Is the Fed Hampering the Recovery?

In his blog post on "Calvinist Monetary Economics," Paul Krugman claims that a recent Wall Street Journal op-ed by John Taylor on why he believes the Fed is hampering the recovery by keeping interest rates low falls into the "Calvinball" category. Writes Krugman:

For those who don’t read the classics, Calvinball is a sport in which you change the rules whenever you feel like it, very much including in the middle of games.

Back then the tight-money types were inventing new and peculiar principles of monetary policy on the fly; it was obvious that they were looking for some reason, any reason, to justify a rise in rates, because, well, because.

Krugman goes on:

Now Taylor is doing the same thing. He claims that he can show that the Fed’s low-rate policy is actually contractionary, using “basic microeconomic analysis”. Actually, as Miles Kimball points out, he’s committing a basic microeconomic fallacy — a fallacy you usually identify with Econ 101 freshmen early in the semester (and as it happens the same fallacy committed by Rajan).

For Taylor argues that low rates engineered by the Fed are just like a price ceiling that reduces the supply of loans, and therefore reduces overall lending.

Wow. No, the Fed’s interest rate target isn’t a price control; there is no legal or other restraint on the rates lenders can charge. The Fed is driving down interest rates, or equivalently driving up the price of bonds, by buying bonds; I can’t think of any kind of economic analysis in which that would reduce the quantity of bonds sellers end up issuing, that is, the amount of borrowing (and lending) in the economy.

 I'll put all of this controversy in the simplest of terms: Keynesian orthodoxy claims that lower interest rates will always have a positive effect upon the economy because the low rates encourage more borrowing, ceteris paribus, even in a so-called liquidity trap. The issue of the "liquidity trap," according to Keynesians, is that other factors are holding back "aggregate demand" so that lowering rates by themselves cannot create enough aggregate demand to lift the economy out of a downturn.

That is where fiscal policy comes in, and that is what Krugman has been saying. Thus, anyone who might claim that attempts by the Fed to push down interest rates might have an opposite effect of what is intended is playing "Calvinball."

The Keynesian approach is pretty straightforward, maybe even crude. All economic activity of an economy, all of the relative prices, all of the relations of production, the products creates, everything, can be put into two functions, aggregate demand and aggregate supply. Push aggregate demand to the right, and as long as the AS curve in not in its steep region, economic growth will occur without too much inflation.

Should the economy be in a "liquidity trap," then the only way to get the AD curve to move to the right is for government to engage in lots and lots of spending. The positive results from the spending then will trickle down to everyone else, provided government spends "enough." However, as Bob Murphy has noted, it seems that Krugman is playing some "Calvinball" of his own:

Here is my observation: Paul Krugman will say that government spending has surged under Obama (and Bernanke has engaged in monetary stimulus) when he wants to blow up right-wingers for their failed predictions, yet referring to the same period of time he will say that government spending has actually been either normal or even contractionary, when explaining why his Keynesian solutions haven’t fixed the economy.

 Certainly, Krugman is not above using the "Heads I win, tails you lose," method of arguing. However, I'd like to address a larger question: Can the Fed's "expansionary policies" actually have a contractionary effect upon the economy?

I'd like to take a different approach than has Taylor and point out that the Fed's purchases of securities of all types -- government, mortgage securities, private assets -- is done in order to keep the asset prices high and send false signals to the markets that these securities are worth more than they really are. (The only word for it is fraud and I should point out that when someone in private business, as opposed to Ben Bernanke, tries to artificially jack up the price of securities, he is likely to be prosecuted.)

The Fed wants to drive money toward those assets by keeping their prices artificially high, and I would argue this has two problems that do hamper the economy:

• First, it prevents the needed liquidation of those assets which cannot be supported by market activity so that investors and entrepreneurs can follow real price signals to see where lines of sustainable investments are located. By throwing in what essentially are false prices, the Fed is making it harder for entrepreneurs to find the suitable production lines;

• Second, the Fed's policies discourage savings (which makes Keynesians very happy, given their vaunted "multiplier" is 1 over the savings rate, so the less we save, the greater the "multiplier"), as real savings provide the liquid capital for long-term investments.

Given Krugman's mechanistic views of the economy and his overt hostility toward economic activity that is not created by government fiat, I doubt what I have said would convince Keynesians of anything. To them, the economy is a simple thing controlled by levers of spending with the Really Smart People in Washington and at Princeton knowing at all times when to "step on the gas" and "when to apply the brakes."

Nonetheless, I also would argue that the Fed is holding back the recovery, even as it acts in the name of "aggregate demand." This isn't "Calvinball." It is economics.

Krugman: The State Makes and Producers Take

Paul Krugman definitely is a class warfare sort of guy, but to him, the parasite classes are those that actually produce something, while people who simply consume are the real producers. There is no other way around his recent attacks.

Furthermore, Krugman at least has come into the open by insinuating strongly that the State owns everything, and anything that we keep is nothing more than a gift from the authorities. Now, even there, I will say that there is room for discussion, such as the question asking whether or not income taxes are more fair than sales taxes or value added taxes, but in the end, we still are at the same place: Krugman believes that the State is nothing less than an out-and-out god creator.

Krugman's latest column is more of the same. First, it has his normal partisan shilling, with an attempt to come up with an explanation as to why Republicans might disagree with The Great One. Second, he once again attacks entrepreneurs, assuming that those who actually create something in the economy are the real parasites, echoing Barack Obama's "You didn't build that" theme.

Before going further, however, let me say that the Republicans actually had a candidate who stood up for free markets, called for peace abroad, free trade, and sound money. The Republicans not only rejected him, but they also treated him about as badly as a party could do. While I registered a few years ago in Garrett County as a Republican, it was so I could vote for Ron Paul in the primaries, and sooner or later I will have to change my registration back to Independent.

My point is that the Republicans really have not done anything that warrants a coherent defense. If they ever decide to be a party that promotes liberty instead of a party promoting warfare abroad and police and prosecutorial abuse at home, then I might be interested in taking a look at them.

Nonetheless, the Republicans' slide into political oblivion is not my main concern. What does concern me, however, is that Progressives like Paul Krugman are winning in the government's all-out war against real-live entrepreneurs, people that Krugman simply attacks by calling them "rich."

We have to understand that there are three kinds of "rich" people in this country. The first group includes people who have inherited large sums of money, the "coupon clippers." For the most part, these people solidly vote Democrat. They sit on boards of foundations, arts councils and the like, and tend to be very liberal in their politics.

While they might not be happy about having to pay more taxes, they generally can afford the increases and by supporting tax hikes, they can receive free publicity for being "humanitarians" and "unselfish" citizens, people worthy of their great wealth. They became wealthy because they were born into wealth, but unlike their ancestors who had to save and invest, these noble people don't have to worry about getting their hands grubby in the marketplace.

The second group includes people like Warren Buffett, the "political entrepreneurs." These are people who tend to be politically-connected, and while they might actually have made large amounts of money through their own enterprise decisions, those decisions often are tied into decisions made by legislators or other government officials. A lot of former and current politicians such as Al Gore and John Kerry also are in this group.

Gore recently was listed at having a net worth of more than $100 million, and that was before he got the sweetheart deal to buy Apple stock at about $7 a share, about $493 below the price per share that mere mundanes have to pay. Although he was simply exercising a director's stock option, Gore became a director because of his political career, not because of any entrepreneurial talent. While he likes to tout himself as an entrepreneur, generally Gore has made money by being tied into government-protected "investments" in "green energy" firms, making speeches, and demanding that free speech be ended if it involves disagreeing with him on global warming.

