Krugman and the "Liquidity Trap"

One thing I appreciate about Paul Krugman's columns is that he clearly explains the Keynesian paradigm, and does it in short space. One of his favorite themes in his promotion of Keynesianism has been the "liquidity trap." Here is what he says about this term:

In my analysis, you’re in a liquidity trap when conventional open-market operations — purchases of short-term government debt by the central bank — have lost traction, because short-term rates are close to zero.

In other words, interest rates are at about zero (or what he calls the "zero-bound,"), which means that typical monetary policy in which the Federal Reserve System increases bank reserves which then can be lent to businesses for capital expansion is ineffective. When that happens, Keynesians then recommend the government follow "fiscal policy," in which the government borrows (or prints money) and spends it directly in the economy as a "stimulus."

Krugman is quite consistent on this point. He goes by the following syllogism:

• Spending drives the economy, and there must be a certain level of spending to keep the economy afloat;
• Private investors are not borrowing enough even though there are lots of bank reserves, which means the economy is in a "liquidity trap";
• Therefore, to boost spending, government must directly spend by borrowing or getting the Federal Reserve System to purchase government bonds directly, which will "stimulate" the economy and allow us to "spend our way out of the" depression.

In a recent post on his NYT blog, Krugman again claims that the rules are different because much of the world is in a "liquidity trap."

However, there is a different approach, as is laid out by Murray N. Rothbard in his classic America's Great Depression. I include Rothbard's description and criticism of the "liquidity trap" in this link. It is quite long, so I don't include the text in this post. However, it is worth reading if you wish to understand that theoretical basis for the current government policies, and a good antidote to them.

Folly and "Financial Reform," Part II

In Paul Krugman's column on "financial reform," he makes it sound so simple. Just put, smart, "well-meaning" regulators in power, and they will make sure that the financial system will work just fine.

Unfortunately, while Krugman understands the technical jargon about finance, he really does not comprehend the economics behind it. According to Krugman, government regulators can pick "winners" just as well as anyone else can do, and since capital itself, economically speaking, is homogeneous, well it is pretty easy to run an economy. Just let the regulators decide where the loans shall go, and there won't be any risk, and the economy will work like a clock.

This is fantasy. If government regulators really could pick winners, as Krugman seems to think, then people that wise immediately would be hired by investment firms -- at many times their government salaries -- and lead Wall Street firms into investment bliss. In truth, reality is much more complicated.

If the world Krugman still champions were in existence now, I would not be writing this piece, as laptops -- if they existed at all -- would be much more primitive than they are now. Forget about the Internet, since copper wire still would be transporting telephone calls, and the Internet as we know it could not exist under such technology.

Television would continue to be the dreadful fare of a few network stations, Dan Rather still would be on the air (since there would have been no bloggers to expose his dishonest use of forged documents in a diatribe against President George W. Bush), and the only way to be able to read Krugman would be if one purchased a paper edition of the New York Times. That is because the "shadow" system Krugman so despises, was the system that financed most of the high-technology ventures that have become an integral part of our lives.

Someone like Krugman cannot understand this because in his world, economic outcomes depend only upon how much money the government is willing to print. Whether or not the financial system operated under 1930s rules or if investors were free to pursue the new technologies would lead to exactly the same outcomes, at least where what was available to consumers is concerned.

In other words, Krugman has no concept of the Law of Cause and Effect. To him, the effect always is the same, economically speaking. However, to Austrian economists, the Law of Cause and Effect is front-and-center in understanding economic outcomes.

Austrians understand that the banking system Krugman so praises could not and would not have financed what turned out to be a massive economic recovery during the 1980s. That role was left to the "shadow" system.

Now, most of the deregulation initiatives of the 1980s and 1990s really was re-regulation, and the system became increasingly skewed, as politicians sought to maximize political contributions coming from the financial sector. Unwise laws like Sarbanes-Oxley limited possibilities of profit within our borders, so banks and brokerage houses turned to other means to make money.

While it is easy to decry a lack of oversight when the financial system went ga-ga over what turned out to be toxic mortgage securities, in hindsight, we realize that had the politicians not deliberately shackled the productive U.S. economy, perhaps banks and brokerage houses might have pursued more sound "investments" than pyramiding funds atop mortgage securities that turned out to be worthless.

Furthermore, Krugman forgets that the loose credit policies of the Federal Reserve System helped to trigger reckless lending and touched off an unsustainable boom. (Krugman does not believe booms are unsustainable. He just believes that if a boom slows down, government needs to print lots of money to keep the party going.)

Now, I agree with Krugman that the banks and brokerage houses were irresponsible, but one does not forget that people who believe that the government "has their backs" are going to be more reckless than people who understand that if they fail, they have to pick up their own pieces. Krugman never seems to fathom that the moral hazard created by the government backstops ultimately set the stage for this disaster. Nor is he ever going to change his tune; it's his story and he is sticking with it. I'll stick by my account.

Folly and "Financial Reform", Part I

In my review in the Freeman of Paul Krugman's The Return of Depression Economics and the Crisis of 2008 (a book that I am requiring for my MBA students this spring) I noted that he made some insightful observations and comments. However, I continued, he then draws all of the wrong conclusions:

...alas, in the end Krugman resorts to the arguments of the great economic cranks of history, from Silvio Gesell to John Maynard Keynes. He’s like the mechanic who expertly describes a problem with your fuel pump—then insists your car needs more gas. If the tank is full, he tells you to attach an auxiliary tank.

In other words, Krugman is still the one-trick pony featured in the Times. Whatever the problem, his solution is always the same: inflation.

Thus it is today with his column on financial reform.Krugman correctly notes that the financial sector took risks that clearly were out-of-bounds, yet they also understood that the government had their backs. All of us can agree on that point, but the next question is where we part: Now that the financial meltdown has happened, what should we do about it?

Austrian economists like me believe that we need to move entirely away from a financial sector backed up by the printing presses of the U.S. Government and the monetary manipulations of the Federal Reserve System. Such a system always is doomed to failure because the symbiotic relationship between the financial sector and government is inevitable when government agents can descend on that sector and overnight change outcomes.

(The predations of Elliot Spitzer and Rudy Giuliani come to mind. While both men were effusively praised by Krugman's NYT employer, Wall Street got the message and gave both men massive amounts of campaign contributions. Like Willie Sutton, politicians know they can raid Wall Street because "that's where the money is.")

Krugman, on the other hand, approaches financial regulation from this point: Democrats always good, Republicans always bad. Democrats want wise regulation, Republicans want wild speculation. Now, that is something I expect to hear from political hacks or from Keith Olbermann, not to mention the editorial writers and columnists at the NYT.

I don't expect a decorated economist like Krugman to give in to this simplistic hackdom, and that is what he is doing, like it or not. Furthermore, he gives a skewed history of the rise of what he and others call the "shadow banking system."

In Krugman's history, the tightly-regulated banking system was almost impervious to failure because regulators kept it from going after Big Risks. Unfortunately, those bad free-market ideologues both created a shadow system and then bamboozled the Wise Government to deregulate the banking system, ultimately leading to the present crisis. That is a history that plays well to both his audience and the current crop of politicians in power.

As I said before, I expect to hear such nonsense from the Usual Suspects, just as I expect Ann Coulter to claim that Barack Obama is not pursuing Big, Bad Muslims around the globe with enough ferocity (and, thus, adding further to our government's financial bankruptcy). However, as economists have noted for decades, the real story of regulation is much more nuanced and requires for people not to give into partisan diatribes.

What Krugman does not tell us is that by 1980, the small, wonderful banking system was in crisis in no small part because of the regulation Krugman praises. Regulators operate according to a set of incentives in which they receive no credit for "picking winners" but are in hot water if they allow actions that result in failure. Therefore, the default for regulators always will be "no."

Ever hear of MCI? Of Borders Bookstore? Of McCaw (now AT&T) Cellular? Of CNN? Of fiber-optics and a thousand other high-technology initiatives? The reason you have heard of them has been that "shadow banking system" that Krugman condemns. The heavily-regulated banking system would not touch them because these were new ventures that were outside of the usual kinds of things (like government bonds) that banks were permitted to help finance.

Like the entrepreneurs in Elizabethan England who set up shop outside London (because the Queen had granted monopolies in that city to her favored people), something noted by economists Robert Ekelund and Robert Tollison in their book Politicized Economies, the shadow financial system grew precisely because it allowed investors to pursue profitable opportunities that the regulated banking system could not.

Furthermore, the "tightly-regulated" banking system, which really was more of a regulated cartel, was losing capital. Part of the regulatory deal was that government would limit the risk the system could take, but it also would place ceilings on interest rates the banks could offer. At a time when inflation was in double-digits, but banks only could pay depositors something in the range of 6 percent, people flocked to money market accounts being offered by financial entrepreneurs that were relatively safe but also paid higher interest rates.

