Krugman Agonistes: We Are In the "Dark Ages" of Economics

While Paul Krugman has a column today alleging that the Obama administration really has not significantly ramped up domestic spending (which is why he says the economy is mired in the doldrums), I want to go back to something he wrote in January 2009, in which he lays out some opposing lines of economic thought (and stays out of partisan politics, for a change).

Furthermore, I find myself agreeing with Krugman that we are in a "Dark Ages" of economic thinking, but for very different reasons. Krugman is alleging that too many economists are accepting Say's Law as being legitimate, when every good Keynesian knows that J.M. Keynes "discredited" Say's Law in the mid-1930s. I disagree wholeheartedly on many fronts.

The difficulties are legion. First, like Keynes, Krugman really gets Say's Law wrong, creating a caricature of what Say wrote in 1803 and then demolishing the straw man he has created. (One has to keep in mind that Say's Law really is a huge obstacle to Krugmanomics, and, like Keynes, Krugman instinctively understands that point.

Second, the argument really goes to the heart of what constitutes what we call an economy. On one side, we see people like J.B. Say and the Austrians write that an economy consists of real things, real assets, and real relationships between goods. On the other side, we see people like Krugman and Alan Blinder and Ben Bernanke insist that governments can create wealth simply by creating money or borrowing and spending. In their view, an economy is little more than a mechanistic entity in which people robotically create goods with the requirement being that they have enough "purchasing power" so consumers can clear the shelves via spending so that the process can repeat itself.

I would urge people to read Krugman's entire blog post to see the perspective from which he is coming. I will include this quote, which I believe is instructive. Calling the perspectives from Eugene Fama and John Cochrane "pure Say's Law," Krugman writes:

There’s no ambiguity in either case: both Fama and Cochrane are asserting that desired savings are automatically converted into investment spending, and that any government borrowing must come at the expense of investment — period.

What’s so mind-boggling about this is that it commits one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship. Yes, savings have to equal investment, but that’s not something that mystically takes place, it’s because any discrepancy between desired savings and desired investment causes something to happen that brings the two in line.

First, and most important, what we call Say's Law is not about accounting identities or even the infamous S=I. Instead, it is about the fact that consumption and production are intricately related, not by a circular patterns, but rather by the simple fact that one's ability to consume MUST arise from the ability of someone to be able to produce something.

I deal with all of this in a paper I published last year on Say's Law in which I take a telling quote from Benjamin Anderson:

The prevailing view among economists, . . . has long been that purchasing power grows out of production. The great producing countries are the great consuming countries. The twentieth-century world consumes vastly more than the eighteenth-century world because it produces vastly more. . . . Supply and demand in the aggregate are thus not merely equal, but they are identical, since every commodity may be looked upon either as supply of its own kind or as demand for other things. But this doctrine is subject to the great qualification that the proportions must be right; that there must be equilibrium.

This view contrasts with the Keynesian/Marxist views that the real problem with a recessionary economy is that there is the problem of overproduction/underconsumption which can be "solved" by the injection of "purchasing power" into the hands of individuals via government intervention. Call it "pump priming," "giving the economy traction," or "enabling workers to buy back the products they created," but nonetheless all three viewpoints operate on the notion that production and consumption are two unequal and unrelated activities, and that the purpose of consumption (or "spending") is to clear the shelves of the goods that workers made so that the workers can be employed making more of them.

Now, the Keynesian argument -- which Krugman repeats -- is that in the real world, savings are greater than investment, especially when the "animal spirits" of investors are quieted. When that is the case, and investment spending is down, it is up to government to fill in the hole by ratcheting up spending. Now, I don't believe I have mischaracterized Krugman's position here, but, nonetheless, I strongly disagree with it.

First, even if I were to give Krugman his point that S>I, nonetheless (and I have not seen this discussed anywhere) the nature of fractional reserve banking would take the existing savings/deposits and loan them out to where the actual new money created would be substantially greater than the savings base. It is true that banks rarely are going to be fully "loaned up," but Krugman ignores the money multiplier that occurs in lending, something that any student who has taken Money and Banking or even a Macro class would understand.

Second, there is something even more fundamental here, and that is the fact that the Krugman position almost seems to be that the Law of Scarcity is abolished when interest rates approach the "zero bound" (in his words). This also is where Krugman and the Austrians really part company, for in Austrian Economics, the Law of Scarcity is not abandoned at the "zero bound" or the presence of unemployed resources.

