Krugman: Capital creates recessions

I see that Paul Krugman has moved into yet another economic dimension in which he declares that capital creates layoffs and layoffs are responsible for...layoffs. He writes:

...the fact is that running a business is nothing at all like making macro policy. The key point about macroeconomics is the pervasiveness of feedback loops due to the fact that workers are also consumers. No business sells a large fraction of its output to its own workers; even very small countries sell around two-thirds of their output to themselves, because that much is non-tradable services.

This makes a huge difference. A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods. Nothing in business experience prepares one for the paradox of thrift, or even the inflationary impact of increases in the money supply (which is real when the economy isn’t in a liquidity trap.)

This is yet another example of the fallacy of "buy back the product" in which production and consumption are regarded as two independent and unrelated things, except that unless workers can "buy back" what they have produced, then the economy will plunge into recession.

In other words, what an economy produces really means nothing in terms of wealth. The production of goods is seen as an impediment to employment. Now, it is one thing when President Obama declares that capital creates unemployment; he is a politician and cannot be held responsible for saying anything of economic intelligence.

However, Krugman is supposed to know better. Economists actually are supposed to understand that when capital is created within a free market system, permitting people to create more goods, that this ultimately creates new opportunities for others.

So there you have it. Capital creates recessions; savings creates recessions. More brilliant economic analysis from Princeton University.

Medicare, Mediscare, and the reality of the future of administrative medical care

Did the Democrats win the special election for Congress this past week because of a fear of what the Republicans might do to Medicare? Paul Krugman thinks so, and he very well might be correct. However, there is something that Krugman does not want to admit, and that is the simple fact that Medicare as we have known it is not sustainable, and not even if we raise taxes on upper-income Americans.

(Krugman, you know, always claims that if we can just "tax the rich," that most federal budget problems will be solved. In other words, if we raise the top tax rate from 35 percent to 39.6 percent, the fiscal planets will align and prosperity will return. I'm not sure how his causality chain works for this blissful scenario, but there it is.)

First, Krugman rightly points out that the Republican plans would cut Medicare, and I am in full agreement with him that this would be the case. However, while I don't agree with the Republicans on what might happen if their plan is enacted, nonetheless I believe that Medicare is going down, anyway, and all of the rhetoric from Krugman cannot change the simple fact that the American economy cannot produce enough to keep ALL of the current programs, from military spending to transfer payments, going at their current rate.

Krugman writes:

The new program might still be called Medicare — hey, we could replace government coverage of major expenses with an allowance of two free aspirins a day, and still call it “Medicare” — but it wouldn’t be the same program. And if the cost estimates of the Congressional Budget Office are at all right, the inadequate size of the vouchers — which by 2030 would cover only about a third of seniors’ health costs — would leave many if not most older Americans unable to afford essential care.

If anyone is lying here, it’s Mr. Ryan himself, who has claimed that his plan would give seniors the same kind of coverage that members of Congress receive — an assertion that is completely false.

And, by the way, the claim that the plan would keep Medicare as we know it intact for Americans currently 55 or older is highly dubious. True, that’s what the plan promises, but if you think about the political dynamics that would emerge once Americans born a year or two too late realize how much better a deal slightly older Americans are getting, you realize that this is a promise unlikely to be fulfilled.

Now, I hate to tell this to Krugman, but Medicare already has been cutting its payments to doctors, and many of them tell me that what Medicare pays is well below their own costs.

Thus, the "cuts" in Medicare have been going on for a while, but no politician is going to admit as such, and neither is Krugman.

Second, Krugman is disingeneous about the Democrats' own plans for cost-cutting. He writes:

Still, are Democrats doing a bad thing by telling the truth about the Ryan plan? “If you demagogue entitlement reform,” says Mr. Ryan, “you’re hastening a debt crisis; you’re bringing about Medicare’s collapse.” Maybe he should have a word with his colleagues who greeted the modest, realistic cost control efforts in the Affordable Care Act with cries of “death panels.”

Hmmm. I believe it was Krugman himself who used the term "death panels," and was quite enthusiastic about the term. Only when his comments went viral did he change his tune.

Still, for all of the political rhetoric out there, we have to face the fact that unless the U.S. economy produces more and becomes one in which firms can pursue profits in a market setting (not profits like they get at Archer-Daniels-Midland courtesy of American taxpayers), this welfare-warfare state is in for a very rude awakening.

Americans have not faced the hard fact that this economy with government burdens cannot be sustained. One can understand when politicians or English professors claim that the only problem is that there is a lack of taxation and spending, but when academic economists -- and especially academic economists representing the most elite institutions of higher education -- want to continue the fiction that all it will take is an injection of borrowed money to bring back prosperity, something is wrong in the profession.

