Unemployment? No Problem! Krugman Can Fix It!

Paul Krugman is on a tear this morning. Excuses about unemployment? Who needs them!

In this column, he attacks people who claim that there are "structural" (that is, institutional) issues of unemployment that are exacerbating the current situation, and certainly some of these would have some merit, even if the Princeton Sage disagrees. For example, the Bush administration pushed home ownership like never before, and now people "own" homes that they cannot sell, so even if jobs are available elsewhere, the families cannot easily move to them.

(I would not be surprised to see one "solution" being what men in the Third World have done: take jobs far away from their homes, and send the money back to their families. That is a fixture of life in Africa and Asia, and we mostly have avoided it here, but that might be changing.)

Krugman writes:

What can be done about mass unemployment? All the wise heads agree: there are no quick or easy answers. There is work to be done, but workers aren’t ready to do it — they’re in the wrong places, or they have the wrong skills. Our problems are “structural,” and will take many years to solve.

But don’t bother asking for evidence that justifies this bleak view. There isn’t any. On the contrary, all the facts suggest that high unemployment in America is the result of inadequate demand — full stop. Saying that there are no easy answers sounds wise, but it’s actually foolish: our unemployment crisis could be cured very quickly if we had the intellectual clarity and political will to act. (Emphasis mine)

Hey, it's easy! Just "create" more "demand"! I had no idea!

How do we do that? Borrow and print lots and lots of money, there will be "demand" everywhere, the economy will "gain traction," and we are back into prosperity. All it takes is some "intellectual clarity and political will."

Of course, part of that "intellectual clarity" is to operate on the assumption that factors of production are homogeneous, and that there are no "structural" issues of production that will come into play when more "stimulus" is created. An economy? No problem! Y = C + I + G + (X-M), so all we need to do is to increase "G" to cover for a lack of "I" and "C" and the ship will right itself automatically.

From where does the "G" funding come? Why ask? ANY increase in "G" brings prosperity, whether it comes from new taxes or borrowing. (The U.S. Government does not directly "print" new money to pay its bills as we have seen in places like Latin America and Zimbabwe, as new money enters through the banking system. In other words, we are more "sophisticated" in the way we create money, as we use a roundabout way to "print.")

Lest anyone think that Krugman has NOT endorsed new taxes as a means to help bring economic recovery via new "demand," that person has not read this:

If we could wave away political reality, I’d let all the Bush tax cuts expire, and use the improvement in the budget outlook to justify a large, temporary increase in public spending.

Moreover, he claims that Obama can build a recovery in part on the expansion of "green jobs" and "clean-energy." Now, if that were true, it would be the first time that an economy recovery came about via the expansion of huge subsidies, since the "green technologies" need massive government help just to stay afloat.

In the reality-based world of economics, assets have real values, and if we have to prop up a set of assets via subsidies, then those subsidies must be taken from those assets that are profitable and then transferred to those that are not. Krugman and company argue that over time, these "new" assets will ultimately become profitable on their own, provided government subsidizes them enough. This is like saying that Mao could have made the backyard steel furnaces created during the Great Leap Forward work if he just had subsidized them enough.

No, assets matter. The structures of production matter. This is news to those who operate in the imaginary C + I + G + (X-M) world, but we are not going to end this hell of unemployment until government stops trying to BLOCK the recovery by re-directing assets from higher-valued, profitable uses to lower-valued and unprofitable uses. It is that simple, but Krugman will ignore it in order to push his own Keynesian fantasies.

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.