Tuesday, June 29, 2010

Commentary on Current Bond Rates

A number of people making comments on this blog have agreed with Paul Krugman that the relatively low bond rates right now "prove" that new monetary creation and an explosion of government spending bring no inflationary pressure. Thus, they claim, the concerns of people that the current "stimulus" efforts will lead to inflation are unwarranted.

I have asked a number of friends who are economists to comment. As I receive them, I will include them in this post.

Guido Hülsmann
Professeur des Universités
Faculté de Droit, d'Économie et de Gestion
Université d'Angers

If I understand this point correctly, higher deficits need not be monetized (or not much) because of the current drop of T-bill rates. Therefore, the danger of inflation is limited. Well, this argument presupposes that it is always possible for political institutions such as the Fed to stabilize TB rates at the current low levels, or even decrease them. But this is wishful thinking. In the past 20 months, the US Treasury, along with the German treasury and a few others, have benefited from the fact that investors have been losing confidence in all other market participants. Therefore, their TB rates have declined while the rates of all others have increased, or are starting to increase. However, this group of beneficiaries shrinks by the day.

Pressure is mounting for rates to go up, for three reasons: (1) there are more and more countries that have to pay higher rates, which will create pressure on T-bills and bonds precisely if and when the general situation seems to stabilize; (2) the supply of T-bills and bonds could dramatically increase if and when the general situation deteriorates, because the US and the German governments have started to act as financial problem-solvers of last resort; and (3) the return on investments in the "natural monies" gold and silver is outpacing the meager return offered by T-bills, and this at much lower risk. These facts are so glaringly obvious that even mainstream banks such as the Landesbank of Baden-Württemberg in Germany, Société Générale in France, or UBS in Switzerland are now hammering this point, to the benefit of their clients. See the latest installment of this wave of financial enlightenment.

As soon as the rates of US T-bills and of bonds start increasing to a moderate crisis level of, say, 10 percent, all government budgets will be belly-up. Then the only remaining alternative will be between (I) US and German government default, entailing a deflationary meltdown of world financial markets, and (II) monetizing T-bills and bonds, which will very quickly bring us on the road of world hyperinflation.

Monday, June 28, 2010

Krugman and the Keynesian "Stones into Bread" Fallacy

The more I read Paul Krugman's columns and papers, the more I realize just how great the gulf is between Austrian and Keynesian thought. It is impossible to sum up all of the differences between the two camps, but I do think that perhaps the disparities can be summed up in the Austrian rejection of Keynes' famous 1943 statement that expansion of credit by the central bank will create a “miracle . . . of turning a stone into bread.”

In his column today, Krugman in a roundabout fashion repeats this notion, as he excoriates the governments of the world for not borrowing, printing, and spending at a rate that he believes will keep the world economy from slipping into depression. At the heart of Krugman's exhortation is his belief that credit expansion is the same thing as creating wealth. I don't think so.

Krugman has almost a religious belief that borrowing and printing money and policies of spending for the sake of spending will pull the country out of a recession. He writes of the current mess:
...this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.
Krugman ignores the recoveries after the 1921 recession and the 1982 recession, both of which occurred in the absence of inflation and and the presence of higher interest rates. Furthermore, while the U.S. Government in both instances ran deficits, they were deficits brought on by the fall in tax revenues due to the recession, not as matters of "deficit-based stimulus" policies.

But, there is a larger issue here, and it is this: Current spending by government does not create wealth, and it is the creation of wealth that will bring us out of the depression. Borrowing from future generations (or repudiating the debt through inflation) is nothing more than making a claim on future wealth. Furthermore, Krugman's recommendations do nothing to address the current set of malinvestments which plague the economy, not to mention the huge added burden of government-imposed costs which make production of wealth more difficult.

Lest we think that Krugman is saying something new, the great Ludwig von Mises more than 60 years ago exposed this faulty thinking. He wrote:
The stock-in-trade of all Socialist authors is the idea that there is potential plenty and that the substitution of socialism for capitalism would make it possible to give to everybody “according to his needs.” Other authors want to bring about this paradise by a reform of the monetary and credit system. As they see it, all that is lacking is more money and credit. They consider that the rate of interest is a phenomenon artificially created by the man-made scarcity of the “means of payment.”

In hundreds, even thousands, of books and pamphlets they passionately blame the “orthodox” economists for their reluctance to admit that inflationist and expansionist doctrines are sound. All evils, they repeat again and again, are caused by the erroneous teachings of the “dismal science” of economics and the “credit monopoly” of the bankers and usurers. To unchain money from the fetters of “restrictionism,” to create free money (Freigeld, in the terminology of Silvio Gesell) and to grant cheap or even gratuitous credit, is the main plank in their political platform.
Indeed, it was as though Professor Mises was anticipating Krugman's arguments. No doubt, Krugman would think Mises was a fool and a charlatan, but the joke is on Krugman. True, Mises did not have a Nobel Prize; but Mises had wisdom, and that makes all the difference.

Friday, June 25, 2010

Krugman: In the Long Run, We Screw Future Generations

Years ago, I taught an Intermediate Macroeconomics college class in which the required text was written by Keynesian disciple Wallace Peterson. In short, the book quoted the General Theory as though it were Scripture, and repeated the numerous economic fallacies that make up the structure of Keynes' book.

(I countered Peterson with Henry Hazlitt's The Failure of the New Economics, which I featured yesterday.)

So, in his post today, he repeats Keynes' silly phrase, "In the long run we are all dead," as though it had great economic value. Now, perhaps certain self-absorbed people might think that when they pass, there are no more generations, but in the real world, the present generation will hand off its economy to the generations of the future -- and in THAT long run, they will very much be alive.

Krugman uses this line to insist that we really cannot afford at the present time to get our financial house in order. We need to borrow, spend, inflate, all to give that perpetual motion machine called an "economy" enough "traction" to where it can move on its own without government spending.

Now, I would love to know what plant Professor Krugman occupies, for on that planet, spending exists to bolster production for its own sake. Indeed, spending replaces consumption, for in the Austrian paradigm, people acquire goods they believe will meet their needs by purchasing them in the marketplace. "Spending," in that view, is a purposeful activity done by individuals who wish to satisfy their needs.

