Drowning in Keynesian fallacies

Whenever a Keynesian, be it Paul Krugman or even the original Keynesian, try to "refute" Say's Law, they generally create a caricature or straw man, and then refute that instead of dealing with Say's basic point. And Krugman does it again in a recent blog post, this time taking on Grover Norquist.

Krugman first takes a quote from Norquist:

The idea that if you take a dollar out of the economy and then — from somebody who earned it, either through debt, or through taxes — and give it to somebody who’s politically connected, that there are more dollars around, that if you stand on one side of the lake and put a bucket into the lake, and walk around to the other side in front of the TV cameras, pour the bucket back into the lake and announce you’re stimulating the lake to great depths. We just wasted $800 billion on stimulus spending that added to debt, that killed jobs.

Krugman then writes, "OK, this is just Say’s Law." As one who has written much on Say's Law, I ask, "It is?"

In dealing with what Krugman insists is a "fallacy," first we have to remind people that Krugman actually believes that printing money CREATES real wealth, or at least it can lead to the creation of real wealth. When criticized, Krugman usually turns to the alleged "baby-sitting co-op" that "solved" its problems by printing more tickets. (You see, the "co-op" is supposed to be a perfect example of an entire economy with all of its complexities.)

Second, Keynes never "discredited" Say's Law. Instead, Keynes created a caricature and refuted that instead, something Henry Hazlitt notes in his book, The Failure of the New Economics, which thoroughly refutes Keynes' General Theory. Furthermore, in denying Say's Law, Krugman is saying in effect that factors of production for purposes of economic analysis can be treated as homogeneous.

Thus, all it takes to get the factors employed is just a monetary or spending transmission, be it via government spending (which is what is "best" in a "liquidity trap"), or by having monetary authorities drive down interest rates. Under this interpretation, inflation does not have a distorting effect upon the economy but, instead, actually stimulates economic activity and creating new wealth.

Thus, what one produces is irrelevant as long as a government can print money. There is a problem, however, and that is that if all it takes is the "courage" to print money (and most governments ALWAYS have the courage to try to produce something from nothing), then Zimbabwe should be the wealthiest nation on the planet.

Krugman would argue that the U.S. Dollar is different, but if real assets mean nothing, or if all assets for purposes of economic analysis considered to be homogeneous, then it would not matter what was produced in the country represented by a particular currency. And as for Say's Law and the Norquist quote, I would argue that Krugman's next quote does not negate the truth of what Norquist is saying, but rather exposes Krugman's fundamental ignorance of simple opportunity cost:

OK, this is just Say’s Law. We don’t know whether Norquist is honest enough with himself to realize that exactly the same logic applies to any spending, that according to his story anyone who borrows to spend, including companies making investments, is just displacing someone else’s spending.

In other words, everything is reduced to just "spending," when, in fact, investment in a free market is profitable when entrepreneurs are able to move resources from lower-valued uses to higher-valued uses as ultimately determined by consumers.

In Wonderland, no such thing happens, as one "investment" is as good as another, since all that matters is spending. Thus, the Obama administration can throw hundreds of billions of dollars at solar energy, windmills, and ethanol and claim that it is "investing in America's future." Indeed, it is diverting resources from higher-valued uses to lower-valued uses and is destroying the economic future of this nation. Furthermore, we are finding that many of the companies receiving these massive subsidies are firms that have contributed money to the Obama campaign, which to me is utter corruption. Contribute to Obama, and have the president then loot taxpayers to throw good money after bad.

The key to understanding what Krugman is saying is to remember that he does not believe resources can be moved from lower-valued to higher-valued uses, at least economically speaking. It is all spending all of the time.

Yes, Krugman, maybe we should have Singapore's tax rates

In calling for higher taxes, Paul Krugman now is trying to claim that if the U.S. Government increases taxes on some people, that will help lead us out of the depression. Now, it would be the first time in human history that increasing taxes brought economic recovery, but in Wonderland (and the Princeton University economics department), anything is possible.

In his latest column, Krugman demands higher taxes on "the rich" (of which category multi-millionaire Krugman resides), Krugman calls for a financial transactions tax, writing:

And it’s instructive, too, to note that some countries already have financial transactions taxes — and that among those who do are Hong Kong and Singapore. If some conservative starts claiming that such taxes are an unwarranted government intrusion, you might want to ask him why such taxes are imposed by the two countries that score highest on the Heritage Foundation’s Index of Economic Freedom.

