Every(Krug)man

Paul Krugman is a bit upset that someone could accuse him of being a "warmonger," since he claims that World War II ended the Great Depression. Now, having spoken personally to Krugman about his opposition to the U.S. war in Iraq (and I share that opposition and told him so), I don't think Krugman loves war.

Nonetheless, his view is problematic, especially when one compares his views to those of economist Robert Higgs, who in this essay clearly debunked the "World War II as the end of the Depression" nonsense. Nonetheless, Krugman counters that the amoral nature of economics allows for war to be a positive catalyst in ending a downturn, even if we are against the war itself.

Economics, he writes, "is not a morality play." That is true, at least at one level. Ludwig von Mises himself wrote that economics is a "value-free" science, but he was writing from a very different perspective.

Krugman's contention is this:

...economics is not a morality play. It’s not a happy story in which virtue is rewarded and vice punished. The market economy is a system for organizing activity — a pretty good system most of the time, though not always — with no special moral significance. The rich don’t necessarily deserve their wealth, and the poor certainly don’t deserve their poverty; nonetheless, we accept a system with considerable inequality because systems without any inequality don’t work. And before the trolls jump in to say aha, Krugman concedes the truth of supply-side economics, that’s not an argument against progressive taxation and the welfare state; it’s just an argument that says that there are limits. Cuba doesn’t work; Sweden works pretty well.

(Now, I would suspect that Krugman would not be able to explain why Cuba "doesn't work," given he thinks that the two greatest critics of socialism of the 20th Century, F.A. Hayek and Mises, were idiots and people of no insight. He probably would mumble something about "incentives," but I doubt Krugman would even be able to comprehend the "economic calculation" issue that Mises and Hayek developed.)

Krugman goes on:

And when we’re experiencing depression economics, by which I mean a situation in which it’s hard to create sufficient demand to achieve full employment — mainly because short-term interest rates are up against the zero lower bound — the essentially amoral nature of economics becomes even more acute. As I’ve said repeatedly, this is a situation in which virtue becomes vice and prudence is folly; what we need above all is for someone to spend more, even if the spending isn’t particularly wise. (Emphasis mine)

It is interesting that he uses such phrasing, given it comes almost word for word from Bernard Mandeville's "Fable of the Bees," which was written in 1705, and which I lampooned in this piece, "The Fable of the Krugman."

Keep in mind, however, that Krugman's turning of the "virtue" of saving upside down to embrace the "vice" of reckless spending is not what Mises meant by describing economics as "value-free." Krugman is just saying that while saving would seem to be a good thing, what is needed now is spending, and lots of it. Thus, "situational ethics" becomes the basis for economic analysis.

However, the problem is not in our interpretation of economic morality. The problem is that Krugman insists that massive spending on behalf of the state will magically transform the U.S. economy, give it "traction," and send us on the Yellow Brick Road to Prosperity if not Oz itself.

Krugman does not embrace war; he embraces the government spending, the planned economy, the interventions, and the intrusions of the state into economic decisions. To him, that is Oz. However, if one reads the Higgs piece, one gets a much better understanding of the "prosperity" that war can bring.

For that matter, the Great Depression did not linger on because of a lack of government spending; as Higgs points out, it was "regime uncertainty," and I will put my money on that every time.

Ironically, while Krugman might not see himself as "Everyman," nonetheless his columns are full of condemnation for those people who might disagree with him or (horrors) vote differently than he does. So, even if the economy might not be a morality play, his columns tell a different story.

Krugman's Non Sequitur

In his comments about Howard Kurtz's profile of him, Paul Krugman declares himself to be a Great Man of Principle: "I support tax increases that will reduce my own after-tax income...."

That is fine, and I figured all along that Krugman, who makes in a year what many of us would have to work a lifetime to earn, would claim that if he is taxed more, the entire country would be better off. Maybe.

