Krugman's California Fantasies (Or are They Hallucinations?)

For many years, I have written that Paul Krugman is not so much an economist as he is a political operative, but I was wrong. He is not just a political operative, but also is just another leftist who believes that government debt and government spending actually are wealth-creating things. However, his latest column on California's supposed "comeback" proves my original point that he is no economist.

California, in Krugman's view, has been the victim of Republicans who blocked tax increases and kept the state from building the Ultimate Lefty Pipedream: High-Speed Rail. Now that the Republicans no longer have any political influence or power there, the Golden State can now tax and spend itself into a glorious future, and if that future of massive government spending turns sour, I am sure that Krugman will be able to blame Paul Ryan or Goldstein or Seinfeld or Blowfeld.

Writes Krugman:

...reports of the state’s demise proved premature. Unemployment in California remains high, but it’s coming down — and there’s a projected budget surplus, in part because the implosion of the state’s Republican Party finally gave Democrats a big enough political advantage to push through some desperately needed tax increases. Far from presiding over a Greek-style crisis, Gov. Jerry Brown is proclaiming a comeback.

Needless to say, the usual suspects are still predicting doom — this time from the very tax hikes that are closing the budget gap, which they say will cause millionaires and businesses to flee the state. Well, maybe — but serious studies have found very little evidence either that tax hikes cause lots of wealthy people to move or that state taxes have any significant impact on growth.

Now, even Krugman is not quite ready to proclaim Paradise Regained, although the lack of any opposition to an accelerated tax-and-borrow-and-spend certainly should speed its arrival:

I’m not suggesting everything in California is just fine. Unemployment — especially long-term unemployment — remains very high. California’s longer-term economic growth has slowed, too, mainly because the state’s limited supply of buildable land means high housing prices, bringing an era of rapid population growth to an end. (Did you know that metropolitan Los Angeles has a higher population density than metropolitan New York?) Last but not least, decades of political paralysis have degraded the state’s once-superb public education system. So there are plenty of problems.

The fact that California has the highest taxes in the country, has a virulent anti-business governmental culture, and has rules that increase the cost of just about everything has nothing to do with it. After all, in Wonderland, higher costs translate into more spending, and more spending creates more wealth, so these "problem" to which Krugman refers actually are opportunities for more government spending, which means a brighter future.

Given the leftist fetish regarding the evils of population growth, I'm not sure why Krugman even would cite the end of such growth as a bad thing. After all, as Matt Yglesias writes in Slate:

I'm reasonably certain that California's deteriorating public services aren't really driving the declining population growth. That's because if you look at someplace in California where it would be nice to live—Santa Monica, say, or Palo Alto—it turns out to be incredibly expensive. All the best land is occupied and the people in those communities don't want it to get filled up with more density and California's environmental legislation gives them powerful tools with which to block new residents.

Given that Krugman can afford to live in places like Santa Monica or Palo Alto, and given his strong environmental credentials, I am sure that he would approve of those laws that keep the Great And Beloved Unwashed far away from himself and others who love these folks who help keep Democrats in office but who really should try to live somewhere else. But California has another problem, and for all of Krugman's Greece I Tell You! fetishes, it seems that there really is a Greece connection.

Like Greece, California has great weather, beautiful and rugged mountains, and a magic coastline. Friends of mine who decry the financial madness and out-of-control governments nonetheless do not want to leave because of the quality of life they have enjoyed there. Like Greece, California governments have run up debts that over time cannot be repaid (two of which are discussed below), and like Greece, California is part of a central currency union and cannot print its own money, and sooner or later government employees in California are going to take such a huge chunk of public wealth (as they have in Greece) that the hard choices that are inevitable will create a lot of consternation.

There are two issues that are government budget eaters in California, and while Krugman kind of alludes to one (high-speed rail), the other is even more explosive: municipal and state pension obligations that have come about because of the state's powerful government unions. Steven Greenhut has written a lot about the state's out-of-control government unions which have driven a number of municipalities to bankruptcies.

The issue is quite simple: a number of cities, not to mention state agencies, pay their unionized employees very well and have promised even better pensions. However, paying for these things is another matter, and maybe Krugman is right in that businesses and individuals will allow tax hikes to go on forever to pay for the enrichment of others, but I have my doubts.

 High-speed rail, or what Krugman calls "infrastructure," is another California boondoggle that really could manage to bankrupt the state government. The original idea was that the state, through sale of bonds, federal grants, and tax increases, would build a high-speed rail line to run between San Francisco and Los Angeles. Like all such public projects, the original cost projections started out relatively small and have metastasized into something else. (I doubt seriously that Krugman ever will write a future column about the fiscal foolishness of California high-speed rail projects if for no other reason than he actually believes that higher costs will translate into more spending which then will create more prosperity. The Keynesian Way.)

Keynesians believe that government spending creates its own wealth multipliers, so when governments promise huge pensions, fund rail boondoggles, and block the growth of businesses, they actually are making everyone better off, as though government spending has an internal generator that can create something from nothing. The Law of Scarcity, however, cannot be repealed by government no matter what Krugman declares.