It is interesting that he brings up Singapore, where Jim Rogers now lives, for Singapore is NOT in the same depression the USA wallows, and here are some facts about Singapore's taxes:

• Singapore has NO taxes on capital gains (and Krugman demands that Congress raise capital gains taxes);
• Sinapore's corporate income rate is a flat 17 percent;
• Singapore's income tax rates are substantially lower than U.S. rates.

So, Krugman justifies a proposed tax on financial transactions because Singapore does it, but then fails to inform readers that Singapore has tax rates that would enrage any U.S. "Progressive" like Krugman. (Interestingly, the USA has some of the highest corporate income taxes in the world, but they are not low enough for Krugman.) For that matter, tax rates in Hong Kong, both corporate and individual, are substantially lower than U.S. rates. (And Hong Kong has no tax on capital gains.)

So, once again we see Krugman being deceitful, claiming that because Hong Kong and Singapore tax financial transactions, we should do it to. However, Krugman fails to add that neither Hong Kong nor Singapore have the punitive taxes on income, corporate profits, and capital gains that we have in this country -- and Krugman demands that they be made even more draconian.

Perhaps Americans should understand why people like Jim Rogers have moved their families and their money from this country. The USA has political leadership that insists on military adventures, wasteful government spending on "alternative energy," a criminal "justice" system that is out-of-control at both federal and state levels, and an anti-business culture among its "Progressive" elites.

What does this mean? It means that there will be no economic recovery in the years to come. Paul Krugman really wants us to believe that if the U.S. Government both jacks up tax rates and spending (perhaps preparing for that fictitious showdown against Krugman's "space ailens"), that the end result will be prosperity. That simply is not going to happen.

Just because Krugman has made millions of dollars calling for expansion of state power does not mean expansion of state power is a good thing. As we are going to find out in the coming years, the countries where Keynesian economics is practiced are going to be those countries with declining economies and declining standards of living.

Taking off this week

I won't be making any posts this week in order to catch up on other work and just to rest a bit. Have a great Thanksgiving and enjoy some rest!

Krugmanomics: Partisanship uber alles

In his most recent column, Paul Krugman demonstrates once again that he is first and foremost a political operative, or, more accurately, a political hack. Despite the fact that he is a highly-decorated and feted academic economist, his economic analysis does not differ from what Paul Begala or Chris Matthews might write.

In writing about the work of the bogus "supercommittee" that Congress is using to cover its latest budget shenanigans, Krugman tries to convince us that the Wise Democrats are trying to save the economy even thought the Evil Republicans are trying to throw even more Americans out of work:

In Democrat-world, up is up and down is down. Raising taxes increases revenue, and cutting spending while the economy is still depressed reduces employment. But in Republican-world, down is up. The way to increase revenue is to cut taxes on corporations and the wealthy, and slashing government spending is a job-creation strategy.

So, at least Krugman is now willing to part with some of the Holy Doctrines of Keynesianism and advocate tax increases during a depression. (Herbert Hoover and Congress massively raised taxes "on the rich" in 1932, and we know how well that turned out, but since Krugman wants us to believe that the Progressive Hoover was radically laissez-faire, that is a bit of history that Krugman manages to shove down the Orwellian Memory Hole.)

Of course, Krugman also decides to rewrite more recent history, that being the state of the economy in 2000. The Great One declares:

Remember, the U.S. fiscal outlook was pretty good in 2000, but, as soon as Republicans gained control of the White House, they squandered the surplus on tax cuts and unfunded wars.

I will agree with him on the wars and I always have been on the record as opposing them, but at least I never have tried to write that wars also can create a "fiscal stimulus." However, one might just forget that in 2000, the infamous Stock Market Bubble popped, and for all of Krugman's claims that the Clinton administration was the soul of responsibility, its credit-fueled boom of the late 1990s could not be sustained.

However, Krugman wants us to forget that part, just as he has seen fit to rewrite the history of financial deregulation in order to fit his partisan agenda. Now, it is one thing for someone like Paul Begala to claim that the U.S. economy was in perfect shape in 2000, and that the recession of 2001 was the result of the Bush administration "talking down the economy."

