Saturday, February 27, 2010

Healthcare Q&A on Back Burner -- Apologies

I know that I have promised to address the healthcare questions straight on, but right now I admit that is on the back burner, as much as I wish it were not. First, I have to write a paper to present at the Austrian Scholars Conference in less than two weeks, and, second, I am writing the Fifth-Year Maintenance Accreditation Report for the Frostburg State College of Business for AACSB. (Yeah, they are paying me for it, and I think my employer wants something from me.)

However, I have not forgotten the healthcare issues and I think I will put my article into a Q&A format. If any of you have any suggestions on what form would be best, let me know. I do appreciate the comments and the debate that goes on, as that was one of the goals I had for this blog.

Oh, and I am a happy camper. My alma mater, the University of Tennessee, beat Kentucky today, 74-65. Granted, we will not beat UK in either the SEC or NCAA tournament, and I would not be surprised to see UK make the Final Four. Nonetheless, I like beating the Cats, even if it is in a regular-season game!

Friday, February 26, 2010

Krugman's Healthcare Howlers

There are times when Paul Krugman lets himself go, and then there are times when the inner political hack really takes over, and his column today represents one of those times. Keep in mind that the editorial page of the New York Times has long been a place where hackdom reigns (just as it does at the Washington Times or any other newspaper where the leadership aligns itself with a political party).

However, one must understand that when a political operative or a member of Congress or a party official makes a hardcore partisan statement, one always considers the source. In fact, we are willing to accept some of the flackdom that accompanies politics and even consider it to be a form of perverse entertainment.

When Krugman makes a statement, however, he is not simply a hired gun by the Democratic Party. No, he is making that statement by the authority of being Paul Krugman, Ph.D. from MIT, faculty member at prestigious Princeton, and, of course, the 2008 winner of the Nobel award in economics. Yet, his column today, for all its supposed appeal to the "authority" of the Congressional Budget Office, is nothing but hackdom that demonstrates not only his outright partisanship, but demonstrates a woeful lack of simple economic knowledge. In other words, I am saying the guy is a fraud. A fraud.

With that out of the way, let us go to the column. Here are his opening jabs:
...what was nonetheless revealing about the meeting was the fact that Republicans — who had weeks to prepare for this particular event, and have been campaigning against reform for a year — didn’t bother making a case that could withstand even minimal fact-checking.

It was obvious how things would go as soon as the first Republican speaker, Senator Lamar Alexander, delivered his remarks. He was presumably chosen because he’s folksy and likable and could make his party’s position sound reasonable. But right off the bat he delivered a whopper, asserting that under the Democratic plan, “for millions of Americans, premiums will go up.”

Wow. I guess you could say that he wasn’t technically lying, since the Congressional Budget Office analysis of the Senate Democrats’ plan does say that average payments for insurance would go up. But it also makes it clear that this would happen only because people would buy more and better coverage. The “price of a given amount of insurance coverage” would fall, not rise — and the actual cost to many Americans would fall sharply thanks to federal aid.
Before dealing with the particulars of this one, let me say that Krugman conveniently forgot to deal with the ultimate howler said at the meeting, a statement by Nancy Pelosi that does not even need fact-checking because it is idiotic on its face. Pelosi claimed that if the Democrats ram through this bill, that it will ultimately "create four millions jobs" and will "create 400,000 jobs" almost immediate.

Don't take my word for it. Click on the link and you will see Pelosi making the declaration. If anything, this bill will destroy wealth and ultimately the jobs that are needed to create wealth.

Now that Pelosi's rant is out of the way, let us go back to Krugman's statements. Indeed, let me zero in on this one: The “price of a given amount of insurance coverage” would fall, not rise — and the actual cost to many Americans would fall sharply thanks to federal aid.

You see, in Paul Krugman's world there exists no opportunity cost. That is right. Krugman is saying that if government subsidizes the payment for health insurance premiums, opportunity cost disappears! Given that in his book, The Return of Depression Economics, he claims that printing money during a recession creates what he calls a "free lunch," which is a way of saying that printing money actually creates new wealth.

I'm sorry, folks. When an economist denies the presence of opportunity cost, it is time to fold the tents and leave. Opportunity cost is the central building block of economic analysis. In fact, if there is no scarcity and no opportunity cost, there is no economics. So, to have an economist -- and a highly-decorated one at that -- declare that subsidies lower real costs it absolutely shocking. Krugman basically is telling readers that government -- or at least government run by the Democratic Party -- can perform magic by creating wealth out of nothing but printed money. This ain't econ, people, it is metaphysics.

Unfortunately, we have to keep in mind that there is no way that we can have the following things and STILL cut real medical costs:

1. Mandates for insurers,
2. Prohibitions on denying insurance for people with pre-existing conditions,
3. Massive subsidies to pay the premiums.

That is a prescription for forcing up real costs, and for those who really believe otherwise, I give you another American institution for which we have seen the same pattern in which third-party payments have forced up costs: higher education.

We have seen tuition and fees for U.S. colleges and universities, both public and private, rise faster than the Consumer Price Index for many years. Why? Much of the payment for college and graduate school is made either through debt (and many people today graduate from all levels of higher education with massive amounts of personal debt) or through direct government payments. Furthermore, government imposes a large number of expensive administrative mandates (Sound familiar?) on colleges and universities. And then we are shocked, SHOCKED that tuition and fees are soaring?

Assume that the government (1) required colleges and universities to admit all applicants, regardless of their academic records (and no place could discriminate, including Krugman's own Princeton University); (2) if someone could not afford the tuition and fees, the government would pay the balance or pay for all of it, and (3) all Americans would be required to go to college.

Does any reader think we would have anything but chaos? Yet, there is qualitatively no difference between my "modest proposal" above and what Krugman and the Democrats are pushing. None.

Now it is one thing to say that the Republicans, intellectually speaking, are running on empty. That is nothing new, and they have been low on gas for more than a decade. It is another things, however, then a Republican brings up an issue of opportunity cost and is called a liar by a Nobel-Prize-winning economist. At that point, Paul Krugman no longer is an economist; he is just another political operative.

Thursday, February 25, 2010

How it all Began

I know it is not nice to rain on someone's parade on the day he wins a Nobel Prize, but when Paul Krugman was announced as the winner, Forbes contacted me to see if I would write a brief commentary. Out of that came my article, "Krugman-in-Wonderland."

Granted, my commentary went against the grain, as most articles praised Krugman to the High Heavens for his "brilliance" and all the other nonsense that goes into lauding someone who is famous for distorting history. I figured that someone needed to sound a different note.

Anyway, that was the genesis of what would become this blog.

Wednesday, February 24, 2010

Can "Green Technology" Lead Us Out of the Recession?

Paul Krugman claims that "green technology" can help lead to an economic recovery, at least judging from this blog post. He writes:
What we really need now is (a) higher spending and lower trade surpluses in surplus nations, China especially but also Germany (b) some big driver of investment, such as green technology. Absent those things, it’s hard to see how we get a durable recovery.
I hate to be the spoiler here, but I cannot understand how the implementation of technologies that require huge subsidies just to survive is going to lead to recovery. This is like saying that the Anderson household can lead an economic recovery if we decide to have lots of car repairs and fix the plumbing.

Now, what is my point here? Obviously, if I have to get the car fixed and the plumbing goes bust, that means I have take money from things I had hoped to do (like go on a vacation) in order to do the repairs.

In order to fund "green technologies," we have to cannibalize the healthy and profitable industries to throw money at this perpetual loser, which also gives us inferior fuel and inconsistent electricity flows, something that consumers, if given their own choices, given the real costs, would not purchase these "green technologies" at all.

So, according to Krugman, we cannot have a real recovery unless the government taxes healthy industries and subsidizes unhealthy ones. This is something out of "The Twilight Zone."