For that matter, Paul Krugman tends to fall somewhat into this category, given the fact that his partisan writings have made him popular with certain groups of people. Like Gore, he has become a multimillionaire, although he has not had to take any risks in the process, unlike those real entrepreneurs Krugman loves to hate. Take away the partisan politics and Krugman is well-known in academic economic circles, but not elsewhere.

In his book, Throw Them All Out, Peter Schweizer documents how these politically-connected people make their money. One reviewer of Schweizer's book describes how Obama's "green energy" people distributed tax dollars:

Perhaps the most disturbing revelations come from Schweizer's investigation into the Obama Energy Department and its infamous "green energy" loan guarantee and grant programs, a program Schweizer calls "the greatest -- and most expensive -- example of crony capitalism in American history." The scandal surrounding Solyndra -- the now-bankrupt, Obama-connected solar power company that received a federally guaranteed loan of $573 million -- is well known. But Solyndra, Schweizer says, is only the tip of the iceberg.

According to his research, at least 10 members of President Obama's campaign finance committee and more than a dozen of his campaign bundlers were big winners in getting tax dollars from these programs. One chart in the book details how the 10 finance committee members collectively raised $457,834, and were in turn approved for grants or loans of nearly $11.4 billion -- quite a return on their investment.

In the loan-guarantee program alone, Schweizer writes, "$16.4 billion of the $20.5 billion in loans granted went to companies either run by or primarily owned by Obama financial backers -- individuals who were bundlers, members of Obama's National Finance Committee, or large donors to the Democratic Party." That is a staggering 71 percent of the loan money.

Schweizer cites example after example of companies that received grants or loans and documents their financial connections to the Obama campaign and the Democratic Party. And he shows how "the [Energy] department's loan and grant programs are run by partisans who were responsible for raising money during the Obama campaign from the same people who later came to seek government loans and grants."

These, of course, are the very kind of "rich" that Krugman praises. Their wealth heavily depends upon schmoozing politicians and is tied into governmental policies, and they tend to be politically liberal. That most of their "investment" actually weakens the economy is irrelevant. They have the correct political views and the correct political ties, so they are sacrosanct.

You won't see Al Gore or John Kerry arguing against higher tax rates, and why should they? For the most part, they either can shelter their income or pay the extra bit, knowing that they will receive huge amounts of free publicity for their "selfless" actions. Furthermore, their own investments will not be placed at risk by the new confiscatory tax policies.

Then there are the people Krugman hates, the real entrepreneurs, the people who have taken real risks and made their money in the markets without the political favors. Moreover, many are in the "millionaire next door" category, business owners who have saved (Oh, the HORROR! Predatory Savers in our midst!), invested, put off present consumption, and maybe don't have the proper educational "credentials."

Many of them tend to be conservative in their politics, many go to church (more "proof" that they are wicked parasites who don't even subscribe to correct thinking), and they are people whose investments are put at risk by government policies. In short, these are the people who have built the economy, people who have had vision and have worked hard.

Krugman considers people in this group to be utterly devoid of any decency at all. They don't think like him (some even believe in "Intelligent Design") and the way they handle their economic affairs truly gets on his nerves. Worst of all, they don't "consume" or "spend" enough of their incomes for Krugman's liking, and many of them don't even read the New York Times!

Perhaps the most telling quote is his claim that only Republicans live in intellectual bubbles:

Well, I don’t have a full answer, but I think it’s important to understand the extent to which leading Republicans live in an intellectual bubble. They get their news from Fox and other captive media, they get their policy analysis from billionaire-financed right-wing think tanks, and they’re often blissfully unaware both of contrary evidence and of how their positions sound to outsiders.

So when Mr. Romney made his infamous “47 percent” remarks, he wasn’t, in his own mind, saying anything outrageous or even controversial. He was just repeating a view that has become increasingly dominant inside the right-wing bubble, namely that a large and ever-growing proportion of Americans won’t take responsibility for their own lives and are mooching off the hard-working wealthy. Rising unemployment claims demonstrate laziness, not lack of jobs; rising disability claims represent malingering, not the real health problems of an aging work force.

This is rich coming from an Ivy League professor who is tied in with the NYT and Beltway Democrats. These are the people who believe that MSNBC is mainstream and "moderate," and anyone who does not hold their secular, urbanite views of the world really has no right even to exist.

I went to high school with a couple of people in the Sulzberger family (publisher of the NYT), and talk about people with limited viewpoints. They literally could not see anything outside of their circles and expressed utter contempt for anyone who did not share their views.

In a politicized world, people do tend to live in bubbles and their ability to think becomes limited. I remember a conversation with a Democratic Party activist in which I asked him (during the mid-1980s) why the economy of the U.S.S.R. was so backward compared to ours. He replied, "It is because the U.S.S.R. has not been a country as long as the United States." Yes, he really believed that.

Thus, I doubt seriously that Paul Krugman ever has ventured outside of his own cloistered surroundings to speak to real-live business owners who must make hard decisions when governments impose new minimum wages or jack up taxes. To Krugman, they are nothing more than parasitic whiners and he is not interested in even trying to understand another point of view. To him, these people are ignorant rubes and the sooner they are replaced with people on government payrolls or people receiving transfer payments, the better. After all, these people will spend their incomes which makes them the true economic benefactors.

"Deficit Hawk Down," Financial Delusion Up

Yes, readers, I do agree with Paul Krugman when he says that the federal budget deficit is not the central fiscal issue that the U.S. Government and the U.S. economy face today. However (and you KNEW there would be a "however" coming), we disagree for opposing reasons.

In his latest column, Krugman attacks what he calls the "deficit hawks" (thus, the clever title for the column) who he says have always been wrong on the real effects of federal budget deficits:

Mr. Obama’s clearly deliberate neglect of Washington’s favorite obsession was just the latest sign that the self-styled deficit hawks — better described as deficit scolds — are losing their hold over political discourse. And that’s a very good thing. Why have the deficit scolds lost their grip? I’d suggest four interrelated reasons.

His reasons are as follows:

• A true Greece-style meltdown has not happened; therefore, it cannot happen here;
• Deficit spending as a share of GDP supposedly has started to decline, and the "deficit hawks" had predicted a reverse secular trend, i.e. recent deficits have become slightly smaller than previous years;
• Advocates of government "austerity" are wrong because "austerity" did not immediately bring about full economic recovery where it was practiced;
• The anti-deficit agenda really was a not-so-secret attempt by Evil Republicans to impose an unrelated evil political agenda.

 There is what I would call a "fifth reason" that Krugman says is a reason why the deficit hawks should not worry: the deficit is a good thing, not bad:

...it was, in fact, a good thing that the deficit was allowed to rise as the economy slumped. With private spending plunging as the housing bubble popped and cash-strapped families cut back, the willingness of the government to keep spending was one of the main reasons we didn’t experience a full replay of the Great Depression.

Whether or not one believes that the government's bank bailouts and subsequent "stimulus" spending prevented a return to 1933 is not answerable because one would have to prove a negative. What we are supposed to believe, however, is that "trickle-down" economics works when the government is in charge.

What happens? The government gives money or financial credits to politically-connected financial institutions and everyone pretends that the market values of the assets of those institutions are higher than what everyone understands is the case. (If you try to do this in private, the government will charge you with "fraud." However, if it is done by the government, it is called "saving the economy.")

Under outright stimulus, the government directly issues funds to politically-favored groups and the individuals then spend the money with the idea being that the good effects will "trickle down" to the rest of us who do not have the same political connections. Somehow, after we spend what money is left over, the effects will be such that the economy will magically have "traction" and it will move forth on its own.

