Krugman's Twinkie Economic Myths

I remember when Dan White, the former San Francisco city supervisor employed the infamous "Twinkie Defense" in his 1979 trial for the murder of the city's mayor, George Moscone, and fellow supervisor Harvey Milk. Apparently, the jurors were bamboozled by this nonsense and convicted him not of first-degree murder but rather voluntary manslaughter, leading to a sentence of seven years (for which he served five).

Most of us had not thought much about Twinkies and their supposed threat until Hostess recently announced its intention to shutter its operations because of an ongoing strike and its inability to compete in the present economy. However, in recent years, Twinkies supposedly had become famous because of their long shelf life, something that was exaggerated with people claiming the sugar-laden snacks could survive nuclear holocaust.

Well, the company that created them has not survived Barack Obama's economic holocaust, but the economic myths of the era in which Hostess cakes did very well also have outlasted the combination of sugar and chemicals, and who better to perpetuate these myths than Paul Krugman? In a recent column, Krugman harkens back to the 1950s -- the "Golden Era" for Twinkies -- and claims that the economy then was strong because of high taxes and union workforce dominance. He writes:

Needless to say, it wasn’t really innocent. But the ’50s — the Twinkie Era — do offer lessons that remain relevant in the 21st century. Above all, the success of the postwar American economy demonstrates that, contrary to today’s conservative orthodoxy, you can have prosperity without demeaning workers and coddling the rich.

Consider the question of tax rates on the wealthy. The modern American right, and much of the alleged center, is obsessed with the notion that low tax rates at the top are essential to growth. Remember that Erskine Bowles and Alan Simpson, charged with producing a plan to curb deficits, nonetheless somehow ended up listing “lower tax rates” as a “guiding principle.”

Yet in the 1950s incomes in the top bracket faced a marginal tax rate of 91, that’s right, 91 percent, while taxes on corporate profits were twice as large, relative to national income, as in recent years. The best estimates suggest that circa 1960 the top 0.01 percent of Americans paid an effective federal tax rate of more than 70 percent, twice what they pay today.

Nor were high taxes the only burden wealthy businessmen had to bear. They also faced a labor force with a degree of bargaining power hard to imagine today. In 1955 roughly a third of American workers were union members. In the biggest companies, management and labor bargained as equals, so much so that it was common to talk about corporations serving an array of “stakeholders” as opposed to merely serving stockholders.

Furthermore, Krugman argues that the road to prosperity is for the government to have massive tax increases and a unionized workforce:

Along the way, however, we’ve forgotten something important — namely, that economic justice and economic growth aren’t incompatible. America in the 1950s made the rich pay their fair share; it gave workers the power to bargain for decent wages and benefits; yet contrary to right-wing propaganda then and now, it prospered. And we can do that again.  

So there it is. The economy was prosperous because of high tax rates (the same rates Krugman told me in response to a question in 2004 that were "insane") and because labor unions were driving up the cost of doing business. Capital had nothing to do with it. The fact that the USA was the one industrialized nation that had not been on the receiving end of mass bombing and artillery attacks had nothing to do with it.

No, the prosperity of the 1950s (when at least a third of Americans officially lived in poverty) was due to massive wealth transfers. However, Krugman fails to point out that during this era, business owners and entrepreneurs did not have to deal with the massive influx of  government regulations at all levels, although I am sure that he would tell readers that had government been even more restrictive at that time, the economy would have prospered even more because higher costs of business translate into more wealth for owners of factors of production, and higher costs are the real source of prosperity.

Not surprisingly, Krugman misses a bit of history along the way. By the end of the 1970s, as these unsustainable policies of high taxes and inflation continued, the U.S. economy was in crisis, and the 1980 election occurred in that atmosphere. Far from creating the prosperity of the 1950s, these policies which Krugman praises led to less capitalization down the road, and when they reached their natural end, it was clear that much of the capital stock of this country was still stuck in the postwar decade while Japan and other nations had moved well past the ruins of the aftermath of World War II.

