Krugman: Capital Stalls Economic Growth and Creates Inequality

One of the differences between mainstream Keynesian (and neoclassical) economists and the Austrians is the view that both sides have of capital. On the Keynesian-socialist side, capital is useful mostly in the spending that is done in capital creation, and future capital improvements and repairs are useful only if these things require more spending.

Before going further, I need to emphasize that Austrians do not endorse all capital expansion, as we do see expansion based upon aggressive efforts by the government via the Fed pushing down interest rates or the government offering all sorts of subsidies and tax benefits (see "green energy") as promoting malinvestment. Since Keynesians such as Krugman do not recognize malinvestment as an economic issue (except for rare times when they think it might aid their arguments, and even then they will not use malinvestment as an economic term), they can endorse things like the massive subsidies for "green energy," since those sectors allegedly "create jobs."

If one ignores the Law of Opportunity Cost, then "green energy" is a great investment. Except, as the Wall Street Journal recently pointed out in an editorial, the Algore Sector of the economy is a disaster, an investor's version of the black hole. If Paul Krugman is interested in the relationship between capital formation and inequality, he need look no further that what has happened to the economic sector that President Barack Obama promised would lead us out of the economic downturn. Time and again we see the government transferring wealth to those who already are wealthy via this unjustified program of capital malinvestment.

(Al Gore, by the way, has managed to become fabulously wealthy living off these taxpayer subsidies while the investors who have helped provide the up-front money that he pockets have taken a financial bath. That is a story for another time and another posting, but I do find it instructive that Krugman never has gone after Gore the way that he has gone after people who actually might be productive.)

So it is today that Krugman takes on the capital bogey, first repeating (with some skepticism) yet another version of David Ricardo's pessimistic "steady state" plateau to be reached at an unnamed time. Ricardo's insistence of decreasing marginal returns to capital is there, as well as the view that at some point, capital formation will run into the proverbial brick wall. To his credit, Krugman disagrees, although not for the right reasons.

For Krugman, growth occurs only if government spending increases. One should not forget his preposterous claim that the recovery was faltering because state government spending was not rising at rates comparable to previous economic recoveries. (It never occurs to Krugman that because states must balance their budgets, they are heavily dependent upon real economic growth from private firms, so if anything, the financial problems in states and municipalities should be the "canary in the coal mine" warning that maybe Obama's policies are not promoting growth.)

Krugman then lets loose with this gem:

So machines may soon be ready to perform many tasks that currently require large amounts of human labor. This will mean rapid productivity growth and, therefore, high overall economic growth.

But — and this is the crucial question — who will benefit from that growth? Unfortunately, it’s all too easy to make the case that most Americans will be left behind, because smart machines will end up devaluing the contribution of workers, including highly skilled workers whose skills suddenly become redundant. The point is that there’s good reason to believe that the conventional wisdom embodied in long-run budget projections — projections that shape almost every aspect of current policy discussion — is all wrong.

Yeah, it is capital creating mass unemployment across the economy just as capital is responsible for the high cost of medical care. True, if it is malinvested capital, then in the long term, the malinvestments direct investment away from truly productive uses, and after the inevitable bust occurs, we see unemployment rising.

On the subject of "inequality," Krugman is insinuating that unless government steps in to limit investment returns to capital, then those returns will enrich some, but at the expense of others. Thus, Krugman reasons, capital that actually might be profitable in a market setting actually helps to create poverty. This is an amazing conclusion, but then we live in amazing time.

Krugman does not address the fact that maybe, just maybe, people purchase goods because they believe use of those goods will make themselves better off. In other words, he recognizes only the returns to investors as having anything to do with economics, while the actual uses of these goods and their economic effects either are ignored or are devalued.

During the 1930s, the New Dealers that Krugman so often praises claimed that the economy was in depression in part because ours was a "mature economy." I remember reading a 1980 Daniel Patrick Moynihan newsletter in which he made essentially the same claim. If that really were true, then I would challenge readers to go back to those eras and see who has a higher standard of living, Americans then or Americans now.

