The Meaningless GDP Growth Numbers

The latest GDP numbers were released Friday and, no, despite what the Associated Press tells us, the economy in the last three months of 2009 did not boom. Yes, 5.7% is a gaudy number, but even Paul Krugman says that it is a "blip." (Yes, when I agree with Krugman, I put that one on, too. Broken clocks can be correct twice a day.)

The current situation, as Krugman explains, is based upon what is called an "inventory bounce." He writes:

Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

It is interesting that Krugman brings up "long-term investment," because at the current time, we don't see businesses investing for the long haul, especially in this country. This is not due to myopia on part of business owners, but rather because we have a situation of what Robert Higgs in this excellent paper calls "regime uncertainty."

During the 1930s, the Roosevelt administration was openly hostile to business owners, forcing up taxes to confiscatory levels (FDR even tried to have a 100 % tax on all income above $25,000 a year), and making open threats to seize companies or force them to shut down. Now, this made him popular with lots of voters, as "populism" does seize upon the resentments of people.

If you notice, Obama is doing the same thing. Now that many of his initiatives are being beaten into the ground with the loss of the 60th Democrat in the U.S. Senate, he is resorting to Huey Long-style threats against private enterprise. No doubt, this will please the Paul Krugmans of the world, but it also means the end of long-term investment here.

And the end of long-term investment here means that businesses will try to keep current operations going but also are going to have an exit strategy, just as they had during the 1930s. However, during that decade, they did not have the option of investing in places like China, which has shown itself to be much more friendly to capital investment than the United States.

To a Keynesian like Krugman, I might as well be speaking gibberish. Keynesians believe that all that is necessary is for the government to print lots of money, make sure that people receive it, and then watch them spend. The more people spend, the more the economy magically grows, since in the Keynesian mind, all assets are homogeneous and spending is the yeast that makes the economic bread rise.

Remember, Krugman holds that investment is useful only because it is another mechanism for spending. The concept that capital investment means more production in the future, and creates the means for people to obtain a higher standard of living simply does not exist in the Keynesian thinking. It is always spending all the time.

March of the Princeton Peacock

In his January 29 column, "March of the Peacocks," we see proof of what I have been saying for years: Paul Krugman is not an economist. He is a political operative, period.

OK, why do I claim that a NOBEL LAUREATE in economics is not an economist? Is not the Nobel given to someone who has contributed something important to economic science? (Not really, but that will not be the topic of discussion today, as this column is dedicated to debunking the wit and wisdom of Paul Krugman, not trashing the Swedish Academy of Sciences, which gives the award.)

Instead, we deal with Krugman's latest missive of rage that Obama has announced a toothless "spending freeze," which apparently turns the poor president into a ... Republican. Besides Krugman's gratuitous insults of President Obama, however, I also think this column presents a very good view of what Robert Higgs calls "vulgar Keynesianism." So, let us begin.

Right out of the box, Krugman proclaims:

Last week, the Center for American Progress, a think tank with close ties to the Obama administration, published an acerbic essay about the difference between true deficit hawks and showy “deficit peacocks.” You can identify deficit peacocks, readers were told, by the way they pretend that our budget problems can be solved with gimmicks like a temporary freeze in nondefense discretionary spending.

Horrors! Obama has endorsed such a scheme, and The Great One is enraged:

What’s going on here? The answer, presumably, is that Mr. Obama’s advisers believed he could score some political points by doing the deficit-peacock strut. I think they were wrong, that he did himself more harm than good. Either way, however, the fact that anyone thought such a dumb policy idea was politically smart is bad news because it’s an indication of the extent to which we’re failing to come to grips with our economic and fiscal problems.

So, let us stop for a moment and think. What is a "dumb policy idea"? Why, according to Krugman, it is anything that lessens the burden that government place on individuals. And it gets better:

The nature of America’s troubles is easy to state. We’re in the aftermath of a severe financial crisis, which has led to mass job destruction. The only thing that’s keeping us from sliding into a second Great Depression is deficit spending. And right now we need more of that deficit spending because millions of American lives are being blighted by high unemployment, and the government should be doing everything it can to bring unemployment down.

Only in Paul Krugman's Wonderland can such a series of words be put into one supposed coherent thought. We are in a severe financial crisis because the financial institutions followed the government's directive and went bonkers in lending money for housing, paying no attention to the growing bubble. Furthermore, they took these risks not because the bank regulators had been seized by "Reaganite free market ideology," but because of the explicit and implicit guarantees by government authorities and especially the Federal Reserve System.

Furthermore, deficit spending is making things worse, not better. It adds to our crushing debt and it further distorts the fundamentals of the U.S. economy in a way that makes us worse off now than when presidents Bush and Obama began their attempts to "spend our way out of the recession."

Unfortunately, as they say on the late-night infomercials, "Wait! There's more!"

In the long run, however, even the U.S. government has to pay its way. And the long-run budget outlook was dire even before the recent surge in the deficit, mainly because of inexorably rising health care costs. Looking ahead, we’re going to have to find a way to run smaller, not larger, deficits.