Paul Krugman's economic missives are full of fallacies, and his latest column is no exception. He employes the Post Hoc Ergo Propter Hoc Fallacy, not to mention the Broken Window Fallacy along with his belief that government policies can eliminate the Law of Opportunity Cost.

Yes, Krugman wants to do what all good Progressives claim is heresy -- "Turn Back the Clock" -- and his views are as mistaken as the notion that Twinkies really constitute health foods. I doubt seriously that if the government were to slap down even higher tax rates and force unionism on every firm that out of that would rise prosperity.

No, out of that would rise Argentina of the 1950s and 1960s, and we know how well that little experiment worked.

$8.50 an hour? Why be stingy? What about $85 an hour? $850 an hour?

Once upon a time, the editors of the New York Times used to editorialize against the establishment of the minimum wage, as they appealed to the arguments centering around the Law of Opportunity Cost. However, soon after Paul Krugman joined the NYT team as a columnist, the paper reversed its stance and decided to champion government-set price floors on wages.

Thus, the NYT today has demanded that the state of New York raise its minimum wage to $8.50, a measure the paper says should "not be controversial." Why? Because when it comes to minimum wage, according to the paper, opportunity cost does not exist. The editorial declares:

Gov. Andrew Cuomo supports an increase, as does Mayor Michael Bloomberg. Only Republican state senators are resisting, using the same stale argument that a minimum wage increase is bad for business. The Senate Republican leader, Dean Skelos, argues that the measure “could be a job killer rather than a job promoter.” That contention has been proved wrong time and again.

There is plenty of evidence showing than an increase can actually help the economy, because people with lower incomes spend a larger share of their paycheck immediately on clothes, food and other goods and services. That money often goes right back into the local economy.

I guess that the editors of the NYT think so highly of themselves that they don't have to adhere to the rules of logic; the use of logical fallacies is perfectly acceptable when the fallacies are employed to promote something the editors (and Paul Krugman) support. So, let us take a look at what is being said.

The first is the fallacy of Appeal to Authority. Hey, Mayor Bloomberg and Gov. Cuomo support this, so it has to be good! Now, unless these two men are omniscient and never wrong about anything, it is irrelevant to whether or not they support the measure, and since neither makes minimum wage, neither person has to worry about being priced out of the market.

The second argument -- that Republicans oppose it, so it must be bad -- is another version of the Appeal to Authority. Democrats support it (conversely), so it must be good. Again, this is fallacious reasoning, although I realize that the NYT editors believe that they are incapable of such foolishness. (Yes, this is an ad hominem, and I mean every word of it.)

Republicans, according to the NYT, are using a "stale argument that a minimum wage increase is bad for business." Actually, not. They are saying that raising the minimum wage will jack up the price of unskilled labor, and that at the margin, some workers will lose their jobs. This is not a "bad for business" argument, but rather a "bad for some workers" statement. Nonetheless, why is this argument "stale"? Is mentioning the First and Second Laws of Thermodynamics "stale," or referring to the Law of Gravity? Of course not, but then why is the Law of Opportunity Cost a "stale" argument? Because the NYT says it is.

It gets even better. In the next paragraph, the editors commit the Fallacy of Composition when they declare that raising the minimum wage will raise the income of workers, who then will spend it and make all of us better off. Sorry, but it does not work that way, for the NYT editors (like Paul Krugman) are mistaking a marginal increase in pay for some workers (who don't lose their jobs) as a total increase in pay for all workers currently making minimum wage.

In other words, government by fiat can raise the total real income of all workers just by ordering it to be so. If that is the case -- and one can draw only that conclusion from the editorial -- then why stop at $8.50 an hour? Why not $85 an hour or even $850? If government can make small increases in total income by fiat, then why not large increases?

Now, if the editors wish to say that an increase to $8.50 would not cause economic harm but that an increase to $85 would, what would be the source of their explanation? If the Law of Opportunity Cost is off the table -- and that generally is the case on the NYT editorial page -- then what would substitute?

But what is an editorial from the NYT without piling on more economic fallacies? In the last paragraph we read:

Mr. (Sheldon) Silver (NY Speaker of the House) said he also plans to expand tax reductions for married couples earning less than $30,000 a year as another way to give incomes a boost. But he is starting with a minimum wage increase because, as he puts it, “People who work full time should not be poor.” That makes good sense for working families and their communities.