But the next line struck me as odd:

I worry greatly about unemployment, even though my own living is secure; I warn about growing inequality, even though I’m of the class that has gained from rising disparities; I’m upset about the direction this country is going, even though my own life is comfortable.

My question is this: How has Krugman gained from "rising disparities"? Is Krugman saying that because his income is rising, the incomes of others MUST fall?

If he is, then, economically speaking, he is giving us a non sequitur and is subscribing to the "fixed pie" argument in economics. That is, there is no such thing as real economic growth; the economy is fixed, and if one person gains, that automatically means that someone else loses.

That is a Third-World view of how an economy works. But, then, a person who subscribes to Y = C + I + G + (X-M) as the Gospel of Economics is going to have a skewed economic perspective.

Unemployment? No Problem! Krugman Can Fix It!

Paul Krugman is on a tear this morning. Excuses about unemployment? Who needs them!

In this column, he attacks people who claim that there are "structural" (that is, institutional) issues of unemployment that are exacerbating the current situation, and certainly some of these would have some merit, even if the Princeton Sage disagrees. For example, the Bush administration pushed home ownership like never before, and now people "own" homes that they cannot sell, so even if jobs are available elsewhere, the families cannot easily move to them.

(I would not be surprised to see one "solution" being what men in the Third World have done: take jobs far away from their homes, and send the money back to their families. That is a fixture of life in Africa and Asia, and we mostly have avoided it here, but that might be changing.)

Krugman writes:

What can be done about mass unemployment? All the wise heads agree: there are no quick or easy answers. There is work to be done, but workers aren’t ready to do it — they’re in the wrong places, or they have the wrong skills. Our problems are “structural,” and will take many years to solve.

But don’t bother asking for evidence that justifies this bleak view. There isn’t any. On the contrary, all the facts suggest that high unemployment in America is the result of inadequate demand — full stop. Saying that there are no easy answers sounds wise, but it’s actually foolish: our unemployment crisis could be cured very quickly if we had the intellectual clarity and political will to act. (Emphasis mine)

Hey, it's easy! Just "create" more "demand"! I had no idea!

How do we do that? Borrow and print lots and lots of money, there will be "demand" everywhere, the economy will "gain traction," and we are back into prosperity. All it takes is some "intellectual clarity and political will."

Of course, part of that "intellectual clarity" is to operate on the assumption that factors of production are homogeneous, and that there are no "structural" issues of production that will come into play when more "stimulus" is created. An economy? No problem! Y = C + I + G + (X-M), so all we need to do is to increase "G" to cover for a lack of "I" and "C" and the ship will right itself automatically.

From where does the "G" funding come? Why ask? ANY increase in "G" brings prosperity, whether it comes from new taxes or borrowing. (The U.S. Government does not directly "print" new money to pay its bills as we have seen in places like Latin America and Zimbabwe, as new money enters through the banking system. In other words, we are more "sophisticated" in the way we create money, as we use a roundabout way to "print.")

Lest anyone think that Krugman has NOT endorsed new taxes as a means to help bring economic recovery via new "demand," that person has not read this:

If we could wave away political reality, I’d let all the Bush tax cuts expire, and use the improvement in the budget outlook to justify a large, temporary increase in public spending.

Moreover, he claims that Obama can build a recovery in part on the expansion of "green jobs" and "clean-energy." Now, if that were true, it would be the first time that an economy recovery came about via the expansion of huge subsidies, since the "green technologies" need massive government help just to stay afloat.

In the reality-based world of economics, assets have real values, and if we have to prop up a set of assets via subsidies, then those subsidies must be taken from those assets that are profitable and then transferred to those that are not. Krugman and company argue that over time, these "new" assets will ultimately become profitable on their own, provided government subsidizes them enough. This is like saying that Mao could have made the backyard steel furnaces created during the Great Leap Forward work if he just had subsidized them enough.

No, assets matter. The structures of production matter. This is news to those who operate in the imaginary C + I + G + (X-M) world, but we are not going to end this hell of unemployment until government stops trying to BLOCK the recovery by re-directing assets from higher-valued, profitable uses to lower-valued and unprofitable uses. It is that simple, but Krugman will ignore it in order to push his own Keynesian fantasies.