Instead, Austrians look to reasons as to why the resources are unemployed, as opposed to the Keynesian argument that people and government simply are not spending enough. Instead, we wish to look beyond to why there no longer is demand for certain things, and to the larger issue of how the proportions involving the factors of production have been disturbed or distorted.

As I have said many times, the Keynesian argument depends upon seeing factors of production as being homogeneous and having no particular special relationships. Everything from mine output to making of cotton candy is just one amorphous and homogeneous set of factors. This is not economic theory; it is a theory of convenience to justify the presence of government spending.

Krugman Tunnels Under Economic Logic

I was wondering why all of a sudden Paul Krugman was on a railroad tear, but now I know why: New Jersey Gov. Chris Christie has pulled the plug on yet another high-cost boondoggle that characterizes construction projects in the New York City area.

Yes, Krugman is bewailing the loss of the long-planned rail tunnel under the Hudson River between New Jersey and NYC, a project that promises to have billions of dollars of cost overruns and would burden the state with even more debt. From what I know, I believe Christie did the right thing, and the angst on the editorial pages of the NY Times that has accompanied Christie's decision definitely tells me the guy is correct.

In defending this boondoggle, which has been "planned" for two decades and still lacks the requisite funding, Krugman resorts to the kinds of cheap tricks that should be beneath a Nobel Prize-winning economist. (OK, I'm not really sure that a Keynesian also can be an economist, but nonetheless Krugman did win the Nobel a couple of years ago.)

For example, in a blog post yesterday, Krugman trots out this notion that the economics of public transit is something quite mysterious and that when one factors in all of the "externalities" and implicit costs that accompany people driving into Manhattan, then the mass transit facilities there more than pay for themselves.

(It is interesting that Krugman actually resorts to trying to make an argument by using "opportunity cost," since part of his current economic theme is that economic downturns at best modify and at worst do away with the Law of Scarcity. So, opportunity cost is fine when Krugman thinks it helps make his argument, but when Austrians try to point out the issues of opportunity cost in the analysis of the business cycle, Krugman claims that they are crackpots.)

Furthermore, Krugman does not want to address the cost issue because labor union practices in New York and New Jersey are behind the astronomical cost numbers for mass transit. However, at this point, Krugman then can switch back to his Keynesian mode and claim that all these high costs are just great, because THEY MEAN MORE SPENDING! He writes:

So this was a terrible, shortsighted move from New Jersey’s point of view. But that’s not the whole cost. Canceling the tunnel was also a blow to national hopes of recovery, part of a pattern of penny-pinching that has played a large role in our continuing economic stagnation.

When people ask why the Obama stimulus didn’t accomplish more, one good response is to ask, what stimulus? Leaving aside the cost of financial rescues and safety-net programs like unemployment insurance, federal spending has risen only modestly — and this rise has been largely offset by cutbacks at the state and local level. Many of these cuts were forced by Congress, which has refused to approve adequate aid to the states. But as Mr. Christie is demonstrating, local politicians are also doing their part.

And the ideology that has led Mr. Christie to undermine his state’s future is, of course, the same ideology that has led almost all Republicans and some Democrats to stand in the way of any meaningful action to revive the nation’s economy. Worse yet, next month’s election seems likely to reward Republicans for their obstructionism.

So here’s how you should think about the decision to kill the tunnel: It’s a terrible thing in itself, but, beyond that, it’s a perfect symbol of how America has lost its way. By refusing to pay for essential investment, politicians are both perpetuating unemployment and sacrificing long-run growth.

I have serious doubts that this tunnel, with its costs of $11-15 billion, would "revive" the economy of that area and also provide for long term growth. First, other policies that Krugman has been endorsing are going to sap growth in the future and second, if there is any growth, much if not most of the financial gain will go to paying off the debt incurred to building those projects.

No, what we have is yet another Krugman shot at someone who actually wants to be fiscally responsible. However, being that Krugman is trying to claim that the current regime in power is being "stingy" with its spending, I doubt the man really is capable of comprehending an economic argument.

Krugman's Rail Fantasy

Paul Krugman is on another tear. Those Evil Republicans are not supporting what clearly would be an extremely-costly "high-speed rail" boondoggle, which then makes them against ALL railroads. Here is Krugman in his own words:

Jonathan Cohn points out the curious opposition of Republicans to any improvement in our woefully inadequate rail system. As he suggests, this opposition goes beyond issues of cost; there’s something visceral about it.

