Is Deflation the Enemy, or Is It Inflation?

Like all Keynesian True Believers, Paul Krugman believes that the worst enemy of the economy is deflation. In his view, deflation causes unemployment and inflation reduces it, and he repeats that canard in this recent column.

Not surprisingly, Krugman claims that unless the Fed under Ben Bernanke engages in massive new money creation (and, of course, spending), the economy is doomed:

Today, Mr. Bernanke is the Fed’s chairman — and his 2002 speech reads like famous last words. We aren’t literally suffering deflation (yet). But inflation is far below the Fed’s preferred rate of 1.7 to 2 percent, and trending steadily lower; it’s a good bet that by some measures we’ll be seeing deflation by sometime next year. Meanwhile, we already have painfully slow growth, very high joblessness, and intractable financial problems. And what is the Fed’s response? It’s debating — with ponderous slowness — whether maybe, possibly, it should consider trying to do something about the situation, one of these days.

The Fed’s fecklessness is, to be sure, not unique. It has been astonishing and infuriating, as the economic crisis has unfolded, to watch America’s political class defining normalcy down. As recently as two years ago, anyone predicting the current state of affairs (not only is unemployment disastrously high, but most forecasts say that it will stay very high for years) would have been dismissed as a crazy alarmist. Now that the nightmare has become reality, however — and yes, it is a nightmare for millions of Americans — Washington seems to feel absolutely no sense of urgency. Are hopes being destroyed, small businesses being driven into bankruptcy, lives being blighted? Never mind, let’s talk about the evils of budget deficits.

In response, I will include material from Murray N. Rothbard's America's Great Depression, a recent article by Robert Higgs, and something I wrote for the Mises Institute two years ago. First, we look at what Rothbard has to say regarding deflation:

With the supply of money falling, and the demand for money increasing, generally falling prices are a consequent feature of most depressions. A general price fall, however, is caused by the secondary, rather than by the inherent, features of depressions. Almost all economists, even those who see that the depression adjustment process should be permitted to function unhampered, take a very gloomy view of the secondary deflation and price fall, and assert that they unnecessarily aggravate the severity of depressions. This view, however, is incorrect. These processes not only do not aggravate the depression, they have positively beneficial effects.

There is, for example, no warrant whatever for the common hostility toward "hoarding." There is no criterion, first of all, to define "hoarding"; the charge inevitably boils down to mean that A thinks that B is keeping more cash balances than A deems appropriate for B. Certainly there is no objective criterion to decide when an increase in cash balance becomes a "hoard." Second, we have seen that the demand for money increases as a result of certain needs and values of the people; in a depression, fears of business liquidation and expectations of price declines particularly spur this rise. By what standards can these valuations be called "illegitimate"? A general price fall is the way that an increase in the demand for money can be satisfied; for lower prices mean that the same total cash balances have greater effectiveness, greater "real" command over goods and services. In short, the desire for increased real cash balances has now been satisfied.

Furthermore, the demand for money will decline again as soon as the liquidation and adjustment processes are finished. For the completion of liquidation removes the uncertainties of impending bankruptcy and ends the borrowers' scramble for cash. A rapid unhampered fall in prices, both in general (adjusting to the changed money-relation), and particularly in goods of higher orders (adjusting to the malinvestments of the boom) will speedily end the realignment processes and remove expectations of further declines. Thus, the sooner the various adjustments, primary and secondary, are carried out, the sooner will the demand for money fall once again. This, of course, is just one part of the general economic "return to normal."

In other words, Rothbard says that deflation will help the adjustment process in which the economic fundamentals get back into balance. Given that Krugman operates on the theory that all assets are homogeneous, he is incapable of understanding anything else.

Prof. Higgs notes this about Keynesians and inflation and deflation:

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.

In this article, I noted that the current crisis came about because of the Fed's reckless money creation, so it certainly is NOT possible that the Fed can SOLVE the problem with more inflation:

The central issue is that the Fed pushed a policy of inflation, with much of the new money going into the mortgage markets; there is no way to avoid the painful and terrible corrections that must follow such fiscal foolishness. (Now we finally see massive commodity-price increases, which have occurred because there is nowhere for the new money to go but directly into commodities and consumer goods.)

