Natural Born (Economy) Killers

When it comes to the use of certain kinds of fuels, myths abound and especially myths created and nurtured by Progressives in academe, government, and the media. Given that Paul Krugman is a card-carrying Progressive, one might expect him to propagate such myths, and he does in his usual Pavlovian style.

Some months ago, he claimed that the use of oil and coal creates such huge negative externalities that the very use of these fuels actually destroys overall wealth. In other words, according to Krugman, if we stopped using coal and oil, we would be wealthier than we are now, our economy more productive, and we would be healthier. Granted, that might sell in the salons of the Progressives, but if one steps back and applies simple logic to what he is saying, the outcome might be different.

(One is reminded of Sen. Harry Reid's "Oil makes us sick. Coal makes us sick," line a few years back. Reid makes us sick.)

In his recent column, Krugman makes the claim that Republicans claim that if the Obama administration were to allow more drilling, the economy would boom. He writes:

...Mitt Romney claims that gasoline prices are high not because of saber-rattling over Iran, but because President Obama won’t allow unrestricted drilling in the Gulf of Mexico and the Arctic National Wildlife Refuge. Meanwhile, Stephen Moore of The Wall Street Journal tells readers that America as a whole could have a jobs boom, just like North Dakota, if only the environmentalists would get out of the way.

Since I am not following the political speeches by the Republicans, I don't know if Romney has made such claims or not, and I have no idea of Moore is saying what Krugman says he is. (Yes, I have reason to doubt the veracity of Krugman's claims, given that the guy has told us that the late 1970s were a golden age of the American economy, that Teddy Kennedy, the authors of a lot of deregulation, actually were conservative Republicans, and that World War II brought prosperity to America.)

Now, if Romney and Moore actually said those things and in the context of which Krugman makes his claims, then I would agree in part with Krugman. Even a much larger energy boom (with coal, oil, and natural gas) than what we see now would not lower unemployment levels across the country by all that much, but certainly we would be better off economically than we are now.

Unfortunately, Krugman makes two major errors involving simple opportunity cost, neither of which surprise me, given that Keynesians want us to claim that in a liquidity trap, the opportunity cost of using factors of production is near-zero (yet, those factors are well-paid when a government "stimulus" magically brings them to employment).

The first is something that Krugman has ignored throughout his writings on energy: the rapid expansion of the dollar. Oil worldwide is priced in U.S. dollars, and when the Federal Reserve System "fights" the downturn by showering the world with that money, one should expect oil prices to rise regardless of how much turmoil there is in the Middle East.

Yes, the saber-rattling HAS made oil markets more unstable and more volatile, but when Krugman declares that the two-ton elephant in the living room really is a tea cozy, he is not being honest. For that matter, I find it interesting that an economist of Krugman's stature is claiming that supply issues matter in oil but don't matter in money.

Krugman's second problem comes with the following statement:

And this tells us that giving the oil companies carte blanche isn’t a serious jobs program. Put it this way: Employment in oil and gas extraction has risen more than 50 percent since the middle of the last decade, but that amounts to only 70,000 jobs, around one-twentieth of 1 percent of total U.S. employment. So the idea that drill, baby, drill can cure our jobs deficit is basically a joke.

Why, then, are Republicans pretending otherwise? Part of the answer is that the party is rewarding its benefactors: the oil and gas industry doesn’t create many jobs, but it does spend a lot of money on lobbying and campaign contributions. The rest of the answer is simply the fact that conservatives have no other job-creation ideas to offer.

The impact of ANY industry is not simply the number of jobs that are directly created within that industry. Does Krugman argue that agriculture is insignificant in this country because only about two percent of the population is involved directly in farming? For that matter, he recently argued that higher education is extremely vital to our society, yet the number of people employed in that field is tiny.

No, what he is saying is that he does not like the energy industries, so he is free to apply different standards to them than he does elsewhere. That is not economic analysis; it is political hackery, period.

Krugman's "caste" nonsense

Paul Krugman really does not seem to understand the effect of third-party payments, and he especially does not understand when it comes to the government and the cost of higher education. In a recent post, he implies that anyone who does not favor massive increases in Pell Grants does so because he does not want the "less fortunate" to have educational opportunities.

Of course, I have a solution: places like Princeton, Harvard, Yale and Stanford have huge endowments. Why not just offer free tuition at these places to students who are "less fortunate" and have admissions policies that will guarantee that people from poor schools can be accepted, no matter what their academic performance might be.

You see, Krugman both claims to be against a stratified caste system, and yet he demands that the USA become like Europe which is heavily stratified and where one's location in the higher-education hierarchy determines ones future. For that matter, the old Soviet Union had the same kind of system.

However, once upon a time, the USA was not stratified in this manner, back before the Progressives gained power and decided that "credentials" were more important than real qualifications. If Krugman really wished to get rid of this "caste" system he claims exists, then he would be in favor of giving entrepreneurs the freedom to produce and end the various regulatory policies of licensing and the like that serve to hold back deserving people.