Notice that Krugman does not say "passenger rail," just "rail," although I guess he is talking about passenger rail travel.

Furthermore, Krugman tries to invoke a questionable economic argument regarding "natural monopoly," as seen here:

It’s not too hard to understand, of course: in real life, as opposed to bad novels, railroads aren’t run by rugged individualists (nor should they be). In fact, passenger rail is generally run by government; even when it’s partially privatized, as in Britain, it’s done so with heavy state intervention to preserve some semblance of competition in a natural monopoly. So rail doesn’t fit the conservative vision of the way things should be.

Hmmm. We have a government monopoly preserving "some semblance of competition in a natural monopoly"? Uh, that does not compute, people. Furthermore, passenger rail was very, very competitive in this country until the automobile became more developed (and was subsidized by the Interstate Highway System) and also after a century of government regulation of railroads.

Furthermore, government subsidies of passenger rail don't exist to "preserve competition," but rather exist to preserve the various rail unions which have helped make the real costs of passenger rail frightfully high. All that is lost to Krugman, of course, who spins his own fantasies.

But, in the end, it really is about people ponying up so Paul can ride the rails for less than the full cost. He writes:

I almost always take trains both to New York and to Washington, and consider the time spent on those trains part of my productive hours — with notebooks and 3G, an Amtrak quiet car is basically a moving office. And I don’t think I’m alone in that.

Gee, I'm surprised Amtrak does not provide him with a heavily-subsidized private car.

As for "high-speed rail," we are speaking of billions and billions of dollars to be spent for which there really won't be any return. To those who don't subscribe to Keynesian "economics," that means that high-speed rail will use far more in resources than it will produce, which means a deficit of wealth. (Yes, Keynesians will claim it would "stimulate" the entire economy because the government is spending lots of money.)

So, any of you who might take economics seriously, don't ride on the same train with Krugman, as he might declare you an "enemy of the people" have have the conductor throw you off to the side!

Daniel Gross: Channeling His Inner Krugman

The New York Times has been a fount of Keynesian revivalism, with not only Paul Krugman's frequent columns and blogs preaching the Gospel of Spending but also other writers as well. Today, I look at a column by Yahoo's economics editor Daniel Gross, in which he claims that the nation's economic recovery depends upon individuals using debt to purchase consumer goods.

Gross claims that the real secret of the past success of the U.S. economy has been the fact that U.S. consumers spend a lot of money. I'm serious. He writes:

...as the economy slowly recovers, there are signs that Americans are rediscovering their free-spending ways. Total consumer credit, which includes non-revolving debt like car loans, has stabilized, and it rose in both June and July. It’s back to where it was in the second quarter of 2009. Collectively, we don’t seem to have run our credit cards through shredders. Mailboxes are again stuffed with credit card solicitations. Newspapers are filled with come-ons from car dealers offering zero-percent financing. The Federal Housing Authority offers mortgages on houses for as little as 3 percent down. You’d be forgiven for thinking that we’ve flown back in time to September 2006.

And, believe it or not, that’s a good thing. The economic expansion that has been going along in fits and starts since June 2009 was initially powered by government stimulus and business investment. But for this recovery to mature, broaden and persist, the greatest economic force known to mankind — the American consumer — has to get back in the game. (Emphasis mine)

In an economy in which consumers account for 70 percent of activity, credit is both a vital lubricant and the indispensable fuel.

Somehow, it does not surprise me that our "elite" thinkers believe this nonsense. (Almost everyone I have known who has been associated with the NYT has considered himself or herself to be intellectually and morally superior to the rest of us mundanes. Over time, these people really do become caricatures of themselves.)

However, if what he is saying is true, then we really should be passing on this Great Secret. Tell the people of Haiti that if they want to have a thriving economy and recover from the recent earthquake, they need start borrowing lots and lots of money so they can buy consumer goods, houses, and the like and spend themselves into prosperity. As for the goods on the shelves, if you spend, they will magically appear.

I would like to contrast Gross's comments with some real economic analysis from Robert Higgs, who recently wrote:

As every student of the business cycle learns early on, the most variable part of aggregate expenditure is private investment. When real gross private domestic investment peaked, in the first quarter of 2006, it was $2,265 billion, or 17.5 percent of GDP. When it hit bottom in the second quarter of 2009, it had fallen by 36 percent to $1,453 billion, or 11.3 percent of GDP. (Deducting investment expenditures aimed at compensating for depreciation of the private capital stock [Table 1.7.6], we find that real net private investment – the part that contributes to economic growth—in the most recent quarter was only one-third as great as it was at its peak in early 2006.) The ups and downs of the business cycle are obviously driven not by consumption spending, but by investment spending.

