Sunday, March 24, 2013

Krugman Supports Capital Controls

In reading Paul Krugman for more than a decade, it seems that he has established a firm ideological pattern: Markets evil, government good. Thus, he has decided the solution for the crisis in Cyprus: capital controls.

Now, Krugman will not admit that capital controls are essentially an act of police-state theft, although that is exactly what they are. Instead, he promotes capital controls as the epitome of “responsible” government trying to beat back the evils of capitalism. He writes:

Whatever the final outcome in the Cyprus crisis — we know it’s going to be ugly; we just don’t know exactly what form the ugliness will take — one thing seems certain: for the time being, and probably for years to come, the island nation will have to maintain fairly draconian controls on the movement of capital in and out of the country. In fact, controls may well be in place by the time you read this. And that’s not all: Depending on exactly how this plays out, Cypriot capital controls may well have the blessing of the International Monetary Fund, which has already supported such controls in Iceland.

That’s quite a remarkable development. It will mark the end of an era for Cyprus, which has in effect spent the past decade advertising itself as a place where wealthy individuals who want to avoid taxes and scrutiny can safely park their money, no questions asked. But it may also mark at least the beginning of the end for something much bigger: the era when unrestricted movement of capital was taken as a desirable norm around the world.

But it gets better:
It wasn’t always thus. In the first couple of decades after World War II, limits on cross-border money flows were widely considered good policy; they were more or less universal in poorer nations, and present in a majority of richer countries too. Britain, for example, limited overseas investments by its residents until 1979; other advanced countries maintained restrictions into the 1980s. Even the United States briefly limited capital outflows during the 1960s.

Over time, however, these restrictions fell out of fashion. To some extent this reflected the fact that capital controls have potential costs: they impose extra burdens of paperwork, they make business operations more difficult, and conventional economic analysis says that they should have a negative impact on growth (although this effect is hard to find in the numbers). But it also reflected the rise of free-market ideology, the assumption that if financial markets want to move money across borders, there must be a good reason, and bureaucrats shouldn’t stand in their way.

As a result, countries that did step in to limit capital flows — like Malaysia, which imposed what amounted to a curfew on capital flight in 1998 — were treated almost as pariahs. Surely they would be punished for defying the gods of the market!

Yes, when the socialist Labor government of Great Britain following World War II was seizing property and “nationalizing” industry after industry, the government also made sure that those people who were the victims of this theft could not legally get their money out of the country. (And, as we know, the great British experiment in socialism was a disaster as the nationalized industries became famous for poor quality goods and declining productivity, leading to high rates of inflation and even an IMF bailout.)

As I read this Krugman column, I get the sense that he is claiming that governments are financially and fiscally responsible, but it is those evil people in private enterprise that are making things worse, and the only reason that they might want to get their money out of the country is that they are being selfish. So, when Argentina and Bolivia installed capital controls in the middle of their hyperinflations, no doubt Krugman would claim that it was no big deal. Hey, they had more money than ever, right?

Lest it looks as though I am exaggerating, here is Krugman in his own words:
It’s hard to imagine now, but for more than three decades after World War II financial crises of the kind we’ve lately become so familiar with hardly ever happened. Since 1980, however, the roster has been impressive: Mexico, Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina again in 2002. And, of course, the more recent run of disasters: Iceland, Ireland, Greece, Portugal, Spain, Italy, Cyprus.

What’s the common theme in these episodes? Conventional wisdom blames fiscal profligacy — but in this whole list, that story fits only one country, Greece. Runaway bankers are a better story; they played a role in a number of these crises, from Chile to Sweden to Cyprus. But the best predictor of crisis is large inflows of foreign money: in all but a couple of the cases I just mentioned, the foundation for crisis was laid by a rush of foreign investors into a country, followed by a sudden rush out.

To read Krugman, one would think that people just dumped money into a country and then took it out for no good reason, and THAT was the cause of the crises. In other words, the flow of capital was not a response to what was occurring, but rather was a cause. This would be consistent with Krugman’s statist ideology, and to be honest, I am not surprised to see him embrace the policies that once were the staple of banana republics.

Notice what never receives blame in a Krugman piece: central banks. No, in Wonderland, the only sin that a central banker can commit is not inflating enough. We are supposed to believe that the rapacious capitalists flinging their money around the globe create the financial crises and then responsible governments and central bankers must come in and clean up the mess.

It never seems to occur to Krugman that the various austerity packages that governments are imposing exist for the purpose of propping up the banks, or if Krugman actually acknowledges that fact, he then claims that such policies exist because of a mystical bout of ideology. The ties between bankers, politicians, and central bankers never are explored as though these people all operate in separate spheres of life.