What is the definition of poor? Furthermore, is Silver saying that work causes poverty? Would a lot of these people be better off not working at all?

One would like to see all occupations being productive enough to where anyone who worked could live comfortably off that pay, but that never has been the case in all of human history, and I doubt seriously that the State of New York by fiat can change economic history, at least for the better. Again, we see the fantasy world that exists at the NYT. It really is the perfect home for Paul Krugman.

NYT: Forcing up labor costs creates more wealth

It always is interesting to see how the "elite" media also seems to produce the most number of economic fallacies, and a trip to the New York Times, and especially its editorial page, never disappoints. In this editorial, we find that laws that force up the price of labor create wealth.

I would suggest you try this at home. If you get two bids for work and you are assured that the quality of work would be the same, take the higher bid because the higher costs will create more wealth. Yeah, you will be using more resources, economically speaking, to do what could have been done with fewer resources, but who are we to argue with the brilliant minds at the NYT?

Keynesianism: The (near) 80-year-old fallacy

One of the things that interests me about Paul Krugman is his use of the word "fallacy" when applied to economics. When I first was learning about economic fallacies, I was taught that they are committed when people believe they can circumvent or negate the Law of Scarcity and the Law of Opportunity Cost.

This was neatly expressed in the acronym TANSTAFL, or "There ain't no such thing as a free lunch." Today, however, it seems that economics, or at least the "economics" of Paul Krugman, has "evolved" and "progressed" well beyond opportunity cost. How do I know? Krugman himself has told us.

In a recent blog post, he makes some interesting, if not outrageous, statements. (Come to think of it, Krugman makes lots and lots of outrageous statements.) He declares:

...when I was younger I firmly believed that economics was a field that progressed over time, that every generation knew more than the generation before.

The question now is whether that’s still true. In 1971 it was clear that economists knew a lot that they hadn’t known in 1931. Is that clear when we compare 2011 with 1971? I think you can actually make the case that in important ways the profession knew more in 1971 than it does now.

What happened in 1971? The U.S. Dollar collapsed as President Richard Nixon declared that suddenly it had come "under attack" by those evil "speculators." Nixon said nothing about the fact that the government, through the Federal Reserve System, had inflated the dollar for years in order to pay for the Great Society and the Vietnam War, and at the same time offering gold from the treasury to foreign governments at $35 an ounce.

Not surprisingly, U.S. gold reserves were fast dwindling and there was a run on the dollar itself, so Nixon did as one might expect Nixon to do: he blamed others and failed to tell the truth about what really was happening. Furthermore, he slapped down general wage and price controls in order to try to keep consumer prices from escalating.

Nixon had the public support of a lot of economists, even those who knew that his "economic plan" (then called Phase I) would be an inflationary disaster -- and it was. What economists "knew" in 1971, if one looks at the actions of the Fed and the president's economic advisers, was that government could inflate its way out of trouble, and the government could manage the economy through various edicts.

This was the day when John Kenneth Galbraith was the king of American economists, along with Paul Samuelson. Of course, what these men "knew" turned out to be utterly untrue. Government could not inflate its way out of trouble, and the 1970s, a decade when the U.S. economy lurched from one crisis to another, proved it.

However, I suspect that Krugman would have us believe that the price controls were brilliant, that all of the problems of the dollar in 1971 were due to speculators, and that had the government left price controls on everything, we would have enjoyed unparalleled prosperity. Or something like that.

His next statement, however, is a Classic Krugman Howler:

I’ve written a lot about the Dark Age of macroeconomics, of the way economists are recapitulating 80-year-old fallacies in the belief that they’re profound insights, because they’re ignorant of the hard-won insights of the past.

What I’d add to that is that at this point it seems to me that many economists aren’t even trying to get at the truth. When I look at a lot of what prominent economists have been writing in response to the ongoing economic crisis, I see no sign of intellectual discomfort, no sense that a disaster their models made no allowance for is troubling them; I see only blithe invention of stories to rationalize the disaster in a way that supports their side of the partisan divide. And no, it’s not symmetric: liberal economists by and large do seem to be genuinely wrestling with what has happened, but conservative economists don’t.

