Saving the Economy Through Bailouts? Only in Wonderland!

I guess it is good that the Democratic National Convention is over if for no other reason than Paul Krugman can get some sleep, given his heart was pounding with joy and admiration over the brilliance of the speakers. No doubt, all this fall he will coordinate his columns and blog posts with talking points from the Obama campaign and the DNC, and I am sure that some real howlers are in store for us lucky readers.

His latest column of gratitude and worship comes in the form of praising Barack Obama for his Wondrous Works in Giving the Economy Life Eternal, or at least a small recovery. He writes:

On Inauguration Day 2009, the U.S. economy faced three main problems. First, and most pressing, there was a crisis in the financial system, with many of the crucial channels of credit frozen; we were, in effect, suffering the 21st-century version of the bank runs that brought on the Great Depression. Second, the economy was taking a major hit from the collapse of a gigantic housing bubble. Third, consumer spending was being held down by high levels of household debt, much of which had been run up during the Bush-era bubble. 

The first of these problems was resolved quite quickly, thanks both to lots of emergency lending by the Federal Reserve and, yes, the much maligned bank bailouts. By late 2009, measures of financial stress were more or less back to normal. 

This return to financial normalcy did not, however, produce a robust recovery. Fast recoveries are almost always led by a housing boom — and given the excess home construction that took place during the bubble, that just wasn’t going to happen. Meanwhile, households were trying (or being forced by creditors) to pay down debt, which meant depressed demand. So the economy’s free fall ended, but recovery remained sluggish. 

 What Krugman wants us to believe is that by bailing out the banks and financial houses (which was pushed by the Bush administration and continued by Obama's presidency), the economy was saved. No, what happened was that the original downturn was not as great as it would have been had some other Kool-Aide-drinking banks also were forced to face the music -- complete with some executives losing their Connecticut mansions -- and the public find out very quickly which financial institutions were zombies and which were not.

Now, Krugman would argue that had the bailouts not occurred, the entire financial system would have collapsed. Granted, if the best thing the financial system could do was to engineer a housing bubble with more liabilities than the entire wealth of the world, maybe it needed the exit door. However, I suspect that we would have seen something quite less than the Apocalypse as Wall Street figures would have seen it in their interest to find a way out of the mess they had helped to create.

But there is more. Economist Mario Rizzo had a most interesting and insightful post this morning on Facebook, writing:

The Democrats say that we cannot go back to the policies that caused the financial crisis and recession. Ok. So what were those policies: The irresponsible expansion of Fannie and Freddie? The excessively easy monetary policy of the Fed? Inadequate regulation of securities? I do not remember a single Democrat objecting to these policies during the period before the crisis. I do remember Barney Frank pushing more and more expansion of Freddie and Fannie, though. Oh, the Bush tax cuts. No economist I have heard of says that the tax cuts caused the crisis and recession. So what are they talking about? 

In fact, what do we have today? For one, it is a financial system full of zombie institutions with the bailouts obscuring which institutions are healthy and which are not. Furthermore, we have the clashing policies of easy money and picky regulations. Yes, the Obama administration is demanding that banks lend money out the wazoo, but the regulators don't want anyone to get those loans. One might want to try a policy in which the banks actually have to bear the consequences of bad and even reckless loans without having the Federal Reserve and the taxpayers standing behind to clean up the mess. I suspect that we would see some civilized behavior on Wall Street; instead, we see what, frankly, is a rigged game in which the government pushes down interest rates, limits the loan choices for banks via strict regulation, and then holds out the prospect of small-but-near-guaranteed returns from federal paper. Gee, I wonder where the banks will send their money.

And then there is the GM bailout. Krugman writes:

But, that said, Mr. Obama did push through policies — the auto bailout and the Recovery Act — that made the slump a lot less awful than it might have been.