Because California now has a Democrat supermajority and will continue that way indefinitely, Krugman believes that there will be nothing to stop the state and municipal governments there from internally generating wealth through tax increases, borrowing, and spending. Even if high-speed rail costs much more than it could collect in actual revenues, that is good because it will mean more spending, and spending is actually a form of wealth production.

Please understand Krugman's larger point. He is saying that the government of California can make it difficult for businesses to operate in a high-tax, high-regulation environment (except businesses that are politically-connected), and try to make up for the loss of wealth through taxation, borrowing and spending. He is saying that the government can internally produce wealth simply by spending money that first must come from other sources.

So, drink up, California! Your future is unlimited all because your politicians and some "economists" believe they can tax you into Paradise.

Update: The Atlantic has a very interesting article on California about what Progressives can learn about governance, and the Democrat that writes it, Conor Friedersdorf, says this about Krugman's California column:

In California, my home state, Democrats have dominated the capitol since roughly 1970. In the last four-plus decades, they've controlled both houses of the state legislature for all but two years. They dominate the state bureaucracy and the leadership of most major cities. And they've long dominated the vast majority of statewide offices, the governorship excepted: Since Ronald Reagan departed in 1975, it has gone back and forth between Democrats (like current and former governor Jerry Brown) and Republicans, most recently the moderate Arnold Schwarzenegger.

Despite this, Paul Krugman, the Nobel Prize-winning economist and New York Times opinion writer, has managed to write a column that proceeds as if, insofar as partisans can be blamed, Republicans are entirely to blame for the state's woes, which he thinks are exaggerated, while Democrats bear no responsibility. As a Californian who hasn't given up on his place of residence, I'm glad to see Krugman thinks there are good times ahead for the Golden State, but the analysis that precedes his conclusion is causing me to doubt him.

Not that Krugman would take notice or admit to being wrong. No, Goldstein is EVERYWHERE and controls all things, don'tcha know?

Our Children ARE the “Ourselves”

Samuel Johnson wrote that “patriotism is the last refuge of a scoundrel,” but in modern America, being “for the children” now has taken that august refuge of the rogue. Thus it is that Paul Krugman has decided to join such company as he appeals to us to think of “our children.”

Krugman doesn’t have any children, but he is such a collectivist that I am sure that he would claim as much “ownership” over my kids as I might do (although no one “owns” kids). I doubt Krugman’s concern for my children would extend to helping pay the substantial bills that accompany their presence.

The normal “cheating our children” has to do with the belief that through government, Americans of my generation (and Krugman’s too, since he and I were born in the same year) have borrowed such huge amounts of money that the debts either will be paid through inflation or through another means that will place a lot of the younger generation in poverty.

Krugman, however, sees it differently. Our “crime” against the children is not borrowing and spending beyond our present means so that we dump huge financial burdens on them in the future. No, our “crime” is that we are not borrowing and spending enough beyond our present means. That’s right; Krugman claims that by seeking to lessen the future financial burdens on our children, we are cheating them.

Why? Because, according to Krugman, if the government borrows lots of money and then spends it immediately, there actually is no effective opportunity cost. He writes:

Contrary to almost everything you read in the papers or see on TV, debt doesn’t directly make our nation poorer; it’s essentially money we owe to ourselves. Deficits would indirectly be making us poorer if they were either leading to big trade deficits, increasing our overseas borrowing, or crowding out investment, reducing future productive capacity. But they aren’t: Trade deficits are down, not up, while business investment has actually recovered fairly strongly from the slump. (emphasis mine)

He goes on to explain how the lack of current spending is depriving young people of teachers, more aid to college, and, of course, he mentions the “I” word, infrastructure. In Krugman’s view, it is a simple thing; just borrow, print and spend, and a strong economy will appear out of the mixture. Malinvestments? No problem. Just spend enough and the economy will expand to the point where there are no malinvestments.

So, there we have it. Borrow, spend, run up the credit card. We "owe it to ourselves," which means that government borrowing also manages to cheat the Law of Scarcity. Borrow now and the kids won't owe anything at all. The Inflation Fairy will do the rest. Just believe and do it for the children. For the children.

No, Paul, Wealth Transfers are NOT a "Free Lunch"

One of the first principles that supposedly is taught in formal economic study is the Law of Opportunity Cost, with the simple acronym being TANSTAFL: "There ain't no such thing as a free lunch." From that hallowed halls of Princeton University, the Land of Privilege, the view is different.

At Princeton University, economists (and probably people in all of the other departments) teach that government is magic, and that financial trickery is the same thing as creating wealth and bringing about legitimate economic growth. Or, to put it another way, Paul Krugman claims that at certain times (when the "lower bound" of interest rates is zero -- the Keynesian "Liquidity Trap"), that financial tricks can create the "free lunch." (Those are his words, not mine.)

