The Latest Bailout: It's Still Greek to Me

With the latest bailout package now aimed at the crisis with the "PIGS," we need to step back and ask just what has been done, for it is not what it seems. Unfortunately, we have seen the cheers from the Usual Suspects, beginning with the New York Times, which declared in an editorial:

Europe’s leaders stared into the abyss and finally decided to act. The nearly $1 trillion bailout package, arranged over the weekend, is intended to head off Greece’s default and stop the crisis from dragging under other weak economies — Portugal, Spain, Ireland and Italy are all vulnerable.

The European and American markets celebrated on Monday. The CAC-40 index in Paris rose almost 10 percent. The Dow Jones industrial average rose 3.9 percent. It was certainly the right thing to do. Coupled with the European Central Bank’s promise to buy bonds from stricken European countries, it arrested the financial turmoil — at least for now.

The last sentence is unintentionally prophetic, for whatever “good effects” the announced bailout supposedly will create, they will be short and are paving the way for future crises. While Greece and other European countries were facing disaster at the present time, it is nothing like the disaster that looms because there still is an economic piper to pay.

To make matters worse, the U.S. Government and especially President Obama urged this package under the "try something big" approach, as opposed to the advice of "try something intelligent." Yet, that is what we are going to get: stupid policies that ultimately will undermine any hope of recovery.

First, and most important, the European Central Bank is not buying bonds with real money, just the printed stuff that will filter throughout Europe and elsewhere and devalue the accounts of anyone who is holding Euros. Like the United States, Europe is broke, and will be even more so once this “bailout” goes through.

Second, for all of the talk of “rescuing” Greece, Spain and Portugal, one asks: Rescued from what? It is easy to diagnose the sources of their difficulties: a bloated public sector complete with militant public employee unions and workplace rules that raise private employment costs to such ruinous levels that all three countries must deal with high unemployment. The “rescue” packages supposedly deal with the former (although I remain a skeptic that they will), yet the real problem lies with the latter, as government policies shackle private investment.

Keynesian economists believe that because governments man the printing press, an economy cannot go broke. Thus, Paul Krugman can write in his NYT blog:

A more expansionary monetary policy could make a real difference — especially if the ECB ends up accepting somewhat higher inflation. Suppose that Speece or Grain need to get relative prices down 15 percent over the next five years. If the eurozone has 1 percent inflation, that’s 10 percent deflation in the periphery. If the eurozone has 3 percent inflation, all you need is stable prices. Also, a stronger overall eurozone economy means higher GDP and hence higher revenue, making the fiscal slog less grim. (Emphasis mine)

There he goes again. Keynesians believe that as long as people are spending (and spending and spending), an economy automatically moves along and all is well. Austrians, however, understand that while things might seem fine on the surface, there is turmoil and distortion among the factors of productions. Although Keynesians believe that the factors are homogeneous and that factor prices always adjust evenly to consumer spending, that simply is not the case.

Economic downturns do not occur because people stop spending, as Keynesians believe. Instead, people stop spending because the economy moves into recession, and stuffing more paper money into the hands of people so they can continue to spend only makes matters worse. Why? Because the recessions are centered on malinvestments which no longer can be supported by consumer spending patterns, the factors associated with those malinvestments also must be liquidated or transferred to other uses in order to allow a real economic recovery to begin.

Bailouts do not just prevent that process, but they also encourage malinvestments to continue, furthering the patterns of distortion and making them worse. At some time, the further rounds of inflation no longer can paper over the distortions and the resulting economic collapse is much worse than it should have been. Thus, instead of “saving” Europe, the central bankers only have put off the Day of Reckoning, which surely will arrive at a future date.

Yeah, Paul, It Always is Bush's Fault

When the U.S. economy moved into recession about the time of President George W. Bush's inauguration, Paul Krugman was quick to blame the downturn on Bush and his proposed tax cuts. Indeed, it would be months before Congress approved the Bush-proposed legislation that cut the top rates from 39.6 percent to 33 percent, which is not a huge cut, but STILL Krugman tried to claim that even the very THOUGHT of such a tax cut was enough to send the economy spiraling downward.

Later, Krugman would blame the financial meltdown on a lack of regulation, as though everyone in the SEC was a financial genius who ALWAYS knew what would be the perfect and riskless investment, IF ONLY they would be permitted to "regulate properly." (That the Clinton administration presided over a huge bubble in the stock markets, calling it "the New Economy," did not earn the same denunciation, which is not surprising, given my previous post about Krugman's outright hyper-partisanship.)

