Keynesianism: The (near) 80-year-old fallacy

One of the things that interests me about Paul Krugman is his use of the word "fallacy" when applied to economics. When I first was learning about economic fallacies, I was taught that they are committed when people believe they can circumvent or negate the Law of Scarcity and the Law of Opportunity Cost.

This was neatly expressed in the acronym TANSTAFL, or "There ain't no such thing as a free lunch." Today, however, it seems that economics, or at least the "economics" of Paul Krugman, has "evolved" and "progressed" well beyond opportunity cost. How do I know? Krugman himself has told us.

In a recent blog post, he makes some interesting, if not outrageous, statements. (Come to think of it, Krugman makes lots and lots of outrageous statements.) He declares:

...when I was younger I firmly believed that economics was a field that progressed over time, that every generation knew more than the generation before.

The question now is whether that’s still true. In 1971 it was clear that economists knew a lot that they hadn’t known in 1931. Is that clear when we compare 2011 with 1971? I think you can actually make the case that in important ways the profession knew more in 1971 than it does now.

What happened in 1971? The U.S. Dollar collapsed as President Richard Nixon declared that suddenly it had come "under attack" by those evil "speculators." Nixon said nothing about the fact that the government, through the Federal Reserve System, had inflated the dollar for years in order to pay for the Great Society and the Vietnam War, and at the same time offering gold from the treasury to foreign governments at $35 an ounce.

Not surprisingly, U.S. gold reserves were fast dwindling and there was a run on the dollar itself, so Nixon did as one might expect Nixon to do: he blamed others and failed to tell the truth about what really was happening. Furthermore, he slapped down general wage and price controls in order to try to keep consumer prices from escalating.

Nixon had the public support of a lot of economists, even those who knew that his "economic plan" (then called Phase I) would be an inflationary disaster -- and it was. What economists "knew" in 1971, if one looks at the actions of the Fed and the president's economic advisers, was that government could inflate its way out of trouble, and the government could manage the economy through various edicts.

This was the day when John Kenneth Galbraith was the king of American economists, along with Paul Samuelson. Of course, what these men "knew" turned out to be utterly untrue. Government could not inflate its way out of trouble, and the 1970s, a decade when the U.S. economy lurched from one crisis to another, proved it.

However, I suspect that Krugman would have us believe that the price controls were brilliant, that all of the problems of the dollar in 1971 were due to speculators, and that had the government left price controls on everything, we would have enjoyed unparalleled prosperity. Or something like that.

His next statement, however, is a Classic Krugman Howler:

I’ve written a lot about the Dark Age of macroeconomics, of the way economists are recapitulating 80-year-old fallacies in the belief that they’re profound insights, because they’re ignorant of the hard-won insights of the past.

What I’d add to that is that at this point it seems to me that many economists aren’t even trying to get at the truth. When I look at a lot of what prominent economists have been writing in response to the ongoing economic crisis, I see no sign of intellectual discomfort, no sense that a disaster their models made no allowance for is troubling them; I see only blithe invention of stories to rationalize the disaster in a way that supports their side of the partisan divide. And no, it’s not symmetric: liberal economists by and large do seem to be genuinely wrestling with what has happened, but conservative economists don’t.

And what is the "enlightened" viewpoint? Why it is print money, bail out everyone, continue the fraud of heavily-subsidized "green energy" that Krugman and his friends insist will lead us to recovery, and have the federal government hire millions of people to engage in make work.

Now, since the General Theory was published first in 1936, it is only a 75-year-old fallacy. The "80-year-old "fallacies" apparently are things like the Law of Scarcity and the Law of Opportunity Cost. In Krugman's view, it is "progress" simply to say that when the economy is in recession, Opportunity Cost no longer holds, and that government can alleviate or even do away with Scarcity via the printing press.

Furthermore, Krugman has made it clear that anyone who might actually appeal to those "80-year-old fallacies" is immoral and has no conscience. Yeah, Krugman and the Really Smart People have done away with Scarcity simply by declaring it no longer exists, at least when government prints up the money.

Keynesianism is one big fallacy, and a cult fallacy at that. It violates the Law of Cause and Effect by declaring that effect really is cause. And it wants us to assume that work is nothing more than a transmission mechanism for money, and it does not matter what government pays people to do, just as long as it provides money so that they can spend it and make us prosperous.