Krugman's (Non)Partisan Adventure

I always love to see Paul Krugman use the term "non-partisan," as it generally means the opposite. Krugman is not supposed to use his column for partisan purposes, or at least that is the agreement he has with the New York Times, but his column strangely seems to echo the current talking points of the Democratic National Committee.

His latest partisan screed involves the Republican's "Pledge to America," which I have not bothered to read, nor will I read, since I remember the last bout of Republican rule. Nonetheless, I do find myself cheering for the Republicans to win this fall not because I believe they will govern effectively, but rather because the current Democratic juggernaut in which the White House and Congress have openly tried to destroy what is left of our economy (or turn the entire private sector into one big crony capitalism venture) has been a disaster.

For that matter, when we had divided government in the 1990s, things were a bit better, although the Clinton administration got Alan Greenspan to create the stock bubble disguised as the "New Economy." That is why I will support divided government for the last two years of Obama's first (And last?) term in office.

In reading Krugman's column, I get the sense that he really believes that if the Obama government can only increase the amount of money that it borrows and spends, that somehow this will have a magic reaction in which the government can begin to balance its budget and lead us into prosperity. He already is on the record demanding the increase of all income tax rates (which he claims will create more prosperity because government will have more money to spend).

While I have no interest in the Republican's latest gimmick -- and the "Pledge" is just that -- I also have no confidence that Paul Krugman really has a clue as to what an economy really is and what makes it work. A plague on all their houses!

Veronique de Rugy on Austerity

In reply to Paul Krugman's numerous missives that the only way governments should react to the downturn is to spend, spend, spend, Veronique de Rugy has a piece in Reason that contradicts Krugman's points. (Yeah, I know, Reason gets Koch money, just as Krugman's people get Soros money. Call it a wash.)

Ms. de Rugy writes:

One of the key signaling devices for international investors is how a government behaves under financial duress—how it balances the demands of its debtors with those of its welfare recipients. Announcements of lower spending and higher taxes tell investors a country is willing to go to great lengths not to default on its debt obligations. If the government instead focuses on preserving its welfare state and public employee benefits, investors know default is more likely and will shy away from that country’s bonds.Japan has the world’s biggest debt as a percentage of GDP, at 227 percent, nearly four times the economist-recommended 60 percent ceiling. It has gotten away with its carelessness without risking default because the country relies more heavily than most on domestic investors to fund its follies. The United States, despite a dangerous debt burden relative to GDP (66 percent) and a structural deficit among the highest of developed countries (almost 4 percent), has so far also escaped investor censure, thanks to the perception that the dollar remains the safest currency in the world. European countries don’t have that luxury.

I would add that the people in power in this country act as though the U.S. Dollar is impervious to any kind of international challenge. They forget that just 40 years ago, that is precisely what happened, and the crisis of 1971 left the USD in the lurch.

She continues:

The notion that austerity is bad and stimulus is good rests on the Keynesian theory that if government spends a lot of money, that money will create more value in economic growth. This purported increase in gross domestic product is what economists call the “multiplier effect.” It’s a nice story, but like most fairy tales, it has scant basis in reality.

In a 2010 paper published by George Mason University’s Mercatus Center (where I work), economists Robert Barro and Charles Redlick showed that in the best-case scenario, a dollar of government spending produces much less than a dollar in economic growth—between 40 and 70 cents. If that was the rate of return on our private-sector investments, America would soon cease to be a leading economic force.

Barro and Redlick also looked at the economic impact of raising taxes to pay for spending increases. They found that for every $1 in tax-financed spending, the economy actually shrinks by $1.10. In other words, greater spending financed by tax increases damages the economy. The stimulus isn’t working, because the economic theory it is based on is fundamentally flawed.

