All is well -- on the inflation front! (If you like inflation)

At the end of "Animal House," there is a scene in which the character played by Kevin Bacon is "assuring" the panicked crowd that "ALL IS WELL!"

I make that point because every time I read something from Paul Krugman or someone claiming the Federal Reserve System is being too tight with money and that there really hardly any inflation at all, I think of Kevin Bacon's "Animal House" character. With the price of food, fuel, and consumer goods skyrocketing, the notion that the massive Ben Bernanke "experiment" of showering the world with dollars has had almost no effect on oil and food prices really is a joke.

But, the joke is on us, if Krugman is to be believed. Fuel prices? Food prices? Oh, they're volatile, so we pay no attention to them. In reading Krugman's column today on "The Intimidated Fed," I must admit that his explanation of higher oil and gasoline prices smacks of Jake Blue's excuses when faced with his jilted fiance (played by Carrie Fisher) who is pointing a machine gun at him:



Actually, according to Krugman, it is Ron Paul's fault:

What’s going on here? My interpretation is that Mr. Bernanke is allowing himself to be bullied by the inflationistas: the people who keep seeing runaway inflation just around the corner and are undeterred by the fact that they keep on being wrong.

Lately the inflationistas have seized on rising oil prices as evidence in their favor, even though — as Mr. Bernanke himself pointed out — these prices have nothing to do with Fed policy. The way oil prices are coloring the discussion led the economist Tim Duy to suggest, sarcastically, that basic Fed policy is now to do nothing about unemployment “because some people in the Middle East are seeking democracy.” (emphasis added)

But I’d put it differently. I’d say that the Fed’s policy is to do nothing about unemployment because Ron Paul is now the chairman of the House subcommittee on monetary policy. (emphasis added)

So much for the Fed’s independence. And so much for the future of America’s increasingly desperate jobless.

Let's see. Oil sold on international markets is traded in U.S. dollars, and the Fed is deliberately trying to weaken the dollar through monetary expansion, and there is no relationship between the two policies and what is happening to oil prices?

Belushi! Thou shouldst be living at this hour! Krugman hath need of thee!

Actually, claiming that Ron Paul is really responsible for people wondering out loud of there just might be a connection between the rise of commodity prices and the Fed's massive monetary expansion honors Rep. Paul too much. (Not that Krugman is honoring him; Krugman has come to condemn Paul, not to praise him.)

The idea that Ron Paul is "intimidating" anyone really is a pathetic joke. During sessions of the House Subcommittee on Monetary Policy, the Democrats act as if they are playing their own version of "Animal House," complete with staged walkouts. (And, no, Rep. Paul does not play the Dean Wormer role and yell at the departing Democrats, "You're finished here at Faber!")

Now, if Krugman has any guts at all, he could be calling for the ultimate marriage of "monetary and fiscal" policies: Have the Fed purchase short-term T-bills directly from the U.S. Department of the Treasury. (The Federal Reserve Act of 1913 outlaws such actions, but all it takes to change the law or get around its provisions is a stroke of the pen, right? Obama already has been making "signing statements" in which he says he doesn't have to follow Congressional directives, so why not end this prohibition with a simple executive order?)

You see, should Krugman believe that they way to eliminate high rates of unemployment is through massive new government spending, why not go whole hog? Let the Fed just finance ALL government borrowing this way. I'm sure that "America's increasingly desperate jobless" would appreciate being hired as street sweepers to sweep up all of the dollar bills lying in the gutter!

Keynes versus Hayek, round two

Here is a fun video made by some of my friends at George Mason University. Notice Joe Salerno playing the Mises role!

You can find it on this link provided by Robert Wenzel.

A change in direction on this blog

For more than a year, this blog has dealt almost exclusively with Paul Krugman's columns, blog posts and public statements. I will continue to follow what Krugman writes, but I also would like to deal with economic subjects and the economy as a whole without always having to reference Krugman.

