The "stimulus" that failed to "fix" the economy

Paul Krugman is at it again, claiming that the Obama "stimulus" of 2009 would be too weak to push the U.S. economy back to full employment. Why? The government did not "spend" enough money.

From what I have read of Krugman's commentary on this particular issue, he is trying to claim that he was some sort of prophet, and that had Obama listened to him instead of his unworthy "advisers," the government would have pumped another $400 billion into the economy and that new money magically would have transformed everything. Yes, out of the trillions and trillions of dollars that have been spread around the world since 2008, it all came down to a measly $400 billion.

While it is true that Krugman accurately noted that this downturn would last for a long time, he got his reasoning wrong. The problem is that Krugman, as a Keynesian macro guy, cannot see anything but aggregates, which is not economics at all. There is no such thing as "aggregate demand" and "aggregate supply," or at least something with such terms that can be represented in the crude "Keynesian Cross" or an AD-AS graph.

With the Keynesians, spending is spending, period, and it does not matter where the spending occurs, just as long as someone somewhere is SPENDING. This is the crudest form of analysis, and I can say forthwith that anyone who believes this is not an economist.

In a couple of links, Sheldon Richman explains first why the "stimulus" did not turn around the economy, and, why more "stimulus" money would fail to have made a difference.

Richman understands something that Krugman and his followers do not: that the creation of new money does not create real wealth, but rather serves to transfer wealth:

But it’s more than that. Since the new money gets into some hands rather than others first, monetary expansion — that is, inflation — changes the pattern of prices and production that would have resulted from voluntary exchange under sound money. Among the prices distorted are interest rates. By doing so, inflation transfers resources from those who produce wealth to others.

Inflation, therefore, is one more government income-distribution program. The lucky early recipients of the fresh fiat money gain purchasing power — command over scarce resources — at the expense of everyone else.

Economies do not grow because government showers them with new money; they grow when people can take existing resources and use them in ways to create more wealth than they did before, or they find new ways to use these resources, often turning them into new kinds of resources. For example, before entrepreneurs found a way to turn crude oil into a useable fuel, kerosene, and to make it widely available at a good price, petroleum was seen as a nuisance, not a resource.

This is something that I have concluded Krugman and others are incapable of understanding. To these people, entrepreneurs are nothing more than parasites, people who somehow profit at the misery of others. In their minds, the State is the creator of all wealth, period.

Under this kind of thinking, production and consumption are two separate and unrelated things. More production does not enable people to consume more; in the Krugman-Keynesian view, more production actually is bad, because then it means that consumers have to find ways to "buy back" the goods that have been created.

Krugman also confuses consumption, which is purposeful activity, with "spending," which is activity that exists not to satisfy the needs and wants of individuals, but rather is a mechanism to "buy back" that which was produced and to enable producers to make more stuff, and so on.

As I said before, this is not economics. It is the creation of mechanistic models that fail to reflect human action. Unfortunately, it is what dominates the thinking in government and academe and even Wall Street, and as long as policies are being made under such direction, this depression not only will continue, but get worse.

Krugman takes on the Austrians and Ron Paul (and, as usual, misrepresents what they are saying)

Gee, hoodathunkitt? Paul Krugman hates Ron Paul. It is not enough for Dr. Paul to want to leave abortion to state legislatures (where the U.S. Constitution would place it), but the very fact that Dr. Paul is personally opposed to abortion and would not perform one is enough to send Krugman into a rage.

Furthermore, Krugman attacks Dr. Paul on the matter of civil rights. Now, keep in mind that Dr. Paul is not against civil rights per se, given that no other person on the scene, Democrat or Republican, that is running for president that openly opposes the police state that both parties have created. (Sorry, Krugman. One cannot support both civil rights AND a police state. So, who is against civil rights?)

Anyway, Krugman is not referring to Dr. Paul's views on race, but rather Dr. Paul's view of the 1964 Civil Rights Act. Like all Progressives, Krugman holds that any law or regulation that is created in the name of something like civil rights is in itself the very essence of those rights. As Frederic Bastiat wrote in The Law in 1848, socialists (and I should add, Progressives) always couched beliefs within a specific government action:

Socialism, like the ancient ideas from which it springs, confuses the distinction between government and society. As a result of this, every time we object to a thing being done by government, the socialists conclude that we object to its being done at all.

