Krugman and the "Magic" of Inflation

I remember reading a book 30 years ago in which the author said that in the end, Keynesians have one arrow and only one in their quiver: inflation. While they might deny that to be true (Hey! We have FISCAL policy!! We borrow a lot of money that is created by the Fed!)

But Paul Krugman certainly seems anxious to prove the author's point, as once again he calls for the "solution" of printing money as salvation for Europe. For that matter, he has long advocated the same "salvation" for this country, continuing that fallacy that our economy is exactly like the so-called babysitting co-op in Washington.

Today's column is pretty typical of Krugman. While I agree that the bank-imposed "austerity" measures put on the regimes of Greece and Spain are not helpful to economic growth, my differences with Krugman are substantial. To Krugman, the entire thing is spending; the more a government spends, the richer everyone becomes, end of discussion. And if the government does not have enough to spend in tax revenues, then print money or borrow, but spend, spend, spend.

As I see it, restructuring any economy in order to place its debt service at the top (which means high tax rates) is likely to be counterproductive in the short run AND long run. Like it or not, governments usually are an impediment to economic growth and certainly not an engine of the same.

For Krugman, financial bubbles ARE the soul of capitalism, period. In his view, investors are a bunch of lemmings that always run over the cliff unless wise government agents steer them otherwise. As Austrians see it, the culprit is going to be the central bank or government in one form or another.

(For those people who claim that the housing bubble was SOLELY the result of private investment, they ignore the role of the Federal Reserve System, Freddie and Fannie, and a government that demanded that more people be put into home ownership, damn the consequences.)

So, what is Krugman's "solution"? He provides it here:

Italy and, in particular, Spain must be offered hope — an economic environment in which they have some reasonable prospect of emerging from austerity and depression. Realistically, the only way to provide such an environment would be for the central bank to drop its obsession with price stability, to accept and indeed encourage several years of 3 percent or 4 percent inflation in Europe (and more than that in Germany).

Both the central bankers and the Germans hate this idea, but it’s the only plausible way the euro might be saved. For the past two-and-a-half years, European leaders have responded to crisis with half-measures that buy time, yet they have made no use of that time. Now time has run out.

So will Europe finally rise to the occasion? Let’s hope so — and not just because a euro breakup would have negative ripple effects throughout the world. For the biggest costs of European policy failure would probably be political. 

Yes, salvation through inflation, as though a central bank can "manage" rates of inflation over time. Krugman's love affair with inflation totally ignores the underside of such a policy, and ignores the fact that over time, the corrosive effects of inflation grow and any "positive" effects (i.e. "deleveraging") tend to diminish.

You see, Krugman truly seems to believe that the only "bad" effects of inflation would be higher prices, although those higher prices would be offset by higher incomes. Inflation, at least in Wonderland, has no effect upon investors' choices, it does not direct money into lines of production that are unsustainable, and it has no destructive effects at all unless it gets out of hand, and even then, the results are not very bad.

Like the Bourbons who, in the words of Tallyrand, "learned nothing and forgot nothing," the Keynesians never learn from inflation, and in the end always reach for that last arrow. Like Krugman, who apparently believes that the Obama administration can subsidize the economy into recovery (see "green energy" and other such nonsense), Keynesians truly believe that all assets are homogeneous, and that an economy is a mixture into which one stirs money and if one stirs in enough money and forces everyone to spend, out of it comes prosperity.

That is a Wonderland view of economics, but apparently that is what our economic and political elites are trying to claim is the truth. So print and spend yourselves into prosperity, Europeans! It must be so, it must be so!

Enemies of the People: This Group of Hawaiians Undermines Government Stimulus

If Keynesians are to be consistent, then they would have to say that the significance of production is not in the particular goods being created, or how they meet human needs, but rather the amount of spending that accompanies the production. Obviously, if what recently happened in Hawaii were to proliferate, Keynesians would go bananas.

This group of determined people got together and fixed a road that government authorities said would cost $4 million to repair. It is pretty clear from this story that the residents spent much less than that, which means (if one applies Krugmanian logic) that they reduced potential wealth by $4 million minus what they actually spent. (Sooner or later, I supposed, Hawaii would have received the "stimulus" money to fix the road.)

After all, it is not the road that creates the wealth. Instead, it is the money that is spent. Right? That is a constant theme from Krugman and other Keynesians, and everyone knows that the Keynesians cannot possibly be in error.