Is Inflation the Cure for our Economy?

About 30 years ago, I read The Biggest Con by Irwin Schiff (Peter's dad), and he made an important point about Keynesian "economics" which I have never forgotten: Inflation is the only arrow in the Keynesian quiver.

That comes to mind as I read Paul Krugman's recent outburst in his blog about inflation: We don't have any:

You might think it would be hard to be an inflation hawk, demanding monetary tightening now now now, in the current environment. For one thing, there’s no inflation. And there’s also mass unemployment. Based on historic Fed behavior, the combination of these two factors should mean a Fed funds rate of around -6 percent; since the Fed can’t do that, it ought at least to keep rates near zero for a long time, probably at least the next two years.

But these guys are made of sterner stuff than that. Irwin Kellner explains that the overall level of prices is rising, as long as you don’t count the goods whose prices are falling.

Being that Krugman wrote in his Depression Economics book that many, if not most, economic problems can by solved simply by "printing money." Do we have troubles now? No problem. Get the Fed to create a lot of funny money, throw it into the economy, and watch the magic begin.

If the economy were simply an amorphous mass of homogeneous assets, and simply stirring money into the pot were all that was needed to make the mixture viable, I guess he might have a point. However, assets are heterogeneous, and inflation only prolongs the fundamental imbalances that have been plaguing us for the last several years.

True, prices for some things have been falling, such as housing prices. That should not be surprising, given the massive malinvestments in housing during the boom, malinvestments that could not and cannot be sustained by simply printing money and lowering mortgage rates.

True, much of the newly-created money is sitting in the banks and has not been loaned in the general economy, seeking demands from the government that banks start lending -- or else. However, don't forget that loans are made on the assumption that the borrower will pay back the money. In the Keynesian view, that is no problem; the new money will automatically "stimulate" economic activity to the point where borrowers will have the money in the future to repay their loans.

However, in the Austrian view, the situation is much more complex. If the economic fundamentals are out of balance, then government action make those imbalances worse, so pouring new money via the banking system will stimulate nothing but further bankruptcies.

Krugman is betting on the former; Austrians see the latter. That is why we are and always will be so-called inflation hawks. Contra Krugman, there are no overall economic benefits that accrue from inflation. None.

Monday, February 22, 2010

The Manchurian Colunmist

Sigh. Even when he gets it right, Paul Krugman gets it wrong. His article today truly is based upon talking points that seem to have come from the DNC headquarters itself. Like Paul Revere, Krugman is riding his horse and shouting from the saddle, "To arms, to arms, the small government people are here!"

Who are the Apostles of "small government"? Why, it is those dastardly Republicans, you know, the same Republicans that gave us wars overseas, gigantic deficits, a housing bubble, and upticks in federal spending that were matched only by the Vietnam-Great Society years of the 1960s. Lest you think I am imagining things, here is Krugman in his own words:

For readers who don’t know what I’m talking about: ever since Reagan, the G.O.P. has been run by people who want a much smaller government. In the famous words of the activist Grover Norquist, conservatives want to get the government “down to the size where we can drown it in the bathtub.”

Oh, yes, and the GOP has been following Norquist's instructions ever since. (Krugman always trots out that quote whenever he wants to play his Paul Revere role to protect the overpowering and expansive state as something that is "progress.")

But why have those Republicans not been able to keep their evil promises? Why, because government social programs are popular:

But there has always been a political problem with this agenda. Voters may say that they oppose big government, but the programs that actually dominate federal spending — Medicare, Medicaid and Social Security — are very popular. So how can the public be persuaded to accept large spending cuts?

So, how have these stealth "small government" activists done it? What is their secret plan? Why, tax cuts! Yeah, cut the top rates so government cannot collect as many taxes and give us Nirvana!

The conservative answer, which evolved in the late 1970s, would be dubbed “starving the beast” during the Reagan years. The idea — propounded by many members of the conservative intelligentsia, from Alan Greenspan to Irving Kristol — was basically that sympathetic politicians should engage in a game of bait and switch. Rather than proposing unpopular spending cuts, Republicans would push through popular tax cuts, with the deliberate intention of worsening the government’s fiscal position. Spending cuts could then be sold as a necessity rather than a choice, the only way to eliminate an unsustainable budget deficit.

Uh, ladies and gentlemen, please tell me when the Republicans actually cut spending. Ronald Reagan certainly didn't, and the Bushes did not during their presidencies. Karl Rove pushed the welfare state expansion, and the Republicans were anxious to follow his instructions when they controlled all three branches of the federal government.

For that matter, Republicans pushed cuts in tax rates in order to change the sets of incentives for private enterprise, and I certainly think that cutting the rates during the 1980s was a good thing. When I asked Krugman if he supported the old 70 percent pre-1981 tax rates (at a public session at the 2004 Southern Economic Association meetings in New Orleans), Krugman replied, "Oh, no! Those rates were insane!" So, I guess Krugman was against those high rates before he supported them.

In other words, we are not receiving an accurate picture of what Republicans are doing. (Don't elect those monsters! They might CUT YOUR SOCIAL SECURITY!) Instead, I think that Glenn Greenwald of Salon presents a much more accurate picture of the modern GOP, one that is based upon reality and is not something that comes out of Wonderland:

This is what Republicans always do. When in power, they massively expand the power of the state in every realm. Deficit spending and the national debt skyrocket. The National Security State is bloated beyond description through wars and occupations, while no limits are tolerated on the Surveillance State. Then, when out of power, they suddenly pretend to re-discover their “small government principles.” The very same Republicans who spent the 1990s vehemently opposing Bill Clinton’s Terrorism-justified attempts to expand government surveillance and executive authority then, once in power, presided over the largest expansion in history of those very same powers. The last eight years of Republican rule was characterized by nothing other than endlessly expanded government power, even as they insisted — both before they were empowered and again now — that they are the standard-bearers of government restraint.

Greenwald continues:

...(the) GOP limited government rhetoric is simply never matched by that Party's conduct, especially when they wield power. The very idea that a political party dominated by neocons, warmongers, surveillance fetishists, and privacy-hating social conservatives will be a party of "limited government" is absurd on its face. There literally is no myth more transparent than the Republican Party's claim to believe in restrained government power. For that reason, it's only a matter of time before the fundamental incompatibility of the "tea party movement" and the political party cynically exploiting it is exposed.

I could not agree more. Unfortunately, Krugman wants to continue the false message that Republicans are going to cut the state, and everyone knows that the state is the lifeblood for all of us. I mean, how can we survive unless government agents are in every room of our houses telling us what to do?!?

After reading Krugman’s blather about the “low-tax, small-government” Republicans, there is only one conclusion I can make: Paul Krugman is the Manchurian Columnist! Yes, he actually is a Republican operative in disguise telling us that Republicans are going to give us less government and lower taxes in order to convince us to vote for them.

But when the GOP actually takes power, the welfare state will grow! Don’t you see the connection? I must let Hollywood know at once!

Sunday, February 21, 2010

Working on Some Responses to Questions and Comments

A number of you have sent me good questions or posted comments on the blog that deserve answers. I'm preparing a post that will try to do that, but it will take time. Furthermore, Krugman will have his Monday column coming up, and I am sure it will be outrageous.

But, I want you to know I am not ignoring your questions and comments and will try to give them good answers. Please be patient.

Friday, February 19, 2010

Krugman's Logic Death Spiral

One of the fundamental tenets of economic logic is that the farther away one gets from the simple relationship of a consumer paying directly for a good, the more the economic calculation for such exchanges becomes muddled. Thus it is with health insurance.

Think of it; most of us receive insurance from our jobs. We pay a premium, our employer pays part of it, which goes to the insurer, and then the insurer pays the doctors, does the negotiations, sets the standards, etc. This is a recipe for permitting costs to get out of control.

