Saturday, July 30, 2011

Stagnation or Stagflation?

One way to make a Keynesian angry is to point out that stagflation -- a simultaneous increase in inflation AND unemployment -- is not possible under the Keynesian scheme. The Phillips Curve supposedly "proves" that the way to get unemployment down is to ramp up inflation.

In a recent blog post, "Stagnation Nation," Krugman laments the woeful GDP numbers and the fact that unemployment is going up, and he blames it on a lack of government spending. However, inflation also is increasing, no matter what Krugman claims.

Anyone who purchases food, fuel, and consumer items can tell that prices are going up, and Krugman can tout the government's CPI all he wants, but that does not change the fact that we are seeing a huge increase in commodity prices at the same time it becomes harder and harder to find work. Yes, yes, he claims that "volatility" is the answer to rising commodity prices, as though volatility explains why they are rising together. What we know is that commodity price changes tend to be more volatile than price changes for finished goods and labor, but that does not explain why commodity prices are going up.

I recall watching the late Richard Gill neatly try to explain stagflation in a scholastic film. His trick was to move the aggregate supply curve to the left and, Voila!, stagflation! But, it only was a trick and explained nothing and certainly did not explain production of goods in the USA during that time. No, the Keynesians have no way to explain stagflation, and so they either ignore it or try to explain it away, claiming higher oil prices are the key. (The cause of inflation, in their view, is...higher prices, a nice example of "begging the question.")

In the end, Krugman claims that governments should spend more, as though a government magically can produce resources out of nothing. And when someone points out that simple fact, he gets angry and resorts to insults or simply pulls another logical fallacy out of his Keynesian hat.

Tuesday, July 26, 2011

Krugman: In denial about spending and borrowing

In reading through Paul Krugman's material through the years, I find that time and again he is in denial both about history and the present state of the U.S. Government. You see, in Krugman's world, whatever Progressivist historians (or, more accurately, distorians) claim about history MUST be true. Why? Because they said so.

Herbert Hoover, despite all evidence to the contrary, was a True Believer in laissez-faire. The New Deal was bringing economic recovery to the nation until the Fed raised interest rates in 1937. World War II brought the USA out of the Great Depression. The regulated banking cartel worked wonderfully but was phased out because of the ideology of free markets, the Republican Party, and Ronald Reagan. (This is despite the fact that much of the banking deregulation of which Krugman speaks took place when Democrats had an overwhelming majority in Congress and Jimmy Carter was in the White House.)

The beat, of course, goes on. We had prosperity during the late 1990s because Bill Clinton got Congress to raise the top income tax rate from 33 percent to 39.6 percent, and that the Fed-sponsored stock market bubble never existed or was irrelevant to the boom. Or, that cutting the top tax rate from 39.6 percent to 35 percent is largely responsible for the current deficits. We now get Krugman's latest rewriting of history: there has not been an increase in government spending since Obama took office. And so on.

As for the current state of affairs, Krugman actually seems to believe that the responsible thing is for the U.S. Government to continue to borrow and spend as though there is no tomorrow (for inflation can repudiate the debt, and, as all followers of Krugman know, inflation is your friend). Now, despite Krugman's utter partisanship, I am not taking the Republican side of things, especially given that it was the Republicans from 2003 to 2007 who jacked up spending, escalated U.S. involvement in military conflicts around the world, and encouraged the financial bubble that brought down the house.

However, when Krugman is claiming that Obama somehow is a "moderate conservative Republican," then I wonder what planet he inhabits. This president has run the largest deficits in history, has unleashed the EPA to throw a slew of new regulations in the middle of a depression, who is demanding that colleges and universities conduct what essentially are kangaroo courts in order to increase sexual assault claims so feminists will be satisfied, and Krugman fails to acknowledge any of this?

The Keynesian party is over, even if Krugman cannot recognize that we cannot spend our way out of an economic crisis. Contrary to what he claims in The Return of Depression Economics, printing money does not create a "free lunch." However, if the government continues to follow the Keynesian directives of borrowing and spending, the "free lunch" soon enough will create enough destruction to ensure that there will be no lunch at all.

Friday, July 22, 2011

Krugman and Austrians: the depression will get worse

While Austrians and Keynesians don’t agree on a lot of things, there is one thing upon which they both seem to agree: the U.S. economy is sinking into the morass of depression. At that point, however, the agreement ends, as the two schools have very different explanations as to why this is happening.

