"The Great Abdication" -- Of What?

Perhaps the most constant theme in Paul Krugman's recent columns has been his unwavering belief that the only way out of this depression is for governments to borrow and spend, and for central banks to inflate, and he repeats this theme again in his latest column. The way out, he believes, is easy and painless: borrow, spend, and inflate:

So what should European leaders — who have an overwhelming interest in containing the Spanish crisis — do? It seems obvious that European creditor nations need, one way or another, to assume some of the financial risks facing Spanish banks. No, Germany won’t like it — but with the very survival of the euro at stake, a bit of financial risk should be a small consideration. 

But no. Europe’s “solution” was to lend money to the Spanish government, and tell that government to bail out its own banks. It took financial markets no time at all to figure out that this solved nothing, that it just put Spain’s government more deeply in debt. And the European crisis is now deeper than ever. 

Yet let’s not ridicule the Europeans, since many of our own policy makers are acting just as irresponsibly. And I’m not just talking about Congressional Republicans, who often seem as if they are deliberately trying to sabotage the economy. 

Let’s talk instead about the Federal Reserve. The Fed has a so-called dual mandate: it’s supposed to seek both price stability and full employment. And last week the Fed released its latest set of economic projections, showing that it expects to fail on both parts of its mandate, with inflation below target and unemployment far above target for years to come. 

This is a terrible prospect, and the Fed knows it. Ben Bernanke, the Fed’s chairman, has warned in particular about the damage being done to America by the unprecedented level of long-term unemployment. 

So what does the Fed propose doing about the situation? Almost nothing. True, last week the Fed announced some actions that would supposedly boost the economy. But I think it’s fair to say that everyone at all familiar with the situation regards these actions as pathetically inadequate — the bare minimum the Fed could do to deflect accusations that it is doing nothing at all.

 And why are governments (and especially the Federal Reserve System) "abdicating" their responsibility to borrow, spend, and inflate? In a word, Goldstein:

Why won’t the Fed act? My guess is that it’s intimidated by those Congressional Republicans, that it’s afraid to do anything that might be seen as providing political aid to President Obama, that is, anything that might help the economy. Maybe there’s some other explanation, but the fact is that the Fed, like the European Central Bank, like the U.S. Congress, like the government of Germany, has decided that avoiding economic disaster is somebody else’s responsibility. 

None of this should be happening. As in 1931, Western nations have the resources they need to avoid catastrophe, and indeed to restore prosperity — and we have the added advantage of knowing much more than our great-grandparents did about how depressions happen and how to end them. But knowledge and resources do no good if those who possess them refuse to use them. 

And that’s what seems to be happening. The fundamentals of the world economy aren’t, in themselves, all that scary; it’s the almost universal abdication of responsibility that fills me, and many other economists, with a growing sense of dread. 

 To be honest, I am filled with dread, too, but it is not because governments have not been spending enough. Central Banks have been piling new reserves into banks, purchasing government securities, mortgage securities, and other assets and pretending that they actually have real value (as opposed to the paper value of "governments always can print money to pay for these 'assets'"). At home, federal borrowing accounts for 40 cents of every dollar the government spends, yet Krugman claims that this is not enough. 

If governments are abdicating anything, it is responsibility and understanding of the basic creation of wealth. Keynesians have this view that if government increases spending, the new money will trickle down to all of the various factors of production in perfectly proportional amounts so that those factors that are unemployed or underemployed will get a boost, and the factors running at higher rates of employment will not be negatively affected. Not even the University of Chicago financial economists ever came up with a Perfect Market Hypothesis to match this one!

(Krugman now is championing a new cause for the current downturn: not enough spending by state governments. His point is that the projected "job growth" of state employees is not where it is "supposed" to be right now, so the federal government must borrow more and give to the state governments, while taxes in the states need to be raised so that there can be more state spending. You see, there is no such thing as opportunity cost when governments borrow, tax, and spend.)

To buttress Krugman's points, I found another blog which worships FDR and also professes the same kind of thinking that Krugman gives us: government spending is the SOURCE of all wealth. The blog declares:

If I were the head of the US government, the first thing I would do would be to introduce a Job Guarantee program and set about restoring jobs and a living income to those who are without either. This would immediately boost aggregate demand and give business firms a reason to start investing and producing. You can’t do this by “internally deflating” your economy a la Ireland or Estonia.