We disapprove of state education. Then the socialists say that we are opposed to any education. We object to a state religion. Then the socialists say that we want no religion at all. We object to a state-enforced equality. Then they say that we are against equality. And so on, and so on. It is as if the socialists were to accuse us of not wanting persons to eat because we do not want the state to raise grain.

Likewise, according to Paul Krugman, the only reason one could oppose sections of the Civil Rights Act which give government huge swaths of control over private property is racism. (Likewise, if one thinks that ANY environmental regulation is bad or unnecessary, then one is in favor of having feces wash up on beaches, to paraphrase Anthony Lewis, who also wrote his columns at the NYT.)

But Krugman was only getting warmed up when he accused Ron Paul of being a racist and a misogynist. (And why else would one be opposed to abortion than out of hatred for women? Gloria Steinem has declared such, and so it is an established truth, at least at Princeton University and the NYT.)

Ron Paul, writes Krugman:

...(ignores) reality, clinging to his ideology even as the facts have demonstrated that ideology’s wrongness. And, even more unfortunately, Paulist ideology now dominates a Republican Party that used to know better.

Given the open opposition that Republican stalwarts have exhibited toward Dr. Paul, the idea that his "ideology" is dominating the GOP is a very sick joke, but Krugman seems to be full of humor these days. Unfortunately, he totally misstates the position that Austrians have on money, and he further writes that all Austrians believe that the monetary base is exactly the same as money that is circulating.

First, as he points out in the article, the Fed massively increased the monetary base and some Austrians have said that sooner or later if that base is turned into large-scale lending, we are going to have inflation. That is a no-brainer. However, because some Austrians have said that maybe inflation will occur sooner rather than later, according to Krugman, that means that all Austrian theory on money is wrong. (This is what the ancients once called a non sequitur, but without the non sequitur, Krugman would not have any columns.

Second, Krugman continues in that insistence:

Austrians, and for that matter many right-leaning economists, were sure about what would happen as a result: There would be devastating inflation. One popular Austrian commentator who has advised Mr. Paul, Peter Schiff, even warned (on Glenn Beck’s TV show) of the possibility of Zimbabwe-style hyperinflation in the near future.

So here we are, three years later. How’s it going? Inflation has fluctuated, but, at the end of the day, consumer prices have risen just 4.5 percent, meaning an average annual inflation rate of only 1.5 percent. Who could have predicted that printing so much money would cause so little inflation? Well, I could. And did. And so did others who understood the Keynesian economics Mr. Paul reviles. But Mr. Paul’s supporters continue to claim, somehow, that he has been right about everything.

Austrians are not shocked at what has transpired. The economy, thanks to the bailouts, explosion of regulations, and incendiary rhetoric from the White House, is mired in depression, just as Austrians predicted it would be if the policies of the past four years were followed. As long as the monetary base remains just that -- a base -- and the money does not circulate, the official rate of inflation will be low. What I do find interesting, however, is Krugman's insistence that commodity prices have nothing to do with inflation, that the only reason they rise and fall is because of demand from "emerging economies" and "volatility." (Of course, "volatility" is an effect, not a cause, but since Keynesians regularly confuse cause and effect, we should not be surprised at Krugman's conclusions.)

You see, if Austrians are wrong in their belief that an expansion of money in circulation will force up prices (and that is what Krugman insinuates), then all of monetary theory is turned upside down. For that matter, Krugman already is on the record in calling for the Fed to directly purchase U.S. Government securities on the primary market, which in essence would be financing government via the printing press. Does Krugman also believe that such an action would not have a huge effect upon prices of goods, or does he want us to believe that any predictions of inflation here would be wrong?

Krugman's insistence that Austrians are ignorant about money is, well, ignorant. Austrians say that money is a secondary good which has a primary use to facilitate exchanges, and its productivity exists in the fact that it allows exchanges to occur that would not happen in a barter economy. Austrians further hold that money is subject to all of the laws of economics, including the Law of Marginal Utility (no, we don't hold that it simply is a quantity variable).

However, one of the most important aspects of Austrian thinking on money is that Austrians emphasize the transmission mechanism of new money being injected into the economy, and that transmission is non-neutral, for those receiving the new money first will be able to pay for goods at the old prices, but with new incomes. This view contrasts with the Keynesian viewpoint that monetary transmission is neutral, and that the only thing which matters is that money get put into the economy so that someone can spend it.

