Update on our Lavian adoption

Sintija (who is age 12) is coming for five weeks this summer, and will arrive July 10. We are still in the adoption process. We have raised about $10,000.00. We are currently awaiting approval from US Immigration to bring Sintija into the country on a permanent basis.

We have most of our paperwork completed. We would like to be able to go to Latvia and bring her home to stay this fall, but we still need to raise money. Our most pressing need is for $5,100.00 to pay for the document translation and the Latvian attorney. After that, all of the subsequent expenses will be for travel.

Is it austerity, or reality?

One of Paul Krugman's constant themes has been that "austerity" is the wrong prescription to deal with a shrinking economy. If the economy is going south, he claims, then governments must spend and spend prodigiously in order to prop up everything. (Krugman adds that this should be the case when the economy is in a "liquidity trap," which he believes changes the rules of economics.)

At one level, I understand his point. The "austerity" programs often mean increased taxes and other government activities that can drag down an economic recovery (although Krugman has been insistent that we need massive tax increases in the USA, so I don't know why he would be against that aspect of "austerity").

Yet, there is something else out there, something that really divides the Keynesian and Austrian camps: Keynesians really believe that spending money is what creates wealth, and that governments can create wealth out of thin air simply by cranking up the spending. Furthermore, assets really are not real; if the economy goes into the tank, government simply can declare prosperity and if people believe (yes, only believe) that the spending will make everyone prosperous, then all is well.

How else can someone really claim that heavily-subsidized industries like "wind power" and "corn-based ethanol" can create overall prosperity and lead us into recovery. How else can someone really claim that if government takes enough resources away from everyone else and gives them to GM, Chrysler, and the United Auto Workers, that we will have overall prosperity?

Austrians do not see "austerity" as a policy, but rather a reality. This is not a morality play (even if Krugman has accused us of enjoying the infliction of "pain"), but rather a bowing to reality of the fact that one cannot fix a broken economy by pretending it is not broken.

There is something else I have noticed; in Krugman's view, if a policy has immediate "good effects," then the policy must be good. Thus, ANY liquidation of malinvestments also must be bad, bad, bad, as that means short-term pain.

It was not just the Keynesians who have demanded that we play a "let's pretend" game about the economy. Shortly after the financial crisis of the fall of 2008 became painfully obvious, Martin Feldstein, who was President Ronald Reagan's chief economic adviser, called for the government to enact what was little more than a scheme to prop up housing prices. Like the Keynesians, Feldstein could not recognize that falling prices were a symptom, not a cause of the larger problem.

In the Keynesian world, there are no malinvestments, only idle resources. Spend enough, and those resources will rise up. After all, doesn't Y = C+I+G+(X-M) tell us everything we need to know about the economy?

Well, not it doesn't. In fact, I will go as far as to say that the equation tells us next-to-nothing about an economy and how it works. The economy is not in recession because there is a lack of spending; there is a fall in spending because the economy is in recession, and we cannot spend ourselves into prosperity no matter what Krugman and the Keynesians tell us.

OK, Krugman really is a mercantilist

One of the supposed great triumphs in economics was the development of an intellectual argument for free trade and against the "mercantilist" doctrines of the day which emphasized the belief that wealth consisted of the money in the government's treasuries. Unfortunately, mercantilist beliefs never quite died, and we see Paul Krugman resurrecting them in his recent column on "making things."

Krugman touts the recent rise in manufacturing employment to the falling dollar and Obama's industrial bailouts, and he may be right. After all, if the government forces Americans to pour resources into certain economic sectors, we should not be surprised when those sectors, at least on paper, are doing better. However, the economic analysis should not be aimed at output, per se, or even employment. No, we in economics, we look at the opportunity cost of the policies that are spurring manufacturing growth to see if they are making us poorer.

Henry Hazlitt, in his classic "Economics in One Lesson," noted that the difference between "good" and "bad" economics was the following:

"The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economsit sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups."

Indeed, one of the constant themes in Krugman's columns has been that only the short-term effects matter. I never have seen him even ask the larger question of whether or not certain policies move resources from lower-valued uses to higher-valued uses, or if we see the opposite occurring.

From what I can read in this column, Krugman really believes that a government can bring an economy into prosperity through financial tricks such as money debasement and industrial subsidies. He writes:

...one potential disaster has been avoided: the U.S. auto industry, which many people were writing off just two years ago, has weathered the storm. In particular, General Motors has now had five consecutive profitable quarters.