The Keynesians, through their Paul Krugman and the New York Times megaphone, have been claiming that the original Barack Obama “stimulus” was too little, and the current emphasis upon budget cutting at all levels of government is exactly the wrong strategy. Austrians, not surprisingly, believe that this explanation is nonsense, and dangerous nonsense.

In a recent column, Krugman lays out his thesis, and it is useful, for it truly exposes the Keynesian mind at work, and a Keynesian mind that allows for no other explanations as to what is happening. The problem is – and always will be – a lack of “aggregate demand,” and the only solution is for governments to spend as though they hit the jackpot.

He writes:
The great housing bubble of the last decade, which was both an American and a European phenomenon, was accompanied by a huge rise in household debt. When the bubble burst, home construction plunged, and so did consumer spending as debt-burdened families cut back.

Everything might still have been O.K. if other major economic players had stepped up their spending, filling the gap left by the housing plunge and the consumer pullback. But nobody did. In particular, cash-rich corporations see no reason to invest that cash in the face of weak consumer demand.

Nor did governments do much to help. Some governments — those of weaker nations in Europe, and state and local governments here — were actually forced to slash spending in the face of falling revenues. And the modest efforts of stronger governments — including, yes, the Obama stimulus plan — were, at best, barely enough to offset this forced austerity.

So we have depressed economies. What are policy makers proposing to do about it? Less than nothing.
If anything described the Keynesian mindset, it is this: Spend, spend, spend. It is a simple thesis, one that certainly appeals to politicians, and even to much of the general public, and has dominated professional economic thinking in the USA since World War II. As Krugman has stated above, households cannot spend what they don’t have, and businesses are not going to invest (read that, spend through capital investment – which always is defined by Keynesians as being valuable because of spending, not by aspects of capital productivity) because they don’t see future demand.

So, we are stuck in what Krugman and Keynesians call a “liquidity trap,” which Krugman seems to believe ends all other discussion. (The notion is that the Law of Opportunity Cost is suspended during a “liquidity trap” because interest rates are low, resources are “idle,” and government can borrow at near-zero percent and spend without consuming any resources. As Krugman said in his book, The Return of Depression Economics, government spending in this situation can create a “free lunch.” He actually used that term.)

While most mainstream economists are not willing to engage the Keynesians on the idea of the “liquidity trap,” Murray Rothbard did not back away. In his book, America’s Great Depression, he takes on the whole notion of the “liquidity trap” head on, writing:
The ultimate weapon in the Keynesian arsenal of explanations of depressions is the "liquidity trap." This is not precisely a critique of the Mises theory, but it is the last line of Keynesian defense of their own inflationary "cures" for depression. Keynesians claim that "liquidity preference" (demand for money) may be so persistently high that the rate of interest could not fall low enough to stimulate investment sufficiently to raise the economy out of the depression.
Rothbard points out a serious problem with that analysis, noting that Keynes never got the theory of interest correct, claiming interest is based upon “’liquidity preference’ instead of time preference,” which then leads to more incorrect conclusions about the state of the economy. Other Austrians have criticized the theory, as well, including William Hutt and Henry Hazlitt.

Both Hutt and Hazlitt took on the whole idea of “idle resources,” which is behind the notion that opportunity cost can be suspended during a depression. The idea of “idle resources” is based upon a notion that factors of production are unemployed because of a lack of spending, and that a burst of government borrowing (at near-zero, which means almost no opportunity cost) will spread to these unemployed assets and put them back to work.

As I noted before, the Keynesian theory is disarmingly simple; resources are unemployed, so government “stimulates” the economy through more spending, the resources are put to work, and somehow, the economy magically sustains itself. On the flip side, Keynesians hold that if new spending does not occur, then deflation will result, making more resources unemployed until ultimately the economy is in a perverse equilibrium in which huge numbers of people are out of work with no prospects for economic improvement.

Krugman is adamant about this point and is so convinced of his rightness that anyone who might disagree does so only because that person wants to see people suffer or because that person is so beholden to the “discredited” Austrian theories that he or she is incapable of adding anything to the public debate. (In fact, Krugman believes there is no debate at all. His position is right, is proven empirically, and cannot be refuted – even when it is refuted.)