In a recent article on the Great Society and the programs it spawned, Robert Higgs notes:

Galbraithianism, Marxism, and other varieties of critical socioeconomic analysis also helped to justify the displacement of antiwar and pro-civil-rights enthusiasms onto a diverse set of antimarket causes, giving rise to heightened support for environmental, consumer, and zero-risk regulations. No perceived social or economic problem seemed out of bounds in this cacophonous new political environment.

Indeed, the reality is that this cannot continue, and Higgs warns:

Almost everyone now acknowledges that federal entitlement programs, crowned by the enormously costly healthcare systems the Great Society spawned, have promised much greater benefits than the government can fund, and hence that many of these benefits will have to be cut, notwithstanding the political fury such cuts surely will elicit. This impending sociopolitical tumult represents one of the Great Society's bitterest fruits.

Is Krugman's Economy Stupid?

Keynesian economists believe that much of what drives private investment in the economy falls into the "animal spirits" category, and those "spirits" make for volatile investing habits. (You have to remember that Keynesians see "investment" as being useful only in that investors are "spending." That we have capital formation really means nothing to the average Keynesian, as he or she believes that production is a rather meaningless and detached part of the economy, and that enough "spending" will magically create the goods that will be demanded.)

In a blog post entitled, "Is It The Economy, Stupid?", Krugman plays into that whole psychology nonsense which states that if consumers are optimistic, they will spend more and that will create prosperity. He posts a graph (shown below) and then comments on the results.

He then writes:

From a short-term economic point of view, this may be a self-fulfilling prophecy, as optimism raises consumer spending.

Will it have political implications? Is economic optimism arriving just in time to save Democrats from a midterm disaster?

From where does consumer spending come? In Krugman's world, consumers just start spending, and out of that comes the recovering economy. In reality, it does not work that way.

This week, I will be covering Say's Law in my principles of macroeconomic classes, which would be anathema to Krugman. Say demonstrated in his 1803 book on political economy that all of our "spending" must have a source: our production.

It makes sense. Economies that produce a lot of goods that people want also are economies with lots of consumer spending. Think about it; all of use work to produce a good or service that others want, and by being paid with money, we then can find a way to "trade" what we have produced so that we can gain goods and services that others have made.

Krugman and Keynesians, on the other hand, see no meaningful connection between production and consumption, and this dichotomy not only is central to Keynesianism, but also to Marxism, socialism, and Institutionalism (of the old variety as developed by Thorstein Veblen more than a century ago). To a Keynesian, we produce goods and then hope that the producers have enough money and the will to spend so they can "buy back the product" they created when they become consumers.

Sometimes, this really becomes ridiculous, as shown by this example. Around 1908, Henry Ford doubled the pay of the workers at his Dearborn, Michigan, plant from $2.50 a day to $5. According to the Keynesians and others, by doing so, Ford "turned his workers into consumers and created the American middle class."

Why is this notion ridiculous? Think about it. If all Ford did was to double the pay of his workers, doing so would have doubled his labor costs, which would have meant that in order to make a profit, he would have to sell his cars at much higher prices than he already was doing.

However, we know that Ford cut the price of the Model T to under $300 after a while, which fulfilled his goal of making the automobile available to nearly anyone. So, this notion that he raised wages to give his workers more money so they could "buy back" the cars they made simply makes no sense. None.

What happened was this: the assembly-line work was monotonous, and Ford had huge, costly turnover problems. By doubling wages, which then were the highest industrial wages in the world, he solved the turnover issue and those cost savings more than made up for the higher labor costs. Furthermore, by ensuring that his workers would be available and anxious to keep their high-paying jobs, Ford could turn his attention to the quality issues that had been plaguing the production of the Model T.

In the end, Ford said that what he did was a "cost-saving" measure, as he took into consideration ALL of his opportunity costs of production, not just the simple wages. Now, most people can understand this explanation, but because Keynesians are so stuck on the "buy back the product" mentality, this bit of logic escapes them.

As for our current "recovery," I am sorry, but there is no meaningful recovery out there. The Obama administration is forcing up business costs, but does nothing to encourage new investments in those product lines that can lead us out of the recession.

Instead, the administration touts its heavily-subsidized "green energy" nonsense that literally destroys wealth in the name of creating it. Yes, "green energy" will "create jobs" in some subsidized industries, but it does so ONLY by damaging the healthy, profitable firms and putting those workers out of jobs.

Krugman, unfortunately, is so partisan that he actually can praise this "recovery" only because Obama, a Democrat, is president. Would he be saying the same thing about this "recovery" if a Republican were in charge? I doubt it.

No, I have no desire to shill for the Republicans, but nonetheless I would like to see an economist be something other than a political operative.