Krugman: F.A. Hayek Wants You to Lose Your Job

One of the reasons I started this blog was to highlight the real differences between Keynesian "economics" and the economics of the Austrian School, and to defend Austrian concepts against the missives coming from Paul Krugman of Princeton University and the New York Times. Thank goodness, mine is not the best or most articulate voice from the Austrian camp, and I have highlighted others, including Robert Higgs, who I believe is infinitely a better economist than Krugman.

Krugman over the years has refused to explain the Austrian viewpoints in anything but outright caricatures and exaggerations. For example, here we get what he calls the "Hangover Theory," which outright misrepresents everything written by Ludwig von Mises, F.A. Hayek, and Murray Rothbard on the subject of business cycle theory.

In this June 14 post on his NYT blog, Krugman once again refuses to take a serious look at what the Austrians claim, deciding, instead, to place them in a false light in order to make them seem as though they are united by one thing: hatred of humanity. He takes the following quote from Hayek as his example of Austrian cruelty:

…still more difficult to see what lasting good effects can come from credit expansion. The thing which is most needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production.If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand resources [are] again led into a wrong direction and a definite and lasting adjustment is again postponed.The only way permanently to ‘mobilise’ all available resources is, thereforeto leave it to time to effect a permanent cure by the slow process of adapting the structure of production.

If one reads Hayek carefully, he is saying that when governments hold down interest rates to artificially low levels, they actually BLOCK the economic recovery, yet all Krugman can see is "persistent high unemployment." Krugman writes:

These days, relatively few economists are willing to say straight out that they regard persistent high unemployment as a good thing. But they find reasons to oppose any and all suggestions to use government policy — including monetary policy — to alleviate the slump. Same as it ever was.

Notice that Hayek has not said any such thing, but to Krugman, free markets and an economy not steered by government must by definition have "persistent high unemployment," although he does not explain why that would be so. (In fact, Krugman seems to believe that he really is above any such explanation, as his declaration alone should be regarded as ex cathera.)

In claiming that economists like Joseph Schumpeter and Hayek were champions of depression, Krugman (and his partner-in-crime Brad DeLong) violently misrepresent the Austrian viewpoint. The Austrians don't claim that the Great Depression was a "good thing," but rather the Great Depression occurred precisely because governments intervened in the economy to prop up malinvestments and to keep the necessary liquidations from occurring. Because of those policies, the economy got both liquidation AND high unemployment.

Unfortunately, Krugman and DeLong never see that simple point. In the Austrian view, we have EITHER liquidation of malivestments or long-term high unemployment, with any high amounts of unemployment coming from the liquidation process being temporary. Krugman and the Keynesians, on the other hand, believe that once the liquidation process begins, the economy never recovers. Ever.

As Robert Higgs writes about these "vulgar Keynesians":

With their great, simple faith in the efficacy of government spending as a macroeconomic balance wheel, vulgar Keynesians disregard malinvestment, past and future, and support government spending in excess of the government’s revenues, the difference being covered by borrowing. Of course, they favor central-bank actions to make such borrowing cheaper for the government. In fact, they chronically prefer “easy money” to more restrictive central-bank policies. As noted previously, they prefer easy money not only because it lowers the cost of financing the government’s deficit spending, but also because it induces individuals to borrow more money and spend it for consumption goods ― such increased consumption spending being viewed as always a good thing, notwithstanding the recent near-zero rate of saving by individuals in the United States. Reflecting on the vulgar Keynesian attitude toward Fed policy, I keep recalling a old country song whose refrain was: “older whiskey, faster horses, younger women, more money.”

Vulgar Keynesians do not spend much time worrying about potential inflation; on the contrary, they are obsessed with an irrational fear of even the slightest hint of deflation. If inflation should become an undeniable problem, we may count on them to support price controls, which, they are convinced on the basis of sketchy knowledge of such controls during World War II, can be made to work well.

I think that pretty much says it.

Is it "Austerity," or is it Responsibility?

If the Keynesian cat were not out of the bag already, Paul Krugman's series of blog posts the past couple of days totally have smoked out his position: Only massive government spending can keep the economies afloat. Like another Paul of centuries ago, Mr. Revere, Krugman is on his horse (Named Mr. Keynes?) crying out, "The recession is coming back! The recession is coming back!"

Now, I tend to find myself in rare agreement with Krugman, except for different reasons. As I have written many times before, Krugman sees an economy simply in terms of spending: when people spend money, times are good, and if they stop spending money, it creates bad times. When people don't spend, then it is up to government to pick up the slack.

