Why No Hyperinflation?

As I have commented before, a number of economists and commentators (and not just Austrians) have been loose with making predictions of hyperinflation, yet we don't see that happening in the real world. However, at the same time, we cannot ignore the fact that prices of a lot of things are going up -- and not just the price of gold, Krugman's "barbaric relic" comments notwithstanding. (Yeah, I know that line came from Keynes, but Krugman used it this week, too.)

In a blog post today, Krugman once again gloats about inflation, or the lack thereof, but then goes off on a weird tangent, talking about "grocery inflation." Now, I cannot recall in any of my grad classes there being a term called "grocery inflation," and being that the average grocery store has thousands of items, with some going up in price and other things not.

Nonetheless, especially in the aftermath of the voyage of the QE2, we have seen prices of commodities go up and, no, I believe Krugman is wrong when he goes off on the "commodity prices are volatile" tangent. No doubt, Krugman dismisses the run-up in gold and silver prices (not to mention oil, which is getting close to $90 a barrel in my last check.)

There also are some other issues here, and one has to remember that when Krugman and I speak of inflation, it is as though we were speaking different languages. Krugman's approach is purely macro-speak, with inflation being the measure of a particular index, i.e., the Consumer Price Index (CPI), the GDP Deflator, or something similar. (That is where he gets "grocery inflation," I guess.)

Austrians are more fundamental when it comes to inflation. To us, inflation is a situation in which the value of money falls relative to the goods for which it is used to purchase. In other words, inflation to us is a monetary phenomenon, not a price phenomenon. Instead, increases in prices reflect inflation (the loss of value of money), as when money loses value relative to other goods, more money then is needed to fulfill transactions.

Now, according to Keynesians, this is foolish, since to them, money is nothing more than a quantity variable. They may have an inkling of why money exists in the first place, but they are much more interested in aggregate variables, and certainly not anything that might smack of a marginal utility theory of money.

That being said, I will once again invoke the hated (by Keynesians) Say's Law to point out that while money facilitates trade, it is not by itself wealth, only a measure of wealth. Money is subject to the laws of economics, even if Paul Krugman doesn't believe it.

Now, there is no doubt that the U.S. Dollar is losing ground overseas, and if we really were in a period of deflation, as Krugman claims, then the dollar would be gaining strength, not losing it. (Deflation occurs when the value of money relative to goods it is used to purchase increases, and that clearly is not happening.) We are seeing asset prices such as housing fall, but those prices need to fall because they were out of kilter with everything else.

(Yes, that means people like me who are homeowners and probably swimming in negative equity have to live with it. The bank gets my house payment every month, and I just consider it to be something akin to a rent payment. I don't like it, but that is the way it is.)

I want to come back to this whole "deflation" issue soon enough, but now want to deal with how new money comes into our economic system. Remember, the Fed mostly has piled up new reserves in banks, raising (actually, spiking) the monetary base. However, a monetary base in the form of bank reserves is a lot different than new money actually floating about in the economy.

When we think of hyperinflation, we think of places like Weimar Germany in 1923 or Argentina and Bolivia in the 1970s and 1980s, or Chile during Allende's three-year rule from 1970 to 1973. In Chile's case the government seized a number of private businesses, mines, and factories, and then directly printed money to pay the workers. (More "proof" that government is not "revenue-constrained," I guess.)

When the government seized the factories, it tripled the wages of workers, but the political organizing and other moves actually lowered workplace productivity. At the same time, the government threw up new tariffs and trade barriers, so people soon were awash in money, but little else.

During that period when inflation got to about 1,000 percent, people got out of money if they could, using items like tobacco, auto parts, and other hard goods that they could use to barter. In Bolivia, where there were (and are) a large number of state-owned enterprises, workers in the mid-1980s would be paid twice a day. They would rush to the streets and trade their money with tourists for dollars or other hard currencies, and then the tourists quickly would spend the money.

That is very, very difficult to happen in our economy. Even during the last big inflation of the late 1970s and early 1980s, the new money came in through the bank lending process. Government workers were not paid with newly-printed dollars, nor did they rush out into the streets to trade for pesos.

