The Nobel Prize of Outright Silliness

Yes, Paul Krugman calls himself a "liberal" and a "progressive," but nonetheless I have higher expectations from someone who has won the Nobel Prize in economics. Having met a number of previous winners of that prize, I can say that the people I met always had a healthy skepticism about politicians and the role of the state in economic affairs.

However, Krugman seems to be one of those True Believers who apparently really thought that Obama was the Second Coming of Hope. I remember that incredibly silly video that Obama briefly had on his campaign website in which children in Hollywood are singing songs of Obama while their parents look on adoringly. (Another woman claimed Obama would be paying her mortgage and everything else, as though suddenly the Great One would abolish the Law of Scarcity.) The man campaigned as a Messiah, complete with having his acceptance speech in a stadium with Greek columns as a backdrop, and Krugman really believed this hype?

In 1980, the leftist Catholic publication Commonweal had an "open letter" to GOP conservatives which reminded them that Ronald Reagan would disappoint them just as Lyndon Johnson had disappointed liberals, and it seems that Krugman now is at that point. Not only is Krugman utterly disappointed that this administration is not the Second Coming of FDR (not that FDR had any answers other than to help create a world war in which Americans could be "employed" by being shot, gassed, and bombed overseas), but he really seems bewildered by ANY contact at all between President Obama and anyone else Krugman doesn't like.

When most of us read George Orwell's 1984, we recognize that Goldstein is a fictional character, but to Krugman, he is real. He writes:

...Mr. Obama has delivered in important ways. Above all, he managed (with a lot of help from Nancy Pelosi) to enact a health reform that, imperfect as it is, will greatly improve Americans’ lives — unless a Republican Congress manages to sabotage its implementation.

So, if The Law of Unintended Consequences kicks in (read Mondale Act of 1974 and subsequent "child abuse" legislation that has resulted in thousands of false accusations and hundreds -- maybe thousands -- of wrongful criminal convictions), it must be the fault of Goldstein, er, Republicans. Having talked to people who actually are going to be on the front lines of implementing this legal monstrosity -- small business owners and the owner of a small accounting firm -- ObamaCare is going to force up costs to people who can least afford them.

However, to a Keynesian like Krugman, higher costs are good, because that means that people being paid will have more money in their pockets, and if the government can make them spend, the economy will blossom. That does not make real economic sense, but it makes sense to a Keynesian. Of course, why worry when the Fed can print lots of new money and directly buy government bonds, so the federal government can spread the wealth?

Obama came into office claiming that he would "revitalize" the economy by "spending our way out of the recession" and by forcing up costs to business owners, curbing trade (to keep unions happy), and generally making everything more difficult. To an economist, this is a prescription for further destruction, but to a Keynesian, it is like hearing beautiful music.

So, when the economy naturally gets worse and there is no real recovery on the horizon, Krugman concludes that the reason is that Obama did not spend enough, tax enough, borrow enough, browbeat enough, and...immediately appoint Elizabeth Warren to head the "consumer protection" agency that supposedly will be the center of All Wisdom in financial regulation.

While I have some problems with the latter part, I do recommend this essay on the modern American "ruling class," of which Krugman clearly is a part. (I also would add that the Republican establishment has attacked Ron Paul as well as Reagan and Barry Goldwater.) This portrayal is much more accurate than Krugman's claim that the Democrats represent All that is Good versus the Republicans who represent All that is Bad, or as Krugman writes, the Republicans have "taken the side of the bad guys...."

The problem is simple; Krugman really believes that state power can overcome the Law of Opportunity Cost and the Law of Scarcity. He really seems to believe that if the left-wing state orders something into being, it will be. No doubt, that must be why North Korea has the highest standard of living in the world.

Yeah, We Needed Just a Few Trillion More Dollars of "Stimulus"

I had no idea that Ezra Klein is a brilliant economist, but apparently he agrees with Paul Krugman, so he needs no more qualifications. Granted, he had his flash of brilliance more than a year after Krugman's epiphany, but nonetheless he still is brilliant.

Klein's "insight" is that the government did not spend enough money this past year. Krugman, on the other hand, said last year that the "stimulus" was not generous enough and would fail to stem the economic downturn. Here is Klein:

The original stimulus package should've been bigger. Rep. David Obey, chairman of the House Appropriations Committee, says the Treasury Department originally asked for $1.4 trillion. Sen. Kent Conrad, chairman of the Senate Budget Committee, wanted $1.2 trillion. What we got was a shade under $800 billion, and something more like $700 billion when you took out the AMT patch that was jammed into the package. So we knew it was too small then, and the recession it was designed to fight turned out to be larger than we'd predicted. In the end, we took a soapbox racer to a go-kart track and then realized we were competing against actual cars.