Krugman: The USA should borrow and spend itself into prosperity

Paul Krugman is on the austerity kick again, and in part, he is right. The austerity measures that have been imposed upon Ireland and Greece by the European Union, are awful, and they are imposing a lot of suffering.

There are some things that Krugman is not saying, however, and I think they bear mentioning. First, we forget that the banks in Europe, plus the European Central Bank, were all-too-anxious to lend billions to Greece even when it was obvious that the Greek government was irresponsible and that Greece has some of the worst government employee unions in the world.

(I know, I know. Public employee unions are great because they encourage spending, and everyone knows that spending creates prosperity, so the unions in Greece simply were spreading wealth.)

Yet, the average Greek must face a grim future because the banks need to be saved. Yes, the bankers of the world most fear a series of world-wide runs, and so the Greeks must pay back the loans, or at least pay back a lot of the loans.

By the way, one of the features of "austerity" programs is raising taxes and tax rates. Not that Krugman mentions this point; all he says is that it is bad that governments are spending less, and that the road to prosperity is paved with government paper.

I am among those who believe that default is best, and that Greece would be wise to leave the euro. Now, where I believe Krugman is wrong is when he thinks that Greece, if it went back to the Drachma, could inflate itself into recovery. He does seem to believe that the USA definitely could do that:

...the main point is that America does have an alternative: we have our own currency, and we can borrow long-term at historically low interest rates, so we don’t need to enter a downward spiral of austerity and economic contraction.

Yes, the USA can borrow and print itself into economic recovery and beyond. Or so says Paul Krugman.

Krugman, College, and the Higher Education Bubble

Paul Krugman claims (implausibly) that he was the first (or one of the first) economists to point out that the hot housing market really was a financial bubble. Of course, Krugman two years earlier had claimed that Alan Greenspan would have to create a housing bubble in order to revive the economy. (Krugman claims that he was just being tongue-in-cheek, and I will let readers decide for themselves.)

In 2004, Mark Thornton wrote:

Signs of a "new era" in housing are everywhere. Housing construction is taking place at record rates. New records for real estate prices are being set across the country, especially on the east and west coasts. Booming home prices and record low interest rates are allowing homeowners to refinance their mortgages, "extract equity" to increase their spending, and lower their monthly payment! As one loan officer explained to me: "It's almost too good to be true."

In fact, it is too good to be true. What the prophets of the new housing paradigm don't discuss is that real estate markets have experienced similar cycles in the past and that periods described as new paradigms are often followed by periods of distress in real estate markets, including foreclosure sales, bankruptcy and bank failures.

Granted, Thornton is from the Austrian School, so he can't possibly know anything about economics or what happens when the Fed forces down interest rates. And given that Austrians are so ignorant about everything, I will use another Austrian, Doug French, to give a counterpoint to Krugman's latest missive about higher education.

Krugman's latest column attacks Republicans for questioning ANYTHING about higher education, claiming that anyone who might have such thoughts is championing ignorance. I hate to say it, but it is not just the Republicans who are asking some serious questions about what is happening and whether or not our system of higher education is sustainable.

Krugman writes:

Here’s what the candidate told the student: “Don’t just go to one that has the highest price. Go to one that has a little lower price where you can get a good education. And, hopefully, you’ll find that. And don’t expect the government to forgive the debt that you take on.”

Wow. So much for America’s tradition of providing student aid. And Mr. Romney’s remarks were even more callous and destructive than you may be aware, given what’s been happening lately to American higher education.

I hate to say it, but most "student aid" is in the form of loans, and when one takes a student loan, their is no divorce from it until every farthing is repaid. (Student loans cannot, by law, be figured into bankruptcy proceedings, so if one owes huge amounts of money and cannot pay it back, tough luck. The government will make your life miserable, and in a recent case in California, government agents literally sent a SWAT team to a house where a man's estranged wife was behind on her student loan payments.)

Krugman goes on to blame Republicans and anyone else who refuses to submit to the fantasy that state governments can continue to spend at Krugman-approved levels, including continuing payments to public colleges and universities at pre-depression levels. However, because he claims that the only thing that is needed solve the problems of higher education is for taxpayers to throw more money at it, he ignores the real underlying financial crisis that involves higher education.

Doug French knows otherwise. In a recent article, he takes on what he calls the "Higher Education Bubble" and throws cold water on the fantasies that Krugman is trying to weave. He writes:

Like all booms, higher education has been fueled by credit. In June of last year, total student-loan debt exceeded total credit-card debt outstanding for the first time, totaling more than $900 billion.

All of this credit has pushed the average cost of tuition up 440 percent in the last 25 years, more than four times the rate of inflation. But while the factors of production on campus have been bid up, just as they are in any other asset boom, the return on investment is a bust. In 1992, there were 5.1 million mal-employed college graduates. By 2008, the number was 17 million.

With Krugman, the answer is simplistic: throw more money into the higher education fire and out of it will appear a wonderful, golden calf.