One one last point, Krugman continually claims that our present policies are starving Washington of wealth and that Washington really is on an "austerity" plan. If that is true, then why is the economy of the D.C. area booming at a time when the economy elsewhere is stagnant? Seven of the top 10 wealthiest counties either are contiguous to D.C. or are contiguous to counties that touch the D.C. borders, and the pattern continues. But if D.C. is booming, then why is the rest of the country doing poorly?

The Capitalists are Coming! The Capitalists are Coming!

There is a new specter on the horizon, a blood-sucking monster that will destroy the lives of people even as it makes goods that improves their lives! Yes, the capitalists are coming, but Paul Krugman is ever vigilant against these evil ones!

According to Krugman, the evil robber barons have made a comeback, benefiting from monopolies, and it is up to the government to save us -- and make the economy more "efficient" at the same time. He asks how it is that the economy can be depressed even while corporate profits are at high levels. Is the old Marxist "capital versus labor" argument back in play?

Krugman, apparently not wanting to go quite as far as his forebears like John Kenneth Galbraith, says that maybe a different explanation is needed, writing:

Why is this happening? As best as I can tell, there are two plausible explanations, both of which could be true to some extent. One is that technology has taken a turn that places labor at a disadvantage; the other is that we’re looking at the effects of a sharp increase in monopoly power. Think of these two stories as emphasizing robots on one side, robber barons on the other.

First, the attack language is the type of thing that one has come to expect from Krugman whenever he speaks of private enterprise. He cannot explain how it might be that people who cannot coerce anyone into making an exchange are engaging in acts of theft, but if the government forces someone to do something at the point of a gun, that is "community" or "caring for the poor."

Second, his overall explanation of why we have higher rates of unemployment among college-educated workers harkens back to the days of FDR when the government was claiming that "automation" or "capital" was the cause of the employment problems. He continues:

About the robots: there’s no question that in some high-profile industries, technology is displacing workers of all, or almost all, kinds. For example, one of the reasons some high-technology manufacturing has lately been moving back to the United States is that these days the most valuable piece of a computer, the motherboard, is basically made by robots, so cheap Asian labor is no longer a reason to produce them abroad.

In a recent book, “Race Against the Machine,” M.I.T.’s Erik Brynjolfsson and Andrew McAfee argue that similar stories are playing out in many fields, including services like translation and legal research. What’s striking about their examples is that many of the jobs being displaced are high-skill and high-wage; the downside of technology isn’t limited to menial workers.

Still, can innovation and progress really hurt large numbers of workers, maybe even workers in general? I often encounter assertions that this can’t happen. But the truth is that it can, and serious economists have been aware of this possibility for almost two centuries. The early-19th-century economist David Ricardo is best known for the theory of comparative advantage, which makes the case for free trade; but the same 1817 book in which he presented that theory also included a chapter on how the new, capital-intensive technologies of the Industrial Revolution could actually make workers worse off, at least for a while — which modern scholarship suggests may indeed have happened for several decades.

This reminds me of the Paul Craig Roberts's claim that if capital is mobile across international borders, the Law of Opportunity Cost no longer applies (which is a way of saying that mobile capital eliminates the Law of Scarcity). Actually, the actual "law" is the Law of Comparative Advantage, but in truth, comparative advantage is just a restatement and application of opportunity cost.

However, what Krugman does not say is that government regulation -- and especially the spate of regulation that has come about through the Obama administration -- also results in stratification of the workplace. The reason is that regulations tend to try to classify and formalize everything and force requirements of specific areas of formal education for any number of jobs that really should not require that much education.

Furthermore, government regulations tend to make hiring much more bureaucratic and formalized, which makes it more costly to hire workers. Yes, the government says it is trying to keep employers from engaging in certain kinds of discrimination, but the end result is that the regulatory state forces up real costs of production and hiring, and that those costs ultimately are borne by workers.