The apparent fetish about SEC "regulators" spending their time surfing the porno sites on the Internet was irrelevant to Krugman, but suddenly he has discovered why the BP spill happened: the regulators at the Department of the Interior were addicted to sex and drugs, and it was all Bush's fault!

In fact, Krugman once again brings up Hurricane Katrina, giving us the same line that the FEMA of the Clinton years miraculously would have saved everyone in New Orleans and had the perfect response to the aftermath of the hurricane. The well-known libertarian writer (and ferocious critic of the Bush gang) James Bovard, in his book on the Clinton years, Feeling Your Pain, has a chapter on FEMA that is worth reading if the readers are tempted to think that FEMA was anything but a vote-buying joke.

As for the oil spill, I find it interesting that more than a year into the Obama administration, anything bad that happens still is Bush's fault. However, as I noted earlier, as soon as Bush took office, he was responsible for an economy diving into recession.

One can find plenty not to like about George W. Bush, and I never voted for the guy, never supported him, and was glad to see him gone. To be frank, economists should not like any modern president's policies, given that presidents are likely to burden the economy with rules and regulations and patronage that force people to spend trillions of dollars on things that make it much more difficult for entrepreneurs to find profitable opportunities.

However, once again, we find Krugman playing the partisan role, just as he has done before. I would expect more from a Nobel Prize winner, but, then again, it is Krugman of which I speak. Enough said.

Krugman: More Unemeployment is a "Good" Jobs Report

The latest issue of Econ Journal Watch has an article by Brett Barkley on how economists change their interpretation of economic events when a person of their own party takes over the White House. Barkley looked at 17 economists, and while 11 were consistent, and five changed their outlooks somewhat, on economist changed his viewpoints in a significant way: Paul Krugman.

Somehow, I am not surprised, as Krugman has been a loud partisan voice instead of a voice of reason. His commentary on the latest jobs report from the government provides another example of partisanship. He writes:

An actually good employment report. A reminder: there are two separate surveys, one of employers — which is where the 290,000 jobs number comes from — and one of households, which is where the 9.9 percent unemployment rate comes from. Sampling error, seasonal adjustments, and other technical factors can make these reports give contradictory indications.

Unfortunately, as he later adds, the economy won't be adding jobs as quickly as it did during the Clinton years. However, he fails to put two and two together.

In the past few years, the federal government has gone on a spending spree, starting with the unwise bailouts and Federal Reserve System initiatives when it became clear the economy was moving into crisis mode. We have high unemployment not (as Krugman says) because the "stimulus" was not "bold enough," but rather because the government continues to print money in order to prop up weak sectors.

If Krugman wonders why we are looking at high unemployment for the next generation, he might want to look in a mirror, for the high-deficit policies of borrowing and spending have been disastrous.

Krugman: A Central Government Solves All Economic Problems. Yeah, Right

I am thankful for Paul Krugman, if for no other reason he has helped me keep my thinking diversified even as the Tonya Craft sham of a trial goes on and takes most of my attention. As the "Greek tragedy" unfolds and Krugman makes his commentaries, once again we see the difference between the Keynesian approaches and the Austrian ones.

Today (Friday, May 7), Krugman once again gives the standard Keynesian theme: A central government can save the day because it can print money. If you think I jest, read on:

The problem, as obvious in prospect as it is now, is that Europe lacks some of the key attributes of a successful currency area. Above all, it lacks a central government.

Now, how would a strong central government be able to rescue Greece from its current crisis? Krugman explains:

First, Greek workers could redeem themselves through suffering, accepting large wage cuts that make Greece competitive enough to add jobs again. Second, the European Central Bank could engage in much more expansionary policy, among other things buying lots of government debt, and accepting — indeed welcoming — the resulting inflation (emphasis mine); this would make adjustment in Greece and other troubled euro-zone nations much easier. Or third, Berlin could become to Athens what Washington is to Sacramento — that is, fiscally stronger European governments could offer their weaker neighbors enough aid to make the crisis bearable.

So, the idea would be for all of Europe to have more inflation via action from the central bank, and thus all of the Europeans could damage their economies simultaneously, creating new crises that Krugman conveniently fails to mention. (Inflation has a way of doing that.)

But, Krugman is not finished, as he also lays out another scenario: Greece leaves the Euro and goes back to the Drachma. In his own words:

What remains seems unthinkable: Greece leaving the euro. But when you’ve ruled out everything else, that’s what’s left.