America’s industrial heartland is now leading the economic recovery. In August 2009, Michigan had an unemployment rate of 14.1 percent, the highest in the nation. Today, that rate is down to 10.3 percent, still above the national average, but nonetheless a huge improvement.

I don’t want to suggest that everything is wonderful about U.S. manufacturing. So far, the job gains are modest, and many new manufacturing jobs don’t offer good pay or benefits. The manufacturing revival isn’t going to make health reform unnecessary or obviate the need for a strong social safety net.

Furthermore, the GM and Chrysler bailouts, he claims, gave us "net" benefits:

...there’s the matter of the auto industry, which probably would have imploded if President Obama hadn’t stepped in to rescue General Motors and Chrysler. For those companies would almost surely have gone into liquidation, closing all their factories. And this liquidation would have undermined the rest of America’s auto industry, as essential suppliers went under, too. Hundreds of thousands of jobs were at stake.

Yet Mr. Obama was fiercely denounced for taking action. One Republican congressman declared the auto rescue part of the administration’s “war on capitalism.” Another insisted that when government gets involved in a company, “the disaster that follows is predictable.” Not so much, it turns out.

Not surprisingly, Krugman is taking a very narrow approach: the bailouts helped the unions, and with government help, GM is making a comeback, so the move by the government must have been a net benefit to the economy. The problem is that there is a much larger picture that we need to understand.

At the time of bankruptcy, GM and Chrysler were hopelessly in the red. In economic terms, consumers saw them as moving resources from higher-valued to lower-valued uses. Just because the Obama administration declared that GM was to be viable again did not make the consumers' judgment wrong; it just forced consumers and taxpayers to put resources into GM that they would not have made voluntarily.

No doubt, the shuttering of GM and Chrysler would have caused hardships in Michigan, Indiana, and Ohio, but those also are the states (especially Michigan) that have shown themselves to be hostile to capital investment and reasonable business practices. Like New York, Michigan's government actively has driven firms out of the state or tried to regulate them to death, and when the results of their actions become apparent, those same governments then demand that taxpayers from elsewhere bail them out.

We also see manufacturing "growth" in subsidized "alternative or green" energy sectors, yet all of the firms in those sectors basically are wards of the state. The excuse to subsidize them has been that we must keep them alive while they "innovate" and experiment with new capital and ways to deliver their products, yet historically subsidized industries generally have lagged behind those that did not need or seek government largess.

Then there is the situation with the dollar, a currency that Krugman claims must be further debased. He writes:

First, what’s driving the turnaround in our manufacturing trade? The main answer is that the U.S. dollar has fallen against other currencies, helping give U.S.-based manufacturing a cost advantage. A weaker dollar, it turns out, was just what U.S. industry needed.

Yet the Federal Reserve finds itself under intense pressure from the right to make the dollar stronger, not weaker. A few months ago, Paul Ryan, the chairman of the House Budget Committee, berated Ben Bernanke for failing to tighten monetary policy, declaring: “There is nothing more insidious that a country can do to its citizens than debase its currency.” If Mr. Bernanke had given in to that kind of pressure, manufacturing would have continued its relentless decline.

This falls into the Keynesian prescription that government through the monetary authorities can inflate us into prosperity. Now, I have no doubt that Krugman partially is correct; debasing the dollar does make American exports more attractive while raising the costs of imports. I'm even willing to give him the argument that if the Federal Reserve System actually were to end its current policy of deliberate inflation, American manufacturing exports might even fall.

Yet, that is not the larger issue. The larger issue is whether or not entrepreneurs will be able to have the freedom to invest and direct resources from lower-valued to higher-valued resources, and seek investment projects that are economically sustainable.

Subsidies require that government cannibalize healthy sectors in order to prop up unhealthy sectors. That is the bottom line in economic analysis here, yet Krugman continues to insist that if the unhealthiest of manufacturers like GM and Chrysler are kept afloat by government intervention, that the overall effect MUST be good. After all, Michigan's rate of unemployment is falling.

In Krugman's world, there is no such thing as opportunity cost, especially if the economy is in what he calls a "liquidity trap." Yet, economic laws are immutable, and they apply to a world of scarcity, and not even the august Princeton University economics faculty can change that simple fact.

I'm sure that more than two centuries ago, Krugman would have been welcomed by the mercantilists and monetary cranks. Today, it seems that the economic faculties of our most prestigious universities once again are open to those very things Adam Smith and others debunked. I guess that is why these faculty members often refer to themselves as "Progressives."