One of the fundamental tenets of Austrian economic theory is that the factors of production gain their value from the value that consumers place upon the final product. (Carl Menger spends a lot of time on this point in the first two chapters of his ground-breaking 1871 classic, Principles of Economics.) It is not hard to see that the way health insurance today is structured, that it is a recipe for out-of-control costs.

Paul Krugman has been writing on health insurance and economics for many years, and from what I have been able to tell, his main points are as follows:

  • Health insurers are greedy and raise premiums because they are greedy;
  • Health insurers can only make money by denying coverage;
  • Medical costs rise because doctors and insurers are greedy;
  • Only government price controls and regulation can ensure that medical costs will be low and medical care will be abundant for everyone.
Now, if one sees some internatl contradictions in this whole scenario, well, that person is applying simple logic, something that is missing from most Krugman columns. However, instead of making accusations against Krugman, let him say things in his own words:

Sky-high rate increases make a powerful case for action. And they show, in particular, that we need comprehensive, guaranteed coverage — which is exactly what Democrats are trying to accomplish.

Here’s the story: About 800,000 people in California who buy insurance on the individual market — as opposed to getting it through their employers — are covered by Anthem Blue Cross, a WellPoint subsidiary. These are the people who were recently told to expect dramatic rate increases, in some cases as high as 39 percent.

Why the huge increase? It’s not profiteering, says WellPoint, which claims instead (without using the term) that it’s facing a classic insurance death spiral.

Bear in mind that private health insurance only works if insurers can sell policies to both sick and healthy customers. If too many healthy people decide that they’d rather take their chances and remain uninsured, the risk pool deteriorates, forcing insurers to raise premiums. This, in turn, leads more healthy people to drop coverage, worsening the risk pool even further, and so on.

Now, what WellPoint claims is that it has been forced to raise premiums because of “challenging economic times”: cash-strapped Californians have been dropping their policies or shifting into less-comprehensive plans. Those retaining coverage tend to be people with high current medical expenses. And the result, says the company, is a drastically worsening risk pool: in effect, a death spiral.

So the rate increases, WellPoint insists, aren’t its fault: “Other individual market insurers are facing the same dynamics and are being forced to take similar actions.” Indeed, a report released Thursday by the department of Health and Human Services shows that there have been steep actual or proposed increases in rates by a number of insurers.

In economics, we have another term for what is being described: adverse selection. That is a common problem with insurance, and there are no perfect solutions, since people either will become sick or have accidents or have their houses burned down. That is life. Furthermore, with insurance, any insurer that does not try to control its costs is going to go bankrupt. (The Great Chicago Fire of 1973 was a classic example of the Worst Case Scenario, as a number of insurance companies went under because they had so many claims.)

Now, at one level, Krugman is correct. If we are going to use health insurance as a payment plan for nearly ALL health-based activities, and if health insurance is going to be the gateway for most care, then those who don't have insurance are going to find it more difficult (but certainly not impossible) to receive medical care.

However, what does Krugman suggest? It is something akin to taking the "hair of the dog" when one has had too much to drink. His "hair of the dog" theory of health insurance goes like this: Health insurance is too expensive and is not readily available, so the cure is to have the government impose price controls and provide "insurance" itself, and then everyone will have abundant care.

I don't think so. If, as the Austrians note, the problem is one of economic calculation, throwing even more distance between the consumers and providers of medical care will not solve anything, but, rather, make the problem worse. Yet, that is precisely what Krugman is demanding:

What would work? By all means, let’s ban discrimination on the basis of medical history — but we also have to keep healthy people in the risk pool, which means requiring that people purchase insurance. This, in turn, requires substantial aid to lower-income Americans so that they can afford coverage.

And if you put all of that together, you end up with something very much like the health reform bills that have already passed both the House and the Senate.

What about claims that these bills would force Americans into the clutches of greedy insurance companies? Well, the main answer is stronger regulation; but it would also be a very good idea, politically as well as substantively, for the Senate to use reconciliation to put the public option back into its bill.

Let me translate. The "solution" is more coercion and government-induced price controls. I think that "solution" speaks for itself.

Thursday, February 18, 2010

Was Financial Deregulation the Result of Free-Market Ideology?

Paul Krugman has made a lot of hay recently about free-market ideology and the financial deregulation initiatives that occurred during the early 1980s, which I have covered in a paper that is being co-authored by Amit Shah, one of my Frostburg State colleagues, and me. I presented the paper today at a conference, and am making it available for anyone who wishes to read it.

The paper conducts some casual empiricism about whether or not Krugman's "Reagan Did It" contention is correct. To make a long story short, we simply don't find the frenzy of conservative ideology in passage of either the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 or the Garn-St. Germaine Act of 1982. Both bills had many Democratic co-sponsors and in both situations, Democrats controlled the House of Representatives.

Our larger point is that these laws, for better or worse, were passed because conditions had changed in finance in which banks and S&Ls were in serious financial trouble, and Congress realized that much of the trouble was due to the regulatory structures that shackled those institutions. Unfortunately, Congress also build moral hazard into the equation and a number of other perverse incentives which led to a number of problems later.

Because I don't know how to download a pdf file to this blog, I will send a pdf copy to anyone who requests it. My email is

Tuesday, February 16, 2010

Working on Paper and Going to Conference

I am preparing to go out of town to a conference in Wilmington, North Carolina, where I will present a paper that examines whether or not the deregulation initiatives that occurred during the early 1980s came about because of a frenzy of Reaganite ideology, as Paul Krugman claims.

When I am done writing the paper (yes, I'm still working on it, and I present it in two days), I will post the copy that I plan to send to a journal later this semester. Needless to say, I am finding that once again, Krugman has been fudging big time on the truth.

Because of the trip and the time I am putting into it, I most likely will not have a post for a day or two. It's called doing my day job.

Update: I will present my paper today at an 8 a.m. session, and then do some posting on Krugman later today.

Monday, February 15, 2010

Yes, Yes, Inflation Solves All Economic Problems

If inflation really could save the world, then we would be looking to Zimbabwe as our savior, given that its government over the past few years has been producing some memorable moments in the history of crankdom. Alas, inflation is a scourge, not an economic solution.

Unfortunately, Paul Krugman does not seem to get it. In his latest column, "Making of a Euromess," he blames the economic crisis in Spain on...the Euro. Now, I am no more fond of the Euro than I am of the 1923 German Mark, but Krugman's reasoning is something to behold. In his own words:
And there’s not much that Spain’s government can do to make things better. The nation’s core economic problem is that costs and prices have gotten out of line with those in the rest of Europe. If Spain still had its old currency, the peseta, it could remedy that problem quickly through devaluation — by, say, reducing the value of a peseta by 20 percent against other European currencies. But Spain no longer has its own money, which means that it can regain competitiveness only through a slow, grinding process of deflation.
Notice that he is saying that Spain really is in trouble because it cannot engage in inflation, since it does not control the Euro, unlike its former fiat currency, the peseta. However, devaluation really does nothing but put off the Day of Reckoning for a while, but that day will arrive.

On the other hand, perhaps the best thing that Spain needs is the "grinding process of deflation," as that simply means that the prices paid for overvalued Spanish factors of production (and especially labor) are going to have to fall into line with economic reality. Most people, and especially the heavily-unionized Spanish workforce, don't want to hear that "option," as they would like to continue the charade that economic recovery is not going to require some short-term painful medicine.

However, if the Spanish were willing to take the medicine, they would be hurting now, but their economy would recover and become a beacon in Europe. Inflation, while delivering the "good effects" in the short-run, runs the economy off the rails as bout after bout of money devaluation takes its toll.