Anyone who believes that the Fed can pretend that heavily damaged mortgage securities are worth more than toilet paper and literally build a $200 billion loan portfolio upon them does not understand finance. Just because Ben Bernanke declares something to be "valuable" does not bestow value upon it.

The simple issue is not lack of liquidity. It is the fact that billions — make that trillions — of dollars were malinvested in markets where the increasing values could not be sustained. To pump near-worthless dollars into this mix does not solve anything; it only ensures that the coming day of reckoning will be even more unpleasant than it would have been otherwise.

So, if the Fed follows Krugman's demands, we can look forward to even more secondary contractions and more malinvestments. The "day of reckoning" won't arrive all at once; it will become a permanent part of our economic landscape.

Krugman Takes on Hayek? Spare Me!

Well, it seems that Paul Krugman is taking on F.A. Hayek, but, as usual, Krugman really has no idea as to what Hayek was saying in 1932, and what Austrians are saying now. First, let us look at Krugman's argument:

...going back to Hayek: attributing the failure to recover to trade restrictions was, in a way, characteristic. Hayek, like his modern followers, never could get his mind wrapped around the fact that the key problem in depressions, and the key observation his theory needed to explain, wasn’t misallocation of labor and other resources — it was mass unemployment. It’s not surprising to see that in the depths of depression he was focused on removing what was, in the end, a minor source of allocative inefficiency. But it’s a stark reminder of the extent to which he really, truly, didn’t get it. (Emphasis mine)

Now, I have read a lot more of Hayek than has Krugman, and never once does Hayek blame the Great Depression on either Smoot-Hawley OR "allocative inefficiency." Hayek, instead, looks at the Great Depression in two stages.

First, there is the original crisis in which the monetary authorities forced down interest rates and allocated resources into lines of production which could not be sustained. THAT is the misallocation of resources of which Krugman speaks.

However, there is NO reason that this misallocation or series of malinvestments should LEAD TO A GREAT DEPRESSION. Hayek NEVER said that, so Krugman is misrepresenting him. (Gosh, I'm shocked, SHOCKED. Krugman is misrepresenting what someone is saying.)

Second, the Great Depression came about because of government RESPONSES to the original crises caused by the malinvestment of resources. Smoot-Hawley was one of the causes, but there were others, which Murray N. Rothbard lays out in his classic America's Great Depression.

Unfortunately, Krugman never will understand that point, not that the guy cares.

Krugman: More Spending will Solve All Business Ills

Paul Krugman continues with his theme that there is nothing wrong with American business that some government borrowing and spending, along with confiscatory legislation, won't solve. Are businesses not engaging in long-term investment? Government should spend more money, and that will "stimulate" the economy and businesses will invest.

Are people "hoarding" their money and not spending it? No problem. The new across-the-board tax increasing coming in January will confiscate lots of new cash, which the government will "wisely" spend, leading to more prosperity. (A lot of people who are fond of the term "tax increases for the rich" are going to find that THEY are the "rich" when the Bush tax cut rates expire at the end of this year.)

Government spending trumps all ills, or at least that is how a Keynesian like Krugman sees it. Forget the fables of "regime uncertainty" or the levying of price controls (which always "lower costs," according to Krugman).

Krugman's attacks on business owners and managers come from a perspective of someone who never has had to meet a payroll and who never has had to deal seriously with any government regulations. Krugman pretty much has been employed in elite academic settings in which his employers have huge endowments that mitigate a lot of problems that ordinary people must face. He earns millions of dollars as a writer and speaker, so the only regulations he must meet are tied to tax rates, and Krugman already believes his taxes are too low.

To Krugman, any complaint from the business sector always is the crying of wolf. He writes:

So why are we hearing so much about the alleged harm being inflicted by an antibusiness climate? For the most part it’s the same old, same old: lobbyists trying to bully Washington into cutting taxes and dismantling regulations, while extracting bigger fees from their clients along the way.

Beyond that, business leaders are, as I said, feeling unloved: the financial crisis, health insurance scandals, and the catastrophe in the Gulf of Mexico have taken a toll on their reputation. Somehow, however, rather than blaming their peers for bad behavior, C.E.O.’s blame Mr. Obama for “demonizing” business — by which they apparently mean speaking frankly about the culpability of the guilty parties.