Like the entrepreneurs who broke down the Mercantilist regulatory system of post-Renaissance England simply by locating elsewhere, the financial entrepreneurs like Michael Milken helped to finance what would be our economic future for two decades. Of course, the established financial firms on Wall Street that were being left out of the action did not like upstarts like Milken, and so Rudy Giuliani did their dirty work, urged on by the NY Times and others.

(By the way, Milken was a liberal Democrat and hardly falls into the category of the "free-market, Republican ideologue" so demonized by Krugman and others. In other words, Milken did not fit the stock profile, but nonetheless was pushed into that false category anyway.)

The background being set, in Part II, I will look at Krugman's current statements and point out why they are wildly untrue and misleading.

Say What? on the Debt

I have read bizarre stuff from Paul Krugman before -- heck, here is a guy who believes prosperity is created by the government printing press -- but I must admit this latest blog post of his comes close to being the most bizarre of all. First, and most important, he declares that the gargantuan public debt really is not much of a big deal.

Second, he wants us to take the word of the Obama administration on the budget numbers up to 2020. Yes, now that the profligate politicians he likes are in power, we are supposed to believe whatever the administration tells us. Right.

However, it gets better. After mentioning that other "independent sources are moderately more pessimistic" (they believe the federal deficit will be five or six percent of GDP instead of the Obama prediction of 3-4 percent), he writes this:

That’s not, in economic terms, a huge number. We could raise taxes that much and still be one of the lowest-tax nations in the advanced world. Or we could save a significant share of that total by not being totally prepared for the day when Soviet tanks sweep across the North German plain.

And it gets better:

The only reason to doubt our ability to get things under control a decade from now is politics: if we’re still deadlocked, if sane Republicans are cowed by the Tea Party, then sure, we can have a fiscal crisis. And longer term, we’ll be in a mess unless we get health care costs under control — which is exactly what we’re trying to do, in the face of cries about death panels.

Yeah, it is those dastardly tea-partiers that are going to cause a fiscal crisis. Why? Well, they oppose "healthcare reform," and everyone knows that a huge combination of new taxes, draconian regulations, mandates and subsidies are going to vastly cut medical costs and help revive the economy.

I will agree that the "War on Terror" has eaten a portion of our nation's production that is equal or greater than any set of costs associated with medical care, and there seems to be no end in sight. What is just as bizarre to me as Krugman's assertion that the Obama numbers are honest is the campaign of the Heritage Foundation, "Four Percent for Freedom," that claims we are not adventurous enough when it comes to military spending and wars abroad.

You see, it never has occurred to the people at Heritage that the financial ruin that has come about in large part because of the "War on Terror" and the vaunted "Ownership Society" initiative of the Bush administration (pushed by Heritage and the Cato Institute) which deteriorated into "let's put everyone into home ownership whether or not they can afford it." Because the Bush administration was profligate, it created a crisis that helped lead to the current political situation, and ultimately to, yes, the real ascension of Krugman to his current "superstar" status. By creating a fiscal crisis, the "conservatives" gave credibility to Krugman, who became well-known in large part because of his public criticism of the Bush administration.

So, we have few voices for fiscal sanity, anymore. On the one hand, Krugman claims that we are supposed to believe Obama's budget numbers as though they came from God, and the "conservatives" want even more war and military spending abroad. Neither side can come to grips with the fact that this government is broke, broke, broke.

Don't kid yourselves. We are on the same path as was Argentina in the mid-20th Century, when a rich and proud nation morphed into poverty and political chaos. Those "advanced" countries of Europe Krugman so praises are headed in the same direction, brought down by the cold hard reality that in order to have a high standard of living, a country must produce something other than paper money. It is unfortunate that the USA is being destroyed by a tag team of the Left and the Right, but here it is.

What About Financial "Reform"?

Once again, we see Paul Krugman promoting the fantasy that our financial system in 1980 was a "robust," productive system done in by the ideology of "deregulation." Well, not exactly.

People who were around then might remember that Krugman's employer, the New York Times, praised the first major deregulation bill, the Depository Institutions Deregulation and Monetary Control Act of 1980. Yeah, you know how those NY Times editorial writers are a bunch of conservative, free-market Republicans.

This time, Krugman claims that as long as regulators are "smart" and "well-intentioned," then they can pull off the whole deal. I think it takes more than that. Krugman, unfortunately, demonstrates his ignorance of finance and of economics (not to mention economic history) in the following missive:

The pre-1980 system was, I’d argue, pretty robust. Bank regulators didn’t have to be all that smart, because the rules were simple — and besides, the large franchise value of banks, the fact that they faced limited competition and were almost guaranteed to be profitable, made bank executives unwilling to take big risks of killing the goose that laid golden eggs.

However, the "golden eggs" of the 1980s were industries in which these bank executives refused to make investments. Ever hear of CNN? What about MCI? McCaw Cellular (now AT&T Cellular) might jog the memory a bit.

These and more all were industries that the banking system -- that "robust" system Krugman praises -- ignored. Krugman really wants us to believe that the high-technology industries, the very industries that are vital to our economic well-being, really just came into being, despite the fact that the banks (regulated by "smart and well-intentioned people") would not make loans to them. Indeed, every one of these firms came about because of the alternative system (specifically, Michael Milken and his "junk" bonds that turned out to be good investments) that Krugman wants to make illegal.

Now, I will be the first to say that if the government is going to backstop the financial system, providing bailouts and other goodies to prop up failure, then the system needs to be regulated. However, keep in mind that this kind of a system is not going to be effective in financing those sectors of the economy we need to lead us out of this recession.

However, none of that matters to Krugman. Here is a guy who really believes that all we need is for a government to have the "courage" to print money, borrow, and spend recklessly.

How DARE Anyone Protest This Bill!

In the days before the vote on the allegedly "historic" Obamacare bill in the House of Representatives, recalcitrant Democrats were receiving threats overt and covert from constituents, unions, and others. A number of them had to deal with obscenity-laden threats from Rahm Emmanuel, courtesy of the Obama White House.

However, such actions were not extremism. No, they were statesmanship, or at least in the Wonderland inhabited by the likes of Paul Krugman.

However, whatever rumors or even lies about the protests of those who were against this monstrosity of a bill are being told, Krugman is there to repeat them, and he does so again in his column today, "Going to Extreme."

Before taking on today's missive, I want to deal with a Big Lie that Krugman was helping to spread. Remember the supposed screaming of the "N-word" at black members of Congress last week? Krugman and all of the others in the media made hay of it. However, it turns out that the account was a fabrication, made up by a reporter from the McClatchy newspaper chain.

(In case you are not familiar with the leftist McClatchy chain, one of its newspapers, the News & Observer of Raleigh, North Carolina, started off the infamous Duke Lacrosse Hoax with a fabricated account written by a female reporter who now works for a Marxist publication. More than any other media outlet, the McClatchy chain was responsible for this patently-false hoax and subsequent attempted frame of three young men by the prosecution and police of Durham. That McClatchy would promote another Big Lie does not surprise me in the least.)

That it turns out that no one -- not one person -- has been able to pick up any of those supposed slurs on the numerous videos made of that moment. This was a fabrication, pure and simple, yet Krugman gleefully jumped on it because it was "proof" that anyone who opposed Obamacare is a racist.

Ironically, Krugman's employer put a correction in his "Fear Strikes Out" column because Krugman had falsely claimed that Newt Gingrich was saying that "civil rights" damaged the Democratic Party. So, Krugman himself is not above promoting fabrications when it suits him. (Of course, Keynesian economics is a fabrication, but that is a discussion for another time and post.)

So, in today's column, we read more of the same:

But back to the main theme. What has been really striking has been the eliminationist rhetoric of the G.O.P., coming not from some radical fringe but from the party’s leaders. John Boehner, the House minority leader, declared that the passage of health reform was “Armageddon.” The Republican National Committee put out a fund-raising appeal that included a picture of Nancy Pelosi, the speaker of the House, surrounded by flames, while the committee’s chairman declared that it was time to put Ms. Pelosi on “the firing line.” And Sarah Palin put out a map literally putting Democratic lawmakers in the cross hairs of a rifle sight.

All of this goes far beyond politics as usual. Democrats had a lot of harsh things to say about former President George W. Bush — but you’ll search in vain for anything comparably menacing, anything that even hinted at an appeal to violence, from members of Congress, let alone senior party officials.

So, we are back to the same partisan vitriol: We Democrats are nice people, those Republicans are a bunch of violent kooks. Now, to me, both parties are full of people who have advocated violence against Americans and much of the rest of the world, and currently are carrying out those threats at home and abroad.

Krugman then makes this astonishing claim:

Mr. Obama seems to have sincerely believed that he would face a different reception. And he made a real try at bipartisanship, nearly losing his chance at health reform by frittering away months in a vain attempt to get a few Republicans on board. At this point, however, it’s clear that any Democratic president will face total opposition from a Republican Party that is completely dominated by right-wing extremists.