 There is a bit of a problem here; the General Motors and Chrysler bailouts did not help the economy; they hurt it. Yes, they kept the United Auto Workers in cash, which was the real purpose, anyway. (More on this below.) However, they also diverted huge amounts of capital away from more productive sectors in order to fund a venture in Crony Capitalism or maybe even Crony Socialism.

I doubt that Krugman is familiar with Frederic Bastiat, and reasonably so, since Bastiat really emphasized opportunity cost and Krugman really seems to believe that by printing money, government can do away with that pesky little economic law. The GM and Chrysler bailouts not only were politically-motivated, but also were carried out with a political calculus, all the way down to determining which dealerships would be closed and which would stay open. (It seems that campaign contributions had something to do with the calculus of decision making.)

Bastiat was a master of understanding the larger picture, something that Keynesians are not able to comprehend. (Sorry, folks, the use of aggregates does not constitute a view of a "big picture" of economics.) Instead of looking to the UAW members who kept their jobs, Bastiat would have looked at the opportunities that were lost and the entrepreneurs who could not see their own ideas fulfilled because the UAW needed a bailout.

I notice another trend in Krugman, writings, and that is a very sneaky theme that goes something like this: The economy is going to recover very well, anyway, so we should re-elect Obama to "validate his record." Furthermore, Krugman wants us to believe that if Mitt Romney were elected and the recovery occurred, that would be very bad because he would wrongly get the credit for recovery. (Actually, I think it will be bad if either man wins the election, but that is another story.)

If Obama is re-elected and the economy slides down, then I am sure that Krugman simply will blame the Goldstein Republicans or even George W. Bush. Of that we can be sure.

While I did not watch the DNC (or RNC) conventions, I did see a hilarious Youtube of former Michigan Governor Jennifer Granholm claiming that Obama's auto bailout saved the entire U.S. manufacturing sector and with it, the whole economy. Not only is she completely unhinged, but the notion that forcing taxpayers to underwrite a horribly-unproductive industry is not the way to save anyone except for those who were politically-connected. Furthermore, her claim that the "entire auto industry" would have collapsed without the bailout is simply false.

I do find it instructive that Krugman never mentioned this mangling of the facts, but as I have said before, the guy is a political operative, not an economist. A real economist would not claim that throwing money into a political rathole constitutes a stimulus that leads to recovery.

Krugman and the Keynesian View of Entrepreneurship

Since Krugman has another column that he has coordinated with the Obama re-election campaign, a column that claims (once again) that the presence of a bank account in another country is proof that one is destroying  the economy at home, I won't make any comments except to say it proves once again that Paul Krugman is not an economist, but simply a political operative. Instead, I want to deal with some issues that have popped up through the comments section.

Someone cleverly sent me this link in response to my saying that Krugman never says anything about entrepreneurship. Yes, the guy is serious. He mentions the word more than four years ago, and that is "proof" that Krugman is an expert on the entrepreneur or something like that. As I went through my own search process through Google, the only other link I could find was Krugman's defense of the GM bailouts in which he claimed that "industrial clusters" really were more important than anything entrepreneurs do.

His comments on the bailouts are especially instructive because the Obama administration essentially wiped out the bondholders, gave the United Auto Workers what they wanted, and then dunned taxpayers to make it all happen. While Krugman might claim that the auto bailout was "the single most successful policy initiative of recent years," what occurred was pretty much a simple wealth transfer.

Furthermore, in his Keynesian style, Krugman assumes that capital and whole structures of production simply exist and that entrepreneurship has nothing to do with it. (Yes, he says the "individual entrepreneur," but in that he is creating the straw man, for he fails to understand the larger role of entrepreneurship in the economy.)

The point is that successful companies — or, at any rate, companies that make a large contribution to a nation’s economy — don’t exist in isolation. Prosperity depends on the synergy between companies, on the cluster, not the individual entrepreneur.