In a recent blog post, Krugman once again claims that tricks can create the "free lunch," which matches what he claims in his book, The Return of Depression Economics. (Once assigned the book as reading for my MBA students, and even many of them were able to see the holes in Krugman's arguments. But, then, The Great One is not known for arguing, preferring the insult and the appeal to academic privilege instead.)

He lays out some scenarios, such as outright printing money or having the Treasury mint a three-trillion-dollar platinum coin and deposit it at the Federal Reserve System, but says they are not feasible? Why? There is a legal debt ceiling set by Congress, which I gather from this post is the only thing keeping these schemes from being realistic. He writes:

In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back. So this is all a gimmick — but since the debt ceiling itself is crazy, allowing Congress to tell the president to spend money then tell him that he can’t raise the money he’s supposed to spend, there’s a pretty good case for using whatever gimmicks come to hand.

Krugman's next comment is even more puzzling, given what he has written in the past:

It’s true that printing money isn’t at all inflationary under current conditions — that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. So even though right now that debt is just a claim by one more or less governmental agency on another governmental agency, it will eventually turn into debt held by the public.

But why should that matter, given Krugman's earlier statements that (1) the Fed should be permitted to purchase short-term Treasury paper in the primary market, thus monetizing the federal debt directly, and (2) that public debt is not much of a problem, since "we owe it to ourselves."

He goes on:

We are living in weird economic times, where many of the usual rules don’t apply and there are big free lunches to be had. But not everything is a free lunch, even now.

 'Tis true, we are in weird times. But those times are better explained by the Austrian Business Cycle Theory than the contradictory madness that comes from Krugman who apparently was for printing money before he was against it.

The vast pull-the-rabbit-out-of-the-hat schemes by the Fed in the end are little more than naked wealth transfers. By propping up the financial institutions that made bad decisions, the Fed is disregarding price signals and rewarding the people who made bad decisions at the expense of those that didn't. Wealth transfers might perform political miracles -- the last election proved that point -- but they are not free lunches. Indeed, they are very expensive lunches, much more costly than should be the case.

There is Plenty of Delusion to Go Around

Paul Krugman writes that the Republican Party is delusional, and who could disagree with him? The USA spends more on "defense" than the rest of the world put together, yet Republicans still are claiming that it is not enough. Moreover, few Republicans left in office are willing to admit that the current rates of spending by the federal government are not sustainable without massive money printing that will turn the dollar into worthless paper.

Unfortunately, the Republicans are not the only party that is defined by delusion, and the number one academic shill for the Democrats -- Krugman himself -- has penned a column that truly is breathtaking its own web of fantasies. But first his attack on the Republicans. Krugman writes:

By all accounts, Republicans have, so far, offered almost no specifics. They claim that they’re willing to raise $800 billion in revenue by closing loopholes, but they refuse to specify which loopholes they would close; they are demanding large cuts in spending, but the specific cuts they have been willing to lay out wouldn’t come close to delivering the savings they demand.

.
I have no reason to doubt his claim, although one also has to understand that President Obama and the Democrats have no intention of cutting any spending of their own, so we really do have an example of the worst kind of hypocrisy in which each side's accusations against the other are nothing more than mirrors held up to themselves. In fact, Krugman seems to revel in the huge expansion of the welfare state that has occurred with the Obama presidency.

One would think this to be a problem, given the state of the economy, but Krugman has an answer: We don't need to worry about paying for all of this because we can borrow-and-print our way to prosperity. He writes:

We are not having a debt crisis.

It’s important to make this point, because I keep seeing articles about the “fiscal cliff” that do, in fact, describe it — often in the headline — as a debt crisis. But it isn’t. The U.S. government is having no trouble borrowing to cover its deficit. In fact, its borrowing costs are near historic lows.

Yep. We can just borrow and spend, and if the markets per chance won't readily accept U.S. paper in the future, then the Federal Reserve System can borrow U.S. bonds in the primary market, provided that Krugman's "clever lawyers" can find a way around the Federal Reserve Act that forbids such practices. The financial well is bottomless.

This is delusion, and it is even more delusional than anything we are hearing from Republicans, if that is possible. Yes, Krugman knows that maybe some day in the future, we might have to rein in the spending, but for now, we can pretend we are rich, and if we pretend long enough, we will become rich.

This is nothing more than the MMT nonsense that we have been hearing from James Galbraith and others, that we can take advantage of the fact that the dollar is a reserve currency, so we can print to our heart's content and beyond. It is a free pot of gold.

I don't have to say what nonsense this is. One cannot inflate the dollar forever, and the damage that is being done to the economy right now is such that we will not be able to climb out of this hole at all.
Whether the Republicans are having an "existential crisis," I don't know. However, I do know that if the U.S. Government continues to follow Krugman's advice, an existential crisis will be the least of our worries. Krugman may believe that he is so clever and so brilliant that he can find ways to circumvent the laws of economics, but those laws have a way of asserting themselves in the end.

Krugman Channels His Inner Crank

For many years I have said that Paul Krugman, academically-decorated as he is, really is not an economist but rather is a political operative with an academic pedigree. Today, I must add another description: crank. Yes, with his column today, Paul Krugman demonstrates beyond a doubt that he is a crank, a pure inflationist on the same level with that most famous crank, Silvio Gesell.

