Neither Structure nor Aggregate Demand

The Paul Krugman theme over the past four years have been pretty consistent and, to be honest, easy to understand. Economies around the world, including our own, are hampered by a lack of what he calls "aggregate demand," or a lack of overall spending, and until those reactionaries and members of Goldstein's Army (the Very Serious People) are vanquished, economic stagnation will remain the norm.

In the Krugman view, there are two competing philosophies. The first is the Keynesian way of thinking, which is promoted by the Good People. The second is the "Structural Unemployment" group, which is run by monsters and worshipers of Goldstein. Since the Keynesian viewpoint is obvious in terms of accuracy and truth, the only reason others would hold to another way of thinking is because they are evil and enjoy watching others suffer.

There are some people, however, who hold to the "structural" view and at least Krugman is charitable toward Edward Lazear, who presented a paper at the recent Fed conference at Jackson Hole. Apparently, Lazear is an exception to the Krugman rule that anyone who disagrees with the Keynesian thesis is evil; Lazear only is misguided.

But what if there is a third theory out there, one that examines demand from a different point of view, and instead of saying that there is a mismatch between individuals and the jobs available lays the current mess at the feet of massive malinvestments that became exposed in 2007 and 2008, and then have grown in the intervening years, thanks to government spending and regulation. Yes, Krugman refers to the third view, the Austrian Theory of the Business Cycle as nonsense and then mislabels it a "hangover theory."

With all respect to Pete Boettke and the "Coordination Problem" group, the current situation in the economy is a classic Austrian example. The "structure" and "coordination" people do have a short-run point. That is, after the original set of malinvestments are exposed and abandoned, then there would be a short period of higher unemployment when the factors of production, including labor, are re-directed away from the malinvestments and toward those lines of production that would be profitable.

(In the classic Austrian view, the malinvestments generally occur in the lines of capital goods and away from consumer goods, as there is a "mismatch" between interest rates and the general time preferences of individuals, the "mismatched" caused by government or central bank intervention. The recession is the time when the factors are redirected to more profitable uses in line with individual time preferences within the economy. During that time, there are both "mismatches" and issues of coordination between labor and other factors.)

I agree with Krugman that the current situation is not in the "mismatch" camp, although even he admits that in the early days after the meltdown of 2008 there was some "mismatch" evidence. However, where Krugman and I part ways (if we ever were on the same path at all) has been government and Fed policies since that fateful September 2008. Krugman holds that government has not spent enough, regulated enough, or bullied enough, and that if Washington engaged in massive new spending schemes, such as preparing for imaginary "space aliens," all would be well.

The Austrians, on the other hand, believe that far from cleaning up the original mess, Washington simply made the mess even bigger. Keynesians, after all, do not believe that booms are periods when resources are pushed in the wrong direction and cannot be sustained. Instead, they believe that as long as government pours money into the economy, the boom can be sustained indefinitely. In fact, Keynesians hold that unless government ratchets up the spending, the economy will be mired permanently in depression because a market economy always moves toward under-consumption and stagnation.

In Keynes's view -- which coincides with Krugman's -- market economies (and especially the more complex and prosperous ones) are inherently flawed. Writes John H. Williams in a 1948 review of The General Theory:

It was not a coincidence, or a misinterpretation of Keynes, that the first great development of the theory by his disciples was the stagnation thesis, that the war was regarded as a superlative demonstration of what could be accomplished to sustain employment by a really adequate volume of effective demand, and that the weight of expectation of Keynesian economists was that we would relapse after the war into mass unemployment unless vigorous antideflation measures were pursued. There is no better short statement of the stagnation thesis than that given by Keynes: “The richer the community, the wider will tend to be the gap between its actual and its potential production; and therefore the more obvious and outrageous the defects of the economic system…. Not only is the marginal propensity to consume weaker in a wealthy community, but, owing to its accumulation of capital being already larger, the opportunities for further investment are less attractive.”

Thus, wealth led to poverty because wealthier people were likely to save more, which would cause "aggregate demand" to spiral downward. It was as inevitable as a sunrise following early morning darkness.

Yet, let us count the ways that the government has intervened in this recession to turn it into a full-blown depression. First, the government has both pushed easy money policies AND pushed strict regulations against private lenders (while simultaneously trying to make lending easier in housing). Far from letting the worst of the malinvestments be permitted to be closed out, the government has tried to keep them going, using vast amount of resources in the process.

Second, it has poured hundreds of billions of dollars into "green energy" subsidies that are malinvestments on their faces. Government attempts to create electricity through wind and solar and has pushed inferior fuels such as ethanol that are much more costly than conventional methods and fuels, which means that hundreds of billions of private and tax dollars have been funneled into lines of production that are not and cannot be sustainable unless government intervenes even more and makes conventionally-produced electricity either illegal or so costly that only then puts the "alternative" sources on a level playing field. Some playing field.