This isn't economics. It is nonsense.

Krugman: "Save" the euro by inflating it to death

Like most Keynesians, in the end, Paul Krugman is a one-trick pony who always recommends inflation as the answer to economic problems. (After all, he DID say in The Return of Depression Economics that inflation could provide a "free lunch" during economic downturns. In other words, the printing press negates the Law of Opportunity Cost.)

So, I see that Krugman now is giving the "Vietnam Strategy" to the Europeans: in order to "save" the euro, you must destroy it -- via inflation. Furthermore, we are supposed to think that had the German government in 1930 embarked on a policy of inflation, that it would have "saved" the country. Somehow, I doubt it.

How should the Europeans do it? Krugman already has set out a strategy that marks the way in which the European Central Bank would purchase the short-term debt of countries like Ireland, Portugal, Spain and Greece and hope that in the future, these countries will get their fiscal house in order. (Even Krugman knows that Greece cannot and won't do it, given Greek policies and its bloated government sector. Nonetheless, he believes that maybe the European Central Bank can inflate Greece's problems away, too.)

However, Krugman does not even contemplate any realistic outcomes of his strategy. If the ECB simply acts as the Big Sugar Daddy for countries by purchasing government bonds wily-nily, what is to keep everyone else from joining the Free Lunch? Sure, the European Parliament can enact policies that supposedly will limit this foolishness, but it is doubtful that once the shower of goodies starts, that anyone will hold to fiscal discipline.

In the end, this is a strategy that would inflate the euro out of existence. Now, that might be "good" for the dollar, given that investors around the world holding money are looking for safe havens. But the dollar sucks, too, thanks to the money-pumping strategy of the Obama administration.

So, in the end we are left with blizzards of paper money. But never fear, says Krugman. After all, everyone from Princeton and Washington knows that paper is more valuable than gold because paper is managed by Really Smart People Who Know More Than Everyone Else.

What is "the social contract" of which Krugman and Elizabeth Warren speak?

[Update]: Sheldon Richman, editor of The Freeman, offers another perspective on Elizabeth Warren and her now-famous words. Between what we are hearing from Washington and Michael Moore's latest veiled call for violence against people who make less money than he does, one can bet that private capital investment in this country is going to be stunted for years.

From what I can tell, the Keynesians and the Depublicans (or maybe the Remocrats) have declared war on private capital. The rest of us will pay dearly for this, and I will say that the U.S. economy NEVER will recover as long as the present gang of thieves holds power. [End Update]

Paul Krugman makes millions of dollars a year. While I am not privy to his actual income numbers, I have been told by a very reliable source that it is in the millions. Furthermore, he has no children and a wife who also earns a high income. The guy clearly makes more money than he needs to live, and many poor families could live well if Krugman were willing to give them a "big hunk of it." (If the man has a charity by which he feeds the hungry, I am not aware of it.)

Thus, we can conclude that Paul Krugman -- if we wish to consistently apply his words, and the recent words of Elizabeth Warren -- is responsible for making other people poorer. Krugman makes a lot of money, and according to Krugman, one only can make money at the expense of others who are worse off, so by Krugman's own admission, he is violating a "social contract."

That is not what Krugman would say, and I am sure that if government agents were to seize his property and most of his holdings, he would scream bloody murder, but that is for another post. Instead, I want to zero in upon this notion of the "social contract" that suddenly seems to be the rage among the Left.

In a recent meeting that has gone viral on YouTube, Elizabeth Warren, the Harvard law professor who President Obama unsuccessfully tried to appoint as a de facto "banking czar," now is running for the U.S. Senate in Massachusetts. This is that quote that the people from Moveon claimed was perhaps the most important thing EVER said:

There is nobody in this country who got rich on his own. Nobody. You built a factory out there – good for you.

But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory….

Now look. You built a factory and it turned into something terrific or a great idea – God bless! Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.

At one level she is right, but no one I know claims that a person has gained wealth by no one's efforts but his own. However, we need to read between the lines of what both Warren and Krugman are saying, and we can find something much more sinister and economically ignorant than what their supporters would like to admit.

