Maybe Obama Doesn't Believe in Government, Either

In the aftermath of Hurricane Sandy, a storm that not only washed away New York and New Jersey neighborhoods but also dumped about three feet of snow where I live, cutting power lines and wreaking general havoc, I have come to a conclusion regarding the response of the U.S. Government and specifically the Federal Emergency Management Agency (FEMA): Barack Obama just does not have enough faith in government.

How would I draw that conclusion? Following the disaster in New Orleans from Hurricane Katrina (which was a Category 3 storm), Krugman said that the federal government's response was bad because the Bush administration was filled with people who don't believe in government:

... the federal government's lethal ineptitude wasn't just a consequence of Mr. Bush's personal inadequacy; it was a consequence of ideological hostility to the very idea of using government to serve the public good. For 25 years the right has been denigrating the public sector, telling us that government is always the problem, not the solution. Why should we be surprised that when we needed a government solution, it wasn't forthcoming?

 So, Krugman had an explanation as to why FEMA was incompetent in New Orleans. However, now that the Obama administration's response to the aftermath of Hurricane Sandy (a Category 1 that quickly weakened into a tropical storm) has been exposed as utterly inept, so far there is silence from the Great Man at Princeton. After all, there is no ideological barrier keeping FEMA from being the Super Agency Krugman has claimed it should be (and allegedly was under Bill Clinton), so why the failure?

While it should be logical to an economist (except Krugman, who is not an economist, but rather a political operative who can do math), centralized government planning in which agents from Washington dictate policy to people who actually have more information is a loser from the beginning. Furthermore, the so-called price-gouging laws are responsible not only for horrific shortages but also discourage entrepreneurs from bringing supplies into the stricken areas, which means the recovery takes longer.

(Krugman is a Keynesian, and Keynesians really don't worry about price controls since everyone knows that prices really don't matter, except when they can be put into indices so that Keynesians can put them on the vertical axis of the Aggregate Demand--Aggregate Supply graphs.)

So, we can say that governments at all levels are involved in the aftermath of the storm, with FEMA taking the lead. And we can see how this is working. Not very well. I guess Obama just doesn't believe enough in the power of the State to work miracles. He needs to make a call to Princeton -- if the lines are not still down.

Krugman's Nixonian Anti-Chinese Screed

Paul Krugman has gone to great lengths to blame China for the current economic depression that the USA and other nations are suffering. Yes, it those dastardly Chinese saved too much; they hold down the real value of their currency; they don't charge enough for their goods, and on and on and on.

In today's NYT column, Krugman goes on another anti-China screed, although at least he does have some lucid moments. So, let us begin. Krugman writes:

The root cause of China’s muddle is its weak-currency policy, which is feeding an artificially large trade surplus. As I’ve emphasized in the past, this policy hurts the rest of the world, increasing unemployment in many other countries, America included.

However, as Don Boudreaux correctly points out, it seems that Krugman contradicts himself later. Krugman says:

But a policy can be bad for us without being good for China. In fact, Chinese currency policy is a lose-lose proposition, simultaneously depressing employment here and producing an overheated, inflation-prone economy in China itself.

One way to think about what’s happening is that inflation is the market’s way of undoing currency manipulation. China has been using a weak currency to keep its wages and prices low in dollar terms; market forces have responded by pushing those wages and prices up, eroding that artificial competitive advantage. Some estimates I’ve heard suggest that at current rates of inflation, Chinese undervaluation could be gone in two or three years — not soon enough, but sooner than many expected.

China’s leaders are, however, trying to prevent this outcome, not just to protect exporters’ interest, but because inflation is even more unpopular in China than it is elsewhere. One big reason is that China already in effect exploits its citizens through financial repression (other kinds, too, but that’s not relevant here). Interest rates on bank deposits are limited to just 2.75 percent, which is below the official inflation rate — and it’s widely believed that China’s true inflation rate is substantially higher than its government admits.

Rapidly rising prices, even if matched by wage increases, will make this exploitation much worse. It’s no wonder that the Chinese public is angry about inflation, and that China’s leaders want to stop it.

But for whatever reason — the power of export interests, refusal to do anything that looks like giving in to U.S. demands or sheer inability to think clearly — they’re not willing to deal with the root cause and let their currency rise. Instead, they are trying to control inflation by raising interest rates and restricting credit.