The blog's name, Krugman-in-Wonderland, will stay the same, at least for now, but the subject matter will be broader. Part of this change comes because of suggestions from readers who would like to see a larger discussion of economic issues, and part of the change, frankly, comes because of the New York Times' new policy of making people pay for access. (I guess that the NYT is following the policies of their nemesis, Rupert Murdoch, who has a pay-to-read policy at the Wall Street Journal.)

I do have access to Krugman's columns through Lexis-Nexis via the Frostburg State library site, and have 20 "free" articles a month at the NYT. So, I won't completely ignore the guy, but am not going to be dealing with the refutation of particular columns or posts unless it is germane to the larger argument.

We all know where Krugman stands. He is an inflationist who actually believes that government can create wealth via printing of money. That is the bottom line with him, and we are now going to be reaping a huge whirlwind because of the funny money that Ben Bernanke has showered around the world.

The irony is that Krugman believes that Bernanke has not inflated enough, and as prices of food, fuel, and (soon to come) consumer goods rise rapidly, Krugman will insist that we really are not experiencing inflation at all, but rather that a rush of "corporate greed" has swept the nation, and that massive price controls will save the day. So, there is much more to come.

The madness of fiat money

Yes, I know that Paul Krugman has yet another budget screed in which he calls for higher taxes, more government spending, and all that. Surprise, surprise, surprise: he falls down and worships the proposal that comes from the hard-core socialist wing of the Democratic Party (the "Progressive Caucus").

However, I am more interested in his recent blog post, "Money Madness," in which he once again explains his belief that a system of fiat money is just fine with him, and if it is fine with Krugman, then it is the Way, the Truth, and the Life. He writes:

The whole tone of this discussion is reminiscent of the way people talked about the gold standard back when it was widely thought that any meddling with the sacred role of a metal with precisely 79 protons would mean the demise of civilization. But it has been 80 years since Britain went off gold, and last I noticed, William and Kate weren’t getting married in a desolate wasteland. We’ve had freely floating exchange rates for almost 40 years....

There you have it. Since we have been outright printing money for nearly a century, everything is just great, right? Furthermore, what Krugman really is saying is that we would not have had prosperity at all. We would be stuck in depression with high unemployment and a very uncertain future.

Oh, wait! After massive new spending, QE2 (which, contra Krugman, turned out to be a big deal), we have high unemployment and a very uncertain future. Krugman's reply? Print more money.

Are food and energy prices rising? Why, that is due to speculators and demand from elsewhere. It couldn't have anything to do with Ben Bernanke's showering of the world with dollars. Why? If it did, then Krugman would have to admit that maybe inflation was not a good thing.

But, Krugman does not stop there. No, he gives us his monetary philosophy of life:

Anyway, money and monetary policy are basically technical issues, albeit important ones. The fate of Western society is not at stake, nor is there a deep moral issue in allowing the purchasing power of the medium of exchange to depreciate modestly over time. Calm down, everyone.

I would beg to differ. If I were to enter your household and take your property, albeit slowly, you would still call it theft.

However, when the government says that you have to use its money for exchanges, and then purposely depreciates that money, leaving you poorer in the process, that is a moral issue. Krugman would counter, of course, that it is the very inflation that makes the economy grow, but he gives no methodology of this "technical" claim.

By the way, when Krugman claimed last year that those who opposed QE2 did so because they wanted people to suffer and be out of work, was he not making a "moral claim"? When he claims that opposition to Keynesian policies is done out of racism, is that not a "moral claim"?

So, I guess that when Krugman attacks people who disagree with him and calls them racists, he is making a "technical" statement. Anyone who points out that deliberate government depreciation of money just might have a moral connotation is engaging in metaphysics.

In the end, with Krugman it is "heads I win, tails your lose."

