The Amnesia Economist

One of the supposed rules for New York Times columnists is that they not endorse candidates or be overly politically partisan in what they write. That is a howler, of course, as the entire newspaper is little more than the house organ for the "respectable" Left in the Democratic Party. This is a newspaper, of course, that prattles on about how DNA "exonerates" people charged with certain crimes, but was absolutely certain in the Duke Lacrosse Case that DNA did not matter at all.

(The paper wanted us to believe that three drunken young men could rape, beat, and ejaculate on a woman for 30 minutes in a tiny bathroom, leave in a hurry without cleaning up anything, use no chemicals to eradicate the mess, and yet not leave one speck of DNA. Instead, the paper insisted, they used what only could be described as a "magic towel" that would make her DNA disappear, not collect the DNA of two of the "rapists," but have only the DNA of one person. But, according to the self-proclaimed "Newspaper of Record," this was "proof" of a rape.)

I make this lengthy point about the NYT because this is a paper that openly and arrogantly contradicts nature itself, as the people who write for the paper, including the vast majority of its columnists, believe that laws of time and space do not apply to them. That makes them free to rewrite history and declare themselves to be akin to the Masters of the Universe.

So it is with Paul Krugman, who this week calls Mitt Romney the "Amnesia Candidate" because Romney dares hold Barack Obama's policies as being responsible for there not being any real economic recovery. Why everyone at the NYT and Princeton KNOWS that EVERYTHING is the fault of George W. Bush BECAUSE HE CUT THE TOP INCOME TAX RATE FROM 39.6 PERCENT TO 35 PERCENT. Yes, anyone who knows ANYTHING about economics knows that slightly lowering income tax rates will cause massive unemployment, or that least that is what Krugman wants us to believe.

(And, please note that Krugman on numerous occasions has claimed that cutting tax rates has been a major cause of the downturn because, as every good Keynesian knows, government always spends more wisely than individuals can and will spend for themselves.)

At the present time, I am working on a project about the Great Depression and today, I will be writing about Herbert Hoover's response to the stock market crash of 1929 and beyond. In my research, I came upon this gem from Krugman. First, the Hoover quote:

It cannot be borrowed without impairment of the credit of the National Government and thus destroy that confidence upon which our whole system depends. It is unthinkable that the Government of the United States should resort to the printing press and the issuance of fiat currency as provided in the bill which passed the House at the last session of Congress under the leadership of the Democratic vice presidential candidate. Such an act of moral bankruptcy would depreciate and might ultimately destroy the value of every dollar in the United States.

Then, Krugman declares:

This should (but won’t) dispel the myth that Hoover was some kind of proto-Keynesian. But look,also, at how closely Hoover’s line of argument follows that of Very Serious People today.

 Yes, one quote from Hoover means that Hoover never called a conference of business and labor leaders in 1929 and demanded that they keep prices and wages high no matter what was happening in the economy. Hoover enthusiastically signed the disastrous Smoot-Hawley Tariff, despite receiving a letter signed by 1,000 economists begging him to veto it.

Hoover never pushed through massive public works projects and Guy Rexford Tugwell, a close adviser to Franklin Roosevelt, never declared, "We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.” Hoover did not resurrect the War Finance Corporation to become the Reconstruction Finance Corporation (which today exists as the Small Business Administration) to make massive loans to failing companies. (After all, Hoover was a "liquidationist" and wanted the entire economy of the USA to go under so he could support the principles of "laissez-faire.")

Of course, Hoover was a True Believer in "laissez-faire" and he never was a Progressive, although he had convened a conference in 1921 on business cycles, and at the conference he did not declare that the standard government approach to a downturn (not to intervene) was outdated and that government needed to expand credit and engage in public works programs. 

Economist Steven Horowitz (who did actual research, not look for a stray quote from Hoover) did not write:

Politicians and pundits portray Herbert Hoover as a defender of laissez faire governance whose dogmatic commitment to small government led him to stand by and do nothing while the economy collapsed in the wake of the stock market crash in 1929. In fact, Hoover had long been a critic of laissez faire. As president, he doubled federal spending in real terms in four years. He also used government to prop up wages, restricted immigration, signed the Smoot-Hawley tariff, raised taxes, and created the Reconstruction Finance Corporation — all interventionist measures and not laissez faire. Unlike many Democrats today, President Franklin D. Roosevelt's advisers knew that Hoover had started the New Deal. One of them wrote, "When we all burst into Washington...we found every essential idea [of the New Deal] enacted in the 100-day Congress in the Hoover administration itself."