This was a mistake, of course. But the mistake may not just have been the size of the stimulus package. I wonder if it wasn't fed by a belief that there'd be other chances. If all we needed was the $700 billion package, then great. But if unemployment remained high and the recovery had trouble taking hold, surely there would be the votes for further stimulus and relief spending. No one in the political system could possibly look at 10 percent unemployment and walk away from it, right?

Wrong. Ten percent unemployment and a terrible recession ended up discrediting the people trying to do more for the economy, as their previous intervention was deemed a failure. That, in turn, empowered the people attempting to do less for the economy. So rather than a modestly sized stimulus leaving the door open for more stimulus if needed, its modest size was used to discredit the idea of more stimulus when it became needed.

So, for lack of an extra $400 billion, all we got was this lousy depression. Krugman last year declared:

...many economists, myself included, actually argued that the plan was too small and too cautious. The latest data confirm those worries — and suggest that the Obama administration’s economic policies are already falling behind the curve.

To see how bad the numbers are, consider this: The administration’s budget proposals, released less than two weeks ago, assumed an average unemployment rate of 8.1 percent for the whole of this year. In reality, unemployment hit that level in February — and it’s rising fast.

So, if I am to interpret this stuff correctly, had Obama had Tim Geithner sell just another $400 billion of Treasuries to the world, the economy would have gained "traction" (Krugman's favorite term) and we would be bouncing toward recovery as we speak.

Sorry, folks, that dog won't hunt. The problem was not that we spent too little; the problem was that the government refuses to understand that credit-fed booms are unsustainable and that this Keynesian "hair of the dog" strategy (in which we don't take just a little whiskey, but drink an entire case) is doomed to failure.

Ironically, in the name of "avoiding the mistakes of the 1930s," our government is taking us down the same path that Hoover and FDR took us. Happy Unemployment, America.

Can Krugman Give Us Better Weather?

One of the criticisms I have had with Paul Krugman's columns has been his use of logical fallacies, like post hoc ergo propter hoc and the non sequitur. In his column today, he manages to use both of them, all the while slashing and burning anyone who might disagree with the Great Nobel Laureate.

Turning from advocating his mechanistic and circular Keynesian economic views (we eat breakfast so we can go to work and we go to work so we can eat breakfast), today he goes after those evil people who want to "cook" the earth. He begins by using yet another post hoc fallacy:

Never say that the gods lack a sense of humor. I bet they’re still chuckling on Olympus over the decision to make the first half of 2010 — the year in which all hope of action to limit climate change died — the hottest such stretch on record.

Of course, you can’t infer trends in global temperatures from one year’s experience. But ignoring that fact has long been one of the favorite tricks of climate-change deniers: they point to an unusually warm year in the past, and say “See, the planet has been cooling, not warming, since 1998!” Actually, 2005, not 1998, was the warmest year to date — but the point is that the record-breaking temperatures we’re currently experiencing have made a nonsense argument even more nonsensical; at this point it doesn’t work even on its own terms.

But will any of the deniers say “O.K., I guess I was wrong,” and support climate action? No. And the planet will continue to cook.

So, let us see. Krugman says that the temperatures for the first half of this year are the hottest on record (that is, the records begun in the late 1800s), yet that is not proof of global warming. However, in the next paragraph, he basically says this is proof of global warming.

But, this one gets better. He then claims that there really was nothing to all of those emails between the noisiest climate scientists, called "Climategate," and that everyone was exonerated:

You’ve probably heard about the accusations leveled against climate researchers — allegations of fabricated data, the supposedly damning e-mail messages of “Climategate,” and so on. What you may not have heard, because it has received much less publicity, is that every one of these supposed scandals was eventually unmasked as a fraud concocted by opponents of climate action, then bought into by many in the news media. You don’t believe such things can happen? Think Shirley Sherrod.

First, the "investigation" was carried out by the very people who have a vested interest in receiving the government and foundation grants to promote their own version of climate science. The institutions were East Anglia University in Great Britain and Penn State University, and both of them stood to lose millions of dollars in grants if it could have been demonstrated the scientists either committed fraud or abused the system.