However, on Planet Krugman, spending is an activity that is done for the sole purpose of keeping people "employed." It does not matter what is produced just as long as the government (or someone else) purchases it. If one steps back and takes a hard look at this paradigm, one can see that it is not "economics" at all, but rather something that turns production and exchange upside down.

Now, I can appreciate Krugman's point regarding the long and short runs. He is saying that if governments do not try to borrow and spend us into prosperity, then in the "long run," there will be no opportunity at all to bring prosperity, since the economy will be in permanent doldrums. He writes:
I mean, why shouldn’t we be focused on the business cycle? We’ve suffered the worst cyclical downturn since the Great Depression; in terms of unemployment and output gaps, we have recovered almost none of the lost ground. Millions of willing workers are idle because of lack of demand; let them stay idle, and we can turn this into a long-term structural problem, but right now it is precisely a short-term, cyclical problem.
When Krugman uses "demand," he means "aggregate demand," which economically speaking is a nonsensical term. There is no such thing as "aggregate demand;" Furthermore, people are trying to build up their savings precisely because they want to have some cushion for the future. If they are abstaining from some present spending, it is because of the current recession/depression.

In other words, personal cutbacks in spending are occurring because the economy is in recession; to say otherwise is to violate what Carl Menger calls The Law of Cause and Effect. Yet, Krugman and his followers continue to believe that the recession came about because people stopped spending, period.

I will go further. If governments cut back on present spending and start to get their financial houses in order, then the long run actually will hold much more promise than what will be the case if governments continue their suicidal attempts to spend resources that, frankly, we no longer have.

Wednesday, June 23, 2010

What "Expansionary" Policies?

OK, Paul Krugman is a True Believer. No matter what, according to the Nobel laureate, the government needs to spend and spend and spend because the economies of the world are in a giant "liquidity trap." However, in a recent blog post, he claims that any deviation from such policies of borrowing, printing, and spending simply is "horrifying." Horrifying?

Not surprisingly, Krugman turns back to Keynes for inspiration:
The case for expansionary policies in the face of a slump is intellectually difficult; Keynes described the writing of the General Theory as a painful process of discovery, and so it is. The natural instinct of almost everyone is to think that tough times require tough measures, and that if the economy is suffering, the government should tighten its own belt. It would take a clear consensus from economists to overcome that natural bias.

And that consensus has, of course, been lacking — largely because a significant proportion of the economics profession has spent the last three decades systematically destroying the hard-won knowledge of macroeconomics. It’s truly a new Dark Age, in which famous professors are reinventing errors refuted 70 years ago, and calling them insights.
This is nuts. Keynes refuted NO errors 70 years ago. His so-called refutation of Say's Law was a joke. First, he created a straw man and then, second, refuted something no one believed.

If anyone did any refutations, it was Henry Hazlitt in 1959 when he made mincemeat of The General Theory in his own book, The Failure of the New Economics. Hazlitt went through Keyne's "masterpiece" line by line, demonstrating how it was nothing but a tissue of fallacies.

There was no "hard-won" knowledge of macro, unless one believes that an economy is nothing but a bunch of aggregates, that prices are just numbers to go into an index, and that government creates wealth by printing money. Don't forget that this "hard-won" knowledge by 1980 was giving us double-digit inflation, high unemployment, and an economy in tatters.

So, Krugman wants us to believe that all we need is borrowing, spending, and lots of printing money. Oh, and costs are nothing but administrative numbers. This is not economics, folks, it is pure bureaucracy.

Tuesday, June 22, 2010

Paul Krugman Endorses Bernie Madoff!

In his post today, Paul Krugman unwittingly gives an endorsement of the disgraced Bernie Madoff, the Ponzi king who will die in prison, unable to spend the millions that he stole through fraudulent means. Yes, yes, I know that Krugman has not actually mentioned Madoff by name, but he does throw his considerable influence behind the financing of Social Security, which actually is the greatest Ponzi scheme in world history.

Now, before the defenders of Krugman go ballistic, I would love to ask Krugman and his followers this question: If Social Security is a legitimate funding scheme, then why is Bernie Madoff in prison? Let me further explain.

Krugman writes the following:
We went through all this at length back in 2005, but let me do this yet again.

Social Security is a government program funded by a dedicated tax. There are two ways to look at this. First, you can simply view the program as part of the general federal budget, with the the dedicated tax bit just a formality. And there’s a lot to be said for that point of view; if you take it, benefits are a federal cost, payroll taxes a source of revenue, and they don’t really have anything to do with each other.

Alternatively, you can look at Social Security on its own. And as a practical matter, this has considerable significance too; as long as Social Security still has funds in its trust fund, it doesn’t need new legislation to keep paying promised benefits.

OK, so two views, both of some use. But here’s what you can’t do: you can’t have it both ways. You can’t say that for the last 25 years, when Social Security ran surpluses, well, that didn’t mean anything, because it’s just part of the federal government — but when payroll taxes fall short of benefits, even though there’s lots of money in the trust fund, Social Security is broke.

And bear in mind what happens when payroll receipts fall short of benefits: NOTHING. No new action is required; the checks just keep going out.
Well, not exactly. The current "surpluses" from SS are borrowed by the U.S. Government to fund part of its deficit spending. Thus, the government owes the government money. While there are surpluses, the whole thing looks sound, but when there are deficits, the money needs to come from somewhere, and that will be the printing press or the Fed's application of its powers to create "money" from thin air.

If this sounds somewhat like Madoff's scheme, that is because it is Madoff with its own twist. When Bernie ran "surpluses," he paid benefits to people who already had given money to his "fund." However, at some point, the Madoff stash began to run deficits and everything went to hell after that.

Madoff, of course, could not print money, nor could he borrow from the central bank indefinitely. THAT is the only difference between SS and Madoff, period.

So, Krugman says that those who raise questions about the future of SS are "lying." No, they are not lying. They are those old-fashioned people who think that printing money is not the same thing as creating real wealth. So, who is not telling the truth here?

Monday, June 21, 2010

Spend Now and Save Later? Right

In the world of Keynesian economics, there really is no individual behavior that is purposeful. People don't "spend" because they believe that the purchase of a specific good or service will make them better off, but because they are "buying back the product" they have produced as workers.

