"Proof" that the "Stimulus" Worked?

In an August 27 post, Paul Krugman shows a graph that supposedly is "proof" that the "Stimulus" actually worked, but also constitutes "proof" that the "Stimulus" was "not big enough." Krugman's post hoc ergo propter hoc world, of course, is full of this stuff, but I believe it will do us well to take a brief look.

The post deals with the following two graphs, the first being Mark Zandi's prediction and the second being the actual GDP numbers (or at least what the government says are the GDP numbers). First, the Zandi graph:

Now, for the post-stimulus graph:

The graphs are what they are. However, Krugman's comment about them is most illuminating:

It’s not a perfect correspondence, nor would you expect one — other factors, especially inventory swings, were bound to make the timing of actual growth different from that of stimulus. Still, the two pictures support the view that stimulus worked as long as it lasted, boosting the economy — which is the same conclusion Adam Posen drew from Japan’s experience in the 1990s (pdf): Fiscal policy works when it is tried. (Emphasis mine)

But the stimulus wasn’t nearly big enough to restore full employment — as I warned from the beginning. And it was set up to fade out in the second half of 2010.

Most important, a new injection of money into a moribund economy (especially if it is an early injection) ALWAYS will bring about more economic activity. In his classic "Fiat Money Inflation in France," Andrew Dickson White points out that during the French Revolution, the first round distribution of Assignats brought new life to the French economy, a "stimulus," if you will.

However, with further injections, the economy responded less and less to the new money and new spending until finally all that was left was the inflation. In this case, I am not surprised at the numbers, but one has to remember that the stimulus was about SPENDING and nothing else. The new money for projects ended up in the hands of people who spent it, clearing existing inventories and the like.

What Krugman wants us to believe is that had there been more money made available through "fiscal" policies (more borrowing by the government), somehow that extra money would have given the economy "traction," which then would have allowed it to move along on its own. There is no real causality as to WHY this would happen; he just wants us to believe that this is what would have occurred.

Actually, what would have happened would have been bigger numbers (as Krugman claims) at the beginning, and then a steeper fall, as there would have been nothing to have SUSTAINED that earlier activity. In the Keynesian paradigm, the economy is a homogeneous mass driven only by spending; Austrians understand that there has to be long-term capital investment that can be sustained by economic activity, and that makes all of the difference.

Just Who is Funding What?

In today's column, Paul Krugman derides what he calls a Republican "witch hunt" because, well, politics has become a pretty ugly thing. If he were to do what I do -- not watch TV or listen to talk radio -- then perhaps his poor life would be a bit more peaceful.

At one level, I can agree with him. I am not enamored with Glenn Beck's antics, I don't listen to Limbaugh, am sick of the "Ground Zero Mosque" nonsense, and I don't believe that President Obama is a closet (or even open) Muslim, nor am I on a grand search for his birth certificate. Furthermore, I don't believe that Mexicans and Central Americans slipping into our border states is a "threat to national security," and I fear that conservatives are going to be pushing the dreaded "Your papers, please," regime upon us -- something that Democrats ultimately would embrace too, given that it would give them more power over those dreaded Republicans traveling about the country.

I am watching more and more Republicans making these things their central talking points, which is why I stay away from party politics. However, in reading Krugman's list of bogeymen, I think that he is also being his usual dishonest self. We read:

...powerful forces are promoting and exploiting this rage. Jane Mayer’s new article in The New Yorker about the superrich Koch brothers and their war against Mr. Obama has generated much-justified attention, but as Ms. Mayer herself points out, only the scale of their effort is new: billionaires like Richard Mellon Scaife waged a similar war against Bill Clinton.

Since I don't receive money from any of these folks nor work for their organizations (although I have published some articles in Cato's magazine, Regulation), I'm not beholden to any of them. But, for all of the hoopla about those dreaded rich people funding things Krugman doesn't like, let us not forget that Krugman and the Democrats have their own billionaire benefactors, led by George Soros.

Yes, if you look at huge numbers of organizations -- including those organizations that Mayer used to gain her "facts" against the dreaded "Kochtopus" -- you will find that they are funded by...Soros. In fact, a number of organizations that Krugman likes to use as his own fact gatherers are funded by Soros and his Open Society Institute. Furthermore, we often see the NY Times editorial page using Soros-funded outfits as their sources.

However, I don't ever recall Krugman mentioning the OSI in any of his columns or blogs, yet Soros is far wealthier and more active than even the Koch brothers. For that matter, Soros was every bit as active against George W. Bush's presidency as was the right against Bill Clinton when he was in the White House.

One does not have to like any of this to recognize what is going on. As the executive branch gets more powerful -- and more reckless (which is what "Progressives" like Krugman want, to be frank) -- the stakes get higher. More and more, it is the executive branch and its regulatory agencies calling the shots, and when that happens, huge amounts of wealth are transferred without a single vote from Congress.

Yet, this kind of unaccountable government, with its symbiotic ties to "private" organizations and "think tanks" funded by billionaires, is precisely the very dream of "Progressivism," and Krugman is squarely in that mix. So, given that Soros began his OSI antics in 1979 -- long before the Koch brothers were funding groups on the Right -- I would say that this process first started on the Left.

But to read Krugman, we are supposed to believe that these poor Democrats are poor little babes in the woods, cowering before the Billionaire-Funded Republican Attack Machine. Give me a break, people. This is politics on all sides, and it is ugly and destructive, and Paul Krugman is an integral part of the ugliness.

Goldstein Halts the Recovery!!

Paul Krugman is correct: we are NOT in a recovery. In fact, the rock is rolling quickly down the hill as we are about to have a downturn -- in a downturn.

Are policy makers in "denial," as Krugman claims? Hardly. Granted, Washington is booming, just as it did from 1933 to 1946 when government became firmly entrenched in the lives of everyone else and, well, someone had to be paid in order to carry out the "entrenching." No doubt, these people are enjoying good times and even if the rest of the country suffers, those tied to the federal government even are enjoying increased incomes. Life is good, at least in DC.

As usual, Krugman trots out the usual canards for this obvious downturn, including (1) the original "stimulus" was not large enough, and (2) Goldstein The Republican Party is blocking new spending. Let us look at both arguments, which are predicated with the nonsense that Goldstein is to blame. Krugman writes:

In the case of the Obama administration, officials seem loath to admit that the original stimulus was too small. True, it was enough to limit the depth of the slump — a recent analysis by the Congressional Budget Office says unemployment would probably be well into double digits now without the stimulus — but it wasn’t big enough to bring unemployment down significantly.

Now, it’s arguable that even in early 2009, when President Obama was at the peak of his popularity, he couldn’t have gotten a bigger plan through the Senate. And he certainly couldn’t pass a supplemental stimulus now. So officials could, with considerable justification, place the onus for the non-recovery on Republican obstructionism. But they’ve chosen, instead, to draw smiley faces on a grim picture, convincing nobody. And the likely result in November — big gains for the obstructionists — will paralyze policy for years to come.

Let us remember that in 2009, Republicans were in NO position to engage in any "obstructionism." The Senate had a filibuster-proof majority and Nancy Pelosi firmly controlled the House. Obama had come in as a combination of Superman-Messiah, and he was in a position to do whatever he wanted, Republicans be damned.

Yet, once again, Krugman chooses to claim that the government did not take on enough debt and fund enough projects (that somehow would magically have carried us onto a wave of prosperity and four-percent unemployment) to end the recession all because a few Republicans were making noise about spending. This is nonsense, pure nonsense.

Furthermore, Krugman NEVER has laid out the causal chain to explain just how taking on a few hundred billions more in government debt would have placed our economy in the pink. He likes to say that the economy would have gained more "traction," but I would ask just what he means by that. An economy is not a perpetual motion machine, and the idea that throwing in some more dollars would have given the economy enough push to sustain itself lacks an explanation device. Instead, we are supposed to just believe it.