For today’s G.O.P. is, fully and finally, the party of Ronald Reagan — not Reagan the pragmatic politician, who could and did strike deals with Democrats, but Reagan the antigovernment fanatic, who warned that Medicare would destroy American freedom. It’s a party that sees modest efforts to improve Americans’ economic and health security not merely as unwise, but as monstrous. It’s a party in which paranoid fantasies about the other side — Obama is a socialist, Democrats have totalitarian ambitions — are mainstream. And, as a result, it’s a party that fundamentally doesn’t accept anyone else’s right to govern.

Please. This is a president who made the hyper-partisan Emmanuel his chief of staff, and who made it clear that he had the votes, and he was going to do whatever he pleased. Obama told Republicans that if they were not going to go along with what he wanted, then it didn't matter, anyway. Furthermore, the Democrats quickly have turned these alleged "threats" of which Krugman speaks into fundraising opportunities, which always makes me a bit suspicious. That Krugman tries to paint a picture of a naive, trusting Obama who was stabbed in the back by those mean, nasty, vicious, racist Republicans is junk that at best is saved for the Daily Kos or Media Matters.

Paul Krugman represents the Eastern, secular, urban Democrat who absolutely cannot understand nor tolerate anything other than the culture in which he lives. Should anyone be different, well, that person really needs at best to pay taxes, and bend over and take whatever the Krugman-approved government gives him or her. Any opposition to his ideas can be motivated only by racism, and whatever "ism" he pulls out of his hat.

Only in Wonderland Will "Healthcare Reform" Reduce the Deficit

Paul Krugman is at it again, trying to convince us that this monstrosity of a bill is going to produce all sorts of financial "savings" for Americans, and he claims to have brought out the heavy intellectual artillery. Krugman pulls out a figure from that great economic soothsayer, Ezra Klein of the Washington Post which "proves" that revenues from this new bill will well-outstrip expenses:

Lest one be a doubter, the Center on Budget and Policy Priorities makes similar claims, and we know that the Left never is wrong on economic policy. However, before we sit back and cheer the good fortune we have before us (you know, "world-class" healthcare and those rich people will pay for all of it), perhaps some wise words from Robert Higgs, an economist whom I respect infinitely more than Krugman or Klein, might be in order:

What has this gargantuan statute wrought? To this question, there can be only one answer: Nobody knows.

I am being quite serious: no single human being knows ― no one can know ― what provisions the statute’s more than 2,000 pages contain. Even if someone had the power to read and remember everything in this massive legislative enactment, he would still harbor a multitude of uncertainties about: how the courts will interpret the law’s general provisions; how the various administrative agencies will flesh out the statute with new regulations; the precise way in which each provision will be implemented; how, when, and in what amounts funds will be made available for carrying out the law’s many stipulated actions; how much resistance the law will meet, both in the courts and among the public, and how these conflicts will be resolved; and countless other matters of critical importance to those directly and indirectly affected by the massive statute ― which is to say, virtually everybody in the United States and a considerable number of people elsewhere, as well.

Already, however, we can say a few things with certainty. One is that this statute, like any other of comparable size, amounts to a Christmas tree for politically favored interests. For months, maybe for years, people will be discovering little provisions tucked into the bill, each of which provides some sort of privilege, protection, subsidy, or other benefit to a particular firm, industry, profession, or other beneficiary. Anyone who has ever toiled through the pages of statutes of comparable length and complexity, as I have for a number of defense authorization and appropriation acts, knows that each such law comprises a host of special-interest provisions.

Higgs makes another point that is well-taken, for Krugman, Klein, and the other cheerleaders for this monstrosity are trying to tell us that a decade from now, no new expenses will be tacked onto this legislation. Right. Higgs says:

We also know that this statute will not be the end of the story of health-care politics in this country. It is, for the current phase, only the end of the beginning. The ink will scarcely be dry in the revised U.S. Code when political factions will undertake to alter or to overturn the provisions just enacted. Thus, within the act’s great expanse, hundreds of little sub-conflicts will rage, as competing interests struggle for control of the state’s coercive power in their area of contention. Politics, in general, is an endless struggle, and the politics of the federal government’s health-care intervention is no exception. Stay tuned.

Finally, because health-care-related economic activity is such a huge part of the overall economy, what happens in this sector will have significant consequences for the operation of other sectors. For example, when Obamacare turns out to be much more costly than the government has claimed it will be, the government’s demand for loanable funds will be greatly increased, with far-reaching effects on interest rates, investment spending, economic growth, and even the U.S. Treasury’s creditworthiness. It is not inconceivable that the burden of supporting this health-care monstrosity will prove to be the (load of) straw that breaks the back of the government camel in the credit markets, where the U.S. Treasury has long been able to borrow the greatest amounts at the lowest rates of interest because its bonds were considered virtually riskless. Indeed, that status as the lowest-risk borrower seems already to be approaching the breaking point, even before the new health-care legislation has taken effect. Implementation of this law can only worsen the Treasury’s plight.

I think that if credibility is an issue, the person with the most in this situation is Professor Higgs.

Inflation is Your Friend! Honest! It Is!

Since Paul Krugman and I cannot agree even on the weather, I doubt I can agree with him about the effects of inflation, as our differences are as vast as those between Austrians and Keynesians. Krugman, like all Keynesians, believes that "moderate" inflation can spur real economic growth by giving an economy "traction," allowing the economic gears, as they were, to start moving.

Austrians, on the other hand, believe inflation is destructive, and that it does not spur growth, but rather unsustainable booms that inevitably end in busts. Therefore, there is no way the ideas can meet.

In this blog post, Krugman includes a chapter from his latest textbook (co-authored with his wife, Robin Wells) in which he "explains" the difference between "moderate inflation" and what we have seen in Zimbabwe. Not everything in this chapter is bad, and at times, Krugman can be an interesting writer, and I can see why this book is popular. However, page 867 has this "gem" that exposes his viewpoints:

...policies that produce a booming economy also tend to lead to higher inflation, and policies that reduce inflation tend to depress the economy.

Well, that is only partly true, but Krugman has a real causality problem. (One remembers the opening line in Carl Menger's Principles of Economics (a much better book than what we see with Krugman and Wells) in which he states: "All things are subject to the Law of Cause and Effect."

It is easy to see where Krugman gets his causality. In the early stages of inflation, we see an economic boom, while in the early stages of "disinflation" or deflation, we see a bust. Therefore, Krugman takes the simple approach: inflation good, deflation bad.

There is an alternative view, and Menger and others in the Austrian camp have led the way. As I read through Krugman's chapter on inflation, I realize that the guy is stuck on aggregates. In that way of thinking, all assets are homogeneous, so when new money is pumped into the economy, people begin spending, inventories are cleared, and the economy has "traction." (In Krugman's view, this becomes a problem only when money growth occurs after the economy has reached its "capacity" to produce.)

Austrians believe that assets are heterogeneous, and that inflation changes the relative values of these assets. Ultimately, the push of new money into certain booming sectors runs out of steam, as the asset values in the inflation-led structure of production clearly do not reflect the actual desires and choices of consumers. At that point, the inflated assets lose their value, and the crisis is at hand.

During a recession, the assets come back to their original and proper relationships, and then the recovery can begin. Unfortunately, since the government continues to try to prop up the assets that the markets already have devalued, there really can be no meaningful recovery.

This is a very brief description of our differences on inflation. Nonetheless, I do think this blog can be useful if only to get the points of Austrian economists out there, as they certainly are not going to be portrayed accurately in the mainstream media.

Krugman's Dishonesty Strikes Out

In Monday's post, I pointed out that Paul Krugman was putting words into the mouth of Newt Gingrich to claim that he was openly being a racist. Well, in Krugman's defense, he was quoting the Washington Post.

Here is the offending quote:

And on the other side, here’s what Newt Gingrich, the Republican former speaker of the House — a man celebrated by many in his party as an intellectual leader — had to say: If Democrats pass health reform, “They will have destroyed their party much as Lyndon Johnson shattered the Democratic Party for 40 years” by passing civil rights legislation. (Emphasis mine)

Like a lot of readers, I was suspicious of whether or not Gingrich even had said "civil rights," and it turns out our suspicions were well-founded. Krugman's employer adds this editor's note to the current version of Krugman's column:

The Paul Krugman column on Monday, about the health care bill, quoted Newt Gingrich as saying that “Lyndon Johnson shattered the Democratic Party for 40 years” by passing civil rights legislation. The quotation originally appeared in The Washington Post, which reported after the column went to press that Mr. Gingrich said it referred to Johnson’s Great Society policies, not to the 1964 Civil Rights Act.

In other words, it looks as though the WP is as dishonest as Krugman. But they are dishonest.

Is The Health Care Bill a Political Liability for Democrats?