When I heard Warren's quote, the first thing that came to mind was the scene in "Godfather II" when Don Fanucci tells a young Vito Corleone that Corleone must let him "wet my beak." In other words, Fanucci was telling Corleone that the neighborhood was his own territory and if Corleone wanted to do business there, he had to pay up -- or else.

Call it what you will, but Fanucci was presenting his own version of "the social contract." Given that Murray Rothbard on more than one occasion likened government to a criminal gang or a mafia, I would say that the "social contract" of which Warren and Krugman speak falls into that category, something neither of them ever would acknowledge.

Yet, what was Warren saying? She was making the claim that entrepreneurs -- people like Steven Jobs -- somehow reap ALL of the gains of their commercial success, and that the ONLY way that other people outside the successful entrepreneur can gain any benefit at all from that successful company is through taxation. That is it. According to Warren, companies like Apple might sell products, but they benefit only the company Big Wigs.

While the Usual Suspects applaud these words, I cannot help but think of the story of "The Little Red Hen," who prepared bread by growing wheat, making flour, and baking the loaf, all while others looked on and did nothing. In the end, the Little Red Hen shared the bread with her chicks.

In the Elizabeth Warren/Paul Krugman version of "The Little Red Hen," however, the other animals could claim that their very presence at the farm was the REAL reason that the Hen could make bread in the first place. The animals might say that since they did not knock down the wheat or burn down the hen house, that it was THEY who were responsible for the Hen's success.

As for "marauding bands," who is Warren kidding? Has anyone ever seen a police raid (and especially from the Feds) on business firms. Please don't tell me that these "law enforcement" raiders are orderly and respectful. They behave exactly like "marauding bands, and all-too-often it is discovered afterward that there was no good reason for the violent raid in the first place.

The word from Krugman and Warren is this: entrepreneurs gain success ONLY at the expense of the people who really are responsible for the entrepreneurs' success in the first place. Entrepreneurs, in their view, really are parasites for they drain the "community" of its rightful wealth.

Now, I agree that many Wall Street firms have gained wealth through political favoritism and from bailouts, but since Krugman and Warren actually supported the bailouts of those banks and financial houses, as well as the bailouts of GM and Chrysler, I'm not sure why they are complaining. The Austrians wanted those entities to bear the costs of their entrepreneurial errors, and permit those firms whose principals had not made the bad choices to be able purchase the assets of the firms that failed, but because the Austrians have wanted the "banksters" to bear the costs of their errors, Krugman and others have claimed that Austrians are "enemies of the people."

Do people have obligations to their neighbors? I believe they do, although the "social contract" of which Krugman and Warren speak is a "contract" that demonizes people who have taken risks and been successful and goes well beyond any relationship and responsibilities that I would be willing to support.

I'm sorry, but the notion that everyone else should have a claim to the income of Steven Jobs -- or even Elizabeth Warren and Paul Krugman -- because of a "social contract" they claim exists is nonsense. But I will go further; Steven Jobs has contributed much more to the well-being of people in this world than Krugman, Warren, and all of the other leftists in the world combined.

Elizabeth Warren and Paul Krugman want us to believe that the Political Classes ultimately create wealth, and that the parasites are people who saved, invested, took risks, and took an idea and were successful in business. This is not a "social contract;" it is turning reality upside down.

Krugman versus Volker: Will Krugman now attack him?

[Update] It didn't take Krugman long to attack Volker. In his blog post today, Krugman claims that inflation can be a good thing and we need more of it. Yeah, inflation is "good." And War is Peace, Freedom is Slavery, and Ignorance is Strength. [End Update]

Paul Volker is a Democrat, and that might be enough for him not to be placed in Paul Krugman's cross hairs in future columns. However, for now it is interesting to see the difference between the last Fed Chairman to really get inflation under control and an "economist" who today claims that inflation is the answer.

Volker today writes in a NYT op-ed:

...now we are beginning to hear murmurings about the possible invigorating effects of “just a little inflation.” Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the “animal spirits” of business, or so the argument goes.

It’s not yet a full-throated chorus. But remarkably, at least one member of the Fed’s policy making committee recently departed from the price-stability script.