However, Begala is nothing but a partisan hack, a shill for a political party, and he has about as much credibility as Karl Rove. I am not shocked or even upset when Begala acts like a political operative any more than I am surprised when my dogs bark at strangers. Dogs bark, and political operatives lie, as such things are in the DNA of both.

It is disconcerting, however, when an "elite" academic economist tries to outdo someone like Begala. As for the "super committee," it is bound to fail not because Democrats are Crusaders for Right And Truth and Republicans are the Second Coming of Darth Vader, but because delusion reigns in Congress, the White House, and in the economics department at Princeton University.

This committee will fail because no one on it is willing to face up to the fact that the U.S. Government has brought disaster upon the economy and except for a few lonely prophets in the House of Representatives (who are openly disdained for their courage), no one in Washington is willing to admit that this current path is not sustainable. The "cuts" in spending are laughable, since they only would be cutting some of the proposed INCREASES in spending. (Only in Washington and at Princeton is a smaller increase in spending called a "cut.")

Yes, failure will come not because Democrats are good and Republicans are evil, but rather because Democrats and Republicans refuse to recognize how they have run this country into utter insolvency.

Solyndra and outright fraud

This latest article from the Washington Post on the Solyndra scandal lays out something close to fraud on behalf of the White House:

The Obama administration urged officers of the struggling solar company Solyndra to postpone announcing planned layoffs until after the November 2010 midterm elections, newly released e-mails show.

I wonder if Krugman will ignore this one or try to spin it as he already has done.

Keynesians: Fight the collapse of the bubbles by creating bigger bubbles

In 2002, Paul Krugman made his infamous statement:

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Krugman, of course, later defended his comments to claim that he did not think such a thing to be desired, but nonetheless the underlying Keynesian principle was there: in order to fight a slump in "aggregate demand," the government must think and act boldly, or, to be more accurate, recklessly.

Indeed, Krugman's fellow Keynesian, Lawrence Summers, has taken this Keynesian principle in the same direction, recently declaring:

The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending. (Emphasis mine)

While Summers is recommending yet another attempt to reflate the housing bubble (in the name of "fixing" the housing market), the larger principle is the same: inflate SOMETHING. However, as I see it, Keynesians such as Krugman and Summers have overlooked the obvious, and that is the sad fact that governments around the world -- and especially the U.S. Government -- have created the Mother of All Bubbles with government paper. Indeed, as I will point out, the government debt bubble that has been created since the housing bubble fell apart about four years ago dwarfs whatever Wall Street produced with its subprime paper, and the U.S. Government and the Federal Reserve System (with Keynesians on the sidelines acting as cheerleaders) are hellbent on "solving" the current bubble-created crisis by unleashing massive inflation.

Before going on, however, I believe I need to point out the obvious: economic "theories" that declare that economies can grow only by the financial system creating phantom assets should be scrutinized and called what they really are: fraudulent. We have to understand that Keynesians now are saying that the financial system and the economy-at-large are at the point where the value of money must be ground down to near-zero in order to maintain our present economic standard of living.

Surely, people should be able to step back and understand just how destructive such beliefs really are, but instead, they are the core of current government policies and they dominate academic economics to the point where dissenters really are being cast into the Outer Darkness Where There Is Weeping And Gnashing Of Teeth. Indeed, in academic economics, the loudest criticism of the Obama administration and the Federal Reserve System has been that it has not inflated enough, that is, make the bubble in government paper even bigger in hopes that all of this finally will give the economy what Krugman calls "traction" and it can move on its own.

Now, Krugman and the others give no explanation as to how this can occur; they simply take it as an article of faith: the economy moves because the economy moves. They respond to dissent with, "No soup for you!"

However, we need to understand that the blizzard of public spending and borrowing now does not reflect the actual performance of the economy (present or future), but rather is just another bubble, this time with government securities. Furthermore, as debt markets go, it is pretty darned unregulated, chock full of moral hazard, and utterly unpayable. As for responsible policy, let us just say that the government policies of the past four years make the Housing Bubble look like the epitome of financial responsibility.

If a bubble means the blowing up of the value of assets well beyond any values as set by their fundamentals, then the government paper bubble easily fits that definition. I say this for the following reasons:

• The amount of debt the government openly admits to having is staggering, almost $15 trillion, and with the government financing about 40 percent of all its present spending via borrowing, we are not dealing with a situation like that of post-World War II, when the national debt as a percentage of Gross Domestic Product was higher than it is now. In other words, while U.S. debt fell rapidly after the war, right now it is growing like mad.