Franklin Delano Roosevelt understood this better than any of our current leaders. He knew that workers’ wages are not just a cost but a source of INCOME. The mainstream economics profession continues to ignore the income side of the wage deal. Supply and demand are not independent variables, just as fiscal policy cannot be viewed outside the broader construct of the economy as a whole. Mass unemployment occurs when there are not enough jobs and hours of work being generated by the economy to fully employ the willing labor force. This is because there is insufficient aggregate spending. Government spending is the one obvious remedy.

 Notice that the writer does acknowledge that workers wages really are a "cost," but then ignores that fact when he goes into the rest of his spiel. As for causality, that is, why this situation occurs in the first place, fuhgeddaboudit. All of a sudden, people stop spending enough money to keep the Perpetual Motion Machine known as the "circular flow economy" going at "full employment," so government must step in and fill the hole.

Murray Rothbard understood these arguments quite well when he wrote in 1969:

The currently fashionable attitude toward the business cycle stems, actually, from Karl Marx. Marx saw that, before the Industrial Revolution in approximately the late 18th century, there were no regularly recurring booms and depressions. There would be a sudden economic crisis whenever some king made war or confiscated the property of his subject; but there was no sign of the peculiarly modern phenomena of general and fairly regular swings in business fortunes, of expansions and contractions. Since these cycles also appeared on the scene at about the same time as modern industry, Marx concluded that business cycles were an inherent feature of the capitalist market economy. All the various current schools of economic thought, regardless of their other differences and the different causes that they attribute to the cycle, agree on this vital point: that these business cycles originate somewhere deep within the free-market economy. The market economy is to blame. Karl Marx believed that the periodic depressions would get worse and worse, until the masses would be moved to revolt and destroy the system, while the modern economists believe that the government can successfully stabilize depressions and the cycle. But all parties agree that the fault lies deep within the market economy and that if anything can save the day, it must be some form of massive government intervention.

 Unfortunately, we have learned nothing. In the past decade, both the spending and regulatory burdens -- yes, burdens -- of the state have multiplied immensely. Entrepreneurs are finding it more and more difficult to negotiate the legal steps in cities across this country to simply start businesses. In an experiment, John Stossel looked at what it would take for a kid to legally open a lemonade stand in New York City, and he found it would take about 65 days, not to mention the opportunity cost of going through all of the legal procedures.

This is the situation across the country, yet we hear from people like Krugman is that (1) there is not enough regulation of business, (2) increasing the financial and regulatory burdens of government will help create prosperity, and (3) government spending will fill all of the holes and overcome the vast numbers of barriers that governments place in front of entrepreneurs. In fact, if I read Krugman correctly, entrepreneurs are predators, while government regulators protect us, and the income that we are taxed to pay these regulators contributes to prosperity.

The cart truly is before the horse, but Keynesians always will be in denial. Instead, they claim that if government borrows and prints new money in massive amounts, somehow all of this will translate into prosperity. I don't see how that is possible, but I guess everything is possible in Wonderland.

Krugman: I Refuse to See the Elephant in the Room

A lot of people have weighed in on the Greek Morality Play, better known as the collapse of Greece's economy, and there is no shortfall of "wisdom" and advice. (For that matter, I made comments myself on the Greek situation during an interview on the RT network last March.)

Not surprisingly, Paul Krugman has weighed in again, and this time he not only claims that the problem is not enough inflation, but also deliberately ignores the real problem behind much of the Greek collapse: Greece's notorious and "bloated" (to use a term from Krugman's employer, the New York Times) bureaucracies led by its militant public employee unions. Instead, Krugman sets up other straw men and then claims that if only -- If Only! -- the Germans would crank up the monetary printing presses, Greece could be saved.

Before going into specifics, I would like to point out that Krugman is correct when he notes that a single currency union of many states indeed does impose certain fiscal restrictions. The examples he uses for the United States are dishonest, and even when explaining the European currency union, he does not tell the whole story, lapsing, instead, into his usual spate of accusations coupled with his demands for more inflation. (And, yes, I will explain my point later in this piece.)