Second, I doubt seriously that Paul Krugman would endorse an in-house investigation in which the "investigators" had a vested interest in the outcome, and then declared that their own scientists had acted properly, if it involved people with whom he disagreed. In fact, he then claims that anyone else who might have a contrary view has that view ONLY because of the funding source of his or her research. He writes:

Look at the scientists who question the consensus on climate change; look at the organizations pushing fake scandals; look at the think tanks claiming that any effort to limit emissions would cripple the economy. Again and again, you’ll find that they’re on the receiving end of a pipeline of funding that starts with big energy companies, like Exxon Mobil, which has spent tens of millions of dollars promoting climate-change denial, or Koch Industries, which has been sponsoring anti-environmental organizations for two decades.

First, I am not sure that all of the so-called skeptics fall into that category, but when Krugman is smearing someone he considers to be evil and dishonest (that is, anyone who might have the audacity to disagree with him), he will use evil and dishonest means. Second, Krugman is saying that if someone is privately funded by certain entities, then their work automatically is a lie; however, he then seems to be making the counter-claim that those funded by leftist governments speak only the truth and always practice the most honest and capable science.

So, an in-house "investigation" by people who have a financial stake in the outcome is an "honest" investigation. Oh, no, Paul Krugman never engages in "political science."

There is one more point: the people Krugman supports have made sure that science journals publish papers with which they (and Krugman) are in agreement, shutting out any other discourse. I remember nearly 20 years ago when the Environmental Protection Agency destroyed the career of a scientist who developed the now-accepted theory of how lakes become acidic. (Hint: "acid rain" was not the culprit, which, while true, nonetheless was not the politically-correct answer.)

One of the truisms of scientific research is that we always should be skeptical of the herd mentality. Time and again, we have seen situations in which things people "knew" to be true were not, from spontaneous generation to continental drift, where the established views were challenged successfully.

True, there always are vested interests in any point of view, and a vested interest in and of itself does not mean something is false. However, when we see Krugman claiming that leftist government funding of science does not create its own sets of conflicts of interest, I am going to object.

Consumption and Spending, and Other Links

In my latest column for the Freeman Online, I differentiate (in 700 words) between consumption and spending. The Keynesians (and Krugman groupies) see spending as mechanistic and necessary so we can repeat the circular "economy" in which we make stuff, put it on the shelves, and then "spend" so that we can clear the shelves so that people will have something to do: make more stuff to put on the shelves.

There are a number of other excellent articles as well. Wendy McElroy looks at the attempts by Sen. Harry Reid to effectively "federalize" the local police, thus making them even less accountable than they are now. Sheldon Richman comments on the latest "re-regulation" of the financial sector, and Steven Horowitz examines Austrian capital theory.

Have a great weekend.

Is There Really a "Keynesian Case"?

Despair overtakes Paul Krugman. It is so bad that he wants "to stick a pencil" in his eye, which not only would hurt a lot, but also just might blind him and make him even more despairing.

Why this deep, dark depression? It seems that pundits do not "understand" the so-called Keynesian Case, that special set of circumstances which, according to all True Believing Keynesians, justifies government spending sprees, printing of money, and borrowing into oblivion. As Krugman writes:

I’ll be frank: the discussion of fiscal stimulus this past year and a half has filled me with despair over the state of the economics profession. If you believe stimulus is a bad idea, fine; but surely the least one could have expected is that opponents would listen, even a bit, to what proponents were saying. In particular, the case for stimulus has always been highly conditional. Fiscal stimulus is what you do only if two conditions are satisfied: high unemployment, so that the proximate risk is deflation, not inflation; and monetary policy constrained by the zero lower bound.

That doesn’t sound like a hard point to grasp. Yet again and again, critics point to examples of increased government spending under conditions nothing like that, and claim that these examples somehow prove something.

In other words, Krugman is demanding that we meet him on what he considers to be HIS ground. He then takes issue with Tyler Cowen's criticism of "fiscal stimulus" when Cowen uses the experience of Germany in the early 1990s:

1. This was not an effort at fiscal stimulus; it was a supply policy, not a demand policy. The German government wasn’t trying to pump up demand — it was trying to rebuild East German infrastructure to raise the region’s productivity.

2. The West German economy was not suffering from high unemployment — on the contrary, it was running hot, and the Bundesbank feared inflation.

3. The zero lower bound was not a concern. In fact, the Bundesbank was in the process of raising rates to head off inflation risks — the discount rate went from 4 percent in early 1989 to 8.75 percent in the summer of 1992. In part, this rate rise was a deliberate effort to choke off the additional demand created by spending on East Germany, to such an extent that the German mix of deficit spending and tight money is widely blamed for the European exchange rate crises of 1992-1993.

In short, it’s hard to think of a case less suited to tell us anything at all about fiscal stimulus under the conditions we now face.

