Robert Higgs versus Paul Krugman

Because Paul Krugman is the most visible spokesman for the Keynesian economic viewpoint (or, at least what Robert Higgs calls "vulgar Keynesianism"), I tend to deal with his statements from the New York Times, as it is convenient to do so, and Krugman clearly does a good job of stating his viewpoints from there. (I tend to avoid statements by James Galbraith, which are like Krugman's, although Galbraith does not do as well in squeezing the concepts into small spaces.)

One prominent economist who also understands the modern Keynesian orthodoxy is Higgs, who edits the Independent Review and who has been an eloquent voice against what Krugman and others promoting. Today, I examine a couple of articles that Higgs wrote in which he clearly lays out why it is that Krugman's orthodoxy is destructive.

In this article published on Lew Rockwell's page almost a year ago, Higgs goes to the heart of the differences between the Austrians and the Keynesians, writing:

The root problem, I believe, lies in the aggregative character of contemporary thinking about macroeconomic fluctuations. In this view, rising aggregate real output is good, no matter what the composition of the newly produced goods and services. A recession, which most analysts understand as a sustained decline of aggregate real output, is bad, and, in their view, it should be combated by fiscal "stimulus" and by expansionary monetary policy in order to reverse the decline in aggregate demand. They do not worry about – indeed, they rarely even pay much attention to – the makeup of the aggregate output that is added during business expansions, lost during business recessions, or brought into being by the government's compensating fiscal and monetary actions. Output is output; spending is spending. In fact, the whole idea of using government spending to offset reduced spending by investors or consumers turns on this assumption that a dollar spent is a dollar spent, regardless of what it is spent for.

However, that thinking, writes Higgs, is wrong because of its insistence upon the homogeneity of investment and output:

In today's vulgar Keynesian environment, investors and economists do not appreciate how the seeds of macroeconomic busts are sowed by artificially created credit that is employed to finance investments that would not be undertaken if they had to be financed by real savings – investments known in economic theory as malinvestments. When a large volume of malinvestments has been undertaken during a boom (e.g., much of the investment in residential housing and commercial real-estate development between 2002 and 2006), and when for whatever reason the pace of new credit creation slows, causing interest rates to rise, then the unsustainability of these malinvestments becomes increasingly apparent. More and more of them are terminated, often in unfinished condition, and many such projects go bankrupt for want of buyers willing and able to pay for them in the market. (Emphasis Higgs')

A "recovery" created by such means is no recovery at all, as Higgs explains:

If the government and the central bank use their fiscal and monetary policies to prop up these malinvestments, they do not solve the basic problem; they only paper it over for the time being. The vast assistance given recently to financial institutions embarrassed by investments in bad real-estate-related securities, for example, has allowed these institutions to delay the write-offs and other balance-sheet adjustments that would reflect the errors they have made. The bailouts have created a large number of zombie financial institutions, much like the ones that caused the Japanese economy to stagnate during the 1990s and later. Owners and managers of financial firms laden with rotten securities have been holding out for government rescues of various sorts, rather than carrying out the required restructuring, which in many cases must include bankruptcy proceedings.

Just as the malinvestments were made possible in the first place by effusions of artificially created credit and hence artificially depressed interest rates, so now the Treasury and the Fed are keeping the owners of these malinvestments afloat by further effusions of artificially created credit. But so long as these inherently unsustainable projects continue, they constitute a huge legion of the living dead. They may look viable, but their viability hinges entirely on de facto subsidies via the government's various bailout schemes. Such projects will remain unsustainable unless continually propped up at the expense of the general public, who will suffer because of increased ordinary taxes or a mounting inflation tax on their dollar-denominated assets. If the government goes forward in this fashion, it will be sustaining an economy rife with malinvestments kept in operation only by constant transfusions of other people's wealth channeled to the zombie projects by the Treasury and the Fed – a permanent policy of robbing prudent, responsible Peter to pay imprudent, irresponsible Paul. No sound, long-run economic development can be based on such productivity-sapping transfers of wealth into projects that are not worth the expense of keeping them going and which misallocate resources to the overall economy's detriment so long as they continue.