Moreover, as Krugman argues, since the Fed has managed to push interest rates for U.S. securities to near-zero, then there is almost no opportunity cost for borrowing (and more borrowing). As he declared in a blog post a while back, it is "free money." Because the Fed and the Social Security Administration own the largest single blocs of U.S. debt, we "owe it to ourselves" which apparently means that there are no problems associated with the high debt of the U.S. Government.

What puts the USA in the "catbird's seat" (as opposed to other countries like Greece) is that this country has its own currency, which means that the government essentially can pay its bills with printed money, and since the U.S. Dollar effectively has been the "world currency" for a long time, we can get away with it, while countries like Zimbabwe could not. Unlike Greece, which is on the euro, we can print and devalue forever, and the rest of the world simply has to take it.

The federal deficit is not the problem in and of itself; instead, it is a symptom of a much larger fiscal problem, and that is that the U.S. Government is spending at rates that impose huge burdens on everyone else. In Krugman's Wonderland, government spending always is a net plus, especially when the economy is down.

(Yes, I know that Krugman calls for "austerity" during a boom, but in reality, politicians spend even more if they think the funds are available. Furthermore, I don't recall hearing Krugman call for massive cuts in government spending during the last few years of the Clinton Stock Bubble or during the Bush Housing Bubble.)

Furthermore, in Wonderland, those who are productive are the real "takers," entrepreneurs are irrelevant to a growing economy, the most desired industries are those that receive massive subsidies, and it is the people receiving direct government benefits that are most likely to take the entrepreneurial risks that our economy needs to grow. (Face it, that was the gist of Barack Obama's "Progressive" inauguration speech, and Krugman himself declared that there was "a lot for progressives to like" in that speech.

So, if the government spends enough money, if enough people can receive new benefits that they will spend quickly, if the spending "trickles down" to those not receiving the direct benefits, if the government continues to massively subsidize politically-favored "green energy" firms and "green" research, if the Fed continues to keep interest rates low, if the government continues to print money, if the "Inflation Fairy" does its magic, and if everyone just believes in the Greatness of Barack Obama, we someday will have real prosperity. That is the financial delusion that apparently rules in "elite" academic and political economics these days.

The Big Shill

Readers of this blog know that I believe academic economists ought not to be shills for politicians and bureaucrats and let one's writings and pronouncements be infected with political partisanship. I have made that point many times and try to hold to it myself with everything that I write. (And that includes Ron Paul, even though I agree with him on many things. Nonetheless, academic economists should be willing to keep their distance, even from people they like.)

Second, academic economists ought to be able to differentiate between political "victories" by a politician and the economic outcomes. Unfortunately, Paul Krugman in this column manages to violate to principles and once again identifies himself as a shill, a lowly political operative.

It is no secret that Krugman worships Franklin Roosevelt and the New Deal, holding it to an almost mystical standard. That FDR's New Deal attempted to organize the entire U.S. economy into a series of cartels, destroyed agricultural products despite widespread hunger (the destruction financed by a tax on agricultural products), criminalized the kosher killing of chickens, and unleashed petty bureaucrats to burden entrepreneurs with useless rules is utterly irrelevant to Krugman. In fact, he wants us to believe that the New Deal -- which actually kept unemployment higher than it would have been had FDR just stuck to engaging in his adulterous liaisons -- in essence created an economic miracle: "...the New Deal had a revolutionary impact, empowering workers and creating a middle-class society that lasted for 40 years...."

In other words, Krugman wants us to believe that no U.S. "middle class" existed before the New Deal and that by empowering the state to move well beyond previous boundaries, FDR accomplished what no one ever before was able to do. Now, I have no idea how the New Deal could have done that, except that Krugman thinks that empowering labor unions and vastly expanding what truly is an unproductive bureaucracy managed to increase overall wealth in the U.S. economy.

This defies the imagination. The New Deal, from its inception, openly attempted to throw sand in the wheels of production and, thus, result in less wealth in the form of goods and services. Destruction of crops destroyed wealth; creating and maintaining cartels destroyed wealth. This is fundamental, yet Krugman turns the whole thing upside down by claiming that the use of violence (which enabled unions to gain higher wages for themselves -- at the expense of non-union workers) and the expansion of the bureaucracies, which are funded by taxpayers who are forced to give up some of their own wealth, somehow made all of us wealthier.

Krugman's gives himself away by telling readers that making some people poorer somehow is good for the economy. He writes:

That said, health reform will provide substantial aid to the bottom half of the income distribution, paid for largely through new taxes targeted on the top 1 percent, and the “fiscal cliff” deal further raises taxes on the affluent. Over all, 1-percenters will see their after-tax income fall around 6 percent; for the top tenth of a percent, the hit rises to around 9 percent. This will reverse only a fraction of the huge upward redistribution that has taken place since 1980, but it’s not trivial.

There is a huge problem here; Krugman explains that the new tax laws will make a portion of our population less well-off, but he does not adequately explain how that benefits the rest of us. Yes, ObamaCare allegedly will make it easier for some people to have access to health insurance, but ObamaCare itself, with all of its new rules, regulations, and criminal penalties, will result in less medical care overall being made available. Even Krugman admits that the health care law created a "Rube Goldberg device of regulations and subsidies...."

Is it my imagination, or is Barack Obama a magician? One would think that by adding rules and procedures (which, according to the Law of Opportunity Cost will increase overall costs), the government is going to force the medical care "supply curve" to the left (to use economists' jargon). How this is a "victory" for the economy, I have no idea.

In Krugman's view, making one group of people less-well-off is the same thing as making everyone else better off, yet he offers no mechanism other than pure transfer payments. However, transfer payments only distribute existing wealth and they create no new wealth. This is the classic "Zero-Sum Economy," and if that is Krugman's view of things, then how does he explain the fact that overall standards of living for everyone are substantially higher than they were during the New Deal. For that matter, they are substantially higher for everyone than they were during Ronald Reagan's presidency.

I would ask anyone to explain how Paul Krugman's theory of political economy actually demonstrates any causal relationship between New Deal and "Big Deal" policies and an overall rising standard of living. Krugman never has explained how an economy might grow in the first place, except to claim that inflation somehow creates economic miracles. (But even there, he does not explain a causal relationship between inflation and real economic growth.)

Furthermore, his explanation of "capital theory" really is nothing more than a spending theory. The new Apple iPhone, he surmised, might boost the economy because people will buy new ones. Come again? Does the iPhone do away with the Law of Opportunity Cost?

In the end, what Krugman is reduced to shilling for Barack Obama because he is a Democrat who has vastly expanded the reach of the State. And according to Krugman, an expanded and more powerful State through coercion makes us all richer. I'm not sure how that happens, but maybe Krugman will explain everything in a future column.

The Dwindling Truth

Leave it to Paul Krugman to use his New York Times column to shade the truth. (The NYT's former public editor, Daniel Okrent, hardly a right-wing conservative, complained that Krugman's columns often had numerous factual errors. Why am I not surprised?)

In his latest column, Krugman promotes a number of false points and I will deal with some of them. Before looking at the substantive claims (the federal budget deficit has been "solved"), I'd like to begin with one his use of a deceitful term, "nonpartisan." He writes:

Recently the nonpartisan Center on Budget and Policy Priorities took Congressional Budget Office projections for the next decade and updated them to take account of two major deficit-reduction actions: the spending cuts agreed to in 2011, amounting to almost $1.5 trillion over the next decade; and the roughly $600 billion in tax increases on the affluent agreed to at the beginning of this year. What the center finds is a budget outlook that, as I said, isn’t great but isn’t terrible: It projects that the ratio of debt to G.D.P., the standard measure of America’s debt position, will be only modestly higher in 2022 than it is now.(Emphasis mine)

Sorry, Paul, but even your employer, the NYT, describes the CBPP as "left-leaning," the Times is not the only one to make that claim.Let's try Time, The Washington Post, and The National Journal, with none of them being considered "right-wing." What Krugman means by "nonpartisan" is that the CBPP does not officially endorse political candidates, but it clearly shills for Barack Obama and the Democrats in general.