When one adds the real costs that governments at all levels impose upon people wanting to start up even small businesses, it should not be surprising that the very kinds of laws of which people like Krugman approve are making the entrepreneurial transitions very costly. (Oh, I forgot. When governments effectively mandate higher business costs, that also is a good thing, since higher costs supposedly mean more spending, and everyone knows that more spending brings back recovery.)

There is another problem, and that is that government regulations that pertain to labor also make the addition of capital more attractive than it otherwise might be in a free market. Yes, I know it might be shocking to admit that government regulations just might change the terms of opportunity cost.

But Krugman is not satisfied there. No, the evil capitalists not only are using robots and permanently displacing workers, but they also are engaging in creating monopolies:

What about robber barons? We don’t talk much about monopoly power these days; antitrust enforcement largely collapsed during the Reagan years and has never really recovered. Yet Barry Lynn and Phillip Longman of the New America Foundation argue, persuasively in my view, that increasing business concentration could be an important factor in stagnating demand for labor, as corporations use their growing monopoly power to raise prices without passing the gains on to their employees.

Earth to Krugman: every academic economist should know that wages and salaries are not "passed on" by employers; they are payments to owners of the factor of production known as labor. Second, while economists like Krugman (and, of course, the usual places like the leftist Daily Kos) make the assumption that profits exist at the expense of workers, the truth is that in a free market, profits are what an entrepreneur will earn if he or she makes the correct assumption regarding present prices for factors of production versus perceived future prices for final goods. Without the possibility of profits, those jobs and, more important, the quality of the goods people can purchase, would not exist.

Investor and writer Kel Kelly notes that at the present time, the inflationary policies of the Federal Reserve System have more to do with the present state of corporate profits than any entrepreneurial success of many of these firms. When one adds that the Obama administration actively has promoted what essentially is crony capitalism, or corporatism, we should not be surprised if politically-favored firms tend to do better.

On a larger point, it would seem that high corporate profits would invite more entrepreneurial activity and more competition, but that clearly is not happening. In a free market, there would be nothing out of the ordinary that would would block entrepreneurs and entrepreneurial firms from pursing those opportunities and, in the process, compete for those profits. However, given the overt hostility of the Obama administration to entrepreneurs in general (or at least entrepreneurs that seek to compete in real markets rather than the government's crony markets) and the fact that every year or so, there is a huge political tug-of-war regarding business and individual tax rates, we should not be surprised that there is not more long-term business investment.

Of course, Krugman holds that the best way to deal with this problem is through government coercion and specifically through anti-trust litigation and higher taxes. Now, someone will have to explain to me how we can revitalize the business sector by unleashing regulators, federal prosecutors, and the IRS on business owners and investors, but I guess that since those people drive up costs, we will assume that they will "spend" their largess and make the economy stronger.

Krugman: Debt? What Debt?

On occasion, I find myself partially agreeing with Paul Krugman and his most recent column attacking Republicans (yeah, I know, that's a rare thing) on their "concern" about the federal budget deficit deserves at least one cheer. I am wearied of Republicans expressing concern about deficits at a time when they are calling for massive increases in military spending.

Now, Krugman does not mention that point at all in his column, instead claiming that the deficit hawks only want to starve the poor and elderly, deny them any medical care, and force them to sleep under bridges. He does not put things in quite that language, but that is the gist of what he is saying. But, then, this is someone who actually believes that government welfare programs increase wealth because they bring about instant spending, and everyone knows that saving money and investing in capital is evil and brings down the economy.

(Krugman's capital theory seems to be another rendition of "Capital Happens" in which capital magically appears in our economy.)

So, let us look at Krugman in his own words:

At a time of mass unemployment and record-low borrowing costs, a time when economic theory said we needed more, not less, deficit spending, the scolds convinced most of our political class that deficits rather than jobs should be our top economic priority.

 Keep in mind that in Wonderland, when the Federal Reserve System pushes down interest rates to artificially-low levels, that has ONLY good effects. After all, the Laws of Wonderland dictate what we should believe about economic growth and the economy in general:

• Saving is evil and only suppresses economic growth
• We should use all means to confiscate savings either through inflation or outright taxation because we need to spend everything we make in the present
• Don't worry about capital formation because "Capital Happens"
• Anything that encourages present spending is good, and anything that requires any present abstinence from spending right now is evil and must not be permitted
• The only real benefit we might get from capital formation is in present spending for capital goods.