But what happens when governments decide not to increase their massive debts and slow their own spending? Krugman (and all Keynesians) believe that such action will create the conditions of the "double-dip recession." Whether it is Canada or Germany or whatever, the message always is the same: spend, spend, spend, or we are doomed, and anyone who disagrees is just plain wrong.

The problem I have with Krugman's protestations is twofold: first, I think that he has his causality wrong in that I believe people stop spending because the economy is in recession; and second, there is no mechanism by which people themselves start spending in order to keep the recovery moving. As I recent wrote in this blog post:

Contra Krugman and his employer, recessions don't occur because people spend less; people spend less because the economy is in recession. Furthermore, the only way to get OUT of the recession is to permit the fundamentals to get back into balance. This is not some sort of Zen "balance," but rather a reflection of the real opportunity costs of the factors of production.

Second, it is clear that Krugman and Collins and Company are clueless on what it will take to end this crisis, as they believe that the way to END the crisis is to continue upsetting the economic fundamentals, as though they did not matter. We have to face the issue that if this spending spree continues, we are headed for disaster, as the economy slowly but surely will deteriorate and our ability to repair things in the future will be even more difficult.

We also have to keep in mind that no government on earth is engaging in true fiscal responsibility. The European governments have huge welfare costs that have undermined the productive capacity of the Continent for years, and China still has massive numbers of unproductive state-run enterprises that not only drag down the economy, but force resources in the directions where the markets never would send them.

What Krugman calls "austerity" really is nothing more than some modest spending cutbacks by governments around the world. Furthermore, the huge spending sprees that governments have been creating, financed by debt and printing money, only have extended and expanded the malinvestment of resources, and the only way we can have a true recovery will be the liquidation of those malinvested resources and transferal to those uses that follow the directions set by consumers.

I am not speaking of a morality play in which we now need "austere" policies. Instead, I am speaking of the simple fact that the unsustainable booms of both the Clinton and Bush years pushed the economy in the wrong direction, and until we are able (and willing) to permit the fundamentals of the economy to get into balance, we are going to see these recessionary conditions continue.

It is true that in the short run, so-called austerity will result in even more unemployment, but if we don't stop this fiscal foolishness soon, we are going to have those rates of unemployment -- and worse -- anyway. The cure will be painful, but if we listen to Krugman, there will be no cure, only more disease.

Austerity Hysteria: Krugman's Employer Joins the Chorus

In yesterday's post, I noted that Paul Krugman does not understand that an economy is made up of heterogeneous assets and that printing money is not the same thing as getting the fundamentals of the economy back into order. However, it seems that once again (as they tag-teamed after the election of Ron Paul), Krugman and his employer (most likely Gail Collins) are joining forces again to demand that our economic malinvestments continue until we inflate ourselves into oblivion.

Today, the NYT has an editorial, "The Wrong Message on Deficits," that Krugman himself could have written. While the "vulgar Keynesian" might agree with the assessment in this editorial, nonetheless it demonstrates that the editors are clueless about what an economy really is. The editorial begins with:

The whip-deficits-now fever is running hot on both sides of the Atlantic. In Europe, politicians are understandably spooked by investors dumping government bonds in the wake of the Greek meltdown. But the sudden fierce enthusiasm for fiscal austerity, especially among stronger economies, is likely to backfire, condemning Europe to years of stagnation or worse.

The United States is running the same very high risk. Democrats have soured on job creation and economic stimulus in favor of antideficit rhetoric, which Republicans have long seen as the easy road to discontented voters in a confusing election year.

Right. Democrats suddenly are turning "fiscally responsible" as an election ploy. From what I can recall about politicians, they usually begin spending like drunken sailors when up for re-election. Would be that were the case.

First, there is NO "job creation" going on, just wealth destruction. When the government borrows another trillion dollars in order to pay people to lay sod on median strips or to send to politicians somewhere, the government actually is moving resources from higher-valued uses to lower-valued uses.

For example, there is a reason that the "alternative energy" industries need to be subsidized: they are taking valuable resources that go into the growing of corn and then fermenting it in large-scale operations, and then forcing Americans to pay not only for inferior fuels, but also for the resources of these operations that would be better used elsewhere.

Contra Krugman and his employer, recessions don't occur because people spend less; people spend less because the economy is in recession. Furthermore, the only way to get OUT of the recession is to permit the fundamentals to get back into balance. This is not some sort of Zen "balance," but rather a reflection of the real opportunity costs of the factors of production.