In this article, published in March, 2009, Higgs goes into more detail explaining why the aggregation of economic activity into the Y = C + I + G + (X-M) equation is just plain wrong and ultimately destructive. Writes Higgs:

This way of compressing diverse, economy-wide transactions into single variables has the effect of suppressing recognition of the complex relationships and differences within each of the aggregates. Thus, in this framework, the effect of adding a million dollars of investment spending for teddy-bear inventories is the same as the effect of adding a million dollars of investment spending for digging a new copper mine. Likewise, the effect of adding a million dollars of consumption spending for movie tickets is the same as the effect of adding a million dollars of consumption spending for gasoline. Likewise, the effect of adding a million dollars of government spending for children’s inoculations against polio is the same as the effect of adding a million dollars of government spending for 7.62 mm ammunition. It does not take much thought to conceive of ways in which suppression of the differences within each of the aggregates might cause our thinking about the economy to go seriously awry.

In fact, “the economy” does not produce an undifferentiated mass we call “output.” Instead, the millions of producers who bring forth “aggregate supply” provide an almost infinite variety of specific goods and services that differ in countless ways. Moreover, an immense amount of what goes on in a market economy consists of dealings among producers who supply no “final” goods and services at all, but instead supply raw materials, components, intermediate products, and services to one another. Because these producers are connected in an intricate pattern of relations, which must assume certain proportions if the entire arrangement is to work effectively, critical consequences turn on what in particular gets produced, when, where, and how.

These extraordinarily complex micro-relationships are what we are really referring to when we speak of “the economy.” It is definitely not a single, simple process for producing a uniform, aggregate glop. Moreover, when we speak of “economic action,” we are referring to the choices that millions of diverse participants make in selecting one course of action and setting aside a possible alternative. Without choice, constrained by scarcity, no true economic action takes place. Thus, vulgar Keynesianism, which purports to be an economic model or at least a coherent framework of economic analysis, actually excludes the very possibility of genuine economic action, substituting for it a simple, mechanical conception, the intellectual equivalent of a baby toy.

Compare this to what Krugman claims: that all that is needed for the government to "create prosperity" is for the central banks to print money and the government to borrow and spend. Yet, the profession claims that Krugman is the better economist? Somehow, I doubt it.

Paul Krugman Is Not a Serious Economist

So, from calling for a return to the super-high tax rates of yesteryear to demanding that governments borrow and print money into oblivion, Paul Krugman believes that socialism really is the road to prosperity. In his post today, "Martin Wolf Is Not A Serious Person," he quotes Wolf and then declares that Wolf is correct.

Just what did Wolf say that was so brilliant? Here it is:

I have now lost faith in the view that giving the markets what we think they may want in future – even though they show little sign of insisting on it now – should be the ruling idea in policy.

Actually, the Wolf quote is at the end of a long rant in which he excoriates the Organization for Economic Co-operation and Development because its members are rightly concerned about the spate of borrowing and ultra-loose monetary policies. Wolf, instead, believes that governments are not being profligate enough. He writes:

...fiscal tightening would only work if it coincided with a robust private recovery. Otherwise, it would drive the economy into deeper recession. Yes, that is a Keynesian argument. But this is a Keynesian situation.

Neither Wolfe nor Krugman explain why there is no "robust" recovery, however. The Keynesian explanation is that a market economy cannot generate by itself the necessary "spending" to move out of the doldrums. Only government can do that.

However, neither Wolfe nor Krugman can explain why that is so when, in fact, every recession before the Great Depression ended without a massive explosion of government spending, including the deep but short-lived recession of 1921. Why is this situation any different?

The problem is that neither person wishes to deal with the fact that the economy is full of malinvestments that governments still are trying to keep propped up, just as Japan tried to do the same during the "Lost Decade." To Keynesians like Wolfe and Krugman, all economic assets are homogeneous, and there is no difference between the activities of the state or private business, economically speaking, except that whatever the state does is morally and economically superior!

Krugman continues to claim that he is not a socialist, but if he wants the state to be doing everything, including confiscating huge amounts of income from individuals, then I don't see where his view differs from standard socialism.

Krugman: In Despair Because Governments Are Reluctant to Inflate Even More?

In his post, "Reasons to Despair," Paul Krugman declares that the prospects for economic recovery are "grim." I happen to agree with him, but our reasons are quite the opposite. For Krugman, his despair is based upon his belief that governments are not inflating enough, while I believe governments are inflating way too much. Obviously, there is no way for our ideas to intersect.

Krugman writes:

Here’s where we are: growing GDP, but mass unemployment still the law of the land, with only tiny progress so far. What can be done?