As I said before, this piece is worth reading. Krugman won't like it, but people who actually believe that economics is more than just stuffing money into an economy of homogeneous factors are going to find it stimulating reading.

Paul Krugman is Part of "The Rest of Us"? I Don't Think So

Hmmm. Paul Krugman, Ph.D. (from MIT) and now a Princeton professor, actually is jus' plain folks. No, he doesn't like those millionaires, and he realizes that if the top tax rate is lifted from 35 percent to 39.6 percent, not only will the economy get a boost, but those strange, rich people will get their comeuppance.

This is hilarious. But, Krugman is making the claim, not me. He writes:

You see, the rich are different from you and me: they have more influence. It’s partly a matter of campaign contributions, but it’s also a matter of social pressure, since politicians spend a lot of time hanging out with the wealthy. So when the rich face the prospect of paying an extra 3 or 4 percent of their income in taxes, politicians feel their pain — feel it much more acutely, it’s clear, than they feel the pain of families who are losing their jobs, their houses, and their hopes.

Sorry, people, Krugman the populist doesn't cut it. I've met the guy, talked to him at length, and I can tell you that he ain't plain folks. If there ever were an elitist, it is Krugman.

Let's get serious about wealth. Krugman is a millionaire, and I suspect that his mid-six-figure salary at Princeton perhaps may pay some of his taxes. This guy makes millions of dollars a year from his speeches (I don't know his fee, but it probably is close to $100K a pop), his NYT column, his textbooks, and his other books.

Keep in mind that I am not criticizing him for making this money. Granted, the textbook market is not a free market as such, but most of his wealth is earned the old-fashioned way: He sells products and services to willing customers.

However, when Krugman tries to tell us that "other" rich are bad people (unless they are like George Soros, who funds a gaggle of left-wing organizations), he fails to mention that he is wealthier than many of the people he claims should have their income confiscated in large chunks because, well, they don't spend their money quickly enough.

There is another problem as well, and that is Krugman's insistence that if government keeps the top marginal tax rate at 35 percent, it is "giving" something to the wealthy. Let me give an analogy. Say that I break into Krugman's house with a few of my armed friends, and I take his big-screen TV, some furniture, and other nice things.

However, I decide that I will not take Krugman's new laptop. Now according to Krugman's view of the world, I am "giving" him a laptop because I have not confiscated it. (Yes, breaking and entering a house and taking the contents is theft; when the government breaks into and enters your bank account, that is called "taxation.")

So, if Krugman is going to get angry at all of those rich people, then I hope that if the tax rates are left at 35 percent, he will voluntarily give the portion that was not taxed (since he is in that tax bracket himself) and give it either to the government or to a worthy charity, or to the poor.

Krugman's Tax-Cut Dishonesty

I wondered when Paul Krugman was going to make his misleading points about the upcoming tax increases, and he did not waste time. Today, he once again provides more fodder for the "Krugman Truth Squad," as well as giving me an excuse to sit on my couch and write yet another blog post.

First, let me provide a Krugman statement and then go from there:

So, about those tax cuts: back in 2001, the Bush administration bundled huge tax cuts for wealthy Americans with much smaller tax cuts for the middle class, then pretended that it was mainly offering tax breaks to ordinary families. Meanwhile, it circumvented Senate rules intended to prevent irresponsible fiscal actions — rules that would have forced it to find spending cuts to offset its $1.3 trillion tax cut — by putting an expiration date of Dec. 31, 2010, on the whole bill. And the witching hour is now upon us. If Congress doesn’t act, the Bush tax cuts will turn into a pumpkin at the end of this year, with tax rates reverting to Clinton-era levels.

In response, President Obama is proposing legislation that would keep tax rates essentially unchanged for 98 percent of Americans but allow rates on the richest 2 percent to rise. But Republicans are threatening to block that legislation, effectively raising taxes on the middle class, unless they get tax breaks for their wealthy friends.