Krugman writes:

So, about those Greek failings: Greece does indeed have a lot of corruption and a lot of tax evasion, and the Greek government has had a habit of living beyond its means. Beyond that, Greek labor productivity is low by European standards — about 25 percent below the European Union average. It’s worth noting, however, that labor productivity in, say, Mississippi is similarly low by American standards — and by about the same margin.

On the other hand, many things you hear about Greece just aren’t true. The Greeks aren’t lazy — on the contrary, they work longer hours than almost anyone else in Europe, and much longer hours than the Germans in particular. Nor does Greece have a runaway welfare state, as conservatives like to claim; social expenditure as a percentage of G.D.P., the standard measure of the size of the welfare state, is substantially lower in Greece than in, say, Sweden or Germany, countries that have so far weathered the European crisis pretty well. 

So how did Greece get into so much trouble? Blame the euro.

 His statement is more significant for what he ignores, not claims, and he has left out the role of Greece's legendary public employee unions. Interestingly, the paper for whom he writes, the NYT, has described the Greek government unions this way:

Stories of eye-popping waste and abuse of power among Greece’s bureaucrats are legion, including officials who hire their wives, and managers who submit $38,000 bills for office curtains.

The work force in Greece’s Parliament is so bloated, according to a local press investigation, that some employees do not even bother to come to work because there are not enough places for all of them to sit.

And there is more:

The government is in many ways an army of patronage appointments built up over decades. When election time rolls around, state workers become campaign workers, and their reach is enormous. There are so many of them that almost every family has one.

This puts the Socialist prime minister, George A. Papandreou, or any other Greek leader, in a tough spot: There can be little upside to cutting jobs precisely when the government most needs support for unpopular budget-cutting actions.

“There is a political cost to these reforms,” said Nickolaos G. Travlos, an economist at the Alba Graduate Business School in Athens. “These workers are opinion leaders in their communities. And they are busy blaming the government, especially a Socialist government that is supposed to protect them."

They are also well organized. This week’s general strike follows weeks of smaller strikes, rallies, sit-ins and a blockade of the Athens landfill that has left piles of garbage rotting in the streets. When auditors from the “troika” — the International Monetary Fund, the European Central Bank and the European Commission — arrived last month at the Finance Ministry, workers blocked their entry.

There obviously is a disconnect here, but one has to remember that Krugman considers government unions to be a source of wealth creation, and not something that destroys wealth. In fact, the more bloated and unproductive the Greek government unions become, the more wealth they create, because their non-productivity means that the government has to hire more people which means more jobs. This clearly is the proverbial "elephant in the living room" that Krugman refuses to acknowledge.

Most "conservative" and libertarian criticisms of Greece that I have read do not deal with Greece's welfare state, contra Krugman. Instead, they have been critical of the very thing Krugman pointedly ignores: government employee unions, and there is enough evidence on the table to demonstrate that the picture of the hard-working Greek citizen toiling long hours is not a government worker, but rather someone in the private economy working to support the bureaucrats that have become a huge burden. (Notice how Krugman lumps all Greek workers together instead of separating those who financially support the unions and those who consume the wealth that others produce.)

Now, if Greece were on the drachma, then I suppose the government could print a lot of money to pay for these workers, and the result would be inflation, lots of inflation. By being on the euro, the Greek government has not had that option, which meant that whatever extra money came into the system outside the private economy would come in via borrowing, and the Greek crisis precisely has been about the government's unmanageable debt service.

In Krugman's world, however, things are turned upside down. Private savings are bad, government spending and debt are good. Public sector unions create wealth and private enterprise destroys it.

His comparison of this country's state governments with Greece might have some bearing in the argument, but even there Krugman gets it backwards. Krugman's support of the government unions in Wisconsin and California and his recent claim that state government spending -- or the alleged lack, thereof -- is causing the current downturn ignores the simple fact that state government unions mostly consume, not create, wealth. Steven Greenhut writes:

Over the past decade, California governments have dramatically increased the pay and especially the benefit packages of public-sector workers. We have firefighters earning average total compensation packages of $175,000 a year in many jurisdictions, and majorities of police officers in some agencies retiring on questionable disabilities. The standard retirement package for the ever-expanding class of “public safety” officials allows them to retire at age 50 with 90 percent of their final year’s pay—and that’s before all the add-ons and scams. Miscellaneous members—the rest of public employees—aren’t far behind, and we’ve seen absurd enrichment schemes and salaries in one scandal after another.