For all those who claim I exaggerate, I will let Krugman's own words speak for him:

For we have our own currency — and almost all of our debt, both private and public, is denominated in dollars. So our government, unlike the Greek government, literally can’t run out of money. After all, it can print the stuff. So there’s almost no risk that America will default on its debt — I’d say no risk at all if it weren’t for the possibility that Republicans would once again try to hold the nation hostage over the debt ceiling.

But if the U.S. government prints money to pay its bills, won’t that lead to inflation? No, not if the economy is still depressed.

Now, it’s true that investors might start to expect higher inflation some years down the road. They might also push down the value of the dollar. Both of these things, however, would actually help rather than hurt the U.S. economy right now: expected inflation would discourage corporations and families from sitting on cash, while a weaker dollar would make our exports more competitive.

This hardly is out of place with Krugman's other writings on the subject. Like all cranks, Krugman looks only at one side of inflation, the "deleveraging" side in which inflation in essence repudiates debt. He absolutely is correct when he says that since U.S. Government debt is denominated in dollars, should the government make its payments via newly-created money (ostensibly done by the Fed directly purchasing U.S. Government short-term debt from the Department of the Treasury), it will have fulfilled its paper obligations.

And he is right that such actions would create future inflationary expectations, but that also is good because that would force more investment or spending, and we could export more. You see? There is no downside to this scheme! Print, print, print, and print some more!

Yet, there IS a downside, and it is huge. First, let us deal with the "little guy," the one who Krugman claims will benefit most from inflation. Krugman assumes that this person, who ostensibly has little or nothing in savings, will not be hurt as prices rise. Yet, it is precisely the "little guy" who does not get the new money first, who does not receive the benefit of getting pay raises that allow him to keep up with the rising prices.

Instead, this person is faced with the prospect of becoming poorer in real terms. Certainly the Obama administration has pursued a policy of inflation, and I wonder how many readers have seen their incomes go up proportionally to their expenses for food, fuel, and other necessities. I doubt seriously that most readers can say that has happened, but that many more will say that prices for goods and services have gone up faster than their incomes.

Second, Krugman really wants us to believe that an inflationary climate will improve investment conditions. I'm not sure how that would happen, given that when there is noticeable inflation, people will put their money into things like gold, silver, and other items that tend to hold their value, something we saw during the late 1970s when we had double-digit inflation.

The other thing that would happen would be people getting out of the dollar, which also was the case during the late 1970s. No doubt, if such things happened, Krugman would call for capital controls, a prohibition on buying gold, and a general investment police state, as though such coercion and prosperity go hand-in-hand.

There is one other inconsistency to which I would like to call the reader's attention: If Krugman really does believe that printing money is a permanent solution to our budget problems, then why raise tax rates? For that matter, why have taxes at all, since we can print our way to prosperity?

I doubt he has a good answer for these questions other than to say that he doesn't want hyperinflation, just enough inflation to repudiate debts and cover the government's budget shortfalls. After all, Warren Buffett on the same editorial page has made the incredible claim that tax rates have absolutely no effect at all on investment. (I challenge readers to find anywhere in Buffett's article where he says tax rates matter.)

Those of us who were adults during the last wave of double-digit inflation remember that most people did not see inflation as a solution, but rather an outright crisis. Certainly, Jimmy Carter did not run for re-election on a platform of even more inflation. I guess he should have had Paul Krugman as his chief economic adviser.

Krugman: I Refuse to See the Elephant in the Room

A lot of people have weighed in on the Greek Morality Play, better known as the collapse of Greece's economy, and there is no shortfall of "wisdom" and advice. (For that matter, I made comments myself on the Greek situation during an interview on the RT network last March.)

Not surprisingly, Paul Krugman has weighed in again, and this time he not only claims that the problem is not enough inflation, but also deliberately ignores the real problem behind much of the Greek collapse: Greece's notorious and "bloated" (to use a term from Krugman's employer, the New York Times) bureaucracies led by its militant public employee unions. Instead, Krugman sets up other straw men and then claims that if only -- If Only! -- the Germans would crank up the monetary printing presses, Greece could be saved.

Before going into specifics, I would like to point out that Krugman is correct when he notes that a single currency union of many states indeed does impose certain fiscal restrictions. The examples he uses for the United States are dishonest, and even when explaining the European currency union, he does not tell the whole story, lapsing, instead, into his usual spate of accusations coupled with his demands for more inflation. (And, yes, I will explain my point later in this piece.)

Krugman writes:

So, about those Greek failings: Greece does indeed have a lot of corruption and a lot of tax evasion, and the Greek government has had a habit of living beyond its means. Beyond that, Greek labor productivity is low by European standards — about 25 percent below the European Union average. It’s worth noting, however, that labor productivity in, say, Mississippi is similarly low by American standards — and by about the same margin.