This is what one might call circular logic, and it reminds me of the imaginary exchange that Professor Israel Kirzner used to explain the circular flow of Keynesianism:

FIRST PERSON to SECOND PERSON: Why do you eat breakfast?

SECOND PERSON: So I can go to work.

FIRST PERSON: Why do you go to work?

SECOND PERSON: So I can eat breakfast.

As I read Krugman's column this morning, I get that same sense of circularity, as he claims that we should be spending now to get the economy out of depression. Saving, he argues, can come in the future: "The responsible thing, then, is to spend now, while planning to save later."

Of course, when he speaks of "saving," he means government budget balancing, as though government were the only legitimate economic entity. In Krugman's view, government spending is a net plus; there is no real opportunity cost to borrowing and printing money. Instead, it is what Keynes called, "Turning stones into bread."

Furthermore, whatever the Congressional Budget Office presents (since Congress is controlled by Democrats) is taken as Gospel Truth:
At the moment, as you may have noticed, the U.S. government is running a large budget deficit. Much of this deficit, however, is the result of the ongoing economic crisis, which has depressed revenues and required extraordinary expenditures to rescue the financial system. As the crisis abates, things will improve. The Congressional Budget Office, in its analysis of President Obama’s budget proposals, predicts that economic recovery will reduce the annual budget deficit from about 10 percent of G.D.P. this year to about 4 percent of G.D.P. in 2014.

Unfortunately, that’s not enough. Even if the government’s annual borrowing were to stabilize at 4 percent of G.D.P., its total debt would continue to grow faster than its revenues. Furthermore, the budget office predicts that after bottoming out in 2014, the deficit will start rising again, largely because of rising health care costs.
This whole thing is predicated upon the Keynesian "solution" of massive borrowing and printing of money actually bringing about a recovery. However, what if this continues to make things worse?

He gives healthcare costs as a future problem, but what is his solution? Give the state more power:
So America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control — without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard — in particular, a modest value-added tax, say at a 5 percent rate, would go a long way toward closing the gap, while leaving overall U.S. taxes among the lowest in the advanced world.
Again, he speaks of lowering costs as being an administrative issue, as though government can simply order "costs" to be lower. That is nonsense. Costs are opportunity costs, but Krugman treats them as simply numbers that government can order to be lower, and that's that. Once again, he sees an economy simply as an administrative entity that can be controlled by fiat.

It is true that while he calls for a five percent Value Added Tax, he does hold to his Keynesian roots in saying that this is not the time for new tax increases. Yet, I have seen him writing NOTHING critical about current attempts by Congress and state governments to raise taxes, and he even has hinted that perhaps we should go back to the old rates that existed before 1981. (He told a public gathering at the Southern Economic Association meetings in 2004 -- in response to my question -- that the old rates were "insane," but he seems to have been backtracking some since then.)

So, while Krugman is being somewhat consistent with Keynesian thinking, he has not dealt with the problem of massive malinvestments in the economy, made worse by government policies. To Krugman, of course, there is only spending, so there can be no malinvestments -- by definition. There is only the administrative, fiat economy.

Friday, June 18, 2010

That 30's Mistake

Continuing with his theme of "spend, spend, spend," Paul Krugman is determined to claim that the free-spending governments of the West really are engaging in "austerity." Of course, not only does he get the New Deal wrong (and he really gets it wrong), but also is wrong about what happened in 1937.

First, with the U.S. Government running multi-trillion-dollar deficits, the notion that spending is anything but wild and wasteful is a fantasy in itself. For Krugman to claim that the government is involved in an austerity program is ridiculous, but here it is:
Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.

Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession.
So, because of a vote regarding a relatively small amount of unemployment compensation funds, suddenly the government is going bare bones. Please.

Second, the depression within a depression in 1937-38 did not come because FDR decided to balance the federal budget. Instead, as Robert Higgs noted in this 1997 paper in the Independent Review, while the Federal Reserve System raised interest rates slightly, nonetheless the real problem came from the White House and its continuing attacks on private capital. Higgs quotes historian Elliot Brownlee, who wrote:
...the tax reform of 1935–37, more than any other
aspect of the New Deal,…stimulated business hostility to Roosevelt.…
[B]usiness opponents of New Deal tax reform charged that Roosevelt’s taxes,
particularly the undistributed profits tax, had caused the recession [of 1937–
38] by discouraging investment....
Furthermore, FDR made it clear after his re-election in 1936 that he was going to tax businesses into oblivion. As Prof. Higgs notes:
Although historians emphasize the president’s defeats with respect to taxation in the late 1930s, contemporary businessmen must have appreciated the reality of increased taxation: in fiscal 1940, with the depression still lingering, the federal government collected 57 percent more total revenue than it had in the prosperous year.
Now, I don't expect Krugman to understand this point, because to him, private capital spending is no different than government spending, and if "capital is on strike" (as FDR declared), then if government makes up the difference through borrowing and printing money, it is just as good. This is something that an economist -- even a Keynesian -- should recognize as being silly.

However, as I read Krugman, I have come to realize that he sees absolutely no difference in government spending and private capital expenditures. Assets really ARE homogeneous, in his view, and there are no real economic fundamentals. Of course, he also wants to demonize anyone who disagrees with him by declaring that anyone who thinks that government spending is out of control is doing ONLY because he or she hates poor people and wants others to suffer. Krugman in his own words:
In America, many self-described deficit hawks are hypocrites, pure and simple: They’re eager to slash benefits for those in need, but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we can’t afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.
First, "tax breaks for the wealthy" is nothing more than political talking points, and I have an aversion to academic economists acting like political operatives. Second, Krugman assumes that any cuts in tax rates have as their ONLY effect the lessening of revenue. There are no benefits at all, only costs.

This is interesting, as Krugman is saying that any money spent or invested privately, then, carry absolutely no benefits to anyone except the people whose taxes are cut, and that those benefits are completely offset by pain inflicted on others. This is not even economics; it is nothing but political leftism.

I wish that governments actually WOULD go on real programs of slashing spending and reducing its burden. What I find from Krugman, however, is that he views government spending and taxation as a net plus, but private investment and spending is only a cost. So, why should there be any private spending and property at all? If we are to follow Krugman's logic, then the state should take over everything. Then we could be prosperous like the Cubans and the North Koreans!