Boudreaux counters:

In short, Beijing keeps the value of the yuan too low by buying dollars with newly created yuan – a policy that Mr. Krugman correctly recognizes to be inflationary.

But as we read on to paragraph ten, we find Mr. Krugman singing an altogether different dirge. He there complains that Beijing now is “trying to control inflation by raising interest rates and restricting credit. This is destructive from a global point of view: with much of the world economy still depressed, the last thing we need is major players pursuing tight-money policies.”

If the “root cause” of the low value of the yuan is Beijing’s inflationary monetary policy – and if this policy harms, as Mr. Krugman says, both China and the rest of the world – why does Mr. Krugman scold Beijing for tightening its monetary policy?

That is a good question. Now, in fairness to Krugman, he is claiming that the proper course of action is for China's government to permit the value of the Chinese currency to rise against the U.S. Dollar, which would make Chinese goods more expensive for Americans.

Krugman reasons that such a policy would shrink China's trade surplus with this country, and that is true. For that matter, I believe that such a policy is more harmful to China than it is to the USA because that means the Chinese are holding dollars which are falling in value and the value of U.S. Government debt also is going to decline.

To put it another way, Americans get Chinese goods, and the Chinese get American paper. Krugman believes that is a better deal for China, and a really bad deal for this country.

Why? He claims that such policies reduce "aggregate demand" in the USA and jack up the rate of unemployment. However, if the end of production is consumption, then China's policy means that Americans are not having to pay the full freight for goods they get to use. (The Chinese at the same time are having to pay more for the goods they produce, which means that the government policy is making them poorer.)

Krugman's perspective is that of a Keynesian, and Keynesians get things backward. To a Keynesian, the purpose of production is, well, production. That is why Keynesians will claim that World War II "ended the Great Depression," because they look at GDP and the rate of unemployment and nothing else.

During World War II, Americans experienced high levels of deprivation that were every bit as serious as what they experienced during the Great Depression. Yes, everyone had a job and money in their pockets, but neither meant that much, as goods were rationed or difficult to find.

I don't support what the Chinese government is doing, but as I see it, the greater victims are the Chinese, not the Americans. China is not responsible for our near-10 percent rate of unemployment; U.S. Government policies from both the Bush and Obama administrations are responsible.

When Nixon faced a huge financial crisis in August 1971, his response was not to look inward, but instead to blame the rest of the world. Economically speaking, his administration was a disaster.

While Krugman recognizes that Nixon's policies of imposing price controls was futile, he never does seem to understand that if China imposes such controls on itself, that the Chinese will bear the brunt of the trouble, not Americans. But even here, I must admit to being puzzled. After all, during the California electricity crisis of a decade ago -- a crisis caused primarily by the fact that the state imposed price controls on the same of electricity -- Krugman claimed that price controls would result in more supply and lower prices.

So, if he holds to that same belief today, then I would think he would be applauding the latest actions of the Chinese government. Go figure.

Krugman Strikes Out

I have come to expect wooly-headed partisanship from Paul Krugman instead of economic analysis, and that is one reason I started this blog. The other reason was that I want to have another source that attacks and exposes the Keynesian fallacies for what they are: dangerous nonsense.

Nonetheless, even Krugman has managed to go where few economists have gone before: into total partisan fantasyland. I figured he would be crowing in his Monday column, and I am correct. Krugman's utterings in the aftermath of the passage of the healthcare nationalization legislation are not worthy of anyone who has a doctorate from one of the most prestigious economics programs in the world. He has given talking points that I would expect to read on the Daily Kos or in one of the ubiquitous emails I receive from the Democratic Party.

Krugman has entitled his column, "Fear Strikes Out," but in reality, Krugman has struck out, demonstrating not only his outright partisanship, but also his dishonesty. Let me begin.

He begins the column with a long quote from President Obama. Now, I generally don't like to begin any of my articles with quotes from politicians unless I am taking the scalpel to their words, as we can figure that however lofty the rhetoric might be, there is an iron fist inside a velvet glove, and this is no exception.