For that matter, given Krugman's definition of "nonpartisan," he would have to claim the Heritage Foundation and Cato Institute are "nonpartisan," given that neither of them endorse actual candidates. Of course, one already knows what he thinks of those two organizations and considers them to be shills for the Republican Party. Yes, this is a small point, but once again we see how Krugman likes to play fast-and-loose with the truth.

On to the meat of the column itself. He writes:

Consider, for example, the case of Social Security. There was a case for paying down debt before the baby boomers began to retire, making it easier to pay full benefits later. But George W. Bush squandered the Clinton surplus on tax cuts and wars, and that window has closed. At this point, “reform” proposals are all about things like raising the retirement age or changing the inflation adjustment, moves that would gradually reduce benefits relative to current law. What problem is this supposed to solve?

 Assume that Al Gore had taken the office (and I am sure that Krugman would claim that he rightfully won it) and had left tax rates where they were. Would there have been deficits in the next few years? I suspect the "Clinton surplus" still would have disappeared for one important reason: the Tech Bubble popped in 2000 and a recession followed in 2001. Krugman writes: "It’s true that right now we have a large federal budget deficit. But that deficit is mainly the result of a depressed economy...." However, he wants us to assume that the reason we had deficits in 2001 and 2002 was that Congress lowered the top income tax rate from 39.6 percent to 35 percent...in 2003.

This is more of the "head I win, tails you lose" method that Krugman uses for his arguments. Now, I agree with him that Bush's wars cost this economy plenty (I don't believe that the economy will "benefit" from "weaponized Keynesianism" and spoke out against these wars from the beginning), but there also is another point that Krugman does not make: the source of larger tax revenues in the late 1990s versus the Housing Boom.

The Tech Bubble centered upon the stock markets and, not surprisingly, we saw a huge increase in the nominal amounts of taxes coming from capital gains during the second Clinton presidential term. In fact, at the end of 2000, capital gains receipts were $80 billion more than they were at the end of 1996. The following financial post also makes it clear that capital gains receipts fell sharply during the Bush years. (Capital gains rates were cut during the second Clinton term, yet they still rose, which surely must vex Keynesians, since they seem to believe such things are not possible.)

You'd better believe we pay careful attention to capital gains here. Friday, the Congressional Budget Office released an analysis of the rise and fall of federal individual income tax revenues from 1994 through 2004. It showed that capital gains accounted for half of the non-legislative changes to individual income tax revenues over the period. Ironically, capital gains revenues increased 0.7% of GDP from 1994 through 2000 under President Clinton, and they fell 0.6% of GDP from 2000 to 2004 under President Bush.

 They didn't fall because rates were cut; rather, they fell because people were not getting huge gains from "flipping" stocks after the Tech binge came to an end. Furthermore, a much different tax regime falls upon capital gains from the sale of houses, which means that the government was not able to cash in on the Fed's recycled dollars during the Housing Boom as it had done a decade earlier when the Clinton Bubble was on the rise.

Krugman, not surprisingly, leaves out that tidbit because it doesn't fit his narrative. Now, I will agree that deficit reduction should not be at the top of the agenda, but for different reasons than Krugman gives. He correctly points out that the depressed economy is responsible for much of the current deficit, although to him that is a good sign:

It’s true that right now we have a large federal budget deficit. But that deficit is mainly the result of a depressed economy — and you’re actually supposed to run deficits in a depressed economy to help support overall demand.

Unfortunately, throughout the piece Krugman trots out his "heads I win, tails you lose" logic. Government spending now is good; but cutting tax rates during a downturn is bad. (The economy was in recession shortly after Bush took office, and Democrats tried to claim that his talking about the recession and his campaign to cut tax rates was the cause of the recession.) The deficit is bad, but not so bad, and if the government inflates the currency, creates more jobs for bureaucrats and keeps entrepreneurs from starting new enterprises, and if the government continues to pay vast subsidies to politically-favored businesses (especially those in "green energy"), then out of that will come a real recovery.

I'm not sure how that will happen, but Krugman believes it will. Enough said.

Japan Steps in It

What do you know? Japan now is out of Paul Krugman's doghouse, and all it took was some inflation. Writes Krugman:

For three years economic policy throughout the advanced world has been paralyzed, despite high unemployment, by a dismal orthodoxy. Every suggestion of action to create jobs has been shot down with warnings of dire consequences. If we spend more, the Very Serious People say, the bond markets will punish us. If we print more money, inflation will soar. Nothing should be done because nothing can be done, except ever harsher austerity, which will someday, somehow, be rewarded.

But now it seems that one major nation is breaking ranks — and that nation is, of all places, Japan.  

Even though Japan's massive Keynesian spending plan in the 1990s did not prevent the "lost decade," nonetheless it seems that the Japanese are ready for their own version of Phase II. (True to form, Krugman claims that Japan's trouble was that it did not build enough roads and bridges to nowhere to have a sustained recovery.)

I'll let Krugman go on with his newest version of the magic of inflation, but I would like to share a great article on the Japanese experience, written by Doug French. Japan, says French, engaged in massive amounts of malinvestment during the 1980s, but the government did everything it could to keep the necessary liquidations from happening:

Between 1992 and 1995, the Japanese government tried six stimulus plans totaling 65.5 trillion yen and they even cut tax rates in 1994. They tried cutting taxes again in 1998, but government spending was never cut. Also in 1998, another stimulus package of 16.7 trillion yen was rolled out nearly half of which was for public-works projects. Later in the same year, another stimulus package was announced, totaling 23.9 trillion yen. The very next year an ¥18 trillion stimulus was tried, and, in October of 2000, another stimulus for 11 trillion was announced. As economist Ben Powell points out, "Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession," with Japan's nominal GDP growth rate below zero for most of the five years after 1997.

 That, folks, means a lot of bridges to nowhere. Unfortunately for Japan, when this latest experiment with inflation and new government spending provides results similar to what happened before, Krugman will claim that the problems was a lack of spending and inflation. I doubt seriously that the Inflation Fairy will grant Japan or Krugman their wishes: a booming economy.

Rage Against the Fraud

When I was teaching in secondary school 30 years ago, I explained to my students how the Fed engages in open market operations and how the Fed expands and contracts what we call the monetary base. I had not been pushing gold, silver, or any other commodity, but one of my students was puzzled.

"What backs the money?" he asked. "Debt," I replied. He and the other students looked at me with astonishment, as they understood instinctively that debt had "value" of dubious worth, and that such a system meant the government could expand the monetary base into oblivion. At that moment, they understood that the USA had essentially a fraudulent monetary system. And, yes, they showed anger, lots of it.

Paul Krugman would have thought them to be a bunch of crazies. Money, after all, is nothing more than a tool that aids a "social system" and that governments can and should manipulate its supply and its value over time in order to help achieve certain social "goals." Anyone who thinks differently, according to Krugman, is certifiably crazy, a nut job.

While he does not explicitly endorse the newest rabbit-from-the-hat scheme in his most recent column, nonetheless he says that it might be necessary because "crazies" in Congress (some Republicans) believe that we cannot continue to borrow money forever and want President Obama to put a lid on spending scheme. Now, I am the first to say that many of these Republicans are delusional but for a different reason than what Krugman claims.