Not surprisingly, Krugman advocates inflation and denounces deflation. Yet, the only hope for Spain is deflation. The European Union is not going to bail out Spain, and that is a good thing. No, Spain needs to get its house in order. Likewise, on this side of the Pond, perhaps the USA needs to get its own house in order and stop preaching the Gospel of Inflation.

Saturday, February 13, 2010

Krugman's New Oracle at Delphi

As everyone knows, the Greek government is in serious trouble, and the nation's economy is taking a hit. Defaults are a terrible thing, and Greece is taking a page from Wall Street and demanding a bailout by the EU Central Bank. (Apparently, Germany is standing in the way, demanding -- Horrors! -- that the Greeks put their own house in order, something that the socialist Prime Minister George Papandreou is denouncing. Gee, why should socialists have to shoulder the costs of, well, being socialist?)

Not surprisingly, Paul Krugman has weighed in on the Greek crisis and at least some of his commentary has truth. Unfortunately, since many of his pronouncements seem to be something akin to the Oracle at Delphi, in which the Pythia (after sniffing some gas from a vent in the earth) would mumble something that the Greeks would hold as true prophecy, it is hard to separate what makes sense from what does not. My rule of thumb in examining anything Krugman says is to pay attention to his analysis of what is happening, but to ignore his Keynesian "solutions," just as the ancient Greeks should have ignored the priestess.

Like so many other countries, Greece drank the Kool-Aid Bubble, and now is experiencing the pain of the inevitable economic contractions that accompany the bubble's collapse. Krugman seems to recognize it, and he even declares (correctly) that "now it faces a prolonged era of grinding deflation as it works its way back to competitive costs."

I absolutely agree. However, what is Krugman's "solution" to this problem? Why, inflate, inflate, inflate. As I pointed out in my post on Krugman and Spain, Krugman laments the fact that Spain no longer can devalue its own currency, since it uses the Euro. This is like complaining that after the alcoholic checks into rehab, those mean people running the place will not let the guy imbibe in his "hair of the dog" solution to alcohol withdrawals.

Where Krugman and I differ is here: Krugman sees inflation as the solution, while I believe it is the problem. He sees nothing good coming from deflation, as he believes (as did Keynes) that it creates a permanent downward spiral. However, as I have written elsewhere, deflation begins with what we see to be "bad effects," but ultimately helps to put the economy back into order again.

Inflation, however, provides the "good effects" first, but ultimately deteriorates. Where Krugman is so very wrong is that he believes that the "good effects" can be made to last indefinitely, just as long as government has the "courage" to continue inflating its currency. In other words, the alcoholic can remain the "happy drunk" indefinitely, just as long as he can keep drinking! So, in the end, Krugman sniffs the gas and then makes a pronouncement that makes about as much sense as came from the Pythia.

Friday, February 12, 2010

Krugman, Medicare, and Republicans

One of the things one learns (or should learn) in an economics graduate program is that while we hold to certain laws of economics, we do not view the world through a template, and especially one structured from political talking points. For example, as an economist, I can say that if one raises the minimum wage during a recession, one of the results will be increased unemployment among lower-skilled workers, and especially teenagers.

That conclusion comes from the laws of supply and demand, and it is sound and can be drawn without going into an ideological frenzy. However, it would be quite another thing if I were to say, "Democrats raised the minimum wage during a recession. Therefore, they want teenagers to be unemployed." Such a statement would be a non sequitur, and fully is outside of my role as an economist.

In fact, every mentor I have had has told me to be careful when venturing into the world of politics, and certainly not to embrace political talking points. Most, but not all, voted for Republicans, but none was active in any Republican activities and certainly never used the classroom or personal conversation to shill for political candidates. Furthermore, none ever presented a Republican candidate as the Hope of the World. There were and are lines that my mentors did not cross.

Unfortunately, I suppose that the Massachusetts Institute of Technology goes by a different set of rules, as its most famous economics doctoral student has used his position to be a partisan shill and to fudge on the truth. At present, I am researching for a paper on the passage of the financial deregulation initiatives of the early 1980s and I can tell you outright that Paul Krugman is rewriting history, declaring things to be true that never happened.

Thus, I wade into his latest food fight, his "Republicans want to cut Medicare" screed that passes as a column in today's New York Times. It is hard to know where to begin here, but I will try to slog through this morass that clearly does not befit someone whose academic honors put him near the top of our profession.

Krugman accuses Republicans of saying that while they want to save Medicare, they really want to cut its benefits. As "proof," he goes back to the 1995 government shutdown that he claims is due to then-Speaker Newt Gingrich's attempt to "ram through deep cuts in Medicare." Now, I don't know what really happened then, and as I have said before, Krugman has this tendency to rewrite history to his liking.

When Republicans are claiming that Democrats want to "cut Medicare" and that they are the saviors of this open-ended program, I find myself in agreement with Krugman that they are not to be trusted. However, the larger problem is that Medicare itself is not a sustainable program no matter how one slices things. Any competent economist can see this problem up front, but Krugman, while being a "star" in economics, nonetheless looks at government programs through the glasses of a partisan Democrat, which clouds and distorts his vision.

Take the following, for example:
No, what’s truly mind-boggling is this: Even as Republicans denounce modest proposals to rein in Medicare’s rising costs, they are, themselves, seeking to dismantle the whole program. And the process of dismantling would begin with spending cuts of about $650 billion over the next decade. Math is hard, but I do believe that’s more than the roughly $400 billion (not $500 billion) in Medicare savings projected for the Democratic health bills.
Let's take this one apart. If the Republicans wanted to dismantle Medicare, they would have done it when they had control of all three branches of government. For that matter, I remember Democrats claiming in 1980 that if Ronald Reagan were elected, he was going to do away with Social Security. None of those things happened, yet Krugman continues to spout the party line as though it makes sense.

Now, is that because Republicans are compassionate, caring folks? No, it is because they want to be elected and re-elected, and few people in our current welfare state can win elections by promising less. It doesn't happen. Republicans, like Democrats, are political animals and know that if they ever engaged in the behavior that matched some of their "let's be responsible" rhetoric...well, that is not going to happen.

Now, I find Krugman's other point even more interesting. Suddenly, he calculates lower costs of (Ah! His brilliant economist mind at work!) $400 billion, but that amount constitutes "savings"! No. They are real-live payment cuts to people working in the medical system. Here is my question: How is it that Democrats propose "savings" but if Republicans do the same, they are proposing "cuts"?

Keep in mind that Krugman's "savings" do not come from actual "savings" but rather from the implementation of price controls. That's right, we have an economist claiming that price controls do not raise the opportunity cost for anyone, and that price controls actually result in real lower costs. This is nonsense.

We have seen real prices fall over time because people find ways to produce more goods using fewer resources. That is how an economy grows, period, but Krugman is not talking about such things. Instead, as I have pointed out, he is endorsing outright price controls (to be enforced, by the way, with criminal penalties).

Krugman has a history of claiming price controls actually do as advertised. During the California electricity blackouts of a decade ago (caused by the state government implementing price controls in the retain sale of electricity), Krugman claimed that the implementation of price controls across the entire western grid would result in lower prices and more supply. Such things don't happen, people. Price controls, as anyone learns in Economics 101, reduce available supply and thus, exacerbate shortages.

Not to be outdone, Krugman also endorsed increasing the minimum wage during a recession, claiming that it would increase overall spending. (Guess he cannot tell the difference between total utility and marginal utility. Take note, Princeton students.)

Any economist worth his salt, Austrian or mainstream, knows there are immutable laws of economics. The Law of Scarcity, the Law of Demand, the Law of Supply, and the Law of Diminishing Returns all are in an economist's lexicon and for good reason. They are as immutable to human action as the Law of Gravity is immutable to our very existence.