I’ve watched a sea of proposals pass that give government employees special privileges that would never be allowed for mere private citizens, such as a recently passed California bill that allows many officials to shield their personal information from public property databases. These privileges encourage arrogance and misuses of power. Pensions are now consuming 16 percent of California’s discretionary budget, and in cities such as San Jose, pension costs escalated an eye-opening 350 percent in a decade.

In Krugman's world, all of this is justified not only under the guise of "democracy" and "fairness," but also because such measures mean more "spending" by government employees, and such spending in Wonderland creates wealth. But a column by Paul Krugman, unfortunately, does not contain just bad economic analysis, but also encompasses some outright howlers, and we see them in his comparison of the Greek situation to this country:

Ask yourself, why does the dollar area — also known as the United States of America — more or less work, without the kind of severe regional crises now afflicting Europe? The answer is that we have a strong central government, and the activities of this government in effect provide automatic bailouts to states that get in trouble.

Consider, for example, what would be happening to Florida right now, in the aftermath of its huge housing bubble, if the state had to come up with the money for Social Security and Medicare out of its own suddenly reduced revenues. Luckily for Florida, Washington rather than Tallahassee is picking up the tab, which means that Florida is in effect receiving a bailout on a scale no European nation could dream of.

Or consider an older example, the savings and loan crisis of the 1980s, which was largely a Texas affair. Taxpayers ended up paying a huge sum to clean up the mess — but the vast majority of those taxpayers were in states other than Texas. Again, the state received an automatic bailout on a scale inconceivable in modern Europe.

 None of these situations involved state spending; in fact, the housing bubble and the S&L crisis involved federally-sponsored institutions which also had crises in other states. Furthermore, his examples of Social Security and Medicare fall into the non sequitur category, given that both are federal programs and paid not by state taxes and spending, but rather through a nation-wide taxation system. In other words, Krugman gives us a dishonest apples-and-oranges comparison.

However, if the states, such as California, were to have fiscal problems because government employee unions have plundered everyone else, that is a different matter altogether. Krugman has argued that the federal government should borrow in near-unlimited amounts in order to prop up the budget deficits in the states, and he essentially argues that Europe should do the same for Greece and other countries.

Yes, this will mean more inflation, but in Wonderland, more inflation means more spending and more spending means a better economy. And, yes, Krugman has argued many times that increased inflation is good for us, almost as good as an invasion of "space aliens."

As Lew Rockwell has noted in this appearance on RT, many of the "austerity" measures imposed upon Greece have been done in the name of bailing out the European banks that were foolish and craven enough to go along with Greece's spending schemes. Instead of bailouts, Rockwell has recommended that Greece simply default, which actually would better serve both Greece and Europe.

Why? Greece would be forced to put its own fiscal house in order by being realistic about government spending, and the European banks in the future would have to lend money for productive measures, not unsustainable government foolishness. Indeed, as he notes, Greek workers have been victimized by governments and banks, but his sympathies are aimed toward the real Greek taxpayer: the private sector worker who has to work long hours to support those who don't have to work at all.

Paul Krugman, on the other hand, claims that the only way to have real economic recovery and growth is for governments to borrow, print money, and continue with excessive government employee union activities. This is not economics in any authentic sense; it is just more Keynesian misrepresentation of reality.

Krugman: We Don't Need No Cause-and-Effect

Why no real recovery? Paul Krugman has the answer. According to his latest bout of economic wisdom, we are still in a depression because not enough people are employed by government. Yes, that has been a constant theme of his lately, and he takes another bite of the apple in a recent column:

Conservatives would have you believe that our disappointing economic performance has somehow been caused by excessive government spending, which crowds out private job creation. But the reality is that private-sector job growth has more or less matched the recoveries from the last two recessions; the big difference this time is an unprecedented fall in public employment, which is now about 1.4 million jobs less than it would be if it had grown as fast as it did under President George W. Bush.

And, if we had those extra jobs, the unemployment rate would be much lower than it is — something like 7.3 percent instead of 8.2 percent. It sure looks as if cutting government when the economy is deeply depressed hurts rather than helps the American people. 