If it happens, it will play something like Argentina in 2001, which had a supposedly permanent, unbreakable peg to the dollar. Ending that peg was considered unthinkable for the same reasons leaving the euro seems impossible: even suggesting the possibility would risk crippling bank runs. But the bank runs happened anyway, and the Argentine government imposed emergency restrictions on withdrawals. This left the door open for devaluation, and Argentina eventually walked through that door.

If something like that happens in Greece, it will send shock waves through Europe, possibly triggering crises in other countries. But unless European leaders are able and willing to act far more boldly than anything we’ve seen so far, that’s where this is heading.

Here is the problem that Krugman forgets: if Greece leaves the Euro, its currency will be considered "soft" on the world markets, like the currencies of Third World nations or of the old communist bloc. Combined with the big increase in inflation as Greece tries to print its way out of the crisis will be the fact that the Greeks will find the costs of imported goods skyrocketing, and they will be reduced quickly to poverty.

Krugman does not understand that deflation and recession would be the BEST things to happen to Greece, as while there might be default, the Greeks once again would be able to get their fiscal house in order. Yes, there would be a quick drop in their standard of living, but they not only would get past that quickly as the economy recovers, but they also would have a brighter future.

The Krugman "solution," however, only extends the problem into the healthier economies of Europe and with inflation, the "good" effects come first, and the "bad" effects are felt later. With deflation, it is the other way around. The Greeks will have troubles up front, but things will get better.

What Krugman does not understand is that the inflation "solution" only will distort the Greek economy even more without solving ANY of the underlying problems. Look, the Greeks are headed for very rough times no matter what they do. However, it would make sense for them at least to be able be doing something that would give them a decent economic future.

Instead, Krugman insists that printing money will solve all problems. I don't think so.

My Big, Fat Greek Disaster

The old saying, "Beware of Greeks bearing gifts," might now be changed to, "Beware of Greeks bearing debt." Indeed, after yesterday's murderous riots, people also need to beware of Greeks bearing Molotov Cocktails, as Greek government employees, after living high on financial bubbles, do not believe they should have to face financial reality.

In a blog post, Paul Krugman acknowledges that the "Greek end game" is going to be disastrous no matter what, as no one there is willing to face the truth: Greece was living in a bubble economy, and when the bubble bursts, there is nowhere to hide. Unfortunately, as a true Keynesian, Krugman believes that the Very Worst Thing that can happen Greece is deflation.

But even Krugman admits that the Greeks need to get their economy into some kind of balance, and that is amazing, given that Keynesians believe that all factors of production, for purpose of economic analysis, are homogeneous, and the way to get costs of factors (especially labor) and prices of goods into "balance" is through inflation. Yet, even that bit of wisdom is tempered with Keynesian foolishness. He writes:

The only thing that could reduce that need for austerity would be something that helped the economy expand, or at least not contract as much. This would reduce the economic pain; it would also increase revenues, reducing the needed amount of fiscal austerity.

But the only route to economic expansion is higher exports — which can only be achieved if Greek costs and prices fall sharply relative to the rest of Europe.

He admits, however, that Greece is not a cohesive society, so the most likely scenario is for Greece to "leave the Euro" and go to printing Drachmas again. That, Krugman admits, will be disastrous, triggering bank runs and worse.

Yet, Krugman does not realize that the problem of leaving the Euro would create even more problems for Greece than bank runs. Should Greece leave the Euro and go back to the Drachma, the currency markets will treat the Drachma as "soft money" and give it the same status as money from Zimbabwe, which does not trade on any currency markets.

To put it another way, Greece will become essentially a Third World country. How did this happen? It happened because central banks around the world engaged in Keynesian "expansion" by creating Dollars, Euros, you name it. Keynesians believe that such action can go on forever without creating any consequences. As you can see, that simply is not true.

Greece is living the consequences. They either can get their house in order and suffer the short-term consequences, or they can go on living in the inflationist fantasy that is Keynesian "economics."

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.

Wages and Unemployment

While Paul Krugman now has switched to promoting environmentalism again (and the fraud of "green energy"), I want to deal today with another problem that he and his friends have helped cause: teenage unemployment rates.

The other day, the NYT editorialized about what teenagers face this summer when they look for temporary work:

Mayors across the country are rightly worried about Congress’s failure to provide money for the summer jobs that keep teenagers off the streets while giving them sorely needed work experience. Unless the Senate acts quickly, this will be one the bleakest summers on record for youth employment. That raises the very real danger that it could be a violent summer as well.