Thus, even though we have seen an explosion of government spending the past few years, according to Krugman, we really are on an “austerity” plan. Why? It is because if the government actually had increased spending on a massive scale, then we would be out of this depression. In other words, since there is only one way out of this morass, and since we are not out of that morass, there hasn’t been enough government spending.

What about the Robert Higgs thesis of “regime uncertainty”? Krugman dismisses that one, too, derisively calling it the “confidence fairy.” Businesses, he argues, are hoarding cash because they see a lack of consumer demand. If governments spend and spend and spend, then businesses will invest, period.

(As for the anti-business rhetoric pouring out from the White House, the surge in regulation, and the demonizing of the oil and coal industries – which are essential players if this economy is going to recover – all of that, according to Krugman, either is non-existent or just white noise, and it certainly has no relevance to our current situation. Why? Because Krugman says so.)

The ultimate answer, according to Krugman and the Keynesians, is to find yet another boom, another possible asset bubble that can work its “magic” at least for a while before it, too, collapses. (Perversely, in a post endorsed by Krugman, Karl Smith hopes that it will be another housing boom.

In reading Krugman and the Keynesians, I always am struck by their notion that assets, economically speaking, really are homogeneous. It doesn’t matter where new spending is directed, just as long as there is spending. Spend, and everything else falls into place.

Second, the Krugman/Keynesian viewpoint is based on an extremely mechanistic interpretation of human action. People within a market setting do not purchase goods they believe will meet their individual needs; no, they spend, as though the spending itself is the ultimate end of an economy.

This is a view that separates production and consumption, making them independent of one another with no true purposeful human action to be found anywhere. There is no meaningful connection between desires of consumers and the valuation of factors of production or the direction that factors go in the various lines of production. It all is something that simply can be described as Y = C + I + G with no need to think further than that tautology.

As I said at the beginning, both Austrians and Keynesians believe we are headed for a steeper economic downturn, perhaps into the abyss of a major depression. However, Krugman and the Keynesians believe that the only salvation is for massive spending and intervention by government. Austrians believe that it is the massive spending and intervention by government that makes things worse, and while Krugman and Company never will admit otherwise, it ultimately is the Austrian paradigm that explains these matters, and explains them with accuracy.

Wednesday, July 20, 2011

Gold at $1600? Paul Krugman says it is a nefarious plot by Glenn Beck!

One of Paul Krugman's constant themes is that the U.S. economy is in a liquidity trap and the only way out is for the government to borrow and spend trillions of dollars. (In other words, if we are not prosperous, we spend as though we are, and the debt created through this scheme magically will take care of itself.)

Of course, a liquidity trap also means deflation, as the normal central bank tool of cutting interest rates to stimulate private borrowing cannot work, as interest rates are too low. Thus, the only way out is through massive government spending.

There is a problem with all of this, however, and that is the fact that not only are food and fuel prices rising, but also other commodity prices, including gold, silver and platinum. What's a Keynesian to do?

Well, since Krugman is in that Princeton group with Ben Bernanke and Alan Blinder, all of which utterly disdain gold and believe that anyone who would buy it as an inflation hedge is a "nut case," I was wondering how The Great One would handle the fact that gold prices have skyrocketed.

(As for the rising price of food and fuel, Krugman on many occasions has blamed the rise on "volatility" or demand from other countries. Since he has declared that there can be no inflation in a liquidity trap, the whole matter is settled -- by definition.)

As always, Krugman fails to disappoint. This time we see that the rise in gold prices is the result of a nefarious plot by...Glenn Beck. After quoting at length from The Street Light, which proclaims that gold prices have "nothing to do with the economy," Krugman declares:
Glenn Beck was financially intertwined with Goldline, and therefore had a financial stake in pushing fears of hyperinflation. And he had many, many viewers. So there was a direct channel through which conservative Americans were being pushed into buying gold.

Market prices almost always tell you something useful. But sometimes what they tell you is that there’s a marketing scam in progress.
Here is the problem with Krugman's analysis: if Glenn Beck and his friends are secretly buying gold in order to entice other people to buy it so that the price will go up well past its fundamentals, they are playing a dangerous game with their own money.