The difference becomes even more obvious when we compare quotes from Gross and Prof. Higgs. First, I quote Gross:

John Maynard Keynes wrote of the paradox of thrift — if everyone saves, everyone becomes poorer, because demand for goods and services will fall. Here’s another paradox: Running up consumer debt may be a moral failure and a recipe for long-term damnation, but it also contains the roots of our short-term salvation.

Now I quote Prof. Higgs:

Such arguments, however, fail to grasp the true nature of the boom-bust cycle, especially the central role of investment spending in driving it—and, more important, in driving the long-run growth of real output that translates into a rising standard of living for the general public. Politicians, if they truly wish to promote genuine, sustainable recovery and long-run economic growth, need to focus on actions that will contribute to a revival of private investment, not on pumping up consumption. In the most recent quarter, real gross private domestic investment was running at an annual rate more than 20 percent below its previous peak and, as noted, real net private investment was fully two-thirds below its previous peak.

To bring about this essential revival of investment, the government needs to put an end to actions that threaten investors’ returns and create uncertainty that paralyzes their undertaking of new long-term projects. Gigantic measures such as the recently enacted health-care legislation and the financial-reform law, which entail hundreds of new regulations whose specific content, enforcement, and costs are impossible to forecast with confidence, contribute to “regime uncertainty” and thereby encourage investors to hold large cash balances or to park their funds in short-term, low-yield, less risky securities. Such investments cannot support genuine recovery and sustained long-run growth.

In sum, our crying need at present is for a robust revival of private long-term investment. Consumption-oriented government “stimulus” programs, at best, only ensure a protracted period of economic stagnation.

Gross, like Krugman, seems to believe that all that is necessary for our economy to recover and grow is for the government to shower dollars on everyone, who will then take the money and spend it, and borrow to add to whatever they don't have. And if people and businesses are not willing to spend, then it is up to the government to confiscate that money via taxation and inflation and other methods of coercion, if necessary.

Prof. Higgs, on the other hand, says that economies grow when businesses are able to invest for the long term and find ways to produce more using fewer resources over time. Thus, the value of "investment spending" is NOT the spending per se, but rather the fact that the lines of production in which they invest are able to produce goods that satisfy the needs and desires of consumers.

I would add that the Krugman-Gross-NYT approach assumes that spending is mechanistic and exists only to clear the shelves so producers can put more goods on the shelves again. In that view, production and consumption are not intricately related, and entrepreneurship is useful ONLY in the fact that they are able to provide jobs for people so they can spend, clear the shelves, and put more stuff back on them.

This is not an economy; it is a circular pattern, and in that view, production is useful only in the fact that it keeps people busy. It would be just as useful for people to be paid to dig holes and then fill them afterward, and continue the process indefinitely. And this is the best that our "elites" can do?

Robert Wenzel and Krugman's "Hangover Theory"

Lew Rockwell recently posted this piece by Robert Wenzel on his page, and it is very much worth reading. (Wenzel wrote it a couple of years ago, but it is quite relevant.)

It deals with Krugman's article that attacked the Austrian Theory of the Business Cycle (ATBC) in 1999, Krugman calling it the "Hangover Theory." Not surprisingly, Krugman not only gets the history of the Great Depression wrong, but he also mangles the theory itself. To further his calumny against the Austrians, he then tries to put the whole thing into a morality play in which he sets the rules and parameters. He also attacks F.A. Hayek and Joseph Schumpeter, two economists whose intellect and life's work dwarfed anything Krugman ever will do.

Krugman's explanation is quite dishonest, but that is the state of modern economics these days.

Are the Keynesians Correct?

Paul Krugman definitely has a sense not only of his own "rightness," but also his own righteousness. While it would be interesting for me to delve into the details of his column today in which he attacks Fox News, when someone goes off the deep end into an outright rant, I let his own words speak for himself.

Although I don't have TV and would not be watching Fox News anyway, nonetheless I do find it interesting that Krugman even wastes time complaining about "news bias." Having followed his employer through the infamous Duke Lacrosse Case, in which the NY Times continued to insist that Mike Nifong was telling the truth and that black was white and that there was a "body of evidence" that should have pushed the whole thing to a trial, I can tell you something about "bias" from a media source. Even today, I marvel at how those "sophisticated" people at the NYT could find a way to believe in an actual "magic towel" that could wipe away all traces of Crystal Mangum's DNA while retaining the DNA of Duke "rapists."