The government's "mistake" of the 1930s was not balancing its budget. No, its "mistake" was believing that government could control private enterprise, raise taxes, and increase the burdens that governments place upon individuals, and somehow out of that would rise prosperity. Apparently, Krugman continues to perpetuate that myth.

Wednesday, June 16, 2010

Does Unlimited Government Spending Bring Prosperity?

Paul Krugman still is on his anti-austerity kick, which I guess is his economic flavor-of-the-week. His blog post on "austerity" and Ireland (among other countries), while clever, really does not answer the question he is asking, plus he inadvertently paints himself into a corner. Let me explain.

First, let us look at what Krugman writes:
...now the cause is fiscal austerity — and we keep hearing about supposed examples of countries that experienced a boom after tightening fiscal policy, supposedly demonstrating that austerity is good, not bad, for employment. First was Canada in the 1990s, which turns out to be a quite different story. Now we’re hearing about Ireland in the 1980s.

So, time for a little research. And whaddya know: this story is also not at all the way it’s being told (pdf). Yes, Ireland had fiscal austerity — but it also benefited from a devaluation and an inflationary boom in the UK.

Oh, and Irish interest rates fell sharply, which was possible because they were very high to begin with; that’s not much of a precedent for the United States today, which starts with very low rates.

So yes, you can boost your economy with fiscal austerity, as long as you also devalue your currency and sharply reduce interest rates; also, incantations will destroy a flock of sheep, if administered with a sufficient portion of arsenic.
We have to remember that Krugman is demanding that governments can bring back prosperity by (1) borrowing trillions of dollars for which there is no appreciable way to pay back the money unless they (2) repudiate the debt by printing money, which is what Krugman wants them to do.

There is nothing surprising here, when one is beholden to Keynesian orthodoxy. When interest rates (as set by the central bank) are at what Krugman calls "zero-bound," then the only entity that can spend freely is government, since it has a legal monopoly on "creating money."

However, Krugman's economic logic in this passage is wanting. First, what does he mean by an "inflationary boom," and why should he care? In Keynesian thinking, inflation is NECESSARY for bringing an economy to "full employment," at least until the economy reaches its highest levels of "capacity." Thus, when one holds to this way of thinking, ALL booms are necessarily "inflationary," as inflation is required for the boom to occur in the first place (and Krugman holds that booms are good).

Second, why did Ireland's interest rates fall? Krugman gives no causality; they just fell. Third, none of this explains why Ireland in the 1980s had a fundamental economic change in which the country went from a quaint, but poor nation that mostly exported people to a place that attracted new investment AND people who wanted to be part of what was happening.

With Krugman, the change just happened, but lots of places have currency devaluations and even lower interest rates, yet do not have paradigm shifts in the economy. In other words, Krugman really has no causality theory for what happened.

James Burnham in a 2003 paper in the Independent Review wrote about the Irish boom, and gives much more detail into what happened. Yet, Krugman, holding to his Keynesian orthodoxy, simply gives us one more example of post hoc ergo propter hoc.

Again, we are dealing with two very different paradigms. In the Keynesian way of thinking, spending is everything. This is very different than "demand" as we know it, economically speaking, in which demand reflects what people want and what they are willing to give up in order to obtain it. In other words, demand cannot be separated from opportunity cost.

In the Keynesian view, however, "demand" really means "aggregate demand," which exists when people have "purchasing power" fueled by money. Thus, when government prints more money, it creates new "purchasing power" and, therefore, new "aggregate demand." There is nothing purposeful about this whole scenario; in fact, there really is nothing economic about it, for real economics deals with opportunity cost, something that pretty much is missing in Keynesianism.

So, we really are arguing two very different views of the world, and I believe that the Austrian view, while hated by the Krugmans of the world, better explains economic phenomena than does Keynesianism. However, don't forget that the very first line of Carl Menger's ground-breaking Principles of Economics makes the important point: "All things are subject to the law of cause and effect." In other words, to Austrians, causality really matters.

We are left, then, with the question that I asked in the title of this post. Krugman assumes that government spending financed via borrowing and printing really exacts no opportunity cost. I cannot accept that view under any circumstances. The fundamental building block of economic thinking is opportunity cost, and to ignore it is to jettison economics in the whole.

Monday, June 14, 2010

Krugman: F.A. Hayek Wants You to Lose Your Job

One of the reasons I started this blog was to highlight the real differences between Keynesian "economics" and the economics of the Austrian School, and to defend Austrian concepts against the missives coming from Paul Krugman of Princeton University and the New York Times. Thank goodness, mine is not the best or most articulate voice from the Austrian camp, and I have highlighted others, including Robert Higgs, who I believe is infinitely a better economist than Krugman.

Krugman over the years has refused to explain the Austrian viewpoints in anything but outright caricatures and exaggerations. For example, here we get what he calls the "Hangover Theory," which outright misrepresents everything written by Ludwig von Mises, F.A. Hayek, and Murray Rothbard on the subject of business cycle theory.

In this June 14 post on his NYT blog, Krugman once again refuses to take a serious look at what the Austrians claim, deciding, instead, to place them in a false light in order to make them seem as though they are united by one thing: hatred of humanity. He takes the following quote from Hayek as his example of Austrian cruelty:
…still more difficult to see what lasting good effects can come from credit expansion. The thing which is most needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production.If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand resources [are] again led into a wrong direction and a definite and lasting adjustment is again postponed.The only way permanently to ‘mobilise’ all available resources is, thereforeto leave it to time to effect a permanent cure by the slow process of adapting the structure of production.
If one reads Hayek carefully, he is saying that when governments hold down interest rates to artificially low levels, they actually BLOCK the economic recovery, yet all Krugman can see is "persistent high unemployment." Krugman writes:
These days, relatively few economists are willing to say straight out that they regard persistent high unemployment as a good thing. But they find reasons to oppose any and all suggestions to use government policy — including monetary policy — to alleviate the slump. Same as it ever was.
Notice that Hayek has not said any such thing, but to Krugman, free markets and an economy not steered by government must by definition have "persistent high unemployment," although he does not explain why that would be so. (In fact, Krugman seems to believe that he really is above any such explanation, as his declaration alone should be regarded as ex cathera.)