We also see the Silvio Gesell side of Krugman when he urges the Fed to ramp up the inflation in order to "encourage" spending. Krugman writes:

The Fed has a number of options. It can buy more long-term and private debt; it can push down long-term interest rates by announcing its intention to keep short-term rates low; it can raise its medium-term target for inflation, making it less attractive for businesses to simply sit on their cash. Nobody can be sure how well these measures would work, but it’s better to try something that might not work than to make excuses while workers suffer.

Here is the problem: businesses are not just sitting "on their cash" because it makes their bottoms feel good. They have no confidence about the future, and the anti-business rhetoric that comes not only out of the White House, but also from Congress and the media is not exactly going to give business owners and investors more confidence.

So, Krugman resorts to the "trick" of rapidly depleting the value of money in order to encourage spending. However, the problem is that businesses only are engaging in short-term investments when, in fact, we need to see long-term movement in order for a recovery to begin. Unfortunately, that is not possible in this political environment, and instead of recognizing that fact, Krugman calls for financial trickery that, in essence, would be a de facto confiscation of money from those who currently are saving.

None of this trickery and coercion will produce a strong economy. Like all good Keynesians, Krugman is worried only about the shortest-term situation, but if the government continues to follow this current path of financial folly (and even try to make Krugman happy), we won't have to worry about the long run because we really will be dead.

Are We Really Suffering from a Paradox of Thrift? Two Critics of Keynes (and Krugman)

In a blog post today, Paul Krugman claims that the U.S. economy is suffering from the "Paradox of Thrift," and we cannot hope to have a recovery until people stop saving and start spending. It is another way of saying that what might be rational for an individual is irrational for the entire economy.

Krugman writes:

In normal times, we believe that more saving, private or public, leads to more investment, because it frees up funds. But for that story to work, you have to have some channel through which higher savings increase the incentive to invest. And the way it works in practice, in good times, is that higher savings allow the Fed to cut interest rates, making capital cheaper, and hence on to investment.

But right now we’re up against the zero lower bound — yes, I’ll get the usual complaints about how long-term rates aren’t zero, but the Fed doesn’t have direct control over those rates — so this normal channel doesn’t work.

And what that means is that if people — or the government — try to save more, they only end up depressing the economy. And the weaker economy leads to lower, not higher investment. And this in turn means that attempts to save more don’t help our future prospects. On the contrary, they reduce the economy’s future growth.

In answering this latest missive, I turn to Robert Murphy (again) and Clifford Thies, both of whom are excellent economists and good writers to boot. Murphy writes:

...it will be useful to spell out exactly what happens in a market economy when consumers decide to save more of their income. The first thing to realize is that people do not decide to "spend" or not; rather, they decide whether to spend in the present versus in the future. For example, imagine that thousands of couples in a large city one day decide to skip their weekly restaurant outings in order to save up for a summer cruise. At first, it seems that this would hurt the economy. After all, local restaurants see their sales drop, and so they buy fewer items from their suppliers and lay off some workers. The suppliers and workers in turn have less income to spend, and so sales are hurt elsewhere too.

However, so long as the entrepreneurs involved in the cruise industry anticipate the eventual increase in demand for their services, they will exactly offset the above effects when they hire more workers and other items in preparation for the busy summer months. The new savings (which were previously spent on restaurants) drives down interest rates, perhaps allowing the cruise operators to borrow money and pay for an additional liner. Thus the decision to save more doesn't reduce total income or employment, once everyone adjusts to the new spending patterns. It is really no different from a scenario where thousands of people become health conscious and decide to spend their money on vegetables rather than fast food.

Now it's true, in the present circumstances of our financial panic, consumer spending has fallen because of fear, not because of a fundamental shift in the desired timing of consumption. But still, the point remains that people cut back on present consumption in order to be able to "spend money" in the future. The difference between our present situation and the cruise-liner story above is just that people right now aren't sure exactly when, and on what, they will be spending this extra savings.

Even so, the best solution is still for the government to mind its own business and let people work things out voluntarily. The uncertainty isn't phony; people really don't know what's going to happen next month. In this situation, it is entirely appropriate for humans to stop cranking out so many iPods and designer clothes, allowing a temporary build-up of the resources that go into the production of these nonessential items.

What is especially ironic in all of this is that even on his own terms, Krugman's recommendations make no sense. That is to say, even if we put aside all of the real, physical readjustments that must occur to revamp the economy in light of the unsustainable housing boom, it would still be the case that the government ought to do nothing. If the present crisis really were largely the result of irrational panic and hoarding then government activism would only make people more uncertain about the future. In particular, no one has any idea what Paulson & Bernanke will announce next regarding financial companies and mortgages. If we're trying to reassure consumers that everything is normal, why would we resurrect tools from the New Deal playbook?

Thies adds:

The paradox of thrift simply took Keynesian economics to its illogical conclusion. If governments should increase their spending during recessions, why should not households? If there were no principles of "sound finance" for public finance, from where would such principles come for family finance? Eat, drink and be merry, for in the long-run we are all dead.

The Keynesian revolution was about overthrowing the doctrines of balanced budgets and sound money, free international trade, and laissez-faire economics, and adopting instead the doctrines of deficit spending, inflation, and the managed economy. Adherence to the tried and true was to be replaced by trust in the new, self-confident generation of macroeconomists, who were not to be constrained by old-fashioned precepts, but who were to be free to do as they knew best.

Both articles are worth reading in their entirety. The point is that in a Keynesian world of homogeneous factors and "spending" (as opposed to purposeful action by consumers and producers), the "Paradox of Thrift" makes perfect sense. But, if capital and other factors are heterogeneous and the structure of production is complex and must fit the economic patterns set by consumers and producers, then the "Paradox" is not a paradox at all, but rather just another economic fallacy.

Krugman's Willful Distortion of the Austrian Theory of the Business Cycle

Once again, Paul Krugman creates a caricature of the Austrian Theory of the Business Cycle, calling it the "Hangover Theory," and then continues to misrepresent what it says and what its adherents say in their analysis of the boom and bust cycles. His recent blog post continues this dishonesty.

Before dealing directly with his accusations about the ATBC, I will note that both David Gordon and Robert Murphy do credible jobs in debunking Krugman's misrepresentations. I will add briefly to what they already have written.

Krugman declares:

...one more thing struck me: at least some members of the FOMC have bought into the hangover theory — the modern version of liquidationism in which mass unemployment is somehow necessary in the aftermath of a burst bubble....

This is an important point, because while Austrians are adamant that malinvested resources and capital that were created or advanced during the boom are NOT sustainable during the crisis and the subsequent bust. (Krugman, it should be noted, insists on saying that Austrians, such as Nobel-Prize Laureate F.A. Hayek, push an "overinvestment" theory when, in fact, the Austrians have dealt with that very term and have said it is not an appropriate one in the ATBC. In other words, even though Austrians address that very word, Krugman still pretends as though they have not done so.)

Furthermore, Austrians, unlike Keynesians, who believe that factors of production generally are homogeneous and are equally affected by new injections of spending, look carefully at the issues of the factors, for what is where the result of the downturn are concentrated. Furthermore, NO Austrian calls for some sort of "general liquidation" of the economy. Instead, Austrians hold that those investments in capital and other factors that no longer are sustainable should be liquidated or transferred to other uses for which there clearly is consumer demand. This is a far cry from Krugman's point.

I know of NO Austrian who claims that "mass unemployment is somehow necessary in the aftermath of a burst bubble," none. Austrians say that if there is mass unemployment (and especially if that unemployment is chronic) we can look to government intervention as the reason. Rothbard, in America's Great Depression, writes:

If government wishes to see a depression ended as quickly as possible, and the economy returned to normal prosperity, what course should it adopt? The first and clearest injunction is: don't interfere with the market's adjustment process. The more the government intervenes to delay the market's adjustment, the longer and more grueling the depression will be, and the more difficult will be the road to complete recovery. Government hampering aggravates and perpetuates the depression. Yet, government depression policy has always (and would have even more today) aggravated the very evils it has loudly tried to cure. If, in fact, we list logically the various ways that government could hamper market adjustment, we will find that we have precisely listed the favorite "anti-depression" arsenal of government policy. (Emphasis mine)

Rothbard then explains the policies that are most harmful:

1. Prevent or delay liquidation. Lend money to shaky businesses, call on banks to lend further, etc.

2. Inflate further. Further inflation blocks the necessary fall in prices, thus delaying adjustment and prolonging depression. Further credit expansion creates more malinvestments, which, in their turn, will have to be liquidated in some later depression. A government "easy money" policy prevents the market's return to the necessary higher interest rates.