I have no doubt that the vast amounts of movement of capital around the globe can exacerbate a crisis, but not create it. However, capital controls are a form of theft, period, although it is a theft that Krugman supports. He wants us to think that because Great Britain had capital controls and imposed socialism, those were the good old days, and there was no economic price to pay for such policies.

Margaret Thatcher and Ronald Reagan did not come to power because a mystical ideology suddenly appeared in books and in newspapers, an ideology that convinced people who were living in great and prosperous times that things really were terrible. When Thatcher took office, inflation in Great Britain was more than 20 percent and it was 13 percent in Jimmy Carter’s last year in office in 1980. The very policies that Krugman currently endorses came to fruition in the late 1970s. Just because he wants to rewrite history and try to convince us that it was conservative Republicans who pushed through most deregulation does not mean the guy is telling the truth.


Lord Keynes said...

"However, capital controls are a form of theft, period,"

Only if you believe the utterly unsupportable and absurd natural rights ethics of Murray Rothbard.

Curiously, Anderson has never even explained what what ethical theory he supports.

ayassos said...

What I'm curious about is Krugman's new assertion that America's housing bubble of the last decade was caused by foreign investment. I thought Alan Greenspan and deregulation did it. What gives?

William L. Anderson said...

What LK is saying in his support of capital controls is that the State is the ultimate owner of everything. There really is no other explanation.

If the government is acting irresponsibility but then forces people to pay for the irresponsibility, what do we call it? LK calls it good policy. I call it something else.

At least we now understand his point of view: God is the State; the State is God.

Lord Keynes said...

No, the state is not the owner of everything. But nor do people have absolute rights over external property.

Notice how the Anderson still will not tell us what ethical theory he subscribes to. He unwillingness to even answer speaks volumes.

William L. Anderson said...

I speak to an ethical authority that says you should not steal. When a government which is made up of individuals who use force to transfer wealth to themselves and their politically-connected friends takes the property of others in order to cover for its own folly, I call that theft.

How is this different than my coming into your house and taking something with the claim that I need it for a "higher purpose." That is what we are seeing in Cyprus and that is at the heart of your own "ethical" theory, LK. You believe that inflation is a good thing when, in fact, inflation transfers wealth from those who are politically-connected from those who are not.

The commandment against stealing predated Rothbard by centuries.

CG said...

I wonder how you feel about "Labor controls", aka immigration.

KSB said...

Of course Krugman favors capital controls. It's another front in the war on that great Keynesian enemy, the saver.

I spoke to a Hungarian some time ago about about life in the USSR era. He was in the Air Force them and made a pretty good wage. However, he lamented that with all the harsh economic and capital controls the only thing he and his fellow pilots could do is spend it all with reckless abandon. Investment was forbidden and saving in any form, be it a bank account or a coffee can buried in the back yard, was economic suicide.

I'm sure Krugman would love the same controls here. Ma and Pa Kettle not spending enough? Just threaten to move the decimal point on their savings account balance a few spaces to the left. That'll get'em spending.

William L. Anderson said...


The larger question is whether or not governments should allow people to leave -- and take their own property -- if they believe the situation they face is oppressive (or for any other reason they want to leave). It would be interesting to see if LK also approved of the policies of the U.S.S.R. and other communist countries in which people were not allowed to leave without government permission. If he says "yes," then he believes in slavery.

As I see it, in the end, Keynesians do believe in slavery, as they hold government is the master and we are to obey. That would be the very definition of slavery.

CG said...

You didn't answer my question. You at best hinted at half of my question. Being allowed to leave is one thing, being allowed to enter is another.

So, how do you feel about immigration?

William L. Anderson said...

I don't see how we can prevent it without using very repressive measures. The idea that we can build a huge wall along the entirety of the Mexican boarder -- some of it in extremely inaccessible land -- is fantasy. People speak of building a wall as though it were possible and as though its cost alone would not further bankrupt the U.S. Government.

Given I have four international children, I obviously cannot say I do not favor their entrance into this country. The problem is our welfare state: we have essentially near-unlimited immigration and the government says that agencies that provide health care and social services MUST also care for immigrants. Obviously, that is hard to do.

As I said at the beginning, the only way to enforce our immigration laws is to use the very kind of oppressive measures that violate everything it means to be American, or at least USED to be American. I don't see any way to avoid it and I see no way to stop it.

Perhaps my best analogy is the drug war. I do not recommend people take what now are illegal drugs and I have seen drug addiction up close (regarding others, not me -- my family is fortunate not to have these particular issues). But saying drugs should be illegal is quite another thing.