• There is no way the U.S. economy can pay its way out of this debt trap, and all of the "experts" are calling for accompanying inflation to allow the government to slowly repudiate its debt or what Krugman has called "deleveraging." (Krugman holds that inflation is good because it is a form of debt repudiation.)

• The budget numbers do not account for all of the hidden but very real liabilities that government obligations to Freddie and Fannie, Social Security and Medicare, which up those numbers at least another $50 trillion. These are paper obligations, obviously, as the U.S. economy will not perform well enough in any of our lifetimes to be able to meet these numbers. In other words, after a crisis caused in large part by moral hazard, the government has increased the amount of moral hazard in the system. Summers lives!

So, why do I say that we are in a government-paper bubble? After all, financially speaking, U.S. government paper is every bit as toxic as the sub-prime paper that collapsed Lehman and would have collapsed a number of other banks and financial houses. Yet, as Krugman happily points out, the interest rate on government bonds is extremely low, which he then uses to claim that the "market" is bullish on the U.S. Government and specifically the Obama administration.

Now, I find it strange that someone like Krugman who believes that markets usually get things wrong and only can operate properly under rigid state control all of a sudden is claiming that the Fed-manipulated low interest rates on U.S. bonds actually reflects the market view of things. If anything, the high price of U.S. bonds tells us that the rest of the economy, not to mention the troubles of the euro and the European Union, are in the tank even more than the government will admit.

In other words, the market for U.S. Government paper is not popular because of any underlying strength, but because it is perceived as being less awful than the situation in Europe. Krugman, of course, sees things differently. U.S. bonds are strong, he argues, because the government can print its own money, something I covered in this post. He writes:

Think about countries like Britain, Japan and the United States, which have large debts and deficits yet remain able to borrow at low interest rates. What’s their secret? The answer, in large part, is that they retain their own currencies, and investors know that in a pinch they could finance their deficits by printing more of those currencies. If the European Central Bank were to similarly stand behind European debts, the crisis would ease dramatically.

One hopes that Krugman would believe that such a scenario could not go on forever, with the government using "clever lawyers" (in Krugman's words) to have the Fed directly purchase government bonds instead of buying them (as the law states) on the secondary market.

Keynesians seem to believe that this is an optimal solution, if Krugman is representative of that group. Ultimately, the "Krugman Solution" would result in massive inflation, which would be a default by other means.

What we do know is that the massive government debt, be it in the USA or in Europe, cannot be paid back, especially since governments now are borrowing in order to fund their own debt services. This is not sustainable, not at all. And given that the dollar value of the government debt overwhelms anything we saw in the housing market, the future is not pretty.

There was another path we could have taken. We could have let the banks and financial houses that were holding mortgage securities to take the necessary haircuts and even go out of business if they were hopelessly insolvent. Despite what the Keynesians claim, the entire economy would not have collapsed, but I am sure that some CEOs would have lost their Connecticut mansions.

Likewise, instead of trying to find ways to prop up the unsustainable housing market, the government instead should have told the banks and mortgage holders that there would be no Uncle Sugar bailouts, and they would have to negotiate with borrowers instead of expecting the government to stand behind them as they went wily-nily with foreclosures. Yes, I believe there would have been a short and severe recession, but the difference is that we would be in a real recovery now.

Instead, we are in a depression. The economy is stuck at an "official" rate of 9 percent unemployment and probably an unofficial rate that is much higher, and there is no hope of a real and sustainable recovery in the future. Instead of looking to market entrepreneurs and at least getting out of the way of the still-profitable and productive entities in our economy, the Obama administration has decided to fight this downturn with massive subsidies and a vast number of new regulations that is raising the cost of doing business.

In other words, Obama and Krugman actually believe we can have a recovery by directing resources from higher-valued to lower-valued uses. That is not a prescription for bringing the economy back; it is a prescription for dragging down this economy until it reaches Third World status.

Apologies for not posting this week

Sorry about the lack of posting. I've been tied up doing Dad things, and with four adolescents in the house, Dad things means being a taxi driver.

I've also had some posts on my other blog regarding the situation at Penn State.

I'll be doing some more commentary about the situation in Europe and what it means for us.