However, after quoting Obama, he then turns to Newt Gingrich:

And on the other side, here’s what Newt Gingrich, the Republican former speaker of the House — a man celebrated by many in his party as an intellectual leader — had to say: If Democrats pass health reform, “They will have destroyed their party much as Lyndon Johnson shattered the Democratic Party for 40 years” by passing civil rights legislation.

Notice that "passing civil rights legislation" was not what Gingrich said. No, Krugman inserted those words to imply that anyone who opposed the legislation was a racist.

Now, I don't like to defend the loathsome Gingrich, and I don't forget that for all of his lofty "limited government" rhetoric, he was just another politician grabbing what he could from the till. However, one has to understand the tactics that Krugman is using, and they are absolutely despicable.

He points out that someone from the Tea Party protests called John Lewis the "N-word," which is "proof" that opposition to the medical care legislation was undergirded with racism. While I also condemn the use of such language, nonetheless, Krugman uses the incident in a way that promotes a non sequitur. Do you have difficulties with the legislation? Do you think that it is going to pile on trillions of dollars of unfunded liabilities on our present and future generations at a time when the government of this country is essentially bankrupt?

Well, if you believe that, or even think it, then you also are a racist. Lest you think I am exaggerating, read on:

Instead, I want you to consider the contrast: on one side, the closing argument was an appeal to our better angels, urging politicians to do what is right, even if it hurts their careers; on the other side, callous cynicism. Think about what it means to condemn health reform by comparing it to the Civil Rights Act. Who in modern America would say that L.B.J. did the wrong thing by pushing for racial equality? (Actually, we know who: the people at the Tea Party protest who hurled racial epithets at Democratic members of Congress on the eve of the vote.

However, what if you are someone who says that the Law of Scarcity was not repealed, no matter what Krugman says? Well, you, too, are a cynical racist. Why? The Congressional Budget Office has declared this legislation to be fiscally sound, and we know that the CBO always gets it right, and that it is "nonpartisan" and never affected by politics:

Yes, a few conservative policy intellectuals, after making a show of thinking hard about the issues, claimed to be disturbed by reform’s fiscal implications (but were strangely unmoved by the clean bill of fiscal health from the Congressional Budget Office) or to want stronger action on costs (even though this reform does more to tackle health care costs than any previous legislation). For the most part, however, opponents of reform didn’t even pretend to engage with the reality either of the existing health care system or of the moderate, centrist plan — very close in outline to the reform Mitt Romney introduced in Massachusetts — that Democrats were proposing.

Ah! We have proof! Mitt Romney pushed what Krugman claims is a similar plan in Massachusetts, and Romney is a Republican, so any opposition to the government's newest edict can only be made on the basis of racism! Don't you see the logic? It is all there!

Krugman, however, is not done. He finishes with this benediction:

This is, of course, a political victory for President Obama, and a triumph for Nancy Pelosi, the House speaker. But it is also a victory for America’s soul. In the end, a vicious, unprincipled fear offensive failed to block reform. This time, fear struck out.

Yes, if you think that legislation that essentially nationalizes medical care, promises price controls, has new provisions that will criminalize actions that once fell into the category of voluntary, peaceful trade, and imposes coercive measures along with empowering the Internal Revenue Service, then you are on the side of the demons. You are a vicious, lying racist who wants everyone to get sick and not have healthcare.

Am I exaggerating? Read the column and see for yourself. You cannot both take a hard look at the fiscal provisions of this legislation and ask questions about it, for if you do, then you are a vicious racist.

There is more in this column and I will take a future look at some other points he makes, but for now, I leave readers with this sobering thought: The 2008 Nobel laureate in economics has declared that questioning this legislation through the lens of the simple laws of economics is an act of racism.

The Trojan Krugman

As a faculty member of a state university in Maryland, I am used to hearing other faculty members substitute Democratic Party talking points for conversation, as most of them are True Believers who defend their party with religious zeal. If the Party declares a certain State of Being, then whatever it decrees becomes the New Reality.

It does not surprise me that professors in English or Political Science would hold to such views, as they are open political partisans. However, I expect more from economists, and especially economists who have Nobel Prizes. I cannot imagine ever having heard political talking points from someone like F.A. Hayek, George Stigler, Gary Becker, or James Buchanan, especially in print. These Nobel laureates believed that their job was to promote and apply sound economic theory, not be shills for political parties or their chosen candidates.

