Paul Krugman Hates Money

I used to think that Paul Krugman just misunderstood money, but now I realize that he really hates the stuff. Hates it.

His recent blog post on Adam Smith and Bitcoin pretty much says it all:

There have been many good pieces written on the dubious economics of Bitcoin; I especially liked this one by Neil Irwin. One thing I haven’t seen emphasized, however, is the extent to which the whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression — a retrogression that Adam Smith would have scorned.

Smith actually wrote eloquently about the fundamental foolishness of relying on gold and silver currency, which — as he pointed out — serve only a symbolic function, yet absorbed real resources in their production, and why it would be smart to replace them with paper currency....

This is not so much a defense of Bitcoin, given I have not followed it and most likely will not be following it, but I do find that his post demonstrates his disdain for money itself. Why do I say that? I say it because he actually believes that mining for gold and silver which were used as money (and for other uses, too) was foolish and wasteful.

Money is a productive asset contra Krugman, for it enables exchanges to occur that would not have happened under a pure barter system. No one things it foolish to dig for silica or for copper or to expend resources to create capital. Yet, money being productive means that one can apply a marginal cost/marginal benefit analysis to it.

Krugman, quoting Smith, argues that paper money is better because one uses fewer resources to create it, but he fails to admit that it is much easier to inflate paper money than it is gold or silver. Yes, yes, all of the Keynesians will point out the Wonder and Majesty of Inflation, and how the Inflation Fairy will save our economy if we just crank out enough dollars.

Yet, inflation lowers the value of the marginal unit of money, and enough of that will lead to the demise of money altogether. (Zimbabwean dollar, anyone?) So, Krugman is saying that in order for money to be useful, governments need to print a lot of it and debase the whole thing, and if governments debase it enough, then the Inflation Fairy will wave her magic wand and make our economy whole again.

Update: Krugman continues his Bitcoin rant in his latest column. Paper money is superior to gold or anything else:

...paper currencies have value because they’re backed by the power of the state, which defines them as legal tender and accepts them as payment for taxes.

In other words, according to Krugman, things have value because government declares they have value. Furthermore, Krugman declares that Ben Bernanke's money printing is not "irresponsible" because we have not yet had hyperinflation. While it is true that the USA has not become Bolivia in the 1980s, nonetheless we are seeing big increases in the prices of food and fuel, two things that are sensitive to monetary changes, and we are witnessing what seem to be twin bubbles in housing and the stock market.

Once again, we are seeing the Krugman insistence that the Inflation Fairy is all we need. Just print money, borrow, and spend ourselves into prosperity. So far, it hasn't worked very well.

An Open Letter to Paul Krugman

Dear Professor Krugman,

In your column today on extending the lower tax rates that now exist on the highest levels of income, you justify your point on two levels:

1. The government needs more revenue and the state needs to take as much property as possible from private owners;
2. Wealthy people are unlikely to spend every penny of their income immediately, so it is important for the Political Classes to get their hands on those funds, as governments will spend freely in the short run.

Thus, from what I can tell, you believe that it is the Very Duty of Everyone to spend everything quickly, and since you are advocating such beliefs publicly, I would like to challenge you to practice what you preach. Here are some suggestions:

• Impose your own tax rates on yourself: If these irresponsible Democrats and Republicans don't jack up the tax rates, i.e. Herbert Hoover in 1932, then raise your own personal rate, taxing yourself at 39.6 percent, and then sending that money to Washington. Your example will inspire others to do the same, I'm sure. If you complain that to do so would require you to hire another accountant, that would be good, since you would be providing a job and we need jobs, you know;
• Spend all of your current income: I'm not privy to what you make, but I suspect that your Princeton salary does not even pay all of your taxes, given that you probably make well over a million dollars a year and maybe more. Now, if you are to be consistent, then you need to spend everything you get when you get it, the sooner the better. Since you are not willing to do the Right Thing and turn your entire income over to the government, the next best thing you can do is to be on a permanent spending spree, with any "savings" falling into the next category;
• Eliminate all of your "investments" except for any portfolio of government bonds: Because governments are up-front spenders, you don't have to worry about where your government bond money is going, for it will be spent quickly (perhaps not quickly enough for True Believing Keynesians, but at least more quickly than private individuals might be spending). Moreover, I would recommend that you eliminate ALL investment in stock, corporate bonds, or anything else that would be deemed "private," since government spending not only is economically superior to private spending, but also morally superior. You can feel good about yourself while still having an "investment" portfolio;
• Don't buy gold, silver, or other commodities: Because of your own personal loathing for gold or any other hedge against inflation (because our immediate "threat" is deflation), you really should not purchase anything that would smack of a "gold standard" or any other representation of money. (This includes any "collectibles" such as gold and silver coins. No cheating, please!) I mean, if you really and truly believe that paper money is morally and economically superior to those "barbarous" relics like gold and silver, then you need to be willing to practice what you are preaching.

I realize that you might be objecting by now. After all, why should you be the fall guy? However, as I read your words, you are claiming that there not only is an economic problem with paying less taxes, saving money, and abstaining from some personal spending in order to save for the future, but also a moral problem, then I would hate for you to be forced to act both unprofessionally AND engage in immoral behavior.

Here is your opportunity to help Save The World! Yes, you can set an example for the rest of us to follow. I mean, if you announce this new Paul Krugman Personal Spending Strategy, what is next? Will Bill Gates sell all of his Microsoft stock and buy government bonds and spend the rest? Who knows?

This hardly is a "modest proposal." All I am doing is recommending that you be consistent with what you are writing, and I know that you are anxious to set that personal example so that everyone else in your income category will be shamed for saving, investing, and refusing to spend every penny today.

Say What? on the Debt

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

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

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

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

And it gets better:

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

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

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

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

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

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