Given that these evil residents depleted the economy of wealth, I would say that they MUST be classified as "enemies of the people." Hey, maybe they might even make President Obama's infamous "Enemies List."

Update: Poster Jeff has provided this gem from Krugman: projects are not about what is created, but rather the spending. So, I guess this means that if the government pays people to dig holes and then fill them again, it is creating wealth because people will spend the money.

Krugman, Bank Regulation, and a Bit of History

Everyone now knows about the infamous trading losses suffered recently by JP Morgan, but leave it to Paul Krugman to claim that a bank that operates within a heavily-regulated system somehow is "unregulated." Oh, I know, Krugman actually is claiming that even Dodd-Frank does not regulate enough and that we need to "turn back the clock" when it comes to banking and reinstall what we had in the 1970s.

Now, I agree with Krugman that banks should not be able to use depositors' money to engage in risky trades and the like, but the problem is not regulation or the lack of regulation per se. Krugman is correct; banks ARE different, but they are different because they legally can operate on the principle of fractional reserves.

As I teach my economics students, if someone deposits money into a bank and the bank lends out a large portion of that deposit, the original depositor still has an immediate claim to ALL of the money he or she has placed in the bank. (I am speaking of demand deposits here, not necessarily time deposits, some of which have penalties for early withdrawal.) When banks place themselves in precarious situations in which a large portion of their loan portfolios become shaky, they invite "bank runs" in which nervous depositors demand their entire share of deposits in the bank.

Obviously, a bank cannot survive a run if enough depositors make withdrawals and the bank cannot raise the requisite cash by calling loans or raising money some other way. However, the government has attempted to create ways to prevent runs. (Before the creation of the Federal Reserve System, banks would appeal for "bank holidays" in which they would close for a time being until the run died down, and banks also would make agreements among themselves, as they did during the Panic of 1907.)

The first in modern times was the creation of the Fed in 1913, with the central bank supposedly serving as the "lender of last resort." During a run, the Fed would loan money to member banks, and the presence of new money was expected to calm nervous depositors and ultimately end the run. Now, before the Civil War, depositors legally could ask for "specie" when making withdrawals. After the war, they got paper money for the most part, and today, that is all we are allowed to have.

While Krugman claims to be a liberal, nonetheless, he is an out-and-out reactionary when it comes to finance, and you have to remember that if Krugman were to have had his way, you would not be reading this, as computers as we know them along with the Internet as we know it and other forms of modern communications would not have existed because their start-ups would not have been financed by the banking system Krugman so admires. He writes:

So what can be done? In the 1930s, after the mother of all banking panics, we arrived at a workable solution, involving both guarantees and oversight. On one side, the scope for panic was limited via government-backed deposit insurance; on the other, banks were subject to regulations intended to keep them from abusing the privileged status they derived from deposit insurance, which is in effect a government guarantee of their debts. Most notably, banks with government-guaranteed deposits weren’t allowed to engage in the often risky speculation characteristic of investment banks like Lehman Brothers. 

This system gave us half a century of relative financial stability. Eventually, however, the lessons of history were forgotten. New forms of banking without government guarantees proliferated, while both conventional and newfangled banks were allowed to take on ever-greater risks. Sure enough, we eventually suffered the 21st-century version of a Gilded Age banking panic, with terrible consequences. 

It’s clear, then, that we need to restore the sorts of safeguards that gave us a couple of generations without major banking panics. 

 Ever hear of CNN and much of cable TV? The banking system that Krugman wants to bring back would not finance these things because they were new and untested and risky. Cell phones? Fuhgeddaboudit! McCaw Cellular was financed by Michael Milken and junk bonds, along with a whole host of other businesses based upon new technologies that really began to blossom in the 1980s.

What would the banking system have favored? Well, Apple certainly would not have been on the list. Instead, the bankers would have listened to the executives of IBM who bet the farm that the future was in mainframes. 

You see, the system that Krugman wants to re-impose, complete with a new version of Regulation Q, was very risk-averse, which meant it only stayed with the so-called safest areas of the economy. Now, maybe Krugman would be happy going back to the days of bell-bottoms and polyester clothing, but our economy would be much more primitive than it is now if Krugman were to get what he wants.

For that matter, Krugman has not been able to get his narratives correct. On numerous occasions, he has claimed that financial deregulation of the late 1970s and early 80s came about purely from "free-market ideology" and Ronald Reagan. Funny how history tells us different things.