Unfortunately, Paul Krugman is not held to the same standards, nor does he hold himself to any standards but those of stooping to the latest set of talking points from the White House, Nancy Pelosi, and Harry Reid. Thus, his latest column demonstrates beyond a doubt that he is willing to promote pure fantasy when it comes to budget numbers, and work in tandem with his part-time employer, the New York Times, to try to convince us that something akin to Harry Potter Economics really exists.

I will go one step further: I believe wholeheartedly that Krugman knows this bill will be disastrous and will create utter chaos in the field of medical care. Into that void will ride the deus ex machina government with a "new" universal plan that will be something out of Canada Care or the British National Health Service. The state takeover of medical care then will be complete. If anything, this bill is the Ultimate Trojan Horse that once passed is going to guarantee that what is left of private enterprise in medical care will be destroyed.

Let me examine some of his statements. First, he gives anecdotes about people who have had their medical insurance revoked for contracting HIV or for other reasons. The new health "plan," he argues, would guarantee that no one could be denied insurance coverage for medical care. He states:

So what’s the answer? Americans overwhelmingly favor guaranteeing coverage to those with pre-existing conditions — but you can’t do that without pursuing broad-based reform. To make insurance affordable, you have to keep currently healthy people in the risk pool, which means requiring that everyone or almost everyone buy coverage. You can’t do that without financial aid to lower-income Americans so that they can pay the premiums. So you end up with a tripartite policy: elimination of medical discrimination, mandated coverage, and premium subsidies.

Now, I can tell you that if automobile or homeowners insurance were put under such rules, premiums would skyrocket, and everyone can understand why. Or, what about life insurance coverage? Should life insurers be forced to charge the same premiums for all applicants, regardless of their health? What would such a move do to the cost of premiums? I think we know the answer.

Therefore, Krugman is supporting a law that is guaranteed to force up the costs of insurance premiums, yet he also is supporting a bill that will impose price controls on medical insurance. My sense is that Krugman understand just what this means, for even he has some knowledge of the very real economic dislocations price controls will bring.

Into the chaos will ride the government, which will offer to subsidize the insurance companies, as they will experience real losses. However, I also think there could be another future, one that would take a page from the Marxist government of Salvador Allende of Chile nearly 40 years ago.

Allende's government printed money in massive quantities, swamping the Chilean economy with worthless paper, driving people to barter and throwing the economy into chaos. The government also imposed draconian price controls in which government-owned businesses were permitted to raise prices, but private enterprises could not. Those private companies that were caught raising prices to cope with inflation were confiscated by the government and the owners not compensated.

I suspect that this will be the future of private health insurance in the United States, and it is what Krugman and his friends hope will be the outcome. The current legislation does impose price controls on insurance premiums, yet also increases the demand for insurance through mandates and subsidies. This guarantees chaos, and even a partisan economist like Krugman can see through this charade.

However, instead of promoting economic principles, Krugman promotes outright fabrications. Take the following from his column, for example:

Can we afford this? Yes, says the Congressional Budget Office, which on Thursday concluded that the proposed legislation would reduce the deficit by $138 billion in its first decade and half of 1 percent of G.D.P., amounting to around $1.2 trillion, in its second decade.

But shouldn’t we be focused on controlling costs rather than extending coverage? Actually, the proposed reform does more to control health care costs than any previous legislation, paying for expanded coverage by reducing the rate at which Medicare costs will grow, substantially improving Medicare’s long-run financing along the way. And this combination of broader coverage and cost control is no accident: It has long been clear to health-policy experts that these concerns go hand in hand. The United States is the only advanced nation without universal health care, and it also has by far the world’s highest health care costs.

Krugman never believed the rosy CBO projections when the Republicans were in power, but suddenly that same office is the Promoter of Truth. If anyone truly believes that this plan, with its mandates, restrictions, new criminal penalties, and massive subsidies is going to reduce the real costs of medical care and simultaneously lower the federal deficit, I have some real estate at 1600 Pennsylvania Avenue that I want to sell to you.

This is fraud, pure fraud. However, Krugman also slyly gives away his real goal: Fully Nationalized Medical Care:

Can you imagine a better reform? Sure. If Harry Truman had managed to add health care to Social Security back in 1947, we’d have a better, cheaper system than the one whose fate now hangs in the balance. But an ideal plan isn’t on the table. And what is on the table, ready to go, is legislation that is fiscally responsible, takes major steps toward dealing with rising health care costs, and would make us a better, fairer, more decent nation.