And what is the "enlightened" viewpoint? Why it is print money, bail out everyone, continue the fraud of heavily-subsidized "green energy" that Krugman and his friends insist will lead us to recovery, and have the federal government hire millions of people to engage in make work.

Now, since the General Theory was published first in 1936, it is only a 75-year-old fallacy. The "80-year-old "fallacies" apparently are things like the Law of Scarcity and the Law of Opportunity Cost. In Krugman's view, it is "progress" simply to say that when the economy is in recession, Opportunity Cost no longer holds, and that government can alleviate or even do away with Scarcity via the printing press.

Furthermore, Krugman has made it clear that anyone who might actually appeal to those "80-year-old fallacies" is immoral and has no conscience. Yeah, Krugman and the Really Smart People have done away with Scarcity simply by declaring it no longer exists, at least when government prints up the money.

Keynesianism is one big fallacy, and a cult fallacy at that. It violates the Law of Cause and Effect by declaring that effect really is cause. And it wants us to assume that work is nothing more than a transmission mechanism for money, and it does not matter what government pays people to do, just as long as it provides money so that they can spend it and make us prosperous.

This isn't economics. It is nonsense.

Krugman and "economic fallacies"

With the job numbers today looking dismal, I figured that the Paul Krugman would call for more borrowing and spending, and he did not disappoint. However, as an added bonus, Krugman also declares certain things to be "economic fallacies," which not only turns upside down any meaning of "economics," but also is built upon that Mother of All Economic Fallacies, the "Fallacy of the Broken Window."

Krugman writes:

One striking example of this rightward shift came in last weekend’s presidential address, in which Mr. Obama had this to say about the economics of the budget: “Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.”

That’s three of the right’s favorite economic fallacies in just two sentences. No, the government shouldn’t budget the way families do; on the contrary, trying to balance the budget in times of economic distress is a recipe for deepening the slump. Spending cuts right now wouldn’t “put the economy on sounder footing.” They would reduce growth and raise unemployment. And last but not least, businesses aren’t holding back because they lack confidence in government policies; they’re holding back because they don’t have enough customers — a problem that would be made worse, not better, by short-term spending cuts.

Notice what Krugman is saying: Government magically can do away with opportunity cost by spending. (Yes, I know, his argument is that government spending will transform "idle resources" and then give the economy "traction" to move on its own.)

Furthermore, he is not listing anything close to an "economic fallacy." Instead, he is dealing with policy issues, while having economic implications, are not economic theories themselves. An "economic fallacy" deals with a violation of either premises or what we might call a "law" of economics.

Perhaps the most famous of the fallacies is about which Frederic Bastiat wrote in "What is seen, and what is not seen" when he described the view that "broken windows" are necessary to keep an economy going:

Have you ever been witness to the fury of that solid citizen, James Goodfellow, when his incorrigible son has happened to break a pane of glass? If you have been present at this spectacle, certainly you must also have observed that the onlookers, even if there are as many as thirty of them, seem with one accord to offer the unfortunate owner the selfsame consolation: "It's an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glaziers if no one ever broke a window?"

Now, this formula of condolence contains a whole theory that it is a good idea for us to expose, flagrante delicto, in this very simple case, since it is exactly the same as that which, unfortunately, underlies most of our economic institutions.

Suppose that it will cost six francs to repair the damage. If you mean that the accident gives six francs' worth of encouragement to the aforesaid industry, I agree. I do not contest it in any way; your reasoning is correct. The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen.

But if, by way of deduction, you conclude, as happens only too often, that it is good to break windows, that it helps to circulate money, that it results in encouraging industry in general, I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.

It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.

What Krugman advocates, of course, is something like the "Broken Window Fallacy" (all in the name of claiming that the BWF is a fallacy in itself), for unless government spending via taxation, monetary creation, and borrowing can create wealth where there was none before, government simply is transferring resources or it is blocking the transference of resources from lower-valued to higher-valued uses.