3. Keep wage rates up. Artificial maintenance of wage rates in a depression insures permanent mass unemployment. Furthermore, in a deflation, when prices are falling, keeping the same rate of money wages means that real wage rates have been pushed higher. In the face of falling business demand, this greatly aggravates the unemployment problem.

4. Keep prices up. Keeping prices above their free-market levels will create unsalable surpluses, and prevent a return to prosperity.

5. Stimulate consumption and discourage saving. We have seen that more saving and less consumption would speed recovery; more consumption and less saving aggravate the shortage of saved-capital even further. Government can encourage consumption by "food stamp plans" and relief payments. It can discourage savings and investment by higher taxes, particularly on the wealthy and on corporations and estates. As a matter of fact, any increase of taxes and government spending will discourage saving and investment and stimulate consumption, since government spending is all consumption. Some of the private funds would have been saved and invested; all of the government funds are consumed.[15] Any increase in the relative size of government in the economy, therefore, shifts the societal consumption-investment ratio in favor of consumption, and prolongs the depression.

6. Subsidize unemployment. Any subsidization of unemployment (via unemployment "insurance," relief, etc.) will prolong unemployment indefinitely, and delay the shift of workers to the fields where jobs are available.

Interestingly, ALL of these things listed above are precisely what Krugman claims will END the downturn. Yet, we have seen government do these things in spades, yet the economy continues to tank. Rothbard clearly notes that mass unemployment, and especially mass unemployment over a long period of time, is NOT necessary, but generally occurs because of government intervention, not in spite of it.

So what does Krugman do? He claims that the REAL problem is that government did not spend enough, regulate enough, tax enough, jack up wages past marginal productivity levels, and subsidize enough unproductive industries (i.e. "green" jobs). And when the economy continues to tank, he creates a caricature of the only business cycle theory that accurately explains what is happening, and then builds a series of falsehoods from there. Just another day at the office for Paul Krugman.

It Doesn't Get Much Worse Than This

[Note]: I am departing from my view of Paul Krugman's analysis in particular and Keynesian analysis in general to post about the state of government "justice" in this country. What I find is that most people take one side or the other according to what has happened to them personally.

I spent all spring blogging on the Tonya Craft trial in North Georgia and witnesses one legal disgrace after another, from perjury to outright judicial and prosecutorial misconduct that was up-front, in-your-face, and perfectly accepted by the "oversight" authorities of Georgia. Having written on the federal "criminal justice" system for the past decade, I have lost any hope that "justice" can be reformed in this country. Furthermore, I believe that what we are seeing is the logical extension of the Progressive Movement that began in the late 19th Century and continues through today.

Progressivism was about creating a "reformist" government that would be administrative in nature and would depend upon "experts" and others who were "superior" in intelligence and virtue to others. It is reminiscent of Nietzsche's belief that one could create the "Ubermensch," and we know how that turned out in Germany. Progressives were scornful of the need for Constitutional checks and balances that, in the view of Woodrow Wilson (perhaps the most virulent racist ever to occupy the White House and the man who brought Jim Crow policies to the federal government), kept the federal government from being able to do what would be "good" for the people.

Instead, Progressives believed that the state should be run by people like them, people who were more intelligent than others, and who could move quickly and decisively, unlike the corrupt legislatures and the various markets. So, I include my post from my other blog today. In one sense, it is a repudiation of Krugman's "Progressivism" and his belief that a government composed of people like him would run the world perfectly. (No, I don't believe that a government of "libertarians" would "run the world" particularly well. There is no Utopia, libertarian or otherwise.) [End Note]

During the erstwhile Duke Lacrosse Case, Joe Neff from the Raleigh News & Observer helped carry the day. In the early days of the affair, the N&O drove the coverage in a dishonest, smarmy way, with one of its resident leftists, Samiha Khanna, writing most of the copy.

However, the adults soon took over and Joe Neff from late spring until the end of the case compiled an extremely impressive list of articles that ultimately exposed the case for the sham it was. Since then, Neff has written a series of article on the scandal that has engulfed the North Carolina "justice" system involving the State Bureau of Investigation (SBI) crime lab, a place where "forensics" often was a sham and where employees tricked the results in order to help prosecutors gain convictions.

If you wish to get a good sense of what happened, read the series in the N&O, as well as Radley Balko's excellent Reason crime column. Balko writes:

A stunning accompanying investigation by the Raleigh News & Observer found that though the crime lab’s results were presented to juries with the authoritativeness of science, laboratory procedures were geared toward just one outcome: putting as many people in prison as possible. The paper discovered an astonishingly frank 2007 training manual for analysts, still in use as of last week, instructing researchers that “A good reputation and calm demeanor also enhances an analyst's conviction rate.” Defense attorneys, the manual warned, often “put words into the analyst's mouth to try and raise inaccuracies.” The guide also instructs analysts to beware of “defense whores”—analysts hired by defense attorneys to challenge their testimony.

Indeed, it was that same mentality shown by prosecutors in their "win at all costs" (the main cost being the truth) in the Tonya Craft trial that led Chris Arnt and Len Gregor to tell a jury that highly-respected defense witnesses Dr. Nancy Aldridge, Dr. Nancy Fajman, Dr. Ann Hazzard, and Dr. William Bernet were nothing but "whores of the court" and people who "lied for pay." At the same time, "Alberto-Facebook" and "The Man" expected people to believe that the poorly-trained and educated, giggling, eye-rolling, sighing, and shoulder-shrugging charlatans at the local Children's Advocacy Center were crackerjack experts.

Why do these things occur? They occur because the legal system protects the criminals within it. Suborning perjury, tampering with evidence, forging documents, and lying in official documents all are crimes, yet no matter how egregious the violations of the law, no prosecutor (and usually no cop) ever is in danger of facing the bar of justice.

In short, prosecutors run the system, and judges (most of whom are former prosecutors) go along with the crimes, and then make rulings that protect all of the wrongdoers from punishment. As a woman at the Georgia State Bar told me, all of these things are just examples of prosecutors "doing their jobs," and she approved of everything I just have listed.

As I have read through the years of example after example of prosecutorial misconduct, I have come to realize that there really is no more hope for the system. The defense bar has been emasculated, and innocent people are convicted each day as prosecutors run about like wild animals. Indeed, if you want to find a group of criminals in the LMJC, don't go to the local jails; just go to Buzz Franklin's office.

While North Carolina claims to be trying to "reform" the system, one cannot "reform" anything when the prosecutors are in charge. The only way there can be any meaningful reform in American criminal justice is to end immunity for prosecutors, police, and judges. If the rest of us have no immunity, and we continue to do our jobs, then why should this class of people be protected from having to obey the law?

As I go through the various links demonstrating misconduct on behalf of prosecutors around the country, I come to realize that nothing is going to change. We see a charlatan like "dentist" Michael West testifying for prosecutors and helping to win convictions, even though all prosecutors who use West know that he is a fraud. Radley Balko explains:

I’ve written extensively on West over the last few years, most recently in a feature about the 1992 Louisiana murder trial and eventual conviction of Jimmie Duncan. In that case, I obtained a video showing West repeatedly jamming Duncan’s dental mold into the body of the young girl Duncan was accused of killing. Forensic specialists say that what West does in the video isn't a remotely acceptable method of analysis, and may amount to criminal evidence tampering. Duncan is on death row in Louisiana, based in part on West's analysis.