On the other hand, many things you hear about Greece just aren’t true. The Greeks aren’t lazy — on the contrary, they work longer hours than almost anyone else in Europe, and much longer hours than the Germans in particular. Nor does Greece have a runaway welfare state, as conservatives like to claim; social expenditure as a percentage of G.D.P., the standard measure of the size of the welfare state, is substantially lower in Greece than in, say, Sweden or Germany, countries that have so far weathered the European crisis pretty well. 

So how did Greece get into so much trouble? Blame the euro.

 His statement is more significant for what he ignores, not claims, and he has left out the role of Greece's legendary public employee unions. Interestingly, the paper for whom he writes, the NYT, has described the Greek government unions this way:

Stories of eye-popping waste and abuse of power among Greece’s bureaucrats are legion, including officials who hire their wives, and managers who submit $38,000 bills for office curtains.

The work force in Greece’s Parliament is so bloated, according to a local press investigation, that some employees do not even bother to come to work because there are not enough places for all of them to sit.

And there is more:

The government is in many ways an army of patronage appointments built up over decades. When election time rolls around, state workers become campaign workers, and their reach is enormous. There are so many of them that almost every family has one.

This puts the Socialist prime minister, George A. Papandreou, or any other Greek leader, in a tough spot: There can be little upside to cutting jobs precisely when the government most needs support for unpopular budget-cutting actions.

“There is a political cost to these reforms,” said Nickolaos G. Travlos, an economist at the Alba Graduate Business School in Athens. “These workers are opinion leaders in their communities. And they are busy blaming the government, especially a Socialist government that is supposed to protect them."

They are also well organized. This week’s general strike follows weeks of smaller strikes, rallies, sit-ins and a blockade of the Athens landfill that has left piles of garbage rotting in the streets. When auditors from the “troika” — the International Monetary Fund, the European Central Bank and the European Commission — arrived last month at the Finance Ministry, workers blocked their entry.

There obviously is a disconnect here, but one has to remember that Krugman considers government unions to be a source of wealth creation, and not something that destroys wealth. In fact, the more bloated and unproductive the Greek government unions become, the more wealth they create, because their non-productivity means that the government has to hire more people which means more jobs. This clearly is the proverbial "elephant in the living room" that Krugman refuses to acknowledge.

Most "conservative" and libertarian criticisms of Greece that I have read do not deal with Greece's welfare state, contra Krugman. Instead, they have been critical of the very thing Krugman pointedly ignores: government employee unions, and there is enough evidence on the table to demonstrate that the picture of the hard-working Greek citizen toiling long hours is not a government worker, but rather someone in the private economy working to support the bureaucrats that have become a huge burden. (Notice how Krugman lumps all Greek workers together instead of separating those who financially support the unions and those who consume the wealth that others produce.)

Now, if Greece were on the drachma, then I suppose the government could print a lot of money to pay for these workers, and the result would be inflation, lots of inflation. By being on the euro, the Greek government has not had that option, which meant that whatever extra money came into the system outside the private economy would come in via borrowing, and the Greek crisis precisely has been about the government's unmanageable debt service.

In Krugman's world, however, things are turned upside down. Private savings are bad, government spending and debt are good. Public sector unions create wealth and private enterprise destroys it.

His comparison of this country's state governments with Greece might have some bearing in the argument, but even there Krugman gets it backwards. Krugman's support of the government unions in Wisconsin and California and his recent claim that state government spending -- or the alleged lack, thereof -- is causing the current downturn ignores the simple fact that state government unions mostly consume, not create, wealth. Steven Greenhut writes:

Over the past decade, California governments have dramatically increased the pay and especially the benefit packages of public-sector workers. We have firefighters earning average total compensation packages of $175,000 a year in many jurisdictions, and majorities of police officers in some agencies retiring on questionable disabilities. The standard retirement package for the ever-expanding class of “public safety” officials allows them to retire at age 50 with 90 percent of their final year’s pay—and that’s before all the add-ons and scams. Miscellaneous members—the rest of public employees—aren’t far behind, and we’ve seen absurd enrichment schemes and salaries in one scandal after another.

I’ve watched a sea of proposals pass that give government employees special privileges that would never be allowed for mere private citizens, such as a recently passed California bill that allows many officials to shield their personal information from public property databases. These privileges encourage arrogance and misuses of power. Pensions are now consuming 16 percent of California’s discretionary budget, and in cities such as San Jose, pension costs escalated an eye-opening 350 percent in a decade.

In Krugman's world, all of this is justified not only under the guise of "democracy" and "fairness," but also because such measures mean more "spending" by government employees, and such spending in Wonderland creates wealth. But a column by Paul Krugman, unfortunately, does not contain just bad economic analysis, but also encompasses some outright howlers, and we see them in his comparison of the Greek situation to this country:

Ask yourself, why does the dollar area — also known as the United States of America — more or less work, without the kind of severe regional crises now afflicting Europe? The answer is that we have a strong central government, and the activities of this government in effect provide automatic bailouts to states that get in trouble.