Now, it is true that if government cuts spending, it will create more unemployment in the short run, but to Krugman, there only is a short run. Because the Keynesian viewpoint holds that resources (for economic purposes) are homogeneous, it does not matter where spending is directed, just as long as "new jobs" are created.

Yet, it DOES matter where spending is directed and it is not a fallacy to emphasize that point. For the past three years, the government has engaged in policies of bailouts, "stimulus" spending, new regulations, and throwing huge amounts of money at "green" energy projects, and we are further away from an economic recovery than when we started.

Yes, Krugman can claim that government spending is falling and that the government already is engaging in "austerity." That is nonsense, but nonsense is what prevails in Washington.

Are the Republicans Killing the Recovery, or is Krugman Killing Economic Logic?

Once upon a time, economists were taught logic, as they had to use it in presenting their material. Over time, the study of logic -- and the attendant fallacies that good students learn in order to recognize good arguments over fallacious ones -- was replaced by multi-variable calculus and statistics.

Places like MIT (where Paul Krugman received his Ph.D.) promoted a mathematically-rigorous economics graduate program, and most everywhere else followed at one level or another. "Doing economics" became creating mathematical models that either were supposed to emulate either what individuals do (microeconomics) or an entire economy (macroeconomics) and then "solving" the mathematical equations and presenting one's results as an economic application.

The most famous of the MIT professors was Paul Samuelson, who not only was successful in transforming academic economics from one of logical constructs to aping the "language of physics," but also promoting Keynesian "economics" in the United States. Like his student after him, Samuelson also received the Nobel in economics.

Why the long introduction? I do it because Krugman once again abandons economics for circular logic in his latest column. We get such gems as:

So we’ve gone through years of high unemployment and inadequate growth. Despite the pain, however, American families have gradually improved their financial position. And in the past few months there have been signs of an emerging virtuous circle. As families have repaired their finances, they have increased their spending; as consumer demand has started to revive, businesses have become more willing to invest; and all this has led to an expanding economy, which further improves families’ financial situation.

Before the Doctrines of Samuelson had taken hold, such a statement immediately would have been recognized as an example of circular logic, or, more specifically, the informal logical fallacy of "begging the question." Today, unfortunately, this is what passes for economic wisdom.

Every once in a while Krugman has a column full of such economic gems, and this is one of them. At the present time, the Republicans are proposing about $60 billion in cuts -- this with a proposed budget deficit of approximately $1.5 TRILLION -- and Krugman is claiming that such cuts will "kill" the current economic recovery.

I'd like to say that on its face, such a statement falls into the "howler" category, but this gives authentic howlers a bad name. This comes from the same guy who still wants us to believe that had the "stimulus" passed in 2009 been $1.2 trillion instead of $800 billion, that we would have had a full recovery. Yeah, all it took was another $400 of paving roads, and we would have been in clover.

However, when Krugman writes a Really Rich Column, he throws in lots and lots of howlers. So, we get this one:

But it’s (the recovery) still a fragile process, especially given the effects of rising oil and food prices. These price rises have little to do with U.S. policy; they’re mainly because of growing demand from China and other emerging markets, on one side, and disruption of supply from political turmoil and terrible weather on the other. But they’re a hit to purchasing power at an especially awkward time. And things will be much worse if the Federal Reserve and other central banks mistakenly respond to higher headline inflation by raising interest rates.

Yep, Krugman pulls his best Jake Blues act by trying to claim that the rise in oil and food prices has nothing to do with the fact that Ben Bernanke has been showering the world with dollars. Yeah, commodity prices are volatile and we have had bad weather, and so on and so on.

The fact that the currency used to pay for oil worldwide is the dollar is irrelevant in Krugman's political world, but it is relevant in the real world. When there is a movement afoot to use something other than the dollar to pay for international oil sales, I don't think it is because the Republicans want to cut 1.7 percent from Obama's current budget.