What happens at a time when businesses are not borrowing for long-term projects, as is the case today? This is what Milton Friedman called "pushing on a string," or what Paul Krugman calls a "liquidity trap."

Is there a way for the current situation to bust into hyperinflation? Obviously, I certainly hope not, as I and my family would go down like everyone else. Certainly, one can see the problems that would arise if the Fed were to directly purchase large amounts of U.S. Treasuries on the primary market to finance the government's borrowing, as it would not take long to see how this transmission device would inject a lot of new money into the economy and certainly would result in much higher prices over time.

There is one more issue, and that is the claims by Krugman that we are falling into "deflation." Frankly, I don't see it. Prices for consumer goods, not to mention food and other commodities, are going up, not down. Yes, the value of those assets that were highly-inflated during the bubble are going down, but that is a good thing (even if my own house is included in this "good thing"). I use that term not because it makes everyone happy, but rather because factor prices need to get into balance, and the government's "stimulus," bailouts, and attempts to build a "recovery" by pouring money into "green energy" are only making the situation worse.

No, we are not about to burst into the holocaust of inflation as we saw in Latin America or recently Zimbabwe, but neither are we falling into deflation as Krugman says. Instead, we are going to muddle along until someone in power learns that one cannot subsidize an economy into prosperity.

Krugman's Phony "Painless" Solutions

I have no idea if Paul Krugman reads the Bible or any other religious material, but being that I am in the midst of reading through the section of the various major and minor prophets of Israel, I can see how Krugman fancies himself to be an Isaiah or Ezekiel. Here is Krugman giving prophecies of woe -- but also presenting what he claims to be are "solution" to the current ills.

Unfortunately, he believes, no decision makers in the government are listening. Instead, from President Obama to Ben Bernanke, these people are listening to the "Pain Caucus" (as he calls people who note that the economy cannot expand with malinvested capital), the "inflationistas," and those lyin' furriners (the Chinese and Germans) who are more responsible than anyone else for our present condition.

For example, he writes of the Chinese and Germans:

After all, you have China, which is engaged in currency manipulation on a scale unprecedented in world history — and hurting the rest of the world by doing so — attacking America for trying to put its own house in order. You have Germany, whose economy is kept afloat by a huge trade surplus, criticizing America for running trade deficits — then lashing out at a policy that might, by weakening the dollar, actually do something to reduce those deficits.

So, there you have it; these countries, which actually make goods that people want to buy, are partially at fault for our predicament. Obviously, we need a good trade war to accompany our failed "war on terror." That will bring prosperity for sure.

Here is the ultimate irony, however. Krugman believes that the government is choosing the "hard way" when, in fact, fixing the current problem is quite easy. As he wrote in his book The Return of Depression Economics, most economic crises (according to him) can be "fixed" simply by the printing of money. In other words, Ben Bernanke really can print some of it, go into his helicopter, and dump it out upon grateful people who then will go and spend it, giving the economy "traction," and leading us into prosperity.

Now, this makes Krugman a most interesting prophet. Most prophets of the Bible excoriated Israelites for seeking a life of ease, for following after false gods, and "oppressing the poor" by getting them to work, and then not paying them, or having crooked judges rule in their favor when the poor brought their cases before the courts of those days.

Krugman, on the other hand, claims that the real solution to the current situation is the easier path. Those that say that we no longer can continue the boom through loose credit and wild deficit spending and who must get the "house in order" really are the villains, for they lead us down the path of pain.

In his famous "Hangover Theory" article in Slate, Krugman (after mangling the Austrian Theory of the Business Cycle) declares:

Powerful as these seductions (ATBC) may be, they must be resisted—for the hangover theory is disastrously wrongheaded. Recessions are not necessary consequences of booms. They can and should be fought, not with austerity but with liberality—with policies that encourage people to spend more, not less.