Well, we could have more fiscal stimulus — but Congress is balking even at the idea of extending aid for the ever-growing ranks of the long-term unemployed. Fiscal responsibility, you see — hey, and let’s make sure estate taxes stay low!

We could get tough with China, which continues its currency manipulation and, in the face of a world of grossly inadequate demand, is actually tightening monetary policy to avoid an overheating economy — when basic textbook economics says that it should be appreciating its currency instead, which would not only rebalance China’s economy but help the rest of the world. So given China’s outrageous behavior, Geithner went to China, got nothing .. and pronounced himself very pleased.

We could do more through monetary policy. Macro theory suggests that the theoretically right answer, if you can do it, is to get central banks to commit to a higher inflation target. But the Fed and the Bank of Japan say no, because … well, that’s not what central bankers do.

It’s depressing: shibboleths and conventional wisdom are blocking all routes out of this slump. And I worry that policy makers will just sit there, for years and years, all the while congratulating themselves on the soundness of their policies.

So, Krugman despairs because the governments won't print enough money and won't confiscate enough wealth from others. Now, he does not explain how destruction of the currency and confiscation of wealth will lead to a "recovery," but I am sure that the answers can be found in his columns.

And China is being "outrageous"? As a commenter pointed out, if China is trying to tighten its output of currency, that alone will result in "appreciation" of its money. (What Krugman claims is that China is overvaluing the US Dollar in relationship to its own currency, which actually makes its own people poorer, yet Krugman actually wants us to believe that this is good for China and bad for us.)

There is a larger problem here, and that is the Krugman-Keynesian view of the economy. In Krugman's view, consumption is irrelevant and unrelated to production. Instead of being purposeful, consumption is little more than "buying back the products made," as though the real purpose of consumption is to get goods off the shelves. In Keynesian doctrine, the purpose of an economy is production for its own sake.

Perhaps this is why Keynesians really wanted us to believe that the economies of the Soviet Union and the old Eastern Bloc were "growing" because the GDP numbers that their bureaucracies spit out were becoming larger every year. The Keynesians were fascinated with the "output" figures, but never once took a hard look at what was being produced, from autos to consumer goods, with much of it being outright junk.

So now, all that is needed is yet another "stimulus" outburst, higher taxes, and even more inflation, and that is going to bring prosperity? And, to launch what effectively would be a protectionist trade war with China? Right.

Should readers wish to get a more sound view of economics, read Henry Hazlitt's classic Economics in One Lesson. Although the first edition came out before Krugman even was born, nonetheless it really is a line-by-line refutation of the nonsense that the 2008 Nobel winner in economics puts out.

Liquidity Trap or Malinvestments?

One of the standard Krugman-Keynesian beliefs is that assets are homogeneous, and that the only thing that matters in an economy is spending. (This is separate from real-live purposeful consumption, which is the end of all productive activity.)

In this line of thinking, a "liquidity trap" view of things makes perfect sense, and Krugman is fond of claiming that the U.S. economy, like Japan 20 years ago, suffers from such a condition. In his post on inflation and Japan, he repeats the old canard that deflation is the enemy and that inflation means nothing, at least at the present time.

(I find it interesting that in yesterday's post, he claims that "inflation did have to be brought down," although he does not specify what that was so, given that at the time, the nation's rate of unemployment was unacceptably high. There is no real consistency here, except to throw out partisan political barbs of "Democrats good, Republicans bad," which is acceptable at DNC headquarters, but I do not think is such when coming from a supposed Nobel Prize winner in economics.)

According to Krugman-Keynesian doctrine, an economy is in a "liquidity trap" if interest rates have a lower bound of zero or near-zero, yet businesses are not borrowing at a rate necessary to keep the economy going at the boom rates. That is why Krugman is fond of repeating his contention that current government borrowing only is replacing lost business borrowing, as though all borrowing has its use ONLY in the money spent.

When the economy is in such a "liquidity trap," according to Keynesians, then the only thing that can "stimulate" an economy is more government spending. That is because, according to Keynesians, there is no mechanism within a market economy that will allow economic activity to be generated, as though it were a dead battery that needs to be "jump-started" from the outside.

In a recent post on the Freeman Online, I take issue with the Keynesian approach, pointing out that the real issue we face -- as did Japan two decades ago -- is that government intervention has generated massive amounts of malinvestment. Our current situation is not a "liquidity trap," but rather is one in which the government has kept the malinvestments alive through the intervention via the Federal Reserve System.