Krugman: Markets are good -- when they supposedly endorse Krugman's position

As a Keynesian, Krugman has embraced the price theory of his predecessors, that being the belief that "price" is the "P" on the y-axis of the Aggregate Demand -- Aggregate Supply graph. (It is hard to know that the "Y" -- Or is it "Q"? -- might be on the x-axis, given that GDP, or Y, is monetary-based and one cannot have the same thing on both axes. Likewise, an AS-AD graph cannot be logically configured to have just "physical output" on the x-axis, either. What's a Keynesian to do?)

Thus, "price" in the Krugmanian viewpoint is a statistic created by government, and it receives its meaning only as part of a state-configured weighted average. However, when it suits him, "price" suddenly can have all sorts of important meanings -- that is, something that supports his viewpoints.

Likewise, Krugman like many other "elite" academics has utter contempt for anything that smacks of the "market." In the academic world, as well as the world of mainstream/leftist journalism, markets are little more than evil creations made by those who wish to get rich on the backs of "the people." And "price theory"? Fuggediboutit, except when "markets" seem to affirm their position.

One of Krugman's constant themes is that there is very, very little inflation in our economy today. Rising fuel and food prices? Why that is just aggregate demand from abroad. QE1, QE2, and QE-in-perpetuity has nothing to do with that phenomenon, and anyone who claims differently does so because he or she is a racist or an Obama-hater (which means the person is a racist).

Why is this true, according to Krugman? Government bond prices. You see, if interest on U.S. Government bonds is low and prices high, then that is PROOF that there is no inflation. In other words, if he can spin a price into something that backs up his claim, then Krugman suddenly becomes Murray Rothbard in claiming that individual prices really do matter.

One thing that Krugman does not point out is that the ratings agencies have given U.S. Government debt their AAA ratings, but the rules applied to the government are different than rules applied elsewhere. I say this because the vast majority of U.S. Government debt (held in six-month T-bills) is repaid with more debt.

No other entity can get away with this. When New York City in 1975 secretly was selling bonds to pay back its previous bonds, the market ultimately revolted and the city had a financial crisis. In fact, what NYC did was illegal, and those behind it were committing criminal fraud, but because of their political connections, no charges were brought.

(Interestingly, the NY Times, which endlessly calls for criminal prosecutions against those alleged to have committed financial fraud, supported this fraud and the fraudsters. So much for the Grey Lady's consistency on criminal justice.)

As I see it, the AAA ratings from S&P and elsewhere are political in nature, and are not the result of any kind of careful -- and honest -- financial analysis. If any of the agencies were to downgrade U.S. Government debt, with its payment scheme of Rob-Peter-to-Pay-Paul, the government would be hauling executives from those firms into prison to join Bradley Manning. Don't kid yourselves on that; anyone who believes that an intimidation factor is not in play here does not understand the thuggery of the U.S. Government.

Yes, the government has declared that ONLY the U.S. Government can pay back bonds by selling other bonds, and as long as Congress raises the debt ceiling, some people believe this charade can go on forever. However, at some point, the real market will revolt against this fraudulent scheme. Yes, I am sure the Federal Reserve System will try to come to the rescue, but the Law of Scarcity will expose anything that Bernanke and company might try to do.

Peter Schiff makes a good point in this article, noting that the rating agencies are banking on the Fed's ties to the virtual printing press. He also notes that the ratings agencies were willing to hang onto the AAA ratings for a lot of mortgage paper that the market ultimately exposed to be worthless. Again, because of the political implications of the housing boom, I am sure that S&P, Moody's and others believed it to be in their best interests to pretend that mortgage bonds were sound investments.

And one can bet that at that point, Krugman will rise up and condemn the very market that he now claims provides "proof" that we have very low inflation and that government borrowing and spending is not out of control.

It's not civility; it's bad economics

As I see it, the Democratic National Committee is getting a good deal with Paul Krugman, for here is a guy who writes PR for the party -- and (at least to my knowledge) does not receive a paycheck for it. Wow! A Nobel Prize winner writes party propaganda, and it's all free!

Lest anyone think that Krugman is about anything but partisan politics, read again. His column today once again declares to the world that he is not about being an economist, but rather a political operative. Furthermore, he then attempts to claim that the New Deal and Great Society were about "values," not political rent-seeking.