Well, C.E.O.’s are people, too — but soothing their hurt feelings isn’t a priority right now, and it has nothing at all to do with promoting economic recovery. If we want stronger business spending, we need to give businesses a reason to spend. And to do that, the government needs to start doing more, not less, to promote overall economic recovery. (Emphasis mine)

So, there you have it. More spending will solve all economic ills. Let the government borrow into oblivion, let the Fed print more money, and this upside down world will right itself and we can return to full employment.

As I have said before, Krugman's main error is seeing an economy as a mass of homogeneous "stuff." Just add new money and the mixture comes to life. That is not an economy; it is a classroom model that fails to take in account the real-live and complex organism of the economy and its various structures of production. By claiming otherwise, Krugman once again demonstrates that while he might have a Nobel prize in economics, he knows very little about a real economy.

S.M. Oliva and DOJ's New War on Doctors

I have come across an excellent commentary by S.M. Oliva, one of the country's most knowledgeable people on anti-trust law regarding recent action by the Obama administration's Department of "Justice" against doctors in Idaho. The government contends that the doctors' refusal to accept Medicare patients at rates that would force them to deliver care at prices less than their own costs is a form of "price fixing," which is a very "creative" way of looking at such matters.

Oliva makes an important point regarding how the government is likely to engage doctors who might balk at the new restrictions that ObamaCare is going to put on them, and that is by bringing criminal charges against them:

First, until now the Federal Trade Commission, not the Justice Department, has taken the lead in prosecuting physicians. Since 2000, the FTC has brought about three dozen cases against physicians (all but one of which settled without any trial). But the FTC only has civil and administrative jurisdiction; the Antitrust Division has civil and criminal jurisdiction. The Sherman Act makes no distinction between civil and criminal “price fixing,” so in a case like this, it’s entirely a matter of prosecutorial discretion whether to charge the doctors with a civil or criminal offense.

Based on the descriptions in the Antitrust Division’s press release, there’s certainly no reason they couldn’t have prosecuted the doctors criminally and insisted upon prison sentences — and there’s little doubt such threats were made or implied to obtain the physicians’ agreement to the proposed “settlement.”

The second reason this is a landmark case is that the Justice Department has unambiguously stated that refusal to accept government price controls is a form of illegal “price fixing.”

The FTC has hinted at this when it’s said physicians must accept Medicare-based reimbursement schedules from insurance companies. But the DOJ has gone the final step and said, “Government prices are market prices,” in the form of the Idaho Industrial Commission’s fee schedule. The IIC administers the state’s worker compensation system and is composed of three commissioners appointed by the governor. This isn’t a quasi-private or semi-private entity. It’s a purely government operation.

What’s more, the Antitrust Division has linked a refusal to accept government price controls with a refusal to accept a “private” insurance company’s contract offer. This lives little doubt that antitrust regulators consider insurance party contracts the equivalent of government price controls — and physicians and patients have no choice but to accept them.

At the present time, the USA leads the world in the number of people incarcerated in prison. Apparently, the Obama administration is going to try to make sure in the future, the upcoming prison clientele is going to be higher-income professionals with M.D. by their names. Don't kid yourselves; this administration means to enforce ObamaCare by throwing people into jail.

Krugman (Sort Of) Responds to "Regime Uncertainty" Arguments

Although Paul Krugman does not want to use the term "regime uncertainty," nonetheless, he seems to be referring to that argument in a July 7 post on business investment. He writes:

Truly, we live in a time of mass delusion — or maybe make that elite delusion — where there are lots of things that everyone believes, without a shred of evidence to back that belief. Here’s one more: everywhere you go, you encounter the claim that businesses aren’t investing, they’re just sitting on piles of cash, because they’re worried about future government policies.

There is, of course, a much more prosaic alternative: businesses aren’t investing because they have lots of excess capacity. Why build new structures and buy new machines when you’re not using the ones you already have?

So is there anything in the data suggesting that we need to invoke fear of government to explain low investment? Not a bit.

He goes on to present a graph that contrasts business investment with the CBO's estimate of the gap between potential GDP and real GDP. Since the pattern of the investment follows the CBO's "gap," according to Krugman, that is the end of the argument.

Krugman's argument is based upon the following sets of questions and answers:

Q: Why is the economy bad?

A: Because businesses and individuals are not spending as much as they used to spend.