For example, the huge amounts of resources poured into propping up the banks and other financial houses, along with keeping General Motors and Chrysler alive, drain the economy of productive capacity. Furthermore, the Obama administration clearly has shown itself to be hostile to real productivity and profitability, labeling profitable firms as being the cause of our problems and calling for higher taxes and other measures to cut the healthy firms down to the level of the unhealthy ones.

The real problem that Japan faced was that its economy had generated malinvestments during its previous boom, and those malinvestments needed to be liquidated, not propped up. Instead, the government tried to keep everything afloat and the result was the "lost decade." Likewise, we are seeing the same thing here.

Krugman, as a True Believer, does not see that. Instead, he really seems to hold that all assets are homogeneous, profits are a drain on the economy, and high taxes and the iron hand of the state will guide us to prosperity. This will not be the case, but I doubt seriously that he will change his tune, given the public worship that intellectuals and the political classes have bestowed upon him.

Krugman Once Again Contradicts Himself

On November 21, 2004, I attended a session at the annual meeting of the Southern Economic Association in New Orleans, and the session speaker was...Paul Krugman. I sat with Prof. Joseph Salerno of Pace University, and we heard Krugman give his usual Keynesian address.

During the Q&A, I asked Krugman that since he was critical of cutting tax rages, then would he favor going back to the 70 percent top rates that existed before they were cut in 1981. Krugman's answer: "No! Those rates were insane!" (His term)

I am reminded of that answer in reading his blog post today about the "postwar system." (Krugman conveniently leaves out the collapse of the Bretton Woods accords in 1971, but since he considers money just something to be printed, I guess he would have considered that to be a good thing.) He writes:

Here’s what I think: inflation did have to be brought down — and Paul Volcker, not Reagan, did what was necessary. But the rest — slashing taxes on the rich, breaking the unions, letting inflation erode the minimum wage — wasn’t necessary at all. We could have gone on with a more progressive tax system, a stronger labor movement, and so on. (emphasis mine)

So, Paul, what is it? And if Krugman really wants me to believe that the standard of living for Americans was higher in the 1970s than it was in the past decade, well, I would like to sell him some ocean-front real estate -- in Nevada.

Is Krugman Capable Even of Telling the Truth? Maybe Not

In reading anything by Paul Krugman, I always am prepared for him to distort the comments of someone he does not like to a point where it is obvious that either the man cannot read, or he cannot tell the truth. The primary victory of Rand Paul in Kentucky last week has put the Left into an out-and-out frenzy, and, not surprisingly, Krugman is trying to lead the pack.

Last week, he was claiming Paul is a racist because he questioned some aspects of the 1964 Civil Rights Act. Today, he is putting false words into Paul's mouth about the BP oil spill. Krugman writes:

Last week Rand Paul, the Tea Party darling who is now the Republican nominee for senator from Kentucky, declared that the president’s criticism of BP over the disastrous oil spill in the gulf is “un-American,” that “sometimes accidents happen.” The mood on the right may be populist, but it’s a kind of populism that’s remarkably sympathetic to big corporations.

Very interesting, and it seems that Democratic National Committee Chair Tim Kaine said something very similar about Paul's comments. (Hmmm, there is not any collusion between Krugman, the NYT editorial writers, and the DNC, is there? Oh, surely not. They claim to operate independently of one another.)

Tom DiLorenzo, however, notes that Paul did NOT say what Krugman and Kaine have claimed. He writes:

Now it’s the chairman of the Democratic National Committee, Tim Kaine, who “does a Maddow” and flat-out lies on national television about Rand Paul. On Fox News Sunday Kaine claimed that Paul said it was “un-American to hold BP accountable” for the oil spill in the Gulf of Mexico. Host Chris Wallace called him out by pointing out that what Paul said was “un-American” was a Democratic pol’s grandstanding bloviation that “we should put a boot on the neck of BP.” Paul said that such rhetoric is un-American, not holding BP accountable for damage it has caused.

In other words, Paul was replying to a specific statement in which a Democrat was wanting the government to go further than the law allows in going after BP. He never said BP should not be criticized, nor did he say criticism was "un-American."

Now, it is one thing when Tim Kaine says something like what he said to Chris Wallace. He is a politician and I expect exaggerations and pure partisan rhetoric from the man.