See? The "solution" really is quite easy. When the value of malinvested assets fall and the follies of a boom are exposed, we then pretend that we are prosperous. Is the income that flowed from the money borrowed to finance these malinvestments drying up? No problem! Let the government either try to prop up these malinvestments by getting the Fed to purchase government bonds, or sell the bonds to a central bank in Upper Slobovia and use those dollars to fund the politicians' latest projects (like rail tunnels). And, if the projects run way over budget, THAT IS EVEN BETTER BECAUSE IT MEANS WE ARE SPENDING MORE MONEY!

Usually, prophets tell people that they must choose the more difficult path, but the Prophet Krugman differs. If I may use an analogy from the New Testament, it would be like Jesus telling his disciples that they should enter "through the wide gate," as "the narrow gate is too painful."

I sense a real anger in Krugman's words. Here is a Nobel Prize winner telling people that the way out of this depression is easy: just borrow, print, and spend (and spend and spend). Yet, somehow, the Bad People are winning the day, falsely convincing people that we cannot borrow and spend our way to prosperity. They are not moved by Krugman's prophecies that the road to ease is for us to start a trade war with China, tell the Germans "Zum Teufel mit Ihnen," and spend, spend, and spend some more.

Is something wrong with this picture?

Krugman's Treasure Trove of Shibboleths

Paul Krugman definitely has been busy since the last election, and so have I -- but not in reading Krugman's material as the day job (and some consulting work on the side) have taken front-and-center. Nonetheless, as I read the Nobel Prize winner's blog this morning, I must admit that I have missed a real treasure trove of Krugman's Shibboleths, including a number that he has written himself.

It is hard to know where to begin, but I think I will begin with Krugman's own Shibboleth: inflation. Some years ago, I read a book by someone lambasting the Keynesians in which he said that their only real "arrow in the quiver" was inflation, and I think that Krugman has continued that long tradition. According to Krugman, the only way that an economy can recover from a depression is via inflation, coming in the form either of central bank monetary expansion or increased government spending.

As Krugman has claimed many times, the U.S. economy -- for that matter, all of the world (except for Zimbabwe) -- is mired in a "liquidity trap" in which individuals and businesses are selfishly holding onto their cash and not spending it. Obviously, THAT is intolerable, so the government either must find a way to confiscate it by force (raise taxes, which Krugman has advocated) or via inflation (which Krugman pursues with religious zeal).

Along the way, he attacks Jim Rogers, a person who actually understands capital, unlike Krugman, who seems to believe that capital magically springs from the ground when people start spending. Yes, Krugman wants us to believe that if the government tries to recreate the government-run financial cartel in which external capital markets were scarce (and the system clearly was running into a wall by the mid-70s), and if government showers the economy with newly-printed dollars, blocks Chinese imports, raises taxes, forces taxpayers to pay for high-cost, subsidized "clean energy," and demonizes any business that actually is profitable (except for those businesses getting government subsidies), that the U.S. economy will roar back into a state of real growth and full-employment.

Yes, Krugman definitely identifies himself with the Inflationists, claiming that if government debases the currency -- and that is what inflation really is -- and, thus, depreciating the cash that people have earned, that we will have prosperity. In a world in which all labor and capital are homogeneous, that would be true. However, in a world in which a government-caused boom creates huge malinvestments -- as we saw with the housing boom -- we have to face reality.

According to Krugman, we can keep the original boom alive via spending and more spending. Assets mean nothing; depreciated currency is everything. In the meantime, blame everything on Goldstein: the Chinese and Republicans. And that is what passes for Great Economic Wisdom with modern Progressives.

To use Krugman's own words: Paul Krugman makes my head hurt.

Krugman's Hocus-Pocus Economics

Well, following the elections, which were pretty disastrous for the Democrats, at least regarding the U.S. House of Representatives, I figured Paul Krugman's first column would be yet another attack on the Republicans. Instead, he attacked President Obama for not having enough "audacity" in his economic programs.

We have been down this road before. Krugman's favorite theme -- other than Republicans come from the Pit of Hell -- has been that Obama did not spend enough, inflate enough, or regulate enough. What Krugman wants us to believe is that the most leftist president of my life somehow did not have the courage to tax, borrow, and spend, and that Obama's lack of "courage" is what blew up the House.