Remember the Hunt Brothers in the late 1970s when they tried to corner the world market on silver? In the short run, they drove the price to nearly $50 an ounce before the whole scheme collapsed. The biggest losers were the Hunts, who lost big when silver dropped to about $11 an ounce in two months (after the scheme was exposed), and then were driven into bankruptcy in 1988 after investors filed numerous lawsuits against them.

Now, I am no expert in buying gold or other commodities, but I don't think that Glenn Beck or any other investor is secretly manipulating the price of gold or anything else. Inflation is a real possibility, given the fact that the U.S. Government has been sending dollars around the globe in an attempt to paper over the financial weaknesses both of banks and central banks. Krugman's insistence that debasing the dollar is the key to prosperity does not exactly give me confidence that I should follow his investment advice and buy government bonds.

Sunday, July 17, 2011

America's Bourbons: Krugman and Reich

A video by former Clinton administration Secretary of Labor Robert Reich has been making the rounds, as Reich (who now is teaching at the University of California-Berkeley) claims to have “solved” our economic problems. What is the problem, according to Reich? Marginal taxes are not high enough.

Indeed, as we shall see, Reich represents a class of people who yearn for the 1950s, when a third of the workforce was unionized, people “believed in government,” tax rates were high, industries such as banking, railroads, airlines, and trucking were tightly regulated, and Americans were fed the kind of news via Progressive newspapers and a regulated broadcast media that the “Reich Class” believed they should have. If one can liken this group to any in history, it would be the Bourbon Dynasty, of which Tallyrand once said, “They learned nothing and they forgot nothing.”

The video, which lasts slightly longer than two minutes and is on the website of the George Soros-funded, features Reich drawing little pictures and numbers that “prove” that most Americans are worse off today than they were in 1980. The problem, he claims, is that by lowering the top tax rates from 70 percent to about 35 percent is the source of nearly all of our woes. (Keeping the 90+ rates that existed before 1964 even would have been better.)

(Robert Murphy has a counter video here that deals in depth with Reich’s arguments, and I won’t repeat what he has said except to say that he is a better economist than Reich.)

Reich says that a strong economy needs a “strong middle class,” and from where does that middle class appear? From the government, of course. His argument goes as follows: we need to confiscate huge amounts of money from rich people (who get rich through nefarious schemes of making and selling goods to others, thereby robbing other people of their wealth). That money then goes to middle class people through government jobs or a private transmission mechanism in which workers are unionized.

Because middle-class people supposedly are more likely to spend a larger share of their incomes than wealthy people (who get their money dishonestly, anyway), the economy is lubricated through middle-class spending. Wealthy people, on the other hand, have the temerity to save some of their money, which drags down the economy.

Furthermore, according to Reich, private enterprise left not controlled by the state concentrates wealth, as income flows from middle-class and poor people to wealthy people through the transmission mechanism of the market. The explanation is easy: businesses make profits, and profits are little more than a scheme by wealthy people to confiscate money from the less fortunate, and profits serve no purpose other than to enrich undeserving people.

Unless taxes are raised to high levels for wealthy people, this process will continue unabated – as it has since 1981 – until Wise People from Washington, Cal, Princeton University, and the New York Times step in and convince recalcitrant lawmakers to understand the Great Wisdom contained in their analysis.

(You see, from 1981 until 2009, all of Washington was under the thrall of Free Market Economics in which no one regulated anything, taxes were almost zero, and rich people ran wild until they ran the whole thing into the ground. There was a brief renaissance under the Great Wisdom of Bill Clinton, who raised the top rate to 39.6, thus setting off an economic boom, but George W. Bush and the hyper-free-market libertarians took over in 2001 and lowered the top rate to 35 percent, which is why the economy ultimately crashed. Paul Krugman already has explained everything in his columns.)

The amazing thing is that even though the “commanding heights” of our society from the media to academe to the leaders of Washington, D.C., believed that this strategy was wrong for America, their wisdom was ignored, as shysters like F.A. Hayek mesmerized Americans with their rhetoric and sweet talk about the wonders of free markets, even though the Really Wise People knew better. Somehow, despite the fact that the Austrians were not given any academic economics positions at any “elite” university, and despite the fact that all the media outlets were utterly hostile to them, they still managed to hypnotize nearly all of America.