You see, in Krugman's world, ANY criticism of the New Deal or Great Society can come only from an evil mind and a more-evil heart, and any criticism of President Obama when he is citing those two in favor of his own political proposals is a Really Bad Thing. From what I can tell, Krugman also believes that it is evil to employ basic tools of economics, like the Law of Scarcity and the Law of Opportunity Cost, in one's own analysis of government action.

While I have little or nothing to do with the Heritage Foundation (which openly has supported America's military adventures abroad as well as the vast domestic prison apparatus at home), nonetheless Krugman's attack on a recent report from Heritage tells us more about Krugman's lack of even basic economic understanding than it does about conservative politics. He writes:

When the (budget) proposal was released, it was praised as a “wonk-approved” plan that had been run by the experts. But the “experts” in question, it turned out, were at the Heritage Foundation, and few people outside the hard right found their conclusions credible. In the words of the consulting firm Macroeconomic Advisers — which makes its living telling businesses what they need to know, not telling politicians what they want to hear — the Heritage analysis was “both flawed and contrived.” Basically, Heritage went all in on the much-refuted claim that cutting taxes on the wealthy produces miraculous economic results, including a surge in revenue that actually reduces the deficit.

By the way, Heritage is always like this. Whenever there’s something the G.O.P. doesn’t like — say, environmental protection — Heritage can be counted on to produce a report, based on no economic model anyone else recognizes, claiming that this policy would cause huge job losses. Correspondingly, whenever there’s something Republicans want, like tax cuts for the wealthy or for corporations, Heritage can be counted on to claim that this policy would yield immense economic benefits.

The point is that the two parties don’t just live in different moral universes, they also live in different intellectual universes, with Republicans in particular having a stable of supposed experts who reliably endorse whatever they propose.

My criticism of Krugman is not based upon whether or not the Heritage report is credible, but rather his statement above on "environmental protection." Let me explain.

In economic analysis, environmental issues fall under the "technological externalities" category. That is, when economic exchanges (and I include production of goods within the umbrella of "exchange") also impose costs upon third parties that do not directly benefit from the original exchange, then we say that a negative "externality" is created that not only imposes harm on the third parties, but also distorts the structure of production.

One can run wild with externalities (which often exist because of problems in the delineation of private property rights, i.e., Who owns the skies when there is air pollution?), but we have to understand that the imposition of laws and regulations to deal with things like pollution also will have costs. Furthermore, when environmental extremists, like those people who now run the powerful Environmental Protection Agency, get their way, they will attempt to impose policies that go well beyond the "environmental protection" for which most Americans are willing to pay.

There is no way to be able to find the theoretical "optimal" policy for environmental protection, but nonetheless we can say that many policies do impose costs upon production, and added costs to production mean less of something is produced. That is fundamental in economic analysis. So, when Krugman declares that "environmental protection" does NOT impose economic losses somewhere, he is violating those fundamental principles of analysis in the area where he has his doctorate.

Furthermore, his endorsement of "green energy" with its vast array of subsidies tell us that one of his "values" is to support the process of moving resources from higher-valued uses to lower-valued uses. There is no way, economically speaking, around that point. Krugman's support of the anti-energy jihad is also support of policies that make us poorer.

In Krugman's Keynesian world, all that government needs to do is to tax, borrow, print money, and spend, spend, spend, and all is right with the world. Indeed, if the Keynesian view that all resources, factors, and capital are homogeneous, then he is correct. But, if they are heterogeneous, then the Keynesian analysis falls flat.

There is one more point, and that is Krugman's idea that the New Deal and Great Society support superior moral "values," or what the New York Times in a nearby editorial (quoting Obama) calls "the basic social compact in America." A welfare state, whether it is transferring vast amounts of resources for corporate welfare or for the creation of huge urban reservations in which millions of people are subsidized in all walks of life, is an entity in which some people are expected to work to support others who are politically-connected.