However, we are supposed to ignore this and accept Krugman's politically-convenient "bad weather and everyone else is getting richer" explanation. That is not economics, nor is it even mediocre economic logic. No, it is the application of pure, political partisanship in an attempt to circumvent sound economic thinking. Yep, that's Paul Krugman.

Does Anyone Understand the Meaning of "Competitiveness"?

OK, I start this post by agreeing with Paul Krugman this morning that the term "competitiveness" is hackneyed and essentially meaningless. However, as I read Krugman's column today, I think that Krugman has come to believe that all that is needed to make our economy more "competitive" is for the Fed to print more money and the government to spend it.

That's right; we need to be Number One in spending. That will revitalize the U.S. economy, at least according to Krugman, who sees "jobs" in and of themselves as the sign of a truly "competitive" economy:

It’s true that we’d have more jobs if we exported more and imported less. But the same is true of Europe and Japan, which also have depressed economies. And we can’t all export more while importing less, unless we can find another planet to sell to. Yes, we could demand that China shrink its trade surplus — but if confronting China is what Mr. Obama is proposing, he should say that plainly.

Furthermore, while America is running a trade deficit, this deficit is smaller than it was before the Great Recession began. It would help if we could make it smaller still. But ultimately, we’re in a mess because we had a financial crisis, not because American companies have lost their ability to compete with foreign rivals.

This demands a larger question, which Krugman does not ask: Why did we have a financial crisis in the first place? The secondary question is this: What needs to be done in order to bring the economy into a recovery, given we have had a financial crisis?

For Krugman, the answer is simple because his view of an economy is simple: Increase government spending. He writes:

The favorable interpretation (of President Obama's new "competitiveness" initiative), as I said, is that it’s just packaging for an economic strategy centered on public investment, investment that’s actually about creating jobs now while promoting longer-term growth. The unfavorable interpretation is that Mr. Obama and his advisers really believe that the economy is ailing because they’ve been too tough on business, and that what America needs now is corporate tax cuts and across-the-board deregulation.

My guess is that we’re mainly talking about packaging here. And if the president does propose a serious increase in spending on infrastructure and education, I’ll be pleased.

He further adds:

The financial crisis of 2008 was a teachable moment, an object lesson in what can go wrong if you trust a market economy to regulate itself. Nor should we forget that highly regulated economies, like Germany, did a much better job than we did at sustaining employment after the crisis hit. For whatever reason, however, the teachable moment came and went with nothing learned.

In both cases, Krugman employs the non sequitur as his rhetorical device. In the first quote, he assumes that if the government suddenly starts more public works construction jobs and showers new money on government schools, that the economy will regenerate itself (or at least start on the path to regeneration).

In the second quote, he creates the syllogism:

• Germany's economy has more regulation than that of the USA
• German employment losses have not been as great as those in this country
• Therefore, a more heavily-regulated economy creates more prosperity.

This ignores the particular areas of regulation, as it makes a blanket statement about regulation but fails to deal with any specifics. Furthermore, throughout the column, Krugman has only one standard for prosperity: employment.

It reminds me of a television debate that a Marxist "economist" had with a "free-market" economist about 30 years ago. The second economist had just come back from Romania and he was pointing out how poor the people were and how badly things worked there.

The Marxist replied (as though this statement trumped everything else), "But there is no unemployment there." In other words, having an official "job" as named by the government was the ultimate sign of prosperity and "competitiveness," and while Krugman is not claiming (at least I don't think he is claiming) that Romania under Nicolai Ceaucescu's tyrannical government was superior to whatever we had in this country, nonetheless he uses the employment standard as though nothing else matters.

In fact, he contrasts his ideal government policy with private business, writing:

Consider: A corporate leader who increases profits by slashing his work force is thought to be successful. Well, that’s more or less what has happened in America recently: employment is way down, but profits are hitting new records. Who, exactly, considers this economic success?

Again, we are seeing the non sequitur at work. According to this statement, Krugman seems to believe that workers are pure cost, and that the more layoffs a company has, the greater its profitability will be. Thus, he reasons, a "competitive" private economy will have high unemployment AND high profits, which means that a "competitive" private sector actually is BAD for an economy and for human welfare in general.