The Reich Class claims that these shysters even managed to hypnotize Ted Kennedy, Jimmy Carter, and an overwhelmingly Democratic Congress in the late 1970s and in 1980 to change the regulatory structure of banking and transportation! If Paul Krugman’s many missives are true – and they have to be, since he is on the Princeton economics faculty – then Kennedy and Carter must have been closet Republicans and Reaganites, since Krugman insists that it was Reagan who did all of the “deregulation.”

And, of course, the intellectual-media-political Ruling Class fought against this foolishness but somehow the Misesians and the Hayekians and Rothbardians prevailed, and now we see the results: real income has fallen consistently since 1981 for the middle class and risen for the rich, and now we are in depression. (The Clinton years, thanks to higher taxes, were golden years, but, then, Reich was part of that government and any government that includes him must be Very Wise.)

There are some problems with the macro-oriented view that real income fell for most Americans as a result of lower tax rates: it rests on the premise that the economy is exactly the same in every respect today as it was 30 years ago. Cars are exactly the same, communications are the same, clothing is the same, everything. There has been no entrepreneurship that has made life any better for most people, as entrepreneurship, according to the Reich Class, does nothing but make a few people wealthy – at the expense of everyone else.

According to the Reich Class, an economy is nothing more than a transmission mechanism of money; the electronic goods we purchase, if one reads Reich Classers like Robert Kuttner, are there only because of government agencies like NASA. If we are not starving, it is because of the Great Wisdom of the U.S. Department of Agriculture. As long as enough tax dollars flow to Washington, government scientists will continue to invent and create new products that falsely are attributed to entrepreneurs like Steven Jobs, who are nothing more than worthless rentiers whose very presence creates poverty and should be eliminated from our body politic.

As for finance, the Reich Class holds that the Foundation of Wealth in the world is the U.S. Treasury Bond, and that any attempt to stop the Holy Event of Raising the Debt Ceiling will cause financial “shock waves” throughout the world. Now, I am sure that the Reich Classers really believe that U.S. Government paper is sacrosanct, but anyone who knows about the basics of finance can see that U.S. Government bonds are fraudulent.

First, keep in mind that no other entity in this country, from municipalities to states to corporations, are permitted to sell bonds in order to pay for previously issued bonds. That is known as fraud, and the reason that the U.S. Government needs to debt ceiling raised is so that it can have funds to pay back what it owes on previously-issued bonds. This hardly is the stuff of sound finance.

Second, unlike municipal bonds (which have to go for specific capital projects like sewer repair) and corporate bonds, which also are issued for explicit things, U.S. Government bonds are spent on just keeping the government running, including paying for employees who play solitaire on their computers all day and for destructive wars abroad. In other words, the U.S. bonds are issued simply to continue the charade that the government has enough money to run its operations.

Now, an official “default” no doubt will bring headlines and a chorus of angst from the Usual Suspects, but it won’t change the underlying reality about the economy, something that the Reich Class Bourbons simply cannot understand. Few, if any, of them are entrepreneurs or know anything about what entrepreneurs do. For that matter, they know nothing about running a business (even though they believe they know EVERYTHING about such things).

What they do know, however, is how to draw a government paycheck and how to live off the wealth of people like George Soros. And they know they are always right, even when they are not.

Tuesday, July 12, 2011

Do we need jobs, or do we need real economic growth?

In my criticisms of Keynesians in general and Paul Krugman in particular, I have said that the Keynesians tend to ignore simple Opportunity Cost. For example, in his best-seller, The Return of Depression Economics, Krugman declared that printing money in the face of a so-called "liquidity trap" provided what he called a "free lunch."

Well, it turns out that Alan Blinder has rejected the notion of a "free lunch," or at least he claims to reject it. In a recent article in the Wall Street Journal, Blinder, while calling for a new "jobs" program, admits that his suggestion is "mitigation," not a "cure," as "there is no such thing as a free lunch." Of course, he then goes and lays out the plans for what essentially is a "free lunch" when it comes to dealing with the economy, as we shall see shortly.

Krugman, on the other hand, takes a more "bold" approach. Unlike Blinder, who advocates a "jobs tax credit" to employers, Krugman wants massive new borrowing and spending by the government in order to create a vast federal employment apparatus. He asks, in a rejoinder to those who say the "stimulus" did not work:
Everybody knows that President Obama tried to stimulate the economy with a huge increase in government spending, and that it didn’t work. But what everyone knows is wrong.