Q: Why aren't businesses and individuals spending like they used to spend?

A: Because the economy is bad.

Q: What would make the economy recover?

A: Businesses and individuals have to start spending again.

As you can see, this is a circular argument, and Krugman bases much of his analysis upon such "logic," yet he claims that people who disagree with him are suffering from "mass delusion." Now, I don't doubt that businesses as a whole are going to invest less during a recession, but Krugman is leaving out some important matters.

The "capacity" argument is not really an economic argument at all. First, it operates on what Austrian economists call the view that factors of production (for analytic purposes) are homogeneous. Second, "capacity" is a theoretical term for the capability of a firm to create output provided that all factors were operating at "full employment."

The idea behind the Keynesian emphasis on "capacity" is that government can "stimulate" the economy to a point where all firms are operating at full capacity, which then signals that we have arrived at a full-employment Nirvana. Of course, this argument contains the assumption that "stimulus" spending affects all sectors of the economy equally, as though an economy is a homogeneous mass of factors.

I have read a number of Robert Higgs' articles and papers, and never once have I seen him resort to the straw man characteristic of Barack Obama as a "socialist." For that matter, he did not call FDR a "socialist" in his "regime uncertainty" paper published 13 years ago.

If, indeed, government spending is what drives a successful economy, then why was there not a "Great Depression of 1946-48" following the end of World War II, when real prosperity returned. Higgs writes:

Finally, this way (regime uncertainty interpretation) of understanding the Great Duration meshes nicely with a proper understanding of the Great Escape after the war. The Keynesians all expected a reversion to depression when the war ended. Most businesspeople, in sharp contrast, “did not think that there was any threat of a serious depression” after the war (Krooss 1970, 217). The businesspeople forecasted far better than the Keynesian economists: the private economy blossomed as never before or since. Official data, which understate the true increase because of mismeasurement of the price level, show an increase of real nongovernment domestic product of 29.5 percent from 1945 to 1946 (U.S. Council of Economic Advisers 1995, 406). Private investment boomed and corporate share prices soared in 1945 and 1946 (Higgs 1992, 57–58). None of the standard explanations can account for this astonishing postwar leap, but an explanation that incorporates the improvement in the outlook for the private-property regime can account for it.

From 1935 through 1940, with Roosevelt and the ardent New Dealers who surrounded him in full cry, private investors dared not risk their funds in the amounts typical of the late 1920s. In 1945 and 1946, with Roosevelt dead, the New Deal in retreat, and most of the wartime controls being removed, investors came out in force. To be sure, the federal government had become, and would remain, a much more powerful force to be reckoned with. But the government no longer seemed to possess the terrifying potential that businesspeople had perceived before the war. For investors, the nightmare was over. For the economy, once more, prosperity was possible.

One does not have to believe Obama is a socialist to understand that the anti-business rhetoric coming from the White House and Congress is having a chilling effect upon long-term business investment. For example, Obama's claim that his administration would "create 700,000 'green' jobs" does not point out that government subsidies to companies not capable of turning a profit ultimately must come from the hides of presently "healthy" companies, and one can be assured that this "plan" actually would destroy more wealth (and jobs) than it would create. 

Yet, instead of trying to understand a differing point of view, we see vengeful politicians now being urged to seize the funds of individuals and businesses in order that government "may better spend it." No doubt, that will create real prosperity.

Krugman, Business Spending, and "Regime Uncertainty"

Paul Krugman has laid down a challenge in his latest blog post, claiming that much of the current joblessness is the result of businesses "sitting on a lot of cash, but not spending it." Indeed, he likens this situation to the extreme cautiousness of Gen. McClellan during the Civil War, which brought about the ire of President Lincoln.

At one level, Krugman claims that the reluctance of businesses to spend is understandable, given what he calls "huge excess capacity." (More on the "capacity" argument later.) He declares:

(Reluctance to spend) then raises the question: how can you believe that, and not also believe that if the U.S. government were to borrow some of the cash corporations aren’t spending, and spend it on, say, public works, this would also create jobs? (Brad DeLong has tried to make this argument repeatedly).

Which brings me to Lincoln and McClellan. General McClellan had raised a powerful army, but seemed disinclined to actually seek battle. So Lincoln sent him a letter: “My dear McClellan: If you don’t want to use the Army I should like to borrow it for a while.” (Yes, there are various versions of the quote).