Now that the Democrats have passed a "healthcare reform" bill that neither reforms nor provides healthcare, what is going to be the political fallout. According to Paul Krugman, it will benefit the Democrats. I have no idea, and I don't care, given that Republicans have not exactly been fiscal stalwarts when in power.

In his blog post, "A Thin Line Between Hate and Love," Krugman contrasts a Wall Street Journal editorial with the results of a Gallup poll in which nearly 50 percent of those polled approved of the plan and only 40 percent said they were against it.

As I see it, the plan will provide whatever "good" results it will bring first, in the short term, but the hammer will come down later -- and it will come down. Americans are going to find out that this "cost-cutting" reform is going to make it more difficult for them to see doctors, and the overall costs they will bear for their medical care will be higher than they are now. That I can guarantee.

So, I suspect that Krugman might be correct regarding the political fallout, although to Krugman, if the Democrats win, that will "prove" that "reform" was a good thing. But, then, his world is so thoroughly politicized that I doubt he can have even a simple conversation without politics entering into it.

Krugman on Freedom

In dealing with Paul Krugman's last column, I concentrated on his accusation that the only possible motivation one could have to question ObamaCare was racism. Yet, there is a paragraph in Krugman's column that points to another issue: freedom itself. He writes:

I’d argue that Mr. Gingrich is wrong about that: proposals to guarantee health insurance are often controversial before they go into effect — Ronald Reagan famously argued that Medicare would mean the end of American freedom — but always popular once enacted.

Krugman's point is that if an entitlement is "popular," then any argument about "freedom" is irrelevant. Now, I can understand why a Medicare benefit might be popular, since it involves people receiving care for which they do not pay. To give an extreme but pertinent example, I am sure that when Hitler's regime stole the property of wealthy Jews and gave it to politically-connected Nazis, that the program was popular with those who received the benefits, yet no one is going to accuse Hitler's regime of enhancing freedom.

Let us look at the statement that Reagan made in 1961 and see whether or not Krugman has fairly characterized it:

One of the traditional methods of imposing statism or socialism on a people has been by way of medicine. It's very easy to disguise a medical program as a humanitarian project. . . . Now, the American people, if you put it to them about socialized medicine and gave them a chance to choose, would unhesitatingly vote against it. We have an example of this. Under the Truman administration it was proposed that we have a compulsory health insurance program for all people in the United States, and, of course, the American people unhesitatingly rejected this.

Reagan added:

The doctor begins to lose freedom. . . . First you decide that the doctor can have so many patients. They are equally divided among the various doctors by the government. But then doctors aren’t equally divided geographically. So a doctor decides he wants to practice in one town and the government has to say to him, you can't live in that town. They already have enough doctors. You have to go someplace else. And from here it's only a short step to dictating where he will go. . . . All of us can see what happens once you establish the precedent that the government can determine a man's working place and his working methods, determine his employment. From here it's a short step to all the rest of socialism, to determining his pay. And pretty soon your son won't decide, when he's in school, where he will go or what he will do for a living. He will wait for the government to tell him where he will go to work and what he will do.

Indeed, what we have seen in the last four decades has been the disconnect between doctor and patient, as the doctor is governed by federal oversight, the Drug Enforcement Agency, Medicare "cost controls" from Medicare, insurer oversight, and the trial lawyers. Second, the nature of taxation is this: if government provides benefits to one group of people by taxing another group of people, then the people who are taxed do lose some of their freedom.

Am I exaggerating? Has any reader ever been subjected to an Internal Revenue Service audit, or known anyone who has gone through that experience? Who is the master and who is the servant? Does this relationship enhance or diminish freedom?

Don't kid yourselves. We are less free today, as the government has ordered everyone to have health insurance, or else face the wrath of the IRS. Krugman may call that freedom, but I call it coercion and yet another example of the master-servant relationship we have with our government.

Granted, Krugman is speaking of what "Progressives" call "Positive Freedom" in which government forces others to provide a benefit to someone, when then does not have to pay directly for the largess. According to Krugman and others, that person if "more free" because he or she now can direct income elsewhere. However, that is "freedom" gained at the expense of other people, who now are less free.

Guy Rexford Tugwell, one of the most important advisers to President Franklin Roosevelt, acknowledged in a 1968 article in The Center Magazine:

The Constitution was a negative document, meant mostly to protect citizens from their government.... Above all, men were to be free to do as they liked, and since the government was likely to intervene and because prosperity was to be found in the free management of their affairs, a constitution was needed to prevent such intervention.... The laws would maintain order, but would not touch the individual who behaved reasonably.

To the extent that these new social virtues developed [in the New Deal], they were tortured interpretations of a document intended to prevent them. The government did accept responsibility for individuals’ well-being, and it did interfere to make secure. But it really had to be admitted that it was done irregularly and according to doctrines the framers would have rejected. Organization for these purposes was very inefficient because they were not acknowledged intentions. Much of the lagging and reluctance was owed to constantly reiterated intention that what was being done was in pursuit of the aims embodied in the Constitution of 1787, when obviously it was done in contravention of them. [Emphasis mine.]

Now, to be fair, Krugman is not writing about the U.S. Constitution, but instead is claiming that expansion of the tax-funded welfare state enhances freedom. Yet, it also is clear that such "Progressive" notions also clash with the idea of freedom as the Founders of the United States saw it. (My guess is that Krugman would call them "racists" and say whatever they believed is not relevant in the 21st Century.)

As I see it, Krugman's definition of freedom is like saying that a situation in which bullies steal the lunch money of schoolchildren increases freedom because the bullies now are free to spend their other income on whatever they please instead of buying food. Unfortunately, like most "Progressives," Krugman believes that the master-servant relationship of government to the people promotes the Good Society. I look at it and see the expansion of outright slavery.

It Ain't a Joke, Paul

Paul Krugman trots out his "five-year plan" and tells us it really is a joke:

It turns out to be almost exactly five years since I began crusading for health reform. At the time, all the buzz was about privatizing Social Security, and many people still thought it would happen; meanwhile, I wrote that

serious health care reform isn’t on the table, and in the current political climate it probably can’t be. You see, the health care crisis is ideologically inconvenient.

And here we are: Social Security still stands, and health reform — imperfect, compromised, but real — has happened.

Update: The title of this post, with its evocation of the Soviet Union, was what is known in the trade as a “joke.”

Actually, the only "joke" is the false belief that Krugman and others are promoting that Congress has repealed the Law of Scarcity. Furthermore, don't forget that Lenin himself declared that government-provided medical care would be at the heart of the new communist utopia.

Krugman Strikes Out

I have come to expect wooly-headed partisanship from Paul Krugman instead of economic analysis, and that is one reason I started this blog. The other reason was that I want to have another source that attacks and exposes the Keynesian fallacies for what they are: dangerous nonsense.

Nonetheless, even Krugman has managed to go where few economists have gone before: into total partisan fantasyland. I figured he would be crowing in his Monday column, and I am correct. Krugman's utterings in the aftermath of the passage of the healthcare nationalization legislation are not worthy of anyone who has a doctorate from one of the most prestigious economics programs in the world. He has given talking points that I would expect to read on the Daily Kos or in one of the ubiquitous emails I receive from the Democratic Party.

Krugman has entitled his column, "Fear Strikes Out," but in reality, Krugman has struck out, demonstrating not only his outright partisanship, but also his dishonesty. Let me begin.

He begins the column with a long quote from President Obama. Now, I generally don't like to begin any of my articles with quotes from politicians unless I am taking the scalpel to their words, as we can figure that however lofty the rhetoric might be, there is an iron fist inside a velvet glove, and this is no exception.

However, after quoting Obama, he then turns to Newt Gingrich:

And on the other side, here’s what Newt Gingrich, the Republican former speaker of the House — a man celebrated by many in his party as an intellectual leader — had to say: If Democrats pass health reform, “They will have destroyed their party much as Lyndon Johnson shattered the Democratic Party for 40 years” by passing civil rights legislation.

Notice that "passing civil rights legislation" was not what Gingrich said. No, Krugman inserted those words to imply that anyone who opposed the legislation was a racist.

Now, I don't like to defend the loathsome Gingrich, and I don't forget that for all of his lofty "limited government" rhetoric, he was just another politician grabbing what he could from the till. However, one has to understand the tactics that Krugman is using, and they are absolutely despicable.

He points out that someone from the Tea Party protests called John Lewis the "N-word," which is "proof" that opposition to the medical care legislation was undergirded with racism. While I also condemn the use of such language, nonetheless, Krugman uses the incident in a way that promotes a non sequitur. Do you have difficulties with the legislation? Do you think that it is going to pile on trillions of dollars of unfunded liabilities on our present and future generations at a time when the government of this country is essentially bankrupt?