Jim Rogers vs. Paul Krugman

In reading Paul Krugman's column today -- his usual political screed about Good Democrats and Bad Republicans (as opposed to Bad Republicans AND Democrats) -- I am struck by the utter ho-hum attitude Krugman has toward the gargantuan U.S. Government debt. To him, the issue is purely political, and there is no danger in stacking on more debt and printing more money.

Instead, Krugman continues to excoriate anyone who might think that the government with its policies of "Quantitative Easing" (called expanding the monetary base even more) and heavy borrowing are not leading our economy into disaster. And, while he praises efforts of the government to drive down the value of the dollar (yes, it temporarily makes U.S. exports cheaper abroad), he claims there is no downside to policies of monetary debasement.

Jim Rogers, the legendary investor, would beg to differ. No, Rogers does not have an economics doctorate from MIT, nor does he have a Nobel Prize in hand or a column in the NY Times. But Jim Rogers knows markets and he knows currencies and he believes that the government is pushing us into an even greater crisis than what we experienced in 2008.

In this recent interview on Russia Today, Rogers states that for all of the rhetoric we hear in Washington, no one seriously is dealing with the crisis. The Democrats have been off the charts, and Republicans are delusional about the state of U.S. military spending. I believe the man has some wise things to say, even if U.S. policy makers and people like Krugman stop up their ears with "Na, na, I can't HEAR you!"

My recent article on the Fed Conference

I had this piece recently on the Mises page, in which I write about attending a Fed conference in March. Indeed, they want us to learn to love the Fed, no matter what it does!

Is mass slaughter a good thing?

So, Paul Krugman finally comes clean on the Civil War. Whatever the losses that might have incurred, the outcome justifies everything:

Via Brad DeLong, Ta-Nehisi Coates argues that the Civil War wasn’t tragic in the way it’s so often portrayed. The human losses were terrible — but the war marked the end of the far greater horror of slavery.

I agree; the Civil War and World War II are the two great moral wars of our history, and they should be remembered with pride.

What I find interesting here is that Krugman assumes that the only way slavery could have ended was through massive violence and the deaths of nearly 700,000 Americans. Other western nations ended slavery through nonviolent means, so is he saying that Americans are the kind of people who only can solve issues through mass killing, rape, and destruction?

The winners generally are privileged to write history, be they winners through violence or through other means, but it often means the history itself is untrue. Furthermore, while slavery was a terrible thing and forever a blot on this country and any country where it is practiced, I do not think that whatever was the situation in American slavery pre-Civil War can compare to the carnage on the battlefield, men by the thousands dying horrible deaths, women raped by drunken soldiers, whole cities burned to the ground, war made and civilians that broke all established rules of warfare.

(Gen. William T. Sherman remarked to a friend after the war that had it been fought in Europe, he likely would have been tried as a war criminal. That Paul Krugman would endorse such a thing tells me volumes about the man.)

As for World War II, there is a body of literature out there that deals with war crimes fought by those who were supposedly on the side of justice and morality. Is Krugman going to call the nuclear destruction of Hiroshima and Nagasaki justifiable, or the massive bombing of Dresden. None of those places needed to have a single bomb dropped on them, yet even today we see Americans praise such mass murder as being justifiable.

Yes, Hitler gave us the Holocaust and the Japanese the Rape of Nanking and worse. Moreover, American policy strengthened history's greatest mass murderer, Josef Stalin, and the U.S. Government authorized the infamous Operation Keelhaul, which resulted in the deaths by execution and the slower execution of the gulag of at least a million Russians.

Tell me these things were not war crimes, and then tell me why they went unpunished. We know the answer.

I never have been particularly jingoistic when it comes to American wars, and as I learn more about our bloody history, I become even less enamored of them. American wars have brought death, destruction, loss of liberties at home, inflation, the strengthening of the worst aspects of the state, and an insatiable appetite here for more killing and carnage abroad. Watching crowds of people chanting "USA! USA!" after the news of Osama bin Laden's killing only brings that point home.

But for Krugman, the Civil War ended slavery, and in his mind, there could have been no alternative. In 1861, I doubt that most Americans -- North and South -- could have seen an end to this awful institution. But, Russians at the same time could not envision the end of serfdom or Brazilians the end of slavery there. Yet, they ended, and not with the wholesale slaughter that accompanied the Civil War. How much better would a peaceful ending to this moral quandary have been than what occurred between 1861 and 1865?