Yet, we have a "decorated" economist claiming that his political party can transcend the laws of economics by fiat. This is not economics, folks. This is Harry Potter Science.

Thursday, February 11, 2010

Krugman, Japan and the Keynesian Cult

One of my pet peeves with Paul Krugman's writings has been his constant rewriting of history, a rewriting that just happens to coincide with left-wing political talking points. For example, we hear that the Great Depression occurred because Herbert Hoover was a staunch believer in laissez-faire and took the advice of Treasury Secretary Andrew Mellon, who called for liquidation of bad assets to "purge" the economy of whatever was "rotten" in the system.

However, even a cursory reading of the history demonstrates Hoover openly rejected Mellon's advice and tried stimulus after stimulus, only to see the economy crumble. (Krugman's response always is the same: Hoover tried "too little, too late." So, whenever ANY so-called stimulus does not work, the standard Krugman-Keynesian response is that the "stimulus" was "too small.")

Thus, he takes issue with a paper by Alberto F. Alesina and Silvia Ardagna in which the authors claim that tax cuts, as opposed to increases in government spending, provide a better "stimulus" for a moribund economy. Not having read the paper, I cannot make any "expert" or otherwise comments except to say that the issue at hand ultimately is not "stimulus" at all; it is the presence of malinvestments that must be liquidated in order for the economy to recover.

Once a boom has collapsed, the boom-era malinvestments begin to act like cancer cells, sucking the life out of what is left of the economy. It is better to let the market salvage any malinvested assets that it can while permitting the others to liquidate rather than to have these sick "assets" bring down the entire economy. (Government Motors and Chrysler, anyone?)

Krugman, however, goes on to criticize the paper on two points: (1) the presence of a "liquidity trap" in which monetary expansion by the central bank no longer can "stimulate" anything, and (2) the record of so-called expansionary policy of the Japanese government during Japan's decade-long recession of the 1990s. Let me begin with the "liquidity trap" arguments.

Murray Rothbard in his classic America's Great Depression devastates the Keynesian "liquidity trap" in the following passage:

...the Keynesians are here misled by their superficial treatment of the interest rate as simply the price of loan contracts. The crucial interest rate, as we have indicated, is the natural rate—the "profit spread" on the market. Since loans are simply a form of investment, the rate on loans is but a pale reflection of the natural rate. What, then, does an expectation of rising interest rates really mean? It means that people expect increases in the rate of net return on the market, via wages and other producers' goods prices falling faster than do consumer goods' prices. But this needs no labyrinthine explanation; investors expect falling wages and other factor prices, and they are therefore holding off investing in factors until the fall occurs. But this is old-fashioned "classical" speculation on price changes. This expectation, far from being an upsetting element, actually speeds up the adjustment. Just as all speculation speeds up adjustment to the proper levels, so this expectation hastens the fall in wages and other factor prices, hastening the recovery, and permitting normal prosperity to return that much faster. Far from "speculative" hoarding being a bogy of depression, therefore, it is actually a welcome stimulant to more rapid recovery.

Keep in mind that Keynesians hold that "real rates" don't mean much, just as Keynes advocated inflation to cut real wages as a means to increase employment. His response was to declare that workers are only interested "in their money wage." History tells us something different, does it not?

On the Japanese recession, Krugman differs with Alesina and Ardagna on the timing and the forcefulness of the government's "stimulus" actions, yet his response is more technical than it should be:

First, the whole stimulus debate is supposed to be about what happens when interest rates are up against the zero bound. Everything is different if the central bank is busy adjusting rates in response to conditions, and may well raise rates to offset the effects of any fiscal expansion. Yet the Alesina-Ardagna analysis doesn’t make that distinction; Japan in the 90s, which was up against the zero bound, is treated the same as a batch of countries in the 70s and 80s, when interest rates were quite high.

Second, they use a statistical method to identify fiscal expansions — trying to identify large changes in the structural balance. But how well does that technique work? When I want to think about Japan, I go to the work of Adam Posen, who tells me that Japan’s only really serious stimulus plan came in 1995. So I turn to the appendix table in Alesina/Ardagna, and find that 1995 isn’t there — whereas 2005 and 2007, which I’ve never heard of as stimulus years, are.

However, as Doug French recently wrote, the Japanese government enacted a number of spending and interest-rate cutting actions during the 1990s, none of which worked. (True to form, Krugman several years ago claimed that had Japan's government not engaged in such actions, the Japanese economy would have fallen into depression, another "Heads, I win, Tails, you lose" proposition we often see from Krugman.)

Interestingly, Krugman always has approached the Japanese recession as having come out of nowhere, or he has linked it to Japan's high savings rate. French, however, notes that Japan had a huge and unsustainable boom that turned into a combination of stock and real estate bubble which popped:

For a brief moment in 1990, the Japanese stock market was bigger than the US market. The Nikkei-225 reached a peak of 38,916 in December of 1989 with a price-earnings ratio of around 80 times. At the bubble's height, the capitalized value of the Tokyo Stock Exchange stood at 42 percent of the entire world's stock-market value and Japanese real estate accounted for half the value of all land on earth, while only representing less than 3 percent of the total area. In 1989 all of Japan's real estate was valued at US$24 trillion which was four times the value of all real estate in the United States, despite Japan having just half the population and 60 percent of US GDP.

Bubbles, as we have seen, result from deliberate "expansionary" policies by government authorities, yet Krugman always seems to treat them as being solely the product of private enterprise. It never occurs to him that the policies of high leverage and betting on inflated asset values would not happen systematically if government were not acting behind the scenes. Instead, he tells us that the only thing that can rescue a financial system is a new round of government regulations.

Japan did not go into recession because of laissez-faire or because its citizens saved too much money, just as the Chinese did not cause our financial bubbles with their own savings. Krugman's response to the boom and bust cycle reminds me of something I saw written about a friend of mine: "The trouble with the world is wine, women, and song. We must stop singing."

Wednesday, February 10, 2010

More Krugman Chutzpah

In one of his blog posts today, Paul Krugman decries what he believes is Republican double-dealing on Medicare. Now, I hardly want to get involved in a food fight between Republicans and Democrats on Medicare payments.

What is interesting, however, is Krugman's last statement:

You almost have to admire the audacity: Republicans are denouncing Obama for proposing Medicare cuts, while themselves proposing much deeper Medicare cuts. And they’re getting away with it.
Now, this is the same Paul Krugman who has constantly decried the 1981 income tax rates that were done in the first year of the Ronald Reagan administration. And, yes, when I asked him during the Q&A of a session at the 2004 Southern Economic Association meetings in New Orleans if he supported the 70 percent rates that stood before they were cut to 50 percent, he said (to a roomful of economists), "Oh, no! Those rates were insane!"

And who now is getting away with what?

Tuesday, February 9, 2010

Spain, Unemployment, and Recession

One of the great weaknesses of Keynesian analysis is its lack of any coherent theory of causality. John Maynard Keynes laid the "problem" of volatile investment spending (which he claimed was the cause of sudden downward shifts in "aggregate demand") to the "animal spirits" of investors.

Now, I hate to break it to people, but the manifestation of "animal spirits" within the investment community does not count as a causal mechanism in the turn of the business cycle. It is mere gibberish.

In his recent blog post on the rising unemployment and recession in Spain, while Krugman does not resort to "animal spirits," nonetheless he gives no sense of causality as to why there is high unemployment in that country. He writes:

...Spain’s troubles are not, despite what you may have read, the result of fiscal irresponsibility. Instead, they reflect “asymmetric shocks” within the eurozone, which were always known to be a problem, but have turned out to be an even worse problem than the euroskeptics feared.