Second, it is clear that Krugman and Collins and Company are clueless on what it will take to end this crisis, as they believe that the way to END the crisis is to continue upsetting the economic fundamentals, as though they did not matter. We have to face the issue that if this spending spree continues, we are headed for disaster, as the economy slowly but surely will deteriorate and our ability to repair things in the future will be even more difficult.

Even they point out things for which they have no explanation. For example, they acknowledge already that "global recovery is already faltering." Yet, they see no irony in that after the spending of trillions of "stimulus" money, things still are going downhill. It never seems to occur to this bunch that we have been going down the wrong path for several years, and we need to stop the madness.

The other path is to take the medicine now (medicine that should have been taken three years ago), deal with the temporary crisis, and then let a real recovery take place. Now, that is something that few politicians are willing to do, but that is what MUST be done, the NYT notwithstanding.

Austerity or Reckoning? We Cannot Print Our Way Out of the Crisis

While attending the 2001 ASSA meetings in New Orleans, I was jogging one morning and found myself in the company of a Yale economics professor who taught monetary economics. We had a discussion of approaches, and I explained that I went with the Austrian view, in which one teaches monetary theory from a marginal utility angle. In other words, money is a specialized good used specifically for exchange that is subject to the same laws of economics as any other good.

The Yale prof listened intently and sounded interested. Given that he taught monetary theory from a quantity view of money approach, my viewpoints were foreign to him, but he was not dismissive of what I was saying. Instead, he told me that he was interested and that he had not even thought of looking at money that way. Whether or not I planted a seed of interest, I read today from another Ivy League economics professor, Paul Krugman, that money is so "other worldly" that we really cannot apply economics at all.

Now,Krugman does not give a direct approach of monetary theory in his blog or columns, but it is there in default. Like all Keynesians, he believes that as long as an economy is not running at "capacity," and if interest rates (as set by government monetary authorities) are at or near zero (which Keynesians call a "liquidity trap"), then the only thing that can drive an economy to "full employment" of all resources is "fiscal policy," in which governments borrow and print money in order to push enough spending to those full-employment limits.

This viewpoint also holds that the key to a healthy economy is the rate of unemployment, not just of labor, but of all resources. For example, the "full-employment" of World War II is seen as an economic triumph because anyone who wanted to find work could get a job (provided he or she moved to the population centers where the factories and administrative offices were located). Farmers had huge markets for their crops, and people suddenly had money in their pockets. The fact that the government rationed goods, including food and fuel, is ignored, since people had jobs, and that was the only thing that mattered.

I don't believe that I am misrepresenting Krugman's views here, as they are pretty much standard modern-day Keynesian. The problem, however, as I noted in my post containing Robert Higgs' assessments of Keynesianism, is that this viewpoint has some very unreal assumptions, the most important being that all assets are homogeneous, so it does not matter what is being produced, be they bombs or bagels, as long as labor is being used. Furthermore, the assumptions also rest upon a pure quantity theory of money in which prices themselves are irrelevant, being subservient to a government-calculated "price level."

Another false assumption from this viewpoint is that consumer spending is nothing more than "buying back" the products they created as workers. There is no purposeful behavior here, just a circular motion of production and purchases. As long as consumers have jobs and income, they can continue this circular pattern and the economy will be operating at "full employment." Thus, World War II in this analysis would be a period of "good times."

Professor Higgs, however, takes down even the "war prosperity" myth in this paper. I think a reading of this will change one's viewpoint considerably about the views economists have about World War II.

Unfortunately, this is a very stilted and inaccurate way of looking at the economy, as there really is no plan or purpose on behalf of individuals. Instead, they simply produce, purchase, and consume in a rather mindless fashion, yet that is what Keynesians believe is a "thriving" economy. In Krugman's view, because we are in a "liquidity trap," the only thing that can rescue the economy is government borrowing and spending.

In today's post, Krugman gives what I would call his classic viewpoint of what I have described. Furthermore, in his theoretical world, any spending cutbacks will create needless disaster. After all, if assets are homogeneous, and governments can borrow and print just as long as the economy is operating "below capacity," then it is foolish to stop and engage in "austerity." He writes:

Some thoughts on the fiscal austerity mania now sweeping Europe: is anyone thinking seriously about how this affects the rest of the world, the US included?