Writes Krugman:

Mr. Obama’s problem wasn’t lack of focus; it was lack of audacity. At the start of his administration he settled for an economic plan that was far too weak. He compounded this original sin both by pretending that everything was on track and by adopting the rhetoric of his enemies.

The aftermath of major financial crises is almost always terrible: severe crises are typically followed by multiple years of very high unemployment. And when Mr. Obama took office, America had just suffered its worst financial crisis since the 1930s. What the nation needed, given this grim prospect, was a really ambitious recovery plan.

Could Mr. Obama actually have offered such a plan? He might not have been able to get a big plan through Congress, or at least not without using extraordinary political tactics. Still, he could have chosen to be bold — to make Plan A the passage of a truly adequate economic plan, with Plan B being to place blame for the economy’s troubles on Republicans if they succeeded in blocking such a plan.

But he chose a seemingly safer course: a medium-size stimulus package that was clearly not up to the task. And that’s not 20/20 hindsight. In early 2009, many economists, yours truly included, were more or less frantically warning that the administration’s proposals were nowhere near bold enough.

And there's more:

I felt a sense of despair during Mr. Obama’s first State of the Union address, in which he declared that “families across the country are tightening their belts and making tough decisions. The federal government should do the same.” Not only was this bad economics — right now the government must spend, because the private sector can’t or won’t — it was almost a verbatim repeat of what John Boehner, the soon-to-be House speaker, said when attacking the original stimulus. If the president won’t speak up for his own economic philosophy, who will?

There is much economic "hocus-pocus" in these statements, a veritable treasure trove of Frederic Bastiat's "Fallacy of the Broken Window." For all his "the stimulus should have been bigger" line, never does he in this or any other column explain how that move would result in a long-term recovery. Oh, yes, he says it would give the economy "traction," as though an economy is a perpetual motion machine that just needs a little push.

So, what should Obama do? Krugman (of course) has the right answers:

There is an alternative: Mr. Obama can take a stand.

For one thing, he still has the ability to engineer significant relief to homeowners, one area where his administration completely dropped the ball during its first two years. Beyond that, Plan B is still available. He can propose real measures to create jobs and aid the unemployed and put Republicans on the spot for standing in the way of the help Americans need.

Would taking such a stand be politically risky? Yes, of course. But Mr. Obama’s economic policy ended up being a political disaster precisely because he tried to play it safe. It’s time for him to try something different.

The only way to "engineer relief" to homeowners is to give them checks or pay their mortgages if they default. It does not take a Nobel Prize to know that a government program that taxes homeowners who are paying their mortgages in order to give to people who are unable to do so is not going to save the housing industry, but it will send a message to people who work and pay their bills that the government thinks them to be an unlimited ATM for the president to buy votes.

Obama playing it safe? The guy who has pushed through a 2,500-page bill that no one has read in its entirety (and no one person knows exactly what is in it) to engineer a complete government takeover of medical care is "playing it safe"? Maybe in Krugman's world, but definitely not in the world where the rest of us live.

Is the Recession Simply a Zero-Sum Game?

Paul Krugman seems to be a True Believer that any disagreement with the principles he espouses MUST come from bad faith. I mean, who could be against more government spending that would give the economy "traction" and put us back into prosperity?

Thus, he reasons, there must be a much darker reason that some people out there seem to believe that piling on more government debt and spending might not have the effects that Krugman claims will be at the end of the tunnel. Isn't he a Nobel winner? Is he not on the Princeton faculty? Did he not receive his doctorate at prestigious MIT? So, to disagree with him is to engage in No-Nothingness!

As the election has approached, Krugman has become even more shrill than usual, laying out personal attacks and portraying anyone who might disagree with him as being motivated by pure evil. Why are they evil? Read the second paragraph again.

In his column today, Krugman now lays our present troubles at the feet of what he calls "debt moralizers." He writes:

“How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?” That’s the question CNBC’s Rick Santelli famously asked in 2009, in a rant widely credited with giving birth to the Tea Party movement.