Moreover, Austrians also point out that the injection of new money into the economy also will have an effect upon the relative prices of goods, and that the relations will change as more money pours in. This contrasts with Krugman's view that new money has no such effect, and that everyone benefits equally from monetary injections. (In Krugman's view, while inflation benefits debtors at the expense of creditors, that is OK because he falsely assumes that all creditors are the "one percent" and that all debtors are in the other category.)

So, because hyperinflation has not hit, Austrians are totally ignorant about money, and that includes Ron Paul. We are dealing with timing, not monetary theory, and Krugman by confusing the former and latter, demonstrates his own ignorance about monetary matters.

Krugman: Save "democracy" via inflation

Paul Krugman is sounding the alarm on Europe and to a certain extent, I agree with him. Economic collapses tend to bring out the worst in people, and invariably, they will turn to the worst politicians who appeal to resentment, envy and hatred.

Invoking the rise of the political lunatics that took power in the 1930s, Krugman writes that "democratic values are under siege," and says that worse things are down the road. Furthermore, when "austerity" measures involve actually empowering the State to grab more in taxes in the name of "balancing budgets," I agree that "austerity" is a bad thing, but, ironically, the only thing Krugman seems to like about austerity measures is raising taxes.

I also agree with him that we are in a depression, but we fully disagree on how we got here and what must be done to get out. Krugman believes that governments should take more power, inflate the currency, borrow heavily (thus, creating new financial bubbles in sovereign debt that cannot ever be repaid with future tax revenues), confiscate more income from wealthy people, and engage in Crony Capitalist measures like funding "alternative energy."

In a nutshell, everything that Krugman demands the European and U.S. governments do will worsen this depression. Everything. From his scheme of having central banks purchase sovereign debt in the primary markets (which are no markets at all) to government bailing out failing firms and giving huge subsidies to "green" industries, Krugman is calling for putting malinvestments on steroids, in the belief that flooding the economies of the world with even more paper money will save us.

This is not something that will lead to recovery; instead, it is not just "hair of the dog," but rather a call to consume the entire dog itself. And, invoking the "babysitting cooperative" as "proof" that he is right might work at the NY Times and with fellow Keynesians, but it makes no sense in the real world.

Europe seems to be on the brink and so is the USA. And if Krugman really does believe that the "solution" involves more sovereign debt, more subsidies, and more malinvestments, then I would like to sell him some real estate in Princeton.

Do leveraged buyouts destroy the economy? Krugman thinks so

It is interesting to watch the millionaire Paul Krugman turn into a populist, as the more he goes off on "taxing the rich," the more he demonstrates his own economic ignorance. In a recent column, he attacks Mitt Romney for being a "job destroyer" because Romney's firm, Bain Capital, engaged in leveraged buyouts, likening him to the villain of Oliver Stone's move, "Wall Street."

Not having seen "Wall Street" or its sequel, I'm not particularly interested in Oliver Stone's view of the world, especially since Stone worships dictators such as Fidel Castro and Hugo Chavez, both of whom have reduced their respective countries, Cuba and Venezuela, into economic basket cases. Nonetheless, the theme that Krugman wants to portray is that leveraged buyouts usually are bad and that they "destroy jobs."

The problem is that Krugman (once again) does not understand the simple Law of Opportunity Cost, which is pretty common among Keynesians. He writes:

So Mr. Romney made his fortune in a business that is, on balance, about job destruction rather than job creation. And because job destruction hurts workers even as it increases profits and the incomes of top executives, leveraged buyout firms have contributed to the combination of stagnant wages and soaring incomes at the top that has characterized America since 1980.

It is hard to know where to begin, but I will start by saying that the official rate of unemployment by itself is no measure of prosperity or even the health of the economy. I recall watching two economists debate each other on television about 30 years ago, with one of the economists having come back from a trip to Romania and talking about the poverty that he witnessed there.

"But there's NO unemployment there," the other economist shot back. (The second economist is a Marxist and teaches at a university where I used to live.) To the Marxist, "unemployment" was the trump card: "Aha! You claim Romania is a bad place to live, BUT EVERYONE THERE HAS A JOB! SO THERE!!"

Indeed, after the communist regime fell there, the curtain was lifted and people found out just how poor Romania was and how even the government's official "we have no unemployment" line was fraudulent. Nonetheless, people on the left still hold that unemployment really is the only variable that matters, economically speaking.