While Krugman never is going to admit that one can legitimately criticize his positions, nonetheless I do believe it is instructive to look into this "special Keynesian Case," better known as the "Liquidity Trap." Because I include Krugman's explanation above about this particular set of circumstances, and even though he does not identify it as a "Liquidity Trap," that is what he is describing.

My counter arguments will feature Murray N. Rothbard, who was the best-known Austrian economist of the late 20th Century after F.A. Hayek. In fact, Rothbard deals directly with the "Liquidity Trap" theories both in America's Great Depression and his tome, Man, Economy and State. In America's Great Depression, he has this to say about the "Keynesian Case":

What, then, does an expectation of rising interest rates really mean? It means that people expect increases in the rate of net return on the market, via wages and other producers' goods prices falling faster than do consumer goods' prices. But this needs no labyrinthine explanation; investors expect falling wages and other factor prices, and they are therefore holding off investing in factors until the fall occurs. But this is old-fashioned "classical" speculation on price changes. This expectation, far from being an upsetting element, actually speeds up the adjustment. Just as all speculation speeds up adjustment to the proper levels, so this expectation hastens the fall in wages and other factor prices, hastening the recovery, and permitting normal prosperity to return that much faster. Far from "speculative" hoarding being a bogy of depression, therefore, it is actually a welcome stimulant to more rapid recovery.

Understand that Rothbard and Krugman are arguing from two very different vantage points. Krugman sees deflation as tragic because he believes that it will lead to a downward spiral in which falling factor prices mean lower absolute incomes, and lower incomes mean less aggregate demand, and the beat goes on.

Rothbard, on the other hand, believes that deflation can be positive because it means that the true relative values of the factors are getting into balance, and are shaking off the distortions that occurred during the inflationary booms. Deflation, in Rothbard's view, means that the previous malinvestments are being cleansed from the system, and that a recovery based upon real values of factors can begin.

Obviously, the two cannot be farther apart. Krugman sees everything in aggregates (Y = C + I + G + [X-M]), while Rothbard views the economy as being a complex web of capital, labor, and other factors in which entrepreneurs are moving resources in ways that they anticipate consumers will desire. For good measure, Rothbard also attacks the entire Keynesian concept of "Liquidity Preference," which is a nice way of saying that during deflation, money increases in value relative to other factors, so that people want to hold more money. Rothbard writes:

The final Keynesian bogey is that people may acquire an un­limited demand for money, so that hoards will indefinitely in­crease. This is termed an “infinite” liquidity preference. And this is the only case in which neo-Keynesians such as Modigliani be­lieve that involuntary unemployment can be compatible with price and wage freedom. The Keynesian worry is that people will hoard instead of buying bonds for fear of a fall in the price of securities. Translating this into more important “natural” terms, this would mean, as we have stated, not investing because of expectation of imminent increases in the natural interest rate. Rather than act as a blockade, however, this expectation speeds the ensuing adjustment. Furthermore, the demand for money could not be infinite since people must always continue consum­ing, whatever their expectations. Of necessity, therefore, the de­mand for money could never be infinite. The existing level of consumption, in turn, will require a certain level of investment. As long as productive activities are continuing, there is no need or possibility of lasting unemployment, regardless of the degree of hoarding.

Indeed, Rothbard believes (and so do I) that there really is an alternative explanation for what Krugman calls a "Liquidity Trap," and that further borrowing and spending by government only will exacerbate the current situation. Like Krugman, I tend to despair, but I am fearful because I believe government is spending and borrowing too much, not to little.

Yeah, I Kind of Agree With Krugman Here

Last March on my other blog (just before the Tonya Craft case basically took over its subject matter), I had a post on recent statements by James K. Galbraith. Professor Galbraith took umbrage and made a post, which I was glad to see him do.

His point was this: We don't have to worry about the government going bankrupt as long as it has legal control over what is called "money." Thus, government always will pay its bills because it can print the currency by which the bondholders receive payment. Thus, the size of deficits does not matter because government cannot (by definition) go bankrupt.

Obviously, if one stops to think about what Galbraith claims, it is almost mind-boggling. However, keep in mind that, like his late father, he is partial to socialism and even the more virulent forms of communism, in which governments used murder and imprisonment to try to force people into behavior that they otherwise would not want to follow. In other words, like John Kenneth Galbraith, James Galbraith believes that governments can do what they want as long as (1) they have a printing press and monopoly over money, and (2) they employ whatever coercive methods they wish.

Now, in his criticism of Galbraith today, Paul Krugman does not go as far as I do, but I do find myself in agreement with much of what he writes. First, Krugman outlines Galbraith's position fairly and accurately, so if you wish to get a good interpretation, read Krugman's post.