After explaining how the real estate bubble also hit Spain (not surprisingly, contributing to the boom there), he then says:

But then the bubble burst, leaving Spain with much reduced domestic demand — and highly uncompetitive within the euro area thanks to the rise in its prices and labor costs. If Spain had had its own currency, that currency might have appreciated during the real estate boom, then depreciated when the boom was over. Since it didn’t and doesn’t, however, Spain now seems doomed to suffer years of grinding deflation and high unemployment.

Here is the problem: Spain's troubles ultimately are not due to the Euro or its lack of a currency it can manipulate (as though currency manipulation is an economic solution at all). The troubles are due to the fact that the government there is hostile to productive people. Spain's policies of forcing up wages and having draconian anti-employer labor laws are the major reason that Spain is not well-positioned for a recovery.

While I don't think that so-called economic freedom indices are perfect, nonetheless I think this recent rating by the Heritage Foundation has some merit. Notice, especially, the very low rating on "labor freedom" in which Spain falls into the "repressed" category. Guess what? In a downturn, strict and inflexible labor policies are going to translate into mass unemployment. Look for Spain to have numbers well above 20 percent in the coming months and years.

Unfortunately, you will not see Krugman deal with that central issue. Instead, he will call for general debasement of the Euro as a "solution" when inflation is no solution at all.

Monday, February 8, 2010

Krugman on the Decline of the USA: It's Goldstein's Fault

Every once in a while, I read the title of a Paul Krugman column and hope against hope that he will say something that makes sense. Unfortunately, the hope always is dashed, as the column degenerates into the kind of partisanship that is not worthy of one of the most decorated economists of our time.

(Not to worry. Krugman spews out invective against any economist who might disagree with his Great Wisdom, and when it comes to the Austrians, he creates a ridiculous straw man argument, attacks his own creation, and then claims to have won the debate.)

Today is one of those hope against hope moments. In "America is Not Yet Lost," Krugman laments the decline and fall of the USA and then offers a solution: change the rules of the U.S. Senate. Yes, that's right. The same person who in the past has championed the filibuster and other Senate tactics when Republicans were in the majority suddenly has seen the light and wants the legislative body to essentially be something like the House of Representatives but with fewer people.

Why does Krugman believe America is declining? Because the Senate is not able to ram through legislation that Krugman favors:

The truth is that given the state of American politics, the way the Senate works is no longer consistent with a functioning government. Senators themselves should recognize this fact and push through changes in those rules, including eliminating or at least limiting the filibuster. This is something they could and should do, by majority vote, on the first day of the next Senate session.

In other words, American no longer is "great" because the Senate has not passed ObamaCare. Forget about this country's foreign wars that it cannot afford or the fact that it essentially is printing money to pay for record budget deficits. (Krugman is on the record as declaring that most economic problems can be solved simply by creating new currency out of thin air.) Forget about the fact that we now have a regime in which federal prosecutors pretty much can charge whomever they want with any crimes of their choosing.

Furthermore, does Krugman want the rules changed for partisan purposes, or on the basis of principle? Here is the test: if Republicans ever take a majority again in the Senate, will Krugman still demand the end of the filibuster? (His employer, the New York Times, demanded that the Senate filibuster the nomination of Samuel Alito to the U.S. Supreme Court. In other words, a filibuster for me, but not for thee.)

None of this is written with approval for what Republicans are doing in Congress. Now, I happen to believe that ObamaCare would be a disaster, with the results showing up sooner than later. Krugman for years has demanded state-run medical care, so I am not surprised at his outburst when it lacks one Senate vote to pass.

Unfortunately, most Senate Republicans support our disastrous foreign adventures and they were instrumental in furthering unwarranted state power into our lives when they held a majority. In short, they were as bad then as the Democrats are now.

At the same time, Republicans are all-but-invisible in Washington these days, just as Goldstein was invisible in Orwell's Oceania until the moments when Big Brother would flash the man's face on the screen during the Two-Minute Hate. Unfortunately, Krugman's column, which at least used to have some legitimate economic commentary, has morphed into little more than an semi-weekly screed of Orwellian propaganda of blaming Goldstein, er, the Republicans, for all our ills.

I can understand Krugman's frustration that just when it seems that the Democrats have been holding all of the political cards, they lose what supposedly is a safe seat and the socialist medicine rock rolls to the bottom of the hill. However, I also expect a decorated academic to rise above political partisanship and to write copy that actually differs from the or Daily Kos talking points. So far, Krugman has demonstrated himself to be little more than a highly-paid shill for the left wing of the Democratic Party.

Saturday, February 6, 2010

Should the Deficit and National Debt Worry Us?

In continuing comments on Paul Krugman's February 5 column, I now turn to this statement that he makes:

...there’s no reason to panic about budget prospects for the next few years, or even for the next decade. Consider, for example, what the latest budget proposal from the Obama administration says about interest payments on federal debt; according to the projections, a decade from now they’ll have risen to 3.5 percent of G.D.P. How scary is that? It’s about the same as interest costs under the first President Bush.

As reader Bill Ott reminds us, we still are dealing with devastating numbers. I will quote what he sent me, and I think you will agree that once again, Krugman is not being an economist, but rather a partisan political shill:

My view is that this is a huge deal. The current $450 billion interest payment would normally reside in the hands of tax payers instead of investors. I guess the immediate needs of tax payers will have to wait for the less immediate needs of large investment companies. I realize that Krugman does not believe the "Broken Window Fallacy" so to him it is just money we pay to ourselves. Even assuming the Broken Window Fallacy is completely and totally false, there is still money sent to foreigners in that interest payment.

Does Krugman have any idea of how much capital leaves the country to foreigners? That is $450 billion x .23 = 103.5 billion. With $103 billion you could buy the output of the entire state of Utah! Or that is $103.5 billion / 300 million = $350 per person per year going entirely to foreigners. So every American loses $350 of REAL SAVINGS each year. I find it sad that the $350 of interest per year could provide a small nest egg for the individual Americans and tens of thousands of US jobs in the aggregate when it goes to funding jobs and economic opportunity for the citizens of China, Japan, The Arab Emirates, etc.

This dovetails nicely with the point I made in an earlier post about equating government borrowing to business borrowing. In Krugman's Keynesian view, there is no structure of production, only an amorphous blob known as an "economy." Whether or not spending is the result of borrowing or just printing money, the only thing that matters is spending.

In that view, government borrowing literally has no different effect than does business borrowing. Any serious look at the two will reveal a huge difference that supposedly an economist, of all people, should understand.

(Thanks to Bill Ott for his comments. If any readers have comments that point out things I have missed, please send them my way!)

Friday, February 5, 2010

Goldstein Strikes Again! (Or, Krugman Says Not to Worry About Deficits)

It seems that Goldstein is at work again, like the nefarious Count Olaf in A Series of Unfortunate Events. This time, however, Goldstein (who, like Olaf, wears lots of disguses) is disguised as a Republican telling people that the current gargantuan deficits are bad.

Pay no heed to these poseurs! Don't listen to Goldstein! Instead, Paul Krugman tells us to listen to the economists, who "take a much calmer view of budget deficits than anything you’ll see on TV." Anything else is a "scare tactic" dreamed up by Goldstein, uh, Republicans.

Krugman has an analogy: scaring people about the deficit is like what the Bush administration did just before invading Iraq:

To me — and I’m not alone in this — the sudden outbreak of deficit hysteria brings back memories of the groupthink that took hold during the run-up to the Iraq war. Now, as then, dubious allegations, not backed by hard evidence, are being reported as if they have been established beyond a shadow of a doubt. Now, as then, much of the political and media establishments have bought into the notion that we must take drastic action quickly, even though there hasn’t been any new information to justify this sudden urgency. Now, as then, those who challenge the prevailing narrative, no matter how strong their case and no matter how solid their background, are being marginalized (emphasis mine).