To me, such "values" are not "moral" by any stretch of the imagination. They are noting but coercion by the political classes against those who are not politically-favored. This is not just political liberalism of what I speak. The Republicans in Congress (with a few exceptions) want to cut out what people call "welfare" for the poor, yet are happy to continue with the current arrangement of creating welfare for the Military-Industrial Complex, as well as agricultural subsidies that are socially and economically harmful. Republicans and Democrats both supported the huge financial and corporate bailouts that have dragged down our economy.

If such things represent "social compacts," then a "social compact" is something imposed by brute force. And that is something that Krugman, his employer, and those Republicans that Krugman hates all have in common.

Who pays for "the kind of society we want"?

If anyone believes that Paul Krugman is nothing more than a shill for the Democratic Party, I think today's column would provide needed ammunition for that point of view. Furthermore, I believe that we also better understand Krugman's "vision" for the rest of us, or should I say the "vision" of the life he wants to have imposed on us.

First, however, let me say that NEITHER party in Washington is "serious" about the federal budget. For all of Krugman's claims that the Congressional Budget Office actually consists of "people who actually understand budget numbers" (at least when they write something Krugman likes), the latest stuff from the CBO is based upon pure fantasy.

As the CBO has been doing for as long as I can remember, it frontloads the revenues from tax increases and backloads the costs, and even then it is not honest about the real costs that will come about because of federal policies. That Krugman would be shilling for this nonsense tells us more about Krugman than it does about the CBO numbers. (I also suspect Krugman watches "Animal House" once a week in a belief that the band at the end of the movie finally will be successful in marching through the wall in the alley. The chance that the band will break through is about as likely as the chance that the CBO is going to give us an accurate depiction of the future.)

Second, as I read through this, I realize that Krugman really is not interested in budget numbers or whose plan actually will get spending under control and cut the federal deficit. No, Krugman gives away his viewpoint with the following:

The president’s proposal isn’t perfect, by a long shot. My own view is that while the spending controls on Medicare he proposed are exactly the right way to go, he’s probably expecting too much payoff in the near term. And over the longer run, I believe that we’ll need modestly higher taxes on the middle class as well as the rich to pay for the kind of society we want. (Emphasis added)

What is the "kind of society we want"? Or, perhaps, I should ask, "Who is 'we'?" Furthermore, who pays for this kind of society, and what if one has a different viewpoint?

As I read that statement, I recalled a recent column by Thomas Sowell (who, unlike Krugman, actually invokes real economic terms in his writings, like "opportunity cost" and Law of Scarcity). In writing on the effects of higher tax rates, Sowell points out that the issue with people like Krugman is not the actual revenues raised, but rather the economic and social vision that these people have -- and have for the rest of us, whether or not we want that "vision" imposed upon us. Sowell writes:

For more than 80 years, the political left has opposed what they call "tax cuts for the rich." But big cuts in very high tax rates ended up bringing in more revenue to the government in the Coolidge, Kennedy, Reagan and Bush 43 After all, "the rich" paid that larger sum of taxes only because their incomes had risen. Their paying a higher share of all taxes doesn't matter to the "progressives," who see high tax rates as a way to take a bigger bite out of the incomes of higher-income people, not just provide more revenue to the government.

However, he further notes:

Tax rates are meant to make an ideological statement and promote class-warfare politics, not just bring in revenue.

There has been much indignation on the left over the recent news that General Electric paid no taxes, despite its large amounts of profit. But another way of looking at this is that high tax rates on paper do not mean high tax revenues for the government.

The liberal answer to budget deficits is almost always to raise tax rates on "the rich," in order to bring in more revenue. The fact that higher tax rates have often brought in less revenue than before is simply ignored.

Our corporate tax rates are higher than in many other countries. That may have something to do with the fact that many American corporations (including General Electric) expand their operations in many other countries, providing jobs – and tax revenues – in those other countries.