Krugman demonstrates the typical macroeconomic view of an economy, seen through aggregates and the false belief that all factors of production are homogeneous and that there is no connection between production and consumption. However, no company becomes more profitable simply by having mass layoffs. Layoffs are a response to changes in consumer choices for the final products made by the firm. Labor is a factor of production, a heterogeneous factor; labor is meaningful as it applies to production, and if its discounted marginal revenue product falls to less than its marginal cost, then a company is wise to jettison that factor, just as it jettisons other factors that become cost burdens.

Furthermore, an economy cannot grow unless entrepreneurs find ways to make more final goods while using fewer resources. At the same time, a growing economy finds ways to take the temporarily unused resources and apply them to other productive uses.

Krugman, however, sees no connection between resources and economic growth. For example, he has written that we can "rebuild" our economy via "green energy," yet none of those industries are able to survive without government mandates, special tax breaks, or outright subsidies.

To an economist, there is a fundamental difficulty with a so-called green economy: it cannot stay afloat without cannibalizing the healthy and profitable areas of production. To Krugman, however, it is all just a matter of spending, and if government borrows and taxes and regulates in order to force Americans to purchase products they don't want, then that is good for the economy.

True, I have used a non sequitur, but that is what Krugman seems to be saying. In his view, the only thing that matters is employment. If government spends and hires people to engage in "jobs," then prosperity will follow, as all that matters are aggregates.

That makes no sense, economically speaking. If Krugman is right, and if the primary issue is simply "creating jobs" so that people can have an income, why do we need production at all? Wouldn't it be even better if the Federal Reserve System just printed zillions of dollars and left bags of money with each person? Since "spending" magically leads to everything else, why wouldn't that be a perfect solution to our problems?

To Krugman, an economy is a mass of numbers and nothing else. There are no relative prices and no interrelationships between factors of production. Thus, to him, "competitiveness" is based on the rate of unemployment, which means that there is nothing in his viewpoint that would have refuted the Marxist I heard 30 years ago claim that Romania's economy -- under which most people in that country lived in poverty -- was superior to that of the United States.

Krugman's Attack on Ron Paul (And Using Logical Fallacies in the Process)

In a recent blog post, Paul Krugman says he admires Ron Paul's "frankness" even though he cites Rep. Paul's ideas as being "crazy." Not surprisingly, Krugman misrepresents what Rep. Paul is saying, ignores what Rep. Paul has said in the past about the financial crisis, and demonstrates his own ignorance by employing the informal fallacy of Appeal to Authority.

There have been a number of posts made to Lew Rockwell's blog about this (including a couple of my own). They are listed here, here, here, and here.

Krugman's "Dark Ages" Demands

Paul Krugman does not simply advocate inflation; no, he worships at its very shrine. Inflation is our savior; inflation will give the economy "traction."

Furthermore, anyone who might have an argument against his illogic is doing nothing short of advocating a return to "the Dark Ages" of economics. I say, nonsense.

One of the mantras of modern Progressives is that contemporary thought always is superior to any thinking that occurred in the past (especially if that thought is espoused by Progressives). Thus, the way to "win an argument" is simply to quote whatever was written or said a while ago and to assume it has to be wrong. (The exception, of course, is anything written by J.M. Keynes, who is treated as The Great Prophet.)

So it is in the Krugman blog post I have linked in which he quotes a passage from Joseph Schumpeter's work and then assumes that because Schumpeter wrote it in the past, that it amounts to advice from "the Dark Ages." Why? Well, because Krugman says so.

However, Schumpeter in that passage is addressing the point that inflation distorts the structure of production, creating malinvestments and bringing about maladjustments which cannot be sustained over time. So, using inflation to fight any depression simply prolongs the pain, and any short-term "gains" are wiped out longer term.

Obviously, since Krugman's mantra is "we need inflation," such words from Schumpeter are heresy. Furthermore, because Schumpeter wrote them many years ago, they automatically are wrong.

But I also have another problem. Krugman has been insisting that the reason the economy is in a funk is because the Obama administration pushed through an $800 billion "stimulus" instead of a $1.2 trillion spending package. Yes, for lack of $400 billion to be spent on political pet projects, the entire economy is sinking.