Most Republicans are "hawks" when it comes to U.S. military adventures overseas, and that has been painfully apparent in the discussion over the nomination of Chuck Hagel for U.S. Secretary of Defense. While a U.S. Senator, the Nebraska Republican spoke out against the vast expansion of military spending and the wars in Iraq, Afghanistan, and elsewhere. He also denounced the beating of war drums against Iran, something that has incensed many conservatives who apparently are itching to bomb Tehran and expand U.S. Middle East wars.

I cannot denounce the rightist mindset on war enough. The same people who once decried Soviet military spending now are blind to the fact that even though the USA spends more on its military budget than the rest of the governments of the world combined, that isn't enough, and that any cutback, no matter how small, means that "we are not safe."

Yes, I think it is good that the Republicans at least are talking about entitlements, although I wish they would also deal with the agricultural subsidies and all of the other corporate welfare that has their fingerprints all over it. Since the Democrats have "discovered" that a lot of military spending also comes in the form of welfare, they definitely have become less vocal in their historical opposition (at least following the Vietnam War) to Pentagon spending.

In other words, I don't look at the Republicans as the "good guys" seeking to be financially responsible when, in fact, they are a major part of the problem. However, Krugman denounces the Republicans not for their hypocritical stance on military spending, but rather because they are even asking the hard questions on whether or not we can continue this "borrow-from-Peter-to-pay-Paul" finance scheme. As Krugman sees it, the irresponsibility is not in those that seek to spend and borrow as through the future does not exist, but in those that say we have to stop this madness.

So, what does he do? He endorses what essentially is a money-printing scheme to get around the hard choices and hard discussion. Are we borrowing 40 cents for every dollar the federal government spends? No problem. Just strike a coin with an announced "value," and that will take care of everything. Continue the financial shell games as though one day the economy magically will turn around, get "traction," and then prosperity will return.

I'm on a list serve with a number of Austrians, and one person, a writer and editor, had this to say, and I believe his words are spot on:

The really amazing thing to me in all this is how EVERY commenter I'm seeing, savvy political or supposedly serious economist, acts as if the actual real physical economy where real goods and services are produced seemingly doesn't play into this at all---this debate seems to me to be revealing an apparent actual lack of understanding that money is not the same thing as wealth.

The only way it doesn't reveal that is if -- and this is what i'm trying to be sure I understand -- the trillion dollar coin solution is NOT economically significant if we are already in a world of fiat money. That is, a sort of, "Well, if you accept fiat money at all, this coin nonsense is just as good a means to make money from nothing as any other."

Keynesians would denounce this person as being a rube, an ignoramus, someone who does not "understand economics." Yet, the opposite is true. He is not the one who is delusional. People who pretend that we can spend as though we are much wealthier than we really are truly are the people who are deluded.

A Barbarous Inflation

So, Paul Krugman comes clean about money, or at least his view of it, writing:

For many people on the right, value is something handed down from on high It should be measured in terms of eternal standards, mainly gold; I have, for example, often seen people claiming that stocks are actually down, not up, over the past couple of generations because the Dow hasn’t kept up with the gold price, never mind what it buys in terms of the goods and services people actually consume.

And given that the laws of value are basically divine, not human, any human meddling in the process is not just foolish but immoral. Printing money that isn’t tied to gold is a kind of theft, not to mention blasphemy.

For people like me, on the other hand, the economy is a social system, created by and for people. Money is a social contrivance and convenience that makes this social system work better — and should be adjusted, both in quantity and in characteristics, whenever there is compelling evidence that this would lead to better outcomes. It often makes sense to put constraints on our actions, e.g. by pegging to another currency or granting the central bank a high degree of independence, but these are things done for operational convenience or to improve policy credibility, not moral commitments — and they are always up for reconsideration when circumstances change. (Emphasis mine)

In other words, the supposed "greatest" economist in the world cannot even articulate an Austrian theory of value without slipping into insults, caricatures, and straw men. Actually, Austrians believe that value is subjective and depends upon what individuals are willing to give up in order to obtain something.

Now, we do believe that laws of economics are immutable because they are based upon human action. Is Krugman about to say that the Law of Marginal Utility, the Law of Scarcity, and Opportunity Cost are nothing but mere human constructs that can be changed at the whim of a legislature or a president? Does the Law of Demand hold only when Krugman wants it to do so?

Austrians have favored gold as money not for any "religious" reasons, but rather because over time gold supplies are not easily manipulated, which means governments find it harder to debase the money that people are holding. Now, according to Krugman, this makes me "anti-Enlightenment" because I don't think that one group of people should be able to use covert means to take property from one person and give it to someone else who is politically-favored.

Let's face it. That is exactly what inflation does: it transfers wealth. Krugman can write about "better outcomes" all he wants, but he really is saying that it is better for government agents to have the power at any time to make political decisions that will negatively affect the property and monetary holdings of individuals. Furthermore, when Krugman declares that money "should be adjusted, both in quantity and in characteristics, whenever there is compelling evidence that this would lead to better outcomes," he really means "adjusted" in just one way: expansion of the amount of money in circulation. After all, there can be nothing worse than deflation, at least in the Krugman-Keynesian view.

I would like to turn toward Krugman's insults toward those who do favor gold. I first link readers to what Carl Menger wrote about money in his 1871 Principles of Economics:

Money is not the product of an agreement on the part of economizing men nor the product of legislative acts. No one invented it. As economizing individuals in social situations became increasingly aware of their economic interest, they everywhere attained the simple knowledge that surrendering less saleable commodities for others of greater saleability brings them substantially closer to the attainment of their specific economic purposes. Thus, with the progressive development of social economy, money came to exist in numerous centers of civilization independently. But precisely because money is a natural product of human economy, the specific forms in which it has appeared were everywhere and at all times the result of specific and changing economic situations. Among the same people at different times, and among different peoples at the same time, different goods have attained the special position in trade described above.

There is nothing "anti-Enlightenment" in that paragraph, or in Menger's entire section on money. So, let us turn to Rothbard, since he was much more libertarian than Menger or Ludwig von Mises, to see if he writes from a religiously-mystical viewpoint:

A most important truth about money now emerges from our discussion: money is a commodity. Learning this simple lesson is one of the world's most important tasks. So often have people talked about money as something much more or less than this. Money is not an abstract unit of account, divorceable from a concrete good; it is not a useless token only good for exchanging; it is not a "claim on society"; it is not a guarantee of a fixed price level. It is simply a commodity. It differs from other commodities in being demanded mainly as a medium of exchange. But aside from this, it is a commodity, and, like all commodities, it has an existing stock, it faces demands by people to buy and hold it, etc. Like all commodities, its "price" is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. (People "buy" money by selling their goods and services for it, just as they "sell" money when they buy goods and services.)

In fact, the Austrians have not written about money or gold in any sort of mystical way, as Krugman claims. Yes, they have said that inflation does involve a form of "theft," since government is using it to quietly transfer wealth from one group of people to another, but claiming simultaneously that it is not engaging in such activity. I suspect that if I entered Paul Krugman's house and took some of his possessions without his permission, he also might accuse me of "theft," even if I vociferously protested by claiming that I was simply engaging in an act of "social justice," since he is wealthier than I am.

Of course, Krugman ends with his usual insults posing as an intellectual contribution to monetary theory:

And I do find myself thinking a lot about Keynes’s description of the gold standard as a “barbarous relic”; it applies perfectly to this discussion. The money morality people are basically adopting a pre-Enlightenment attitude toward monetary and fiscal policy — and why not? After all, they hate the Enlightenment on all fronts.

The bottom line is that we aren’t really having a rational argument here. Nor can we: rationality has a well-known liberal bias.