Consider, for example, what would be happening to Florida right now, in the aftermath of its huge housing bubble, if the state had to come up with the money for Social Security and Medicare out of its own suddenly reduced revenues. Luckily for Florida, Washington rather than Tallahassee is picking up the tab, which means that Florida is in effect receiving a bailout on a scale no European nation could dream of.

Or consider an older example, the savings and loan crisis of the 1980s, which was largely a Texas affair. Taxpayers ended up paying a huge sum to clean up the mess — but the vast majority of those taxpayers were in states other than Texas. Again, the state received an automatic bailout on a scale inconceivable in modern Europe.

 None of these situations involved state spending; in fact, the housing bubble and the S&L crisis involved federally-sponsored institutions which also had crises in other states. Furthermore, his examples of Social Security and Medicare fall into the non sequitur category, given that both are federal programs and paid not by state taxes and spending, but rather through a nation-wide taxation system. In other words, Krugman gives us a dishonest apples-and-oranges comparison.

However, if the states, such as California, were to have fiscal problems because government employee unions have plundered everyone else, that is a different matter altogether. Krugman has argued that the federal government should borrow in near-unlimited amounts in order to prop up the budget deficits in the states, and he essentially argues that Europe should do the same for Greece and other countries.

Yes, this will mean more inflation, but in Wonderland, more inflation means more spending and more spending means a better economy. And, yes, Krugman has argued many times that increased inflation is good for us, almost as good as an invasion of "space aliens."

As Lew Rockwell has noted in this appearance on RT, many of the "austerity" measures imposed upon Greece have been done in the name of bailing out the European banks that were foolish and craven enough to go along with Greece's spending schemes. Instead of bailouts, Rockwell has recommended that Greece simply default, which actually would better serve both Greece and Europe.

Why? Greece would be forced to put its own fiscal house in order by being realistic about government spending, and the European banks in the future would have to lend money for productive measures, not unsustainable government foolishness. Indeed, as he notes, Greek workers have been victimized by governments and banks, but his sympathies are aimed toward the real Greek taxpayer: the private sector worker who has to work long hours to support those who don't have to work at all.

Paul Krugman, on the other hand, claims that the only way to have real economic recovery and growth is for governments to borrow, print money, and continue with excessive government employee union activities. This is not economics in any authentic sense; it is just more Keynesian misrepresentation of reality.

Krugman: We Don't Need No Cause-and-Effect

Why no real recovery? Paul Krugman has the answer. According to his latest bout of economic wisdom, we are still in a depression because not enough people are employed by government. Yes, that has been a constant theme of his lately, and he takes another bite of the apple in a recent column:

Conservatives would have you believe that our disappointing economic performance has somehow been caused by excessive government spending, which crowds out private job creation. But the reality is that private-sector job growth has more or less matched the recoveries from the last two recessions; the big difference this time is an unprecedented fall in public employment, which is now about 1.4 million jobs less than it would be if it had grown as fast as it did under President George W. Bush.

And, if we had those extra jobs, the unemployment rate would be much lower than it is — something like 7.3 percent instead of 8.2 percent. It sure looks as if cutting government when the economy is deeply depressed hurts rather than helps the American people. 

 First, let us get something straight. The "private sector" hardly is thriving. Yes, we are hearing about "record profits" from some businesses, but these are not the best of times for business and a lot of people understand that the foundations are quite shaky.

Second, governments do not generate wealth on their own. Everything that they spend ultimately comes from something that has been produced in the business world. (Sorry, Keynesians. Newly-printed money is not wealth. It is newly-printed money.) Thus, if state and local governments are hurting, they are hurting because businesses and individuals do not have the revenues to support the kind of spending that many states have enjoyed.

This last point is important, because Krugman in effect is declaring that state government spending is the source of wealth for much of the economy. After all, if businesses were doing as well as Krugman and the Democrats are claiming, and if millionaires abound, then there should be no problem in raising the tax revenues necessary for the funding of police, firefighters, and teachers.

Krugman, of course, would claim that the way to generate new funds would be for the federal government to ramp up its borrowing, and then give the money to state governments. Not that this is sustainable, but at least he would have a plan.

However, that still does not solve Krugman's "cause-and-effect" issue. The gathering of tax revenues by state and local governments is what allows these governments to spend, and they only can gain revenues by taxing businesses and individuals. Yet, Krugman wants us to believe that the causal chain runs the other way: state spending generates wealth; in fact, it is the originator of wealth.

Once upon a time, academic economists actually were taught things like cause-and-effect. However, in Macroworld, effect becomes cause.

David Gordon Schools Krugman

David Gordon has a scathing review of Krugman's new book, End This Depression Now!, in which Gordon writes that Krugman has a "cartoon version of Keynesianism." Gordon writes:

Krugman does not so much as mention the pioneering work of Robert Higgs, Depression, War, and Cold War, which decisively challenges the contention that World War II ended the Great Depression. Higgs convincingly shows that prosperity returned only after the war ended. But let us, very much contrary to fact, suppose that Krugman is correct about the effects of government spending in the years after 1940. His defense of Keynes would still be grossly deficient.

