Maybe the Stimulus-Bearing Space Aliens will have iPhones

I believe I owe Paul Krugman an apology, for I have written in the past that Keynesians do not have a theory of capital. I was wrong; Keynesians do have a capital theory: it is called More Spending.

Now, this is not a theory of capital like that developed by the Austrian School, beginning with Carl Menger. Instead, it is a theory that says that the construction and addition of capital to the economy is useful mainly in the amount of short-term spending that it brings. Thus, the actual performance of new capital takes a back seat to the fact that when business enterprises purchase the capital, they spend money, and it is that short-term spending that is significant.

For those who might argue differently, Krugman lays out his view in his column that claims the new iPhone will provide "stimulus" to the U.S. economy. True, it seems that others also have drunk the Kool-Aide, and others seem to be even more enthusiastic about this latest rendition of the "Broken Windows Fallacy" than even Krugman (although he does seem to buy into the concept):

A recent research note from JPMorgan argued that the new iPhone might add between a quarter- and a half-percentage point to G.D.P. growth in the last quarter of 2012. How so? First, the report argued that Apple was likely to sell a lot of phones in a short period of time. Second, it noted that although iPhones are manufactured overseas, most of the price you pay when you buy one is domestic value-added — retailing and wholesaling, advertising and profits — all of which counts as part of G.D.P. Finally, it took some plausible guesses about the price of each phone and the number of phones sold, and used those guesses to make an estimate of the impact on G.D.P.

It’s all pretty straightforward. But the implications are wider than most people realize.

The crucial thing to understand here is that these likely short-run benefits from the new phone have almost nothing to do with how good it is — with how much it improves the quality of buyers’ lives or their productivity. Such effects will kick in only over the longer run. Instead, the reason JPMorgan believes that the iPhone 5 will boost the economy right away is simply that it will induce people to spend more.

 Once again, we see the most important element of economic thinking go missing: opportunity cost. The money that people will spend for new iPhones is money that will not be directed in the purchase of other goods. We do not have new "spending" arising from nothing; what we will have is a redirection of how people spend their incomes.

Not surprisingly, Krugman does not end at that point. If you believe in the "iPhone stimulus," he crows, then you believe that more government spending will boost the economy. But, hey, why even stop there?

Why not go whole hog and hope that the invasion of the space aliens comes complete with the Little Green Men stopping at the Apple Stores and elsewhere to buy the iPhones before they set out to destroy the earth. However, if that is their plan, then we should not resist the invasion because doing so would invoke "weaponized Keynesianism," and Mitt Romney supports that, so it must be bad. (Actually, it is bad, but not because Mitt likes it. Yes, Paul, there is more to life than partisan political thinking.)

No, we should not resist because after the Little Green Men With iPhones destroy the earth, we then will have the Ultimate Keynesian Stimulus of rebuilding just about everything. As Krugman writes:

Yet depressions do end, eventually, even without government policies to get the economy out of this trap. Why? Long ago, John Maynard Keynes suggested that the answer was “use, decay, and obsolescence”: even in a depressed economy, at some point businesses will start replacing equipment, either because the stuff they have has worn out, or because much better stuff has come along; and, once they start doing that, the economy perks up. Sure enough, that’s what Apple is doing. It’s bringing on the obsolescence. Good.

The Little Green Men With iPhones could accelerate that process, all to the better. In fact, I will slightly change Krugman's next paragraph to demonstrate exactly what I mean:

But why suffer through years of depressed output and high unemployment while waiting for enough obsolescence to accumulate? Why not have the government Little Green Men With iPhones step in and spend more, say on education and infrastructure, to help the economy through its rough patch? Don’t say that the government Little Green Men With iPhones can’t add to total spending, or that government spending can’t create jobs. If you believe that the iPhone 5 can give the economy a lift, you’ve already conceded both that the total amount of spending in the economy isn’t a fixed number and that more spending is what we need. And there’s no reason this spending has to be private.

So, all it takes for us to experience new stimulus is for E.T. to phone home. If he does it with an iPhone, all the better.

Krugman: Break Windows, Help the Economy

OK, so Paul Krugman has decided to be a political shill for Barack Obama, but in today's blog post, he decides to abandon economics all together. Just as Larry Kudlow, Timothy Noah and others jettisoned economic logic for a bizarre "Broken Windows Theory" when they claimed that the 9/11 attacks would be good for the economy,  Krugman (fittingly on September 11) makes a similar claim about the iPhone 5.