When Herbert Hoover returned to the USA after his tour of Europe following World War I, he did not outline a new economic and social "vision" for the country that so excited Progressives that "Louis Brandeis, Herbert Croly of the New Republic, Colonel Edward M. House, Franklin D. Roosevelt, and other prominent Democrats for a while boomed Hoover for the presidency."

You see, the facts about Herbert Hoover are quite inconvenient when one wishes to portray him as something he clearly was not. So, one takes one quote from Hoover to "prove" that nothing else that historians have written about him is true. After all, when one is trying to promote a myth, a little amnesia cannot hurt.

Like the writers at the NYT during the lacrosse case, Krugman knows that if he continues to make untrue declarations, few readers will do fact-checking. After all, the Duke boys were white and "privileged," so they MUST have raped Crystal Mangum. 

Likewise, Hoover's entire career was devoted to Progressive causes and the paper trail is long, but when Paul Krugman tosses all of the facts down the Orwellian Memory Hole, then he must be right because, after all, he is a decorated and famous economist.

Every(Krug)man

Paul Krugman is a bit upset that someone could accuse him of being a "warmonger," since he claims that World War II ended the Great Depression. Now, having spoken personally to Krugman about his opposition to the U.S. war in Iraq (and I share that opposition and told him so), I don't think Krugman loves war.

Nonetheless, his view is problematic, especially when one compares his views to those of economist Robert Higgs, who in this essay clearly debunked the "World War II as the end of the Depression" nonsense. Nonetheless, Krugman counters that the amoral nature of economics allows for war to be a positive catalyst in ending a downturn, even if we are against the war itself.

Economics, he writes, "is not a morality play." That is true, at least at one level. Ludwig von Mises himself wrote that economics is a "value-free" science, but he was writing from a very different perspective.

Krugman's contention is this:

...economics is not a morality play. It’s not a happy story in which virtue is rewarded and vice punished. The market economy is a system for organizing activity — a pretty good system most of the time, though not always — with no special moral significance. The rich don’t necessarily deserve their wealth, and the poor certainly don’t deserve their poverty; nonetheless, we accept a system with considerable inequality because systems without any inequality don’t work. And before the trolls jump in to say aha, Krugman concedes the truth of supply-side economics, that’s not an argument against progressive taxation and the welfare state; it’s just an argument that says that there are limits. Cuba doesn’t work; Sweden works pretty well.

(Now, I would suspect that Krugman would not be able to explain why Cuba "doesn't work," given he thinks that the two greatest critics of socialism of the 20th Century, F.A. Hayek and Mises, were idiots and people of no insight. He probably would mumble something about "incentives," but I doubt Krugman would even be able to comprehend the "economic calculation" issue that Mises and Hayek developed.)

Krugman goes on:

And when we’re experiencing depression economics, by which I mean a situation in which it’s hard to create sufficient demand to achieve full employment — mainly because short-term interest rates are up against the zero lower bound — the essentially amoral nature of economics becomes even more acute. As I’ve said repeatedly, this is a situation in which virtue becomes vice and prudence is folly; what we need above all is for someone to spend more, even if the spending isn’t particularly wise. (Emphasis mine)

It is interesting that he uses such phrasing, given it comes almost word for word from Bernard Mandeville's "Fable of the Bees," which was written in 1705, and which I lampooned in this piece, "The Fable of the Krugman."

Keep in mind, however, that Krugman's turning of the "virtue" of saving upside down to embrace the "vice" of reckless spending is not what Mises meant by describing economics as "value-free." Krugman is just saying that while saving would seem to be a good thing, what is needed now is spending, and lots of it. Thus, "situational ethics" becomes the basis for economic analysis.

However, the problem is not in our interpretation of economic morality. The problem is that Krugman insists that massive spending on behalf of the state will magically transform the U.S. economy, give it "traction," and send us on the Yellow Brick Road to Prosperity if not Oz itself.

Krugman does not embrace war; he embraces the government spending, the planned economy, the interventions, and the intrusions of the state into economic decisions. To him, that is Oz. However, if one reads the Higgs piece, one gets a much better understanding of the "prosperity" that war can bring.