We do have a framework for thinking about this issue: the Mundell-Fleming model. And according to that model (does anyone still learn this stuff?), fiscal contraction in one country under floating exchange rates is in fact contractionary for the world as a hole. The reason is that fiscal contraction leads to lower interest rates, which leads to currency depreciation, which improves the trade balance of the contracting country — partly offsetting the fiscal contraction, but also imposing a contraction on the rest of the world. (Rudi Dornbusch’s 1976 Brookings Paper went through all this.)

Now, the situation is complicated by the fact that monetary policy is up against the zero lower bound. Nonetheless, something much like this transmission mechanism seems to be happening right now, with the weakness of the euro turning eurozone fiscal contraction into a global problem.

Folks, this is getting ugly. And the US needs to be thinking about how to insulate itself from European masochism.

However, if assets are heterogeneous, and if money is a good subject to the laws of economics, and if the Europeans must be able to produce real goods in order to pay for their welfare states, then Krugman is uttering foolishness. For the past three years, governments have been boosting their spending to irresponsible levels (at Krugman's urging) and printing money like mad in order to try to "spend" their way back to prosperity, and we are seeing the results: unemployment is at double-digit levels and all of this spending has created zombie financial institutions that on paper are "solvent" but in reality are on the brink.

Furthermore, the wave of government debt creates real liabilities that reflects the perilous situation that exists today. Instead of creating "full employment," these policies have furthered the malinvestments that are at the heart of this downturn. Unfortunately, Krugman refuses to see this point, so he will continue to demand that governments create even more malinvestments, all in the name of "fighting the depression."

At the heart of this matter is the Keynesian myth that money is something extra-economic, and that printing more of it (provided the economy is at less than full employment) will put us back to work and create prosperity. Instead, the current policies of the U.S. and European governments are digging the hole deeper, and Krugman is claiming that the only thing that will work is for us to use bigger shovels.

Is Fiscal Sanity the Inflicting of "Pointless Pain"?

Paul Krugman is a popular fellow in many circles because he both represents the "Progressive" political views of liberal Democrats (and some Republicans, let's face it) and also gives very clear explanations of what economist Robert Higgs calls "vulgar Keynesianism." And, as I have explained in previous posts, the Keynesian view holds that an economy is little more than a perpetual motion machine that needs to be greased with newly-printed government money in order to keep running smoothly.

Thus it is that Krugman has become the champion of "stimulus," and given the set of assumptions under which he operates, what he says makes perfect sense. If assets are homogeneous, which means that there are no real economic fundamentals to fall out of balance, then all it takes to keep the economy going is an infusion of new money. In fact, as Krugman writes in this blog post, to pull back on "stimulus" now would be an act of madness, the infliction of "pointless pain."

He writes:

And even this figure conveys a misleading impression of the importance of stimulus spending. First, since cutting stimulus would weaken the economy, it would reduce revenues — that is, a substantial part of the debt growth the IMF attributes to stimulus would have happened even without stimulus, through lower revenue. Second, for the US at least the core reason for long-run budget concern is rising health care costs — in fact, health cost control is the sine qua non of long-run solvency — which has nothing whatever to do with how much we spend on job creation now.

So how much we spend on supporting the economy in 2010 and 2011 is almost irrelevant to the fundamental budget picture. Why, then, are Very Serious People demanding immediate fiscal austerity?

The answer is, to reassure the markets — because the markets supposedly won’t believe in the willingness of governments to engage in long-run fiscal reform unless they inflict pointless pain right now. To repeat: the whole argument rests on the presumption that markets will turn on us unless we demonstrate a willingness to suffer, even though that suffering serves no purpose.

And the basis for this belief that this is what markets demand is … well, actually there’s no sign that markets are demanding any such thing. There’s Greece — but the Greek situation is very different from that of the US or the UK. And at the moment everyone except the overvalued euro-periphery nations is able to borrow at very low interest rates.

So wise policy, as defined by the G20 and like-minded others, consists of destroying economic recovery in order to satisfy hypothetical irrational demands from the markets — demands that economies suffer pointless pain to show their determination, demands that markets aren’t actually making, but which serious people, in their wisdom, believe that the markets will make one of these days.

If one wishes to find a quick study in modern Keynesian thinking, here it is. The entire operation is circular -- if governments want more revenue, they need to borrow and print money and it will come back to them in, well, revenue.

Yet, let us step back for a second and examine the larger picture. Krugman is saying that the the only way for governments to pay back their debts in the future is, well, to get into more debt. This is most interesting and deserves a harder look. First, debt comes with interest, so any newly-acquired debt will mean that principal AND interest payments will be in our future, so the debt will grow automatically.