Given that Krugman already has called for the Fed to finance present government spending via Fed purchases of federal debt in the primary market, we know where this whole thing is headed. In fact, as Krugman says, our problem right now is that the federal debt needs to be greater, as we need to borrow trillions of dollars more:

And just to be clear, the danger for next year is not that the deficit will be too large but that it will be too small, and hence plunge America back into recession.

 The last statement really should leave us in a quandary, for earlier in this column, Krugman attacked the "tax cuts for the wealthy" (or what we call Democratic talking points) as helping to create deficit conditions. However, given that we need larger deficits, why raise tax rates at all? If we can borrow at no appreciable opportunity cost -- And what self-respective Keynesian ever would think that government spending always trumps the Law of Scarcity? -- why should we worry if tax rates are "too low"?

As Krugman declares:

This wouldn’t be hard if they had been making a more honest case on the budget: the truth is that deficits are actually a good thing when the economy is deeply depressed, so deficit reduction should wait until the economy is stronger. As John Maynard Keynes said three-quarters of a century ago, “The boom, not the slump, is the right time for austerity.”

 So, Krugman seems to be operating at cross purposes with himself. Using his own logic, it would be stupid to raise income taxes on anyone or to jack up taxes on investment because deficits during a depression are "a good thing." But we have to remember that "Krugman Logic" is not based upon economics, but rather on left-wing politics.

The Man Who Called for "Death Panels" to Save Money Now Claims Mitt Romney Wants to Let People Die to Save Money

I know it is shocking to readers to hear that Paul Krugman claims that his Keynesianism is purely empirical and based only on "facts," and that his televised statements recommending "death panels" did not come from ideology, but rather from Holy Empiricism. (Yes, I now. Krugman later claimed that he really didn't say what he said and that only an ideologue could contend that his statement calling for "death panels" to "save money" actually was a recommendation of letting people die prematurely in order to "save money.")

So, even though Krugman said the following, he really didn't say it and I am sure that his gaggle of groupies will believe him:

Some years down the pike, we're going to get the real solution, which is going to be a combination of death panels and sales taxes. It's going to be that we're actually going to take Medicare under control, and we're going to have to get some additional revenue, probably from a VAT.

 So, given Krugman's previous statements (which he made but didn't make), he now accuses Mitt Romney and Paul Ryan of wanting to let people die in order to "save money." However, RR are even more sinister than just pure "death panels" advocates:

The Romney-Ryan position on health care is that many millions of Americans must be denied health insurance, and millions more deprived of the security Medicare now provides, in order to save money. At the same time, of course, Mr. Romney and Mr. Ryan are proposing trillions of dollars in tax cuts for the wealthy. So a literal description of their plan is that they want to expose many Americans to financial insecurity, and let some of them die, so that a handful of already wealthy people can have a higher after-tax income.

I had no idea that the reason that some people believe that capital gains taxes should not be as high as Krugman and Barack Obama demand is because they want people to die. The explanation I always heard was that high capital gains taxes limit capital investment, but since capital is irrelevant to a Keynesian (except for its promotion of short-term spending), I guess Krugman's answer makes sense. Yes, anyone who thinks that we should not be putting tax barriers in the way of capital formation believes so because he or she wants people to be without healthcare in their most dire moments.

Hoodathunkitt?

Krugman: Capital creates recessions

I see that Paul Krugman has moved into yet another economic dimension in which he declares that capital creates layoffs and layoffs are responsible for...layoffs. He writes:

...the fact is that running a business is nothing at all like making macro policy. The key point about macroeconomics is the pervasiveness of feedback loops due to the fact that workers are also consumers. No business sells a large fraction of its output to its own workers; even very small countries sell around two-thirds of their output to themselves, because that much is non-tradable services.