But high-tax ideologues don't see it that way. They would be horrified at the idea that we ought to lower our corporate tax rates, just so that more American businesses would do more of their business at home, providing more Americans with much-needed jobs.

To ideologues, that is just a cop-out from the class-warfare battle. It is far more important to them to score their political points against "the rich" or "Wall Street" than that a few million more Americans out of work would be able to find jobs.

The idealism of the left is a very selfish idealism. In their war against "the rich" and big business, they don't care how much collateral damage there is to workers who end up unemployed.administrations. This included more – repeat, more – tax revenue from people in the highest income brackets than before.

You see, the "vision" that Krugman has for us is of a society in which everything is provided administratively. The government plans our lives, tells us what we should eat, what we should wear, what we should use for transportation, and, frankly, what we should believe.

An economy, in Krugman's view, is nothing more than a mass of stuff that just happens. The mines, the factories, the capital, the farms, and the stores just appear, and they will operate just fine as long as the government manages to throw enough money at them to keep the "spending" machine in operation.

The entrepreneur, in Krugman's view, is not someone who moves resources from lower-valued to higher-valued uses while in search of a profit. No, the entrepreneur is a parasite, someone who works outside the Vision of the Anointed Ones (like Krugman) who are working to create the society that we should have.

I have come to believe that Krugman thinks that incentives really don't matter, and that one can have a great economy if the government just uses enough coercion, throws enough "uncooperative" people into prison, and confiscates enough wealth from "parasites" who actually create something. Here is someone who really thinks that price controls are an effective way to lower real costs, and that price controls and the like have no negative effects at all.

This is not economics, and it certainly is not the economics of a free society. However, people like Krugman believe that "freedom" is nothing more than government provision of everything -- and government attacks on the liberty of anyone who might disagree with what Sowell calls, "The Vision of the Anointed."

In the end, Krugman's "kind of society we want" is one in which everyone works for the state, whether or not one actually is a government employee. Like all Progressives, he believes that the highest measure of one's being is to support the "progressive" state, and if you don't like it, well, there is a nice jail cell waiting for you.

Sanity is Missing in Action, not the President

In his excoriation of President Obama in his recent column, Paul Krugman claims that if Obama would have stood up against the "radicalism" of the house, perhaps we might be on our way to economic nirvana:

...let’s give the president the benefit of the doubt, and suppose that $38 billion in spending cuts — and a much larger cut relative to his own budget proposals — was the best deal available. Even so, did Mr. Obama have to celebrate his defeat? Did he have to praise Congress for enacting “the largest annual spending cut in our history,” as if shortsighted budget cuts in the face of high unemployment — cuts that will slow growth and increase unemployment — are actually a good idea?

This falls into the "don't make me laugh" category. As Lew Rockwell recently wrote, there are no "cuts" in spending at all, despite the rhetoric:

In the first place, no one is talking about actual cuts, not even the supposedly radical Republicans. These are cuts in projected spending, meaning that everyone is dealing with symbolic changes in a future that is just as symbolic. Even on paper, the only way to consider these cuts is to compare them with the GDP and the national debt -- both of which are slated to rise. Forgetting those two metrics, and looking at the actual numbers, there are no cuts at all and only increases.

Even the dating of the Republican’s balanced budget is ridiculous. So the budget will be fully balanced in 2040? That’s three decades from now. Few of the people in office will still be in office, and many will be dead. To see how viable this is, consider how many political plans of the year 1982 still survive today.

I will go even further. Despite Krugman's constant claims that prosperity will return if the government throws enough new money around and if the highest marginal tax rates are raised from 35 percent to 39.6 percent, he is absolutely wrong.

The problem is not with "idle" resources; the problem lies in the fact that the Obama administration, along with the other Usual Suspects in Congress, academe, and the media, cannot recognize that there are huge swaths of malinvested resources still dragging down the economy. It does not matter how many dollars the government throws at housing; the government encouraged the wasting of billions of dollars for something that cannot be sustained in any normal market, and no one in authority still is willing to admit any mistakes.