I'm not sure which of the "Enlightenment" figures advocated inflation, including Jeremy Bentham. However, Bentham did call for governments to arrest and imprison people who "might" commit crimes one day, and he favored the surveillance society that we have today. Certainly, the all-encompassing State is a product of post-Enlightenment thinking.

However, when one points out that people are hurt by inflation, and that inflation over time distorts the structure of production and wreaks havoc on an economy, then according to Krugman, those people are wrong because someone before the Enlightenment might have believed the same thing.

Furthermore, Krugman is claiming, apparently, that all systems of thought and all writings and laws produced before the Enlightenment were wrong. Does that include laws against theft and murder? Does that mean Aristotle and Plato were idiots? Who knows. After all, we are not having a "rational discussion," since Krugman now is claiming that any system of thought produced before the Enlightenment automatically is wrong. Somehow, I think that is an irrational way of looking at things.

Moral Obligation Fraud

One of the hallmarks of Keynesian "economics" is the view that one does not differentiate between a real and a paper asset. Paper currency is just as valuable as, say, gold coins and a heck of a lot better, since one can more easily reproduce paper money. Likewise, Keynesians are quick to jump on the "print-money" bandwagon as a quick fix for dealing with a real economic crisis, including the demand that governments essentially defraud its citizens.

Paul Krugman has done this whole thing one better as he calls for the Obama administration to engage in financial fraud under the guise of "moral obligation bonds." Yes, this is the same Paul Krugman who in the past has called for criminal investigations for Wall Street executives (except for Jon Corzine, who was a Democrat politician, so it doesn't matter how badly he defrauded his clients), but the amount of financial fraud in Krugman's proposal would dwarf anything that the most dishonest people in the financial markets had done. Indeed, Bernie Madeoff has slain his thousands and Krugman his tens of thousands.

Before I explain why I believe Krugman is demanding financial fraud, let us examine his own words. He writes:

Don’t like the platinum coin option? Here’s a functionally equivalent alternative: have the Treasury sell pieces of paper labeled “moral obligation coupons”, which declare the intention of the government to redeem these coupons at face value in one year.

It should be clearly stated on the coupons that the government has no, repeat no, legal obligation to pay anything at all; you see, they’re not debt, and therefore don’t count against the debt limit. But that shouldn’t keep them from having substantial market value. Consider, for example, the fact that the government has no legal responsibility for guaranteeing the debt of Fannie and Freddie; nonetheless, it is widely believed that there is an implicit guarantee (because there is!), and this is very much reflected in the price of that debt.

One must admit that this is rich, calling a bond upon which the government legally could default a "moral obligation" security. (And don't forget that the government, even if it paid back this loan, would essentially default via the "magic" of inflation.) This from a person who in past columns has marveled that governments in the past actually took financial obligations and financial treaties seriously.

But it gets even better, as Krugman writes:

And maybe the coupons wouldn’t have to be sold on the open market; why not just have the Fed buy them? Bear in mind that the Fed doesn’t always buy safe assets; it’s buying a lot of mortgage-backed securities (from Fannie and Freddie; see above), and during the worst of the financial crisis it bought lots of commercial paper. So why not slightly speculative pieces of paper sold by the Treasury?

 In other words, the Fed can pretend that what essentially are political securities has real value. That is financial fraud, period. People have gone to prison for much less. And lest one think I have misread Krugman, he gives us this gem:

If there is a legal problem even with selling these coupons, there are still alternatives, such as paying suppliers with these coupons and then having the Fed buy them. The mechanics really don’t matter; as long as we’re in a liquidity trap, printing money, printing conventional debt securities, or printing funny money with no legal standing that nonetheless lets the government pay its bills are all equivalent.

 So, instead of facing the hard reality that the government cannot spend at current levels given the ability of the U.S. economy to produce enough tax revenues, Krugman claims that we can fix our problems by having Treasury and the Fed pull more rabbits from their proverbial hats. Call it what you wish, but this is fraud by every legal and moral definition. It also is the hallmark of Keynesian "economics."

Booms and "Trickle-Down" Spending

One of the real differences between Austrian Economics and what is taught in mainstream Neoclassical thought is the view of the individual. Austrians see individuals as acting with a purpose while many Neoclassicals see people as acting in a more mechanistic fashion. What comes out of this is the viewpoint by Neoclassicals that what might be good for individuals runs at cross purposes to what supposedly is "good" for society as a whole.

I don't mean violent or coercive behavior in which one steals from someone else and makes himself better off while making someone else simultaneously worse off. Instead, I am referring to peaceful, private, and mutually-agreed-upon economic exchange or decisions involving my person or my family, which is at the heart of Austrian thinking. Mises wrote that individuals will act in order to make themselves better off, and when that action comes about via mutually-beneficial exchange with others, the action can have positive social benefits.

For example, when I make an exchange at the grocery store, I am purchasing food that I believe will make me better off in the future, both relieving me of hunger and also providing healthy personal benefits. Likewise, the people within the store who are recipients of my money are able to use that to accomplish their own individual purposes. This is not "mindless" behavior, as many Marxist critics of capitalism like to claim; it is purposeful and not based upon coercion.

Now, I agree that this is pretty much Exchange 101 found in many economics texts, including the mainstream ones, but Austrians and the mainstream part ways when it comes to a broader social viewpoint. To put it another way, Austrians believe that individual freedom to trade one's possessions, be they accumulated wealth in the form of money or goods, or one's labor or talents will have positive social and economic effects across an economy, provided that individuals are free to do these things without coercion. It is the non-aggression principle at work.

Keynesians such as Krugman see things differently. What is good for an individual often is not good for the economy at large. In his recent column, Krugman writes:

...an economy is not like a household. A family can decide to spend less and try to earn more. But in the economy as a whole, spending and earning go together: my spending is your income; your spending is my income. If everyone tries to slash spending at the same time, incomes will fall — and unemployment will soar.

 This is something that intuitively sounds right, but is based upon a principle founded upon a belief that mutually-agreeable exchange and individual action that can be harmful economy-wide, and that if a lot of people decide, for example, to save more money, that is what creates unemployment. The Keynesian-Krugman point has been made on many occasions, and I don't believe I am being controversial when I state it.

At one level, if a lot of people suddenly decide to stop spending all of their income and decide to withhold some present income so that they may consume more later, that obviously will have certain effects upon some part of the economy, as there will be less demand for certain kinds of goods and services. That is obvious and non-controversial.

There is, however, a larger issue Krugman and Keynesians ignore, and that is why this change of behavior has occurred. In the Keynesian view, just as Malthus once held, this change is not a rational response to a set of changing economic conditions; instead, it is irrational, "animal spirits" behavior. It just happens. People just stop spending and start saving, and then the whole Fallacy of Composition kicks in and kicks down the economy.

 Austrians note that when booms run their course -- as they invariably do -- and that the current level of activity in certain sectors cannot be sustained through normal exchange, then people are going to adjust their behavior. Furthermore, Austrians are going to point out that booms over time (1) result in wasted or malinvested resources, (2) are financed via borrowed money that sooner or later must be paid back, and (3) create conditions in which there must be a "correction" within the economy as the booms run aground.

Moreover, Austrians also believe that if the government does not interfere with the creation and application of directing resources, then entrepreneurs will look for and find those lines of production that are compatible with current economic conditions. It is those lines of production, then, that will lead a recovery.

Even Krugman will admit that the Housing Bubble could not be sustained, although he is not going to claim resources were "malinvested" if for no other reason than to do so would hand Austrians an important intellectual victory, and that is not something Krugman can countenance. Still, what is a "bubble" if it is not malinvestment or based upon malinvestment? Krugman is not going to claim that the Housing Bubble was infinitely sustainable, and if a set of investments cannot be sustained when other normal market factors expose that fact, then we are dealing with malinvested resources, period, even if he refuses to cite the M-word.