Second, if there really are no economic basics and if assets are homogeneous, then there is no way for the economy to grow or improve. The Keynesian viewpoint is not intellectually or theoretically positioned to explain how an economy can grow, except to say that more spending has a magical effect upon economic processes that miraculously enable the factors of production to create more goods.

However, such a "miraculous" process cries out for an explanation. If factors are homogeneous and their output increases only when spending increases, then how can these assets produce more goods and services from more spending? Should more spending somehow enable entrepreneurs to change the productive processes to where producers can make more goods and services from the same amount of resources, then the Keynesian argument no longer holds.

That is because the Keynesian viewpoint has no mechanism for this extra burst of production, except to say that somehow before there was "enough" spending, that assets were not operating at "full capacity." In other words, that the only thing that can enable these "underused" or "underutilized" assets to operate at "full employment" is for government to print lots and lots of money.

While the Keynesian might think that the "capacity" example explains economic growth, it actually explains nothing. How did the "capacity" get there in the first place? What made entrepreneurs and producers arrange resources to create the particular means of production?

In the Keynesian view, this simply "happens." It is random, and it involves no real purposeful behavior, yet that makes no sense. Production does not simply happen, and an economy does not just appear out of a new blizzard of paper money.

No, the Keynesians don't have an answer, so for Krugman to claim that cutting back on stimulus would simply inflict "pointless pain" is to misunderstand what his happening. Instead, if one sees assets, resources, and factors of production as being heterogeneous, and if one holds that the structures of production within an economy matter, then this "hydraulic Keynesianism" in which politicians and bureaucrats simply pull and push levers is no explanation of the economy at all.

I doubt that the policymakers of the G20 really understand what I have pointed out, but they do realize that something is amiss. If they really did understand what was happening, not only would they demand governments pull back on this reckless spending, but that their bureaucrats and politicians get out of the way of entrepreneurs and let them find those assets that are profitable, and let them go to work.

The current Keynesian prescriptions are leading to disaster, just as they led to disaster during the 1930s. If we want years and years of high unemployment and no economic growth, then all we have to do is to follow what Krugman is demanding. While I have no confidence in the "austerity" of the G20, I have even less confidence in Krugman's Keynesianism.

Can Krugman Explain the 1983 Recovery?

The last time the United States saw double-digit unemployment was during the recession of 1982, which seemed to spell huge problems for then-President Ronald Reagan. He had pushed through a cut in tax rates (across-the-board) with the top rate dropped from 70 percent to 50 percent, and the federal deficit was skyrocketing to record nominal levels (past $200 billion in 1983).

There are two ways to look at that recession and the subsequent recovery. The first is through the standard Keynesian lens with a few twists. I remember reading an editorial in the Atlanta Constitution entitled "Tax Hike or Recession" in which the writer claimed that unless the government raised the top rates back to 70 percent, interest rates would continue to rise, and the economy would move into recession. Congress did not raise income tax rates (although it did pass a tax increase in other areas which Austrian Economists believe had a stifling effect on the economy).

Now, no self-respecting Keynesian economist would argue for a tax increase during a recession, although they do have a "balanced-budget multiplier" in the Keynesian arsenal that "proves" a tax increase will stimulate the economy more than letting individuals keep their earnings. (This raises the question as to whether or not a 100 percent tax would really do the trick, although most Keynesians have not willingly taken their "balanced-budget multiplier" to its logical conclusion.)

Nonetheless, the Keynesian analysis is fairly simple in its causality: recessions come about because people spend less money. Furthermore, Keynesians believe that higher interest rates are a cause of recessions, as was the case in 1982, and any decrease in the rate of inflation also will have negative economic effects, as economic growth cannot occur without inflation.

If I can characterize the Keynesian position from an Austrian point of view, it is that Keynesian economics is based upon the following fallacy: post hoc ergo propter hoc, or "after this, therefore, because of this." For that matter, Keynesians employ the same fallacy in order to explain economic recoveries, which could be explained in the following form: "After federal budget deficits, therefore, because of federal budget deficits."

There is no doubt that federal budget deficits grew during the early 1980s, and the government borrowed huge sums to paper over the differences. However, the question as to whether or not the borrowed expenditures fueled the real economic recovery of the 1980s is legitimate. Government statistics tell us that before and during the recession, expenditures as percentage of U.S. GDP rose in military spending, and in Social Security and Medicare, along with net interest on the federal debt.