The whole thing is so outrageous that one does not wonder why West is not behind bars, but even today, prosecutors in Mississippi seek out the services of this lying charlatan and the disgraced "forensic pathologist" Steven Hayne. (I am sure that both men would be welcomed with open arms in the LMJC both by prosecutors and judges. Liars and charlatans feel very, very comfortable around each other. Maybe they can have a group hug.)

In a country where people actually cared about justice, men like Arnt, Gregor, West, Outhouse, and many others would be looking for honest work or would be sitting in the crowbar motel. Instead, they draw large salaries on the public till, lie in court, present false evidence, send innocent people to prison, and are touted in the local press as "heroes."

An Open Letter to Paul Krugman

Dear Professor Krugman,

In your column today on extending the lower tax rates that now exist on the highest levels of income, you justify your point on two levels:

1. The government needs more revenue and the state needs to take as much property as possible from private owners;
2. Wealthy people are unlikely to spend every penny of their income immediately, so it is important for the Political Classes to get their hands on those funds, as governments will spend freely in the short run.

Thus, from what I can tell, you believe that it is the Very Duty of Everyone to spend everything quickly, and since you are advocating such beliefs publicly, I would like to challenge you to practice what you preach. Here are some suggestions:

• Impose your own tax rates on yourself: If these irresponsible Democrats and Republicans don't jack up the tax rates, i.e. Herbert Hoover in 1932, then raise your own personal rate, taxing yourself at 39.6 percent, and then sending that money to Washington. Your example will inspire others to do the same, I'm sure. If you complain that to do so would require you to hire another accountant, that would be good, since you would be providing a job and we need jobs, you know;
• Spend all of your current income: I'm not privy to what you make, but I suspect that your Princeton salary does not even pay all of your taxes, given that you probably make well over a million dollars a year and maybe more. Now, if you are to be consistent, then you need to spend everything you get when you get it, the sooner the better. Since you are not willing to do the Right Thing and turn your entire income over to the government, the next best thing you can do is to be on a permanent spending spree, with any "savings" falling into the next category;
• Eliminate all of your "investments" except for any portfolio of government bonds: Because governments are up-front spenders, you don't have to worry about where your government bond money is going, for it will be spent quickly (perhaps not quickly enough for True Believing Keynesians, but at least more quickly than private individuals might be spending). Moreover, I would recommend that you eliminate ALL investment in stock, corporate bonds, or anything else that would be deemed "private," since government spending not only is economically superior to private spending, but also morally superior. You can feel good about yourself while still having an "investment" portfolio;
• Don't buy gold, silver, or other commodities: Because of your own personal loathing for gold or any other hedge against inflation (because our immediate "threat" is deflation), you really should not purchase anything that would smack of a "gold standard" or any other representation of money. (This includes any "collectibles" such as gold and silver coins. No cheating, please!) I mean, if you really and truly believe that paper money is morally and economically superior to those "barbarous" relics like gold and silver, then you need to be willing to practice what you are preaching.

I realize that you might be objecting by now. After all, why should you be the fall guy? However, as I read your words, you are claiming that there not only is an economic problem with paying less taxes, saving money, and abstaining from some personal spending in order to save for the future, but also a moral problem, then I would hate for you to be forced to act both unprofessionally AND engage in immoral behavior.

Here is your opportunity to help Save The World! Yes, you can set an example for the rest of us to follow. I mean, if you announce this new Paul Krugman Personal Spending Strategy, what is next? Will Bill Gates sell all of his Microsoft stock and buy government bonds and spend the rest? Who knows?

This hardly is a "modest proposal." All I am doing is recommending that you be consistent with what you are writing, and I know that you are anxious to set that personal example so that everyone else in your income category will be shamed for saving, investing, and refusing to spend every penny today.

Lew Rockwell on Keynesian "Inception"

One thing I like about Lew Rockwell is that he has an uncanny way of explaining things in ways that anyone (except, perhaps, a Ph.D. economist) can understand. There is no wonkishness, no equivocating, and certainly no appeal to the God of the State.

His latest article, "The State's 'Inception' Fails," is an excellent case in point, and I urge readers to find out for yourselves why I believe this commentary is on the mark. Lew writes:

Two years ago, the economy was seriously dragged down amidst an amazing banking crisis that spread throughout the world. The illusion created by loose credit – that housing could go up in price forever and we could enjoy permanent prosperity due to monetary expansion – was shattered by events. Reality had dawned. We found ourselves in the midst of an economic depression.

At that point in policy, we were at a fork in the road. The wise direction was to let the depression happen. Let the bad investments wash out of the system. Let housing prices fall. Let banks go broke. Let wages fall and permit the market to reallocate all resources from bubble projects to projects that make economic sense. That was the direction chosen by the Reagan administration in 1981, and by the Harding administration in 1921. The result in both cases was a short downturn followed by recovery.

The Bush administration, in a policy later followed by the Obama administration, instead attempted a tactic of dream incubation as portrayed in the recent film Inception. The idea was to inject artificial stimulus into the macroeconomic environment. There were random spending programs, massive buyouts of bad debt using phony money, gargantuan tax tricks, incentive programs for throwing good money after bad, and hiring strategies to weave illusions about how all is well.

His reference to "Inception" is quite accurate, and his explanation clearly explains his analogy:

In the movie, the goal of the dream incubation was to implant an idea into an unsuspecting subject’s head that would cause him to act differently than he otherwise would have. In the real life version of inception, the state tried to implant in all our heads the idea that there was no depression, no economic collapse, no housing crisis, no push back on real estate prices, and really no serious problem at all that the state cannot fix provided we are obedient subjects and do what we are told.

In the movie version, the attempted inception is on a time clock. The dream weavers can only keep the subject in a state of slumber so long. In the real life version, things are much messier. The headlines have spoken about the impending recovery every day for all this time, and yet the evidence has never really been there. All the stimulus really did was forestall events a bit longer, but it hasn’t prevented them.

Now, with the stock markets melting and the near-universal consensus that we are back in recession, everyone is awake. It is pretty clear that the inception did not take. The unemployment data look absolutely terrible. As the Wall Street Journal points out, only 59% of men age 20 and over have a full-time job (in the 1950s, that figure was 85%). Only 61% of all people over 20 have any kind of job now.

Unfortunately, the "educated" people like Paul Krugman and Ben Bernanke, while disagreeing on some of the details of what government policies should be, nonetheless share the same general view: Only government spending can bring back the economy through artificial "stimulus." Unfortunately, these people have misunderstood what an economy really is and how it works. Like other academic economists, they see an economy through mathematical equations in which there really is no purposeful human action.

Instead, the automons produce goods on one end and then "buy back" what they have produced, which makes no sense from the larger point of view. It creates a view of people who simply go through the same motions day after day, and if they do it enough times, the economy gains what Krugman likes to call "traction," which then permits this process to go on somewhat rhythmically. If the individual does not spend in the patterns that the academic economists declare are necessary for this "traction" to continue, then the consumer somehow is "falling down on the job."

With the "Ruling Class" economists and politicians, there always is someone else to blame. The "stimulus" was too small; consumers are greedily saving their money instead of dishing it out at the stores and in auto showrooms; businesses refuse to engage in long-term spending and investment; banks are sitting on reserves; or Republicans (though is a huge minority in Congress) are keeping President Obama from carrying out his proper duties just as Goldstein constantly thwarted the aims of Big Brother.

Unfortunately, this administration -- like the one that preceded it -- is refusing to face reality and continues to believe in its "inceptionist" tactics. However, an economy is not an imaginary construct; it is a real entity and its success depends upon the ability of entrepreneurs and producers to make those goods that people need, something that always will escape the understanding of the supposedly "best and brightest" among us.

Once Upon a Time When Krugman Was an Economist

Someone sent me this link of a Paul Krugman article from 13 years ago, "In Praise of Cheap Labor," and I find it absolutely fascinating. I doubt seriously that Robin Wells would let her husband write something like this today, but nonetheless there is real economic analysis in this piece.