Furthermore, the Nobel Laureate declares:

Let’s talk for a moment about budget reality. Contrary to what you often hear, the large deficit the federal government is running right now isn’t the result of runaway spending growth. Instead, well more than half of the deficit was caused by the ongoing economic crisis, which has led to a plunge in tax receipts, required federal bailouts of financial institutions, and been met — appropriately — with temporary measures to stimulate growth and support employment.

The point is that running big deficits in the face of the worst economic slump since the 1930s is actually the right thing to do. If anything, deficits should be bigger than they are because the government should be doing more than it is to create jobs.

It is hard to know where to begin. First, and most important, Krugman and his minions are not being marginalized. Please. The guy is earning sums of money with his speeches and articles that would make a professional athlete jealous. The Keynesians are in positions of power and influence, occupying the top positions at the Federal Reserve System, the Ivy League professorships, and are the subjects of fawning pieces in the leading U.S. newspapers and periodicals. So, let's cut the crap about these guys being shoved into a corner somewhere.

What Krugman means about being "marginalized" is that some people dare disagree with him in public forums and in print, which he sees as something akin to blasphemy. Has he not faithfully proclaimed the Keynesian Gospel, yet there still are infidels out there?!? How dare they contradict the General Theory!

Second, Krugman himself claimed that the unemployment rate would peak somewhere in the eight-percent range if the stimulus were passed. Guess what? The stimulus passed, and we are at 10 percent and climbing. (Krugman's excuse that the stimulus was not large enough is yet more Nobel-Prize nonsense.)

So, are we to believe that the only thing between us and the abyss is the size of the deficit, and the more the government borrows and spends, the better off we shall be? That is what Krugman is claiming, because, as we all know, should the federal debt become greater, all that government needs to do is to print lots of money, which will repudiate the debt, and if the Chinese don't buy it, we can accuse them of being "mercantlists" or worse.

In other words, there always is someone else to blame. Right now, it is those pesky Republicans who, after being defanged in the past two elections (in part, for involving us in wars and for running huge deficits and giving us the Housing Bubble), apparently really are the "shadow government" after all. How do I know that? Here are the words of the Master Himself:

The main difference between last summer, when we were mostly (and appropriately) taking deficits in stride, and the current sense of panic is that deficit fear-mongering has become a key part of Republican political strategy, doing double duty: it damages President Obama’s image even as it cripples his policy agenda. And if the hypocrisy is breathtaking — politicians who voted for budget-busting tax cuts posing as apostles of fiscal rectitude, politicians demonizing attempts to rein in Medicare costs one day (death panels!), then denouncing excessive government spending the next — well, what else is new?

The trouble, however, is that it’s apparently hard for many people to tell the difference between cynical posturing and serious economic argument. And that is having tragic consequences.

For the fact is that thanks to deficit hysteria, Washington now has its priorities all wrong: all the talk is about how to shave a few billion dollars off government spending, while there’s hardly any willingness to tackle mass unemployment. Policy is headed in the wrong direction — and millions of Americans will pay the price.

Well, Houston, we have a problem. According to Krugman, deficits are bad if they occur in a Republican administration, but are good when the Democrats are in charge. Such thinking is not worthy of an acclaimed economist who really should be above spouting political talking points. Does Krugman really want us to believe that opportunity cost - the bedrock of all economic analysis - really becomes nonexistent when the economy tanks? That deficits are bad when the wrong people are in charge, but the same conditions are good when politicians approved by Princeton University and the New York Times are in control?

Such sentiments really are not worthy of a decorated economist. Thus, I have concluded that Goldstein himself has kidnapped the economist Paul Krugman and is disguised as Princeton's finest. Yes, Goldstein is writing Krugman's column!

Thursday, February 4, 2010

Should We Blame the Chinese for the Recession?

When the economies of Singapore, Indonesia, and other Southeast Asian countries crashed more than a decade ago, mobs of people rampaged in the streets, seeking out ethnic Chinese merchants and workers and beating and killing them. Why? Well the Chinese were convenient scapegoats.

Today, Paul Krugman, while not advocating mayhem and murder against Chinese (thank you for being civilized, Paul), nonetheless is trying once again to blame China for at least some of our current troubles. China, he declares, is using a "beggar-thy-neighbor" policy against us.

China's "crime," it seems, is undervaluing the Renminbi relative to the U.S. Dollar, having an official exchange rate that values its currency lower than it could get in the market. This makes Chinese exports cheaper relative to U.S. goods, which is one reason that American consumers can purchase inexpensive Chinese products.

However, such a policy encourages China to send its goods abroad, and it also means that such goods are more expensive at home than they would be in a free market. Thus, if anyone is being "beggared," it is Chinese consumers, who are being fleeced in order to permit Americans to consume more goods from China.

Obviously, this is a situation of poorer people subsidizing those who are wealthier. It is welfare in reverse, philanthropy from the poor to the rich.

American consumers are not the ones complaining. U.S. producers are not happy, and for all of the talk in Washington of protecting consumers, it is the producers who tend to be politically connected. Furthermore, if we are going to speak of real-live victimization, then perhaps the fact that the Chinese central bank has been purchasing boatloads of near-worthless U.S. Treasuries is the real scam.

Let's be honest, folks. For years, we have sent dollars to China, dollars that, frankly, are overvalued. The Chinese people have sent us goods, such as cell phones and computers, and in return the government has taken the money and purchased U.S. paper that depreciates daily. Who is getting the good deal, and who is being cheated?

I think that is a legitimate question, one that Krugman does not want to answer.

Chutzpah, or Just Bad Economics?

One thing I have admired about Paul Krugman has been out out-and-out chutzpah. Here is a guy who told a roomful of economists (including me) in 2004 that the 70 percent top marginal tax rates that existed before 1981 were "insane," but then writes in his blog that the cutting of those rates to 50 percent contributed to the recession of 1981-82. (He does not give us any causality, just rhetoric.)

So, a year ago, in this blog post, he shows the Obama (then) projections of the economy with and without the "stimulus."

He then adds the following:

Kudos, by the way, to the administration-in-waiting for providing this (the graph) — it will be a joy to argue policy with an administration that provides comprehensible, honest reports, not case studies in how to lie with statistics.

Hmmm. According to the Obama projections - Krugman then claimed were (at least) mostly truthful, our rate of unemployment should be under eight percent. Given that the rate actually is well above 10 percent - and climbing - how does one square such projections with the statement that this administration was telling the truth, especially since Krugman himself in that post says that the numbers on the graph were close to the ones he had projected?

Well, he declares that the stimulus was not "big enough." So if the government had printed more money, if the government took on even greater debt, if the government were to nationalize the banks and medical care system, then we would be in the Promised Land.

That does not cut it, folks. The Obama administration gave us a set of projections that were as bad as anything coming from the Bush White House. Furthermore, Krugman himself signed onto the figures and now blames the fact that they were bogus on Obama not being fiscally reckless enough and Goldstein, uh, those bad, bad Republicans.

Wednesday, February 3, 2010

Does Government Borrowing Equate to Business Borrowing?

One of Paul Krugman's constant themes is that we should not be concerned about the accelerated rate of government borrowing because all that has happened is that federal borrowing is supplanting the fall in business borrowing. In a recent post on his blog, "Conscience of a Liberal," he declares:

I keep trying to tell people this: the surge in government borrowing has been more than offset by a plunge in private borrowing, and we’re less dependent on foreign financing than we have been for a long time.

There you have it: We should not worry about the rapid increase in government debt as the total rate of borrowing in the country is about what it was before the recession began. This statement tells volumes about the differences between the Keynesian and Austrian ways of examining the acquisition of debt.