How can this apparent conflict between short-run needs and long-run responsibilities be resolved? Intellectually, it’s not hard at all. We should combine actions that create jobs now with other actions that will reduce deficits later. And economic officials in the Obama administration understand that logic: for the past year they have been very clear that their vision involves combining fiscal stimulus to help the economy now with health care reform to help the budget later.

The sad truth, however, is that our political system doesn’t seem capable of doing what’s necessary.

If anything exposes the shallow thinking that comprises Keynesianism, here it is. First, Krugman resorts to, well, gimmicks. Only a Keynesian-socialist would believe that a program based upon a 2,000-plus page bill that uses a combination of criminal law, government spending mandates, and price controls would lower the federal deficit.

Second, he uses rhetorical trickery in declaring that somehow the government can identify those very jobs (and then create them) which will result in later deficit-reduction. Does he mean more tax collectors? Perhaps we need more people to run printing presses, since he tries to tell us that printing money actually creates a "solution" to our economic problems.

In fact, why create "jobs" at all? For Krugman, everything is based upon spending, spending, spending. Why not just give everyone bagfuls of money and let them quit working? After all, in the Keynesian world, an economy magically appears when we start spending money. Economic fundamentals? Why those are just the creations of sick, "Reaganite" minds!

Here is the problem. Krugman has endorsed time and again government initiatives that increase the burdens that private businesses must bear. (No problem to a Keynesian, as the increases costs require more spending which -- Presto! -- creates prosperity.) In the real world, when businesses bear heavier burdens and consumers cannot pay higher prices, we have this thing called bankruptcy.

Furthermore, when companies like General Motors and Chrysler are no longer solvent, that means that the sum of their assets is greater than the whole of the company, the very definition of being bankrupt. But instead of allowing those assets to be liquidated and turned over to companies that can run them profitably, Krugman and his Keynesian-socialist friends demand that government prop up those companies, which creates a further drain on the economy.

During the past two years, we have seen the burden of U.S. debt grow to insurmountable levels. The government has increased its spending wildly, has increased the minimum wage (and, not surprisingly, teenage unemployment is at record levels), and is ramping up environmental rules that make it even more costly for businesses.

Unfortunately, the Keynesian mind cannot see any of this. All it can see is spending, and if spending is up, then unemployment must be falling. Keynesians simply cannot fathom the obvious: the more government increases its burdens, the more difficult it is for people to engage in simple economic transactions, and that means the destruction of wealth.

Now, I will give Krugman credit for saying the political system is incapable of doing what is necessary. However, he is making the absurd statement that politicians are not willing to spend even more money, which is an oxymoron. (I agree that the American political system, which is geared to increased spending, is incapable of taking any long-run action to stop the bleeding and put the U.S. economy back on a sound, or at least semi-sound footing.)

Perhaps it is ironic that Krugman uses the peacock as the symbol for someone who believes that cutting government spending is a good thing. After all, the guy has been strutting about for a long time, advocating unsound economic policies, demanding more inflation, and generally calling for the destruction of private enterprise.

Unfortunately, he cannot see the damage behind him because his tail feathers are in the way.

Krugman and Obama's "Conservative" Ideology

Until reading the Great Wisdom of Paul Krugman's blog, I had no idea that Barack Obama really was a Reaganite Conservative, but the Great Nobel Laureate has made this secret discovery and shares it with the common folk:

These days quite a few people are frustrated with President Obama’s failure to challenge conservative ideology. The spending freeze — about which the best thing you can say in its favor is that it’s a transparently cynical PR stunt — has, for many, been the final straw: rhetorically, it’s a complete concession to Reaganism.

According to what I heard on the radio yesterday, the government plans to "freeze" spending in a way that will "save" about $25 billion a year -- this from a multi-trillion-dollar budget. And this is a "complete concession to Reaganism"? (It is not as though Ronald Reagan froze government spending, and under his presidency, the budget grew, and grew.)

To let us know that he always has been on the case, Krugman shares a column he had a couple years ago that "proves" Obama must be a secret admirer of Reagan. (Maybe he has a candle shrine to the Gipper somewhere in a secret room in the White House.)

According to Krugman, the 1980s was a time when the rich got richer and the poor got poorer, a veritable (let's hear it) "decade of greed." However, if one can think back to the time when personal computers were in their infancy and the high-tech sectors began to grow, that was the 1980s. Everything you are using now just to read this article came to the fore during that time.

Furthermore, Krugman claims all over his columns that the only true way to fight a recession is through huge increases in Keynesian spending, and that permitting inflation to fall and not trying to prop up failing sectors is the way to disaster. Well, he might remember that the Reagan administration was the last one to permit the liquidation of malinvested resources, and out of it came not only a strong recovery, but the base for gains in productivity that lasted nearly 20 years.

Look at what has happened in the last year. The government has been printing money and throwing it everywhere, yet unemployment is growing, and we are farther from a real recovery now than we were when Obama took office. Krugman's typical Keynesian response is that the government has not spent enough. Right. The USA now has debt that guarantees either an outright default or repudiation of debt through inflation, and Krugman still is not satisfied and wants even more profligacy.

Ludwig von Mises and the Austrians were on the Keynesian scam from the beginning. Just because the latest Prophet of the Hoax has a Nobel Prize does not mean Keynesianism has stopped being fraudulent. It was and always will be a pathetic excuse for economic analysis.