In claiming that economists like Joseph Schumpeter and Hayek were champions of depression, Krugman (and his partner-in-crime Brad DeLong) violently misrepresent the Austrian viewpoint. The Austrians don't claim that the Great Depression was a "good thing," but rather the Great Depression occurred precisely because governments intervened in the economy to prop up malinvestments and to keep the necessary liquidations from occurring. Because of those policies, the economy got both liquidation AND high unemployment.

Unfortunately, Krugman and DeLong never see that simple point. In the Austrian view, we have EITHER liquidation of malivestments or long-term high unemployment, with any high amounts of unemployment coming from the liquidation process being temporary. Krugman and the Keynesians, on the other hand, believe that once the liquidation process begins, the economy never recovers. Ever.

As Robert Higgs writes about these "vulgar Keynesians":
With their great, simple faith in the efficacy of government spending as a macroeconomic balance wheel, vulgar Keynesians disregard malinvestment, past and future, and support government spending in excess of the government’s revenues, the difference being covered by borrowing. Of course, they favor central-bank actions to make such borrowing cheaper for the government. In fact, they chronically prefer “easy money” to more restrictive central-bank policies. As noted previously, they prefer easy money not only because it lowers the cost of financing the government’s deficit spending, but also because it induces individuals to borrow more money and spend it for consumption goods ― such increased consumption spending being viewed as always a good thing, notwithstanding the recent near-zero rate of saving by individuals in the United States. Reflecting on the vulgar Keynesian attitude toward Fed policy, I keep recalling a old country song whose refrain was: “older whiskey, faster horses, younger women, more money.”

Vulgar Keynesians do not spend much time worrying about potential inflation; on the contrary, they are obsessed with an irrational fear of even the slightest hint of deflation. If inflation should become an undeniable problem, we may count on them to support price controls, which, they are convinced on the basis of sketchy knowledge of such controls during World War II, can be made to work well.
I think that pretty much says it.

Friday, June 11, 2010

Is it "Austerity," or is it Responsibility?

If the Keynesian cat were not out of the bag already, Paul Krugman's series of blog posts the past couple of days totally have smoked out his position: Only massive government spending can keep the economies afloat. Like another Paul of centuries ago, Mr. Revere, Krugman is on his horse (Named Mr. Keynes?) crying out, "The recession is coming back! The recession is coming back!"

Now, I tend to find myself in rare agreement with Krugman, except for different reasons. As I have written many times before, Krugman sees an economy simply in terms of spending: when people spend money, times are good, and if they stop spending money, it creates bad times. When people don't spend, then it is up to government to pick up the slack.

But what happens when governments decide not to increase their massive debts and slow their own spending? Krugman (and all Keynesians) believe that such action will create the conditions of the "double-dip recession." Whether it is Canada or Germany or whatever, the message always is the same: spend, spend, spend, or we are doomed, and anyone who disagrees is just plain wrong.

The problem I have with Krugman's protestations is twofold: first, I think that he has his causality wrong in that I believe people stop spending because the economy is in recession; and second, there is no mechanism by which people themselves start spending in order to keep the recovery moving. As I recent wrote in this blog post:
Contra Krugman and his employer, recessions don't occur because people spend less; people spend less because the economy is in recession. Furthermore, the only way to get OUT of the recession is to permit the fundamentals to get back into balance. This is not some sort of Zen "balance," but rather a reflection of the real opportunity costs of the factors of production.

Second, it is clear that Krugman and Collins and Company are clueless on what it will take to end this crisis, as they believe that the way to END the crisis is to continue upsetting the economic fundamentals, as though they did not matter. We have to face the issue that if this spending spree continues, we are headed for disaster, as the economy slowly but surely will deteriorate and our ability to repair things in the future will be even more difficult.
We also have to keep in mind that no government on earth is engaging in true fiscal responsibility. The European governments have huge welfare costs that have undermined the productive capacity of the Continent for years, and China still has massive numbers of unproductive state-run enterprises that not only drag down the economy, but force resources in the directions where the markets never would send them.

What Krugman calls "austerity" really is nothing more than some modest spending cutbacks by governments around the world. Furthermore, the huge spending sprees that governments have been creating, financed by debt and printing money, only have extended and expanded the malinvestment of resources, and the only way we can have a true recovery will be the liquidation of those malinvested resources and transferal to those uses that follow the directions set by consumers.

I am not speaking of a morality play in which we now need "austere" policies. Instead, I am speaking of the simple fact that the unsustainable booms of both the Clinton and Bush years pushed the economy in the wrong direction, and until we are able (and willing) to permit the fundamentals of the economy to get into balance, we are going to see these recessionary conditions continue.

It is true that in the short run, so-called austerity will result in even more unemployment, but if we don't stop this fiscal foolishness soon, we are going to have those rates of unemployment -- and worse -- anyway. The cure will be painful, but if we listen to Krugman, there will be no cure, only more disease.

Thursday, June 10, 2010

Austerity Hysteria: Krugman's Employer Joins the Chorus

In yesterday's post, I noted that Paul Krugman does not understand that an economy is made up of heterogeneous assets and that printing money is not the same thing as getting the fundamentals of the economy back into order. However, it seems that once again (as they tag-teamed after the election of Ron Paul), Krugman and his employer (most likely Gail Collins) are joining forces again to demand that our economic malinvestments continue until we inflate ourselves into oblivion.

Today, the NYT has an editorial, "The Wrong Message on Deficits," that Krugman himself could have written. While the "vulgar Keynesian" might agree with the assessment in this editorial, nonetheless it demonstrates that the editors are clueless about what an economy really is. The editorial begins with:
The whip-deficits-now fever is running hot on both sides of the Atlantic. In Europe, politicians are understandably spooked by investors dumping government bonds in the wake of the Greek meltdown. But the sudden fierce enthusiasm for fiscal austerity, especially among stronger economies, is likely to backfire, condemning Europe to years of stagnation or worse.

The United States is running the same very high risk. Democrats have soured on job creation and economic stimulus in favor of antideficit rhetoric, which Republicans have long seen as the easy road to discontented voters in a confusing election year.
Right. Democrats suddenly are turning "fiscally responsible" as an election ploy. From what I can recall about politicians, they usually begin spending like drunken sailors when up for re-election. Would be that were the case.