There are times when we are not always going to be happy with the outcomes of a policy, and this is one of them.

CG said...

It's just interesting to see that capital controls have been pretty much eliminated in the past 50 years, whereas labor controls have been, if anything, made more severe - at least in the US.

Most people do follow the law, and will not move in illegally. Removing the labor controls will most certainly have an effect.

As for welfare, there is a parallel there too: it's called called tax havens. That's a huge motivator for folks to move capital around, right up there with "Oh look, a new set of marks to strip".

Remember the first thing that happened when Albania came online: the airplane game. Arguably, many of the real estate schemes being played are only slightly more sophisticated...

Anonymous said...

I was actually going to point that out (your international children), but you beat me to it.

As for immigration, I agree with you about the welfare state, and I think that Hoppe's paper on this is quite good. The only people that should be able to restrict the movement of people are property owners (i.e. trespass), any other limitation upon the free movement of people is unjust in my opinion, because they don't have a logical case against such a thing if they do not in fact own the land in question. And since collective ownership is a logical impossibility, then it follows that a state's restrictions upon immigration is absurd, but then everything the state does is absurd (including the systematic legalized plunder known as the welfare state).

Anonymous said...

Professor Anderson, so you would even support having the United States ship in Somali Muslims and other questionable people that have nothing in common with Americans (ethnicity and culture wise) that would have no interest in respecting the property rights and liberty of others? What about the prisoners over at Guantanamo Bay? Sometimes the nationalist arguments against massive immigration and having quotas to determine which immigrants are more desirable and have more skills to offer seems sensible to me if the drug war isn't going to be ended.

Anonymous said...

Various immigrants would have to pass a sort of college admissions style test to weed out those immigrants who have no interest in offering any economic value to American society. How valid are IQ tests, ACTs, and SAT scores in determining various cognitive abilities and intelligence of people?

I feel that you have a lot with Bryan Caplan on this immigration issue. I seriously hope that you aren't taking a blind, insane, dogmatic, and altruistic position in believing that all immigrants have something economically productive to contribute to this country.

William L. Anderson said...

I think all of you can see why I don't like to "go there" regarding immigration. When I tell conservatives that I want to end the drug war, I am accused of wanting all of America's youths to get strung out on heroin.

Likewise, when I say that I believe that enforcement of many immigration laws can be problematic, I am accused of wanting those damned Ay-Rabs or someone else to roam our streets.

In a perfect world, people would be quite happy in their home countries. However, there are wars (some caused or supported by the USA) which create refugee problems and situations in other countries that make life there unlivable, so they try to come here. How do we respond? I am not sure.

Oh, yes, I also have been personally attacked for "bringing non-white children into this country." To those people, I say perform a certain act upon yourselves. They are my children, period.

William L. Anderson said...

OK, my last adoption was a Latvia girl who now is 14. I guess that qualifies as Caucasian. (Latvia was about the only country that would let a guy my age still adopt. I was too old for Ethiopia and Guatemala has shut the door.)

I also happened to like Latvia. The food was good, Riga is a beautiful city, and the music scene is terrific.

Anonymous said...

Don't get me wrong, I like libertarians, but I don't subscribe to the open immigration policies of the Libertarian Party and I wasn't trying to imply anything racist in my prior comments.

I think you would find this link intriguing too. Signed by Calvin Coolridge himself!

Anonymous said...

You should also note that America's fertility rate is on the decline. My views are in line with that of Pat Buchanan on the immigration issue.

William L. Anderson said...

I don't mind someone having a different view on immigration, and no one on this blog has attacked my choice of adoptions. (Although some may question my sanity, now that I am 59 and have four teenagers in the house. Yes, they wear me out.)

Lord Keynes said...

"The commandment against stealing predated Rothbard by centuries. "

Oh, dear me. Are you slyly hinting that you get your morals from the Bible?

So, essentially, you believe in "divine command theory", the worst and most ridiculous moral theory of all time.

If god orders mass murder (as he does in Deuteronomy 2:33-36, 3:1-11), then mass murder is moral.

Moreover, if you really take your morality from the Bible, then libertarianism is impossible:

Let every person be subject to the governing authorities; for there is no authority except from God, and those authorities that exist have been instituted by God. Therefore whoever resists authority resists what God has appointed, and those who resist will incur judgement. For rulers are not a terror to good conduct, but to bad. Do you wish to have no fear of the authority? Then do what is good, and you will receive its approval; for it is God’s servant for your good. But if you do what is wrong, you should be afraid, for the authority does not bear the sword in vain! It is the servant of God to execute wrath on the wrongdoer. Therefore one must be subject, not only because of wrath but also because of conscience. For the same reason you also pay taxes, for the authorities are God’s servants, busy with this very thing. Pay to all what is due to them—taxes to whom taxes are due, revenue to whom revenue is due, respect to whom respect is due, honour to whom honour is due. (Romans 13.1–7).