This makes a huge difference. A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods. Nothing in business experience prepares one for the paradox of thrift, or even the inflationary impact of increases in the money supply (which is real when the economy isn’t in a liquidity trap.)

This is yet another example of the fallacy of "buy back the product" in which production and consumption are regarded as two independent and unrelated things, except that unless workers can "buy back" what they have produced, then the economy will plunge into recession.

In other words, what an economy produces really means nothing in terms of wealth. The production of goods is seen as an impediment to employment. Now, it is one thing when President Obama declares that capital creates unemployment; he is a politician and cannot be held responsible for saying anything of economic intelligence.

However, Krugman is supposed to know better. Economists actually are supposed to understand that when capital is created within a free market system, permitting people to create more goods, that this ultimately creates new opportunities for others.

So there you have it. Capital creates recessions; savings creates recessions. More brilliant economic analysis from Princeton University.

Paul Krugman: government eliminates opportunity cost

Ever since the Progressive Era, Americans have been bombarded with the notion that all goods really are collective in nature. Thus, we hear about "our food supply" and "our oil," and "our healthcare."

If goods truly are collective, then it ultimately is up to that most collective entity, government, to "distribute" them. Pay no attention to the real problems that arise out of the notion of collective things, which is nothing but socialism using different terms. And even Paul Krugman cannot "solve" the central problem of socialism: economic calculation.

In his column on Medicare, Krugman manages to wrap a falsehood around a central kernel of truth, that being that on paper, Medicare costs less than private insurance. He writes:

...here’s what you need to know: Medicare actually saves money — a lot of money — compared with relying on private insurance companies. And this in turn means that pushing people out of Medicare, in addition to depriving many Americans of needed care, would almost surely end up increasing total health care costs.

The idea of Medicare as a money-saving program may seem hard to grasp. After all, hasn’t Medicare spending risen dramatically over time? Yes, it has: adjusting for overall inflation, Medicare spending per beneficiary rose more than 400 percent from 1969 to 2009.

But inflation-adjusted premiums on private health insurance rose more than 700 percent over the same period. So while it’s true that Medicare has done an inadequate job of controlling costs, the private sector has done much worse. And if we deny Medicare to 65- and 66-year-olds, we’ll be forcing them to get private insurance — if they can — that will cost much more than it would have cost to provide the same coverage through Medicare.

And what causes this problem? Private enterprise, of course:

And then there’s the international evidence. The United States has the most privatized health care system in the advanced world; it also has, by far, the most expensive care, without gaining any clear advantage in quality for all that spending. Health is one area in which the public sector consistently does a better job than the private sector at controlling costs.

I will give Krugman his argument as far as it goes, but I think that a few points just might be in order, points that Krugman conveniently ignores.

The first is that Medicare is NOT subject to state mandates, and that is a huge factor, as mandates drive up the cost of insurance. (I won't ask why Krugman ignores this point except to say that it does not fit with his narrative that socialism is morally and economically superior to private enterprise.)

Second, Medicare sets the payment schedule and doctors that treat Medicare patients have no other choice. Patients can sue insurance companies and the media generally will side with patients and doctors in having the courts order insurers to spend lots of extra money. However, that does not happen (to my knowledge) with Medicare.

Third, there is no way that the advent of third-party payments will NOT result in higher costs, as decisions for care are made by people who do not have a direct interest in the outcomes. Keep in mind that if we had third-party payments for buying other things, like food, then food prices would be higher than they are now.

Fourth, Krugman falls for the silly doctrine that medical care is "different" and not really subject to the laws of economics. Now, keep in mind that when we say that something is subject to economic laws, what we are saying is that it is a scarce good. If economic laws don't apply, then the good cannot be scarce.

I cannot believe for a second that Krugman would claim that medical care is a non scarce item, yet, he writes about medical care as though it is not scarce. For example, take his long-held view that medical capital drives up costs. If that were true, then it would be the first time in economic history that the presence of capital (at least developed in a free market) forced real costs to be higher than they would be in the absence of capital.