Krugman and the Senate Filibuster

For most of the time from 1995 to 2007, Republicans controlled the U.S. Senate. For most of the same period (since 1999), Paul Krugman was writing columns for the New York Times. I have not read all of his columns, obviously, but I think I safely can say that he never wrote a column attacking the Democrats for using the filibuster to block legislation.

In other words, when his party was in the minority, the filibuster was (and is) a good thing because it could block legislation he did not like. However, now that Democrats have worked for more than a year with a filibuster-proof majority only to lose that advantage in the stunning win last week by Scott Brown in Massachusetts, suddenly the filibuster is turning this country into a "banana republic."

Why, Krugman even points out that the filibuster is not in the Constitution! Wow! A "Progressive" who has discovered the U.S. Constitution! What next? Will Krugman ask where in the Constitution can we find the authorization for all of the power that is controlled by the executive branch? Maybe, just maybe, he will start asking where the Constitution authorizes Social Security, Medicare, and a whole host of other things he supports.

What truly is pathetic is that he resort so the "Goldstein" accusations. For the past year, Republicans have been toothless, falling before Democrat supermajorities in the House and Senate and a president who has done what he darn well pleases, yet any lack of "progress" is due to those Republicans! Goldstein lives!

Krugman's Liquidation Fetish

Oh, sadness! Paul Krugman is beside himself, as President Obama has announced a tiny (and I mean tiny) spending freeze on about $25 billion a year. Yet, to hear the Great Nobel Laureate put it, Obama has decided to destroy the economy. In Krugman's own words:

A spending freeze? That’s the brilliant response of the Obama team to their first serious political setback?

It’s appalling on every level.

It’s bad economics, depressing demand when the economy is still suffering from mass unemployment. Jonathan Zasloff writes that Obama seems to have decided to fire Tim Geithner and replace him with “the rotting corpse of Andrew Mellon” (Mellon was Herbert Hoover’s Treasury Secretary, who according to Hoover told him to “liquidate the workers, liquidate the farmers, purge the rottenness”.)

Now, there is a bit of a problem here. With the Obama administration running up deficits of more than a trillion dollars a year, we have to ask ourselves just where the government is going to find all of these excess funds. Oh! I forgot! We print the money, the Zimbabwe solution.

(By the way, had Hoover actually listened to Mellon instead of rejecting his advice, there would have been no Great Depression. Mellon understood then -- as some of us understand now -- that there were huge amounts of malinvested assets that needed to be liquidated before the economy could begin to recover.)

The problem in the economy is not inadequate demand, no matter what Krugman claims. The problem is that the government continues to try to resurrect dead or dying assets with yet another infusion of cash, and with predictable results. These assets soak up resources and continue to distort the economic fundamentals. Granted, a Keynesian cannot understand that simple point because to a Keynesian, there are no economic fundamentals, just an amorphous mass called an "economy."

In this blog posting, Krugman lays another attack on Ronald Reagan and the Recession of 1982 without telling the whole story. (Krugman is quite adept at leaving out the important parts, especially if the facts don't coincide with his narrative.) Even though Krugman wants us to forget this point, people were predicting defeat for Reagan in 1984, as the Keynesians predicted another Great Depression.

Instead, Reagan did not try to use inflation to prop up malinvested assets, did not try to "stimulate demand" with lots of printed money, and within a year, the economy was well on the road to recovery. You might recall that he won every state except for Minnesota (his opponent, Walter Mondale, came from Minnesota, and Reagan barely lost that state) and Washington, D.C., which always votes for Democrats.

True, Krugman tries to spin a Keynesian recovery from that one, too, but it does not work. But, then, most of what Krugman wants does not work.

The Hayek-Keynes Rap

If you want to get a sense of the Austrian versus Keynesian viewpoints, then this little rap, the brainchild of Russ Roberts of George Mason University, will help. And it is fun to watch.

If you want to know about the "stimulus," then know something about the "hair of the dog" cure for hangovers. They are pretty much the same thing.

Krugman and the Tyranny of Markets

The Great Nobel Laureate is upset that someone is worried about the response of the markets (this means Wall Street, of course). Now, I happen to agree with some of what Krugman says, but for very different reasons. As usual, even when Krugman starts to get it right, he ultimately veers into Wonderland.

Krugman is reacting to Tim Geithner's argument that the Senate needs to reconfirm Ben Bernanke in order to calm the markets, and declares that the government should not base its actions on possible reaction of others:

Nobody really knows how the markets will react; the right thing, always, is to pursue policies that look right on the substance.

At one level he is right; markets generally will react short-term to anything that upsets the current political calculus. However, the idea of "substance" in Krugman's Wonderland is for the government to be printing more money and for the state essentially to nationalize the markets. This is not substance, folks. It is something akin to what Hugo Chavez is doing in Venezuela, and we all know how well that is working.

Like so many Keynesian economists, Krugman looks at markets with the wisdom of John Maynard Keynes himself, who declared markets to be run by "animal spirits." To Keynes, there was no rhyme or reason to markets and furthermore, the sale of secondary assets in any kind of market had no economic value, anyway. Therefore, the markets don't tell the government what to do; the government tells the markets how to act.