The siren song is both alluring and predictable. Economic circumstances and the limitations on orthodox policies are indeed frustrating. After all, if 1 or 2 percent inflation is O.K. and has not raised inflationary expectations — as the Fed and most central banks believe — why not 3 or 4 or even more? Let’s try to get business to jump the gun and invest now in the expectation of higher prices later, and raise housing prices (presumably commodities and gold, too) and maybe wages will follow. If the dollar is weakened, that’s a good thing; it might even help close the trade deficit. And of course, as soon as the economy expands sufficiently, we will promptly return to price stability.

Well, good luck.

When Volker became Fed Chairman in the summer of 1979, inflation was running in double digits and the economy was moribund. G. William Miller, Volker's predecessor, believed that the way to "stimulate" the economy was to crank up the printing presses, and the results were obvious. Volker, on the other hand, was willing to slow the presses and within a few years, inflationary expectations were near-zero.

Yet, the economy recovered. During the recession of 1982, there were liquidations as the economic landscape in places like Cleveland and Pittsburgh changed drastically. (Pittsburgh has recovered well, while Cleveland stays with the old model of thwarting entrepreneurs -- it takes well over a year to get new business permits there -- and looking to government spending as its own rescue fairy. The results speak for themselves.)

According to Krugman, however, one cannot have any liquidations AND recovery. No, the only way to have an economic recovery is for government to borrow, print, and spend. His most recent claims that the U.S. Government is on an "austerity" program simply don't wash. The federal government has ramped up spending in the days of Obama, and the president promised us that if Congress would pass his 2009 plan, unemployment would not rise above 8 percent.

In calling for yet more spending and more "stimulus," Krugman writes:

In the United States, the modest federal stimulus of 2009 has faded out, while state and local governments have slashed their budgets, so that over all we’ve had a de facto move toward austerity not so different from Europe’s.

Strange to say, however, confidence hasn’t surged. Somehow, businesses and consumers seem much more concerned about the lack of customers and jobs, respectively, than they are reassured by the fiscal righteousness of their governments. And growth seems to be stalling, while unemployment remains disastrously high on both sides of the Atlantic.

The cure? He declares:

The answer is that we need a major push to get the economy moving, not at some future date, but right now. For the time being we need more, not less, government spending, supported by aggressively expansionary policies from the Federal Reserve and its counterparts abroad. And it’s not just pointy-headed economists saying this; business leaders like Google’s Eric Schmidt are saying the same thing, and the bond market, by buying U.S. debt at such low interest rates, is in effect pleading for a more expansionary policy.

And how will government finance this policy? It cannot come from the primary bond market, as that would be nothing more than a simple transfer.

No, what Krugman wants is for the Fed to purchase short-term government debt, and lots of it, and to do it on the primary market. He has not said so directly, as the Federal Reserve Act of 1913 expressly forbids the Fed from doing so. However, I believe that what Krugman wants is for Congress either to change the law or for Obama to declare an emergency or to issue a convoluted executive order like what FDR did when he confiscated gold.

Like it or not, that is Krugman's end game in which the Fed simply buys government debt on the primary market. While Krugman might claim that this constitutes a "free lunch" and the promise of prosperity, Volker knows better. It will be interesting to see when and where the collision between them occurs.

Krugman and the New Moralizing

Paul Krugman loves to take on what he calls the "moralizing" crowd, at least when it comes to making economic policy choices. If someone objects to the Federal Reserve System inflating money so that it devalues the holdings of individuals -- a confiscation of their wealth -- then that person is engaging in what Krugman calls "moralizing," and that is bad.

However, when it comes to the Welfare State, Krugman suddenly turns into Jeremiah, excoriating the Israelites for not worshiping the God of Collectivism. In his column today, he repeats the leftist canard that in a free society, one is "free to die." (The other leftist slogan is that in a free society, one is "free to starve," which is why I guess people in North Korea are going hungry.)

I did not watch the Tea Party debate the other night and am not interested in pulling up the recordings, given I just am tuned out to hearing politicians yapping. However, there was a situation in which someone asked Ron Paul a hypothetical question about a 30-year-old man who had not purchased medical insurance, Krugman writes (always trying to put Paul in the worst possible light because, after all, Ron Paul cannot possibly be as decent a human being as is Paul Krugman):

Mr. Paul replied, “That’s what freedom is all about — taking your own risks.” Mr. Blitzer pressed him again, asking whether “society should just let him die.”