Krugman also insists that inflation will give the economy "traction," as though an economy is a perpetual motion machine that just needs a push from monetary authorities to move on its own. Where does he get that? Furthermore, the only way for his plan to work is for all assets to be homogeneous and for factors of production to automatically be able to adjust when done so administratively.

Does he know nothing about what happened with such economic planning in the former U.S.S.R.? There were economic planners who were as intelligent as Paul Krugman and who had doctoral degrees from Moscow State University, where the economics curriculum was every bit as rigorous as that of MIT.

Yet, the economy was a miserable failure, as planners could not negotiate simple goods through simple processes. Why? The economy lacked real prices that reflected the relative scarcity of factors of production. Instead, they believed that administered prices and production functions would take care of things, which never happened.

So, Paul Krugman demands the same for us. Have inflation distort prices, assume that factors of production are homogeneous, ratchet up government spending, and it will give us prosperity. Hey! It worked well for the U.S.S.R.

Talk about the Dark Ages.

Krugman: Post Hoc Ergo Propter Hoc

The Post Hoc Ergo Propter Hoc Fallacy is an important tool in Paul Krugman's arsenal of arguments that he presents from his page in the New York Times. In his column today, he argues in a roundabout fashion that if the Congress permits the so-called Bush Tax Cuts to expire in 2011, that we can expect economic recovery to follow.

No, he does not say that, but he does make this point:

When Bill Clinton raised taxes on top incomes, conservatives predicted economic disaster; what actually followed was an economic boom and a remarkable swing from budget deficit to surplus. Then the Bush tax cuts came along, helping turn that surplus into a persistent deficit, even before the crash.

Everything he says there is true, but he also leaves out some important things. First, the economic boom of the 1990s did not happen until the latter part of the decade, with the nation's rate of unemployment dipping below five percent in 1997. That boom, of course, produced a huge stock market bubble, something Krugman leaves out (since it does not fit his narrative), and Americans found out in 2001 that much of that "prosperity" was phony.

Second, when Krugman refers to the "crash," he is not speaking of the crash of the stock market (and especially the NASDAQ) in late 2000 and early 2001, which was part of the Clinton presidency. Indeed, even had tax rates remained the same as they were before Congress cut the rates in 2001, the phony surplus quickly would have morphed into deficit, which is what happens during recessions.

Just as Krugman indicates (in a backdoor approach) that had tax rates not been cut in 1981, that there would have been no recession, Krugman now is trying to tell us that there only will be positive effects when the Bush tax cuts expire next year.

Since he insists upon using partisan political talking points ("tax cuts for the wealthy"), perhaps some perspective is in order. When the tax cuts expire, we are not looking at just the top rates going back to 39.6 percent. No, we are looking at ALL rates going back up, as the lowest rate jumps from 10 percent to 15 percent and so on.

In other words, every person reading these words today will see his or her federal income taxes go up next year, and you can bet that the tax increases for some of you will be much higher than you had believed. After all, Krugman has insisted that ONLY the wealthy received tax relief, and you are going to find out that Krugman was wrong.

Now, I must add that I am not defending the talking points from Republicans. When we have a federal government invading other countries and jacking up spending (when Republicans controlled the White House AND Congress) at levels that would have made Lyndon Johnson proud, we are not talking about a "low tax" environment. There really is no free lunch, and higher government spending equates to people bearing a greater burden of deadweight losses imposed by the state. There is no way around it, and I have no intention of repeating Republican talking points about "dynamic scoring" or anything else about cutting tax rates.

One of my graduate school professors, Robert Ekelund, wrote this article six years ago about the record of Republicans in office, and it is instructive to anyone who believes that even if Congress changes hands next year that we are going to see any relief. I have no confidence in the current Congress, and will have none in the next, no matter what the political rhetoric might be.

So, will higher taxes lead to more prosperity, as Krugman seems to insist? We shall see, but the last major tax increase during a depression took place in 1932 under Herbert Hoover. We know how that move turned out.