Guess what? As the bedlam that will result from this "fiscally responsible" legislation increases -- and I have no doubt that the House Democrats will cave in the end -- the next step (and the next step after that) will be to create the "single payer" plan that Krugman has wanted all along.

I am no fan of the current system. Third-party payments for rudimentary medical care through insurance are responsible for the costly mess that is U.S. medical care. If we purchased food or automobiles via the same payment system through which we purchase medical care, there would be runaway costs and utter chaos in those markets, too.

I'll go a step further. Even if Republicans were to take back the Congress in the upcoming elections, there is no way this bill would be repealed, no matter what they might have promised in the heat of a political campaign. This is a bill that, in my view, is purposely designed to drive everyone to a "single-payer" government plan, as what exists in Canada. However, it also will be an entitlement, and once entitlements become law, they are politically-impossible to eliminate.

No, Americans are going to be stuck with something that will cost them much more of their earnings -- and produce inferior care -- than a true free-market in medical care would produce. Unfortunately, we now are so far removed now from such markets in that sector that most people would be afraid to take the plunge and eliminate the government controls and subsidies. Thus, we ultimately will be stuck with "single-payer," and the long lines and waits and denial of care that will accompany it. Sooner or later, the Trojan Horse will open and government minions will take over everything in medical care (that they don't already control).

In his promotion of this monstrous bill, I believe that Paul Krugman really does understand that, no, it won't cut costs, no, it won't reduce the deficit, and, yes, it ultimately will lead to an utterly politicized system. For once, I wish he would tell the truth about what is to happen, but Krugman long ago gave up telling the truth in exchange for being a shill and a political operative.

The Most Bizarro Health "Reform" Arugment: ObamaCare Will Cut the Deficit

Is Paul Krugman an economist or a political operative? Seven years ago, I said it was the latter, and nothing Krugman has written since then has changed that opinion. In this blog post, Krugman once again exposes himself as the politically-partisan shill that he has become.

Now, I will say that some of what he says is useful, at least if one is moved by the delusion that the Republicans actually have a decent answer in this healthcare debate. Krugman notes that

...(Republicans) have a problem: Obamacare is very much like the Massachusetts health reform, which was not only implemented by a Republican governor, but by a governor who is a serious contender for the 2012 presidential nomination.

Unfortunately, he quickly breaks from reality with the following statement:

So they insist that the two plans have nothing in common — but the only real difference they can point to is that Massachusetts didn’t fund its plan in part out of Medicare savings.

Of course, it couldn’t. But think about this a bit more: Republicans are saying that what makes Obamacare a socialist takeover, whereas Romneycare wasn’t, is the fact that unlike Romney’s plan, Obama’s plan cuts government spending.

Uh, does Krugman really believe that this plan is going to provide any Medicare "savings" at all? Or that the Obama monstrosity "cuts government spending"? Now, Krugman was all over the proposals from the Bush administration that promised fictitious results, but now that his candidate is in the Oval Office, suddenly the nonsense that is ObamaCare presents the truth and only but the truth.

Anyone who claims that price controls are going to "cut" government spending is not an economist, as real economists understand the price system, how it works, and what happens when government intervenes into market exchanges. That someone of Krugman's stature would spend his political capital on a bogus mess called ObamaCare tells me that the guy is a political operative and nothing else.

Paul Krugman: Spreading Economic Myths to Debunk What He Calls "Health Reform Myths"

Economists like to debunk what we call economic myths. For example, I have used this blog to debunk Paul Krugman's Herbert Hoover myths about the Great Depression. However, I must admit that Krugman does all of us one better when he employs economic myths in an attempt to "debunk" what he says are "Health Reform Myths."

...reform still has to run a gantlet of misinformation and outright lies. So let me address three big myths about the proposed reform, myths that are believed by many people who consider themselves well-informed, but who have actually fallen for deceptive spin.

OK, fair enough. What are these myths?