So shouldn’t that be our response to all that idle corporate cash? We don’t literally have to borrow from the corporations; they’re parking their funds in the money market, and the feds would borrow from that market. But the end result would be to put some of that idle cash to work — and, ultimately, to give the corporations a reason to start investing, too, so that the deficit spending would crowd investment in, not out.

First, the government IS borrowing a lot of cash from businesses and especially from the banks. Second, Krugman is not advocating that businesses seek better deals; no, he is quietly but obviously demanding that government confiscate this "excess cash" if businesses don't increase their spending.

He then throws down the glove: "I have never seen a coherent objection to this line of argument."

My sense is that Krugman has seen "coherent" arguments against this line of thinking, but simply will not acknowledge that anyone else can fashion anything contrary to his own ex cathedra pronouncements. However, in the spirit of Krugman's challenge, I will fashion my own argument, and will lean heavily upon an economist that I really respect, Prof. Robert Higgs.

First, and most important, the "capacity" argument is a red herring that is based upon circular arguments (one of Krugman's favorite tactics). According to Krugman, businesses have large, unused productive capacity that will only become engaged after businesses start spending again. Thus, businesses are causing their own demise, so it is up to the government to break this circular pattern of job destruction and confiscate business cash and spend it wisely.

Once again, we see Krugman claiming that the CAUSE of a recession is less spending, which he also claims in a recent column. Yet, as I see it, this is a violation of what Carl Menger called "The Law of Cause and Effect." Krugman is confusing effect with cause and is missing the larger picture.

He is right that businesses (and many individuals) are putting money in relatively safe places (all of which Krugman would equate to stuffing money in one's mattress), but his circular argument as to why simply fails on its face. However, Robert Higgs has noted many times that "regime uncertainty" on behalf of the Obama administration's actions, which he equates to what happened during the Great Depression.

In 1997, Higgs published a paper in The Independent Review on the Great Depression in which he blamed the "regime uncertainty" promoted by the Roosevelt administration for the lack of long-term investment by businesses. Higgs writes:

Evidence from public opinion polls and corporate bond markets shows that FDR’s policies prevented a robust recovery of long-term private investment by significantly reducing investors’ confidence in the durability of private property rights. Not until the New Deal/war economy ended and resources became available for peacetime production did private investment—and the nation’s economic health—fully recover.

Higgs elaborates on the Great Depression theme in this piece, using a lengthy quote from a member of FDR's "brain trust," noting that FDR's anti-business rhetoric and his punitive policies toward business kept business owners from making longer-term decisions. Higgs in this column equates the current hostility to business by the Obama administration and the equally anti-business Congress to what happened with FDR and points out that we should not be surprised that the present "regime uncertainty" is not going to bring about recovery. He writes:

Speaking to CNBC in Las Vegas recently, Steve Wynn, the billionaire developer and operator of entertainment properties, said: “Washington is unpredictable these days. No one has any idea what’s next . . . the uncertainty of the business climate in America is frightening, frightening to everybody, and it’s delaying recovery.” Wynn complains of “wild, uncontrolled spending” and “unbelievable, unsustainable debt.”

Wynn also has operations in China, and he remarks that he “has no qualms about dealing with the Chinese government. Macau has been steady. The shocking, unexpected government is the one in Washington.” Not very long ago, such a statement would itself have been shocking.

The gambling and real estate magnate expresses concerns about inflation, FHA’s making the same mistakes Fannie and Freddie have made, and the business costs arising from the new health-care law. “We’re on our way to Greece,” he declares, “in the hands of a confused, foolish government.” Exasperated, he mutters, “It’s got to stop. It’s got to stop.”

These observations remind me of similar statements made by investor Lammot du Pont in 1937: “Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate.” Even members of Franklin D. Roosevelt’s cabinet eventually appealed to him to clear the air in which private investors were finding it difficult to breathe, but he refused to do so, preferring to plunge ahead with the New Deal and to publicly blame “economic royalists” for his policies’ failures.

Now, I am sure that Krugman would claim that the above arguments are nonsense and don't provide a "coherent" argument, but nonetheless I believe Higgs has the much stronger argument than Krugman's claim, which is based upon circular logic.