So, if there is to be tyranny, he wants it to come from Washington. No doubt, Paul Krugman has the Great Wisdom necessary to run all of our economic affairs, just as the central planners of the old Soviet empire were able to do. (One of Krugman's mentors, the late Paul Samuelson, was full of praise for Soviet Socialism, all the way until the empire collapsed.)

Krugman Agonistes, Part II

The great soul search is over. Paul Krugman has, albeit reluctantly, recommended that Ben Bernanke be reappointed as the chairman of the Federal Reserve System. Now, this hardly is the Great Moment For Which I Have Been Waiting, but I do find his reasoning to be interesting.

On the con side, Krugman states:

• The Fed did not recognize the Greenspan-Bernanke housing bubble;
• Bernanke has failed to admit publicly that he blew it on the subprime mortgages;
• He failed to support the creation of a Consumer Protection Agency (and old Ralph Nader demand in which a government agency full of activists who hate private enterprise will decide pretty much everything economic);
• He is not aggressively pushing policies that will quickly bring down inflation and create millions of new jobs;
• He thinks too much like a banker.
  

On the pro side, he writes:

• While there are good Keynesian replacements, a confirmation battle would be bruising, so it is better to go with the safe choice;
• Bernanke has engaged in "unorthodox" but necessary actions to "save the economy from depression;
• Another appointee might listen to the "inflation hawks" (people who think inflation is bad), which would make things even worse.

Let me translate: Bernanke has "fought" this recession by using the Fed's unlimited pocketbook to buy trillions of dollars of worthless assets and help banks and other entities artificially balance their ledgers, and he should be rewarded for it. Second, any worries about inflation are overblown and the real enemy is deflation and unemployment.

As much as anything, Krugman's words today expose the Keynesian mentality as well as anything I have read. To a Keynesian, there is the Eternal Struggle Between Inflation and Unemployment because, after all, a market economy is prone to internal destruction because ultimately, consumers cannot spend enough money on their own to keep the economic perpetual motion machine running.

In this view, all assets, factors of production, and capital are homogeneous entities that pretty much respond equally to new money being thrown into the pot. New money, or should I say, newly-created (printed) money always greases the wheels of the machinery and leads to more economic activity, and more activity will lower unemployment.

As you know, I have a totally different view of things, and from the Austrian perspective, inflation does not grease the wheels of commerce over time, but rather destroys them, because assets and the like are NOT homogeneous. They are heterogeneous, and their values reflect the valuation that consumers give them through their own choices.

Lest anyone think that "aggressive" policies of money creation will bring back an economy, read this superb piece by Doug French, given in Houston last Saturday in which he takes a look at the experience in Japan. (The Japanese central bank followed Krugman's advice, so if you want to see Krugmanism in action, read Doug's account.)

As for me, I don't want to see Bernanke reappointed. I want to see the Fed closed down. Get rid of this engine of inflation and economic destruction. Now.

Krugman Agonistes

Paul Krugman says he is "agonizing" about the reappointment of Ben Bernanke to the chairmanship of the Fed. Of course, he "agonizes" for all of the wrong reasons. Bernanke, you see, is too worried about "inflation" at a time, Krugman says, when he should be more concerned about "joblessness."

You have to understand that Krugman, who writes in The Return of Depression Economics that printing money "solves" a lot of economic problems, really believes that the printing press creates wealth. (No doubt, if I could print money and pay off my debts, that would solve a lot of my problems, too, but nonetheless printing money is what the ancients once called inflation.)

Like every good Keynesian, Krugman actually believes inflation is a good thing. You don't believe me? Then read this from an earlier post on his blog:

Right now, real interest rates are too high, on a PPE basis (that’s Proof of Pudding is in the Eating): the economy is clearly operating far below capacity due to insufficient demand. The cost of that insufficient demand is enormous — not just in dollars of wasted output, but in severe social and psychological damage to the unemployed.

While real interest rates are too high, however, the short-term nominal rate is as low as it can go. So there are only two ways real rates can be reduced. Either the Fed has to buy long-term assets, driving down the wedge between short and long rates — the Gagnon proposal, which comes out of Ben Bernanke’s own work — or it needs to raise expected inflation. Or it could and probably should do both. (Emphasis mine)

The problem, of course, is that Krugman is stuck in the "inadequate aggregate demand" ghetto of thought. Print money and everything falls into place. The guy truly believes that all assets and capital are homogeneous, and that all that is needed to make the system work is a new shower of "expected inflation." Enough said.

Turning on Geithner and Bernanke?

It seems that the architects of Obama's economic policies are facing the wrath of the Democrats and the pundits, and Paul Krugman is trying to be first in line to come up with a catchy term: Geithnerdammerung. (A play on Wagner's Gotterdammerung, or "Twilight of the Gods." Kind of appropriate.)

Yet, as I have read Krugman's columns over the last year, his criticism of Obama, Geithner, and Bernanke has not been over their policies of printing vast sums of money or driving our government into unpayable debt. No, he is upset because they have not tried to turn our economy into something akin to Venezuela or Bolivia.

I mean, what's there for a Keynesian not to like in a situation in which the state effectively shuts out entrepreneurs and raises the barriers for private firms that are not looking for handouts? When the original "TARP" was debated in September 2008, many of us objected not on ideological grounds (although certainly libertarians aren't going to support this kind of thing), but also on longer-term economic issues.