The major deregulation act, DIDMCA, was passed in 1980. That year, Jimmy Carter (a Democrat) was president, the Democrats had an effective 59-41 majority in the Senate (58 Democrats and one independent who voted with the Democrats) and a whopping 277-158 majority in the House of Representatives. At the time of the act's passage, Carter had a large lead on Reagan in the polls and few people saw the results of November 1980 coming.

In 1982, with passage of the Garn-St. Germaine Act, all of the research I have done into it points to people other than Reagan as being the driving forces behind the changes in laws regulating Savings and Loans. The impetus to those changes did not come from ideology but from the hard fact that S&Ls were losing depositors and that many of their mortgages had low interest rates, but market rates at the time were well above 10 percent. Thus, it either was let them invest elsewhere or collapse altogether. That Krugman deliberately ignores that situation and rewrites history does not surprise me at all.

And, we are supposed to believe that the Greenspan-Bernanke "Put," with its promises of "liquidity," the actions of the Fed during the boom in pushing down interest rates, the political pressure on banks and other lenders to ignore the obvious and loan huge mortgages to people with questionable backgrounds, not to mention the actions of Freddie and Fannie, had NOTHING to do with the housing bubble and the meltdown. Instead, according to Krugman, it was the natural outcome of a pure free-market system that ALWAYS will create systematic errors because all entrepreneurs are like the band in "Animal House" that tried to march through the wall.

So, government creates a huge system of moral hazard, government encourages (and government "encouragement" always has coercion behind it) reckless lending, and we then conclude that all of this was ENTIRELY do to the "free market." Maybe in Wonderland, but not in the real world.

I would like to add one thing. Unregulated governments have floated huge amounts of paper around the world, much of it worthless, and the financial bubbles that government paper has created dwarf what we saw in the housing bubble. Yet, Krugman's answer is for governments to float more paper and resort to financial trickery to give this stuff "value."

One might have to assume that Krugman believes government agents, at least when it comes to finance, to be omniscient. Gee, if they are so smart, then why are they not leading Wall Street firms to new and glorious heights?

Easy Useless Keynesianism

When it became clear in 2007 and beyond that the housing bubble was breaking up and the bills for the national spending spree were coming due, the Bush administration shifted into "stimulus" mode. (It was nice getting an extra $2,100 in my checking account, but I defied the government and paid some bills instead of buying that big-screen HD TV. Yeah, I'm a bad example to all of you.)

Barack Obama came into Washington with Big Plans For A Big Stimulus, and the Federal Reserve System has been spreading dollars everywhere. However, the economy remains mired in depression, and Paul Krugman believes he has the solution: more stimulus. Lots more stimulus.

In his recent column, Krugman claims that the problem is that we don't have enough government spending, and if we don't spend, expand the state, and employ more people as bureaucrats, our economy never will recover. Actually, if we continue to spend, expand the state, and employ more people as bureaucrats, indeed, our economy never will recover. Krugman writes:

Of course, structuralistas say they are not making excuses. They say that their real point is that we should focus not on quick fixes but on the long run — although it’s usually far from clear what, exactly, the long-run policy is supposed to be, other than the fact that it involves inflicting pain on workers and the poor. 

Anyway, John Maynard Keynes had these peoples’ number more than 80 years ago. “But this long run,” he wrote, “is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the sea is flat again.” 

I would only add that inventing reasons not to do anything about current unemployment isn’t just cruel and wasteful, it’s bad long-run policy, too. For there is growing evidence that the corrosive effects of high unemployment will cast a shadow over the economy for many years to come. Every time some self-important politician or pundit starts going on about how deficits are a burden on the next generation, remember that the biggest problem facing young Americans today isn’t the future burden of debt — a burden, by the way, that premature spending cuts probably make worse, not better. It is, rather, the lack of jobs, which is preventing many graduates from getting started on their working lives. 

So all this talk about structural unemployment isn’t about facing up to our real problems; it’s about avoiding them, and taking the easy, useless way out. And it’s time for it to stop. 

 And what constitutes "doing something"? According to Krugman, it is having governments increase their borrowing and monetary creation supposedly to start employing idle resources. Unfortunately, we are not dealing with idle resources per se; we are dealing with malinvested resources and every one of Krugman's schemes to deal with the problem only will make that problem worse.