It’s a sentiment that resonates not just in America but in much of the world. The tone differs from place to place — listening to a German official denounce deficits, my wife whispered, “We’ll all be handed whips as we leave, so we can flagellate ourselves.” But the message is the same: debt is evil, debtors must pay for their sins, and from now on we all must live within our means.

And that kind of moralizing is the reason we’re mired in a seemingly endless slump.

First, I see Krugman continue his practice of taking stray quotes and fashioning huge movements from them. Being that the vast majority of so-called Tea Partiers could not tell you who Rick Santelli is, I doubt that hundreds of thousands of people have demonstrated across the country in the Name of Rick. (I guess we are supposed to believe that had he not said anything, the Democrats would not be facing huge midterm election losses.)

Second, I have not heard any U.S. politician claim that America must be good for its debts to China and other entities that have purchased U.S. Treasury debt, and the notion that suddenly we have become a nation of "debt moralizers" is really silly. Does anyone really think that if the Republicans take over Congress (or at least the House) -- or even the White House in two years -- that the USA suddenly will stop being the world's largest debtor nation in history?

But, even with these Krugman pronouncements, what I find amazing is his belief that the real problem is that businesses and individuals refuse to take on even more debt, and, specifically, that the infamous Housing Bubble was nothing more than a zero-sum game. He writes:

The years leading up to the 2008 crisis were indeed marked by unsustainable borrowing, going far beyond the subprime loans many people still believe, wrongly, were at the heart of the problem. Real estate speculation ran wild in Florida and Nevada, but also in Spain, Ireland and Latvia. And all of it was paid for with borrowed money.

This borrowing made the world as a whole neither richer nor poorer: one person’s debt is another person’s asset. But it made the world vulnerable. When lenders suddenly decided that they had lent too much, that debt levels were excessive, debtors were forced to slash spending. This pushed the world into the deepest recession since the 1930s. And recovery, such as it is, has been weak and uncertain — which is exactly what we should have expected, given the overhang of debt.

The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people — those with excessive debts — is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall.

Thus, in Krugman's view, the Keynesian Cross really is a Model for the Whole World. The bubble really was nothing more than a huge wealth transfer, and now the people who got the wealth are selfishly squirreling it away. He goes on:

Yet those parts of the private sector not burdened by high levels of debt see little reason to increase spending. Corporations are flush with cash — but why expand when so much of the capacity they already have is sitting idle? Consumers who didn’t overborrow can get loans at low rates — but that incentive to spend is more than outweighed by worries about a weak job market. Nobody in the private sector is willing to fill the hole created by the debt overhang.

So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang.

So there you have it. There WERE no malinvestments. All of the assets created in the boom have exactly the same value that they had before the crash occurred. However, those Bad, Bad Moralizers want to see people suffer for their sins:

But the moralizers will have none of it. They denounce deficit spending, declaring that you can’t solve debt problems with more debt. They denounce debt relief, calling it a reward for the undeserving.

And if you point out that their arguments don’t add up, they fly into a rage. Try to explain that when debtors spend less, the economy will be depressed unless somebody else spends more, and they call you a socialist. Try to explain why mortgage relief is better for America than foreclosing on homes that must be sold at a huge loss, and they start ranting like Mr. Santelli. No question about it: the moralizers are filled with a passionate intensity.

I can't say that I have watched too many "moralizers" flying into a rage, as the Rage Guy is Krugman himself. People who disagree with him, he writes, can only be motivated by Really Bad Intentions, and if you wonder why that is so, read the second paragraph of this post (again).

However, in this Keynesian-Cross/Zero-Sum analysis, something does not make sense. If all of this really is a zero-sum game, as Krugman is claiming, then why would the houses have to be sold at a loss? Is the lowering of housing values also a plot by Mitch McConnell and The Forces of Evil? After all, Krugman has written elsewhere that the Austrian Theory of the Business Cycle is nothing more than an economic version of the Phlogiston Theory of Fire. Part of that theory says that credit-fired economic booms also create large amounts of malinvested assets that cannot be sustained over time, and certainly the housing boom/bubble fits that description. (David Gordon wrote an excellent rebuttal to Krugman's portrayal of the ATBC in 1998.)