In a recent interview with the New Yorker, financial economist Eugene Fama forcefully made the point to let the bad financial institutions fail. He was not speaking as an ideologue; he was speaking as someone who understands finance and human nature. Asked about the claims by Bernanke and Henry Paulson that not bailing out the banks would have brought the entire financial system crashing down, Fama's reply is instructive:

Maybe it would have—for a week or two. But it pretty much stopped for a week or two anyway. The credit markets stopped for more than a week or two. But I think that was really a function of increased uncertainty about the future.

He goes on:

...there is just a high degree of risk aversion on the part of people currently in government. They don’t want to be blamed for bad outcomes, so they are willing to do bad things to avoid them. I think Bernanke has been the best of the performers.

Having had a lot of graduate economics classes taught by people who hold to Fama's way of thinking, I understand the points in the interview in a way that the average reader does not. (He makes a number of surprising comments regarding asset bubbles and the like, and the average reader or even average economist is going to be doing some head-scratching.)

Now, what does this have to do with Krugman? In the beginning, Krugman was for the bailouts because to him, economic assets are all the same. It does not matter if the banks balance their books using newly-printed money or if they do it by actually engaging in real-live profitable behavior. That's the nature of Keynesian "economics." It is "economics as though economics doesn't matter."

So, Krugman's objection was not in the government's running up debt, the Fed inflating (saving us from the faux threat of "deflation") and buying billions of dollars of assets with funny money, or even the government's nationalizing the mortgage system. (Yeah, no moral hazard there.)

Instead, he objects because the Obamaites have not gone whole hog and done what Juan Peron did in Argentina and Hugo Chavez has done in Venezuela: seize the banks and other businesses and turn them into state-run enterprises. That such moves led to chaos in those countries and destroyed their economies does not compute with the Keynesians.

(I would challenge readers to look at what Peron did and see if it differs in substance from what Krugman has demanded be done here. To a Keynesian, there is no difference at all in assets, whether they are held by government or by private owners, except that the government always can do things better and cheaper because they don't have to bear the costs of profits.)

Is the Senate Bill the "Right" Thing?

In his column today, Paul Krugman implores the House to pass the Senate's "health care" bill because it is the "right thing." With the improbable victory of Republican Scott Brown in last Tuesday's Massachusetts special election, the Senate Democrats no longer have the 60 votes to ram anything they want down the legislative channel, which endangers the entirety of ObamaCare.

Krugman understands that point, and I don't disagree with his political analysis. Yet, the guy is so partisan that he does not pick up on the obvious issue, and that is why the Democrats, with overwhelming numbers in both the House and Senate, have not been able to do whatever they wanted. Instead, we get the "Goldstein is responsible for our ills" nonsense, the Republicans playing the role of the alleged villain of Oceania.

Where the guy is clueless is in economics. Krugman belongs to that school of though that says that government can make anything happen, provided there is enough coercion. Thus, we get to the main point of the Senate plan, which is an attempt to create a product that lots of people do not want at all, and never would buy if they were not put at the point of a gun. He writes:

Think of health care reform as being like a three-legged stool. You would, rightly, ridicule anyone who proposed saving money by leaving off one or two of the legs. Well, those who propose doing only the popular pieces of health care reform deserve the same kind of ridicule. Reform won’t work unless all the essential pieces are in place.

Suppose, for example, that Congress took the advice of those who want to ban insurance discrimination on the basis of medical history, and stopped there. What would happen next? The answer, as any health care economist will tell you, is that if Congress didn’t simultaneously require that healthy people buy insurance, there would be a “death spiral”: healthier Americans would choose not to buy insurance, leading to high premiums for those who remain, driving out more people, and so on.

And if Congress tried to avoid the death spiral by requiring that healthy Americans buy insurance, it would have to offer financial aid to lower-income families to make that insurance affordable — aid at least as generous as that in the Senate bill. There just isn’t any way to do reform on a smaller scale.

In other words, all paths lead back to the Senate's bill. However, there are some things that Krugman ignores here, and they are worth mentioning. First, despite Krugman's contention in his book (which I am having my MBA students read) The Return of Depression Economics, that governments can find an economic "free lunch," in reality opportunity cost rules. (It is hardly unusual to see Krugman ignore opportunity cost, given he is a True-Believing Keynesian, but, as I have written elsewhere, the guy is not an economist; he is a political operative.)

Krugman ignores the opportunity cost issues here or only pays lip service to the fundamental precepts of economic analysis, which is like a doctor claiming that one can cure a fever by bleeding someone. Regarding the Senate bill, we have a body of government creating a "good" that most people never would purchase in a free market, given their own choices.

Now, to Krugman, that is irrelevant. This is another version of scene in an old "Our Gang" episode in which Spanky's father tells his complaining son at the breakfast table, "You will eat your mush, and you will like it." Krugman is telling us, in effect, that the government must "break eggs" in order "to make an omelet," and we are supposed to think that the government's omelet is a good thing.

In fact, the Senate version, with its tax on the "cadillac plans" is telling a lot of Americans that they are going to have to do with inferior care in order to make this whole boondoggle work, as the government tries to force those people to take plans they don't want. Thus, Obama's promise not to raise taxes on families making less than $250K a year goes up in smoke.

