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.

Is Mitt Romney a Magician? Paul Krugman Believes He Is

I see that Paul Krugman definitely is coordinating his column with the Obama re-election campaign, and he has a number of howlers in his latest concoction. Before dealing with his notion that Mitt Romney and Bain Capital could purchase perfectly healthy company, run them into bankruptcy, and then sell them for a profit, let me first look at Krugman's opening salvo:

In a better America, Mitt Romney would be running for president on the strength of his major achievement as governor of Massachusetts: a health reform that was identical in all important respects to the health reform enacted by President Obama. By the way, the Massachusetts reform is working pretty well and has overwhelming popular support.

I have no idea if anything Krugman says is true regarding the program's "success" and its "overwhelming popular support," but I ran across this interesting exchange the other day about "Romneycare" from someone living in Massachusetts:

When we file our annual income tax returns in Massachusetts, there's a multi-page form on which we're required to specify the type of medical insurance we have, whether or not our coverage is "substantially compliant" (which the insurance plans have to tell us by sending us an annual form) and then, if our coverage isn't "substantially compliant," another form, with a lengthy worksheet, to compute the penalty tax which turns out to be a function of "Modified Massachusetts Adjusted Income"—the computation of which requires the filling out of another lengthy worksheet after adjusting for various deductions and credits (the computation of which requires yet a third worksheet). 

At a dinner party this past Friday evening, I was chatting with a physician friend, a family/primary care physician. I asked him how his practice has been faring under Romneycare and what he thought of Obamacare. He told me that since Romneycare came on board, he and his colleagues, in their office practice, can only hope to make ends meet on volume, scheduling five to ten minute routine appointments, twenty minutes for "serious cases," and annual physicals (which take fifteen minutes) booked up to six months in advance. From 5:00 p.m. to 6:30 p.m. each day, he and his staff sit down to attend to paperwork. Has Romney care led to cost reductions and better care for patients, I asked him. No way, he told me. It's only been better for the insurance companies. What about Obamacare? He rolled his eyes. "We've been sold a bill of goods." He and his family live modestly. He's certainly not getting rich from his medical practice. His wife works to make ends meet. She's a nurse. At your office? I asked him. No, at one of the public clinics where she does better than she could do at his practice, "no fooling."

Granted, the doctor probably is evil to the core, since he doesn't share Krugman's enthusiasm for "Romneycare," and certainly not for Obamacare. I'm sure that Krugman would write off such comments as being straight from Goldstein's headquarters and, besides, doctors really should not be making the same amount of money as Keynesian economists!

But Krugman only is getting warmed up, and then treats the readers to more interesting theories of economics, such as one that holds that the more damage one does to a business firm, the more valuable that firm becomes. I never would have known had it not been for this column, given that I was foolish enough to think that a firm would become more valuable the more profitable and productive it is. He writes:

In any case, however, Mr. Romney wasn’t that kind of businessman. Bain didn’t build businesses; it bought and sold them. Sometimes its takeovers led to new hiring; often they led to layoffs, wage cuts and lost benefits. On some occasions, Bain made a profit even as its takeover target was driven out of business.

So, if we are to correctly read Krugman, he is saying that poor management and unsound practices resulted in Bain's being profitable. Romney is a magician! And what, according to Krugman, is a sound business practice? According to Princeton's Finest, a business becomes more valuable as its real costs of production increase. You know that diagram that one learns in Microeconomics in which higher real costs of production cause the supply curve to shift to the left (or the cost curves that a firm faces shift upward and to the left)? Obviously, that cannot be correct because Krugman's Keynesian analysis declares that more real spending on production actually increases overall wealth:

Why, for example, do many large companies now outsource cleaning and security to outside contractors? Surely the answer is, in large part, that outside contractors can hire cheap labor that isn’t represented by the union and can’t participate in the company health and retirement plans. And, sure enough, recent academic research finds that outsourced janitors and guards receive substantially lower wages and worse benefits than their in-house counterparts. 

Just to be clear, outsourcing is only one source of the huge disconnect between a tiny elite and ordinary American workers, a disconnect that has been growing for more than 30 years. And Bain, in turn, was only one player in the growth of outsourcing. So Mitt Romney didn’t personally, single-handedly, destroy the middle-class society we used to have. He was, however, an enthusiastic and very well remunerated participant in the process of destruction; if Bain got involved with your company, one way or another, the odds were pretty good that even if your job survived you ended up with lower pay and diminished benefits.

So, there it is. If American firms had forced up their own costs of doing business and made themselves uncompetitive with firms overseas, then our economy would be better off. (No doubt, a dose of protectionism and some capital controls would work wonders, I'm sure.)