And the crowd erupted with cheers and shouts of “Yeah!”

The incident highlighted something that I don’t think most political commentators have fully absorbed: at this point, American politics is fundamentally about different moral visions.

Now, there are two things you should know about the Blitzer-Paul exchange. The first is that after the crowd weighed in, Mr. Paul basically tried to evade the question, asserting that warm-hearted doctors and charitable individuals would always make sure that people received the care they needed — or at least they would if they hadn’t been corrupted by the welfare state. Sorry, but that’s a fantasy. People who can’t afford essential medical care often fail to get it, and always have — and sometimes they die as a result.

Indeed, people can die from a lack of treatment, but, as Krugman notes in this interview, if who is to die is decided by government agents wearing white coats and repeating the mantra of "lower costs, lower costs," then we should "let them die." Furthermore, the notion that many people in the medical professions are motivated ONLY by money is a huge lie.

My grandfather, Dr. William Chisholm, served as a medical missionary in Korea before World War II, and he treated many, many people who never paid him a cent. Today, my cousin, David Morton, who is Dr. Chisholm's grandson, works in the hinterlands of Malawi treating patients who cannot pay him. (According to Krugman, those men are just fantasies. No doubt, they must have evil intentions, since they were and are motivated by their Christianity, and we already know what Krugman thinks of Christians.)

Furthermore, we have many doctors all over the world, not just in the USA, who will treat patients who do not compensate them. Yes, because medical care is scarce, ultimately someone needs to pay something, and often others are willing to pay, or some doctors at least are willing to essentially charge themselves in certain situations. Furthermore, Ron Paul is a doctor and is much closer to the medical scene than Krugman, yet here is Krugman lecturing the man about medical care and essentially calling him a liar. Yes, that is what Krugman is doing.

According to Krugman, ONLY the Welfare State can ensure the moral outcomes; anything else is immoral, and those who object to any aspect of the Welfare State are immoral monsters who just want to see others suffer and starve. Am I exaggerating? Read the column and you will see what I mean.

As for morality, Krugman says that it is a good thing for governments to destroy the assets of individuals through inflation (and to oppose such a thing, according to Krugman, is immoral, as those who oppose it do so only because they selfishly want other people to be out of work and to suffer), but when a man who has been a doctor speaks of compassion within his profession, well that man is an immoral liar.

So, I guess in Wonderland, people in a free society are "free to die," and in Wonderland, Krugman is free to lie.

Krugman's Fed Road Map: Print Money, Buy Government Bonds!

In reading Paul Krugman, I am struck by the man's chutzpah, his willingness to accuse others of being immoral while simultaneously claiming that his money-printing schemes are moral. Yeah, it's confusing, but to Krugman and his followers, it all makes sense.

Krugman's latest morality play, however, even outdoes himself, and at the same time, he unwittingly presents the "road map" he believes that governments should use when they get into financial trouble. It is hard for me to believe that America's supposed "best" economist is recommending a scheme in which he both calls for governments simply buy their own bonds with their own newly-printed money, and declares that anyone who might oppose such financial trickery as being immoral, but there it is.

Krugman writes:

Here’s how such a run works: Investors, for whatever reason, fear that a country will default on its debt. This makes them unwilling to buy the country’s bonds, or at least not unless offered a very high interest rate. And the fact that the country must roll its debt over at high interest rates worsens its fiscal prospects, making default more likely, so that the crisis of confidence becomes a self-fulfilling prophecy. And as it does, it becomes a banking crisis as well, since a country’s banks are normally heavily invested in government debt.

Now, a country with its own currency, like Britain, can short-circuit this process: if necessary, the Bank of England can step in to buy government debt with newly created money. This might lead to inflation (although even that is doubtful when the economy is depressed), but inflation poses a much smaller threat to investors than outright default.

Before tackling what really is a mind-boggling proposition, let me say that "for whatever reason" is really not economic analysis. Instead, it is Krugman once again demonstrating that he does not understand what Carl Menger called the Law of Cause and Effect.