Second, the idea that this whole mess will "lower costs" is a joke, a very sick joke. What Krugman means is that the government is going to try to do the impossible: increase the overall demand for medical care but hold down costs by, well, ordering those costs to be lower. If the reader thinks this is reminiscent of King Canute sitting on the shore and ordering the tide not to rise, well, go to the head of the class.

To a Keynesian, costs are nothing more than numbers to be manipulated through coercion. To an economist, however, costs reflect real conditions of scarcity and opportunities elsewhere. For Krugman, higher costs are reflective of "greed" in the system; force doctors and other professionals to receive less compensation (or tax away their "excess" pay) and that takes care of everything.

This, of course, is like saying that the wall facing the band at the end of "Animal House" really was an imaginary barrier. Just keep marching, and eventually the band would break through. In the case of medical care, at some point people are going to stop providing the services, especially when government creates the perverse conditions in which it orders fees that do not even cover what physicians have to pay in order to make sure the procedures occur at all. (That already is the case in many medical cases, and doctors are responding by cutting back.)

What the Senate bill really does is to turn private insurance carriers into something akin to regulated utilities. Even Krugman understands that the actions taken by the Senate are going to place upward pressures on premiums, but the Keynesian True Believer thinks that if the government orders prices not to rise (enforced by prison terms, of course), that will be the end of it.

So, you have the scenario in which insurance companies are forbidden to deny coverage to anyone for health reasons, but somehow, this will result in lower costs. Economist Walter Williams of George Mason University (Walter is a real economist, infinitely better than Krugman) likens this to someone walking into an insurance agent's office wanting to buy fire insurance because his house currently is burning down.

No, I think that Krugman -- even Krugman -- understands this basic issue. He understands that this will result in all sorts of economic dislocations which ultimately will lead Congress to implement the plan he has wanted all along: the government "single-payer" system. That is no solution, economically or medically speaking, but it does empower the state, and for a statist like Krugman, that is nirvana.

Krugman's Magic Bullet: Coercion

Paul Krugman calls himself a "liberal," but it certainly is not of the "government-leave-us-alone" liberalism. Instead, it is a belief that no one should be able to be left alone, especially in the area of medical care.

In his January 21 posting, Krugman rightly (yes, I give him some credit) notes that by itself banning discrimination on purchasing insurance will create "an adverse-selection death spiral, in which healthy people opt out and premiums soar." Krugman's solution? Coercion, of course:

You can’t solve that without both requiring that healthy people buy insurance and helping those with lower incomes afford the premiums.

I think this is something the ancients once called "rule of force." Remember, the government wanted to send you to prison for a few years if your refused.

Once upon a time, liberalism meant something else other than having the government force you to purchase a product you did not want. That liberalism is dead today. Perhaps Krugman should name his blog, "A liberal with no conscience."

Links to Robert Murphy Criticisms of Krugman

Robert Murphy, an excellent economist and writer, writes some criticisms of Krugman's recent columns. In the first one, Murphy writes about Krugman's "solutions" to current budget woes. Definitely worth reading.

In the second article, Murphy explains how Krugman mistakes a Keynesian "identity" on trade with real-live economic analysis. Again, another piece worth reading.

On another note, I am traveling these next few days and will post when I can. Of course, Friday is a day of a regular Krugman column, and I am sure he will not disappoint.

Krugman Still is Awaiting His Messiah

After having used his column to campaign for Obama's presidency, and having given readers partisan politics in the guise of "economic analysis," Paul Krugman is about ready to give up on his Messiah, his Chosen One.

Why? It seems that with the loss of the 60th Democrat, this 2,600-page monstrosity of "healthcare reform" that no one in the Senate (at least no Democrat) has fully read is in danger, and apparently Obama is not ready to declare martial law or something like that to ram it through. Krugman declares:

I’m pretty close to giving up on Mr. Obama, who seems determined to confirm every doubt I and others ever had about whether he was ready to fight for what his supporters believed in.

Just what is it that Obama is supposed to "believe in"? Massive debt? A new hike in the minimum wage that has jacked up the teenage rate of unemployment? Printing money out the wazoo? Wars abroad? Bailing out irresponsible state spending? Bailing out GM and Chrysler? Pushing fraudulent "green jobs" that will make us poorer?

I mean, what is there not to like about Obama's presidency so far, should one be a "Progressive"? The guy is ensuring that an economic recovery will be anemic at best and non-existent at worst, and entrepreneurs who are not in bed with the government are getting the shaft. This is a Keynesian's dream.

Krugman's "He Wasn't The One We've Been Waiting For" post title reminds me of the passage in Matthew 11 when the disciples of John the Baptist ask Jesus, "Are you the one who is to come, or whall we look for another?" Jesus replied by reciting passages from the Prophet Isaiah. Perhaps Obama, given a similar question by Krugman's followers, could answer:

Tell Krugman the printing press is in high gear, taxes are being raised, industry is being nationalized, government-backed financial moral hazard is expanded, the Drug War goes on, minimum wages are raised, and we are vastly expanding public debt.