Krugman writes:

There’s been some buzz about a report suggesting that the iPhone 5 could, all by itself, give a significant boost to the US economy. I can’t judge how plausible the sales estimates are; but it’s worth pointing out how the economic logic of this suggestion relates to the larger picture.

The key point is that the optimism about the iPhone’s effects has nothing (or at any rate not much) to do with the presumed quality of the phone, and the ways in which it might make us happier or more productive. Instead, the immediate gains would come from the way the new phone would get people to junk their old phones and replace them.

In other words, if you believe that the iPhone really might give the economy a big boost, you have — whether you realize it or not — bought into a version of the “broken windows” theory, in which destroying some capital can actually be a good thing under depression conditions

Of course, it’s nice that the reason we’re junking old capital is to make room for something better, not just for the hell of it. But you know what would also be nice? Building useful stuff like infrastructure employing labor and cash that would otherwise sit idle.

First, it is obvious that Krugman has not a clue about the creation of wealth and he certainly knows nothing about capital. Keynesians believe that the real benefit of capital spending is, well, spending, and Krugman does nothing to dispel that false notion in this post.

Second, the idea that the money spent on buying new iPhones would provide a "significant boost" to the economy is to forget what Keynesians and Krugman always forget: opportunity cost. If someone purchases an iPhone, then that means the person cannot purchase something else. The presence of new iPhones does not mean that suddenly everyone has new reserves with which to spend new money.

Now, Krugman seems at best to give a backhanded endorsement of the "broken windows theory," but nonetheless this "theory" is pure Keynesianism. As every Austrian knows, it is not even the "broken windows theory," but rather the "broken windows fallacy." The concept comes from Frederic Bastiat in his famous "That Which is Seen, and That Which is Not Seen," the first chapter entitled, "The Broken Window."

Defenders of Krugman will point to the last paragraph in the quote in which he essentially calls for more public works spending, but one needs to remember that Krugman sees public works projects as important not because of the roads and bridges that will make transportation more reliable, but because these projects are transmitters of spending via individual incomes.

He has it backward. What we produce is what permits us to consume. Krugman believes that all it takes is for someone to have cash in his hand, and the goods magically appear on the shelves. It might work that way in Wonderland, but not in a real economy.

(Thanks to Scott Ellis for showing me Krugman's post)

Is Krugman an Economist or Just a Partisan Shill?

According to Paul Krugman, the failure of Republicans to pass the American Jobs Act is the reason there is at least a little bit of doubt about Obama's re-election victory this fall. You see, according to Krugman, the economy would be close to booming right now if only, if only, if only.

And how does Krugman know that this piece of legislation would have been the magic bullet? Because some bloggers said it would. Yes, a bunch of Keynesians claim that a law that did not passed was the Answer to the Great Secret, but now we never will know if this act -- THIS act -- would have set the world aright.

This is the kind of stuff that stuns me. I was taught by some very good economists not be be a cheerleader for politicians, and certainly not to be someone who repeats political talking points and pretends that they really are economic truths. At least Alan Blinder is paid to be a partisan shill, and spews his propaganda on Obama's payroll.

At the same time, Ben Bernanke is trying to rev up the inflation engines in hopes that he can give Obama at least a small boost before the election to make it seem as though the economy is better off than it really is. Gee, maybe it is a Princeton thing; academic economists as nothing but shills for politicians, paid and unpaid.

[Update]: In his latest column, Krugman repeats his tired canard that it was Goldstein's "obstructionism" that is responsible for the current downturn. Along the way, he gives some very curious economic analysis:

There were good reasons for these positive assessments. Although you’d never know it from political debate, worldwide experience since the financial crisis struck in 2008 has overwhelmingly confirmed the proposition that fiscal policy “works,” that temporary increases in spending boost employment in a depressed economy (and that spending cuts increase unemployment). The Jobs Act would have been just what the doctor ordered.

 Wow! We were almost there, almost to prosperity! Goldstein destroyed the recovery again! However, Krugman is not through "proving" that Goldstein was the evil force behind this depression. He writes:

The most important consequence of that stonewalling, I’d argue, has been the failure to extend much-needed aid to state and local governments. Lacking that aid, these governments have been forced to lay off hundreds of thousands of schoolteachers and other workers, and those layoffs are a major reason the job numbers have been disappointing. Since bottoming out a year after Mr. Obama took office, private-sector employment has risen by 4.6 million; but government employment, which normally rises more or less in line with population growth, has instead fallen by 571,000. 