My point is this: Krugman cannot have it both ways. He is not free to claim both that all that has occurred is a transfer of wealth, and, at the same time, the value of housing truly has fallen. Furthermore, we are not just dealing with a "capacity" issue, as Robert Higgs' "Regime Uncertainty" theory has merit here.

For the past four years, the political Left has controlled the U.S. Senate and the U.S. House of Representatives, and for the last two years, the White House as well. All three entities have been a wellspring of anti-enterprise rhetoric, and we are reading on the NY Times editorial page that government must be more aggressive in criminalizing entrepreneurial error. This hardly is an atmosphere in which any firm would want to invest, given that if a someone were to misread the future, that mistake would mean he or she goes to prison.

Furthermore, Krugman's notion that more spending will cure everything by giving the economy more "traction" is nothing more than the application of circular logic to economic theory. Unfortunately, circular logical today is passed off by our "elites" are Real Wisdom.

When it became evident three years ago that the Housing Boom could not be sustained, the Bush administration and Congress had a couple of choices. They could have realized that it was futile to continue down the same path and to permit the economy to adjust to those assets that were sustainable, or it could pretend that all the economy needed to keep the charade going was to inject more "spending." Not surprisingly, they chose the latter, although now Krugman says that they were not playing Charades aggressively enough. Moreover, he further claims that the Really Bad People know the truth, but just enjoy making others suffer.

No, an economy is not a zero-sum game, nor is it just one big circle in which (to take Israel Kirzner's example) someone eats breakfast so he can go to work, and then goes to work so he can eat breakfast.

Sinking the QE2 and the False Monetary Policy -- Fiscal Policy Divide

For most of my life, QE has meant Queen Elizabeth. (An early-childhood thrill was being able to board the Queen Elizabeth I while it was docked at a New York harbor and have the opportunity to look around. This also was an age when trans-Atlantic passenger travel often was conducted on the water because flying still was prohibitively expensive.)

Today, QE2 means "Quantitative Easing, the second round," which is another way of saying the Federal Reserve System is supposed to find a way to convert the massive monetary base in banks into lots of new loans. However, as Paul Krugman and many others have pointed out, with interest rates close to "the zero bound," it does the Fed little or no good to use low interest rates to employ "Monetary Policy." (Krugman does favor devaluation of the US Dollar, as it would raise prices and cut real wages, which, according to Keynesians, would accomplish what the so-called Classical economists held: that unemployment occurs when wages are higher than what the labor market is willing to bear.)

As anyone who has taken a typical course in Macroeconomics, the supposed debate is between "Monetary Policy" and "Fiscal Policy" prescriptions for how government should deal with the economy. The debate between followers of John Maynard Keynes (Keynesians) and followers of Milton Friedman (Monetarists) centers around which kind of policy is effective in situations like the one we face today.

Keynesians say that when interest rates are extremely low, then government needs to take up the slack by borrowing and spending in hopes that the "stimulus" will "prime" the economy and get it moving again, the "traction" argument that Krugman often uses. On the Monetarist side, the Friedmanites say that Keynes was wrong in claiming that "money does not matter," and that the Fed really does have tools to get businesses to borrow once again.

Thus, we see the academic arguments spilling to editorial pages and onto the street, with the assumption that the Monetary Policy -- Fiscal Policy prescriptions take up the entire universe of macroeconomic prescriptions. However, what if there were a "third way" of viewing this matter, one that eschews both arguments?

Neither Keynesians nor Monetarists bring factors of production into the mix and specifically capital. Instead, if they do concentrate on prices, it is prices of final or consumer goods, but even there, the only "prices" that matter are those that are part of the "price indices," or the Consumer Price Index. (True, Friedman did speak out against price controls and he certainly had a better understanding of price theory than does Krugman, but nonetheless the macro arguments from both Keynesians and Monetarists ignore the micro-level system of prices.)

