Egos and Economists Who Yearn for the Nonexistent Past

One of the constant themes of Paul Krugman's writings these days, other than shilling for Barack Obama and Democrats in general, is the walk down memory lane to the nation's idyllic past where tightly-regulated industries wisely governed by The Great Eye Of Washington grew and grew until those Bad And Greedy Ideologues Led By Ronald Reagan completely overturned the Perfect System and replaced it with Greed And Chaos.

Now, I always find it interesting that people like Krugman claim that "turning back the clock" is a foolish and reprehensible thing to do -- except when people Krugman do it. Progressivism, as they see it, means that ANY new government regulation or regulatory system ALWAYS is an improvement over the previous chaotic regime when Evil Private Enterprise was in charge. Thus, any attempt to change anything can be borne only from evil intentions, as each law, each regulation, each encroachment by the State is another step toward the Perfect Society.

In a recent column, Krugman once again takes us down memory lane, telling us that Mitt Romney must have been the Second Coming of Oliver Stone's fictional character Gordon Gekko, the takeover specialist who bought healthy, profitable firms, gutted them, drove them into the ground, and ultimately made a profit from destroying companies. Now, this is quite interesting, coming from an economist, given that the scenario, while nicely fitting for Hollywood, describes an impossible set of events.

In Krugman's Wonderland, it is entirely plausible that a corporate raider only can make money if he drives a profitable company into bankruptcy. After all, in the Real World, if the parts (i.e. physical assets) of a firm are more valuable than the firm itself, then we know that the firm already was headed for doom.

For example, the value of Apple does not rest in its physical assets such as inventory, parts, building, and the like. Instead, the value of that firm lies in the ability of its people to move factors of production from lower-valued to higher-valued uses, as ultimately determined by consumers. If a corporate raider or any other company were to try to purchase Apple, it would have to buy the "whole," not the "sum of its parts," something that would make Apple's purchase price prohibitively expensive.

All of this is lost in Wonderland, where life is static, and the capital that served companies in 1950 (when the rest of the world was recovering from the devastation of World War II, as the USA was not a physical battleground and did not have destroyed factories and bombed-out cities) is still working perfectly 30 years later and produces exactly the same returns. This is the state of mind that brought Krugman's mentor, Paul Samuelson, to claim that socialism in the Soviet Union was a "powerful engine for economic growth" that sooner or later would overtake the capitalist world in economic strength.

After all, in Wonderland, an economy is little more than a graph of aggregate supply and aggregate demand (with a Keynesian Cross thrown in for good measure) in which government stirs in new money and out of the mixture comes full employment (as long as the "right people" are in charge of the apparatus of the state). Anything that might upset this picture always is portrayed as evil.

Now, what I find interesting, beyond Krugman's partisan shilling, is the following statement, which tells me more about Krugman's grasp of the current economy than it does even about his politics:

In the wake of a devastating financial crisis, President Obama has enacted some modest and obviously needed regulation; he has proposed closing a few outrageous tax loopholes; and he has suggested that Mitt Romney’s history of buying and selling companies, often firing workers and gutting their pensions along the way, doesn’t make him the right man to run America’s economy.

First, I had no idea that presidents "run America's economy," but there it is. Second, I find it quite interesting that he uses Obama as his stellar example of attacking capitalism. As Kimberly Strassel recently noted:

President Obama is no fan of Mitt Romney-style "vulture" capitalism. So what's his alternative?

All those Republicans grousing about the president's attacks on private equity might instead be seizing on this beautiful point of contrast. Mr. Obama, after all, is no mere mortal president. Even as he's been busy with the day job, he's found time to moonlight as CEO-in-Chief of half the nation's industry. Detroit, the energy sector, health care—he's all over these guys like a cheap spreadsheet.

Like Mr. Romney, Mr. Obama has presided over bankruptcies, layoffs, lost pensions, run-ups in debt. Yet unlike Mr. Romney, Mr. Obama's C-suite required billions in taxpayer dollars and subsidies, as well as mandates, regulations, union payoffs and moral hazard. Don't like "vulture" capitalism? Check out the form the president's had on offer these past three years: "crony" capitalism.(Emphasis mine)

Strassel looks at Obama's record, and I find it quite interesting that Krugman refuses to apply the same standards to the President of the United States that he does private enterprise. Barack Obama as "Master of the Universe." Who would have thought it?

Now, one might remember the Solyndra debacle, and when one combines Solyndra's $500 million implosion with the other bankruptcies that Obama-financed firms have contributed (along with their millions in political contributions to Obama), the numbers are greater than J.P. Morgan's $2 billion trading loss, that has sent Krugman into apoplexy.Then there is General Motors, Obama's economic centerpiece:

Speaking of cars, Detroit is the business venture Mr. Obama's team has been most flogging as a success. True, General Motors and Chrysler are still turning their lights on, though they'd have arguably been doing the same had they been left to go through normal, orderly bankruptcies like those that helped the steel and airline industries restructure to become more competitive.