First, there is NO "job creation" going on, just wealth destruction. When the government borrows another trillion dollars in order to pay people to lay sod on median strips or to send to politicians somewhere, the government actually is moving resources from higher-valued uses to lower-valued uses.

For example, there is a reason that the "alternative energy" industries need to be subsidized: they are taking valuable resources that go into the growing of corn and then fermenting it in large-scale operations, and then forcing Americans to pay not only for inferior fuels, but also for the resources of these operations that would be better used elsewhere.

Contra Krugman and his employer, recessions don't occur because people spend less; people spend less because the economy is in recession. Furthermore, the only way to get OUT of the recession is to permit the fundamentals to get back into balance. This is not some sort of Zen "balance," but rather a reflection of the real opportunity costs of the factors of production.

Second, it is clear that Krugman and Collins and Company are clueless on what it will take to end this crisis, as they believe that the way to END the crisis is to continue upsetting the economic fundamentals, as though they did not matter. We have to face the issue that if this spending spree continues, we are headed for disaster, as the economy slowly but surely will deteriorate and our ability to repair things in the future will be even more difficult.

Even they point out things for which they have no explanation. For example, they acknowledge already that "global recovery is already faltering." Yet, they see no irony in that after the spending of trillions of "stimulus" money, things still are going downhill. It never seems to occur to this bunch that we have been going down the wrong path for several years, and we need to stop the madness.

The other path is to take the medicine now (medicine that should have been taken three years ago), deal with the temporary crisis, and then let a real recovery take place. Now, that is something that few politicians are willing to do, but that is what MUST be done, the NYT notwithstanding.

Wednesday, June 9, 2010

Austerity or Reckoning? We Cannot Print Our Way Out of the Crisis

While attending the 2001 ASSA meetings in New Orleans, I was jogging one morning and found myself in the company of a Yale economics professor who taught monetary economics. We had a discussion of approaches, and I explained that I went with the Austrian view, in which one teaches monetary theory from a marginal utility angle. In other words, money is a specialized good used specifically for exchange that is subject to the same laws of economics as any other good.

The Yale prof listened intently and sounded interested. Given that he taught monetary theory from a quantity view of money approach, my viewpoints were foreign to him, but he was not dismissive of what I was saying. Instead, he told me that he was interested and that he had not even thought of looking at money that way. Whether or not I planted a seed of interest, I read today from another Ivy League economics professor, Paul Krugman, that money is so "other worldly" that we really cannot apply economics at all.

Now,Krugman does not give a direct approach of monetary theory in his blog or columns, but it is there in default. Like all Keynesians, he believes that as long as an economy is not running at "capacity," and if interest rates (as set by government monetary authorities) are at or near zero (which Keynesians call a "liquidity trap"), then the only thing that can drive an economy to "full employment" of all resources is "fiscal policy," in which governments borrow and print money in order to push enough spending to those full-employment limits.

This viewpoint also holds that the key to a healthy economy is the rate of unemployment, not just of labor, but of all resources. For example, the "full-employment" of World War II is seen as an economic triumph because anyone who wanted to find work could get a job (provided he or she moved to the population centers where the factories and administrative offices were located). Farmers had huge markets for their crops, and people suddenly had money in their pockets. The fact that the government rationed goods, including food and fuel, is ignored, since people had jobs, and that was the only thing that mattered.

I don't believe that I am misrepresenting Krugman's views here, as they are pretty much standard modern-day Keynesian. The problem, however, as I noted in my post containing Robert Higgs' assessments of Keynesianism, is that this viewpoint has some very unreal assumptions, the most important being that all assets are homogeneous, so it does not matter what is being produced, be they bombs or bagels, as long as labor is being used. Furthermore, the assumptions also rest upon a pure quantity theory of money in which prices themselves are irrelevant, being subservient to a government-calculated "price level."

Another false assumption from this viewpoint is that consumer spending is nothing more than "buying back" the products they created as workers. There is no purposeful behavior here, just a circular motion of production and purchases. As long as consumers have jobs and income, they can continue this circular pattern and the economy will be operating at "full employment." Thus, World War II in this analysis would be a period of "good times."

Professor Higgs, however, takes down even the "war prosperity" myth in this paper. I think a reading of this will change one's viewpoint considerably about the views economists have about World War II.

Unfortunately, this is a very stilted and inaccurate way of looking at the economy, as there really is no plan or purpose on behalf of individuals. Instead, they simply produce, purchase, and consume in a rather mindless fashion, yet that is what Keynesians believe is a "thriving" economy. In Krugman's view, because we are in a "liquidity trap," the only thing that can rescue the economy is government borrowing and spending.

In today's post, Krugman gives what I would call his classic viewpoint of what I have described. Furthermore, in his theoretical world, any spending cutbacks will create needless disaster. After all, if assets are homogeneous, and governments can borrow and print just as long as the economy is operating "below capacity," then it is foolish to stop and engage in "austerity." He writes:
Some thoughts on the fiscal austerity mania now sweeping Europe: is anyone thinking seriously about how this affects the rest of the world, the US included?

We do have a framework for thinking about this issue: the Mundell-Fleming model. And according to that model (does anyone still learn this stuff?), fiscal contraction in one country under floating exchange rates is in fact contractionary for the world as a hole. The reason is that fiscal contraction leads to lower interest rates, which leads to currency depreciation, which improves the trade balance of the contracting country — partly offsetting the fiscal contraction, but also imposing a contraction on the rest of the world. (Rudi Dornbusch’s 1976 Brookings Paper went through all this.)

Now, the situation is complicated by the fact that monetary policy is up against the zero lower bound. Nonetheless, something much like this transmission mechanism seems to be happening right now, with the weakness of the euro turning eurozone fiscal contraction into a global problem.

Folks, this is getting ugly. And the US needs to be thinking about how to insulate itself from European masochism.
However, if assets are heterogeneous, and if money is a good subject to the laws of economics, and if the Europeans must be able to produce real goods in order to pay for their welfare states, then Krugman is uttering foolishness. For the past three years, governments have been boosting their spending to irresponsible levels (at Krugman's urging) and printing money like mad in order to try to "spend" their way back to prosperity, and we are seeing the results: unemployment is at double-digit levels and all of this spending has created zombie financial institutions that on paper are "solvent" but in reality are on the brink.