What he is in effect saying is this: "Instances that appear to confirm the claim that government spending ends depressions count in favor of Keynes. But cases that go against Keynes do not count, because we cannot rule out the possibility that greater spending would have worked."
What Keynes's friend Piero Sraffa, who cannot be suspected of bias in favor of the Austrian School, wrote in his copy of Keynes's General Theory applies to Krugman as well: "as usual, heads I win, tails you lose."

 I believe that is a fair commentary on how Krugman presents his material, and his method of arguing his point. If you agree, it is because you are good; those who disagree do so because of the evil lurking in their hearts and souls.

Krugman: Government debt is no burden because "we owe it to ourselves"

In his latest missive, "Nobody Understands Debt," Paul Krugman proves that he does not know debt, or at least government debt, either. While there is much to dislike in the column, I am going to deal with his claim that government debt is different because it is "money we owe to ourselves."

Now,I will agree with Krugman that government debt is different than typical "family debt," but not for the reasons he gives. Krugman writes:

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves. (Emphasis mine)

Krugman's reasoning, however, can apply to private debt as well, since he decides to use collective terms. In the case of private debt, individuals borrow from banks or other individuals, and bank loans are created by individual deposits. Therefore, when individuals don't pay back their debt, someone has to take a haircut.

Government loan guarantees tend to cloud this picture, but even when a guaranteed loan falls into default, individuals -- taxpayers and consumers -- are forced to give up some of their real income either through taxation or inflation. There really is not a free lunch, even if Krugman wants to claim there is.

(Because of government loan guarantees -- and deposit "insurance" falls into this category -- a lot of moral hazard is built into the private lending system. Defenders of this system say that it promotes worthy "investments" -- such as "green energy" -- that would not be funded otherwise by private lending, while critics such as the Austrians say that it promotes malinvestments and reckless behavior by lenders that ultimately leads to a crisis.)

Most Americans borrow from other Americans, so using the standards for public debt that Krugman has given, it would seem that most private lending also involves money "we owe to ourselves." One is not free to apply a collective term to government and then claim that it is not applicable to private activity, given there is nothing magical about government that can create a "collective" by fiat.

After all, individuals and institutions hold government debt, and if Krugman is claiming that an individual is not harmed when he or she lends money to the government and is not paid back, then he is dead wrong. (In other words, it is business as usual.)

Adding to that point, Murray Rothbard writes:

The ingenious slogan that the public debt does not matter because “we owe it to ourselves” is clearly absurd. The crucial question is: Who is the “we” and who are the “ourselves”? Analysis of the world must be individualistic and not holistic. Certain people owe money to certain other people, and it is precisely this fact that makes the borrowing as well as the taxing process important. For we might just as well say that taxes are unimportant for the same reason.

Even Krugman does admit that there can be problems with debt:

Now, the fact that federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion. But these costs are a lot less dramatic than the analogy with an overindebted family might suggest.

And that’s why nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s conventional wisdom would lead you to believe. Britain, in particular, has had debt exceeding 100 percent of G.D.P. for 81 of the last 170 years. When Keynes was writing about the need to spend your way out of a depression, Britain was deeper in debt than any advanced nation today, with the exception of Japan.

In other words, more government debt is good when government is trying to "spend (our) way out of a depression," but the act of more borrowing does have its opportunity costs, but the costs are not all that great, or at least Krugman assures us of that. Of course, if the problem becomes too great, then the Federal Reserve, through the workings of "clever lawyers," can find a way to directly purchase U.S. Government debt on the primary "market," which Krugman touts as a "solution." (One wonders why Krugman does not recommend what would be the Ultimate Fix to our problems to have the Fed purchase ALL government bonds, and that the bonds encompass ALL federal spending. Then the Fed could forgive the debt, monetize everything, and the government would have limitless funds to spend and to bring us into prosperity.)

In the Keynesian world, there is no opportunity cost. As Keynes wrote in 1943, credit expansion by the central bank performs the "miracle" of "turning stones into bread." Because Keynesians believe that a market economy is destined to implode because individuals save some of their income, not spending all of it instantly, it is up to government, to paraphrase Krugman, to "fill the hole" left by the loss of private spending.

There is one more issue to cover, and that is my earlier statement in which I agreed with Krugman that government debt was "different" than private debt, but for different reasons. In this area, I turn to Rothbard:

The public debt transaction, then, is very different from private debt. Instead of a low-time preference creditor exchanging money for an IOU from a high-time preference debtor, the government now receives money from creditors, both parties realizing that the money will be paid back not out of the pockets or the hides of the politicians and bureaucrats, but out of the looted wallets and purses of the hapless taxpayers, the subjects of the state. The government gets the money by tax-coercion; and the public creditors, far from being innocents, know full well that their proceeds will come out of that selfsame coercion. In short, public creditors are willing to hand over money to the government now in order to receive a share of tax loot in the future. This is the opposite of a free market, or a genuinely voluntary transaction. Both parties are immorally contracting to participate in the violation of the property rights of citizens in the future. Both parties, therefore, are making agreements about other people's property, and both deserve the back of our hand. The public credit transaction is not a genuine contract that need be considered sacrosanct, any more than robbers parceling out their shares of loot in advance should be treated as some sort of sanctified contract.