When it comes to issues of leveraged buyouts, Krugman's logic goes south, especially on the employment situation. First, we have to remember that a viable firm is one in which the value of the whole is greater than the sum of its parts. This is important, because Krugman wants us to believe that firms like Bain buy healthy and viable companies, destroy them from within, and then pocket the money and throw people out of work. Furthermore, it is the creation of unemployment, according to Krugman, that creates the "wealth" for people like Romney.

Now, we have to understand that the ONLY way for Bain or any other firm in this situation to make money is for the standard "buy low, sell high" and the only way that such a thing can happen with a leveraged buyout is for the sum of the parts of the firm be greater than the value of the firm as a whole. In other words, the firm has to be in trouble, whether it be mismanagement or something else that has made the company decline in value.

For example, Bain could NOT have purchased Apple for a leveraged buyout, since the value of Apple as a firm would be greater than all of the individual assets that Apple possesses. Yet, if one reads Krugman's column, he wants to paint a picture of Bain purchasing a company that is doing great, and it just destroys it so that some rich guy can walk off with money in his pocket.

Logically speaking, that is not possible. One cannot purchase a viable, healthy firm, sell off its assets, lay off its workforce, and make money. For that matter, the kind of cost-slashing measures that might occur if a corporate raider actually tries to save the firm are not arbitrary; they are done because the value of the sum of the parts is greater than the value of the whole.

Employees who go through such buyouts generally don't have happy stories to tell about it, but one should remember that if a firm is in a situation in which it finds the value of the sum of its parts to be greater than the value of the whole, the hard truth is that those employees most likely are going to lose their jobs, anyway. Why? A firm in that condition is not likely to last long, as it has an illness that either can be fixed only with new management or entrepreneurial ideas, or is going out of business (where its assets will be sold at a bankruptcy auction).

An analogy is the junkyard for cars. Many of the cars that are brought to junkyards still can be operated, and many of them could be fixed to the point where they might work. Junkyards, however, don't make money from fixing the cars on the lot. Instead, they make money by selling the parts taken off the junked cars to mechanics and dealers or selling the components as scrap to be recycled.

That is the hard reality of the world of leveraged buyouts. A firm is not a candidate for such a fate unless buyers perceive either that the company is going out of business or is so mismanaged or has unnecessarily-high costs of production. As everyone knows, leveraged buyouts are risky in that the raiders sometimes don't get what they anticipated, and when people lose their jobs, there are hard feelings.

However, Krugman would have us believe that leveraged buyouts are the CAUSE of unemployment, as opposed to the fact that job losses in such situations come about because the firm no longer was as viable as it once was. True, I realize that Keynesians probably are incapable of thinking of something in terms of opportunity cost, and they certainly can find no value in someone breaking up a firm and selling off the assets when the conditions allow them to do so.

In Wonderland, economies grow because of the nebulous thing called "aggregate demand," which is created by governments creating money. There is no such thing as opportunity cost in that world, and the entrepreneurial processes of creating more goods while using fewer resources does not spell growth to them, but rather unemployment.

Krugman wants us to believe that people get rich in a market economy by causing large-scale unemployment. In a market economy, people become wealthy by providing something that others want and are willing to give up something scarce that has value to others in order to obtain that new good or service. In the process of doing so, entrepreneurs create employment opportunities that enable more and more people to be able to obtain things that they previously could not.

Unfortunately, Krugman has chosen another path of explanation and the end result of governments following his advice is more poverty, inflation, and, in the end, more unemployment.

Well, Hayek DID win a Nobel Prize

Paul Krugman has announced it: Hayek is not important, and his views have been "discredited," although he did win the Nobel in 1974 for those "discredited" views.

Now, Krugman did not mention Hayek's Nobel, claiming instead that the only reason Hayek was well-known was for The Road to Serfdom which, of course, was nothing more than a right-wing screed, at least according to Krugman. He also says that in the early 1930s, Hayek "made a fool of himself" and that "his ideas vanished from the professional discussion."

Contra Krugman, Keynes did not do anything more than to rewrite Mandeville's "Fable of the Bees," claiming that the less savings that occurs in an economy, the better the economy will perform. (Capital, as we all know, simply appears like magic.) As for the Austrian Theory of the Business Cycle, Krugman constantly refers to it as a "Hangover Theory," which it is not, and then claims Austrians are saying that artificial expansion of credit leads to "overinvestment" when, in truth, Austrians say there is "malinvestment," which is much different.

Let us not forget that Krugman is claiming that this "liquidity trap" which he claims is in play also means that there is no opportunity cost to more government borrowing, and that when governments print money, they actually are creating more wealth. That is the real meaning of Keynesianism.