 First, let us get something straight. The "private sector" hardly is thriving. Yes, we are hearing about "record profits" from some businesses, but these are not the best of times for business and a lot of people understand that the foundations are quite shaky.

Second, governments do not generate wealth on their own. Everything that they spend ultimately comes from something that has been produced in the business world. (Sorry, Keynesians. Newly-printed money is not wealth. It is newly-printed money.) Thus, if state and local governments are hurting, they are hurting because businesses and individuals do not have the revenues to support the kind of spending that many states have enjoyed.

This last point is important, because Krugman in effect is declaring that state government spending is the source of wealth for much of the economy. After all, if businesses were doing as well as Krugman and the Democrats are claiming, and if millionaires abound, then there should be no problem in raising the tax revenues necessary for the funding of police, firefighters, and teachers.

Krugman, of course, would claim that the way to generate new funds would be for the federal government to ramp up its borrowing, and then give the money to state governments. Not that this is sustainable, but at least he would have a plan.

However, that still does not solve Krugman's "cause-and-effect" issue. The gathering of tax revenues by state and local governments is what allows these governments to spend, and they only can gain revenues by taxing businesses and individuals. Yet, Krugman wants us to believe that the causal chain runs the other way: state spending generates wealth; in fact, it is the originator of wealth.

Once upon a time, academic economists actually were taught things like cause-and-effect. However, in Macroworld, effect becomes cause.

David Gordon Schools Krugman

David Gordon has a scathing review of Krugman's new book, End This Depression Now!, in which Gordon writes that Krugman has a "cartoon version of Keynesianism." Gordon writes:

Krugman does not so much as mention the pioneering work of Robert Higgs, Depression, War, and Cold War, which decisively challenges the contention that World War II ended the Great Depression. Higgs convincingly shows that prosperity returned only after the war ended. But let us, very much contrary to fact, suppose that Krugman is correct about the effects of government spending in the years after 1940. His defense of Keynes would still be grossly deficient.

What he is in effect saying is this: "Instances that appear to confirm the claim that government spending ends depressions count in favor of Keynes. But cases that go against Keynes do not count, because we cannot rule out the possibility that greater spending would have worked."
What Keynes's friend Piero Sraffa, who cannot be suspected of bias in favor of the Austrian School, wrote in his copy of Keynes's General Theory applies to Krugman as well: "as usual, heads I win, tails you lose."

 I believe that is a fair commentary on how Krugman presents his material, and his method of arguing his point. If you agree, it is because you are good; those who disagree do so because of the evil lurking in their hearts and souls.

Was Reagan a Keynesian -- or a "Liquidationist"?

Paul Krugman apparently believes that he has struck the mother lode: He has declared that Ronald Reagan actually was more "Keynesian" than Barack Obama. Why? He writes:

O.K., by now many readers have probably figured out the trick here: Reagan, not Obama, was the big spender. While there was a brief burst of government spending early in the Obama administration — mainly for emergency aid programs like unemployment insurance and food stamps — that burst is long past. Indeed, at this point, government spending is falling fast, with real per capita spending falling over the past year at a rate not seen since the demobilization that followed the Korean War.

 He then goes on:

Why was government spending much stronger under Reagan than in the current slump? “Weaponized Keynesianism” — Reagan’s big military buildup — played some role. But the big difference was real per capita spending at the state and local level, which continued to rise under Reagan but has fallen significantly this time around. 

And this, in turn, reflects a changed political environment. For one thing, states and local governments used to benefit from revenue-sharing — automatic aid from the federal government, a program that Reagan eventually killed but only after the slump was past. More important, in the 1980s, anti-tax dogma hadn’t taken effect to the same extent it has today, so state and local governments were much more willing than they are now to cover temporary deficits with temporary tax increases, thereby avoiding sharp spending cuts.

Actually, there is a mother lode of confusion here, something that Krugman is good at creating with his sleight-of-hand use of statistics, not to mention a total refusal to examine the substance of the economic recovery that occurred after the recession of 1982. First, the notion that "revenue sharing" programs by the federal government actually helped lead the recovery is a True Krugman Howler. The actual amounts of money that was distributed in the form of block grants with minimal federal regulatory oversight (something that Krugman no doubt would claim was evil) was a pittance in terms of overall state budgets.