Furthermore, during the recession huge portions of what might be called the "old economy" simply disappeared. Cities like Cleveland and Pittsburgh lost industries to the point where the term "Rust Belt" was used to describe the swath of northern states steel mills and other factories became little more than scrap metal. Unlike previous economic recoveries, hundreds of thousands of laid-off workers were not called back to their old jobs because those production facilities disappeared. (One might remember that Billy Joel's song "Allentown" was a major hit in 1982.)

Yet, the economy clearly recovered and it is obvious, in hindsight, that this recovery was different than what had been the case during the 1970s and before. First, this was a recovery that was not accompanied by high rates of inflation. Second, the recovery was centered not in the traditional manufacturing areas, but rather in the development of computers and telecommunications.

Third, financing was made available through the short-lived methods pioneered by Michael Milken, the so-called Junk Bond King, who helped bring about a lot of corporate restructuring that needed to take place. Fourth, the ending of the transportation cartel (i.e. "deregulation") enabled goods to be shipped more quickly, cheaply, and efficiently. (The cost-saving "Just-in-Time" methods of production simply would not have been possible had the old regulations governing trucking and railroads.)

So, despite the fact that inflation went down and interest rates stayed high, the United States had a robust economic recovery in the mid-1980s. This recovery defied the Keynesian rules; indeed, it was the closest thing one will see to an Austrian recovery in our lifetimes.

The so-called founder of the Austrian School, Carl Menger, wrote in his groundbreaking 1871 book, Principles of Economics, "All things are subject to the Law of Cause and Effect." Indeed, we begin with causality. Unfortunately, Keynesians consistently (at least they ARE consistent) confuse effect with cause, and that makes all of the difference.

The Pain Economist

In my Monday column, I looked at some of the work done by Robert Higgs, who takes on the "vulgar Keynesianism" head-on. Today, I look at the chief spokesmen for the "vulgar Keynesians," Paul Krugman, who excoriates modern policymakers for doing what he claims is "inflicting pain" through financial "austerity."

In his May 31 column, Krugman writes the following:

When the financial crisis first struck, most of the world’s policy makers responded appropriately, cutting interest rates and allowing deficits to rise. And by doing the right thing, by applying the lessons learned from the 1930s, they managed to limit the damage: It was terrible, but it wasn’t a second Great Depression.

Now, however, demands that governments switch from supporting their economies to punishing them have been proliferating in op-eds, speeches and reports from international organizations. Indeed, the idea that what depressed economies really need is even more suffering seems to be the new conventional wisdom, which John Kenneth Galbraith famously defined as “the ideas which are esteemed at any time for their acceptability.”

Given that Galbraith was a hardcore socialist, and one who was quick to praise the communist economies, I find it significant that Krugman quotes him, especially when one sees that Krugman has been calling for higher taxes and raising business costs as the means for securing a new "prosperity."

What are these terrible ideas that Galbraith would have criticized? Why, they are very (very) small measures of fiscal responsibility. Krugman declares that policymakers want to let interest rates rise and for governments to begin (and only begin) the process of living within their means. Such "responsible" behavior, Krugman argues, is irresponsible in outcomes:

The best summary I’ve seen of all this (changes of policy direction) comes from Martin Wolf of The Financial Times, who describes the new conventional wisdom as being 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.”

Put that way, it sounds crazy. And it is. Yet it’s a view that’s spreading. And it’s already having ugly consequences. Last week conservative members of the House, invoking the new deficit fears, scaled back a bill extending aid to the long-term unemployed — and the Senate left town without acting on even the inadequate measures that remained. As a result, many American families are about to lose unemployment benefits, health insurance, or both — and as these families are forced to slash spending, they will endanger the jobs of many more.

And that’s just the beginning. More and more, conventional wisdom says that the responsible thing is to make the unemployed suffer. And while the benefits from inflicting pain are an illusion, the pain itself will be all too real.

In Krugman's view, governments can stop all of the pain -- and bring back prosperity -- simply by printing and borrowing, and any attempt to bring this unsustainable action to a halt is interpreted as a deliberate infliction of "pain" upon vulnerable people. Now, if assets really were homogeneous, and if government borrowing had exactly the same results that business borrowing might have, that would be one thing.

However, assets are NOT homogeneous; they are heterogeneous and as Higgs noted in his articles, an economy is not a blob of homoegeneity: it is a complex organism of assets and production, and the failure to recognize this fact means that we are doomed to repeat the very failures of the 1930s.

Perhaps the greatest irony in the present economic morass is that economists and governments around the world are claiming that they are acting to "avoid the mistakes of the 1930s," yet governments actually are engaging in a repeat of that decade, and we know how it ended: in destruction, death, and war.