Krugman begins by describing the appalling conditions at the municipal dump in Manilla (and it reminds me of what I saw at the dump in Guatemala City 10 years ago when we adopted our now-11-year-old daughter), and then makes the following statement:

The occasion was an op-ed piece I had written for the New York Times, in which I had pointed out that while wages and working conditions in the new export industries of the Third World are appalling, they are a big improvement over the "previous, less visible rural poverty."

Of course, this admission was followed by a spate of hate mail, but Krugman goes on, applying solid logic and empirics to his argument:

...moral outrage is common among the opponents of globalization--of the transfer of technology and capital from high-wage to low-wage countries and the resulting growth of labor-intensive Third World exports. These critics take it as a given that anyone with a good word for this process is naive or corrupt and, in either case, a de facto agent of global capital in its oppression of workers here and abroad.

But matters are not that simple, and the moral lines are not that clear. In fact, let me make a counter-accusation: The lofty moral tone of the opponents of globalization is possible only because they have chosen not to think their position through. While fat-cat capitalists might benefit from globalization, the biggest beneficiaries are, yes, Third World workers.

After all, global poverty is not something recently invented for the benefit of multinational corporations. Let's turn the clock back to the Third World as it was only two decades ago (and still is, in many countries). In those days, although the rapid economic growth of a handful of small Asian nations had started to attract attention, developing countries like Indonesia or Bangladesh were still mainly what they had always been: exporters of raw materials, importers of manufactures. Inefficient manufacturing sectors served their domestic markets, sheltered behind import quotas, but generated few jobs. Meanwhile, population pressure pushed desperate peasants into cultivating ever more marginal land or seeking a livelihood in any way possible--such as homesteading on a mountain of garbage.

He continues:

...wherever the new export industries have grown, there has been measurable improvement in the lives of ordinary people. Partly this is because a growing industry must offer a somewhat higher wage than workers could get elsewhere in order to get them to move. More importantly, however, the growth of manufacturing--and of the penumbra of other jobs that the new export sector creates--has a ripple effect throughout the economy. The pressure on the land becomes less intense, so rural wages rise; the pool of unemployed urban dwellers always anxious for work shrinks, so factories start to compete with each other for workers, and urban wages also begin to rise. Where the process has gone on long enough--say, in South Korea or Taiwan--average wages start to approach what an American teen-ager can earn at McDonald's. And eventually people are no longer eager to live on garbage dumps. (Smokey Mountain persisted because the Philippines, until recently, did not share in the export-led growth of its neighbors. Jobs that pay better than scavenging are still few and far between.)

I agree with Krugman that conditions in Third World countries where these producers are permitted to open factories are improving. (Guatemala City certainly was a good example, and what I found there was that even poor people were earning more than did a doctor in Cuba at the time, and the shops and markets were overflowing with goods.)

However, to some people, this is not good enough. Krugman's explanation of the opposition to trade around the globe is insightful:

Why, then, the outrage of my correspondents? Why does the image of an Indonesian sewing sneakers for 60 cents an hour evoke so much more feeling than the image of another Indonesian earning the equivalent of 30 cents an hour trying to feed his family on a tiny plot of land--or of a Filipino scavenging on a garbage heap?

The main answer, I think, is a sort of fastidiousness. Unlike the starving subsistence farmer, the women and children in the sneaker factory are working at slave wages for our benefit--and this makes us feel unclean. And so there are self-righteous demands for international labor standards: We should not, the opponents of globalization insist, be willing to buy those sneakers and shirts unless the people who make them receive decent wages and work under decent conditions.

However, as Krugman note, this is a very shortsighted view and it does harm to the people who these activists supposedly want to help:

This sounds only fair--but is it? Let's think through the consequences.

First of all, even if we could assure the workers in Third World export industries of higher wages and better working conditions, this would do nothing for the peasants, day laborers, scavengers, and so on who make up the bulk of these countries' populations. At best, forcing developing countries to adhere to our labor standards would create a privileged labor aristocracy, leaving the poor majority no better off.

And it might not even do that. The advantages of established First World industries are still formidable. The only reason developing countries have been able to compete with those industries is their ability to offer employers cheap labor. Deny them that ability, and you might well deny them the prospect of continuing industrial growth, even reverse the growth that has been achieved. And since export-oriented growth, for all its injustice, has been a huge boon for the workers in those nations, anything that curtails that growth is very much against their interests. A policy of good jobs in principle, but no jobs in practice, might assuage our consciences, but it is no favor to its alleged beneficiaries.

You may say that the wretched of the earth should not be forced to serve as hewers of wood, drawers of water, and sewers of sneakers for the affluent. But what is the alternative? Should they be helped with foreign aid? Maybe--although the historical record of regions like southern Italy suggests that such aid has a tendency to promote perpetual dependence. Anyway, there isn't the slightest prospect of significant aid materializing. Should their own governments provide more social justice? Of course--but they won't, or at least not because we tell them to. And as long as you have no realistic alternative to industrialization based on low wages, to oppose it means that you are willing to deny desperately poor people the best chance they have of progress for the sake of what amounts to an aesthetic standard--that is, the fact that you don't like the idea of workers being paid a pittance to supply rich Westerners with fashion items.

In short, my correspondents are not entitled to their self-righteousness. They have not thought the matter through. And when the hopes of hundreds of millions are at stake, thinking things through is not just good intellectual practice. It is a moral duty.

I'm not sure that Krugman could write such prose today, and certainly not for the New York Times. Furthermore, Krugman actually refers to things like factors of production, something that Keynesians routinely ignore in their analysis, except to surmise that factors generally are homogeneous.

So, while I oppose most of what Krugman writes today, I fully agree with his assessment in this article. If we care about poor people, we will not yank away job opportunities because some leftist activist believes that unless a Third World citizen will refuse to work for a wage less than what the activists deem "just," that poor person can go live in a garbage heap. Out of sight, out of mind.

Is China the New "Predator"?

From about 1980 until the mid-1990s, Japan was the Great Peril to the United States, at least from what the politicians, the unions, and their supporters were telling us. Today, the Great Bogeyman is China which, according to Paul Krugman, is engaging in "predatory trade policy."

Why does he say predatory? Krugman explains:

Right now, China is following a policy that is, in effect, one of imposing high tariffs and providing large export subsidies — because that’s what an undervalued currency does. That should be a violation of trade rules; it might in fact be a violation, but the language of the law is vague on the subject. But leave aside the fine print of the law for a moment: what China is doing amounts to a seriously predatory trade policy, the kind of thing that is supposed to be prevented by the threat of sanctions.

I have no intention of debating Krugman on what China might be doing, and that would include "undervaluing" its currency. It seems to me that China is doing what the old Mercantilists advocated hundreds of years ago.

Furthermore, I don't doubt that producers around the world resent the Chinese trade strategy. Nonetheless, from an economic point of view, China is not making itself wealthier by pursuing these policies. If there are victims, they are the Chinese people themselves.

It is one thing to say that such a policy can be disruptive to world trade and certainly make life more difficult for manufacturers in other countries, but it is quite another to claim that the Chinese policies will make China better off any more than export subsidies given by the U.S. Government are good for the U.S. economy. In fact, the actual effect is to make U.S. consumers better off, but at the expense of Chinese workers.

Peter Schiff, in this speech given in 2009, laid out this point, noting that right now, the Chinese are working, but we Americans get the goods, paying for them with green pieces of paper. Obviously, this is not a relationship that will continue, and sooner or later, as Schiff notes, the Chinese are going to be able to "keep their stuff."

When I think of predatory actions, I think of one group of people taking something from others, and not paying for it. Think of the U.S. invasion of oil-rich Iraq or the police in this country committing literal highway robbery in the name of "asset forfeiture." Now, THOSE actions are predatory in every sense of the word.

However, China is not invading our country (sending goods here that we purchase voluntarily is NOT an "invasion"), nor is it engaging in anything close to acts of war, yet Krugman calls for economic sanctions against China. That is ridiculous. While I don't support what the Chinese Government is doing, I believe that its Mercantialism actually is more harmful to China than it is to other countries.