However, we now come to the response to what should be done when the markets have exposed the malinvestments. (I note here that Krugman believes that unless government agents are all over those participating in peaceful, private exchange, markets will run blindly over a cliff, dragging everyone else with them. Yet, it was the markets that exposed the Housing Bubble just as the markets exposed Bernie Madeoff's fraud, not government regulators.)

Krugman's answer is for government to create yet more bubbles and create more malinvestments. Yes, we have the infamous Krugman quote from about a decade ago on the need for Alan Greenspan to create a housing bubble, but I am not talking about that. Instead, Krugman believes that governments should borrow and print and spend in order to fill a "hole" of spending, since money and exchange no longer will be directed toward the part of the economy that collapsed, i.e. housing in this case.

(For example, Krugman has strongly endorsed boondoggles like wind power and mass-subsidized electric cars, yet the fact that these entities continually need subsidies to stay alive speaks volumes for their economic sustainability. These are malinvestments pure and simple, yet Krugman and President Obama wish for us to believe that this economy can fashion an economy recovery from them.)

The Keynesians argue that if there are "unemployed or idle resources," then malinvestments are not possible, since the economy can absorb a lot more spending without overall prices rising. Such reasoning ignores the question of why those resources are "idle" in the first place. Krugman would claim that they are "idle" because people are not spending money, and so government must take the place of everyone else and spend in order to pump up the economy again, creating the "trickle-down" effects that supposedly would boost the economy.

Yet, these resources are idle because earlier investments in them could not be sustained. The markets are telling us something, but Keynesians ignore the obvious, instead demanding that these sectors receive extra injections of government spending.

In effect, Krugman and the Keynesians are claiming that the Law of Scarcity is suspended during severe economic downturns, but unless government starts borrowing and spending in huge amounts, then everyone else will be severely limited by scarcity. Likewise, households are bound by scarcity, but governments are not.

Lest anyone claim that I am misrepresenting Krugman, here he is in his own words:

So what can be done? A smaller financial shock, like the dot-com bust at the end of the 1990s, can be met by cutting interest rates. But the crisis of 2008 was far bigger, and even cutting rates all the way to zero wasn’t nearly enough.

At that point governments needed to step in, spending to support their economies while the private sector regained its balance. And to some extent that did happen: revenue dropped sharply in the slump, but spending actually rose as programs like unemployment insurance expanded and temporary economic stimulus went into effect. Budget deficits rose, but this was actually a good thing, probably the most important reason we didn’t have a full replay of the Great Depression.

But why should the the private sector "regain" its balance? If mutually-beneficial exchange over an economy has harmful effects, and if the natural tendency of a market economy is to implode as people increase their savings, then why should we expect any kind of recovery at all, and why should governments stop their massive spending?

If one sees individual spending as being mechanistic instead of purposeful, then the Keynesian viewpoint might make sense. An economy, in this view, is little more than a perpetual motion machine kept running by spending that moves in a circular flow, with resources being homogeneous.

There is one more point I believe that needs to be made. Krugman claims that our recovery is weaker than it should be because the federal government is not taxing, printing, and borrowing enough, and that if the government were to bolster its spending habits even more -- like preparing for the imaginary invasion of "space aliens" -- then all would be right with the world and we would see a wondrous recovery.

As I see it, we lack a real recovery for a number of reasons, including the government's insistence upon forcing resources from higher-valued to lower-valued uses. ("Green energy" investments are a case in point.) The federal government, and especially the Obama administration, demonstrate hostility toward entrepreneurs who are not connected to the political classes, and the Fed's slashing of interest rates to near-zero not only take away incentives for people to save, but also sends false price signals to the markets, making it harder for entrepreneurs to find truly profitable and sustainable lines of production.

Krugman believes that all that is necessary for recovery is for government to shower money upon politically-favored enterprises, with the spending having a huge "trickle-down" effect on the rest of us. Yes, if resources are purely homogeneous and if individuals do not act purposefully, then Krugman has a point, but if that is not the case, then he is demanding that the government continue the behavior that has put us in a depression in the first place.

Krugman and Class War

Many times on this blog I have said that Paul Krugman is a political operative, not an economist, and he shows his true colors once again with the latest federal budget madness. I say this because an economist should look at what Congress and President Obama have done and be able to conclude easily that we are looking at a disaster in which we are seeing an acceleration of a process that is leading to financial ruin.

Krugman, of course, only is concerned about preserving and expanding the Welfare State, increasing the reach of the State over the lives of individuals, confiscating more wealth, and guaranteeing that future generations are going to live in a more stratified and, frankly, oppressive society. That is what Krugman considers to be a "victory." He writes in his latest column:

For the reality is that our two major political parties are engaged in a fierce struggle over the future shape of American society. Democrats want to preserve the legacy of the New Deal and the Great Society — Social Security, Medicare and Medicaid — and add to them what every other advanced country has: a more or less universal guarantee of essential health care. Republicans want to roll all of that back, making room for drastically lower taxes on the wealthy. Yes, it’s essentially a class war.

 As I see it, Krugman believes that the American middle class should be heavily dependent upon government, both for employment and welfare benefits. In his view, if the government prints $60,000 (through its method of borrowing with the Fed monetizing the debt) and then pays for an employee in a federal regulatory agency, then the government has "created a middle-class job." However, the reality is that the government created nothing; it destroyed economic opportunities elsewhere, transferring resources from productive to unproductive uses.

Furthermore, he holds that any attempt to rein in spending would be tantamount to "warfare" on the "middle class," even though historically the American middle class has arisen precisely because capital development has allowed for people to participate in larger-scale wealth creation, benefiting themselves and their families. Krugman, unfortunately, does not recognize the role of real productivity in creating wealth; instead, it is all about spending, spending, and more spending.

Lest anyone think this is a faulty analysis of how Krugman views the economy, his following statement throws light on his thinking:

There were also some actual positives from a progressive point of view. Expanded unemployment benefits were given another year to run, a huge benefit to many families and a significant boost to our economic prospects (because this is money that will be spent, and hence help preserve jobs). Other benefits to lower-income families were given another five years — although, unfortunately, the payroll tax break was allowed to expire, which will hurt both working families and job creation. (Emphasis mine)

Again, unemployment benefits are seen as wealth generating as opposed to what they really are: wealth destroying. Yes, individuals who are unemployed receive some relief, but we still are dealing with transfer payments, period, even though Krugman actually seems to think that spending is more productive than actually producing a good or service that others wish to obtain. It's loopy thinking, but that is what passes for academic economics these days.

His last statement, however, makes no sense when compared to what he already has been saying. Throughout the column, he has claimed that taxes are good, they create wealth, that transfers are wealth-creating, but now a two-percent hike in the Social Security tax harms the economy. Does he not realize that every penny taken from those taxpayers will be transferred to others who will spend the money? And is not spending the greatest wealth creator of all?

So, we see Krugman contradicting himself, although regular readers of his work understand he has been doing that for years. Still his idea that wanting tax rates that do not have higher pay earners paying out half or more of their income in taxes somehow constitutes "class warfare" still is puzzling. Is Krugman saying that ALL income is transfer, and allowing others to keep some of their income is aggression against others? If so, then all of us are aggressors -- and all are victims of aggression. It is nonsensical, but that's Paul Krugman.

No, Paul, Wealth Transfers are NOT a "Free Lunch"

One of the first principles that supposedly is taught in formal economic study is the Law of Opportunity Cost, with the simple acronym being TANSTAFL: "There ain't no such thing as a free lunch." From that hallowed halls of Princeton University, the Land of Privilege, the view is different.