Likewise, both groups tend to view the macro economy as having homogeneous factors of production in which production pretty much automatically happens just as long as there is "enough money" by which to make the requisite transactions that will keep the goods moving. As noted before, they differ on the role of money, but also the nature of economic shocks.

The Keynesians hold that a market economy is internally unstable because individuals have a marginal propensity to save that sets off a cycle of under-consumption/overproduction that drags the economy down to a liquidity trap, which can last indefinitely. The Monetarists, on the other hand, hold that the market economy is stable and that the shocks are external, specifically coming when the monetary authorities at the Fed try to push too much money at one time into the economy. Thus, they argue that the Fed should have monetary growth targets. (Friedman even argued for a Constitutional amendment which instructed the Fed to permit the supply of money to grow about two percent annually.)

So, that supposedly is the crux of the Big Debate. However, as noted earlier, neither Keynesians nor Monetarists are willing to concede the Austrian point that during a boom, capital will be malinvested and the crisis occurs when lines of production are no longer sustainable, given the economic bubble has burst. In order for a recovery to occur, the malinvested capital must be liquidated or transferred to uses that can be profitably sustained. In the Austrian view, factors of production (and especially capital) are heterogeneous, not homogeneous, and that simply adding money or new spending to the mix only will further the malinvestments.

Now, in the current debate, I agree with Krugman and the Keynesians that simply easing loan terms will solve nothing, given that businesses are not going to borrow just for the heck of it. Entrepreneurs (who generally are left out of the macro discussions, since it is hard for these "economists" to find proper mathematical variables to depict them) must see the possibilities for economic profit, and in this current age with the White House spouting out anti-business rhetoric and the New York Times editorializing continuously for criminal prosecutions for "economic crimes," entrepreneurs are seeing the handwriting on the wall.

Furthermore, from what I can tell, Keynesians and the "Progressives" who now hold political power see entrepreneurs as being either evil and greedy or as being "socially useful" when they seek to build enterprises that depend upon government funding. To people like Krugman, production of goods is little more than a technological question that is answered by a production function. I doubt seriously that Krugman would even begin to understand the real role of entrepreneurs, given that I never have read any economic commentary from him that even recognized their existence.

So, in a nutshell, it won't do any good to increase bank reserves, but nor will it do any good for government to launch a massive, bond-fed "spending" program. Yes, some people will be employed and temporarily have money in their pockets, but the larger effects cannot and will not be sustainable.

Falling Into Economic Illiteracy

During the fall of 2008, a video made its way around the Internet. Some children of Hollywood producers and Democratic activists were put into a small choir, complete with a leader who directed them to sing about how "Obama's gonna save us." The children sang praises like the choirs of Chinese children four decades earlier who had sung praises to Mao, the Great Leader who was portrayed as the very Sun.

The camera panned on the parents who listened with enraptured hearts, and the expressions on their face were of unalloyed joy. The Very Messiah was here, and he was going to spread freedom, happiness, and plenty. All it would take would be a vast expansion of the State and Obama was the One to do it.

Paul Krugman was not in the audience, but he might as well have been, given the tone of his columns that fall. Indeed, even those who decided upon the Nobel Prize were caught up in the Messiah Fever and awarded its highest honor to Obama's Prophet Krugman.

Two years later, there are no choirs singing praise to the Holy One of Chicago, and the economy is in much worse shape than we could have imagined, and all signs on the horizon are bad. What could Obama have done? Paul Krugman knows, and he shares his Prophetic Vision (Oh, lucky us!) in his column today.

Obama, Krugman writes, did not do enough. He did not spend enough, nor regulate enough, or spread Joy and Peace and Happiness. He should have immediately imposed the very medical system that Canadians would like to change. According to Krugman's fellow NY Times columnist, Frank Rich, Obama apparently did not arrest enough people, either, nor throw enough people into prison, to join with the other two-million plus that already are spending time in government cages.