Furthermore, the NYT even sees the "solution," which at best could be described as a "workfare" program:

The House has approved $600 million for summer jobs for teenagers. The Senate has failed to act. Senate Republicans have blocked a separate proposal by Patty Murray, Democrat of Washington, that would have committed $1.3 billion to create 500,000 summer jobs for the young.

I did the math, and found that such a program (which I doubt seriously actually would employ that many people) would cost $3,000 per job. To people like Krugman and his employer, that might be called an "investment," but to an economist who sees labor as a factor of production, it is called a cost.

There is a dual problem here that goes to the heart both of economic theory AND economic policies, and that problem is that Keynesians like Krugman and True Wooly-Headed Liberals as populate the NYT editorial board (and newsroom) believe that production and consumption are separate and unequal entities. In this viewpoint, the end of production is not necessarily consumption; instead, consumption is what is needed to clear inventories so people can produce more goods and, thus, stay employed.

For example, when Hillary Clinton went to China last year, she essentially told the Chinese that they have to continue to purchase U.S. Government debt so that Americans could use that debt to buy more Chinese goods which, in turn, would "give" Chinese workers their jobs. This viewpoint essentially is the Keynesian position as well.

To these people, all jobs are "welfare" programs at heart, as there is no real connection between production and consumption, and that is a destructive doctrine, for it undermines the ability of people to produce those things which help fulfill our needs. Let me explain.

In a free-market economy, exchange is a voluntary act in which all parties engage because they believe that all will be better off after the exchange takes place. This may not always be the case, as people might be engaging in exchange because of faulty information, but nonetheless, we do trade with one another to improve our own welfare, and that improvement in our welfare is wealth-creating.

In fact, production itself is an act of exchange. When a person works in a free-market setting, that individual generally is creating more wealth than he or she will consume from that act of production. To put it another way, it adds a "surplus" to the economy. Marx believed that "surplus" was "captured" by the capitalists, who did not deserve it.

However, we find that in a free market, that "surplus" adds to overall wealth which then results in more and more goods and services being made available to people who previously would not have been able to afford them. The competition to make better goods also means that over time, the quality of the products should improve. (The computer industry is a prime example here.)

Thus, it is crucial that when one is employed, that the worker is able to be paid according to his or her marginal productivity, or, to use economist-speak, the discounted marginal value product (DMVP). When minimum or "living" wage policies force up wages, the laws of economics still are not repealed (no matter what politicians or the NYT might tell us).

If the law forces up wages past the DMVP, then what happens is that it costs the employers more to have the lower-productivity workers on the job than they can produce. In that situation, the workers lose their jobs.

For all of the Keynesian trickery, unemployment, in the end, ALWAYS is a DMVP issue, so when the government forces up nominal wages, it will create unemployment.

Even Keynes recognized that fact, but his "solution" (which Krugman accepts) was to employ inflation as a means for cutting wages. (Read Keyne's own words in the General Theory in which he says that workers won't recognize that their real wages are being cut by inflation.)

There is another false argument that Krugman gives, in which he argues that raising the marginal wage would result in greater consumption and, conversely, allowing the marginal wage to fall to where it equals the DMVP would result in MORE unemployment. In his own words:

So let me repeat a point I made a number of times back when the usual suspects were declaring that FDR prolonged the Depression by raising wages: the belief that lower wages would raise overall employment rests on a fallacy of composition. In reality, reducing wages would at best do nothing for employment; more likely it would actually be contractionary.

Here’s how the fallacy works: if some subset of the work force accepts lower wages, it can gain jobs. If workers in the widget industry take a pay cut, this will lead to lower prices of widgets relative to other things, so people will buy more widgets, hence more employment.

But if everyone takes a pay cut, that logic no longer applies. The only way a general cut in wages can increase employment is if it leads people to buy more across the board. And why should it do that?

What is the problem? Krugman confuses marginal with total. Furthermore, he cannot conceive of wages being anything but arbitrary amounts of money being given to people in hopes that they will spend and keep the perpetual motion machine known as the Keynesian economy running.

Thus, because he misunderstands employment at the very fundamental level, Krugman cannot get the rest of the equation correct, either. What Krugman does not understand is that the minimum wage, while not only helping to create record unemployment rates among teenagers, also further distorts the structure of production of an economy and makes things worse over the long run.

True, Keynesians argue that "in the long run, we all are dead," but their policies are helping to put our economy in the grave.