Bob Murphy's Tribute To Paul Krugman

Economist Robert Murphy, who has a number of excellent critiques of Krugman's writings, has done it again with a YouTube tribute to Bob's "favorite blogger," The Krugman, which can be seen on this link.

(And, yes, I am old enough to remember the original "Susan" from The Buckinghams)

Will "Austerity" Doom Us? Or Is It a Plot By Bond Buysers?

Paul Krugman is a guy on a mission, and when he writes all of his columns and blogs on a single theme -- "Austerity" is Bad, Really Bad -- then one can tell he is serious about his message. His column today falls into that category (again), but now he also presents the problem as being caused both by ignorance (not agreeing with Krugman is being ignorant) and A Sinister Plot By Bond Buyers To Destroy The World.

Riding in on his steed, Krugman declares:

For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed.

This conventional wisdom isn’t based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the policy elite’s imagination — specifically, on belief in what I’ve come to think of as the invisible bond vigilante and the confidence fairy.

Bond vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts. Now there’s no question that countries can suffer crises of confidence (see Greece, debt of). But what the advocates of austerity claim is that (a) the bond vigilantes are about to attack America, and (b) spending anything more on stimulus will set them off.

But the 2008 Nobel Laureate has declared that the USA can and should continue on its spree of borrowing, printing money, and spending. (Thus, we can pretend we prosperous and rich even when we are broke, since printing money creates wealth, according to this Keynesian acolyte.)

Krugman's poster child for "austerity" is Ireland, which according to him is in the Very Throes of Permanent Destruction:

And current examples of austerity are anything but encouraging. Ireland has been a good soldier in this crisis, grimly implementing savage spending cuts. Its reward has been a Depression-level slump — and financial markets continue to treat it as a serious default risk.

However, according to Financial Times, Ireland is not doing as badly as Krugman claims, and seems to be moving in the right direction:

Ireland climbed out of recession on Wednesday with the economy returning to growth in the first quarter, after suffering one of the deepest downturns of any advanced industrialised economy.

Ireland’s return to growth, in spite of having undertaken a huge fiscal retrenchment over the past two years which prolonged the downturn, will provide encouragement to other European economies facing up to tackling rising public deficits.

Furthermore, FT notes Krugman's recent criticisms of Ireland's policies:

Paul Krugman, the Nobel-laureate economist, argued last week that Ireland had seen little reward for its brave fiscal measures. “Virtuous, suffering Ireland is gaining nothing,” he wrote in the New York Times. He was referring to the reaction in the bond markets, where Ireland is still paying 3 per cent more than Germany to finance its budget. But Irish ministers argue they had little choice but to tackle the deficit.

“Had we not done so, the deficit would have ballooned towards 20 per cent of GDP – a level at which the very financial survival of this country would have been at risk,” Mr Lenihan said at the time of the December budget.

Ireland has slashed public sector salaries by about 15 per cent. Welfare has been cut, including 10 per cent off child benefit. New income and health levies have also been imposed.

The return to growth reflects a buoyant performance by the export sector, particularly the foreign-owned multinationals, who have benefited from the euro’s decline and from Ireland’s falling cost base. Ireland sells close to 60 per cent of its exports outside the eurozone – to the UK, US and other economies.

Now, FT is not claiming that Happy Days Are Here Again on the Emerald Isle, but it is clear that after chasing the same housing bubble as much of the rest of the world, Ireland is putting its house in order, unlike the USA. Krugman's entire analysis depends upon the notion that governments should spend and spend until the economies "recover," but with government continuing to prop up malinvestments and discouraging private investment in healthy sectors due to what economist Robert Higgs calls "regime uncertainty," there is not going to be a recovery in the private sector, period.

In Keynesian analysis, the "end game" is the magical recovery of the private sector. Yet, FDR's New Deal (which Krugman generally praises) clearly did not bring recovery, and it created a huge regime uncertainty. However, given the Obama administration's attacks upon productive people and its attempts to force high-cost, low-output things like "green jobs" upon us, not to mention Obama's own anti-entrepreneurial rhetoric, government spending is likely to be the only game in town.

It won't bring recovery, but it does permit people like Krugman to claim that the state really is our savior when, in reality, it is anything but.

(Hat tip to Chris Westley for the FT article)