Well, if you believe that, or even think it, then you also are a racist. Lest you think I am exaggerating, read on:

Instead, I want you to consider the contrast: on one side, the closing argument was an appeal to our better angels, urging politicians to do what is right, even if it hurts their careers; on the other side, callous cynicism. Think about what it means to condemn health reform by comparing it to the Civil Rights Act. Who in modern America would say that L.B.J. did the wrong thing by pushing for racial equality? (Actually, we know who: the people at the Tea Party protest who hurled racial epithets at Democratic members of Congress on the eve of the vote.

However, what if you are someone who says that the Law of Scarcity was not repealed, no matter what Krugman says? Well, you, too, are a cynical racist. Why? The Congressional Budget Office has declared this legislation to be fiscally sound, and we know that the CBO always gets it right, and that it is "nonpartisan" and never affected by politics:

Yes, a few conservative policy intellectuals, after making a show of thinking hard about the issues, claimed to be disturbed by reform’s fiscal implications (but were strangely unmoved by the clean bill of fiscal health from the Congressional Budget Office) or to want stronger action on costs (even though this reform does more to tackle health care costs than any previous legislation). For the most part, however, opponents of reform didn’t even pretend to engage with the reality either of the existing health care system or of the moderate, centrist plan — very close in outline to the reform Mitt Romney introduced in Massachusetts — that Democrats were proposing.

Ah! We have proof! Mitt Romney pushed what Krugman claims is a similar plan in Massachusetts, and Romney is a Republican, so any opposition to the government's newest edict can only be made on the basis of racism! Don't you see the logic? It is all there!

Krugman, however, is not done. He finishes with this benediction:

This is, of course, a political victory for President Obama, and a triumph for Nancy Pelosi, the House speaker. But it is also a victory for America’s soul. In the end, a vicious, unprincipled fear offensive failed to block reform. This time, fear struck out.

Yes, if you think that legislation that essentially nationalizes medical care, promises price controls, has new provisions that will criminalize actions that once fell into the category of voluntary, peaceful trade, and imposes coercive measures along with empowering the Internal Revenue Service, then you are on the side of the demons. You are a vicious, lying racist who wants everyone to get sick and not have healthcare.

Am I exaggerating? Read the column and see for yourself. You cannot both take a hard look at the fiscal provisions of this legislation and ask questions about it, for if you do, then you are a vicious racist.

There is more in this column and I will take a future look at some other points he makes, but for now, I leave readers with this sobering thought: The 2008 Nobel laureate in economics has declared that questioning this legislation through the lens of the simple laws of economics is an act of racism.

Jeremy Warner Gets It Right On Krugman

Paul Krugman makes light of the recent article by Jeremy Warner in The Telegraph, but I think Warner is spot on. Here is Warner in his own words:

When the self-proclaimed "conscience of liberal America" and a one-time free trader to boot starts arguing for protectionism, you know that things have come to a pretty pass. But that's what's happened over the past week.

Paul Krugman, a Nobel Prize-winning economist, has taken to advocating a 25 per cent "surcharge" – he refuses to use the more descriptive term of "import tariff" – on goods from China as a way of bringing the Chinese leadership to heel over currency reform. So potentially dangerous and out of character is this idea that when I first read it, I assumed he was being ironic. But sometimes the cleverest of people can also be the most stupid, and he's now said it so often that you have to believe he's serious.

What he's advocating is trade retaliation so extreme that it would make the 1930s look like a stroll in the park. Contrary to Professor Krugman's naïve assumption that the Chinese would soon cave in and allow their currency to float if confronted by such hard-ball tactics, I am certain that nothing is more guaranteed to produce the opposite response.

Professor Krugman's suggestion mines a rich seam of populist US thinking and rhetoric which grows ever more vocal and worrying as the recession persists. What makes Krugman and other highly regarded economists who toe the same line so dangerous is that they give intellectual respectability to a fundamentally disreputable idea.

Unlike Krugman, who already has given us a fantasy version of what would happen if the USA were to retaliate against China for officially undervaluing its currency against the dollar. To be honest, I think Peter Schiff's recent comments were far more astute.

Warner makes some important and insightful comments here:

An outbreak of protectionism is just what the still-fragile economic recovery doesn't need. China makes an easy scapegoat for America's ills, but it is not the cause, nor would making it revalue its currency provide the solution. The debate is echoed in Europe, where Germany – an exporter second only to China – finds itself blamed for the eurozone crisis. If only Germany would make itself less competitive, if only Germany would save, invest and export less, then everybody else would be fine. The virtuous find themselves depicted as the villainous. If the argument were not so perverse, it would be laughable.

Let us briefly consider what would happen if Professor Krugman got his way and there was either a 25 per cent devaluation of the dollar against the renminbi or 25 per cent import duties. Almost overnight China would sink into a deep recession as exporters already operating on wafer-thin margins were plunged into insolvency.

American business, which relies heavily on China as the assembly plant of choice (guess where iPods are made), would also find itself deep in the mire. Even in the long term, the revaluation would scarcely be more helpful. Over time, Chinese wages would merely deflate relative to US ones to make exports competitive again.

For all of his "credentials," let us not forget that Krugman is a Keynesian who has no clue whatsoever what happens in a real economy. His world is the imaginary world of aggregates, GDP numbers, crude graphs, and no real people and certainly no real production. There is no such thing as consumption, only spending. And all good Keynesians know that no one has to produce anything, just print a bunch of money, and we'll all be rich!

Gee, Maybe We Need Another War

In a post today, Paul Krugman examines an IMF graph of GDP of "advanced" countries and makes a most startling claim:

The projected pace presumably means the blue line above, which is taken from the IMF’s World Economic Outlook Database. The red line shows what would have happened if growth were to continue at its average pace from 2000 to 2007.

As you can see, what Mr. Lipsky apparently considers an acceptable result, good enough to pull back stimulus, is basically to accept the losses in output during the crisis as permanent, leaving us on a drastically lower trend as far as the eye can see.

You mean, all we need is for government to spend more, and then the GDP trends can go on forever? In other words, just print the money.

As far as I am concerned, this graph is inaccurate because it is too optimistic, not too pessimistic. You will notice that it assumes that the world's economies have recovered, and we are back on track for economic growth, as the figure demonstrates.


To prove his point, Krugman quotes Keynes regarding his view of the economy in 1932:

I predict with an assured confidence that the only way out is for us to discover some object which is admitted even by the deadheads to be a legitimate excuse for largely increasing the expenditure of someone on something!

Krugman's last line? "And it took Hitler to provide that object."

Yeah, a war. Great jobs program. So, the world's politicians did not have the "courage" to print money and spend, spend, spend, and got war, instead.

The USA and Indonesia

In his recent post comparing the situation in the United States with the dollar versus what happened in Indonesia and Southeast Asia 13 years ago, Paul Krugman smugly makes the following statement:

...US companies have not been borrowing heavily in foreign currencies.

I shouldn’t have to explain this. There have been many, many papers trying to assess the possibility of an Asian or Argentine-style currency crisis for the United States; all of them run up against the simple fact that large foreign-currency indebtedness was central to these crises, and we just don’t have that problem.

That is true as far as it goes. The Asian currencies fell and fell quickly relative to the USD and other holdings. That meant people suddenly found that their money only could purchase about half of what they could buy before the crisis hit.

Why do I bring up this point? Note that Krugman has been calling for the Fed to print money, which would weaken the USD and "make our exports more competitive." From a macro sense, there is some truth to that point, but from the vantage point of individual Americans, that is a disaster. It seems to me that Krugman both is welcoming the demise of the dollar and, at the same time, claiming that our currency and our fates are immune from the economic disasters caused by inflation.

When the crisis hit in places like Indonesia, people rioted (and killed Ethnic Chinese, whom they blamed for all their ills), and millions were plunged into poverty. This was not a happy time.

Yet, if one logically and consistently follows Krugman's policy prescriptions, you see that he wants us to go down the same road. Now, I believe that our policies so far are going to expose Americans in ways they cannot imagine. The dollar IS overvalued, Americans have been financing their consumption by borrowing from the Asians, and this gravy train is going to come to a halt.

Peter Schiff on Krugman, the Nobel Prize, and the End Game for the Dollar

Earlier this week, I posted a video in which Peter Schiff takes on Paul Krugman for his recent call to declare what essentially would be a "trade war" against China. In this column, Schiff goes into more detail to explain the problems in Krugman's reasoning.

I think that Schiff really lays out Krugman's thinking in these paragraphs:

According to Krugman, our secret weapon of economic invincibility is the Fed's ability to print dollars endlessly. If China were to foolishly decide to attack us by selling our debt, the Fed could simply step in and buy the excess with newly printed greenbacks. (In other words, Krugman sees no difference between funding the debt and monetizing it. See my latest video blog on the subject.) For Krugman, China would gain little from such an attack, but would lose the ability to export to its best customer and suffer severe losses in the value of its dollar holdings. Krugman's worldview is reassuring – but it has absolutely nothing to do with reality.