Yet, it was entrepreneurship over time that created this cluster, but to admit that would mean that perhaps his collectivized view of economics might not fit reality. Furthermore, entrepreneurship is not limited to people who (in Krugman's words) start their businesses in garages. (Notice that he leaves out Steven Jobs and how Apple was started, but that would mess up his narrative.)

The point is that the quintessential business figures of the 80s weren’t creative entrepreneurs. They were big-corporation executives (Lee Iacocca) and takeover artists (Michael Milken, Ivan Boesky). The gazillionaires who started in garages came later.

By limiting entrepreneurship to people "in garages," Krugman leaves out the larger understanding of what entrepreneurship is or what entrepreneurs do. Michael Milken WAS a financial entrepreneur, as he gained funding for a number of enterprises that the banks in the cartelized system that Krugman praises to much would not touch. It was Milken who secured start-up funding for CNN, which helped revolutionized how the news is brought into our homes. The creation of MCI, which did an end run around the way long distance calling was done via the AT&T government-created monopoly, came through Milken's funding.

It was Milken that secured the start-up money for McCaw Cellular, which took an idea and laid the foundation for the vast cellular networks we have now. And there were many more enterprises, NONE of which would have received funding from the banking system that Krugman insists was perfectly fine and should have remained in place.

You see, Paul Krugman wants us to believe that modern telecommunications "just happened" or that government would have created a wonderful system on its own. Like the industry "clusters" that really are the source of wealth (and we know that the clusters just appeared on their own -- or were the result of government action along with the farsightedness of the labor unions) in Krugman's view, there really is no need for the entrepreneur, who is just a sideshow, a freak in a garage who takes advantage of what government in its infinite wisdom already has created.

In Krugman's world the telecommunications that we enjoy now would have happened anyway because, well, just because. New technologies just happen and their application to the economy just happen, too. Furthermore, even things like the pre-existent "supply chain" are not subject to entrepreneurial ideas. No, they simply exist and if a company like Wal-Mart is able to change the way that supply chains work, well, that was not entrepreneurship; it was just fate.

I would urge readers to look at what Peter Klein has written in his book The Capitalist and the Entrepreneur. Unlike Krugman, Klein actually is an economist who knows something about entrepreneurs and entrepreneurship, and who does not feed partisan political propaganda to readers. (Unlike Krugman, Klein does not coordinate his writing efforts with partisan political campaigns.)

Anyone who does take the time to read Klein will see that the scope of entrepreneurship is much, much larger than anything Krugman can imagine. But, then, Klein is not going to tell readers that government spending, borrowing, and printing is the Source of All Wealth.

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On another note, I would urge readers to look at this recent Wall Street Journal editorial that lists a number of aspects of labor law in Spain that create barriers to employment. According to the editorial, 99 percent of Spanish businesses have 49 or fewer employees. Why?

Once a Spanish business reaches 50 employees, its workers must also elect five workplace reps to bargain on wages and conditions. These delegates must each receive at least 15 paid hours off monthly for their duties, and the quotas rise as companies grow. By the time a business hires its 751st staffer, it must have at least 21 workplace reps, each getting a minimum of 40 paid hours off per month.

No doubt, Krugman would claim that such measures will increase "aggregate demand" because governments create new wealth by forcing up wages. That the Spanish employment laws prevent larger enterprises from enjoying the economies of scale from large-scale capital funding simply gets beyond the thinking of a Keynesian.

More economic illiteracy from the NY Times

Paul Krugman seems to be in a bi-partisan spirit in his latest column, claiming that Mitt Romney is a "closet Keynesian," and he may be right. I'm not sure that Romney is a closet anything other than a guy who wants to be president, and he has the "presidential looks" that come from Central Casting.

I must admit that Romney's economic leanings don't interest me much and I doubt the guy has any real compass other than one in which the needle points to the White House. So, while Krugman tries to convince readers that Romney is another Keynesian, I have decided to comment on other examples of economic illiteracy that have been appearing on the NYT editorial page.