Second, he creates a mathematical model that reminds me of some of the things I saw in grad school (and is easy to follow) in which he sets up a scenario in which the government runs up against its limits of borrowing (what can be borrowed by others who have a "surplus" to lend). What he concludes is that at some point, the rate of inflation takes off into the empty space of hyperinflation.

How might that play out in our system? At some point, the Federal Reserve becomes the primary purchaser of U.S. debt (as opposed to its current role of purchasing debt in the secondary market), so government is directly spending newly-printed dollars which quickly move through the economy (as velocity increases). In fact, I think that if there is a weakness in this model (and any model which simply acts on the pure quantity of money theory has fundamental weaknesses in explaining economic behavior on behalf of individuals), it is the assumption that velocity (V) remains constant throughout.

One of the characteristics of a hyperinflation is the quickening of velocity -- how quickly money changes hands in an economy. The other thing -- and Krugman accurately mentions this -- is that people will get out of money altogether and use substitutes that either hold or increase in value (relative to money).

My sense is that Galbraith believes that government simply can "crack down" and force people to accept money (On pain of death, if need be?). Krugman does not go that far, but he is a True Believer in coercion, at least "progressive" style.

Nonetheless, Krugman's point here is well-taken, and I would agree that there is the danger of hyperinflation, given the government's path. Galbraith argues that government can exercise its powers to the point where people are forced to use the government's money, while Krugman simply says that we are not near any point of hyperinflation, given that the current Consumer Price Index is pointed downward.

There is much more I would like to say here, but I wanted to point out that when I believe Krugman is at least partially right, I will give him credit.

Krugman: Post Hoc Ergo Propter Hoc

The Post Hoc Ergo Propter Hoc Fallacy is an important tool in Paul Krugman's arsenal of arguments that he presents from his page in the New York Times. In his column today, he argues in a roundabout fashion that if the Congress permits the so-called Bush Tax Cuts to expire in 2011, that we can expect economic recovery to follow.

No, he does not say that, but he does make this point:

When Bill Clinton raised taxes on top incomes, conservatives predicted economic disaster; what actually followed was an economic boom and a remarkable swing from budget deficit to surplus. Then the Bush tax cuts came along, helping turn that surplus into a persistent deficit, even before the crash.

Everything he says there is true, but he also leaves out some important things. First, the economic boom of the 1990s did not happen until the latter part of the decade, with the nation's rate of unemployment dipping below five percent in 1997. That boom, of course, produced a huge stock market bubble, something Krugman leaves out (since it does not fit his narrative), and Americans found out in 2001 that much of that "prosperity" was phony.

Second, when Krugman refers to the "crash," he is not speaking of the crash of the stock market (and especially the NASDAQ) in late 2000 and early 2001, which was part of the Clinton presidency. Indeed, even had tax rates remained the same as they were before Congress cut the rates in 2001, the phony surplus quickly would have morphed into deficit, which is what happens during recessions.

Just as Krugman indicates (in a backdoor approach) that had tax rates not been cut in 1981, that there would have been no recession, Krugman now is trying to tell us that there only will be positive effects when the Bush tax cuts expire next year.

Since he insists upon using partisan political talking points ("tax cuts for the wealthy"), perhaps some perspective is in order. When the tax cuts expire, we are not looking at just the top rates going back to 39.6 percent. No, we are looking at ALL rates going back up, as the lowest rate jumps from 10 percent to 15 percent and so on.

In other words, every person reading these words today will see his or her federal income taxes go up next year, and you can bet that the tax increases for some of you will be much higher than you had believed. After all, Krugman has insisted that ONLY the wealthy received tax relief, and you are going to find out that Krugman was wrong.

Now, I must add that I am not defending the talking points from Republicans. When we have a federal government invading other countries and jacking up spending (when Republicans controlled the White House AND Congress) at levels that would have made Lyndon Johnson proud, we are not talking about a "low tax" environment. There really is no free lunch, and higher government spending equates to people bearing a greater burden of deadweight losses imposed by the state. There is no way around it, and I have no intention of repeating Republican talking points about "dynamic scoring" or anything else about cutting tax rates.

One of my graduate school professors, Robert Ekelund, wrote this article six years ago about the record of Republicans in office, and it is instructive to anyone who believes that even if Congress changes hands next year that we are going to see any relief. I have no confidence in the current Congress, and will have none in the next, no matter what the political rhetoric might be.

So, will higher taxes lead to more prosperity, as Krugman seems to insist? We shall see, but the last major tax increase during a depression took place in 1932 under Herbert Hoover. We know how that move turned out.