile encourages people in delusions of adequacy, which make them resistant to government by experts who know what choices people should make.

Time was, the progressive cry was “Workers of the world unite!” or “Power to the people!” Now it is less resonant: “All aboard!”

So, what does Krugman say? First, the guy who has praised the TSA and claimed that its very existence is proof of it legitimacy, now complains about the "war on liquids" and the stressful airport security.

Second, while train travel is nice, he forgets the part about taxpayers having to pony up the big bucks to pay for it. True, Keynesians don't believe in opportunity cost, but that does not mean it doesn't exist.

So, when I am riding the rails into NYC in a couple of weeks, I will thank all of you for paying for my trip.

Krugman's New Gig: He's a Comedian!

Once upon a time, I thought Paul Krugman was at least a semi-serious economist, as opposed to being just another political operative. (The difference is that I actually read Krugman's stuff, in part because of this blog and also in part because I do hope -- against hope, I'm afraid -- that he will give some of the economic wisdom that he used to give. No, I don't read anything on the Wall Street Journal editorial page by either Karl Rove or Peggy Noonan, as pure political operative material is not worth the time spent reading it.)

In his semi-weekly anti-Republican screed masquerading as a column, Krugman decides to delve into comedy. After attacking the Republican budget proposals which actually may cut a tiny sliver of spending (don't hold your breath, however), Krugman then gives us this gem:

What would real action on health look like? Well, it might include things like giving an independent commission the power to ensure that Medicare only pays for procedures with real medical value; rewarding health care providers for delivering quality care rather than simply paying a fixed sum for every procedure; limiting the tax deductibility of private insurance plans; and so on.

And what do these things have in common? They’re all in last year’s health reform bill.

That’s why I say that Mr. Obama gets too little credit. He has done more to rein in long-run deficits than any previous president. And if his opponents were serious about those deficits, they’d be backing his actions and calling for more; instead, they’ve been screaming about death panels.

Yes, talk to people in the healthcare business who actually have to deal with the new law and all of its new regulations. Talk to people who have to fork out huge amounts of money to comply with these new rules, the restrictions on care, and the like.

This is "cost-cutting" in its most bureaucratic and Orwellian sense. One does not and CANNOT cut "costs" by forcing people to bear new costs. (Don't forget that Krugman himself used "death panels" in a positive way on national television, and he sees governmental denial of care as a legitimate tool for "cost-cutting.")

The fundamental concept in economics is opportunity cost. The Keynesian notion that government can simply create money to bring about new spending and thus reclaim "idle resources" is one way that Keynesians like Krugman like to claim that they can create the "free lunch." (Don't forget that Krugman himself makes that very claim in his Depression Economics book.)

So now we have Krugman claiming that forcing up real costs and passing laws somehow can circumvent the very real and immutable laws of economics. It's official; he no longer is an economist; he is a political operative, and maybe a comedian. Maybe both.

Uh, I believe the federal employment trend is upward, Paul

Gee, it seems that Paul Krugman has found a new word to describe people who might actually believe that the Law of Marginal Utility applies to money and to economics in general: Zombie. In a recent blog post, he claims to be able to debunk the "myth" of "soaring federal employment," and, thus, label anyone who disagrees a "zombie."

Krugman's "proof" is the graph below, which does show that in Census years, there are temporary spikes in government employment. However, we still can see a significant growth (even without the Census workers) in federal employment since Obama took office.

As I see it, this significant increase demonstrates what many of the "zombies" (including me) have been saying: the government's policies of the last two years have turned the federal government into the only "growth" industry in the country. Furthermore, the addition of literally hundreds of thousands of government employees does nothing but increase the economic burden on everyone else.

So, who is the zombie? Could it be the guy who believes that an addition of government to be paid by everyone else is an economic "stimulus"? Oh, I forgot. "Sophisticated" economists have repealed the Law of Scarcity and the Law of Opportunity Cost.

Krugman Agonistes: We Are In the "Dark Ages" of Economics

While Paul Krugman has a column today alleging that the Obama administration really has not significantly ramped up domestic spending (which is why he says the economy is mired in the doldrums), I want to go back to something he wrote in January 2009, in which he lays out some opposing lines of economic thought (and stays out of partisan politics, for a change).

Furthermore, I find myself agreeing with Krugman that we are in a "Dark Ages" of economic thinking, but for very different reasons. Krugman is alleging that too many economists are accepting Say's Law as being legitimate, when every good Keynesian knows that J.M. Keynes "discredited" Say's Law in the mid-1930s. I disagree wholeheartedly on many fronts.