About that Social Security "Trust Fund"

In his column today, Paul Krugman defends Social Security and (of course) demonizes anyone who might raise any objections. As he writes, people who raise questions (he claims that would be "Conservatives"): "...hate Social Security for ideological reasons: its success undermines their claim that government is always the problem, never the solution."

Now, my sense is that we are dealing with a non sequitur, but Krugman uses those a lot. However, I'm not going to debate the merits of SS today, but rather deal with one statement that Krugman has made regarding the "trust fund." He writes:

About that math: Legally, Social Security has its own, dedicated funding, via the payroll tax (“FICA” on your pay statement). But it’s also part of the broader federal budget. This dual accounting means that there are two ways Social Security could face financial problems. First, that dedicated funding could prove inadequate, forcing the program either to cut benefits or to turn to Congress for aid. Second, Social Security costs could prove unsupportable for the federal budget as a whole.

But neither of these potential problems is a clear and present danger. Social Security has been running surpluses for the last quarter-century, banking those surpluses in a special account, the so-called trust fund. The program won’t have to turn to Congress for help or cut benefits until or unless the trust fund is exhausted, which the program’s actuaries don’t expect to happen until 2037 — and there’s a significant chance, according to their estimates, that that day will never come. (Emphasis mine)

Here is the problem: the "special account" is nothing more than short-term government paper that matures every six months. At the present time, most government debt is paid via...more government debt -- plus interest. Now, this looks nice, officially-speaking, but the problem is that the mechanism for turning this bond-laden "trust fund" into cash is for the government to sell the bonds.

Now, if I know Krugman, he would say (as would James K. Galbraith) that this is no problem, because the Federal Reserve System can buy the bonds. (He has not said this, I know, but I suspect that would be in his arsenal of answers.) In other words, the ultimate "backing" for Social Security is a glorified and "sophisticated" mechanism of printing money.

So, I would not exactly call this a sound system of "investment." My sense is that Krugman is trying to score ideological points, not promote good finance.

What Can the Fed Do?

In his column today, Paul Krugman excoriates the Federal Reserve System, and especially Ben Bernanke, for "inventing reasons to dither in the face of mass unemployment." Why? Because the Fed is not creating enough inflation, which Krugman claims will give the economy "traction."

Krugman writes:

America’s current economic troubles aren’t exactly identical to those of Japan in 1999-2000: Japan was experiencing outright deflation, while we aren’t — yet. But inflation is well below the Fed’s target of around 2 percent, and it is continuing to slide. And Americans face a level of unemployment, and sheer human misery, far worse than anything Japan went through.

Yet the Fed is doing almost nothing to confront these troubles.

However, Krugman also suggests a "solution," and it is here that I think we need a discussion. He says:

What could the Fed be doing? Back when, Mr. Bernanke suggested, among other things, that the Bank of Japan could get traction by buying large quantities of “nonstandard” assets — that is, assets other than the short-term government debt central banks normally hold. The Fed actually put that idea into practice during the most acute phase of the financial crisis, acquiring, in particular, large amounts of mortgage-backed securities. However, it stopped those purchases in March.

Since then, the economic news has grown steadily worse. And earlier this week, the Fed changed course — but barely. It now says that it will reinvest the proceeds from maturing securities in long-term government bonds. That’s a trivial change, basically the least the Fed could get away with without facing a firestorm of criticism — and far short of the major asset-purchase program the Fed should be undertaking.

So, once again we see the post hoc ergo propter hoc fallacy at work. Why is the economy now in the tank? The Fed isn't buying enough assets, as though the economy was doing well in March.

Not surprisingly, Krugman blames those dastardly regional Fed chairmen for this plight, declaring:

What’s going on here? Has Mr. Bernanke been intellectually assimilated by the Fed Borg? I prefer to believe that he’s being political, unwilling to engage in open confrontation with other Fed officials — especially those regional Fed presidents who fear inflation, even with deflation the clear and present danger, and are evidently unmoved by the plight of the unemployed.

And in fairness to Mr. Bernanke, discord among senior officials also makes it difficult for policy to change expectations: it would be hard to credibly commit to higher inflation if this commitment were constantly being undercut by speeches out of the Richmond or Dallas Feds. In fact, I’d argue that loose talk by some Fed officials is already having a negative economic impact. But while Mr. Bernanke doesn’t have the authority to stop that loose talk, he could make it clear that it doesn’t represent overall Fed policy.

Yeah, its the rhetoric. If only we had all members of the Fed declaring that what this country needs is a good bout of inflation, then everything would be fine and the economy would be gaining "traction" toward recovery. However, there is a problem here, and it is NOT that President Obama waited until recently to fill 16 Fed slots, regardless of what Krugman claims.

No, the problem is that Krugman confuses the paper purchase of assets deemed worthless in the markets with the creation of real wealth. I have said before that Krugman really does confuse paper money with wealth, a fallacy that Adam Smith and others exploded more than two centuries ago, yet lives on in the hallowed halls of Ivy League institutions.

Like the Supply-Siders that claim that the real problem is that the government has not cut tax rates low enough (although that does help), Krugman's answer always is that there is not enough inflation. In Krugman's view, there really is no "real" economy; instead, it is a combination of paper and rhetoric, as though capital and other factors of production are simple putty to be molded in the hands of the "experts" in Washington.

The economy is not tanking because of any alleged "dithering" at the Fed. It is tanking because the government insists upon strangling those firms that still are healthy ("wicked profiteers") and propping up the politically-connected firms (i.e. Government Motors) or forcing taxpayers to ante up to pay for assets that cannot ever be profitable in a real economy (i.e. "Green Energy"). The Keynesian prescription - inflate, inflate, inflate - is what is intellectually and morally bankrupt, and as long as that mentality rules, we will have a moribund and depressed economy.

"Forgive Us Our Debts...."

One of the central working assumptions in Keynesian theory is the homogeneity of all assets. As economist Robert Higgs notes:

This way of compressing diverse, economy-wide transactions into single variables has the effect of suppressing recognition of the complex relationships and differences within each of the aggregates. Thus, in this framework, the effect of adding a million dollars of investment spending for teddy-bear inventories is the same as the effect of adding a million dollars of investment spending for digging a new copper mine. Likewise, the effect of adding a million dollars of consumption spending for movie tickets is the same as the effect of adding a million dollars of consumption spending for gasoline. Likewise, the effect of adding a million dollars of government spending for children’s inoculations against polio is the same as the effect of adding a million dollars of government spending for 7.62 mm ammunition. It does not take much thought to conceive of ways in which suppression of the differences within each of the aggregates might cause our thinking about the economy to go seriously awry.

In fact, “the economy” does not produce an undifferentiated mass we call “output.” Instead, the millions of producers who bring forth “aggregate supply” provide an almost infinite variety of specific goods and services that differ in countless ways. Moreover, an immense amount of what goes on in a market economy consists of dealings among producers who supply no “final” goods and services at all, but instead supply raw materials, components, intermediate products, and services to one another. Because these producers are connected in an intricate pattern of relations, which must assume certain proportions if the entire arrangement is to work effectively, critical consequences turn on what in particular gets produced, when, where, and how.

These extraordinarily complex micro-relationships are what we are really referring to when we speak of “the economy.” It is definitely not a single, simple process for producing a uniform, aggregate glop. (Emphasis mine)

I quote Prof. Higgs to answer Krugman's recent blog post on debt and GDP in which he points out that during the 1930s the debt/GDP ratio fell. In commenting on graphs he has in his post (which you can see on his link -- I'm not reproducing them here), he writes:

Debt actually fell as the economy slumped, through a combination of deleveraging and default. The ratio to GDP spiked only because GDP collapsed. Conversely, as the economy began to recover under the New Deal (before the big mistake of 1937), the debt ratio improved thanks to rising GDP, even though the nominal level of debt also rose.

What all this tells you is how important it is, in dealing with debt, to get the economy moving — and how devastating it is, even if you’re deeply frugal, if contraction and deflation rule.