There is a huge difference between selling your debt to another and "selling" it to yourself. When China buys our debt, it uses its own savings. In order to purchase a trillion dollars of U.S. Treasuries, the Fed would have to expand our money supply by a corresponding amount. Even Krugman acknowledges that this would cause the dollar to lose value; however, he feels that a weaker dollar is good for America and bad for China.

This is correct. In reading Krugman's columns and blog posts, I find that same theme: printing U.S. Dollars will create prosperity, while having "sound money" leads to depressions. For example, in his book The Return of Depression Economics, Krugman claims that printing money in most economic crisis situations will "solve" the crises.

For that matter, if one thinks Schiff is off-base with his characterization of Krugman's statements, this Krugman post lays out his belief that the dollar is nearly invincible:

There have been many, many papers trying to assess the possibility of an Asian or Argentine-style currency crisis for the United States; all of them run up against the simple fact that large foreign-currency indebtedness was central to these crises, and we just don’t have that problem.

At one level, that is true, but Krugman also wants to have it both ways. On one side, he claims that the USD pretty much is invincible, but then he also claims that at least some of our problems stem from the dollar being too strong, and that it needs to be weakened.

I think that Schiff's point about Krugman's confusion between China buying U.S. debt and the Fed making such purchases is well-taken. On the one side, when China purchases our treasuries, it ultimately sends real goods our way. There is no increase in the number of dollars circulating; Americans simply are borrowing from the Chinese to fuel their own consumption.

However, if the Fed buys treasuries, that is done essentially with newly-printed dollars, which will lower the value of everyone's dollar holdings, from China to the guy on the street with a few dollars in his pocket. As the new money circulates throughout the economy, prices go up, and we experience directly the negative effects of the Fed's actions.

Furthermore, by calling for tariffs and other measures to "punish" China for its currency policy, Krugman is demanding that the U.S. Government make everyone else worse off in the name of "helping the economy." Schiff writes:

Most economists, Krugman included, see cheap money as a panacea for all ills. And while it's true that a falling dollar, by lowering the real value of U.S. wages, would help make U.S. goods more competitive, it would also lead to skyrocketing consumer prices, rapidly rising interest rates, and a collapse in American living standards. Make no mistake: this is the end game of Krugman's "get tough on China" policy.

Now, I do think that Krugman's articles are consistent with what he believes: printing money is a good thing, as it creates inflation, which fuels current spending, which then gives the economy "traction." At some point, he reasons, the economy (which operates in the circular flow like a perpetual-motion machine) simply starts moving again. It just needs a "push," and government spending combined with inflation is what "primes the pump."

This is the typical macroeconomist's view of an economy. All assets are homogeneous, there is no real connect between production and consumption, and unless government intervenes in the economy via new spending and printing money, the economy naturally will implode because of the negative effects of saving (paradox of thrift).

People, this is not economics. It is model-building, and highly-stylized model-building at that. It does not reflect economic reality, and it can lead only to inflation and ruin in the long run. No wonder Schiff makes the following declaration:

In his latest weekly New York Times column, Nobel Prize-winning economist Paul Krugman put forward arguments that were so nonsensical that the award committee should ask for its medal back.

I concur wholeheartedly. What Krugman puts forward is not "economics" in any sense of the word. Instead, it is nothing but state-inspired manipulation of an economy, period.

The USD is not invincible. At the present time, with all of the other fiat currencies floating around, it still is relatively viable, but that situation cannot last forever or even for a few years. Krugman really seems to believe that the Fed endlessly can print dollars, and only good things can come from it. That is not economics, folks, that is madness.

The Trojan Krugman

As a faculty member of a state university in Maryland, I am used to hearing other faculty members substitute Democratic Party talking points for conversation, as most of them are True Believers who defend their party with religious zeal. If the Party declares a certain State of Being, then whatever it decrees becomes the New Reality.

It does not surprise me that professors in English or Political Science would hold to such views, as they are open political partisans. However, I expect more from economists, and especially economists who have Nobel Prizes. I cannot imagine ever having heard political talking points from someone like F.A. Hayek, George Stigler, Gary Becker, or James Buchanan, especially in print. These Nobel laureates believed that their job was to promote and apply sound economic theory, not be shills for political parties or their chosen candidates.

Unfortunately, Paul Krugman is not held to the same standards, nor does he hold himself to any standards but those of stooping to the latest set of talking points from the White House, Nancy Pelosi, and Harry Reid. Thus, his latest column demonstrates beyond a doubt that he is willing to promote pure fantasy when it comes to budget numbers, and work in tandem with his part-time employer, the New York Times, to try to convince us that something akin to Harry Potter Economics really exists.

I will go one step further: I believe wholeheartedly that Krugman knows this bill will be disastrous and will create utter chaos in the field of medical care. Into that void will ride the deus ex machina government with a "new" universal plan that will be something out of Canada Care or the British National Health Service. The state takeover of medical care then will be complete. If anything, this bill is the Ultimate Trojan Horse that once passed is going to guarantee that what is left of private enterprise in medical care will be destroyed.

Let me examine some of his statements. First, he gives anecdotes about people who have had their medical insurance revoked for contracting HIV or for other reasons. The new health "plan," he argues, would guarantee that no one could be denied insurance coverage for medical care. He states:

So what’s the answer? Americans overwhelmingly favor guaranteeing coverage to those with pre-existing conditions — but you can’t do that without pursuing broad-based reform. To make insurance affordable, you have to keep currently healthy people in the risk pool, which means requiring that everyone or almost everyone buy coverage. You can’t do that without financial aid to lower-income Americans so that they can pay the premiums. So you end up with a tripartite policy: elimination of medical discrimination, mandated coverage, and premium subsidies.

Now, I can tell you that if automobile or homeowners insurance were put under such rules, premiums would skyrocket, and everyone can understand why. Or, what about life insurance coverage? Should life insurers be forced to charge the same premiums for all applicants, regardless of their health? What would such a move do to the cost of premiums? I think we know the answer.

Therefore, Krugman is supporting a law that is guaranteed to force up the costs of insurance premiums, yet he also is supporting a bill that will impose price controls on medical insurance. My sense is that Krugman understand just what this means, for even he has some knowledge of the very real economic dislocations price controls will bring.

Into the chaos will ride the government, which will offer to subsidize the insurance companies, as they will experience real losses. However, I also think there could be another future, one that would take a page from the Marxist government of Salvador Allende of Chile nearly 40 years ago.

Allende's government printed money in massive quantities, swamping the Chilean economy with worthless paper, driving people to barter and throwing the economy into chaos. The government also imposed draconian price controls in which government-owned businesses were permitted to raise prices, but private enterprises could not. Those private companies that were caught raising prices to cope with inflation were confiscated by the government and the owners not compensated.

I suspect that this will be the future of private health insurance in the United States, and it is what Krugman and his friends hope will be the outcome. The current legislation does impose price controls on insurance premiums, yet also increases the demand for insurance through mandates and subsidies. This guarantees chaos, and even a partisan economist like Krugman can see through this charade.

However, instead of promoting economic principles, Krugman promotes outright fabrications. Take the following from his column, for example:

Can we afford this? Yes, says the Congressional Budget Office, which on Thursday concluded that the proposed legislation would reduce the deficit by $138 billion in its first decade and half of 1 percent of G.D.P., amounting to around $1.2 trillion, in its second decade.

But shouldn’t we be focused on controlling costs rather than extending coverage? Actually, the proposed reform does more to control health care costs than any previous legislation, paying for expanded coverage by reducing the rate at which Medicare costs will grow, substantially improving Medicare’s long-run financing along the way. And this combination of broader coverage and cost control is no accident: It has long been clear to health-policy experts that these concerns go hand in hand. The United States is the only advanced nation without universal health care, and it also has by far the world’s highest health care costs.

Krugman never believed the rosy CBO projections when the Republicans were in power, but suddenly that same office is the Promoter of Truth. If anyone truly believes that this plan, with its mandates, restrictions, new criminal penalties, and massive subsidies is going to reduce the real costs of medical care and simultaneously lower the federal deficit, I have some real estate at 1600 Pennsylvania Avenue that I want to sell to you.

This is fraud, pure fraud. However, Krugman also slyly gives away his real goal: Fully Nationalized Medical Care:

Can you imagine a better reform? Sure. If Harry Truman had managed to add health care to Social Security back in 1947, we’d have a better, cheaper system than the one whose fate now hangs in the balance. But an ideal plan isn’t on the table. And what is on the table, ready to go, is legislation that is fiscally responsible, takes major steps toward dealing with rising health care costs, and would make us a better, fairer, more decent nation.

Guess what? As the bedlam that will result from this "fiscally responsible" legislation increases -- and I have no doubt that the House Democrats will cave in the end -- the next step (and the next step after that) will be to create the "single payer" plan that Krugman has wanted all along.