Any melding of public debt into a private transaction must rest on the common but absurd notion that taxation is really "voluntary," and that whenever the government does anything, "we" are willingly doing it. This convenient myth was wittily and trenchantly disposed of by the great economist Joseph Schumpeter: "The theory which construes taxes on the analogy of club dues or of the purchases of, say, a doctor only proves how far removed this part of the social sciences is from scientific habits of mind."

Rothbard was writing in favor of repudiation of government debt (which then would discourage individuals from lending to the government in the future), but the larger point still stands. All taxpayers are on the hook for repaying government debt, but the terms are decided by others. It is the ultimate "loan guarantee" in which people who don't participate in the process still are forced to pay for it.

Krugman calls it a "social contract." I think it should be called something else.

Can we "save" the euro through inflation and outright financial fraud? Good luck!

It has come to this: all we need is a bit more time to sort out the financial mess that now engulfs Europe (and, by proxy, the United States). In the meantime, the Federal Reserve System, the European Central Bank, as well as four other banks, will resort to the usual "fixes" of inflation and the everlasting game of "Let's pretend that the worthless securities they purchase really are valuable."

The latest reprieve, for all its ballyhoo, is nothing but a stay of execution for the euro and (next) the dollar, but for the moment the central bankers -- and especially Ben Bernanke -- can share the spotlight and have the Usual Suspects praising them for their Great Wisdom and Foresight:

In Europe and the United States, where the announcement broke well ahead of stock market openings, the prospect of more cheap money to ease banks’ operations sent stock indexes soaring. A broad index of German stocks, the DAX, jumped almost 5 percent Wednesday, while the broad measure of American stocks, the Standard & Poor’s 500-stock index, climbed more than 4 percent. Short-term borrowing costs also declined modestly for some European governments and banks.

But policy makers and analysts were quick to caution that the Fed’s action did not address the fundamental financial problems threatening the survival of the European currency union. At best, they said, efforts by central banks to ease financial conditions could allow the 17 European Union countries that use the euro sufficient time to agree on a plan for its preservation.

In other words, the head has been temporarily moved from the chopping block, and that is cause for a party. Keep in mind, however, that the very people who celebrated in the stock and bond exchanges sooner or later will return with very different looks on their faces, as they realize that this lurching from crisis to crisis -- with the "solution" being more "liquidity" (read that, inflation) -- is unsustainable. The debt is unmanageable, period, and these economies are incapable at the present time of generating enough income to pay back these loans, especially given that the current set of "bailout" loans coming from the Fed and elsewhere are nothing more than loans to enable these countries to pay their current debt service.

Now, according to Paul Krugman, there really is a way out for the euro and the dollar. Yes, in response to the Greek crisis and others that follow in its wake, the European and U.S. government must follow policies that resemble...Greece. No, I'm not kidding.

Read for yourself:

I hope, for our sake as well as theirs, that the Europeans will change course before it’s too late. But, to be honest, I don’t believe they will. In fact, what’s much more likely is that we will follow them down the path to ruin.

For in America, as in Europe, the economy is being dragged down by troubled debtors — in our case, mainly homeowners. And here, too, we desperately need expansionary fiscal and monetary policies to support the economy as these debtors struggle back to financial health. Yet, as in Europe, public discourse is dominated by deficit scolds and inflation obsessives.

Yes, what is needed is inflation and more borrowing, the very things that put us in this untenable position in the first place. The U.S. economy is not producing enough to give the tax revenues needed for this burst of spending in the last four years, so borrowing and, essentially, monetizing U.S. debt are the only ways even to continue this spree.

There is another way out, one that is painful but at least will not have the long-term destructive effects of the kind of massive inflation that seems to be on the horizon: default. Yes, default.

First, a real default versus what Krugman is demanding -- default via inflation -- will not have the same distorting economic effects that inflation (and especially if it reaches double-digits...and beyond) would have, and second, a default would provide a much more realistic picture of what the situation really is, as opposed to what happens when inflation undercuts the price system. Yes, there will be a sharp downturn when this happens, but afterward, there will be the real prospect of an economic recovery, something that simply is not going to happen if this borrowing and printing madness continues.

When Krugman calls for "expansionary fiscal and monetary policies," he is not talking about policies that actually will expand the real economy. No, he is talking about more financial trickery, more central bank "pulling rabbits out of hats," more "stimulus" money given to politically-connected groups that are tied to the Obama administration, and so on.

Trickery and inflation won't save the euro. The irony as I see it is that the euro has a lot better chance of surviving if some honesty is permitted to enter the discussion. At the present time, unfortunately, the loudest voices are those that call for further debasement of the euro (and the dollar) and even more borrowing to cover the payments for the last set of loans. Neither option is sustainable, but for now, that is all the Keynesians seem to be offering.