Granted, such words ain't exactly Isaiah, but nonetheless, they should be Gospel themselves to Keynesians like Krugman.

Krugman Worries about "Politicized" Textbooks

I always love it when leftists like Krugman claim that something they don't like is being "politicized." In a recent blog post, Krugman complains that conservatives have influence in the writing of textbooks that appear in that state's public schools, which means that a point of view which does not meet Krugman's approval might be taught there. Horrors!

Krugman goes on to describe how there was resistance to Keynesian texts (maybe for good reason) right after World War II, but Paul Samuelson managed to get his stuff by the watchdogs. Unfortunately, that meant a generation of students receiving training in Really Bad Economics, and we never have recovered. The Keynesian Gospel of spending, taxing, and borrowing became the "New Economics" which now is leading us to the "New Bankruptcy." And Krugman is proud of this legacy?

Nonetheless, a text that apparently Krugman would believe does not reflect a "politicized" viewpoint would be a text that claims Franklin Roosevelt's New Deal brought us out of the Great Depression, and that the nation became prosperous through inflation. No politics there.

What Didn't Happen: Krugman Telling the Truth

In George Orwell's classic 1984, the poor people of Oceania constantly were being fooled. Despite the fact that Big Brother had total control of the media, it seems that the masses were being duped by the ubiquitous Goldstein. For years, Oceania has been at war with Eurasia. Suddenly, Big Brother tells them that Goldstein has tricked them into believing such lies, as OCEANIA IS AT WAR WITH EAST ASIA! (I mean, everyone should have known that!)

In reading Paul Krugman's missive today in the New York Times, "What Didn't Happen," I am reminded of Orwell. According to the Great Nobel Laureate, Krugman insists that we believe the following:

• The "stimulus" was "too small"
• The Obama administration was not "tough enough" with the banks (he should have nationalized them, I suppose -- but, then, they pretty much are nationalized already)
• Obama did not do as did Ronald Reagan and blame the previous administration.

I must admit that I admire Krugman's chutzpah at one level. Here is a guy to has the guts to claim things that patently are not true and are easily debunked, but he is able to do with (without any sanctions) in the editorial section of the NYT and get away with it, mostly because his employers at Princeton University and in New York are happy to promote his untruths.

In debunking this latest set of claims, let me begin with the last one first, that Obama refuses to blame Bush for his troubles. Writes Krugman:

Finally, about that narrative: It’s instructive to compare Mr. Obama’s rhetorical stance on the economy with that of Ronald Reagan. It’s often forgotten now, but unemployment actually soared after Reagan’s 1981 tax cut. Reagan, however, had a ready answer for critics: everything going wrong was the result of the failed policies of the past. In effect, Reagan spent his first few years in office continuing to run against Jimmy Carter.

Mr. Obama could have done the same — with, I’d argue, considerably more justice. He could have pointed out, repeatedly, that the continuing troubles of America’s economy are the result of a financial crisis that developed under the Bush administration, and was at least in part the result of the Bush administration’s refusal to regulate the banks.

But he didn’t. Maybe he still dreams of bridging the partisan divide; maybe he fears the ire of pundits who consider blaming your predecessor for current problems uncouth — if you’re a Democrat. (It’s O.K. if you’re a Republican.) Whatever the reason, Mr. Obama has allowed the public to forget, with remarkable speed, that the economy’s troubles didn’t start on his watch.

Yes, Krugman sneaks yet another one of his post hoc ergo propter hoc claims that it was the tax cuts of 1981 that must have created the recession of 1982. Now, remember that in 1981, Congress voted to bring down the top marginal personal income tax rate from 70 percent to 50 percent. Funny about that move. At the Southern Economic Association meetings in New Orleans in 2004, I attended a talk by Krugman, and in the Q & A I asked him if he recommended going back to the 70 percent rates.

"Oh, no!" He replied forcefully. "Those rates were insane!" (Yes, he used the i-word.) Thank goodness, I had a number of economists in the room with me, including Joe Salerno of Pace University and the Mises Institute sitting in the next chair, and I suspect that Prof. Salerno's memory is as sharp as mine.

As an economist, I always like to see the Law of Cause and Effect in action, and I would like to know how those 1981 tax cuts created massive unemployment. For that matter, Krugman continually claimed throughout the Bush administration that the lowering of the top rate from 39.6 percent to approximately 33 percent played a major role in the recession of 2001, despite the fact that the rates were not even changed until after the recession began.

Has Obama not been blaming the Bush administration, as Krugman claims? Let us look at the recent record. On Saturday, January 9, 2010, the Associated Press had the following piece:

He says "the buck stops with me," but nearly a year into office, President Barack Obama is still blaming a lot of the nation's troubles — the economy, terrorism, health care — on George W. Bush.

Over and over, Obama keeps reminding Americans of the mess he inherited and all he's doing to fix it. A sharper, give-me-some-credit tone has emerged in his language as he bemoans people's fleeting memory about what life was like way back in 2008, particularly on the economy.

(No doubt, the AP must be run by...Republicans! Goldstein himself is president of that faux organization!)