The problem is that Krugman is operating on the assumption that private and government debt are homogeneous in nature when, in fact, they are not. Most private debt, and especially private debt of that era, is for capital formation and business expansion. Government debt (and especially the federal debt), on the other hand, mostly exists for present spending purposes and it not investment by any stretch of the imagination. (The one exception on the local and state levels is the issuance of capital bonds which are used for roads, bridges, and other physical infrastructure improvements. These bonds usually have pretty specific fees designed for repayment, as opposed to having a general obligation for taxpayers.)

In the Krugman-Keynesian view, however, there is only spending, and debt is useful to the economy ONLY in the fact that it permits more present spending, which supposedly is the grease that gives the economy "traction" and allows there to be future development. As Krugman has noted elsewhere, public debt might be rising, but it only is helping to replace the drop in private debt.

However, it is important to note that the mechanism for repaying private debt (which is undertaken for capital or business expansion) is the sale of goods and services in the future. The debt ultimately is repaid because real wealth is expanded, as opposed to the debt payments coming from the pockets of future taxpayers.

Krugman would argue that government borrowing today simply helps keep spending alive, and that will give the economy some "traction" so that the economy in the future will be stronger. What is lacking in that train of thought, however, is the mechanism for economic growth. In his view, economic growth occurs because people spend more money. End of discussion.

This view, I believe, is extremely shortsighted. In Austrian (and the old standard) views of economics, economic growth occurred because over time, people found ways to create more goods and services by using fewer resources, thus permitting those now-unused resources to be applied to other uses. That seems to be counter-intuitive to today's thinking in which we assume that growth occurs only because we are using more and more scarce resources (and that one day those resources will run out and we will be reduced to poverty via increased scarcity).

Again, this demonstrates a huge misunderstanding of what resources are and how we use them. Many products we now use are made from factors that at one time were not seen as resources at all. Crude oil once was seen as a nuisance product, and the modern silicon for computers is nothing more than something derived from sand.

Capital is useful because it serves as a tool for permitting us to make more goods from fewer factors of production, and especially labor. Contrary to the atavistic belief that capital creates mass unemployment, capital allows labor to be applied to uses to which labor before was too scarce to be used in this way.

Thus, to say that the only economic use of capital is the spending generated to create it (which I doubt even Krugman believes, although his analysis does not permit any other interpretation) is to misunderstand capital and to misunderstand the use and importance of debt. In other words, the guy simply does not "get it."

Krugman: The State is Light

[Update, Thursday, August 12, 2010, 9:20 AM]: I have deleted Wednesday's post on scientific fraud because I am not sure that the false temperature listing was deliberate. There may have been an error by the satellite readings that people did not pick up until later. I do try to make sure that what I put on my website is reasonably accurate, and I am not sure that what I have alleged is true, given the information I have now. [End Update]

On August 3, 1914, British Foreign Secretary Edward Grey looked out of the window of the Foreign Office and watched as workers lit the street lamps for the approaching nightfall. Germany had just invaded Belgium, Europe was at war, and Parliament the next day would declare war on Germany and Austria-Hungary, and much of the world would be plunged into the horror of World War I.

Grey then made his famous and prophetic statement: "The lamps are going out all over Europe. We shall not see them lit again in our time," and the slaughter of 10 million soldiers and countless civilians in the next four years would prove his point.

In his column today, Paul Krugman plays off that statement, but puts things in a different context. The lamps are going out, but they are going out because the state does not seize enough property and resources from Americans:

The lights are going out all over America — literally. Colorado Springs has made headlines with its desperate attempt to save money by turning off a third of its streetlights, but similar things are either happening or being contemplated across the nation, from Philadelphia to Fresno.

Meanwhile, a country that once amazed the world with its visionary investments in transportation, from the Erie Canal to the Interstate Highway System, is now in the process of unpaving itself: in a number of states, local governments are breaking up roads they can no longer afford to maintain, and returning them to gravel.

And a nation that once prized education — that was among the first to provide basic schooling to all its children — is now cutting back. Teachers are being laid off; programs are being canceled; in Hawaii, the school year itself is being drastically shortened. And all signs point to even more cuts ahead.

We’re told that we have no choice, that basic government functions — essential services that have been provided for generations — are no longer affordable. And it’s true that state and local governments, hit hard by the recession, are cash-strapped. But they wouldn’t be quite as cash-strapped if their politicians were willing to consider at least some tax increases. (Emphasis mine)

Why are we in this terrible, terrible state? It is because Goldstein's legions, er, the few Republicans left in Congress, have not properly worshiped the Greatness of the State. (Of course, this assumes that Republicans actually shrink government, but I have seen no evidence of that claim in the past 30 years, when the Republican Party was at its strongest since before the Great Depression.)

Krugman goes on:

...the federal government, which can sell inflation-protected long-term bonds at an interest rate of only 1.04 percent, isn’t cash-strapped at all. It could and should be offering aid to local governments, to protect the future of our infrastructure and our children.

But Washington is providing only a trickle of help, and even that grudgingly. We must place priority on reducing the deficit, say Republicans and “centrist” Democrats. And then, virtually in the next breath, they declare that we must preserve tax cuts for the very affluent, at a budget cost of $700 billion over the next decade.

In effect, a large part of our political class is showing its priorities: given the choice between asking the richest 2 percent or so of Americans to go back to paying the tax rates they paid during the Clinton-era boom, or allowing the nation’s foundations to crumble — literally in the case of roads, figuratively in the case of education — they’re choosing the latter.

It’s a disastrous choice in both the short run and the long run.

In the short run, those state and local cutbacks are a major drag on the economy, perpetuating devastatingly high unemployment.

It’s crucial to keep state and local government in mind when you hear people ranting about runaway government spending under President Obama. Yes, the federal government is spending more, although not as much as you might think. But state and local governments are cutting back. And if you add them together, it turns out that the only big spending increases have been in safety-net programs like unemployment insurance, which have soared in cost thanks to the severity of the slump.

That is, for all the talk of a failed stimulus, if you look at government spending as a whole you see hardly any stimulus at all. And with federal spending now trailing off, while big state and local cutbacks continue, we’re going into reverse.

So, we are to assume that the U.S. Government is just wallowing in money when, in fact, it is borrowed money, money that U.S. taxpayers ultimately must repay. (Of course, what will happen is that the government will repudiate the debt via inflation, which also is a tax, albeit a more hidden tax.)

But that is not all. We are supposed to think that the government is sitting on piles and piles of cash, but Goldstein selfishly is letting rich people keep some of their income, and then those evil rich people also are sitting on that cash. So the problem is that those who have the money are not spending it, and that is why we are in recession. And why are they not spending the money? Krugman explains with this non sequitur:

How did we get to this point? It’s the logical consequence of three decades of antigovernment rhetoric, rhetoric that has convinced many voters that a dollar collected in taxes is always a dollar wasted, that the public sector can’t do anything right.

The antigovernment campaign has always been phrased in terms of opposition to waste and fraud — to checks sent to welfare queens driving Cadillacs, to vast armies of bureaucrats uselessly pushing paper around. But those were myths, of course; there was never remotely as much waste and fraud as the right claimed. And now that the campaign has reached fruition, we’re seeing what was actually in the firing line: services that everyone except the very rich need, services that government must provide or nobody will, like lighted streets, drivable roads and decent schooling for the public as a whole.

So the end result of the long campaign against government is that we’ve taken a disastrously wrong turn. America is now on the unlit, unpaved road to nowhere.

Now, the last time I ever heard anything about "Welfare Cadillacs" was in the 1960s, more than four decades ago. Since then, the American State at all levels has grown fantastically, and while I have heard some rhetoric from Republicans about "big government," nonetheless the reality of governmental expansion belies whatever politicians might say.

Yet, according to Krugman, the problem is that the state does not swallow enough wealth. I suppose that he believes that perhaps had his hero FDR been successful in his attempt to levy a 100 percent tax on all incomes above $25,000 (he tried to do this with an executive order in 1942, but Congress struck down his attempt and the courts did the rest), then we would be a rich, happy country right now.