The first "myth" is that government is taking over a sixth of the U.S. Economy. Krugman says that government already controls much of the healthcare sector, and THAT sector runs very, very well. The "failing" healthcare sector, he says is the so-called private part:

The only part of health care in which there isn’t already a lot of federal intervention is the market in which individuals who can’t get employment-based coverage buy their own insurance. And that market, in case you hadn’t noticed, is a disaster — no coverage for people with pre-existing medical conditions, coverage dropped when you get sick, and huge premium increases in the middle of an economic crisis. It’s this sector, plus the plight of Americans with no insurance at all, that reform aims to fix. What’s wrong with that?

The next "myth" is that the proposed law "does nothing to control costs." According to Krugman, "Realistically, health reform is likely to do much better at controlling costs than any of the official projections suggest."

Krugman's third "myth" is that this reform is "fiscally irresponsible." He defends the pending legislation:

How can people say this given Congressional Budget Office predictions — which, as I’ve already argued, are probably too pessimistic — that reform would actually reduce the deficit?

I will try to answer Krugman by concentrating on one item: the notion that this bill will "cut costs" and, thus, reduce the federal deficit.

Perhaps the most charitable thing I can say is that Paul Krugman, being a "macroeconomist," really does not understand costs. To the economist (that is, an economist who actually has real economics training), a cost is an opportunity cost, which is the subjective value of the next-highest-valued alternative. THAT is a cost. Krugman, however, continues to insist that a cost is nothing more than an arbitrary monetary outlay.

Cost ruduction, then, according to Krugman, is nothing more than slapping down price controls. If government decrees lower prices for medical care, then like magic, prices will fall, and there will be ample care for all. Now,I have no idea what Krugman was doing the day price theory was discussed in his graduate micro class, but I doubt he was listening.

No competent economist will endorse such cost controls. For that matter, most pricing in medical care (and especially in hospitals) already is heavily regulated by federal authorities. So, if regulated prices already are spiraling out of control, how does Krugman get away with claiming that another layer of the same stuff is going to do the trick?

Economists like Krugman who do nothing but deal in aggregates have no understanding whatsoever about prices. None. To Krugman, a price is just a number, an arbitrary number, and if government lays down new sets of numbers, then there will be no dislocations whatsoever.

That is nonsense, and dangerous nonsense at that. We know from thousands of years (yes, thousands) of government price controls that such controls are followed by dislocations, economic chaos, and stunted economic growth. If Krugman cannot understand that fact, then he is not an economist, but rather just another political operative.

Is the ObamaCare plan irreponsible? Of course, it is! Anyone who believes that Congress and the Executive Branch can construct by fiat a plan that centrally directs medical care that replaces the voluntary choices of the millions of individuals involved in this industry and not create real problems does not understand economics at all. Why am I not surprised that Krugman cannot and will not understand this simple point?

NOTE: At a session of the Austrian Scholars Conference, economist Lowell Gallaway, a co-author with Richard Vedder of the excellent book, Out of Work, noted sarcastically that Krugman has been vocal in peddling the same high-wage theories that Herbert Hoover promoted during the Great Depression. In other words, far from being the opposite of Hoover, Krugman is his intellectual soul mate!

Krugman's Logic Death Spiral

One of the fundamental tenets of economic logic is that the farther away one gets from the simple relationship of a consumer paying directly for a good, the more the economic calculation for such exchanges becomes muddled. Thus it is with health insurance.

Think of it; most of us receive insurance from our jobs. We pay a premium, our employer pays part of it, which goes to the insurer, and then the insurer pays the doctors, does the negotiations, sets the standards, etc. This is a recipe for permitting costs to get out of control.

One of the fundamental tenets of Austrian economic theory is that the factors of production gain their value from the value that consumers place upon the final product. (Carl Menger spends a lot of time on this point in the first two chapters of his ground-breaking 1871 classic, Principles of Economics.) It is not hard to see that the way health insurance today is structured, that it is a recipe for out-of-control costs.

Paul Krugman has been writing on health insurance and economics for many years, and from what I have been able to tell, his main points are as follows:

• Health insurers are greedy and raise premiums because they are greedy;
• Health insurers can only make money by denying coverage;
• Medical costs rise because doctors and insurers are greedy;
• Only government price controls and regulation can ensure that medical costs will be low and medical care will be abundant for everyone.