Peter Klein on the absurdity of Keynesian Economics

Peter Klein of the University of Missouri (who wrote his dissertation under Oliver Williamson, who, unlike Paul Krugman, is an actual economist who won the Nobel Prize) takes on Keynesian dogma. Enjoy.

Can we "save" the euro through inflation and outright financial fraud? Good luck!

It has come to this: all we need is a bit more time to sort out the financial mess that now engulfs Europe (and, by proxy, the United States). In the meantime, the Federal Reserve System, the European Central Bank, as well as four other banks, will resort to the usual "fixes" of inflation and the everlasting game of "Let's pretend that the worthless securities they purchase really are valuable."

The latest reprieve, for all its ballyhoo, is nothing but a stay of execution for the euro and (next) the dollar, but for the moment the central bankers -- and especially Ben Bernanke -- can share the spotlight and have the Usual Suspects praising them for their Great Wisdom and Foresight:

In Europe and the United States, where the announcement broke well ahead of stock market openings, the prospect of more cheap money to ease banks’ operations sent stock indexes soaring. A broad index of German stocks, the DAX, jumped almost 5 percent Wednesday, while the broad measure of American stocks, the Standard & Poor’s 500-stock index, climbed more than 4 percent. Short-term borrowing costs also declined modestly for some European governments and banks.

But policy makers and analysts were quick to caution that the Fed’s action did not address the fundamental financial problems threatening the survival of the European currency union. At best, they said, efforts by central banks to ease financial conditions could allow the 17 European Union countries that use the euro sufficient time to agree on a plan for its preservation.

In other words, the head has been temporarily moved from the chopping block, and that is cause for a party. Keep in mind, however, that the very people who celebrated in the stock and bond exchanges sooner or later will return with very different looks on their faces, as they realize that this lurching from crisis to crisis -- with the "solution" being more "liquidity" (read that, inflation) -- is unsustainable. The debt is unmanageable, period, and these economies are incapable at the present time of generating enough income to pay back these loans, especially given that the current set of "bailout" loans coming from the Fed and elsewhere are nothing more than loans to enable these countries to pay their current debt service.

Now, according to Paul Krugman, there really is a way out for the euro and the dollar. Yes, in response to the Greek crisis and others that follow in its wake, the European and U.S. government must follow policies that resemble...Greece. No, I'm not kidding.

Read for yourself:

I hope, for our sake as well as theirs, that the Europeans will change course before it’s too late. But, to be honest, I don’t believe they will. In fact, what’s much more likely is that we will follow them down the path to ruin.

For in America, as in Europe, the economy is being dragged down by troubled debtors — in our case, mainly homeowners. And here, too, we desperately need expansionary fiscal and monetary policies to support the economy as these debtors struggle back to financial health. Yet, as in Europe, public discourse is dominated by deficit scolds and inflation obsessives.

Yes, what is needed is inflation and more borrowing, the very things that put us in this untenable position in the first place. The U.S. economy is not producing enough to give the tax revenues needed for this burst of spending in the last four years, so borrowing and, essentially, monetizing U.S. debt are the only ways even to continue this spree.

There is another way out, one that is painful but at least will not have the long-term destructive effects of the kind of massive inflation that seems to be on the horizon: default. Yes, default.

First, a real default versus what Krugman is demanding -- default via inflation -- will not have the same distorting economic effects that inflation (and especially if it reaches double-digits...and beyond) would have, and second, a default would provide a much more realistic picture of what the situation really is, as opposed to what happens when inflation undercuts the price system. Yes, there will be a sharp downturn when this happens, but afterward, there will be the real prospect of an economic recovery, something that simply is not going to happen if this borrowing and printing madness continues.

When Krugman calls for "expansionary fiscal and monetary policies," he is not talking about policies that actually will expand the real economy. No, he is talking about more financial trickery, more central bank "pulling rabbits out of hats," more "stimulus" money given to politically-connected groups that are tied to the Obama administration, and so on.

Trickery and inflation won't save the euro. The irony as I see it is that the euro has a lot better chance of surviving if some honesty is permitted to enter the discussion. At the present time, unfortunately, the loudest voices are those that call for further debasement of the euro (and the dollar) and even more borrowing to cover the payments for the last set of loans. Neither option is sustainable, but for now, that is all the Keynesians seem to be offering.