Think about it: Where are the big public works projects? Where are the armies of government workers? There are actually half a million fewer government employees now than there were when Mr. Obama took office.
Krugman further claims that most of the "stimulus" actually "consisted of tax cuts, not spending," and the government's attempt for mortgage relief has failed because the government has not tried it, spending only $2 billion of the $46 Congress set aside for the program. Even if that is true, Krugman has not explained how mortgage relief would jump-start the economy.

If there is a difference between Blinder and Krugman (even though they both teach at Princeton University), however, I would say that Blinder believes that any "jobs program" would provide temporary relief while Krugman seems to be a True Believer that new government jobs would promote new spending which would give the economy what he calls "traction" to move on by itself. What neither person seems to understand, however, is that unemployment is a symptom of the current economic problems, not a cause.

Now, to a certain extent, Krugman kind of understands this, but only on a most superficial and, frankly, circular basis. In Krugman's analysis, spending creates jobs, but then people with jobs also spend, so if the economy suffers from a lack of spending which causes people to lose their jobs, then the government should start spending so that people can get their jobs back so they can spend.

Neither person seems to have a clue as to what an economy really is, and neither seems to understand even the most fundamental basis of production. To them, an economy is something that just happens; spend the money and an economy magically appears. And if an "economist" cannot even understand an economy or only can explain its workings in the most superficial and mechanistic fashion (Y = C + I + G), then he or she pretty much is incapable of understanding that a "job" is not an independent and random creation of the state, but rather the employment of factors of production that is purposeful in nature.

To Keynesians such as Krugman and Blinder, factors of production really are homogeneous; as long as money is spent, it will flow evenly to all of those factors that currently are unemployed and lift them back into employment at the same time. Yet, one cannot understand the dynamics of a recovery unless one understands the simple fact that factors of production are heterogeneous.

This goes back to the Keynesian view of the boom, which Keynesians see as a good thing. When the bust occurs, argue Keynesians, government must spend to "fill the hole" (in Krugman's words) in order to keep boom conditions flowing. However, the booms do not go off the rails because of a lack of spending per se, but rather because the boom is based in large part upon spending and investment that is directed toward lines of production that cannot be sustained because consumer spending is trying to move in a different direction.

The contraction, or recession, actually is a corrective action in which the malinvested resources no longer are receiving the same amounts of investment money, with entrepreneurs looking for those lines of production that are sustainable, given consumer preferences and choices. The bitter irony is that the government's "stimulus" actions, along with its regulatory initiatives, are trying to keep resources in those unsustainable lines of production and actually are blocking a recovery.

Furthermore, President Obama has painted himself into a corner. By continuing the Bush initiatives to deal with the original crisis and prevent the necessary liquidation of some lines of production, Obama also has guaranteed that an ensuing correction will be much worse than it would have been had the economy been able to take a corrective course four years ago, and I think that he and his advisers know it.

Unfortunately, Obama continues to insist that he can do the impossible: direct investment into lines of production that are unsustainable in a free market (such as "green energy") and blame Bush and the Republicans for everything. (And Bush and the Republicans bear a lot of responsibility, but Obama is in his third year of office and he only has made things worse.)

The sad fact is that the American economy has not yet seen the very necessary economic correction that needs to happen before we can have a real recovery. The political classes have done all they can to block the correction, which means that we are going to have the worst of both worlds: economic stagnation. There is a way out, but neither the "elite" economists nor the people in political power are willing to take that route, and everyone else will pay for their foolish choices.

Monday, July 11, 2011

Update on our adoption of Sintija

This past weekend, we drove to New York City to get Sintija, who is staying with us for five weeks this summer. This is part of a hosting program that is separate from the adoption process, but plays a part in the process, no less.

Our hope is that there will be a good relationship established (and we already are off to a good start, even if she speaks no English) this summer so when (Lord willing) we are assigned to her and travel to Latvia in the fall, that things will go well. This process with Latvia is long and costly and requires three trips to the country, but so far we have managed to get to this point.

After arriving home last night, Sintija slept until about 10 this morning and was greeted by our two dogs, Teddy (the one in the picture) and Spanky. We are happy to report that this first meeting was successful!