French, on the other hand, sees the trends and the hard numbers to boot. And while Krugman might claim to have been a prophet on the housing bubble, he clearly is blind to what is happening in higher education. And when someone tries to point out the realities, Krugman does what Krugman always does: he makes insults and partisan statements.

I will go further: higher education really has become a consumer good instead of a producer's good for many people. As a college professor, I can attest to that last statement, as much as I wish that Krugman were correct. But he is not.

Sean Rosenthal on Krugman's claim on British "austerity"

On a number of occasions, Paul Krugman has claimed that "austerity" measures are hurting the British economy and should be ended immediately in favor of more spending. Sean Rosenthal demonstrates that the British government has both raised taxes (which Krugman ignores) AND run large budget deficits.

Rosenthal writes:

Interestingly, Krugman neglects to provide any data on British government actions. In particular, although he asserts that British policies have simply been to "slash spending," he neglects that Britain ignored the advice of free-market supporters by increasing tax rates significantly, such as raising the top marginal income-tax rate to 50 percent, the capital-gains-tax rate to 28 percent, and the value-added-tax rate to 20 percent. More damaging to his view, as can be seen on tables 25 and 27 of this Organisation for Economic Co-operation and Development (OECD) document, British spending has experienced no significant cuts and still represents a sharp increase compared to prerecession levels.

This does not exactly square with Krugman's claims, but that hardly is unusual.

Will Krugman join the Democrats' "It's the speculators!" chorus?

One of my main contentions with Paul Krugman is that I don't believe the man understands even the basics of Price Theory. Yes, I am sure he can dazzle anyone with mathematical models on the subject, but nonetheless he represents the Progressive Wing of modern academic economics, and I have yet to meet a Progressive that can give me a clear explanation of what happens when prices change.

A number of prominent Congressional Democrats are publicly claiming that "speculation" is responsible for rising gasoline prices. (I guess that their claims are even worse than those of Krugman, who has written in his blog that gasoline prices have gone up because of economic activity in China, and because commodity prices are "volatile.")

Of course, those same speculators were at work when gasoline prices went down, and especially nearly four years ago when prices dropped from more than $4 a gallon in the summer of 2008 to about $1.50 near Christmas that same year. One wonders, if speculation occurs, how it seems that speculators are involved ONLY when gas prices go up.

I will be watching to see if Krugman joins this bandwagon, or if he writes something to the contrary. If he says nothing at all, then he is proving that as a political hack, he will protect the Democrats, even when they wallow in utter economic ignorance.

And, yes, I believe that when we have a commodity that is priced world-wide in dollars, and when the chairman of the Federal Reserve System openly attempts to shower the world with dollars, we are going to see price increases in things like crude oil and gasoline. Oh, and Krugman already has discounted that possibility.

Heading for double-digit inflation?

Whenever someone mentions inflation, Paul Krugman is all over the statement, trotting out the CPI which shows relatively low overall price increases at about three percent. (He holds this as "proof" that government can massively increase the monetary base and spread dollars around without having any ill economic effects.)

However, those of us who regularly go grocery shopping and who purchase fuel have seen a much different picture, one that Krugman claims does not exist. And now there is more proof that inflation is worse than what the government and its political operatives (like Krugman) have been claiming:

Forget the modest 3.1 percent rise in the Consumer Price Index, the government's widely used measure of inflation. Everyday prices are up some 8 percent over the past year, according to the American Institute for Economic Research.

The not-for-profit research group measures inflation without looking at the big, one-time purchases that can skew the numbers. That means they don't look at the price of houses, furniture, appliances, cars, or computers. Instead, AIER focuses on Americans' typical daily purchases, such as food, gasoline, child care, prescription drugs, phone and television service, and other household products.

The institute contends that to get a good read on inflation's "sticker shock" effect, you must look at the cost of goods that the average household buys at least once a month and factor in only the kinds of expenses that are subject to change. That, too, eliminates the cost of housing because when you finance your home with a fixed-rate mortgage, that expense remains constant until you refinance or move.

The article continues:

The group maintains that this index better measures the real-world impact of price changes, particularly for people on a budget. And, largely as the result of the recent run-up in gas prices, this "everyday price index" (EPI) suggests that Americans are being pinched far more tightly than the official inflation measure would have you believe.

Over the past year, the EPI is up just over 8 percent, according to the economics group. The biggest factor: Motor fuel and transportation costs are up 21.06 percent from year-ago levels. The cost of food, prescription drugs, and tobacco also have increased faster than the government's inflation measure, rising 3.56 percent, 4.21 percent, and 3.4 percent, respectively.

In other words, the daily purchases definitely are in the crosshairs of inflation, and I only can imagine that things will get worse. Krugman likes to claim that commodity prices are "volatile," which supposedly explains why they have skyrocketed. It would have nothing to do with Ben Bernanke's policies at the Fed.

Of course, let us be honest. The only think in the end that Keynesians have is inflation, and they believe that if the government inflates enough, somehow this will "rescue" the economy. Yes, reducing real incomes of Americans by creating more dollars somehow is going to "strengthen" the economy. Right.