Yes, the state has neither been a great enough Sugar Daddy, nor has the state killed enough people overseas, nor has it been harsh enough to people who don't meet the approval of the editorial board of the "Newspaper of Record." The same newspaper that decries the state of imprisonment in this country claims that our Real Problem is that we don't have enough people in prison. It has come to that. The children sang of Obama "spreading freedom," but apparently (at least at the NY Times) spreading "freedom" means more incarceration of people who don't meet the newspaper's definition of being politically correct.

So, what does Krugman claim is the reason that unemployment is higher than it was when Obama took office? The government did not pretend that it is wallowing in riches and money, and while it boosted spending and debt, it engaged in Krugman's definition of "austerity."

A few commentators will point out, with much more justice, that Mr. Obama never made a full-throated case for progressive policies, that he consistently stepped on his own message, that he was so worried about making bankers nervous that he ended up ceding populist anger to the right.

But the truth is that if the economic situation were better — if unemployment had fallen substantially over the past year — we wouldn’t be having this discussion. We would, instead, be talking about modest Democratic losses, no more than is usual in midterm elections.

The real story of this election, then, is that of an economic policy that failed to deliver. Why? Because it was greatly inadequate to the task.

Krugman, it seems, was the Keeper of the Secret, and he gives us the Answer For Which We Have Waited:

When Mr. Obama took office, he inherited an economy in dire straits — more dire, it seems, than he or his top economic advisers realized. They knew that America was in the midst of a severe financial crisis. But they don’t seem to have taken on board the lesson of history, which is that major financial crises are normally followed by a protracted period of very high unemployment.

If you look back now at the economic forecast originally used to justify the Obama economic plan, what’s striking is that forecast’s optimism about the economy’s ability to heal itself. Even without their plan, Obama economists predicted, the unemployment rate would peak at 9 percent, then fall rapidly. Fiscal stimulus was needed only to mitigate the worst — as an “insurance package against catastrophic failure,” as Lawrence Summers, later the administration’s top economist, reportedly said in a memo to the president-elect.

But economies that have experienced a severe financial crisis generally don’t heal quickly. From the Panic of 1893, to the Swedish crisis of 1992, to Japan’s lost decade, financial crises have consistently been followed by long periods of economic distress. And that has been true even when, as in the case of Sweden, the government moved quickly and decisively to fix the banking system.

To avoid this fate, America needed a much stronger program than what it actually got — a modest rise in federal spending that was barely enough to offset cutbacks at the state and local level. This isn’t 20-20 hindsight: the inadequacy of the stimulus was obvious from the beginning.

One wonders at the ingratitude of Krugman's words. After all, has not the Obama administration done everything in its power to undermine entrepreneurs all the while giving lip service to them? Oh, the administration has found clever ways to offer low interest rates to those firms who Follow In The Way Of Obama instead of doing real entrepreneurship.

Instead of insightful people finding ways to put resources to use that will enable real economic growth to occur, the Obama administration is dunning taxpayers to continue to finance and to expand the Ethanol fraud. Favored firms from those on Wall Street to GM to the producers of "clean energy," the vast subsidy machine rolls on, pushing us further into depression. Yes, 15 percent Ethanol in our gas tanks "is gonna save us." (Given the performance of this administration, I think that the Ethanol would do better as cheap whiskey, which at least would permit us to better drown our sorrows.)

The fundamental issue here is that not one person in this administration, nor its acolytes like Krugman, has a clue as to what makes an economy grow. They really believe that it is little more than a perpetual motion machine, a mixture of homogeneous stuff into which one throws money to make everything work magically.

So, today, instead of singing praises to His Messiah, Paul Krugman is left to rage that Obama didn't listen to him and borrow, print, and spend even more money, further empower labor unions, jack up the minimum wage to a zillion dollars an hour, or give all government employees a big raise. Thus, we see that those most honored in academic economics really have no idea what economics is, a discipline that is based upon the simple Law of Scarcity.

No, Obama refused to pretend that the Law of Scarcity did not exist. And why not? Two years ago, he was the Chosen One, the Holy One of Chicago, the One Who Would Save Us.