Second, and even more important, Krugman is claiming that temporary tax increases by state governments played an important role in bringing about economic recovery. In other words, money taken from private citizens and businesses and given to state employees and businesses contracting with the state somehow turned around a nasty recession.

Unless Krugman wants to appeal to the silly "balanced budget multiplier," I am not sure that his "logic" makes sense. (The "balanced budget multiplier" is based upon the belief that government will spend all of the money taken from households instead of just part of it, so a tax increase will bring about stronger economies. Obviously, this "logic" ultimately leads to the Mother of All Prosperity Schemes: a 100 percent tax.) To claim that robbing Peter to pay Paul would bring about economic recovery simply does not pass the laugh test.

Krugman grasps at more straws with his statement that "weaponized Keynesianism" also helped bring about economic recovery. It is true that Reagan did push through spending increases for the Pentagon, and no doubt that made military contractors and their employees better off, but if ramping up military spending truly were a pure benefit rather than a cost, then I guess the key to prosperity today would be for the USA to invade yet another hapless Third World country.

(As in his statement that tax increases in the states played a strong rule in bringing economic recovery, Krugman would be hard-put to complain about American military adventures abroad, since they do result in more government spending, and as every good Keynesian knows, more government spending means more general prosperity.)

There is something that Krugman does not address in this article, and that is the amount of liquidation and economic shifting that took place during the 1980s. Since Krugman and I were born in the same year, both of us remember some of the things that occurred during the recession of 1982 -- and the claims that were being made at the time.

A lot of farmers that had piled up debt (at the urging of federal agriculture officials) in anticipation of inflation and a permanent increase in crop prices found themselves watching their farms being sold at auction after crop prices fell in the wake of the Federal Reserve System's efforts (under Paul Volcker) to cut back money growth. I distinctly remember Dan Rather beginning one of his broadcasts at a farm auction, and Hollywood produced a spate of movies decrying the demise of debt-ridden farmers.

A large number of older iron and steel foundries were abandoned, giving rise to Billy Joel's hit song, "Allentown," and places like Pittsburgh, Pennsylvania, underwent fundamental economic changes as whole industrial sectors that were the basis of the economies in those places shut down. Likewise, a number of U.S. automobile plants shut down permanently (and the way was paved for automobile companies from other countries to build non-unionized plants in the USA, plants that have performed much better than their American counterparts).

There also were fundamental changes in transportation, as the Interstate Commerce Commission regulatory schemes that created cartels in trucking and railroads were changed drastically and the ICC actually was phased out altogether. Entire new high-technology industries grew rapidly during this time, as changes in the rules governing telecommunications ultimately paved the way for the modern use of the Internet.

In other words, Reagan actually permitted huge portions of the economy to liquidate, a term that is anathema to Keynesians like Krugman. Despite the demands by members of Congress to adopt "industrial policies" that would prop up failing industries and create huge new subsidies for sectors favored by congressional Democrats, there actually was substantial free-market growth in the economy, and by the beginning of 1984, it was clear that the economy was in strong recovery mode.

Now, according to Krugman, what happened then actually was impossible. Yes, there was some growth in government, but certainly nothing like the massive spending that Keynesians claim would have been necessary for real economic recovery to have occurred. Furthermore, Keynesians would have us believe that the amount of liquidation that happened in 1982 and beyond would have dragged the U.S. economy into oblivion, but that clearly is not what happened.

People trained in statistical methods know that there always are clever ways to present numbers, and Krugman is playing that game. A number of people already have dealt with his numbers trickery and I won't join them. Instead, I wish to deal with Krugman on the basis of theory.

According to Paul Krugman, the economic recovery of 1983-84 could not have happened, given the liquidation that accompanied the recession, yet it did. Thus, he is forced to make up the fantasy story that "revenue sharing," "weaponized Keynesianism," and state tax increases really were the secret to prosperity. Oh, and the rate of inflation fell sharply during that time, something that Keynesians would argue is not possible during a recovery.

Unfortunately, a lot of people buy into this nonsense -- and it is nonsense -- and it gives Washington the excuse that taking more of our money and blowing it on "green energy" boondoggles and worse will hasten economic recovery. No, these schemes hold back whatever recovery we might get.