Third, the Obama administration has continued the unwise bailout programs of the Bush administration, including the rewriting of contracts when it created "Government Motors." (I have no doubt that Bush, had he been in office, would have done the same thing, and it would have been the wrong thing.)

Keynesians believe that once resources become unemployed, they cannot become employed again in a market economy unless government intervenes first. That it is not true and history bears out that fact means nothing. After all, Keynesianism is a theory in which government intervention always is the solution.

The Economics Killers

Before I look at some aspects of Paul Krugman's column today, I need to tell readers that, no, I did not watch any of the Republican National Convention, and I don't support Mitt Romney or the Republican Party, which officially has set itself up as nothing more than the political faction of the Neoconservatives. If Romney is elected, he still won't be president; no, Bill Kristol and Dick Cheney still will be the men behind the curtain.

It always is amazing to me to see how certain narratives continue to exist, even after real-live experience has debunked them time and again. Krugman always is claiming that the Republicans (including Romney and Paul Ryan) really are Radical Free Marketeers in action and if elected, will work to make government so small it "can be drowned in a bathtub." We have had six Republican presidents in my lifetime, and I cannot recall one time that government was smaller in spending and in scope than it was when that person took office. When writing of Keynesian economics, Krugman claims that the critics are blind to the facts, but when he writes about politics, he is as blind as anyone from the Washington Times or Fox News regarding the rhetoric and the facts.

Nonetheless, in today's column, he goes off on Republicans and Medicare, claiming:

But back to the big lie. The Republican Party is now firmly committed to replacing Medicare with what we might call Vouchercare. The government would no longer pay your major medical bills; instead, it would give you a voucher that could be applied to the purchase of private insurance. And, if the voucher proved insufficient to buy decent coverage, hey, that would be your problem.

I have no idea if the Republicans can impose the Next Wonkish Measure or not, or if they would give a real-live effort. I just don't know, but given the rhetoric and reality of the past, I cannot imagine that they will do what Krugman breathlessly claims they will do. But, hey, the guy is a master of regurgitating Democratic Party Talking Points, and that is the perspective that I take. After all, he is first and foremost a political operative.

What does interest me is what he says next, for it reflects his "knowledge," or lack thereof, about markets and how they work. Take his following points regarding insurance and Medicare:

Why would anyone think that this was a good idea? The G.O.P. platform says that it “will empower millions of seniors to control their personal health care decisions.” Indeed. Because those of us too young for Medicare just feel so personally empowered, you know, when dealing with insurance companies. Still, wouldn’t private insurers reduce costs through the magic of the marketplace? No. All, and I mean all, the evidence says that public systems like Medicare and Medicaid, which have less bureaucracy than private insurers (if you can’t believe this, you’ve never had to deal with an insurance company) and greater bargaining power, are better than the private sector at controlling costs. 

I know this flies in the face of free-market dogma, but it’s just a fact. You can see this fact in the history of Medicare Advantage, which is run through private insurers and has consistently had higher costs than traditional Medicare. (Emphasis mine) You can see it from comparisons between Medicaid and private insurance: Medicaid costs much less. And you can see it in international comparisons: The United States has the most privatized health system in the advanced world and, by far, the highest health costs.

Since I don't have the cost numbers in front of me, I won't dispute what he has said, and furthermore, I will answer using the assumption that his numbers are correct. Instead, I ask this simple question: Why would a private firm create a bureaucracy and then voluntarily engage in practices that force up its costs? After all, as economists since 1871 will note, the value of the final product is not determined from the value of the factors of production, but the other way around.

In other words, firms would gain nothing from engaging in activities that are more costly than necessary to provide a final product. When we do see something as Krugman describes, we need to know why private insurance costs would be higher than government bureaucracy costs.

Krugman does not give an answer, except to claim that what we are seeing is a free market in action. To me,  this is a non-explanation, given that I never have seen an economist -- including Krugman -- claim that firms can be more profitable by imposing higher costs upon themselves. So why would the insurance companies do it, especially since they operate in what Krugman seems to claim is a near-unregulated free market?

I think anyone who has worked for an insurance firm or for any regulated industry can tell you that government "oversight" is costly. Furthermore, what Krugman does NOT say is that Medicare and Medicaid officials are not subject to many of the same regulations that are laid down on private firms. Certainly no firm would create a bureaucracy that is unnecessarily costly as in free markets, higher costs do not lead to higher profits. I also would like to add that the regulatory process also serves as a domestic protectionist device that keeps out competition -- and leads to higher prices for consumers.