Whether it is propping up the housing industry or creating new bureaucracies or subsidizing pet Obama-favored "clean energy" firms, the end result is expanding the malinvestments and ensuring that those still-healthy industries are unable to lead the recovery. Unfortunately, Krugman truly is stuck in 1939, refusing to acknowledge that the very things he claims will give us recovery are leading us into the abyss.

There is one more outrageous point that he makes. Earlier in the article, he writes:

O.K., there’s something I didn’t tell you: The paper in question was published in June 1939. Just a few months later, World War II broke out, and the United States — though not yet at war itself — began a large military buildup, finally providing fiscal stimulus on a scale commensurate with the depth of the slump. And, in the two years after that article about the impossibility of rapid job creation was published, U.S. nonfarm employment rose 20 percent — the equivalent of creating 26 million jobs today. 

 As Robert Higgs noted in his paper on the alleged "prosperity" of World War II, the notion that World War II was "good for the economy" and made Americans prosperous is fraudulent, period. Today, prosperity will come if Americans prepare for an invasion of space aliens.

John Stossel on liberty and private enterprise

Because I have a very busy schedule over the next two weeks, my posting will be spotty and I will depend upon others to do my writing for me. John Stossel provides a very good article on why private enterprise always is painted as the enemy and government as the rescuer.

I will note that every time government really screws up something, the solution ALWAYS is to give more power to the government agency that performed poorly. After every financial and economic crisis which the Fed helps to create, the answer is to give the Fed even MORE authority, which it gladly takes.

In the early 1970s, the government created the Food Pyramid in which it emphasized lots and lots of carbs. Americans doubled their intake of wheat and "fat-free" but sugar-laden foods became the norm. The government also forced corn syrup on us while forcing up the price of sugar, all in the name of helping people.

Today, we have an obesity epidemic and the "solution" is to give the government more power to tell us what we can and cannot eat. And so it goes. The government helps to create a problem, and then is called upon to "fix" it. The best description I can give is that we have the firefighters who start fires and then are called heroes when they bravely put them out. (Except government seems to make the fires burn even brighter and hotter, all the while claiming it needs more authority to fight the very fires it is breeding.)

Krugman: More inflation and higher taxes will end the depression

In recent months, Paul Krugman has become an out-and-out cheerleader for inflation, claiming that throwing out more dollars somehow will revive the economy because people will quickly spend their depreciating money and such actions will enable more goods to sell. If a problem develops with that strategy -- and with inflation, the bad effects come later -- well, we can solve that with price controls and activist government.

Today, he repeats his claim that the REAL problem is that we don't have enough inflation because the Evil Republican Party doesn't want it. In fact, he argues, most Republicans want a gold standard. This time, he cites some allies, Thomas Mann and Norman Ornstein, who say that the Republicans today are “dismissive of the legitimacy of its political opposition.”

I must admit that while I see the Republicans historically as being destructive, nonetheless this is a real howler, given the fact that Democrats never could accept their losses in the 1980 election of Ronald Reagan as legitimate, and the opposition to Reagan's presidency was savage. You see, Krugman and other Democrats really believe that the one-party state that existed in this country during the 1960s and 1970s (and in many ways, Nixon's policies mirrored those of Democrats) was the only legitimate state of affairs. For example, Krugman writes:

If something like the financial crisis of 2008 had occurred in, say, 1971 — the year Richard Nixon declared that “I am now a Keynesian in economic policy” — Washington would probably have responded fairly effectively. There would have been a broad bipartisan consensus in favor of strong action, and there would also have been wide agreement about what kind of action was needed. 

 Krugman's memory might be a bit spotty, but I remember that what we had was a dollar crisis because the game of paying for the Vietnam War and the vast expansion of government during the Lyndon Johnson years by essentially printing more dollars had blown up. The response was...print  more dollars, but slap down price controls to make the ensuing inflation not look so bad.

In other words, the "broad bipartisan consensus" never existed in large part because of Democratic hatred for Nixon and the belief that no Republican ever should be in the White House post-FDR. But even if there had been that "consensus," the policy response to the crisis would have been a disaster.

Krugman, you see, claims that we can solve this whole crisis by printing more dollars and raising tax rates on wealthy people. He writes:

For the past century, political polarization has closely tracked income inequality, and there’s every reason to believe that the relationship is causal. Specifically, money buys power, and the increasing wealth of a tiny minority has effectively bought the allegiance of one of our two major political parties, in the process destroying any prospect for cooperation.