In other words, obey the state and pay your taxes.

Mike said...

Let's return to the main point of this particular post. Capital Controls.

Capital controls at their premise are a manifestation tyranny. A statement that you don't own your property, the collective does through the power of the State. You are not a sovereign individual, you are a subject. You are not a citizen, you are a serf.

No amount of pseudo intellectual spin or obfuscation changes that or can rationalize it away.

William L. Anderson said...

I had no idea that LK was an authority on the Bible. My, my. Here is a guy who knows everything about economics, including the "truth" that the Law of Demand applies only when he wants it to apply -- and that demand curves slope upward whenever a leftist government says they do.

That same Bible in Revelation refers to the Roman state as a "beast" and hardly is complimentary.

By the way, LK, does that mean we are free to come to your place and help ourselves to whatever we want? After all, we are "the people," and the government (or at least the government under Obama) claims to be doing all these wondrous deeds in the name of "the people."

A theologian, an economist, and a political philosopher. We are so fortunate to have such a Great Mind commenting on this page.

Mike said...

As a kid LK was picked last for dodgeball. He still harbors resentment.

Anonymous said...

"As a kid LK was picked last for dodgeball. He still harbors resentment."

I think there's a lot of truth in this statement.

Further, I find it quite amusing, and ironic, how leftists/statists - just as LK did above - have completely changed their tune when it comes to invoking Scripture in an economics/policy discussion. For years they screamed bloody murder to keep religion/theology OUT of policy discussions. Why? Well, we need to keep state and church separate and it's not right for personal religious beliefs to be shoved down others' throats. It's amazing how well-versed they've all become to now tell us how to "render unto Caesar" and "obey the state."

Anonymous said...

“The Libertarian creed rests upon one central axiom: that no man or group of men may aggress against the person or property of anyone else.” ~ Murray Rothbard, For a New Liberty

can someone splain why this is absurd
and unsupportable? i is an uneddicated hick

rfam said...

What is strange in Cyprus is breaking the deposit insurance limit of $100,000. That should be the last loss position not the first. Equity, debt, uninsured deposits, insured deposits in that order, right? People or companies who deposit more than that in a Cypriot bank should be smart enough to know that they are unsecured lenders. Those people don't need capital controls.

I suppose capital controls are a matter of horizon meaning PK is referring to "fast" money. But even long term investment seems at risk under capital controls if the investor is concerned about extracting future profits from their investment. Either way its hard to justify and unforeseen consequences of controls are sure to appear.

I think its the word "control" in capital controls that PK loves.

Anonymous said...

"can someone splain why this is absurd
and unsupportable? i is an uneddicated hick"

Non-aggression, non-interventionism, non-coercion, and respect for others and their property must seem like absurd and unsupportable concepts to power-mad, self-aggrandizing jackals like LK and his ilk who, ultimately, want you to just "obey the state." His words, not mine.

CommonSense said...

He is confusing cause and effect. It is like blaming the ability to invest in companies (for capital to flow into them from outside) for some companies going bankrupt when investors decide it is time to stop throwing good money after bad and the stock prices crash and no one will loan it money to keep afloat. The problem is the management of those companies, not the fact that investment is possible. The existence of corporations that go bankrupt wouldn't justify the idea of getting t rid of the ability to buy stock in companies and loan them money. It wouldn't justify the idea of forcing people to keep investing in a bad company to prevent them from going under.

In typical nationalistic selfish fashion he wishes to use that as an excuse to strangle emerging economies in poor countries that need capital in order to develop the way the US has. More than "throwing the baby out with the bathwater" it is strangling the baby. For most of us it is an accident of birth that we are in the wealthy US instead of one of those poor countries he doesn't care about (some are in the US having escaped the poor country of their birth, but that is not easy or possible for most).

The US achieved prosperity in part since it is a massive free trade zone where capital flows freely. People in Florida can invest in Apple and use the return on investment there. Investment flowing into Silicon Valley for startups from elsewhere helps that community and returns investment to help others.

The same process works globally. The wealthier other countries become, the more American products they buy. Investments made by Americans overseas (especially if tax codes are changed to avoid double taxation) leading the return to be brought home increase US wealth.