Now, if Krugman really wants to claim that the pre-1871 theories -- that the cost of production is what determines the cost of the final product -- he is free to do so. However, he just might be rejecting the price theory that has been taught for more than a century. If he wishes to turn back the clock to David Ricardo's theory of value, so be it.

Goldstein and Gold

I had no idea that Ayn Rand and John Gault ruled the Republican Party and Congress, but Paul Krugman claims that is so, and who can doubt what he says, given Krugman is always right about everything. So, today he claims that Paul Ryan is a devoted follower of Ayn Rand and that he is going to try to impose a gold coin standard upon us and destroy the economy.

Given that we have had Republicans talking about gold for decades, including Ronald Reagan and his Gold Commission, and it was a Republican, Richard Nixon, who destroyed the remnants of the American gold standard, somehow I don't think a guy who has read Atlas Shrugged a few times is going to end the paper money standard we have had for a while. However, all of us know that Goldstein is capable of anything, and no one depends more upon Goldstein that Krugman.

Yes, Krugman goes over the Usual Stuff on how Republicans always are going to completely end the Welfare State, even though Republicans in power never have done that. Well, Ryan did read some works by Ayn Rand, didn't he? What other proof do you need? Krugman writes:

Well, it’s right there in that 2005 speech to the Atlas Society, in which he declared that he always goes back to “Francisco d’Anconia’s speech on money” when thinking about monetary policy. Who? Never mind. That speech (which clocks in at a mere 23 paragraphs) is a case of hard-money obsession gone ballistic. Not only does the character in question, a Galt sidekick, call for a return to the gold standard, he denounces the notion of paper money and demands a return to gold coins.

But then Krugman gets into the meat of this column: Ryan will impose a gold standard, and the economy will collapse. This falls into the "Yeah, Right" Category. First, Krugman has been claiming that inflation will lead us into recovery, and he also has claimed that inflation is a wonderful way to transfer money from the wealthy to the poor. (Please tell that to the poor and lower-income people who have been spending more and more money at the gas pump and the grocery store that inflation is their savior.)

Second, Krugman claims that the inflation rate is so low that we really don't need to worry about money, anyway. So, what is it? Is inflation bad or good? If the rate is low, why doesn't he come out and claim that we need much more monetary debasement?

An Unserious Political Operative

After a two week hiatus, Paul Krugman is back, and while I still am posting on The Agitator (which takes most of my blogging time), nonetheless I will be here periodically. Unfortunately, even after receiving a bit of a rest, Krugman has decided that instead of being an economist, he is going back to being what he usually is: a political operative instead of an economist.

His latest work, an attack on Paul Ryan, is pretty typical of what one would expect from a member of the Obama re-election campaign, and given that Krugman seems to be coordinating his columns with the campaign's talking points, we can expect more (and more, and more) of this stuff into the election and most likely beyond. As one who will not be voting for either Romney or Obama (and that clown posing as Obama's vice president), I don't have a political dog in this fight, so I'm not going to waste time and space defending undefendable politicians.

While I have no problem not putting up a defense of Mitt Romney and Paul Ryan, I cannot imagine a serious economist defending Barack Obama and his program. We have a president who is trying to destroy an entire industry (coal-burning generators of electricity) and trying to force Americans to purchase less efficient and more expensive electric power in return, and Paul Krugman claims that this is a "stimulus" program because the government has shelled out billions of dollars in subsidies to politically-connected "green energy" firms.

Yes, an unserious economist would claim that destroying a healthy and profitable industry to prop up industries that literally consume more than they produce actually will help bring about economic recovery. Yes, an unserious economist would claim that a surefire way to bring economic recovery is to prepare for an imaginary invasion of "space aliens." Yes, an unserious economist would call for the Fed to come up with a clever plan to get around the law creating the Federal Reserve System that prohibits the Fed from directly purchasing short-term federal government bonds so that the Fed could have what essentially would be a money-printing scheme to fund government expenditures.

Yes, an unserious economist would insist that a story about a babysitting co-op that allegedly kept itself afloat by printing extra babysitting coupons somehow is a perfect analogy to the U.S. economy and "proves" that all it takes is for the government to print money to keep things well-oiled.

As I have stated many times, I am not supporting Romney and Ryan any more than I am supporting Obama and that clown Joe Biden. (Talk about unserious; here is a guy who doesn't even know what century we are in -- and people claimed Dan Quayle was an idiot.)

So, if Krugman wants to claim that subsidies, bailouts, printing money, and blankets of stifling regulations constitute a "serious" economic recovery program, he can be my guest. But these things are not just "unserious." No, they are a very sick joke.

Is another Bailout in GM's Future?