 Now, I can see a politician writing this, but an economist really has some explaining to do in order to successfully claim that government jobs will lead a recovery. First, however, Krugman does more of his aggregate tricks when he tries to essentially claim that private sector employment pretty much has recovered.

Here is the problem: the kinds of jobs that disappeared versus the kinds of jobs that have grown in number in the past four years are not the same. It is clear that the private sector is not as robust as it was before the downturn, and the lack of tax revenues being generated is the main reason that employment is lagging in state and local government jobs.

Krugman, however, wants us to believe state and local government jobs are the source of economic growth. That literally is impossible. These are not wealth-creating jobs, for the most part; instead, they consume wealth. The lack of growth in those jobs is proof that the private sector still is not producing enough to fund levels of government to where they were four years ago.

Like most Keynesians, Krugman has the cart before the horse. He wants us to believe that government is a net wealth creator when it is not. Furthermore, he wants us to believe that government can inflate the economy into prosperity, which is an illusion, but a convenient illusion.

Saving the Economy Through Bailouts? Only in Wonderland!

I guess it is good that the Democratic National Convention is over if for no other reason than Paul Krugman can get some sleep, given his heart was pounding with joy and admiration over the brilliance of the speakers. No doubt, all this fall he will coordinate his columns and blog posts with talking points from the Obama campaign and the DNC, and I am sure that some real howlers are in store for us lucky readers.

His latest column of gratitude and worship comes in the form of praising Barack Obama for his Wondrous Works in Giving the Economy Life Eternal, or at least a small recovery. He writes:

On Inauguration Day 2009, the U.S. economy faced three main problems. First, and most pressing, there was a crisis in the financial system, with many of the crucial channels of credit frozen; we were, in effect, suffering the 21st-century version of the bank runs that brought on the Great Depression. Second, the economy was taking a major hit from the collapse of a gigantic housing bubble. Third, consumer spending was being held down by high levels of household debt, much of which had been run up during the Bush-era bubble. 

The first of these problems was resolved quite quickly, thanks both to lots of emergency lending by the Federal Reserve and, yes, the much maligned bank bailouts. By late 2009, measures of financial stress were more or less back to normal. 

This return to financial normalcy did not, however, produce a robust recovery. Fast recoveries are almost always led by a housing boom — and given the excess home construction that took place during the bubble, that just wasn’t going to happen. Meanwhile, households were trying (or being forced by creditors) to pay down debt, which meant depressed demand. So the economy’s free fall ended, but recovery remained sluggish. 

 What Krugman wants us to believe is that by bailing out the banks and financial houses (which was pushed by the Bush administration and continued by Obama's presidency), the economy was saved. No, what happened was that the original downturn was not as great as it would have been had some other Kool-Aide-drinking banks also were forced to face the music -- complete with some executives losing their Connecticut mansions -- and the public find out very quickly which financial institutions were zombies and which were not.

Now, Krugman would argue that had the bailouts not occurred, the entire financial system would have collapsed. Granted, if the best thing the financial system could do was to engineer a housing bubble with more liabilities than the entire wealth of the world, maybe it needed the exit door. However, I suspect that we would have seen something quite less than the Apocalypse as Wall Street figures would have seen it in their interest to find a way out of the mess they had helped to create.

But there is more. Economist Mario Rizzo had a most interesting and insightful post this morning on Facebook, writing:

The Democrats say that we cannot go back to the policies that caused the financial crisis and recession. Ok. So what were those policies: The irresponsible expansion of Fannie and Freddie? The excessively easy monetary policy of the Fed? Inadequate regulation of securities? I do not remember a single Democrat objecting to these policies during the period before the crisis. I do remember Barney Frank pushing more and more expansion of Freddie and Fannie, though. Oh, the Bush tax cuts. No economist I have heard of says that the tax cuts caused the crisis and recession. So what are they talking about? 