So, when Krugman claims that anyone who disagrees with him either must be on the payroll of the Koch Brothers or the Coors family, I think he has jumped the shark. Could someone say just as easily that people who think like Krugman are on the payroll of George Soros? After all, the famed New Yorker article by Jane Mayer, which claims that the Koch Brothers are the secret force behind the Tea Party, admitted that Soros gives more to leftist causes and organizations in one year than the Kochs have given in their lifetimes.

(For the record, I have published two book reviews and one article in Regulation Magazine, which is published by the Cato Institute, which receives Koch Brothers money. I received $1,000 for each piece that I wrote. That must mean, according to Krugman, that I am on the Koch payroll.)

There is a much more important piece that Krugman wrote on his blog last week that is much more intriguing than his latest anti-Fox rant. In "How the Other Half Thinks," Krugman declares that the Keynesian predictions have been closer to the mark than what he calls the "classical" positions; therefore, Keynesianism must be correct. He writes:

The point is that recent events have actually amounted to a fairly clear test of Keynesian versus classical economics — and Keynesian economics won, hands down.

Now, I am not sure what he means by "classical" here, given that there have been many schools of thought from the past. Does he mean the Monetarists? The Marshallians? The Austrians? (Not a chance there, since Krugman hates the Austrians and when he does describe their positions on things, he deliberately distorts what they say, creating his own "straw man," and then knocking down a false image.)

Like John Maynard Keynes, Krugman creates the "straw man" of "classical" theory and goes from there. If there is a heart to Krugman's point, it is this: So-called laws of economics are turned upside down when economic conditions push interest rates -- or at least interest rates set by the central bank -- to near zero.

When that happens, according to Krugman, then "virtues and vices" and, well, vice versa. Here is the problem I have with his point, and it is fundamental: The Law of Scarcity cannot be repealed by Federal Reserve policies. When one goes to the core of the issue, that is what Krugman is saying.

Krugman's economic thought is really not "economics" at all. It is a mathematical, mechanistic view of an overall economy in which there are no purposeful entities called people. In that view, production and consumption are two separate and unrelated things; the only purpose of "spending" is to clear the shelves so that producers will have something to do.

While the British "classicals" of the 19th Century were way off in their theory of value (and never did fully embrace Marginal Utility, instead creating a hybrid theory in which MU worked in the short run and cost-of-production in the long run), they did hold to Say's Law. (I discuss Say's Law and the Austrian Theory of the Business Cycle in this paper which appeared last year in the Quarterly Journal of Austrian Economics.)

I agree that Krugman has been correct in that we have not seen the hyper-inflation that some have predicted, although when one understands that new money moved into the system via bank loans, it is not surprising at all, since business activity is way down. The real issue, then, is why we are not seeing business activity.

Krugman's answer is that we have to have more spending before businesses are willing to borrow and spend beyond their short-term needs. In that view, spending will lead to spending, and once the system gains what Krugman calls "traction," the economic train can move forward. (My sense is that he dismisses the run-up in gold, silver, and other commodities as being the result of "nut cases" buying the stuff and having no economic meaning, except that Fox News viewers have extra money to spend.)

For lack of time (yes, I do have a day job, and I have to meet with the AACSB re-accreditation team this morning), I cannot go into a full explanation of an alternative view here. However, I do want to make this salient point: Laws of economics are immutable; they cannot change because no one, not Krugman, not the Keynesians, not the Charalists, no one, can repeal the Law of Scarcity.

Krugman really wants us to believe that the Law of Scarcity does not hold when interest rates (set by the Fed) are at a "zero bound." That is the bedrock of the discussion, as I see it. To me, it is like Krugman is saying that the Law of Gravity cannot hold when one is discussing the Theory of Evolution or the Theory of Global Warming. It makes no sense, for it violates the very fundamental tenets of economic theory.

Say what he will, Krugman is trying to argue that Scarcity does not matter. Well, it does matter and it matters greatly.

Paul Krugman's Excellent Protectionist Adventure

Note: Before starting on my post today, I want to share an excellent article, "My Encounter With Paul Krugman," by Murray Sabrin, a professor of finance in the Anisfield School of Business, Ramapo College of New Jersey. Prof. Sabrin lays out the Keynesian nonsense that Krugman gave in his talk and provides an alternative explanation. The article is well-worth reading.