Furthermore, the wave of government debt creates real liabilities that reflects the perilous situation that exists today. Instead of creating "full employment," these policies have furthered the malinvestments that are at the heart of this downturn. Unfortunately, Krugman refuses to see this point, so he will continue to demand that governments create even more malinvestments, all in the name of "fighting the depression."

At the heart of this matter is the Keynesian myth that money is something extra-economic, and that printing more of it (provided the economy is at less than full employment) will put us back to work and create prosperity. Instead, the current policies of the U.S. and European governments are digging the hole deeper, and Krugman is claiming that the only thing that will work is for us to use bigger shovels.

Monday, June 7, 2010

Is Fiscal Sanity the Inflicting of "Pointless Pain"?

Paul Krugman is a popular fellow in many circles because he both represents the "Progressive" political views of liberal Democrats (and some Republicans, let's face it) and also gives very clear explanations of what economist Robert Higgs calls "vulgar Keynesianism." And, as I have explained in previous posts, the Keynesian view holds that an economy is little more than a perpetual motion machine that needs to be greased with newly-printed government money in order to keep running smoothly.

Thus it is that Krugman has become the champion of "stimulus," and given the set of assumptions under which he operates, what he says makes perfect sense. If assets are homogeneous, which means that there are no real economic fundamentals to fall out of balance, then all it takes to keep the economy going is an infusion of new money. In fact, as Krugman writes in this blog post, to pull back on "stimulus" now would be an act of madness, the infliction of "pointless pain."

He writes:
And even this figure conveys a misleading impression of the importance of stimulus spending. First, since cutting stimulus would weaken the economy, it would reduce revenues — that is, a substantial part of the debt growth the IMF attributes to stimulus would have happened even without stimulus, through lower revenue. Second, for the US at least the core reason for long-run budget concern is rising health care costs — in fact, health cost control is the sine qua non of long-run solvency — which has nothing whatever to do with how much we spend on job creation now.

So how much we spend on supporting the economy in 2010 and 2011 is almost irrelevant to the fundamental budget picture. Why, then, are Very Serious People demanding immediate fiscal austerity?

The answer is, to reassure the markets — because the markets supposedly won’t believe in the willingness of governments to engage in long-run fiscal reform unless they inflict pointless pain right now. To repeat: the whole argument rests on the presumption that markets will turn on us unless we demonstrate a willingness to suffer, even though that suffering serves no purpose.

And the basis for this belief that this is what markets demand is … well, actually there’s no sign that markets are demanding any such thing. There’s Greece — but the Greek situation is very different from that of the US or the UK. And at the moment everyone except the overvalued euro-periphery nations is able to borrow at very low interest rates.

So wise policy, as defined by the G20 and like-minded others, consists of destroying economic recovery in order to satisfy hypothetical irrational demands from the markets — demands that economies suffer pointless pain to show their determination, demands that markets aren’t actually making, but which serious people, in their wisdom, believe that the markets will make one of these days.
If one wishes to find a quick study in modern Keynesian thinking, here it is. The entire operation is circular -- if governments want more revenue, they need to borrow and print money and it will come back to them in, well, revenue.

Yet, let us step back for a second and examine the larger picture. Krugman is saying that the the only way for governments to pay back their debts in the future is, well, to get into more debt. This is most interesting and deserves a harder look. First, debt comes with interest, so any newly-acquired debt will mean that principal AND interest payments will be in our future, so the debt will grow automatically.

Second, if there really are no economic basics and if assets are homogeneous, then there is no way for the economy to grow or improve. The Keynesian viewpoint is not intellectually or theoretically positioned to explain how an economy can grow, except to say that more spending has a magical effect upon economic processes that miraculously enable the factors of production to create more goods.

However, such a "miraculous" process cries out for an explanation. If factors are homogeneous and their output increases only when spending increases, then how can these assets produce more goods and services from more spending? Should more spending somehow enable entrepreneurs to change the productive processes to where producers can make more goods and services from the same amount of resources, then the Keynesian argument no longer holds.

That is because the Keynesian viewpoint has no mechanism for this extra burst of production, except to say that somehow before there was "enough" spending, that assets were not operating at "full capacity." In other words, that the only thing that can enable these "underused" or "underutilized" assets to operate at "full employment" is for government to print lots and lots of money.

While the Keynesian might think that the "capacity" example explains economic growth, it actually explains nothing. How did the "capacity" get there in the first place? What made entrepreneurs and producers arrange resources to create the particular means of production?

In the Keynesian view, this simply "happens." It is random, and it involves no real purposeful behavior, yet that makes no sense. Production does not simply happen, and an economy does not just appear out of a new blizzard of paper money.

No, the Keynesians don't have an answer, so for Krugman to claim that cutting back on stimulus would simply inflict "pointless pain" is to misunderstand what his happening. Instead, if one sees assets, resources, and factors of production as being heterogeneous, and if one holds that the structures of production within an economy matter, then this "hydraulic Keynesianism" in which politicians and bureaucrats simply pull and push levers is no explanation of the economy at all.

I doubt that the policymakers of the G20 really understand what I have pointed out, but they do realize that something is amiss. If they really did understand what was happening, not only would they demand governments pull back on this reckless spending, but that their bureaucrats and politicians get out of the way of entrepreneurs and let them find those assets that are profitable, and let them go to work.

The current Keynesian prescriptions are leading to disaster, just as they led to disaster during the 1930s. If we want years and years of high unemployment and no economic growth, then all we have to do is to follow what Krugman is demanding. While I have no confidence in the "austerity" of the G20, I have even less confidence in Krugman's Keynesianism.

Thursday, June 3, 2010

Can Krugman Explain the 1983 Recovery?

The last time the United States saw double-digit unemployment was during the recession of 1982, which seemed to spell huge problems for then-President Ronald Reagan. He had pushed through a cut in tax rates (across-the-board) with the top rate dropped from 70 percent to 50 percent, and the federal deficit was skyrocketing to record nominal levels (past $200 billion in 1983).

There are two ways to look at that recession and the subsequent recovery. The first is through the standard Keynesian lens with a few twists. I remember reading an editorial in the Atlanta Constitution entitled "Tax Hike or Recession" in which the writer claimed that unless the government raised the top rates back to 70 percent, interest rates would continue to rise, and the economy would move into recession. Congress did not raise income tax rates (although it did pass a tax increase in other areas which Austrian Economists believe had a stifling effect on the economy).