I am no fan of the current system. Third-party payments for rudimentary medical care through insurance are responsible for the costly mess that is U.S. medical care. If we purchased food or automobiles via the same payment system through which we purchase medical care, there would be runaway costs and utter chaos in those markets, too.

I'll go a step further. Even if Republicans were to take back the Congress in the upcoming elections, there is no way this bill would be repealed, no matter what they might have promised in the heat of a political campaign. This is a bill that, in my view, is purposely designed to drive everyone to a "single-payer" government plan, as what exists in Canada. However, it also will be an entitlement, and once entitlements become law, they are politically-impossible to eliminate.

No, Americans are going to be stuck with something that will cost them much more of their earnings -- and produce inferior care -- than a true free-market in medical care would produce. Unfortunately, we now are so far removed now from such markets in that sector that most people would be afraid to take the plunge and eliminate the government controls and subsidies. Thus, we ultimately will be stuck with "single-payer," and the long lines and waits and denial of care that will accompany it. Sooner or later, the Trojan Horse will open and government minions will take over everything in medical care (that they don't already control).

In his promotion of this monstrous bill, I believe that Paul Krugman really does understand that, no, it won't cut costs, no, it won't reduce the deficit, and, yes, it ultimately will lead to an utterly politicized system. For once, I wish he would tell the truth about what is to happen, but Krugman long ago gave up telling the truth in exchange for being a shill and a political operative.

Krugman on Inflation and Stagflation

Being that Paul Krugman has attempted to rewrite the financial history of the 1970s and 1980s, I am surprised that he even admits that there was stagflation -- a combination of high inflation and unemployment -- during the 1970s. After all, under Keynesian doctrine, rates of inflation and unemployment supposedly have a negative relationship, and Keynesians supposedly believe that stagflation is an oxymoron.

Since the numbers did not lie, Keynesians decided that they had to create a one-time scenario in which oil prices somehow were the culprit. Writes Krugman:

The kind of inflation we had in the 1970s, the famous era of stagflation — high inflation combined with high unemployment — was quite different (than some of the famous hyperinflations). Deficits weren’t the issue — actually, US deficits were much smaller in the inflationary 70s than in the disinflationary 80s. Instead, what you had was a combination of excessively expansionary monetary policies, based on an unrealistic view of how low the unemployment rate could be pushed without causing accelerating inflation (the NAIRU), plus oil shocks that pushed up inflation across the board thanks to widespread cost-of-living clauses in contracts. There was never any risk of hyperinflation; the only question was whether and when we’d be willing to pay the price in high unemployment of bringing inflation back down.

Now, Krugman does not explain why unemployment and the rate of inflation went down together during the 1980s, but that is an issue for another post at another time.

I do find it curious that Keynesians will resort to the "cost-push" inflation line when it suits them, as they are trying to claim that prices go up because, well, prices go up. I have likened the Keynesian (and Krugman) explanation for deflation to that famous scene in "The Blues Brothers" in which Jake Blues (played by the incomparable John Belushi) tries to talk his fiancee out of gunning him down in the sewer:



Indeed, the idea that the changes in price of one commodity -- even a commodity as important as oil -- causing huge fluctuations in the U.S. economy makes Jake Blues' appeal sound true. By the way, inflation in the 1980s did not go down because unemployment went up, no matter what Krugman says. (He cannot have it both ways.) Inflation went down because the Federal Reserve System put down the brakes on money creation and held them down for a long time.

By the way, unlike our current situation, the USA had a real recovery after the recession of 1982. But, then, Paul Krugman was not influencing the government to print, borrow, and spend wildly.

A Krugman in Wolf's Clothing

Paul Krugman's jihad against China continues and he now enlists the help of Martin Wolf, who claims that China and Germany are "uniting" in their nefarious plan to "impose deflation." Yes, Krugman has decided to continue his theme that "Mercantilism" is the proper path to prosperity, which means that wealth really is created when governments manipulate the system.

Today, he insists that not only are his views correct, but that they fall within the very scope of the laws of supply and demand. For a guy who insists that the laws of economics are turned upside down during depressions and that "none of what you learned in Econ 101 applies," I find it curious that suddenly these laws really matter. (Well, they matter when Krugman says they matter and their application is seen to be to his advantage.)

I think a larger view is in order here. Krugman has claimed elsewhere that the real culprit in the bubble was Chinese savings, and now the dastardly Chinese are giving us the one-two punch with its pegged exchange rates. Furthermore, by doing so, China supposedly is preventing our government from properly engaging in policies of inflation! What's a Nobel Laureate to do?!?

Furthermore, he likens the Chinese currency policies to the policies pushed by Latin American countries in the 1950s. In his own words:

As I read this debate, one thing that’s truly amazing is the way China defenders are recapitulating some old fallacies from, of all places, Latin America. Back in the 50s it was common for Latin economists to insist that getting realistic exchange rates wouldn’t solve their persistent balance of payments problems because imbalances were “structural” — now we’re hearing the same thing about China, with the only difference being that this time it’s a surplus, not a deficit, that is supposedly immune from the usual rules of supply and demand.

Hmmm. As I recall, the Latins were overvaluing their currencies relative to the U.S. Dollar, creating what were called "dirty rates." (Indeed, that has been a staple of Third World countries, not to mention the old Communist Bloc during the Cold War.)

I also remember that Americans accused Japan of undervaluing the yen during the 1980s, and that was the reason for the huge trade surpluses in Japan's balance of payments accounts. In the end, the Japanese spent their surpluses on U.S. real estate. (I remember the hysteria fueled by the politicians and the media when Japanese investors purchased the Rockefeller Center, as though the Japanese were going to tow those buildings back to Japan.) That little venture, as one might recall, turned out badly for the Japanese, as real estate prices plummeted, along with the value of Japan's stock market. (Can someone spell "m-a-l-i-n-v-e-s-t-m-e-n-t-s"?)

For all of the Mercantilist fallacies pushed by Krugman, we have to remember that to Krugman and Keynesians in general, production is done for its own sake. Lawrence Reed noted this fallacy in his wonderful article in the April 1981 Freeman, "7 Fallacies of Economics." The fourth fallacy, "production for its own sake," has this gem, which I think perfectly applies to Krugman:

A bad economist who falls prey to this ancient fallacy is like the fabled pharaoh who thought pyramid-building was healthy in and of itself; or the politician who promotes leaf-raking where there are no leaves to be raked, just to keep people “busy.”

When Reed wrote those words, few people had heard of Paul Krugman. However, if one wishes to better understand Krugman's economic worldview, read "7 Fallacies of Economics," and you will find that nearly everything the Nobel Laureate writes falls into one of the categories listed in that piece.

I hate to say it, but the Chinese are not the source of our problems, no matter what Krugman, Martin Wolf, the New York Times, and our politicians might be saying. The problem has been the massive malinvestments that defined the economies of the USA and Europe, malinvestments that Krugman and our government insist need to be kept going.

However, the more we try to prop up the unhealthy portions of the economy at the expense of those portions that are healthy, the worse things will become. The Austrians understand this in spades, but the "wise" Keynesians are clueless. So, like Wolf and Krugman, they look elsewhere for blame instead of looking in the mirror.

Peter Schiff Takes On Paul Krugman

Even though Peter Schiff is not a Nobel Laureate in economics or has a doctorate in economics from MIT, it is clear he knows economics in a way that Paul Krugman never could. In this video, he refutes Krugman point by point.



(Hat tip to Michael Rozeff and an emailer named Mike)

Krugman: "Mercantilism Works"

Lest anyone think that my recent post on Krugman channeling Bernard Mandeville was an exaggeration, today, the Nobel Laureate lets himself go in a blog post. In his own words, "Mercantilism works." Read on:

As I’ve written many times in various contexts since the crisis began, being in a liquidity trap reverses many of the usual rules of economic policy. Virtue becomes vice: attempts to save more actually make us poorer, in both the short and the long run. Prudence becomes folly: a stern determination to balance budgets and avoid any risk of inflation is the road to disaster. Mercantilism works: countries that subsidize exports and restrict imports actually do gain at their trading partners’ expense. For the moment — or more likely for the next several years — we’re living in a world in which none of what you learned in Econ 101 applies.

I did not make up these things. Krugman is claiming that the very things that Mandeville declared almost 300 years ago all are true.

So, are you cutting back purchases, getting out of debt, and building up your savings? Then you are an Enemy of the People, for you are engaged not only in folly, but folly that is destroying our economy and making us poorer.

Krugman defines the "liquidity trap" (which came from John Maynard Keynes) as such:

In my analysis, you’re in a liquidity trap when conventional open-market operations — purchases of short-term government debt by the central bank — have lost traction, because short-term rates are close to zero.

Now, you may object that there are other things central banks can do, and that they actually do these things to some extent: they can purchase longer-term government securities or other assets, they can try to raise their inflation targets in a credible way. And I very much want the Fed to do more of these things.