To make matters worse, the Obama administration continues to insist that granting huge subsidies to corn-based ethanol and electric "wind farms" ("subsidy farms" is the more appropriate term) will help lead us out of the recession. Earth to Obama (and Krugman and the others): it is impossible to subsidize oneself into prosperity. Any benefits accrued to one party MUST be confiscated from another when subsidies are involved. An economy built upon subsidies is an economy that will continue to shrink.

Krugman still is of the belief that if the political classes pretend we are prosperous and throw enough money into the economy, then suddenly everything magically will rise and the prosperity train will be on the tracks. This is utterly delusional, but delusion seems to be the watchword at the NY Times and in Washington.

Massive federal spending, face it, is "ludicrous and cruel"

In his column today, Paul Krugman takes his cue from the Democratic National Committee and writes yet another one of his partisan screeds on the Republicans' federal budget proposals, calling it "ludicrous and cruel." Actually, he is right, but I think for reasons other than what he might admit.

First, he demonstrates that he really is little more than a political operative because he aims much of his vitriol against Rep. Paul Ryan, the House Budget Committee Chairman. In fact, as he often does, Krugman spends as much time with personal attacks on an individual as he does with the ideas that the individual is espousing. To me, that is ironclad proof that the focus of his column is that of a partisan political operative, NOT an economist.

Second, he then goes into yet another tizzy to claim that a 4.96 percent cut in tax rates somehow has triggered every other evil that one can imagine, and he really wants us to think that if only the "rich" could be taxed at 39.6 percent instead of 35 percent, that all would be well. Only a political operative would say that, because a real economist would understand that the scenario Krugman presents is nonsense.

Third, the idea that our economy can support massive welfare spending and subsidies at home and military adventures abroad is plain delusional. Now that the Obama administration has decided to follow in the footsteps of its predecessor and continue the fiction of Empire Forever, Krugman no longer raises the objections to military adventures and its requisite spending as he did when George W. Bush was president.

Instead, he promotes the delusion that because Ben Bernanke is keeping interest rates artificially low, the USA can continue to borrow and spend into perpetuity. (No, we will borrow and spend into oblivion.)

We are seeing a period of outright political delusion that dwarfs even the delusion that accompanied Lyndon Johnson's pursuit of the "Great Society" AND the war in Vietnam. Both then and now, the politicians have imagined that they can pretend the U.S. economy can continue to carry the heaviest burdens of government in the history of the world.

So, we have reached yet another episode of the dog-and-pony show known as the government shutdown. It is all political theater, while the rest of us will learn the very hard lesson that just because economists like Paul Krugman and his friends claim that this government can spend us into prosperity does not make it so.

No doubt, when inflation begins to really catch fire -- and there is no avoiding it now -- Krugman will call for price controls and claim everything as its cause but the truth: out-of-control borrowing and spending creates disasters, not prosperity.

Are we in a "liquidity trap"?

Paul Krugman insists that at the present time, the economy is in what Keynesians call a "liquidity trap," so the ONLY policy that will set the economy back on a boom track is massive government spending. In my Wednesday column for the Freeman Online, take on that point:

Some economists claim the economy is in a Keynesian liquidity trap, which makes it a special case calling for “unorthodox” policies. Paul Krugman writes:

I know that some people find this hard to understand — perhaps because they don’t want to understand — but people like me have never claimed that fiscal expansion is always and everywhere the right policy, even in response to recession…. All of the unorthodox policy recommendations and conclusions are contingent on the economy being in a liquidity trap, in which short-run nominal interest rates are up against the zero lower bound and can’t go lower.

And liquidity-trap conditions are rare; in fact, they’ve only happened twice in US history. Unfortunately, we’re living in one of those episodes right now.

Well, are we in a liquidity trap? And does the present situation require constant bursts of government spending?

Read the rest of the column

Krugman rewrites history (again)

One of the most famous lines said by anyone in the Herbert Hoover administration was what Secretary of the Treasury Andrew Mellon supposedly told his boss: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” Oh, and he said one other thing: "Purge the rottenness out of the system."