Now, no self-respecting Keynesian economist would argue for a tax increase during a recession, although they do have a "balanced-budget multiplier" in the Keynesian arsenal that "proves" a tax increase will stimulate the economy more than letting individuals keep their earnings. (This raises the question as to whether or not a 100 percent tax would really do the trick, although most Keynesians have not willingly taken their "balanced-budget multiplier" to its logical conclusion.)

Nonetheless, the Keynesian analysis is fairly simple in its causality: recessions come about because people spend less money. Furthermore, Keynesians believe that higher interest rates are a cause of recessions, as was the case in 1982, and any decrease in the rate of inflation also will have negative economic effects, as economic growth cannot occur without inflation.

If I can characterize the Keynesian position from an Austrian point of view, it is that Keynesian economics is based upon the following fallacy: post hoc ergo propter hoc, or "after this, therefore, because of this." For that matter, Keynesians employ the same fallacy in order to explain economic recoveries, which could be explained in the following form: "After federal budget deficits, therefore, because of federal budget deficits."

There is no doubt that federal budget deficits grew during the early 1980s, and the government borrowed huge sums to paper over the differences. However, the question as to whether or not the borrowed expenditures fueled the real economic recovery of the 1980s is legitimate. Government statistics tell us that before and during the recession, expenditures as percentage of U.S. GDP rose in military spending, and in Social Security and Medicare, along with net interest on the federal debt.

Furthermore, during the recession huge portions of what might be called the "old economy" simply disappeared. Cities like Cleveland and Pittsburgh lost industries to the point where the term "Rust Belt" was used to describe the swath of northern states steel mills and other factories became little more than scrap metal. Unlike previous economic recoveries, hundreds of thousands of laid-off workers were not called back to their old jobs because those production facilities disappeared. (One might remember that Billy Joel's song "Allentown" was a major hit in 1982.)

Yet, the economy clearly recovered and it is obvious, in hindsight, that this recovery was different than what had been the case during the 1970s and before. First, this was a recovery that was not accompanied by high rates of inflation. Second, the recovery was centered not in the traditional manufacturing areas, but rather in the development of computers and telecommunications.

Third, financing was made available through the short-lived methods pioneered by Michael Milken, the so-called Junk Bond King, who helped bring about a lot of corporate restructuring that needed to take place. Fourth, the ending of the transportation cartel (i.e. "deregulation") enabled goods to be shipped more quickly, cheaply, and efficiently. (The cost-saving "Just-in-Time" methods of production simply would not have been possible had the old regulations governing trucking and railroads.)

So, despite the fact that inflation went down and interest rates stayed high, the United States had a robust economic recovery in the mid-1980s. This recovery defied the Keynesian rules; indeed, it was the closest thing one will see to an Austrian recovery in our lifetimes.

The so-called founder of the Austrian School, Carl Menger, wrote in his groundbreaking 1871 book, Principles of Economics, "All things are subject to the Law of Cause and Effect." Indeed, we begin with causality. Unfortunately, Keynesians consistently (at least they ARE consistent) confuse effect with cause, and that makes all of the difference.

Tuesday, June 1, 2010

The Pain Economist

In my Monday column, I looked at some of the work done by Robert Higgs, who takes on the "vulgar Keynesianism" head-on. Today, I look at the chief spokesmen for the "vulgar Keynesians," Paul Krugman, who excoriates modern policymakers for doing what he claims is "inflicting pain" through financial "austerity."

In his May 31 column, Krugman writes the following:
When the financial crisis first struck, most of the world’s policy makers responded appropriately, cutting interest rates and allowing deficits to rise. And by doing the right thing, by applying the lessons learned from the 1930s, they managed to limit the damage: It was terrible, but it wasn’t a second Great Depression.

Now, however, demands that governments switch from supporting their economies to punishing them have been proliferating in op-eds, speeches and reports from international organizations. Indeed, the idea that what depressed economies really need is even more suffering seems to be the new conventional wisdom, which John Kenneth Galbraith famously defined as “the ideas which are esteemed at any time for their acceptability.”
Given that Galbraith was a hardcore socialist, and one who was quick to praise the communist economies, I find it significant that Krugman quotes him, especially when one sees that Krugman has been calling for higher taxes and raising business costs as the means for securing a new "prosperity."

What are these terrible ideas that Galbraith would have criticized? Why, they are very (very) small measures of fiscal responsibility. Krugman declares that policymakers want to let interest rates rise and for governments to begin (and only begin) the process of living within their means. Such "responsible" behavior, Krugman argues, is irresponsible in outcomes:
The best summary I’ve seen of all this (changes of policy direction) comes from Martin Wolf of The Financial Times, who describes the new conventional wisdom as being that “giving the markets what we think they may want in future — even though they show little sign of insisting on it now — should be the ruling idea in policy.”

Put that way, it sounds crazy. And it is. Yet it’s a view that’s spreading. And it’s already having ugly consequences. Last week conservative members of the House, invoking the new deficit fears, scaled back a bill extending aid to the long-term unemployed — and the Senate left town without acting on even the inadequate measures that remained. As a result, many American families are about to lose unemployment benefits, health insurance, or both — and as these families are forced to slash spending, they will endanger the jobs of many more.

And that’s just the beginning. More and more, conventional wisdom says that the responsible thing is to make the unemployed suffer. And while the benefits from inflicting pain are an illusion, the pain itself will be all too real.
In Krugman's view, governments can stop all of the pain -- and bring back prosperity -- simply by printing and borrowing, and any attempt to bring this unsustainable action to a halt is interpreted as a deliberate infliction of "pain" upon vulnerable people. Now, if assets really were homogeneous, and if government borrowing had exactly the same results that business borrowing might have, that would be one thing.

However, assets are NOT homogeneous; they are heterogeneous and as Higgs noted in his articles, an economy is not a blob of homoegeneity: it is a complex organism of assets and production, and the failure to recognize this fact means that we are doomed to repeat the very failures of the 1930s.

Perhaps the greatest irony in the present economic morass is that economists and governments around the world are claiming that they are acting to "avoid the mistakes of the 1930s," yet governments actually are engaging in a repeat of that decade, and we know how it ended: in destruction, death, and war.