In fact, what do we have today? For one, it is a financial system full of zombie institutions with the bailouts obscuring which institutions are healthy and which are not. Furthermore, we have the clashing policies of easy money and picky regulations. Yes, the Obama administration is demanding that banks lend money out the wazoo, but the regulators don't want anyone to get those loans. One might want to try a policy in which the banks actually have to bear the consequences of bad and even reckless loans without having the Federal Reserve and the taxpayers standing behind to clean up the mess. I suspect that we would see some civilized behavior on Wall Street; instead, we see what, frankly, is a rigged game in which the government pushes down interest rates, limits the loan choices for banks via strict regulation, and then holds out the prospect of small-but-near-guaranteed returns from federal paper. Gee, I wonder where the banks will send their money.

And then there is the GM bailout. Krugman writes:

But, that said, Mr. Obama did push through policies — the auto bailout and the Recovery Act — that made the slump a lot less awful than it might have been.

 There is a bit of a problem here; the General Motors and Chrysler bailouts did not help the economy; they hurt it. Yes, they kept the United Auto Workers in cash, which was the real purpose, anyway. (More on this below.) However, they also diverted huge amounts of capital away from more productive sectors in order to fund a venture in Crony Capitalism or maybe even Crony Socialism.

I doubt that Krugman is familiar with Frederic Bastiat, and reasonably so, since Bastiat really emphasized opportunity cost and Krugman really seems to believe that by printing money, government can do away with that pesky little economic law. The GM and Chrysler bailouts not only were politically-motivated, but also were carried out with a political calculus, all the way down to determining which dealerships would be closed and which would stay open. (It seems that campaign contributions had something to do with the calculus of decision making.)

Bastiat was a master of understanding the larger picture, something that Keynesians are not able to comprehend. (Sorry, folks, the use of aggregates does not constitute a view of a "big picture" of economics.) Instead of looking to the UAW members who kept their jobs, Bastiat would have looked at the opportunities that were lost and the entrepreneurs who could not see their own ideas fulfilled because the UAW needed a bailout.

I notice another trend in Krugman, writings, and that is a very sneaky theme that goes something like this: The economy is going to recover very well, anyway, so we should re-elect Obama to "validate his record." Furthermore, Krugman wants us to believe that if Mitt Romney were elected and the recovery occurred, that would be very bad because he would wrongly get the credit for recovery. (Actually, I think it will be bad if either man wins the election, but that is another story.)

If Obama is re-elected and the economy slides down, then I am sure that Krugman simply will blame the Goldstein Republicans or even George W. Bush. Of that we can be sure.

While I did not watch the DNC (or RNC) conventions, I did see a hilarious Youtube of former Michigan Governor Jennifer Granholm claiming that Obama's auto bailout saved the entire U.S. manufacturing sector and with it, the whole economy. Not only is she completely unhinged, but the notion that forcing taxpayers to underwrite a horribly-unproductive industry is not the way to save anyone except for those who were politically-connected. Furthermore, her claim that the "entire auto industry" would have collapsed without the bailout is simply false.

I do find it instructive that Krugman never mentioned this mangling of the facts, but as I have said before, the guy is a political operative, not an economist. A real economist would not claim that throwing money into a political rathole constitutes a stimulus that leads to recovery.

"Seriously, that was an awesome speech."

Lest anyone think that Paul Krugman is anything more than a political operative, read his blog post on Bill Clinton's speech at the Democratic National Convention. Krugman writes:

Seriously, that was an awesome speech. Clinton isn’t just an amazing political talent; he has the ability to make wonkery accessible and compelling. Of course, he had one major advantage over the supposed wonks on the other side (still shaking my head over the Ryan implosion), namely, the well-known liberal bias of the facts.

 Whatever. Actually, if Bill Clinton is right and there are three millions jobs going begging in this country because of mismatches with appropriate workers, I'd say that was a problem. No, that is not the main cause of high unemployment, but it is just one more nail in the coffin of the U.S. economy.

By the way, Peter Schiff has done a great job of exposing the mentality of some delegates to the DNC with this video on a call to ban all corporate profits. To be honest, I doubt there is one delegate at that convention who could adequately explain why profits AND losses are important in a free-market system. But, then, I doubt Krugman could explain, either.

Economist or Political Operative?

You will notice that I rarely offer criticism of Paul Krugman's material when he is being directly partisan. The reason is that I believe that one can be a political operative or an economist, but when an economist becomes a pure shill for a political party, then whatever he or she writes on that subject is not worth reading.

I will continue to make comments on actual policy prescriptions and Krugman's view of the economy, but I am not going to take political sides and defend the undefendable.

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.