Again, this is a long process, but I can tell readers already that we really like Sintija. She is tall for her age (12, turning 13 in October) and is a prettier girl than what we had seen in the original picture. She seems to have a wonderful, mischievous personality, shy, but at the same time ready to be part of our family. She does not yet know we are trying to adopt her, and may not know until the fall.

So, pray for us that this will turn out to be a wonderful time. Thanks to all of you who have supported us.

Friday, July 8, 2011

Krugman and "economic fallacies"

With the job numbers today looking dismal, I figured that the Paul Krugman would call for more borrowing and spending, and he did not disappoint. However, as an added bonus, Krugman also declares certain things to be "economic fallacies," which not only turns upside down any meaning of "economics," but also is built upon that Mother of All Economic Fallacies, the "Fallacy of the Broken Window."

Krugman writes:
One striking example of this rightward shift came in last weekend’s presidential address, in which Mr. Obama had this to say about the economics of the budget: “Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.”

That’s three of the right’s favorite economic fallacies in just two sentences. No, the government shouldn’t budget the way families do; on the contrary, trying to balance the budget in times of economic distress is a recipe for deepening the slump. Spending cuts right now wouldn’t “put the economy on sounder footing.” They would reduce growth and raise unemployment. And last but not least, businesses aren’t holding back because they lack confidence in government policies; they’re holding back because they don’t have enough customers — a problem that would be made worse, not better, by short-term spending cuts.
Notice what Krugman is saying: Government magically can do away with opportunity cost by spending. (Yes, I know, his argument is that government spending will transform "idle resources" and then give the economy "traction" to move on its own.)

Furthermore, he is not listing anything close to an "economic fallacy." Instead, he is dealing with policy issues, while having economic implications, are not economic theories themselves. An "economic fallacy" deals with a violation of either premises or what we might call a "law" of economics.

Perhaps the most famous of the fallacies is about which Frederic Bastiat wrote in "What is seen, and what is not seen" when he described the view that "broken windows" are necessary to keep an economy going:
Have you ever been witness to the fury of that solid citizen, James Goodfellow, when his incorrigible son has happened to break a pane of glass? If you have been present at this spectacle, certainly you must also have observed that the onlookers, even if there are as many as thirty of them, seem with one accord to offer the unfortunate owner the selfsame consolation: "It's an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glaziers if no one ever broke a window?"

Now, this formula of condolence contains a whole theory that it is a good idea for us to expose, flagrante delicto, in this very simple case, since it is exactly the same as that which, unfortunately, underlies most of our economic institutions.

Suppose that it will cost six francs to repair the damage. If you mean that the accident gives six francs' worth of encouragement to the aforesaid industry, I agree. I do not contest it in any way; your reasoning is correct. The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen.

But if, by way of deduction, you conclude, as happens only too often, that it is good to break windows, that it helps to circulate money, that it results in encouraging industry in general, I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.

It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.
What Krugman advocates, of course, is something like the "Broken Window Fallacy" (all in the name of claiming that the BWF is a fallacy in itself), for unless government spending via taxation, monetary creation, and borrowing can create wealth where there was none before, government simply is transferring resources or it is blocking the transference of resources from lower-valued to higher-valued uses.

Now, it is true that if government cuts spending, it will create more unemployment in the short run, but to Krugman, there only is a short run. Because the Keynesian viewpoint holds that resources (for economic purposes) are homogeneous, it does not matter where spending is directed, just as long as "new jobs" are created.

Yet, it DOES matter where spending is directed and it is not a fallacy to emphasize that point. For the past three years, the government has engaged in policies of bailouts, "stimulus" spending, new regulations, and throwing huge amounts of money at "green" energy projects, and we are further away from an economic recovery than when we started.

Yes, Krugman can claim that government spending is falling and that the government already is engaging in "austerity." That is nonsense, but nonsense is what prevails in Washington.

Monday, July 4, 2011

Krugman's Keynesian Cash Con

In the Keynesian system, spending IS demand, and the more spending, the more demand, and the more demand, the more production to meet the demand. There is a nice logic to the system, which is why it has a widespread appeal.

Economics, however, looks under the surface to deal not only with issues of causality, but also to take apart that which seems to be true and to ferret out those things which others taking a superfluous view have missed. For example, the typical "man on the street" believes that the value of, say, gasoline is derived from the value of crude oil and the various aspects of cost of production.