To get to the same place, Mr. Obama's crony capitalism handed $82 billion in taxpayer dollars to the two firms. That bailout money went to make sure the unions that helped drive GM to bankruptcy (and helped elect Mr. Obama) did not have to give up pay or pension benefits for current workers. They were instead rewarded with a share of the new firm. The UAW at GM meanwhile used the government-run bankruptcy to bar some 2,500 nonunion workers who had been laid off from transferring to other plants. How truly vulture-like.

Contract law was shredded, as unions were given preference over other creditors, such as pension funds for retired teachers and police officers. Congressmen used political sway to keep open their weak auto dealerships, forcing layoffs at stronger ones (vulture . . . vulture . . . vulture). Political masters obliged the industry to pour resources into unpopular green cars. The political masters were obliged to offer $10,000 tax credits to convince Americans to buy them. (They still won't.) And the message to every big industry? Go ahead, run your business into the ground. The Capitalist-in-Chief has your back (especially if you are unionized).

I have my doubts that Krugman's future columns will deal with any of these sticky issues. (The Washington Post has an interesting column about Obama's "Public Equity" record.) He already is on the record as supporting the vast "green energy" subsidies in part because he believes coal is evil and in part because subsidies mean spending, and every Keynesian knows that spending, even if for financial turkeys, is the lifeblood of an economy.

As for GM and Chrysler, Krugman also has thrown in with the Obama administration on its action, yet in the "restructuring" of GM, the government pretty much forced massive layoffs and the like, the very things that Krugman claims make private equity to be the Very Spawn of Satan. The difference is that when private equity firms are in charge of layoffs, they tend to be done for economic reasons.

In the case of GM and Chrysler, however, it was quite clear from the start that the purpose of the bailout was to reward political contributors to the president and Democrats and to punish anyone who had the temerity not to bow down to Obama and his White House gang. This is what the ancients once called "Crony Capitalism," but when the cronies are Obama and company, then suddenly what was once a scourge now becomes an asset.

None of this is should be read as a defense for the current presidential candidacy of Mitt Romney. He has provided nothing in his campaign that tells me he has a clue of what is happening to this country and what needs to be done. Instead, he simply claims that he will "manage" the economy better than Obama has done.

The idea that Romney is running as a "Manager-in-Chief" should give anyone pause, and I don't think he will have any more economic success than did Richard Nixon, who presided over price controls, inflation, and economic stagnation. However, it seems that Krugman is clueless as to what Romney's real weaknesses might be. Instead, he shills for Obama because he believes that the president is the Right Man to lead us back to that era when government created cartels in banking, telecommunications, cartels, and energy and all was perfect and right with the world. Except that it wasn't.

Jonathan Macey schools Krugman on private equity

There is life imitating art, art imitating life, and then there is make-believe. Not surprisingly, Paul Krugman chooses the third option, at least when it comes to his belief that Oliver Stone's "Wall Street" gave an accurate picture of how private equity firms work.

(I do agree with Krugman's contention that government is not a business and that a businessman is any more capable of being an effective president than a career politician. Nonetheless, Krugman then wants us to believe the same tired song that government creates prosperity by spending, while businesses create recessions by becoming more efficient and by employing more capital. I can see a politician making such a statement, but an academic economist is supposed to understand something about the Law of Opportunity Cost.)

In his most recent column, Krugman quotes Gordon Gekko's famous "greed is good" speech as though that actually were accurate economics -- that corporate raiders could make money by buying healthy firms and then destroying their value.

What Krugman wants us to believe is that companies like Bain Capital would target successful, healthy, profitable firms, purchase them, and then make money either by running them into bankruptcy and then selling their assets. Now, perhaps at Princeton University, they teach that firm owners become wealthy by driving their firms into insolvency, but I would like to know how the market value of a company would INCREASE when it is careening into failure.

In an excellent article in the Wall Street Journal, Yale law professor Jonathan Macey explains how the private equity system actually works (as opposed to how Krugman says it works). (I don't have the full article available, and if I am able to do it later, I will post it.)

Macey's point is simple; a firm like Bain Capital purchases a firm that is underperforming relative to similar companies, restructures it, and then sells it. In order to profit, the private equity firm must be able to sell the firm (or its assets) for more than it paid for the company at the beginning.

Some common sense is in order, as Macey notes. A company cannot purchase a healthy company, run it into the ground, and then sell it for more than for the purchase price. While Krugman might believe that business people are utterly stupid (as opposed to professors and politicians), they are not so stupid as to buy high and sell low and do it consistently -- and remain in business.

If the Bain Capitals of the world are going to make profits, then they have to sell businesses or their assets (or both) for more than what they paid for the company, and they are NOT going to be able do that by looting a company. That simply makes no sense, which is why I hardly am surprised that both Krugman and Newt Gingrich seem to share the belief that businesses can profit by buying healthy companies, destroying them, and then getting even more value from their sale.

None of this means I am endorsing Mitt Romney for president. I hardly am enamored with his candidacy, but when people like Krugman and Gingrich demonstrate that they are utterly ignorant of how the leveraged buyout process works while condemning the whole practice, I'm going to speak up for the simple reason that someone needs to be able to explain some of the simple yet profound tools of economics without the political baggage.