All Hail the Debt Fairy! All Hail the Inflation Fairy!

In September 2008, if it had not been obvious before, it had become abundantly clear since that the borrow-and-spend party has been over for nearly five years, yet Paul Krugman is becoming even more shrill about the need to a large dose of the fiscal equivalent of "hair of the dog." Yet, governments, including that of the USA, have been attempting to appeal to the Debt Fairy and the Inflation Fairy to wave their magic wands and heal the economies with more of the same.

In his latest column, Paul Krugman combines a relatively true statement about the current state of economic affairs -- long-term joblessness is becoming chronic -- with a non-sequitur. First, he comments upon the desperate situation that has become normal for many people, and second, he then blames it on a paper published a few years ago by a couple of economists:

Well, the famous red line on debt, it turns out, was an artifact of dubious statistics, reinforced by bad arithmetic. And America isn’t and can’t be Greece, because countries that borrow in their own currencies operate under very different rules from those that rely on someone else’s money. After years of repeated warnings that fiscal crisis is just around the corner, the U.S. government can still borrow at incredibly low interest rates.

But while debt fears were and are misguided, there’s a real danger we’ve ignored: the corrosive effect, social and economic, of persistent high unemployment. And even as the case for debt hysteria is collapsing, our worst fears about the damage from long-term unemployment are being confirmed.

Understand what Krugman is saying. As long as the USA can print money and borrow from the Federal Reserve, then Americans don't have to worry about how much debt the government piles up and how much money the Fed prints. The Debt Fairy and the Inflation Fairy will sprinkle magic dust and do what no fairy before has been able to do: conjure up a real economic recovery by encouraging the very kind of economic behavior that put this country into the mess in the first place.

Lest anyone think I exaggerate, Krugman himself qualifies the points I have made:

And let’s be clear: this is a policy decision. The main reason our economic recovery has been so weak is that, spooked by fear-mongering over debt, we’ve been doing exactly what basic macroeconomics says you shouldn’t do — cutting government spending in the face of a depressed economy.

It’s hard to overstate how self-destructive this policy is. Indeed, the shadow of long-term unemployment means that austerity policies are counterproductive even in purely fiscal terms. Workers, after all, are taxpayers too; if our debt obsession exiles millions of Americans from productive employment, it will cut into future revenues and raise future deficits.

Our exaggerated fear of debt is, in short, creating a slow-motion catastrophe. It’s ruining many lives, and at the same time making us poorer and weaker in every way. And the longer we persist in this folly, the greater the damage will be.

First things first. U.S. debt today stands at roughly 105 percent of current GDP, and only about 40 percent of current spending is financed via taxation. This is not "austerity" by any definition of the word, and one can bet that the next time the debt ceiling issue comes to the fore, Congress and the president -- after yet another dog-and-pony show complete with the Usual Suspects giving their usual talking points -- will come to an agreement. This number will grow, although it won't grow fast enough for Krugman.

Furthermore, Krugman fails to point out that the Obama administration has been relentless in trying to drive the U.S. economy in a direction in which vast amounts of resources are being used to push economic frauds like "green energy" and even another housing boom. In other words, it is more of the same. The government places huge burdens upon entrepreneurs who wish to operate in a relatively free market and drives resources into destructive "Crony Capitalism," as though policies that enrich contributors to Obama and the Political Classes will translate into general prosperity.

Keynesians are fond of claiming that as long as we have "idle resources," this is a wise policy, as at some point, if the Debt Fairy and Inflation Fairy sprinkle enough magic dust, all of these "idle resources" will awaken like Snow White after the kiss from the prince and come to life again. This is an amazing claim, for it is saying that when the economy is depressed, the Law of Scarcity can be ignored.

Yes, Keynesians believe that if only government spends enough and borrows enough, that we can emerge from this morass, and that the only thing standing in the way of progress is the presence of Goldstein -- I now dub him "Scoldstein" -- telling us we need to put something in our piggy banks. We can spend our way into another boom, and when that boom collapses -- as it surely will -- we just invoke the incantations of the Twin Fairies and begin another ride into the sunrise.

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.

The "Full Faith and Credit of the United States"? Right!

I remember watching advertisements 30 years ago for U.S. securities in which the narrator asks the prospective buyer, "What stands behind your investment? Why the full faith and credit of these United States!" with a picture of the U.S. Capitol standing behind him.

Even then, I thought that to be a bit excessive, given that he was not speaking of the USA as a collection of people, but rather the federal government, which he was equating to all of us, as though the sum total of our entire lives is the majesty of the American state. In other words, he was saying, "The U.S. Government will extract the money from others in one way or another to pay back these 'investments'."

Unfortunately, Paul Krugman uses the same language, and as an economist, he should know better. Furthermore, he is being knowingly deceptive, for a term like "full faith and credit" means that the borrower will pay back according to the terms of the agreement.

However, that is not what the U.S. Government does or has been doing for decades. When it pays back its loans, it does so with purposely-debased money and also by robbing Peter to pay Paul, an act in which it purchases bonds to pay repay bonds that were issued to pay back previously-issued bonds -- and so on. (This kind of borrowing, by the way, is illegal in the private sector and in municipal trading, although I am sure that states and cities do it more often than they ever will admit.)