Thus, when the U.S. Government slapped price controls on domestic crude oil in the name of making it less expensive to create gasoline, the typical politician, journalist, and Keynesian economist, as well as the "man on the street," believed that was supposed to be the case. It was as though the Marginalist Revolution of 1871 and the development of Neoclassical Economics had not happened, that Alfred Marshall's "Derived Demand" of the factors as well as Carl Menger's important insights never existed.

I say this for two reasons. First, much of what Krugman writes is in the line of the discredited "Cost of Production" Theory of Value. Here is a guy who along with other "liberal" economists during the California electricity crisis of a decade ago (brought about by price controls levied by California authorities) declared that the way to "solve" the problem was...more price controls. (He even said that price controls would increase the supply of electricity, which even for Krugman is an amazing thing in its repudiation of Neoclassical value theory.)

Second, in recent commentary, Krugman has turned to the situation of so-called "corporate cash" in which banks and corporations are making paper profits, but holding onto large sums of money. Now, I have no problem with the numbers he is using, and I have no doubt that banks are not loaning out a lot of their excess reserves (and Krugman hardly is the only one saying this, given Robert Higgs has written similar things and his perspective of this crisis is 180 degrees opposite of what Krugman is saying).

People can agree on basic data, but the interpretation not only of why banks and corporations are not loaning and investing long-term but also of the reason that we don't have more inflation is where the debates exist. Krugman, not surprisingly, takes the Keynesian view:
So here’s what you should answer to anyone defending big giveaways to corporations: Lack of corporate cash is not the problem facing America. Big business already has the money it needs to expand; what it lacks is a reason to expand with consumers still on the ropes and the government slashing spending.

What our economy needs is direct job creation by the government and mortgage-debt relief for stressed consumers. What it very much does not need is a transfer of billions of dollars to corporations that have no intention of hiring anyone except more lobbyists.
Elsewhere, he writes:
In fact, that idle cash has become a major conservative talking point, with right-wingers claiming that businesses are failing to invest because of political uncertainty. That’s almost surely false: the evidence strongly says that the real reason businesses are sitting on cash is lack of consumer demand. In any case, if corporations already have plenty of cash they’re not using, why would giving them a tax break that adds to this pile of cash do anything to accelerate recovery?
In other words, all that needs to happen is for the government to accelerate spending, either by taking some burdens off consumers or for the government to seize and spend the money itself. That is why Krugman has reversed his view that he told other economists and me in 2004 that 70 percent tax rates "were insane," and now is endorsing higher income and corporate taxes in order for government to confiscate money and spend it.

What I find interesting is his utter dismissal of Higgs' contention that "regime uncertainty" has anything to do with corporate investment. Even if government is to confiscate most corporate profits in the future with high taxes, not to mention the imposition of more regulations, in Krugman's view, the band in "Animal House" will continue to try to march through the wall. As long as there might be "spending" in the future, corporations automatically will engage in capital investment. That is nonsense.

Furthermore, as Higgs pointed out, if banks start making loans wily-nily from their huge monetary base, we WILL see a big rise of inflation. For Krugman, inflation is good; it will "stimulate demand" and repudiate debt, and magically remove us from what he calls a "liquidity trap." Higgs, on the other hand, who is a far wiser person than Krugman ever will be, has much better insights. Uncertainty really does matter, and while Keynesians refuse to read Higgs, the man is right.

Krugman writes that we are forgetting the "lessons of 2008" as though his view were self-explanatory. He refuses to acknowledge that the housing bubble occurred because government guarantees and the infamous "Greenspan/Bernanke Put" in which the Fed promised to backstop whatever foolishness the banks engendered was a major reason that banks and other lenders ran over the cliff.

To Krugman, profits and losses mean nothing, and prices and interest rates don't send any meaningful economic signals. The regulator under the Democratic administration is All-Knowing and All-Wise, while the regulator (usually the same person) under the Republican administration is a devotee of Ayn Rand.

So, Krugman actually wants us to believe that if government confiscates large amounts of corporate cash and spends them on politically-based projects, that corporations automatically will start investing for the future. Apparently, one of those projects must be that proverbial bridge in Brooklyn that Krugman is trying to sell us.