Furthermore, states and localities are cutting back spending just like the rest of us because the U.S. economy is in a serious recession, and, contrary to what Krugman tells us, the recession did not happen because of anti-government rhetoric or rich people or the lack of high tax rates. There is this problem of causality, and, unfortunately, Krugman confuses cause with effect.

Krugman: Higher Taxes Are A Net Plus

As I have noted before, Paul Krugman told me during a Q&A in a session at the 2004 Southern Economic Association meetings (Dr. Joseph Salerno was sitting next to me and he can verify what I am writing) that the 70 percent tax rates that existed before 1981 were "insane." Given what Krugman has written in a recent blog post, my sense is that he has repudiated his 2004 statement.

He writes:

If we could wave away political reality, I’d let all the Bush tax cuts expire, and use the improvement in the budget outlook to justify a large, temporary increase in public spending.

However, he notes, so he goes to the next best thing: raising only the top marginal rates. His justification is pure Keynesian and it leads to asking the following question: If government spending always is better than private spending, then why not have a 100 percent tax rate on ALL income? Let me explain.

Krugman declares that wealthy people might not spend all of the income that accrues to them (they save it, and everyone knows that Keynesians believe that saving is bad, bad, bad), so government must confiscate as much as possible, since government always spends what it gets (and more). As for lower-income people, they are not so willing to save, so they spend their money, which is good for the economy:

It comes down to the dual fiscal problem the U.S. economy faces: short-term, the government needs to do all it can to prop up spending; long-term, it needs to reduce the deficit. The latter concern means that it would be a terrible idea to make the high-end tax cuts permanent; that would be a huge drain on the public finances, serving no good purpose. But why not a temporary extension? Because it would do very little to promote spending.

The basic framework we have for thinking about consumer spending goes back to none other than Milton Friedman, whose “permanent income” hypothesis says that people will save most of any income change they see as merely transitory. Telling rich people that we’ll keep their taxes low for a couple more years is, for them, a transitory income gain; they’ll save the bulk of it.

Isn’t the same true for lower-income people? Not to the same extent. Permanent-income reasoning doesn’t fully apply when some people are “liquidity-constrained” — they have depressed income, which would make them want to spend more than they earn right now, but they’re out of assets and unable to borrow, or unable to borrow except at relatively high interest rates. People in that situation will spend much or all of any temporary windfall.

So if we give money to people likely to be liquidity-constrained, they are likely to spend it. That’s why aid to the unemployed is an effective stimulus; it also suggests that tax cuts for lower-income workers will be relatively effective at raising demand. But the affluent, who typically have lots of assets and good access to borrowing, are much less likely to be in that situation. So tax cuts for the lower 60 or 80 percent of the population are an OK, not great but OK, form of stimulus; tax cuts for the top 2 percent, not at all.

Notice that Krugman says that letting lower-income people keep some of their money is "OK," but not "great." What is "great," obviously, is government spending.

So, I ask the question again: Given Krugman's logic, is it not better for government to confiscate ALL earnings from everyone and spend the money on what the Political Classes believe to be important? After all, Krugman clearly states in this post that government spending is better for the economy than private spending, so it seems to me that logic should prevail and all of us work for the government for free.

Paul Krugman and Comment Policies

A lot of fuss has been stirred up this past week with Paul Krugman's announcement that he was changing the comment policies on his blog to limiting the comments to three inches. After the hostile response by some, Krugman basically said: "Hey, it's my blog and if you don't like it, you can lump it."

A number of people have sent me the recent American Thinker piece on this change in policy, although I must say that I am reluctant to embrace the claim that Krugman is doing this out of sheer paranoia. I don't know, and, frankly, since I rarely write in his comments section, I don't care what his comment policies might be.

On a number of occasions, my own comments section has featured duels between people who agree with Krugman and those who disagree, and once in a while I join in the discussion, although I usually limit my comments to the actual blog post. I figure that the comments section is for people to express their own views and, frankly, to have fun.

So, unless a comment is obscene or potentially libelous, I tend to let it stand, as I am not wounded by disagreements nor do I worry that some people think I am an idiot. When one makes public statements, as I have done, people will disagree and that is OK.

I do think that Krugman has seemed angrier on his blog lately, and certainly has been even more partisan. As an academic economist, I tend to believe that economists should be above political rhetoric, even if we can support political candidates. My hope is that my blog or other articles do not degenerate into political talking points, and all too often, I believe Krugman does just that.

Economists have a lot of intellectual weapons, and I don't believe that we have to let our analysis degenerate into ______ good and _______ bad. Unfortunately, I believe that is just what Krugman has done, and his constant blame of all our current problems on Goldstein, er, Republicans, is just silly and beneath his stature as a Nobel laureate.

Bob Murphy Takes on Krugman's History and Krugman's Curious Definition of Prosperity

Paul Krugman is fond of claiming that Herbert Hoover was a "liquidationist" (he was not) and that the Hoover administration responded to the downturn by having the Federal Reserve System raise interest rates and by cutting spending.

Bob Murphy, who in my view is a real economist (not a Keynesian), takes on the Krugman version of American economic history in this article, which I believe is worth reading. He not only debunks the Krugman-Robin Wells (Krugman's wife) thesis, but also anticipates the counter-criticisms.

In his column today, Krugman continues his theme that the Fed and the government are not doing enough borrowing and spending to prop up the economy. I guess that trillion-plus-dollar deficits still are not enough for him.

However, I do wish to take on one element of his analysis, that being the definition of "prosperity" as being associated only with the rate of unemployment. Now, he only has the word in the title, but it is clear that he is saying that the rate of unemployment (or employment) is the key to prosperity.

I would like to argue that it is the other way around: a prosperous economy will provide employment opportunities. But there also is another point that Keynesians seem to forget: employment is a MEANS to an end, not an end in itself.

During the Cold War, I remember hearing a Marxist (card-carrying Marxist) "economist" claiming that Romania had a better economy than that of the USA because there was "no unemployment there." Now, he said this during the recession of 1982, when the rate of unemployment then was close to what it is today. Indeed, I remember hearing the critics claim (including men like John Kenneth Galbraith) that not only was the supposed "full employment" of the U.S.S.R. and its satellites "proof" of a "superior" economy, but THEY HAVE FREE MEDICAL CARE.

Now, what they did not point out was that the real standard of living for people in those countries was dismal, and medical care for the mundanes (those that were not part of the Communist Party ruling class) was pretty bad, to put it mildly. Furthermore, as James Bovard points out in this recent article, Romania, for all the lovefest showered upon it from different quarters, in reality was a most miserable place.

I bring up these points to note that full employment in itself is NOT an appropriate "goal" for an economy. Furthermore, I would say that "economies" do not have "goals." Instead, individuals have goals. An economy is a mechanism by which individuals produce and distribute things that help to meet their needs, in which individuals participate as part of their own means-ends frameworks.

The question we should ask is this: Why are there impediments to individuals being able to engage in those things which help us to meet our goals? If you are wondering why this is so, try starting your own business to make goods or provide services that others might want, and you will find that government provides a large number of barriers.

In some cases, such as delivering documents from one person to another, one might find that it is against the law, given the legal monopoly held by the U.S. Postal Service. Places like Cleveland, Ohio, which has been losing population for years, make it very difficult for entrepreneurs to get started, as Nick Gillespie notes in this recent article on the Reason website.

To the Keynesian, however, all of this is gibberish. An economy to them is nothing but a series of numbers to be stacked into GDP figures. In that view, assets are homogeneous and all that is needed is a little bit of inflation and -- Presto! -- we have an "economy."

There is a "great gulf fixed" between how Paul Krugman and I view an economy. Krugman despairs because the government is not spending enough money and the Fed is not printing enough to create high rates of inflation. I despair because the government is doing everything it can to destroy what still is relatively healthy in the economy in order to help its sick friends, like corn-based ethanol, "alternative" energy, and firms on Wall Street that are politically-connected.