Krugman writes: "John Boehner has just declared that he’s going to hold the full faith and credit of the United States hostage every time we hit the debt limit."You see, there can be no discussion at all of where all of this is heading. Instead, we are supposed to simply trust Washington to spend wisely, as though that already were happening.

This is not an endorsement of Boehner, by any means. Boehner cannot even stand debate within his own party, let alone a larger political arena. Instead, we get posturing by President Obama and Boehner as though they really were serious about getting things under control, with Krugman's answer is for the debt ceiling to be removed so that the U.S. Government can continue the delusion that it is creating wealth when, in fact, the government is transferring and destroying it.Yes, Congress and the president have no self-control, so the answer is to pretend that they do. Amazing.

That Krugman actually buys into the notion that the U.S. Government can borrow and print its way into the future without serious consequences is amazing, given his stature within the economics profession. Debasing the currency, crony capitalism (which he endorses via "green energy" subsidies), and preventing the creation of wealth through monopolistic regulation is not an economic plan; it is a plan for destruction.

So, there is no "full faith and credit of these United States" by any means. Krugman may want us to believe that paying back bonds with depreciating currency has only good effects, but rhetoric and financial trickery is no replacement for the Law of Opportunity Cost.

Krugman's overly "sunny" view of solar power

Despite the many failures of the planned socialist economy, it always seems as though the American academic elites believe that THEY can make a go of it. Thus, the Really Serious People (to take a term from Krugman) come up with scheme after scheme, including ways to put people who cannot afford to own houses into home ownership, throwing vast subsidies into corn-based ethanol, and, of course, solar energy.

Not surprisingly, Paul Krugman has weighed in on the side of the subsidized "green" economy, claiming that basically we can subsidize our way to prosperity, which logically is impossible. (Yeah, I know that at Princeton, everything is possible -- when one is spending someone else's money.)

Furthermore, if one even doubts the efficacy of replacing all so-called fossil fuels with solar panels, then one is suffering from a delusion put there by the evil oil companies. Krugman declares:

We are, or at least we should be, on the cusp of an energy transformation, driven by the rapidly falling cost of solar power. That’s right, solar power.

If that surprises you, if you still think of solar power as some kind of hippie fantasy, blame our fossilized political system, in which fossil fuel producers have both powerful political allies and a powerful propaganda machine that denigrates alternatives.

Yeah, it was those oil companies that created that sticky wicket known as "Opportunity Cost" which always seems to get in the way of the Obama administration's financial schemes. However, Krugman manages to take something that very well might be true -- that the cost of making solar panels has been falling -- and then present a false argument with it, something I will cover later in this post.

First, let me briefly address the "fracking" issue he presents. I agree with Krugman that the environmental risks of using current methods to drill for natural gas in the Mid-Atlantic states (including the area where I live) in some areas might be quite risky. In fact, I recently was a featured speaker at a meeting in which I laid out the issues as I saw them, and put forth an objection that Krugman ignores: the use of eminent domain.

While private companies cannot seize another's private property, the energy companies can ask local and state governments to take land by eminent domain, and that is what some of them are doing. As I see it, if firms have to engage in such tactics in order to be profitable, then what they are doing is simply another form of receiving subsidies, and a drain on the economy.

Thus, I agree that the social costs of "fracking" may be high, although given Krugman's animus against oil, coal, and gas, I am not ready to believe whatever he says about them. Furthermore, many of the "externalities" are property rights issues, and much of what Krugman advocates is anti-private property, which means he wants the political system to decide the social costs of fossil fuels-based energy, and the political system is utterly untrustworthy.

As for solar power, Krugman claims that it will be competitive with oil and coal once the "social costs" are factored into the equation. Obviously, that is a red herring, as Krugman wants the government to pile so much regulation and red tape into the system that in the end, the energy economy of 1800 would be more "efficient" than what we have now.

Krugman continues to excoriate anyone who raises a question about Solyndra, but I believe that when we permit the political system to determine the economic winners and losers, we get not just one bankrupt company, but an entire bankrupt economy. As Ted DeHaven of the Cato Institute points out, the Solydra affair was a prime example of "crony capitalism," and Krugman claims to be against such things (except when he is for them).

Yes, it is fallacious to say that because Solydra went bankrupt, ALL solar energy is bad. That is not my point. What I AM saying is that for the past three decades, we have been propagandized with the false stories that affordable solar energy IS JUST AROUND THE CORNER.

Well, maybe it is now, but I have my doubts. At the present time, solar panels make sense for small operations and for things like calculators, but the idea that we can use it to replace entire electric grids still seems like fantasy to me. Unlike Krugman, I'm in the 99 percent and cannot afford to put huge numbers of solar panels on my house.

Robert Wenzel and the March Toward Socialism

Paul Krugman does not like to say that government control of the economy is socialism, and maybe he is correct. After all, the Nazi government controlled prices, picked "winners and losers," and directed production.

Producers got to own the property (in name, at least) and those favored producers got to be profitable, but at the expense of those people and companies that were not politically connected or simply were scorned by Hitler and his gang. We called that "Fascism." Another term might be "Crony Capitalism."

Today, we have a regime that tries to pick winners, rewards friends, and direct production to those lines favored by Washington. Call it what you will, but Robert Wenzel in this post calls it socialism. And I think he is correct.