Now, if one sees some internatl contradictions in this whole scenario, well, that person is applying simple logic, something that is missing from most Krugman columns. However, instead of making accusations against Krugman, let him say things in his own words:

Sky-high rate increases make a powerful case for action. And they show, in particular, that we need comprehensive, guaranteed coverage — which is exactly what Democrats are trying to accomplish.

Here’s the story: About 800,000 people in California who buy insurance on the individual market — as opposed to getting it through their employers — are covered by Anthem Blue Cross, a WellPoint subsidiary. These are the people who were recently told to expect dramatic rate increases, in some cases as high as 39 percent.

Why the huge increase? It’s not profiteering, says WellPoint, which claims instead (without using the term) that it’s facing a classic insurance death spiral.

Bear in mind that private health insurance only works if insurers can sell policies to both sick and healthy customers. If too many healthy people decide that they’d rather take their chances and remain uninsured, the risk pool deteriorates, forcing insurers to raise premiums. This, in turn, leads more healthy people to drop coverage, worsening the risk pool even further, and so on.

Now, what WellPoint claims is that it has been forced to raise premiums because of “challenging economic times”: cash-strapped Californians have been dropping their policies or shifting into less-comprehensive plans. Those retaining coverage tend to be people with high current medical expenses. And the result, says the company, is a drastically worsening risk pool: in effect, a death spiral.

So the rate increases, WellPoint insists, aren’t its fault: “Other individual market insurers are facing the same dynamics and are being forced to take similar actions.” Indeed, a report released Thursday by the department of Health and Human Services shows that there have been steep actual or proposed increases in rates by a number of insurers.

In economics, we have another term for what is being described: adverse selection. That is a common problem with insurance, and there are no perfect solutions, since people either will become sick or have accidents or have their houses burned down. That is life. Furthermore, with insurance, any insurer that does not try to control its costs is going to go bankrupt. (The Great Chicago Fire of 1973 was a classic example of the Worst Case Scenario, as a number of insurance companies went under because they had so many claims.)

Now, at one level, Krugman is correct. If we are going to use health insurance as a payment plan for nearly ALL health-based activities, and if health insurance is going to be the gateway for most care, then those who don't have insurance are going to find it more difficult (but certainly not impossible) to receive medical care.

However, what does Krugman suggest? It is something akin to taking the "hair of the dog" when one has had too much to drink. His "hair of the dog" theory of health insurance goes like this: Health insurance is too expensive and is not readily available, so the cure is to have the government impose price controls and provide "insurance" itself, and then everyone will have abundant care.

I don't think so. If, as the Austrians note, the problem is one of economic calculation, throwing even more distance between the consumers and providers of medical care will not solve anything, but, rather, make the problem worse. Yet, that is precisely what Krugman is demanding:

What would work? By all means, let’s ban discrimination on the basis of medical history — but we also have to keep healthy people in the risk pool, which means requiring that people purchase insurance. This, in turn, requires substantial aid to lower-income Americans so that they can afford coverage.

And if you put all of that together, you end up with something very much like the health reform bills that have already passed both the House and the Senate.

What about claims that these bills would force Americans into the clutches of greedy insurance companies? Well, the main answer is stronger regulation; but it would also be a very good idea, politically as well as substantively, for the Senate to use reconciliation to put the public option back into its bill.

Let me translate. The "solution" is more coercion and government-induced price controls. I think that "solution" speaks for itself.

Krugman, Medicare, and Republicans

One of the things one learns (or should learn) in an economics graduate program is that while we hold to certain laws of economics, we do not view the world through a template, and especially one structured from political talking points. For example, as an economist, I can say that if one raises the minimum wage during a recession, one of the results will be increased unemployment among lower-skilled workers, and especially teenagers.

That conclusion comes from the laws of supply and demand, and it is sound and can be drawn without going into an ideological frenzy. However, it would be quite another thing if I were to say, "Democrats raised the minimum wage during a recession. Therefore, they want teenagers to be unemployed." Such a statement would be a non sequitur, and fully is outside of my role as an economist.

In fact, every mentor I have had has told me to be careful when venturing into the world of politics, and certainly not to embrace political talking points. Most, but not all, voted for Republicans, but none was active in any Republican activities and certainly never used the classroom or personal conversation to shill for political candidates. Furthermore, none ever presented a Republican candidate as the Hope of the World. There were and are lines that my mentors did not cross.