That’s an extraordinary step. Almost everyone agrees that raising taxes on the middle class in the middle of an economic slump is a bad idea, unless the effects are offset by other job-creation programs — and Republicans are blocking those, too. So the G.O.P. is, in effect, threatening to plunge the U.S. economy back into recession unless Democrats pay up. (Emphasis mine)

As I note below, Krugman already is on the record as calling for the repeal of ALL of the tax-rate cuts from the last decade, and then taking the money and having the government spend it. (Guess what, Paul? If government takes the money, it will spend it, period.) So, is Krugman now claiming that raising taxes (since we already know government WILL spend that new revenue) will cause the economy to go downhill? And this after earlier calling for expiration of ALL lower tax rates? The guy needs to make up his mind.

OK, let us look at the actual rate cuts. This recent AP article does a good job of explaining what actually will occur, as opposed to Krugman's partisan rant:

Here's some pressure for lawmakers: If they don't reach agreement on extending soon-to-expire Bush-era tax cuts, nearly all their constituents back home will get big tax increases.

A typical family of four with a household income of $50,000 a year would have to pay $2,900 more in taxes in 2011, according to a new analysis by Deloitte Tax LLP, a tax consulting firm. The same family making $100,000 a year would see its taxes rise by $4,500.

Wealthier families face even bigger tax hikes. A family of four making $500,000 a year would pay $10,800 more in taxes. The same family making $1 million a year would get a tax increase of $52,300.

The estimates are based on total household income, including wages, capital gains and qualified dividends. The estimated tax bills take into account typical deductions at each income level.

Democrats have been arguing for much of the past decade that tax cuts enacted in 2001 and 2003 under former President George W. Bush provided a windfall for the wealthy. That's true, but they also reduced taxes for the working poor, the middle class, and just about everyone in between. (Emphasis mine)

So, according to Krugman, for a family making $100K a year, $4,500 is just chump change, a tiny sliver of cash. I don't think so. Tax rates were cut at every level of income and one of the ironic results was that the tax payments became even more progressive than they had been before, with about half of all U.S. households paying no federal income tax at all. (However, they do pay Social Security tax, which for many families takes more money from them than does the federal income tax.)

Furthermore, Krugman recently called for raising ALL taxes at all levels:

If we could wave away political reality, I’d let all the Bush tax cuts expire, and use the improvement in the budget outlook to justify a large, temporary increase in public spending.

Let me translate: If the government takes a bigger bite of taxes during the recession, then it can spend more money, and we will be better off than before. Now, I'm not sure how that works, and maybe the Great One Can explain to me how this would help lead us back to prosperity and full-employment, but I'm confused.

Furthermore, if raising all tax rates to take more income would be good for the economy, why not a tax of 100 percent? I mean, just think of all the wonderful things government can do for us if it just has enough money to spend!

One of the hard realities that is about to hit American families is that at all levels, they will be paying substantially more in taxes than before, once the current rates expire. Krugman has been denying this reality for years, claiming that the cut in the top rate from 39.6 percent to 35 percent has been responsible for almost all of the federal deficit. This is nonsense, pure nonsense, and it is nonsense on its face.

So, Krugman wants it both ways. He wants to claim that if government takes a bigger chunk of money from all of us -- and then spends it on "jobs programs" -- the economy will improve. If the tax rates for everyone but those making past the $200K threshold are kept at current levels, the economy will improve.

So, which is it? Now, I am not going to say that if the second option listed above is implemented, that the economy will plunge into oblivion. Furthermore, government spending, no matter how it is financed, is a tax, period. The money may not come from direct revenues, but nonetheless it is a tax.

(Yes, yes, I know that Chartalists have declared that when it comes to government gaining revenues, the Law of Scarcity is repealed, but we are dealing with economics here, not fantasy.)

In the end, Krugman wants us to believe a number of things that are mutually-exclusive. By disguising it in a partisan rant, he is able to present the "Good Democrats versus Evil Republicans" morality play that no doubt will make his groupies happy, but he does so by engaging simply in partisan politics, not economics.