Being that Paul Krugman has enthusiastically endorsed the Obama administration's bailouts of General Motors and Chrysler, he might get a double dose of happiness. According to this article, there is a good possibility that GM might go belly-up again within a few years:

President Obama is proud of his bailout of General Motors.  That’s good, because, if he wins a second term, he is probably going to have to bail GM out again.  The company is once again losing market share, and it seems unable to develop products that are truly competitive in the U.S. market.

Right now, the federal government owns 500,000,000 shares of GM, or about 26% of the company.  It would need to get about $53.00/share for these to break even on the bailout, but the stock closed at only $20.21/share on Tuesday.  This left the government holding $10.1 billion worth of stock, and sitting on an unrealized loss of $16.4 billion.

 Even though the stock market has been climbing, GM shareholders -- including the U.S. Government -- have not been participating in the good times. I hardly am surprised. Yes, the Obama administration decided to screw the bondholders and other GM creditors while laying some gifts on the United Auto Workers (a labor union that certainly played an important role in bringing down GM, although it was a group effort with managers and labor). However, the government cannot overturn the laws of economics, no matter what Krugman might say.

Debt, Depression...and Goldstein (Again)

One of the constant themes of Paul Krugman's hyper-partisan columns has been the role of Goldstein in the current economic failure, and he gives us more Orwellian material in his latest column. Yes, the same president who has unleashed the Environmental Protection Agency to try to reduce our electricity output, and the same president who had absolute majorities in the House and Senate (filibuster-proof majority there) for more than half of his current term in office has seen the economy stymied by the Forces of Evil. Yes, the economy has not climbed out of the depression because Goldstein has declared that we must remain in the mire:

There has been plenty to criticize about President Obama’s handling of the economy. Yet the overriding story of the past few years is not Mr. Obama’s mistakes but the scorched-earth opposition of Republicans, who have done everything they can to get in his way — and who now, having blocked the president’s policies, hope to win the White House by claiming that his policies have failed.

Now, the president controls the executive branch, the U.S. Supreme Court handed him a victory in the ObamaCare decision, and the president's party controls the Senate. Only the House of Representatives eludes Obama's control. That Republicans would disagree with Obama's economic policies hardly is shocking, given that opposition parties generally do disagree on a few things.

The so-called "scorched earth" opposition refers to the Republicans being unwilling to raise the top tax rate from 35 percent to 39.6 percent, and their "intransigence" in supporting Obama's desire to tax investment income more heavily. I believe that people can agree to disagree on some things, and I do believe that raising taxes on private investment income during a depression is not a good thing. I guess that makes me a "scorched earth" sort of fellow.

Ultimately, Krugman lays huge amounts of upon Edward DeMarco, who heads the agency that oversees Freddie and Fannie, and DeMarco does not support policies that Krugman likes:

But Edward DeMarco, the acting director of the agency that oversees Fannie and Freddie, refuses to move on refinancing. And, this week, he rejected the administration’s relief plan. 

Who is Ed DeMarco? He’s a civil servant who became acting director of the housing finance agency after the Bush-appointed director resigned in 2009. He is still there, in the fourth year of the Obama administration, because Senate Republicans have blocked attempts to install a permanent director. And he evidently just hates the idea of providing debt relief.

Yes, that's it. DeMarco apparently is a career bureaucrat who moved into that office by default and he stands in the way of ending the depression, which means that he must be Goldstein. Of course, we are talking about a bureaucratic functionary who easily could be canned. After all, this is the same Obama administration that overrode contracts and made up its own rules on the fly in the bailout of GM and Chrysler; this is an administration that is fining oil producers for not using cellulosic ethanol, conveniently ignoring the hard fact that there is no cellulosic ethanol being produced anywhere right now. Somehow, I am sure that the Obama people are not without options here.

Nonetheless, Krugman holds this whole thing as "proof" that Goldstein purposely is driving down the economy to keep Big Brother, er, Obama, from being re-elected. Writers Krugman:

...the DeMarco affair nonetheless demonstrates, once again, the extent to which U.S. economic policy has been crippled by unyielding, irresponsible political opposition. If our economy is still deeply depressed, much — and I would say most — of the blame rests not with Mr. Obama but with the very people seeking to use that depressed economy for political advantage.

 No, Krugman never has offered proof that DeMarco is making his decisions for political reasons, and I have no idea if Krugman's housing scheme even would make a dent in the depression. However, when one is performing the "Two-Minute Hate" and putting Goldstein's picture on the screen, good sense and even truth are going to be thrown out the window.

I'm Blogging on The Agitator in August

Radley Balko has asked me to blog on The Agitator this month, so I will do my best to agitate the readers. I'll be linking to this site as well.