We have a couple of interesting ones. First, there is a claim that the GM and Chrysler bailouts somehow saved the economy as though it is possible to both dig a hole deeper and simultaneously claim one actually is filling it up. (The piece is by Steve Rattner, an Obama auto adviser, which means we are seeing political spin at its worst.)

Since Krugman is in a bi-partisan spirit, I have decided to go after a couple of Republicans for their op-ed on why the government should require automakers to make cars that can run on a bunch of different fuels, including methanol, which Tom Ridge (who distinguished himself as the first Secretary of the Department of Homeland Security, or should I say our future version of the domestic KGB) and former Bush Transportation Secretary Mary E. Peters have written. Why am I not surprised that the article ignores the simple Law of Opportunity Cost?

Let me first look at the bailout. At the time the Obama administration essentially nationalized GM (and partially-nationalized Chrysler), these companies had balance sheets that were billions of dollars out of whack and were hopelessly in the red. Had Obama not been beholden to the United Auto Workers and forced taxpayers to prop up these firms, both would have gone into Chapter 7 bankruptcy, which means all of the assets of these companies would have been liquidated to pay their creditors.

Rattner is correct that the bailouts did keep other companies tied to GM and Chrysler afloat, but like everyone else who writes for the NYT editorial page, his claim that the bailouts were economically-successful depends entirely upon eliminating the opportunity costs involved. He does that by pointing ONLY to one side of the equation and ignoring the other. It is like saying that if my wife hands me $10 from her purse, the economy is $10 wealthier.

Unfortunately, many people believe that governments create wealth by fiat, which is akin to a doctrine of State Economic Creationism, and Rattner is one of them. I don't blame Obama and his minions for their spin, as politicians are famous for that, but nonetheless economics does not permit us to look ONLY at one side and not the other.

The truth about GM and Chrysler is that there were (and still are) consuming more resources than they produce. That's right, the government could not eliminate that sad fact simply through executive order, no matter what Rattner and Obama might claim. As for the assets of GM and Chrysler, they would not have disappeared; the useful ones would have been sold to other auto companies and the industry could have better restructured.

True, the UAW would have taken a hit, but the only way to defend the bailouts from the UAW perspective is to claim that higher factor prices create more wealth. (That is a favorite tactic of Paul Krugman, by the way, which literally turns economics, opportunity cost, and the history of economic growth on their heads.) In truth, the UAW workers were overpaid relative to the auto industry, yet they were less productive than their counterparts.

For all its claims that it wishes to "protect" consumers, the Obama administration has an odd way of doing so. Consumers had spoken loudly in the case of GM and Chrysler, yet Obama slapped them in the face. However, neither the NYT nor Paul Krugman believe that, in the end, consumers should have any say when it comes to politically-protected firms and politically-protected unions.

(In his Playboy interview, Krugman also repeats the same fallacies that high wages by themselves create wealth. This is another rendition of the wrongheaded belief that governments can order wages to rise, which then creates wealth instead of what really happens: governments destroy wealth.)

As for Ridge and Peters, I have one question: If methanol is such a great idea, and if all it takes is a $100 tweaking to ensure that all cars can be flexible in fuel choices, then why haven't entrepreneurs taken that leap? One can go on about "network costs" and the like, but entrepreneurs created gasoline and diesel networks during the 20th Century without government leading the way.

Instead of trying to understand why fuels like methanol are not widely distributed, Ridge and Peters succumb to the wonkishness of central economic planning, as though Washington can guide an entire industry by fiat. Because I am not familiar with much of the regulatory structure in the auto industry, I don't know how the government's current set of rules would affect the building and marketing of cars powered by natural gas or methanol.

For example, do the CAFE mileage standards play a role? What about other rules? I don't know, but more often than not, we find that government regulations often stand in the way of good ideas.

Nonetheless, I don't get that sense with Ridge and Peters. Instead, they see something and create the false notion that government successfully can order something into production without there being terrible economic dislocations.