Unfortunately, I suppose that the Massachusetts Institute of Technology goes by a different set of rules, as its most famous economics doctoral student has used his position to be a partisan shill and to fudge on the truth. At present, I am researching for a paper on the passage of the financial deregulation initiatives of the early 1980s and I can tell you outright that Paul Krugman is rewriting history, declaring things to be true that never happened.

Thus, I wade into his latest food fight, his "Republicans want to cut Medicare" screed that passes as a column in today's New York Times. It is hard to know where to begin here, but I will try to slog through this morass that clearly does not befit someone whose academic honors put him near the top of our profession.

Krugman accuses Republicans of saying that while they want to save Medicare, they really want to cut its benefits. As "proof," he goes back to the 1995 government shutdown that he claims is due to then-Speaker Newt Gingrich's attempt to "ram through deep cuts in Medicare." Now, I don't know what really happened then, and as I have said before, Krugman has this tendency to rewrite history to his liking.

When Republicans are claiming that Democrats want to "cut Medicare" and that they are the saviors of this open-ended program, I find myself in agreement with Krugman that they are not to be trusted. However, the larger problem is that Medicare itself is not a sustainable program no matter how one slices things. Any competent economist can see this problem up front, but Krugman, while being a "star" in economics, nonetheless looks at government programs through the glasses of a partisan Democrat, which clouds and distorts his vision.

Take the following, for example:

No, what’s truly mind-boggling is this: Even as Republicans denounce modest proposals to rein in Medicare’s rising costs, they are, themselves, seeking to dismantle the whole program. And the process of dismantling would begin with spending cuts of about $650 billion over the next decade. Math is hard, but I do believe that’s more than the roughly $400 billion (not $500 billion) in Medicare savings projected for the Democratic health bills.

Let's take this one apart. If the Republicans wanted to dismantle Medicare, they would have done it when they had control of all three branches of government. For that matter, I remember Democrats claiming in 1980 that if Ronald Reagan were elected, he was going to do away with Social Security. None of those things happened, yet Krugman continues to spout the party line as though it makes sense.

Now, is that because Republicans are compassionate, caring folks? No, it is because they want to be elected and re-elected, and few people in our current welfare state can win elections by promising less. It doesn't happen. Republicans, like Democrats, are political animals and know that if they ever engaged in the behavior that matched some of their "let's be responsible" rhetoric...well, that is not going to happen.

Now, I find Krugman's other point even more interesting. Suddenly, he calculates lower costs of (Ah! His brilliant economist mind at work!) $400 billion, but that amount constitutes "savings"! No. They are real-live payment cuts to people working in the medical system. Here is my question: How is it that Democrats propose "savings" but if Republicans do the same, they are proposing "cuts"?

Keep in mind that Krugman's "savings" do not come from actual "savings" but rather from the implementation of price controls. That's right, we have an economist claiming that price controls do not raise the opportunity cost for anyone, and that price controls actually result in real lower costs. This is nonsense.

We have seen real prices fall over time because people find ways to produce more goods using fewer resources. That is how an economy grows, period, but Krugman is not talking about such things. Instead, as I have pointed out, he is endorsing outright price controls (to be enforced, by the way, with criminal penalties).

Krugman has a history of claiming price controls actually do as advertised. During the California electricity blackouts of a decade ago (caused by the state government implementing price controls in the retain sale of electricity), Krugman claimed that the implementation of price controls across the entire western grid would result in lower prices and more supply. Such things don't happen, people. Price controls, as anyone learns in Economics 101, reduce available supply and thus, exacerbate shortages.

Not to be outdone, Krugman also endorsed increasing the minimum wage during a recession, claiming that it would increase overall spending. (Guess he cannot tell the difference between total utility and marginal utility. Take note, Princeton students.)

Any economist worth his salt, Austrian or mainstream, knows there are immutable laws of economics. The Law of Scarcity, the Law of Demand, the Law of Supply, and the Law of Diminishing Returns all are in an economist's lexicon and for good reason. They are as immutable to human action as the Law of Gravity is immutable to our very existence.

Yet, we have a "decorated" economist claiming that his political party can transcend the laws of economics by fiat. This is not economics, folks. This is Harry Potter Science.