And the takeover of half our political spectrum by the 0.01 percent is, I’d argue, also responsible for the degradation of our economic discourse, which has made any sensible discussion of what we should be doing impossible.

 He goes on:

Many pundits assert that the U.S. economy has big structural problems that will prevent any quick recovery. All the evidence, however, points to a simple lack of demand, which could and should be cured very quickly through a combination of fiscal and monetary stimulus.(Emphasis mine)

No, the real structural problem is in our political system, which has been warped and paralyzed by the power of a small, wealthy minority. And the key to economic recovery lies in finding a way to get past that minority’s malign influence. 

 In other words, this depression could end if only -- if only -- there were a way to raise taxes on investment (thus, we would have less private investment so government or subsidized "investment" like what we saw with Solyndra would take its place) and spread even more dollars around the world while re-establishing the One-Party State. That is not a prescription for recovery, folks. It is a prescription for disaster.

I'm not going to carry the water for Republicans by any means. They are utterly blind to the destruction that their wars have created, and I will say unequivocally that Republican support for the Drug War and the fetish on immigration have helped to create a gulag of prisons that rivals what Stalin created in his worst days.

(Yes, I am a registered Republican, but that is because I had to do so in order to be able to vote for Ron Paul in the primaries. I'll keep that registration in hopes that future "Ron Paul" candidates will be on primary ballots down the road. This fall, I will vote -- if I vote at all -- for the Libertarian presidential candidate.)

Nonetheless, Democrats in the Obama administration have proven beyond a doubt that they are quite happy with the Surveillance State and the Police State and want to expand it, unionizing all of those government employees in the meantime, and turning them into a political force that will further destroy our few liberties we have left. (In California, for example, the powerful prison guard union -- a mainstay of the Democratic Party there -- successfully destroyed any attempts to lower the state's record number of inmates. The prison guards also are staunch lobbyists against any attempt to weaken our draconian drug laws.)

However, none of this matters to Krugman. To him, all that is needed is a return to the high tax rates of the New Deal along with further socialization of the economy. What he forgets is that when a government destroys the incentives for entrepreneurs and effectively undercuts the ability of entrepreneurs to operate without government subsidies, that government also dooms its economic future. Krugman might claim that our current problems are due to an economic plutocracy, but don't kid yourself. What Krugman wants is a political plutocracy based in Washington to run all of our affairs, a plutocracy that essentially would be answerable to no one but itself.

Of course, as a good Keynesian, Krugman has no use for the entrepreneur. Just tax, inflate and spend, and governments will create a good economy. That is his message, and it is utterly destructive, but also popular. But, then, Juan Peron destroyed Argentina's economy and he was a hero, too. I guess that Krugman wants Barack Obama to ape Peron or maybe even Hugo Chavez. What he does not say is how those men have ensured through their hyper-Keynesian policies that the economies of their nations will be basket cases into the foreseeable future.

Wenzel at the Fed

Bob Wenzel recently spoke at the New York Federal Reserve Bank and I include both his speech, which is a classic, and his remarks about the background of the speech. One thing I find interesting is that none of the economists there had any inkling of what the Austrians actually said versus what they "believed" the Austrians had said.

(One economist actually believed that the Austrians were the Chicago School and that the Austrians had invented the equation of exchange. I must admit to being floored by that one.)

I still have not watched the Krugman-Paul "debate," although I did read Krugman's snarky comments on his blog in which he accuses Dr. Paul of babbling. I especially find this quote to be interesting:

If Ron Paul got on TV and said “Gah gah goo goo debasement! theft!” — which is a rough summary of what he actually did say — his supporters would say that he won the debate hands down; I don’t think my supporters are quite the same, but opinions may differ. (Emphasis mine)

Yeah, Krugman believes that Really Smart and Serious People are his followers. I know one of his followers. He told me in the 1980s that the reason that the socialist economy of the Soviet Union was backward and chaotic was that the U.S.S.R. had not been a country as long as the United States. Chew on that one for a while.

Nonetheless, I love how Krugman sets himself up not only to be intellectually superior, but superior in every way to those mundanes who might believe that inflating money just might create long-term harm. Yeah, I know. Anyone who believes that really should be herded onto a farm somewhere and fed grass and oats.