Lest anyone think that just the AP has noticed this from Obama, one of his staunches political allies in the media, Roland Martin of CNN, wrote last month:

...instead of bringing up Bush, maybe they ought to spend more time driving home their message of making the right moves at the right time to get the country moving in the right direction. Bush has gone into retirement, choosing not to speak negatively of President Obama (unfortunately, we still have to hear Cheney and his rants).

If we are to move into a new year and a new way of governing, going back and talking about the past doesn't help. It only gives the impression that you don't have enough good things to say about your own agenda.

We don't have ol' Bush to kick around anymore. Now the heat will be applied fully to Obama, and we'll have to see if Mr. Calm, Cool and Collected can handle the tough moments as easily as he's basked in the praise and adulation.

Now, I find this curious, given that Krugman has had no problem himself blaming Bush's tax cuts for nearly every economic problem, and I doubt seriously that this current White House is so high-minded that it really takes ownership of the rising rates of unemployment and the current economic free fall. Nonetheless, Krugman's column is not about the truth; it is about continuing his partisan narratives couched in the language of The Economist Who Knows Everything.

What about the "stimulus" or alleged lack, thereof? First, Krugman leaves out the role of the Federal Reserve System which has spent trillions of dollars on all sorts of bailout nonsense, and all on the whim of the administration and its own chairman, Ben Bernanke.

Second, there is a more obvious question: How can a government that is flat broke, running more than a trillion dollars in the red, come up with trillions more to spend? Krugman's answer is to print more money (as he points out in his 2008 best-seller The Return of Depression Economics. (I am having my MBA students this spring read that book in order to compare and contrast Krugman's statements to those of the Austrian Economists.)

If printing money works so well, according to Krugman, then why collect taxes at all? In fact, why work at all? Last year, Krugman claimed that the purpose of the "stimulus" was for its spending, not for any real work that might have been done. Well, as I see it, if the work being done is not useful for any purpose other than spending, why use the scarce resources at all and just line up people and hand them their paychecks?

The "stimulus" is a failure not because of any paucity of government spending but because the politically-oriented disbursements don't address the imbalance of the economic fundamentals and the massive malinvestments of the Bush years that still have not been fully liquidated. (That is due in large part because the government continues to try to prop up the owners of the failed assets, with predictable results.)

Last, but not least, there are the banks. Let's face it; if Krugman really believes that the Bush administration "failed to regulate the banks," then I'd like to sell him a few bridges from Brooklyn. While trying to promote his own pathetic narrative of "the bankers serve THEM, but the people in the White House are on OUR SIDE," he forgets that the symbiotic relationship between Wall Street and the banks is not one of reckless free-enterprisers versus wholesome and good Democratic politicians.

There is good reason that the politicians are cozy with Wall Street. Like Willie Sutton, the know "where the money is," and don't mind helping themselves to a few million or more here and there. Economists I respect much more than I do Krugman (like Bruce Yandle of Clemson University, for starters and Jeffrey Miron from Harvard) have noted for years of the real nature of regulation has been for there to be a "revolving door" between the regulators and the industries they supposedly regulate.

Furthermore, as Eugene Fama (perhaps the most distinguished financial economist in the country from the University of Chicago) pointed out in a recent interview with the New Yorker, it was a mistake to bail out the banks in the first place because -- contrary to Krugman and his friends at the NYT -- no institution is "too big to fail." (I love his line that Krugman "wants to be czar of the world." No doubt, the Big K would run everything perfectly.)

Like his rewriting of the history of regulation and deregulation, Paul Krugman begins with the narrative, and then proceeds to pound square pegs into round holes. That hardly is unusual, as most of us perform that exercise from time to time. However, when most of us are caught, we listen to reason.

Krugman, on the other hands, listens only to himself and the daily set of talking points coming from left-wing Democrats. As I have said many times before, the man is not an economist; he is a political operative. Period.

Welcome to Krugman-in-Wonderland!

I would like to welcome readers to my new blog, Krugman-in-Wonderland, dedicated, of course, to Paul Krugman and the Keynesian and politically-partisan missives he sends almost daily from his perch at the New York Times and elsewhere. In this blog, I will have my own comments plus links to some of Krugman's critics, and especially the criticisms of the Austrians. (The best of the Austrian critics is NOT yours truly, but rather Robert Murphy, who often takes Krugman apart on the Mises Daily page.)

It will take a few days to get this blog up and running, as I do have a day job. However, I do hope you will enjoy some good economic sense as I try to provide an antidote to the Keynesian mishmash from Krugman that masquerades as "good economics."

Of course, there will be the obvious question: Why is a nobody like me taking on a Nobel Laureate, a Princeton University faculty member, no less? True, the odds are not exactly in my favor. Krugman is one of the foremost public intellectuals in the country and I, well, am not. Krugman has his doctorate from MIT and has a Nobel Prize. I have my doctorate from Auburn University and have no prizes.

Nonetheless, over the years I have found that it is not as hard to answer Krugman as one might think. First, he is a True Blue Keynesian, and plenty of people before me have taken the Keynesian paradigm apart. Second, Krugman has this way of trying to rewrite recent history, and he stubbornly does not let the facts get in the way. Thus, he makes himself to be a pretty easy target.

To quote "The Godfather," this is business, not personal. I have met Krugman only once and he seemed to be pleasant enough. My beef with him is professional; he writes bad economics, and I want to set the record straight.