(Murray is a friend of mine and is a regular reader of KIW. Yes, my sympathies to him on both counts!)

One of the things Krugman likes to do is to write a number of columns and blog posts according to a certain theme, and he keeps things varied, although the Keynesian thread runs through them. Thus, he "stays on message" even when moving from one area to another.

In his column, "Taking On China," Krugman repeats a couple of his constant themes: China's refusal to allow its currency to have an official value that meets Krugman's approval is helping to cause this current depression, and protectionism is a legitimate policy when the economy is in the tank. He writes:

Serious people were appalled by Wednesday’s vote in the House of Representatives, where a huge bipartisan majority approved legislation, sponsored by Representative Sander Levin, that would potentially pave the way for sanctions against China over its currency policy. As a substantive matter, the bill was very mild; nonetheless, there were dire warnings of trade war and global economic disruption. Better, said respectable opinion, to pursue quiet diplomacy.

But serious people, who have been wrong about so many things since this crisis began — remember how budget deficits were going to lead to skyrocketing interest rates and soaring inflation? — are wrong on this issue, too. Diplomacy on China’s currency has gone nowhere, and will continue going nowhere unless backed by the threat of retaliation. The hype about trade war is unjustified — and, anyway, there are worse things than trade conflict. In a time of mass unemployment, made worse by China’s predatory currency policy, the possibility of a few new tariffs should be way down on our list of worries.

So, let's see. Because prices are not rising out of control right now when some people predicted that the Federal Reserve System's vast expansion of the monetary base was going on, that means protectionism is a worthy policy. This is a typical fallacy that Krugman uses, the non sequitur.

To further his cause, Krugman resorts to another fallacy, the "Appeal to Authority," by enlisting the late Paul Samuelson (another Nobel Prize winner) who was one of Krugman's mentors when he was in graduate school at MIT. In a recent blog post, Krugman quotes Samuelson:

With employment less than full and Net National Product suboptimal, all the debunked mercantilist arguments turn out to be valid.

Yes! Laws of economics from the Law of Scarcity to the Marginal Utility Theory of Value hold ONLY when times are good! However, if the economy is sluggish, then it is time to trot out "Fable of the Bees" and start all over again.

Krugman lavishes praise upon those in Congress who are pushing this latest round of protectionism. (He calls this latest move "bipartisan," so I guess when Republicans -- who always have been protectionist since their beginnings in the 1850s -- aren't so bad when they do Krugman's bidding, or at least we can say they have taken a holiday from their usual goals of Doing Evil.)

However, as he has done with the "stimulus" and new government spending, Krugman claims that this still is not enough. I only can imagine that his next move would be to trot out Smoot-Hawley II, since it worked so well the first time it was imposed. He writes:

For the truth is that U.S. policy makers have been incredibly, infuriatingly passive in the face of China’s bad behavior — especially because taking on China is one of the few policy options for tackling unemployment available to the Obama administration, given Republican obstructionism on everything else. The Levin bill probably won’t change that passivity. But it will, at least, start to build a fire under policy makers, bringing us closer to the day when, at long last, they are ready to act.

So, it seems that those Evil Republicans have not been channeling enough of their Inner Smoot-Hawley to satisfy Krugman, but maybe, just maybe, we can have a full-blown world-wide trade war, blaming those Dastardly Chinese for their intransigence and for their effrontery in producing goods that Americans want to buy (and for buying U.S. Treasuries by the handful in order to fund our own deficit spending).

No doubt, this will rev up Krugman's base, as his supporters will claim that we can have this wonderful economy based upon a form of autarky. (It is amazing that Krugman actually got his Nobel Prize allegedly for his trade theory, as now he is claiming that unless currencies are matched according to Krugman standards, trade creates poverty.)

Keynesianism is based upon a belief that the laws of economics hold only in special conditions, and when those conditions are not met, then governments need to act as though the Law of Scarcity does not exist. To Austrians like me, the laws of economics are like the Law of Gravity: they are immutable and always apply.

As I see it, Krugman's latest missives contain about as much sound thinking as would be a directive from the MIT graduate that in special conditions, the Law of Gravity does not hold. However, I somehow doubt we would see Krugman then getting ready to take a leap off the Empire State Building, but economically speaking, that is exactly what he is demanding we should do.