You see, there is no real reason for this sudden unwillingness for investors to purchase government bonds except for maybe changes in "animal spirits" or maybe just whatever. It is like his "under consumption" theme that under girds his theme in which there is no real cause for this sudden change of mass consumer preferences for buying anything. Blame it on "whatever."

As for the bond-buying scheme, apparently it never occurs to Krugman that once a government resorts to this kind of financial trickery -- and no other term will suffice -- that it is sending the message to investors that its bonds essentially are worthless. I simply cannot see how a contrivance would lead to anything but disaster.

If a government were to do what Krugman recommends, then there would be no constraint at all in its spending, as politicians would claim that it had "free money." Why worry about taxes? Investor confidence? We don't need no stinkin' CONFIDENCE FAIRY! Just print the money and spend!

By the way, this is exactly how Zimbabwe financed its government and it brought ruinous inflation. Yet, Krugman not only recommends this nefarious financing as a "solution," but he also has the gall to claim that anyone who might oppose it is a "moralizer," as though there were something wrong with pointing out that when governments engage in this kind of madness, they also destroy the wealth of every citizen who uses that government's currency.

Since a number of European countries are using the euro, Krugman claims that the European central bank should be printing more euros to buy the debt of countries like Spain and Italy (and I am sure he believes likewise for Greece). Here he is in his own words:

What Mr. (Jean-Claude Trichet) Trichet (the president of the European Central Bank or E.C.B.) and his colleagues should be doing right now is buying up Spanish and Italian debt — that is, doing what these countries would be doing for themselves if they still had their own currencies. In fact, the E.C.B. started doing just that a few weeks ago, and produced a temporary respite for those nations. But the E.C.B. immediately found itself under severe pressure from the moralizers, who hate the idea of letting countries off the hook for their alleged fiscal sins. And the perception that the moralizers will block any further rescue actions has set off a renewed market panic.

Notice that anyone who might point out that this "pull-the-rabbit-out-of-the-hat" finance sows its own seeds for disaster is nothing but a "moralizer" who apparently is bent on inflicting pain on others for no good reason. It doesn't take training in economics for someone to see where such a scheme would lead -- and I have no doubt that government employee unions would demand such a "fix" in order to prop up their own bloated trickery -- but from what I have read of Krugman, he seems to think that these unions really are creating wealth.

At least we see Krugman's road map for the USA: Have the Fed directly purchase short-term U.S. bonds. For now, such a scheme would be illegal, given that the Federal Reserve Act of 1913 expressly forbids exactly what Krugman has proposed for other countries to do. (No doubt, the people who wrote the original act were "moralizers," too.)

As I said before, it does not take training in economics to see where such actions would lead. However, if one has "economics" training from a lofty U.S. university, then one apparently is free to discard all laws of economics -- and all rules of common sense.

Krugman, Shame, and Politicizing Tragedies

People have sent Paul Krugman's comments on 9/11 and I admit to having a mixed reaction. As many of you know, I have not supported the U.S. wars abroad and even had a conversation with Krugman in 2004 about my opposition to them, especially the Iraq war.

However, Krugman seems to use the post-9/11 tragedy to play his usual games of political partisanship, and that is what bothers me most. George W. Bush hardly is the first politician to hype and politicize a tragedy. Yes, it is disgusting, but Bill Clinton hyped Oklahoma City and trotted out legislation that was every bit as terrible as what we saw in the Patriot Act. (In fact, much of what was in the Patriot Act was what Clinton tried to get passed but could not in the face of Republican opposition.)

Furthermore, now that the Obama administration continues the odious CIA rendition programs, sends assassination squads abroad, and keeps the prison at Guantanamo open, we hear nothing from Krugman. Nothing.

This is not a guy who support civil liberties; this is a guy who supports Democrats. Krugman will use the civil liberties weapon when it fits against Republicans, but is silent when Democrats engage in the same horrible conduct.

Yes, the Bush administration's reaction to 9/11 was shameful, just as Bill Clinton's was after Oklahoma City. Both administrations engaged in the slaughter of innocent people -- and received praise from the usual quarters.

Furthermore, when Bush was president, war was terrible. With Obama in the White House, it now is a "stimulus." Enough said.