Anyway, Krugman gives yet another prescription for the economy, one that curiously mirrors what the Juan Peron regime did in Argentina in the 1950s and 60s. Inflation, protectionism, and capital controls all were part of Peron's plan, and we know how well that turned out. No doubt, Krugman would consider Argentina to be a huge success.

Krugman: Welfare is the Nation's "Seed Corn"

Paul Krugman must feel at times as though he is Horatio at the Bridge. He openly campaigned for Democrats last fall only to see the House fall to Republicans and for the Democrats to see their once almost insurmountable Senate majority fall apart. And now, the Republicans are calling for budget cuts and Krugman once again dons his battle gear.

Now, I absolutely agree with him that the military budget should not be sacrosanct, and most likely I would want more cut out of the Budget to Preserve the Empire than would he. (After all, Keynesians believe that military spending also serves as an economic "stimulus," even if they don't like what it accomplishes.) Any Republican who believes that the current level of military spending and military interventions overseas is sustainable is not someone who is willing to listen to reason.

However, Krugman does not seem to be particularly exorcised about the lack of Republican desire to cut military spending. Instead, he decides that a poll by the Pew Research Center really should be the centerpoint of economic policy. He writes:

...Americans were asked whether they favored higher or lower spending in a variety of areas. It turns out that they want more, not less, spending on most things, including education and Medicare. They’re evenly divided about spending on aid to the unemployed and — surprise — defense.

The only thing they clearly want to cut is foreign aid, which most Americans believe, wrongly, accounts for a large share of the federal budget.

Pew also asked people how they would like to see states close their budget deficits. Do they favor cuts in either education or health care, the main expenses states face? No. Do they favor tax increases? No. The only deficit-reduction measure with significant support was cuts in public-employee pensions — and even there the public was evenly divided.

The moral is clear. Republicans don’t have a mandate to cut spending; they have a mandate to repeal the laws of arithmetic.

In other words, since no one really wants to stop spending, let's just pretend that we have lots and lots of money, or that we can increase the national debt or just get the Fed to give us QE3, QE4, and QE5, which is the Going-Out-Of-Business Sale. In the meantime, Krugman really wants us to think that unless we have a vast welfare state, somehow our economy and our society will disappear:

The answer, once you think about it, is obvious: sacrifice the future. Focus the cuts on programs whose benefits aren’t immediate; basically, eat America’s seed corn. There will be a huge price to pay, eventually — but for now, you can keep the base happy.

Yet, if anyone has called for the eating of the economy's seed corn, it has been Paul Krugman. Because, in his view, capital simply "happens," then we don't have to worry about capital development, given that if we spend lots of money, capital magically appears.

To Paul Krugman, there is no difference between real wealth and the printing of money. As he wrote in The Return of Depression Economics, all it takes is for the government to end the downturn is just to print money. There is, he claims, a "free lunch" out there. What he does not say is that these are the very policies that destroy our real seed corn, our capital base.

Do We Need Capital Controls?

I meant to blog on this last week, but only now can give the subject of capital controls my attention. In a post of nearly two weeks ago, Paul Krugman praises such restrictions during the economic crisis in Malaysia of more than a decade ago, yet wonders if such controls would work in Greece and Spain.

Such comments once again reveal the "Historicist" Krugman, just as he believes that governments should engage in printing lots of new money (what some call "inflation") during bad times, and refrain from such activity when times are good. Likewise, capital controls might be successful at times and unsuccessful in certain periods.

In other words, outside circumstances dictate economic policies rather than economic policies staying within the bounds of the laws of economics, which are based upon laws of human action. Thus it is with capital controls.

We have to remember that capital controls are based upon coercion. After all, such controls prevent people from taking things they value out of the country. It is another way of saying that government owns everything, and anything people have in their possession simply is borrowed from the state.

Granted, we are dealing with very different fundamental approaches. Krugman is saying that Malaysia instituted capital controls, and after the crisis ended, investment flowed into the country again. Thus, they were "successful."

Yet, what might be the case had the government of Malaysia declared that the country was a safe place to invest, and that also meant people could bring their possessions into the country and take them out again if they so desired? I don't know the results, since Malaysia did not go that route. However, as I see it, there is a huge fundamental difference between Krugman and the Austrians here, and it is not just based upon potential outcomes.

No, what Krugman endorses is a form of theft. That's right, theft. Capital controls are theft. Krugman might believe that they can be "good theft," but nonetheless, government is taking control of the possessions of others. Since Keynesian economics endorses stealing through the "magic" of inflation, I hardly am surprised that America's loudest Keynesian believes theft is just fine in other forms, too.