Robert Higgs on Krugman's New Book

Robert Higgs, who coined the term "Vulgar Keynesianism," takes on Paul Krugman's new book, End This Depression Now! I especially like Higgs' description of the Keynesian view of output.

This Goldstein Economy

Goldstein strikes again. We are not at war with Eurasia; we are at war with Eastasia!

Likewise, the economy was doing just fine UNTIL THE REPUBLICANS TOOK OVER THE HOUSE IN 2011!! We'd be in recovery by now and everyone would have a job!

For two years -- two years -- Barack Obama had an overwhelming Democratic majority in the House and a filibuster-proof majority in the Senate, but apparently even then Goldstein was lurking, directing everything in the shadows, keeping the government from spending like it should. Or so Paul Krugman would have us believe.

As I have said many times, I have no hope that Republicans in power would do any better than has Obama, especially given the fact that the housing bubble occurred under the watch of a Republican president and a Republican Congress, at least until 2006. However, I do believe that academic economists should do more than just shill for a political party, and that also means taking a critical look at what those parties are doing in regards to public policies. Instead, Krugman feeds the Democratic Underground more red meat and calls it "economics."

Krugman's latest assertion is that Obama is not spending very much at all, and if one counts state government spending, we are in a nation-wide "austerity" program. He writes:

What do I mean by saying that this is already a Republican economy? Look first at total government spending — federal, state and local. Adjusted for population growth and inflation, such spending has recently been falling at a rate not seen since the demobilization that followed the Korean War. 

How is that possible? Isn’t Mr. Obama a big spender? Actually, no; there was a brief burst of spending in late 2009 and early 2010 as the stimulus kicked in, but that boost is long behind us. Since then it has been all downhill. Cash-strapped state and local governments have laid off teachers, firefighters and police officers; meanwhile, unemployment benefits have been trailing off even though unemployment remains extremely high. 

 Speaking as someone who has had to deal with several years of furloughs because state tax receipts did not match overoptimistic projections (Gov. Martin O'Malley each year has presented budgets to the state legislature that seem to be from another planet and another economy), I know that spending is not what state politicians want it to be. However, in reading Krugman, one would think that this fall in projected spending is due to a Goldstein-like plot rather than a reflection of the hard fact that this economy is in a depression.

Yes, I know it is shocking to readers, but when economies are moribund, tax receipts tend not to be as high as politicians and Keynesian economists want them to be. However, that is a reflection of reality, not a dastardly Goldstenian Plot hatched by black-cape-wearing Republican politicians. 

Furthermore, the fall in projected tax revenues is an effect, not a cause of the depression. I know that Keynesians don't believe that; furthermore, I realize that Keynesians believe that if states raised tax rates to astronomical levels and the U.S. Government would double the amount of its borrowing, that the economy would be back to levels of prosperity in no time.

However, according to Krugman, while Goldstein has kept the Obama administration from bringing back prosperity, nonetheless this government has some "proud" and great economic achievements:

At this point, however, Mr. Obama and his political team don’t seem to have much choice. They can point with pride to some big economic achievements, above all the successful rescue of the auto industry, which is responsible for a large part of whatever job growth we are managing to get.

 Yes, the creation of "Government Motors" is a big engine of the prosperity that is left. Now, Krugman does not cite facts and figures for proof; instead, he blurts out an ex cathedra statement, knowing that the Democratic Underground and the Daily Kos will jump on that statement as being authoritative and a Self-Revealing Truth.

So there you have it. If we want real prosperity, we have to raise taxes, borrow more money, put more public employees on the payroll, and bail out failed industries. And when that rendition of the Broken Window Fallacy fails, there always is Goldstein to blame.

Krugman Solves Another Mystery! And Breaks More Windows!

In his column on why he believes austerity is the wrong policy, Paul Krugman manages to play the part of both a psychologist AND an advocate of Broken-Window Economics, which is a pretty big accomplishment when one is limited to 750 words. But, then, Krugman is an exceptional person and he was up to this mighty task.