In the Keynesian view, the only thing that matters is spending. Capital and other assets are pretty much homogeneous in their economic effects, and the benefit we derive from capital expenditures is from the spending itself, not what capital represents. Thus, Keynesians would hold that in a time of high unemployment, if government borrows a load of money in order to build a bridge or road to Nowhere, that is perfectly acceptable because it causes government to spend, which "creates jobs," and puts money into the hands of people who then spend it.

Austrians, however, see assets and capital as being heterogeneous, and it matters how they fit into an economy's structure of production. Furthermore, contrary to Keynesian thought, opportunity cost does not take a vacation during a recession; contra Krugman, there is no "Prosperity Economics" that differs with "Depression Economics."

Businesses borrow for two reasons. The first is through a line of credit which they use in order to avoid cash-flow problems. These are short-term loans which are paid back quickly when cash from sales comes into the business. The second is for longer-term capital investment.

When businesses borrow for expansion or capital replacement, they do so with the expectation that such actions ultimately will result in future sales that result from the goods being made with the new or replaced capital. They don't borrow in order to spend for the sake of spending. Instead, they are engaging in purposeful, future-oriented behavior.

Contrast this with the current wave of government borrowing. First, most of the "stimulus" money is for projects that really have little value for capital expenditure purposes. (The building -- in the name of "stimulus" -- of a multi-billion-dollar high-speed passenger railroad that will lose huge amounts of money with each passenger is not exactly wise capital spending.)

Second, government today is borrowing to pay its current operations costs, yet there is no anticipation that the spending today will result in new sources of revenue in the future. This is nothing more than spendthrifts maxing out their credit cards with no regard for how they will pay back the debt.

Krugman wants us to believe that if the government borrows, spends, and debases money, thus causing inflation, these actions will give the economy some "traction" which will encourage it to move on its own, as though it were a perpetual motion machine. However, this is an extremely superficial way of approach economics, and its application always has been and always will be a failure.

Tuesday, February 2, 2010

Whoops! Bad Question! Krugman and Medical Care in Canada

I don't think that Paul Krugman expected the response he received when he asked a number of Canadians if they believed they had a bad medical system. (As you know, Krugman has declared that any negative stories about care in Canada are lies. Guess he must be in a room full of liars.)

From the Past: My First (of Many) Piece on Krugman

More than six years ago, after having read enough of Paul Krugman's missives in the NY Times and elsewhere, I decided to write my own criticism of The Great One. Little did I know it would be the first of many, as I figured at the time I was just saying my peace and that would be the end of it.

Since, then Krugman has continued to write, and so have I. As I read through this article that I wrote in 2003, I can say that nothing has changed with Krugman, and my view of his brand of "economics" has not changed, either. It was a fraud then, and it is a fraud now.

Keynesianism appeals to the supposed "common sense" of people when, in reality, it distorts what actually happens in an economy, and in many ways, it is as destructive as the atomic bombs that hit Hiroshima and Nagasaki in 1945. The difference is that one could see the damage in those cities, while with Keynesianism, we see the results of the damage but all too often, people cannot recognize the source.

Monday, February 1, 2010

Krugman and Canadian Bacon

Paul Krugman seems to have this thing about Canada. Even after a number of Canadians at a meeting told him that they did not like their country's medical system, Krugman pretended they never existed and continues to claim that any negative stories about Canadian medicine are "lies" (his word).

His latest Canadian love affair is with the banking system of our neighbor of the North, and he does have some good points. First, there have been no bank failures in Canada and the system has not come crashing down, as it has done here. (I also point out that Canada did not have any bank failures during the Great Depression at a time when half of U.S. banks went under.)

Second, he notes that both Canada and the USA had low interest rates during that period, yet Canada did not suffer from the same housing bubble that ate the U.S. economy, and he claims to have discovered the Canadian secret: regulation. He writes:

...Canada’s experience does seem to support the views of people like Elizabeth Warren, the head of the Congressional panel overseeing the bank bailout, who place much of the blame for the crisis on failure to protect consumers from deceptive lending. Canada has an independent Financial Consumer Agency, and it has sharply restricted subprime-type lending.

Above all, Canada’s experience seems to support those who say that the way to keep banking safe is to keep it boring — that is, to limit the extent to which banks can take on risk. The United States used to have a boring banking system, but Reagan-era deregulation made things dangerously interesting. Canada, by contrast, has maintained a happy tedium.

More specifically, Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization, in which banks package and resell claims on their loans outstanding — a process that was supposed to help banks reduce their risk by spreading it, but has turned out in practice to be a way for banks to make ever-bigger wagers with other people’s money.

There he goes again. First, and most important, financial "deregulation" was not the brainchild of Ronald Reagan, no matter how many times he repeats that lie. As I have pointed out before, the first wave of financial "deregulation" came during the administration of that Right-Wing Republican, Jimmy Carter. Granted, like the episode with the Canadians complaining about their medical system, Krugman ignores little facts that might get in the way of his narrative.

(He hardly is alone here. For example, during the infamous Duke Lacrosse Non-Rape Case, as more and more evidence appeared debunking the prosecutor's narrative, members of the Duke faculty, administration, and the editorial board of the New York Times -- one of Krugman's employers -- dug in their heels and resorted to even wilder claims in order to preserve the Big Lie.)

Now, I will agree with Krugman that U.S. financial institutions took huge risks in the subprime mortgage market, and, furthermore, they were reckless with their leverage. However, Krugman always resorts to his magic bullet as the cure: regulation and the establishment of a government consumer "protection" agency. In other words, like his employer in the Duke Lacrosse Non-Rape Case, he does not like to be confused with facts.

First, and most important, American banks are regulated. That's correct, regulatory agencies did not disappear during the Reagan administration in a frenzy of free-market madness. Second, he omits the moral hazard and the infamous "Greenspan-Bernanke Put" which let the financial institutions know that the government always had their backs, not matter how deep the hole they dug for themselves.

Third, it seems that the Canadian government has been receiving "bailout" money from its government, an item that the Nobel Laureate (and many of the rest of us) missed. In other words, the Canadian banks might not be the towering citadels of finance that Krugman wants us to believe is the case.

Fourth, Krugman leaves out an important law (and accompanying set of regulations) that pushed home ownership rates in the so-called subprime market: The Community Reinvestment Act of 1977. Under this law, banks were supposed to loosen mortgage underwriting standards to let borrowers with low credit ratings buy houses, and in 1994, the Clinton administration (Yes, another Right-Wing Republican presidency, you know) began to push banks to do even more subprime lending.

When the Bush administration came into office, it added another wrinkle to this push to lower underwriting mortgage standards by pushing the "Ownership Society." This program was based upon the belief that home ownership would bring many other desirable social results. Somehow, I don't think that foreclosures were among those intended results.

The results, as we see in the graph below depicting home ownership rates, were significant regarding overall U.S. home ownership:

Not surprisingly, we see that home ownership rates spiked significantly after 1994 and continued upward at a steep rate until the whole scheme fell apart a couple of years ago. In other words, it was not just low interest rates, but rather low interest rates plus government policies meant to push unqualified people into home ownership. We know the rest of the story.

Now, the idea that a consumer protection agency along with more regulation would have kept U.S. institutions out of the subprime market is a real howler. First, the expansion of the subprime was government policy, done partly in the name of "consumer protection." Second, the regulators themselves were the ones that were pushing banks to make these loans, so to say that regulators disappeared is not true.

I agree that so-called deregulation plus moral hazard has turned into a "heads I win, tails you lose" situation for Wall Street, but that hardly is a free-market situation, no matter how many times Krugman claims it is. Instead, we have seen the development of a politically-based corporatism in which politically-favored institutions are given a near-free ride -- and everyone else pays for it.

Krugman persists in this belief that under the correct guidance, government regulators (in an administration run by Progressive Democrats) can act as omniscient referees. Sorry, Paul. That view holds as much promise as the prospect of Canadian Bacon being served at a Passover meal.