In his column today, Paul Krugman takes that quote and decides to rewrite history. True, Krugman is famous for that, as he gives us several howlers per week, but this one is important because not only does Krugman give us a false accounting of history then, he makes an equally-spurious claim for today.

The first and most important thing to remember (and something Krugman always seems to leave out -- not surprisingly) is that Hoover brags that he rejected Mellon's advice. This is important, because Krugman always presents that quote as an official policy of the Hoover administration when, as Hoover notes in his memoirs, he not only refused to follow Mellon's suggestion but he also tried actively to keep the liquidation from happening.

My sense is that Krugman ignores that fact because it does not fit into his chain of events, and because he wants to claim that the Republicans, who apparently want to cut all of $61 billion from a $3.5 TRILLION federal budget are trying to engage in what he calls Mellon-style austerity:

But never mind the lessons of history, or events unfolding across the Atlantic: Republicans are now fully committed to the doctrine that we must destroy employment in order to save it.

And Democrats are offering little pushback. The White House, in particular, has effectively surrendered in the war of ideas; it no longer even tries to make the case against sharp spending cuts in the face of high unemployment.

So that’s the state of policy debate in the world’s greatest nation: one party has embraced 80-year-old economic fallacies, while the other has lost the will to fight. And American families will pay the price.

Now, I am not sure how a tiny proposed cut in spending translates to "austerity," but like Blutarsky in "Animal House" who asked his frat brothers if the Americans quit "when the Germans bombed Pearl Harbor," Krugman is on a roll.

However, I think for all his botching of history, Krugman does perform a useful function here, and that is to ask the question (in his own, nasty way, of course) as to the larger issue underlying debate about boom and bust. Are we dealing with simple idle resources that need to be jump-started via an infusion of government spending, or are we dealing with malinvested resources that need either to be liquidated or transferred to other uses?

This is not an idle question, for I believe it is at the heart of all of Krugman's anti-"austerity" diatribes. Krugman clearly believes that the problem is that of idle resources; people stopped spending, and the only way to get the economy moving again is to bring in wads of new government spending that will give the economy "traction" and continue the circular process.

To Krugman, a boom is just that: a boom. It can and should be continued by all means possible, including policies of massive borrowing, spending, and, yes, creation of new money. (As Krugman claims in The Return of Depression Economics, many economic problems can be solved simply by printing money, and that printing money creates what he calls "a free lunch.")

In that world, all factors of production, economically speaking, are homogeneous. It does not matter from what direction the spending comes, as everything moves in the same way. If a boom is touched off by something like the housing bubble, it creates the very kind of mix of capital and labor that a huge infusion of government spending would produce.

Should that be the actual situation, then Krugman is correct and the way to long-term prosperity is for government to print and spend. Money in that view would be nothing more than a tool used by government to manipulate events, and as long as the "correct" people are in political power, such policies will create a second-best nirvana.

The Austrian position, however, is much different. Austrians hold that factors of production are heterogeneous, and that the mix of capital created during a credit-fed boom cannot be sustained, even if the government throws in new spending measures after new measures. In fact, Austrians believe that the very wave of spending that Krugman demands government do only exacerbates the situation, as it only deepens the unsustainable capital structures and creates even more malinvestments. That is the heart of the Austrian Theory of the Business Cycle (ATBC).

I'm not about to claim that the "austerity" measures of what Krugman speaks are based upon the ATBC or that finance ministers across the globe suddenly have embraced Austrian Economics. Nonetheless, I will say that until the economy can deal with the very real malinvestments that piled up during the last 20 years, we are doomed to have a low-growth economy with high unemployment.

This is the Austrian critique in a nutshell. As for Krugman's claims that the Republicans suddenly have become the Second Coming of Andrew Mellon, I believe that is, to put it mildly, a bit of hyperbole. But, Krugman never would engage in that kind of rhetorical fallacy, would he?