The difficulties are legion. First, like Keynes, Krugman really gets Say's Law wrong, creating a caricature of what Say wrote in 1803 and then demolishing the straw man he has created. (One has to keep in mind that Say's Law really is a huge obstacle to Krugmanomics, and, like Keynes, Krugman instinctively understands that point.

Second, the argument really goes to the heart of what constitutes what we call an economy. On one side, we see people like J.B. Say and the Austrians write that an economy consists of real things, real assets, and real relationships between goods. On the other side, we see people like Krugman and Alan Blinder and Ben Bernanke insist that governments can create wealth simply by creating money or borrowing and spending. In their view, an economy is little more than a mechanistic entity in which people robotically create goods with the requirement being that they have enough "purchasing power" so consumers can clear the shelves via spending so that the process can repeat itself.

I would urge people to read Krugman's entire blog post to see the perspective from which he is coming. I will include this quote, which I believe is instructive. Calling the perspectives from Eugene Fama and John Cochrane "pure Say's Law," Krugman writes:

There’s no ambiguity in either case: both Fama and Cochrane are asserting that desired savings are automatically converted into investment spending, and that any government borrowing must come at the expense of investment — period.

What’s so mind-boggling about this is that it commits one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship. Yes, savings have to equal investment, but that’s not something that mystically takes place, it’s because any discrepancy between desired savings and desired investment causes something to happen that brings the two in line.

First, and most important, what we call Say's Law is not about accounting identities or even the infamous S=I. Instead, it is about the fact that consumption and production are intricately related, not by a circular patterns, but rather by the simple fact that one's ability to consume MUST arise from the ability of someone to be able to produce something.

I deal with all of this in a paper I published last year on Say's Law in which I take a telling quote from Benjamin Anderson:

The prevailing view among economists, . . . has long been that purchasing power grows out of production. The great producing countries are the great consuming countries. The twentieth-century world consumes vastly more than the eighteenth-century world because it produces vastly more. . . . Supply and demand in the aggregate are thus not merely equal, but they are identical, since every commodity may be looked upon either as supply of its own kind or as demand for other things. But this doctrine is subject to the great qualification that the proportions must be right; that there must be equilibrium.

This view contrasts with the Keynesian/Marxist views that the real problem with a recessionary economy is that there is the problem of overproduction/underconsumption which can be "solved" by the injection of "purchasing power" into the hands of individuals via government intervention. Call it "pump priming," "giving the economy traction," or "enabling workers to buy back the products they created," but nonetheless all three viewpoints operate on the notion that production and consumption are two unequal and unrelated activities, and that the purpose of consumption (or "spending") is to clear the shelves of the goods that workers made so that the workers can be employed making more of them.

Now, the Keynesian argument -- which Krugman repeats -- is that in the real world, savings are greater than investment, especially when the "animal spirits" of investors are quieted. When that is the case, and investment spending is down, it is up to government to fill in the hole by ratcheting up spending. Now, I don't believe I have mischaracterized Krugman's position here, but, nonetheless, I strongly disagree with it.

First, even if I were to give Krugman his point that S>I, nonetheless (and I have not seen this discussed anywhere) the nature of fractional reserve banking would take the existing savings/deposits and loan them out to where the actual new money created would be substantially greater than the savings base. It is true that banks rarely are going to be fully "loaned up," but Krugman ignores the money multiplier that occurs in lending, something that any student who has taken Money and Banking or even a Macro class would understand.

Second, there is something even more fundamental here, and that is the fact that the Krugman position almost seems to be that the Law of Scarcity is abolished when interest rates approach the "zero bound" (in his words). This also is where Krugman and the Austrians really part company, for in Austrian Economics, the Law of Scarcity is not abandoned at the "zero bound" or the presence of unemployed resources.

Instead, Austrians look to reasons as to why the resources are unemployed, as opposed to the Keynesian argument that people and government simply are not spending enough. Instead, we wish to look beyond to why there no longer is demand for certain things, and to the larger issue of how the proportions involving the factors of production have been disturbed or distorted.

As I have said many times, the Keynesian argument depends upon seeing factors of production as being homogeneous and having no particular special relationships. Everything from mine output to making of cotton candy is just one amorphous and homogeneous set of factors. This is not economic theory; it is a theory of convenience to justify the presence of government spending.