At Princeton University, economists (and probably people in all of the other departments) teach that government is magic, and that financial trickery is the same thing as creating wealth and bringing about legitimate economic growth. Or, to put it another way, Paul Krugman claims that at certain times (when the "lower bound" of interest rates is zero -- the Keynesian "Liquidity Trap"), that financial tricks can create the "free lunch." (Those are his words, not mine.)

In a recent blog post, Krugman once again claims that tricks can create the "free lunch," which matches what he claims in his book, The Return of Depression Economics. (Once assigned the book as reading for my MBA students, and even many of them were able to see the holes in Krugman's arguments. But, then, The Great One is not known for arguing, preferring the insult and the appeal to academic privilege instead.)

He lays out some scenarios, such as outright printing money or having the Treasury mint a three-trillion-dollar platinum coin and deposit it at the Federal Reserve System, but says they are not feasible? Why? There is a legal debt ceiling set by Congress, which I gather from this post is the only thing keeping these schemes from being realistic. He writes:

In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back. So this is all a gimmick — but since the debt ceiling itself is crazy, allowing Congress to tell the president to spend money then tell him that he can’t raise the money he’s supposed to spend, there’s a pretty good case for using whatever gimmicks come to hand.

Krugman's next comment is even more puzzling, given what he has written in the past:

It’s true that printing money isn’t at all inflationary under current conditions — that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. So even though right now that debt is just a claim by one more or less governmental agency on another governmental agency, it will eventually turn into debt held by the public.

But why should that matter, given Krugman's earlier statements that (1) the Fed should be permitted to purchase short-term Treasury paper in the primary market, thus monetizing the federal debt directly, and (2) that public debt is not much of a problem, since "we owe it to ourselves."

He goes on:

We are living in weird economic times, where many of the usual rules don’t apply and there are big free lunches to be had. But not everything is a free lunch, even now.

 'Tis true, we are in weird times. But those times are better explained by the Austrian Business Cycle Theory than the contradictory madness that comes from Krugman who apparently was for printing money before he was against it.

The vast pull-the-rabbit-out-of-the-hat schemes by the Fed in the end are little more than naked wealth transfers. By propping up the financial institutions that made bad decisions, the Fed is disregarding price signals and rewarding the people who made bad decisions at the expense of those that didn't. Wealth transfers might perform political miracles -- the last election proved that point -- but they are not free lunches. Indeed, they are very expensive lunches, much more costly than should be the case.

Krugman's Keynesian "Trickle-Down" Economics: Washington, D.C., as an Experiment

According to Paul Krugman and other Keynesians (not to mention almost all so-called political Progressives), endorsing a relatively free economy in which governments do not set or regulate prices and permit owners of factors of production to bargain in free markets is also to endorse what they call "Trickle-Down Economics." This "theory," according to the Progressives, operates like this: If we "help" the "rich," (that is, do not confiscate all or nearly all of their wealth), then by so doing, the spending of the rich will "trickle down" benefits to everyone beneath.

Obviously, this is presented with the belief that the "theory" is false on its face, or at least the results of the "theory." The rich, as Krugman and others will tell you, don't spend all of their income, which means that not everyone beneath them will receive enough income to survive. The better way to do things, according to the Krugmanites, is for the government to confiscate most of the earnings and wealth of the rich and distribute them to everyone else. This will result in equal incomes, which then assure enough spending to keep the Big Circle of the Economy moving and result in economic Nirvana.

For the past four years, we have had a major Keynesian experiment in Washington, D.C., as huge amounts of money have been transferred from elsewhere in the USA to the D.C. area, and especially the nation's capital itself. The outlying counties have become considerably wealthier, and especially wealthier relative to the rest of the USA. But what about Washington, itself? If the Keynesian theory is correct, then the wealth absorbed by government should have "trickled down" to the other residents of D.C. who are not directly connected to high-paying government jobs, political office, or lobbying firms or companies that have major government contracts.

Certainly the economy of D.C. has received enough new money to have gained "traction" (as Krugman likes to call it) to be engaged in a boom. Well, it turns out that unless one is well-connected politically, the Keynesian "stimulus" just might not have as much staying power as Krugman claims.

It turns out that income and living inequality in the District are worse than ever, according to recent reports:

Two decades of record federal spending and expanding regulation have fostered a growing upper class of federal contractors, lobbyists and lawyers in the District of Columbia area. The federal government funneled $83.5 billion their way in defense and other work in 2010 - an increase of more than 300 percent since 1989, even after adjusting for inflation. Private industry poured more than $3 billion into lobbying toinfluence the government, nearly double what it spent a decade ago.

Like spokes on a wheel, the high-rise offices of this elite radiate out from Capitol Hill along major arteries deep into suburban Maryland and Virginia. The latest Census figures placed 10 of the capital's surrounding counties in the top 20 nationwide for median household income - up from six in 1990.

The article lays out the rise of Lani Hay from military officer to out-and-out Washington tycoon whose wealth has come about solely from the income transfers from private individuals and businesses to the government. And her $120 million in government-awarded income pales next to the income that others gain at the government troughs.

Yet, at the same time, the regular people in Washington are not taking part in this orgy of new governmental wealth. This article lays out what the "other" people experience, as the blogger Glenn Reynolds received this from a D.C. council member:

"I really think you should reconsider your article about how Washington, DC was not affected by the recession and is doing so much better than the rest of the country. . . . I am not sure if you have ever been to the DC area, but I live here and there is a lot of poverty. The capital area might be doing great and the 2 wards where congresspeople live might be doing well, but the rest of the city is affected by poverty. Wards 7 and 8 have an average income of less than $30,000 and there are boarded up stores all over the city, just not in the 2 mile radius that tourists and outsiders see. . . . Maybe your next article could be about how DC has the largest income margin in the nation? About how the congresspeople and lobbyists make over $100,000 a year and the rest of city is living in poverty?"

 That is not all. The Reuters article lays out a few gems that would contradict the Keynesian Gospel:

Inequality has increased in 49 of 50 states since 1989. (See accompanying box on how inequality was measured.)

The poverty rate increased in 43 states, most sharply in Nevada, ravaged by the housing bust, and in Indiana, which saw a rise in low-paying jobs.

Twenty-eight states saw all three metrics of socioeconomic well-being worsen. There, inequality and poverty rose and median income fell.

In all 50 states, the richest 20 percent of households made far greater income gains than any other quintile - up 12 percent nationally.

The five largest increases in inequality all were in New England: Connecticut first, followed by Massachusetts, New Hampshire, Rhode Island and Vermont. The decline in manufacturing jobs hit New England's poor and middle hard, while the highly educated benefited from expansion in the biotech and finance industries.

And then there is this: 

Massachusetts boasts the country's finest public education system, but that has failed to slow a sharp increase in the income divide. Indiana has revamped the state's welfare system, but the number of people in poverty has soared. And in the District of Columbia, the federal government's hand in rising inequality is visible locally and nationwide.

This is not possible under Krugman's Keynesian Trickle-Down Theory. More money for public education means inequality disappears. The New England states vote heavily Democratic, and very liberal Democrats at that (no Republican holds statewide office in New England), so there can be no question that the policies that govern these states are correct, according to Krugman's views. Furthermore, there is no more Democratic political entity in the country than Washington, D.C., so there can be no doubt that the city is following "proper" political and economic policies.

So, if all of the claims that Krugman has been making the past several years are true, then there is little or no economic inequality in Massachusetts and in Washington, D.C., and they are the two most "liberal" political entities in the country. Inequality cannot be happening there because Paul Krugman always is correct.