Broken Window Fallacy, Again (and Again)

It is hard to know where to begin, but I think I'll start with his newest version of why breaking windows is good economics, and leave the psychology until the end. In a move that is like hurling a one-ton boulder through a huge plate-glass window, Krugman writes:

The bad metaphor — which you’ve surely heard many times — equates the debt problems of a national economy with the debt problems of an individual family. A family that has run up too much debt, the story goes, must tighten its belt. So if Britain, as a whole, has run up too much debt — which it has, although it’s mostly private rather than public debt — shouldn’t it do the same? What’s wrong with this comparison? 

The answer is that an economy is not like an indebted family. Our debt is mostly money we owe to each other; even more important, our income mostly comes from selling things to each other. Your spending is my income, and my spending is your income. 

So what happens if everyone simultaneously slashes spending in an attempt to pay down debt? The answer is that everyone’s income falls — my income falls because you’re spending less, and your income falls because I’m spending less. And, as our incomes plunge, our debt problem gets worse, not better.

 I admit that this sounds good, and I am sure that the Really Brilliant People at Princeton and the NY Times will be his Amen Chorus, but Krugman actually manages to pile up one fallacy after another, and in the process he also demonstrates his belief that factors of production really are homogeneous. Now, if that really were the case -- one set of assets is just like another -- then maybe the Keynesian argument would make sense, but in an economy made up of heterogeneous labor, resources, and capital, Krugman really is pursuing circular logic.

Austrians argue -- correctly, I believe -- that the real problem that becomes manifest during the boom is that investors are led down the wrong paths into investments that cannot be sustained, period. Take housing, for example. Since the Housing Bubble burst in 2007-08, the government has poured billions and billions of dollars into trying to reflate the bubble, yet overall housing prices are continuing to fall.

Keynesians have no answer for this, because in their view, if the government or private consumers continue to throw money at an asset, then it automatically should be sustained. Yet, it is obvious that the housing market it not behaving according to Keynesian dictates.

Nowhere is the dichotomy between Austrians and Keynesians more clear than in those three paragraphs. With Krugman, it is all spending all of the time, and if government slashes spending on things like "green energy" subsidies, then it is making EVERYONE poorer. Austrians, on the other hand, correctly note that these kinds of subsidies themselves enrich those who are politically-connected at the expense of everyone else. Malinvestments don't even enter the picture, at least not in Wonderland.

Yes, Yes, Advocates of "Austerity" Hate Poor People

Krugman next turns to his psychological skills, ferreting out what he says is the REAL reason that "austerity" advocates continue to push their views:

...the austerity drive in Britain isn’t really about debt and deficits at all; it’s about using deficit panic as an excuse to dismantle social programs.

In the world of Keynesianism, spending on social programs creates wealth. For example, when President Obama announced that he was killing the Keystone Pipeline, he also added that the payment of additional unemployment benefits actually would help the economy more than would the building of a pipeline because it would bring about more spending than would occur in the construction of the line.

To put it another way, Obama believes that oil is not an asset, only a cost. In that regard, he is being a good Keynesian when he claims that profitable ventures are a drain on the economy but paying out welfare benefits adds to wealth.

I believe this demonstrates a huge point of difference between Austrians and Keynesians. Keynesians like Krugman hold that by spending on social programs, the government is generating new wealth and can help build an entire economy upon such actions.

Austrians, on the other hand, believe that social programs must rest upon the back of an economy that has created real wealth elsewhere. Fiscally speaking, these programs are a cost, not a generator of net wealth. This is not an argument against such programs, but rather just a statement of economics.

In other words, the arguments reflect fundamental views of economics. Unfortunately, Krugman has decided to claim that since "everyone knows" that social programs on their own are wealth-generating, that the only reason one might argue that they should be cut back is because one hates poor people.

Economies are not self-generated from government spending. Cranking up the government printing presses and then directing the newly-created money to those who are politically-connected does not give the overall economy a boost. Instead, it enriches some at the expense of others.

Now, I am not jumping in with the "austerity" crowd that holds that governments must jack up tax rates in order to pay banks that took risks when they threw loans at dubious "investments." However, Krugman's "we owe it to each other" is not sound economics on any level, period. Furthermore, his view that government spending alone will boost the economy into a real recovery is just plain wrong. His is not a prescription for recovery; it is a prescription for a continuing depression.