(My take on slavery as an economic institution has been that even taking aside the fact that slaveholders were using kidnapped labor, the very act of removing the labor of the slave from the outcomes of one's labor is a recipe for bad economic outcomes. Under socialism, government commandeers resources and moves them from higher-valued uses to lower-valued uses. How is chattel slavery any different? I don't see how it can be any different at all.)

No doubt, Krugman's supporters will claim that I must be a supporter of slavery or am a racist or maybe a "Neo-Confederate." Let them. They can ignore that for much of my adult life, I have moved closer and closer philosophically toward pacifism, and the aftermath of these destructive wars does nothing to change my mind.

Bailouts, Blunders, and Bad Policies

While Paul Krugman's column for May 2 is not exactly coordinated with the nearby editorial, "The Economy Slows," there is correlation if one looks for it. For both Krugman and his editorial bosses, it is all about government magically "fixing" the economy by new spending, new regulations, and creation of new "money."

Krugman is engaging in his usual political talking points, today excoriating the Republicans for what he claims is weakening of the new financial regulations, while the editorial writers bemoan for the umpteenth time that the economy, well, sucks. And if that were not enough, Krugman even reaches back to the hoary claims that this whole crisis came about because the Bush administration did not bail out...Lehman Brothers. Yeah, had the government just written a big, fat check for Lehman, all would be well today.

Now, I have no desire to get into the minute details of financial regulation, except to say that every regulatory initiative before has ended up creating cartels of people who ultimately have privileges above everyone else in the industry because of political connections. Economists have long established the unholy relationships between the regulators and the regulated, and while Krugman might persist in claiming that the Sainted Elizabeth Warren will "reinvent" regulation, here is betting that human nature wins (as it always does).

Furthermore, Krugman really wants us to believe that one of THE causes of the crisis was foreign exchange swaps. Good grief! Uh, can someone spell "H-O-U-S-I-N-G B-U-B-B-L-E, or did foreign exchange swaps create that crisis, too?

In the late 1970s, if one actually goes back and reads the financial literature of the time (as opposed to depending upon Krugman and his employer to give us an accurate depiction of that era), the push for deregulation was NOT ideological. The heavily-regulated banking "cartel" was struggling in the face of double-digit inflation, as people were taking money from low-interest bank accounts and putting money into highly-liquid money-market accounts that were coming into play and paying higher rates of interest than were the banks.

On the investment banking side, Michael Milken was pioneering high-yield and (supposedly) high-risk bonds (derisively called "junk bonds") that were doing an end run around the regulated system that could not and would not finance a number of new high-technology ventures. (Krugman leaves out that point because it does not fit into his narrative.) Entities like MCI and CNN were among these firms Milken helped to finance.

Are you reading this on a cell phone? The banking cartel that Krugman claims was working just fine would not touch the new cell phone industry that turned to Milken and his investment banking firm. Yes, Milken was doing an end run around the regulated system and the banks wanted a piece of it. (And they got Rudy Giuliani, who had his own political aspirations, to go after him with bogus criminal charges -- something admitted by one of Giuliani's lieutenants in a speech to Rutgers University law students.)

I include these points because Krugman really believes that if we only could go back to the days when trucking, airlines, railroads, telecommunications, and financial institutions were "regulated" into tiny, neat cartels, that everything today would be just great. Well, if the old system that Krugman praises were in existence, we would not be reading this, as there would have been no Internet for Al Gore to have invented.

Why? Because we still would be routing telephone calls through strands of copper wire instead of using fiber optics, as the regulated firms did not want to have to switch to anything that would deprive them of their full depreciation write-downs for tax purposes. Oh, and long-distance calls most likely would be about a dollar a minute instead of, in most situations, zero cents.

But, Krugman and his employer really seem to believe that the way to revive this economy is to turn back the clock to the regulatory structure of the 1930s, as though shrinking the economy by creating new cartels (which, by definition, limit output) through regulation. Oh, and government would simply depend upon the Fed to create new money in order to try to hide the fact that the regulatory side of government is making the economy contract.

Funny, the NYT editorial complains that inflation is of the "cost-push" variety, which means that higher prices are the result of higher prices, which is a logical absurdity. But absurd is the new watchword today. Shrink the economy, print money, create new cartels, limit technology, and out of that will come an economic version of the Shining City on the Hill.

(Yes, I need to address what went wrong in the financial deregulation, and why the system ran into the ground. Needless to say, I believe that the history of the past 30 years is not as simple as the "good regulation, bad freedom" story that Krugman and his ilk are telling.)