But the reality is that unconventional monetary policy is difficult, perceived as risky, and never pursued with the vigor of conventional monetary policy.

It is difficult to point out all of the major fallacies here, as time and space stand in the way, but let me say that anyone who has read Murray Rothbard's America's Great Depression or Henry Hazlitt's classic Economics in One Lesson can see just how badly Krugman misses the mark. In Krugman's world, an economy is not made up of purposeful individuals who engage in mutually-beneficial exchange in order to better themselves.

No, according to Krugman, an economy is a perpetual motion machine, an entity that needs (in Krugman's words) "traction." Just push the thing forward via government spending and -- yes -- inflation, and it will run by itself. However, in the meantime, make sure everyone spends whatever they have, and go into huge debt, if necessary, or the motion machine will stop working.

Krugman claims that the economy is greased by spending, but spending, especially in the Keynesian view, is a much different concept than consumption. Under a spending regime in Keynesian economics, people simply are "buying back the products" that they have produced. In other words, they are clearing the shelves so they can produce more stuff to put on the shelves.

This is not purposeful activity; it is a caricature of an economy and certainly is a caricature of what consumers actually do. People don't spend so they can produce more goods so that they can spend and keep the process going indefinitely.

In this view, there is no particular structure of production. As a professor at the recent Austrian Scholars Conference told me, Keynesianism would hold that it does not matter if the capital improvements at his college involve building new buildings and improving old ones, or if all of the money were spent building a new bell tower that would rival the old Tower of Babel, since the only thing that matters is spending.

The problem is not that consumers are failing to spend enough money. Instead, as the Austrians have pointed out time and again, the problem is that during the past decade, government policies have directed people to create huge amounts of malinvestments that must be liquidated before we can have a recovery. Instead, Krugman and the world's politicians and central bankers are insisting that we just keep going in the same unsustainable direction and somehow the light at the end of the tunnel will be a ray of sunshine instead of the train headed straight at us.

Do We Need Capital Controls?

I meant to blog on this last week, but only now can give the subject of capital controls my attention. In a post of nearly two weeks ago, Paul Krugman praises such restrictions during the economic crisis in Malaysia of more than a decade ago, yet wonders if such controls would work in Greece and Spain.

Such comments once again reveal the "Historicist" Krugman, just as he believes that governments should engage in printing lots of new money (what some call "inflation") during bad times, and refrain from such activity when times are good. Likewise, capital controls might be successful at times and unsuccessful in certain periods.

In other words, outside circumstances dictate economic policies rather than economic policies staying within the bounds of the laws of economics, which are based upon laws of human action. Thus it is with capital controls.

We have to remember that capital controls are based upon coercion. After all, such controls prevent people from taking things they value out of the country. It is another way of saying that government owns everything, and anything people have in their possession simply is borrowed from the state.

Granted, we are dealing with very different fundamental approaches. Krugman is saying that Malaysia instituted capital controls, and after the crisis ended, investment flowed into the country again. Thus, they were "successful."

Yet, what might be the case had the government of Malaysia declared that the country was a safe place to invest, and that also meant people could bring their possessions into the country and take them out again if they so desired? I don't know the results, since Malaysia did not go that route. However, as I see it, there is a huge fundamental difference between Krugman and the Austrians here, and it is not just based upon potential outcomes.

No, what Krugman endorses is a form of theft. That's right, theft. Capital controls are theft. Krugman might believe that they can be "good theft," but nonetheless, government is taking control of the possessions of others. Since Keynesian economics endorses stealing through the "magic" of inflation, I hardly am surprised that America's loudest Keynesian believes theft is just fine in other forms, too.

Fable of the Krugman

While Paul Krugman likes to present himself as being a Keynesian, in reality, his intellectual roots run back a few centuries to the Mercantilists. If you wish to see the Krugman of 300 years ago, read Bernard Mandeville's "The Fable of the Bees," first published in 1705, to see all of the same economic (and logical) fallacies that haunt Keynesianism and Krugman's columns.

Do you want the "paradox of thrift"? You can find it there. There is "underconsumption" and the emphasis upon spending that has not changed in three centuries, at least when one reads Krugman's columns.

In his column, "Taking on China," Krugman takes his Mercantilist arguments to a new high (or low, which might be more appropriate), blaming, yes, China for the continuing economic depression in the rest of the world. It seems that China has been undervaluing its currency, the renminbi, and that forces the rest of the world into that infamous "liquidity trap." Here is Krugman in his own words:

...it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.

To understand Krugman's logic, first you must turn economic logic upside down. By undervaluing its currency, China is following a policy of exports first, and in the process is amassing a lot of foreign reserves in the process. This, by the way, was the very kind of practice that Adam Smith and other Classical economists railed against, as they successfully argued that such artificial trade restrictions made their own people poorer.

Furthermore, China has been building a huge surplus denominated in fiat currencies from abroad, mostly the U.S. Dollar. However, Ben Bernanke and soon-to-be-his-partner-in-crime Janet Yellen are willing to turn the dollar into worthless paper that cannot compete with the infamous German Mark of 1923, not to mention the fading Euro and Lord knows what else. Maybe we can throw some Bolivian money in the mix and some Argentine Pesos from the Age of Juan Peron.

By pursuing this action, Chinese producers indeed are able to sell their goods more cheaply abroad than are Americans. This much is true. Conversely, this also means that China is willing to ship real wealth overseas and accept our worthless green pieces of paper in return. Yes, we have the situation in which the poorer Chinese are playing the role of philanthropist to the wealthy Americans and European. Hmmm, exploitation, anyone? This is a better deal than Colonialism.

Now, if one has a Keynesian, er, Mandevillian, view of the world, this is terrible. In the Keynesian view of things, spending, not consumption, is the end of economic activity. There IS a difference. Under the Keynesian view of things, consumption and production are two unrelated things. People make products and then hope-to-goodness that they can "buy back" what they have just produced.

In this view of things, producers just "make things," and then the real reason for spending is just to empty the inventories. That way, producers can make more things and then they are cleared off the shelves, and the process begins anew.

This is not an economy; this is a cat chasing its tail. The only purpose I can see here is keeping people occupied. The purpose of "consumption" here only is to "buy back" what has been made; it does not and cannot go any farther.

No wonder that Keynesians emphasize the "circular flow" of the economy, as it fits within their circular logic. Israel Kirzner once parodied this whole set of nonsense with the following dialogue: "Why do you eat breakfast? So I can go to work. Why do you go to work? So I can eat breakfast."

Lest one thinks I am exaggerating or trying to present a caricature of Keynesianism as fact, take the following quote from Krugman, in which he praises Richard Nixon's 1971 action in which he cut ties to gold, devalued the dollar (or, in real-live terms, engaged in a default), and wrote a vital chapter in what would be a disastrous economic decade:

In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies.

Now, as a hardcore partisan Democrat, Krugman cannot utter the N-word, except in derision, yet he is praising what Austrians see as a dishonest approach to the real problem of runaway government spending, fiat currencies, and a mountain of government debt. To Krugman, all of the things I have mentioned are virtues, just as Mandeville praised profligacy as being virtuous and thrift as a vice.

I would pose a different scenario. Indeed, China should end its pegging of the renminbi to the U.S. Dollar, but for different reasons. Chinese workers have toiled in factories, yet government policies are overpricing those goods at home. This is similar to what Japan did in the 1980s and we see how well that worked for the Japanese.

Yes, Wal-Mart is full of Chinese consumer goods that are artificially cheap for us, and as long as we can keep this arrangement going, who is to complain? Krugman does not like it for all of the wrong reasons. To him, when he sees Americans buying something at Wal-Mart (well, let's face it, I'm sure Krugman never lowers himself to step into a Wal-Mart and mingle with the Great Unwashed), he sees trade imbalances. I see American consumption made possible by the philanthropic Chinese government acting to the detriment of the Chinese consumer.

Granted, one must understand Keynesian and Mandevillian logic. Domestic consumption, according to this "logic," is "buying back the product," but the real goal of American production should be to let someone in another country consume what Americans have produced. If that does not make sense to you, don't worry. It means you are thinking clearly.

As for the Krugman "solution," he advises the Nixon strategy of raising tariffs (Krugman calls for a 25 percent import surcharge) and telling the Chinese that while they amassed those dollars, the heck with them if they wish to spend them at least here. Who would have thought that Mr. Democrat would be channeling the policies promoted by the Republican that Democrats Love to Hate, Richard Milhous Nixon?

Of course, this would work wonders at home. Americans, who are struggling to make ends meet, would discover that prices were shooting up and their dollars would purchase less than before. There would be international tensions and the dollar would become the worthless paper in a scenario that the Austrians have been predicting for a while.

Yes, this is the Mercantilist world of Paul Krugman. Peaceful private exchange is an act of aggression, and aggression will bring us from an imaginary "liquidity trap." Indeed, War is Peace, Slavery is Freedom, and Ignorance is Strength.