Would Krugman ever write that the development of the assembly line made automobile costs higher? If that were true, then the story of how Henry Ford was able to bring down the price of a new car from about $1,000 to less than $300 simply would be non-existent.

If, indeed, capital were to be responsible for higher real medical costs, then one would have to look at other factors to see why this would be so, for it makes no economic sense by itself. Unfortunately, Krugman is not willing to go outside the narrative that medical care is "different."

Moreover, if government by taking over payments can eliminate opportunity cost (or make it substantially lower), then why does not government involve itself in everything else and lower costs? For that matter, if government by simple fiat can create such miracles, then why has socialism failed in places like Cuba, North Korea and the U.S.S.R.?

Say What?

While I set up this blog because of fundamental disagreements I have with Paul Krugman on economics and political economy, nonetheless I did not set it up for the purpose of disagreeing with him. In other words, I don't disagree with Krugman for the sake of disagreement.

More than once, I have read through one of his columns and found myself in agreement (if not total, certainly agreeing with most of what I was reading), but then he comes up with something to which I ask myself, "Say what?" Thus it is today with his column on education: after making some sense, Krugman then gives readers the classic non sequitur.

The column points out that going to college might not provide the automatic financial boost for individuals that it once did, and he gives some examples. Unfortunately, Krugman approaches the entire subject from a purely administrative point of view, as though an economy were something run by a political board of directors.

In fact, most of Krugman's columns and articles do rest upon the viewpoint that an economy is something to be administered by the state, and in that point, it hardly differs from what used to be the case in the former U.S.S.R. and China. The U.S.S.R. used to have the highest per capita ratio of Ph.D.s to the rest of society, but the economic results were less-than-satisfying.

(When I was in graduate school, my math econ teacher, Henry Thompson, once pointed out that the Soviets led the world in developing the application of matrix algebra to solving simultaneous equations in putting together the economic Five-Year Plans. After telling us that fact, he added, "Of course, it didn't do them any good.")

As I read through the column, I realize that Paul Krugman the economist hasn't a clue about the role of entrepreneurship in an economy. None. Instead, we get this:

So if we want a society of broadly shared prosperity, education isn’t the answer — we’ll have to go about building that society directly. We need to restore the bargaining power that labor has lost over the last 30 years, so that ordinary workers as well as superstars have the power to bargain for good wages. We need to guarantee the essentials, above all health care, to every citizen.

In other words, "prosperity" is something that just happens (provided that the government "stimulates" the economy with enough "spending"), and that the government then must ensure that the benefits of a productive economy be spread throughout the population. Furthermore, the process must be one of, frankly, coercion. We must force employers to pay more, we must force taxpayers to purchase medical services for others, and so on.

In other words, in Krugman's view, an economy is something that is administered, supported by government spending and monetary creation, and everything forced upon others either through outright violence or threats of violence and property confiscation. Not once in any of his columns have I read anything that even was close to recognizing that entrepreneurship is the key to a growing economy.

Instead, Krugman seems to believe that an economy just "happens," and that the role of government is to keep the perpetual motion machine running. To be honest, there is nothing in his viewpoint that would be any different than what was done in the U.S.S.R. during the communist era. Education, then, is nothing more than a mechanism to put people in certain predetermined slots in which they would receive an income because, well, they are supposed to receive an income. There is no matching of any position with what contribution it actually makes to that thing called an economy.

(Actually, in Krugman's view, the usefulness of any position is in how much the person employed spends on goods. Likewise, the usefulness of capital is the spending required to create it. Spending, spending, spending.)

I also would add that Paul Krugman really would have no way of explaining why it was that the Soviet economy was primitive compared to what existed in the West. And we should not be surprised, given that one of his most important mentors, Paul Samuelson, actually believed that communism and central economic planning someday would result in a Soviet economy that would be more productive and prosperous than that in this country.

In the end, there really is no difference between MIT economics and what existed in the U.S.S.R. Everything either is administered or simply happens. All production functions are known, and all that is needed is for administrators to act according to "efficient" means. We see how well that worked in the Soviet Union.