It is quite another, however, when a Nobel Prize winner acts clearly in concert with politicians to put out statements that either are inaccurate or absolutely untrue. This is behavior that should be beneath someone of his stature, but apparently we now are in an age when we have come to expect a highly-decorated academic to make statements that patently are lies at worst and mis-statements at best.

I cannot recall seeing any other Nobel Prize winner in economics engage in this kind of dishonest partisan behavior, not on the right nor the left. Apparently, Krugman is in a class by himself.

Paul Krugman: Think Exactly Like Me, or You Are a Racist

Paul Krugman, as a New York Times columnist, is supposed to operate independently of the newspaper's editorial policy, in that his columns are supposed to reflect his thinking and not be done in coordination with the newspaper's editorials. Of course, his latest attack on Rand Paul and the appearance of the paper's editorial calling Paul a racist just might be coincidence, but I have my doubts.

Why is Rand Paul a "racist," according to Krugman and his employer? He is a racist because he does not believe that the federal government should dictate anti-discrimination policies to private businesses via the Civil Rights Act of 1964. Keep in mind that Paul has not used racially-inflammatory language during his campaign or even brought up race at all. However, if he does not worship at the feet of the feds, then he is by definition a racist, or at least that is what they claim at the NYT.

Writes Krugman:

You know, if Rand Paul loses his Senate race, in a way I’ll be sorry. He’s been so much fun in such a short period of time!

Anyway, given the flap over his assertion that he wouldn’t support the Civil Rights Act of 1964, some Republicans are making the argument that they were the party of civil rights, while Democrats were the enemies. And there’s some truth to that: in the 1950s and early 1960s, the opponents of civil right were largely Southern Democrats.

But what happened to those Southern Democrats? They became Republicans. And I’m not just speaking metaphorically: many Republican members of Congress during the era of GOP dominance were, literally, former Democrats who switched parties.

The point is that today’s Democratic party is, effectively, the party of Lyndon Johnson, whose decision to push forward on civil rights cost the party the South, as he knew it would. Meanwhile, today’s Republican party is the party of Richard Nixon, who cynically exploited the backlash against civil rights to build a new majority.

Therefore, Rand Paul is a "Southern Democrat" who is a racist, like Theo Bilbo or George Wallace in his earlier years. Now, Krugman offers no proof that Paul is a racist; he just makes the connection.

Likewise, his employer declares:

In a handful of remarkably candid interviews since winning Kentucky’s Republican Senate primary this week, Mr. Paul made it clear that he does not understand the nature of racial progress in this country.

As a longtime libertarian, he espouses the view that personal freedom should supersede all government intervention. Neighborhood associations should be allowed to discriminate on the basis of race, he has written, and private businesses ought to be able to refuse service to anyone they wish. Under this philosophy, the punishment for a lunch counter that refuses to seat black customers would be public shunning, not a court order.

It is a theory of liberty with roots in America’s creation, but the succeeding centuries have shown how ineffective it was in promoting a civil society. The freedom of a few people to discriminate meant generations of less freedom for large groups of others.

It was only government power that ended slavery and abolished Jim Crow, neither of which would have been eliminated by a purely free market. It was government that rescued the economy from the Depression and promoted safety and equality in the workplace. (Emphasis mine)

Republicans in Washington have breathlessly distanced themselves from Mr. Paul’s remarks, afraid that voters might tar them with the same extremist brush. But as they continue to fight the new health care law and oppose greater financial regulation, claiming the federal government is overstepping its bounds, they should notice that the distance is closing.

Now, the editors don't explain how the government "rescued" the economy from the Great Depression, given that the rate of unemployment in 1939 was substantially higher than it was in 1930 or even 1931, and was close to the 1933 high of 25 percent. However, we are speaking of the NYT, the same newspaper that tried to claim that Duke lacrosse player Reade Seligmann simultaneously could be both at a bank teller and at a party miles away raping Crystal Mangum. This is a newspaper that believes its very words supercede reality.

Krugman makes one more interesting comment: "So yes, let’s honor the great Republicans of yore; I’m a Lincoln man, myself."

That is interesting. Lincoln was a self-proclaimed racist, whose Illinois did not permit free black people to live within its state borders. Lincoln also ordered his armies to loot, burn down whole cities and towns, and whose armies went pillaging and raping as they went along.

Thus, if I am to follow Krugman's logic (and the logic of his employer), then Krugman favors rape, racism, and destruction. Hey, if he is a "Lincoln man," then he has to favor what Lincoln did.