For that matter, the Great Depression did not linger on because of a lack of government spending; as Higgs points out, it was "regime uncertainty," and I will put my money on that every time.

Ironically, while Krugman might not see himself as "Everyman," nonetheless his columns are full of condemnation for those people who might disagree with him or (horrors) vote differently than he does. So, even if the economy might not be a morality play, his columns tell a different story.

Krugman Takes on Hayek? Spare Me!

Well, it seems that Paul Krugman is taking on F.A. Hayek, but, as usual, Krugman really has no idea as to what Hayek was saying in 1932, and what Austrians are saying now. First, let us look at Krugman's argument:

...going back to Hayek: attributing the failure to recover to trade restrictions was, in a way, characteristic. Hayek, like his modern followers, never could get his mind wrapped around the fact that the key problem in depressions, and the key observation his theory needed to explain, wasn’t misallocation of labor and other resources — it was mass unemployment. It’s not surprising to see that in the depths of depression he was focused on removing what was, in the end, a minor source of allocative inefficiency. But it’s a stark reminder of the extent to which he really, truly, didn’t get it. (Emphasis mine)

Now, I have read a lot more of Hayek than has Krugman, and never once does Hayek blame the Great Depression on either Smoot-Hawley OR "allocative inefficiency." Hayek, instead, looks at the Great Depression in two stages.

First, there is the original crisis in which the monetary authorities forced down interest rates and allocated resources into lines of production which could not be sustained. THAT is the misallocation of resources of which Krugman speaks.

However, there is NO reason that this misallocation or series of malinvestments should LEAD TO A GREAT DEPRESSION. Hayek NEVER said that, so Krugman is misrepresenting him. (Gosh, I'm shocked, SHOCKED. Krugman is misrepresenting what someone is saying.)

Second, the Great Depression came about because of government RESPONSES to the original crises caused by the malinvestment of resources. Smoot-Hawley was one of the causes, but there were others, which Murray N. Rothbard lays out in his classic America's Great Depression.

Unfortunately, Krugman never will understand that point, not that the guy cares.

That 30's Mistake

Continuing with his theme of "spend, spend, spend," Paul Krugman is determined to claim that the free-spending governments of the West really are engaging in "austerity." Of course, not only does he get the New Deal wrong (and he really gets it wrong), but also is wrong about what happened in 1937.

First, with the U.S. Government running multi-trillion-dollar deficits, the notion that spending is anything but wild and wasteful is a fantasy in itself. For Krugman to claim that the government is involved in an austerity program is ridiculous, but here it is:

Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.

Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession.

So, because of a vote regarding a relatively small amount of unemployment compensation funds, suddenly the government is going bare bones. Please.

Second, the depression within a depression in 1937-38 did not come because FDR decided to balance the federal budget. Instead, as Robert Higgs noted in this 1997 paper in the Independent Review, while the Federal Reserve System raised interest rates slightly, nonetheless the real problem came from the White House and its continuing attacks on private capital. Higgs quotes historian Elliot Brownlee, who wrote:

...the tax reform of 1935–37, more than any other
aspect of the New Deal,…stimulated business hostility to Roosevelt.…
[B]usiness opponents of New Deal tax reform charged that Roosevelt’s taxes,
particularly the undistributed profits tax, had caused the recession [of 1937–
38] by discouraging investment....

Furthermore, FDR made it clear after his re-election in 1936 that he was going to tax businesses into oblivion. As Prof. Higgs notes:

Although historians emphasize the president’s defeats with respect to taxation in the late 1930s, contemporary businessmen must have appreciated the reality of increased taxation: in fiscal 1940, with the depression still lingering, the federal government collected 57 percent more total revenue than it had in the prosperous year.

Now, I don't expect Krugman to understand this point, because to him, private capital spending is no different than government spending, and if "capital is on strike" (as FDR declared), then if government makes up the difference through borrowing and printing money, it is just as good. This is something that an economist -- even a Keynesian -- should recognize as being silly.

However, as I read Krugman, I have come to realize that he sees absolutely no difference in government spending and private capital expenditures. Assets really ARE homogeneous, in his view, and there are no real economic fundamentals. Of course, he also wants to demonize anyone who disagrees with him by declaring that anyone who thinks that government spending is out of control is doing ONLY because he or she hates poor people and wants others to suffer. Krugman in his own words:

In America, many self-described deficit hawks are hypocrites, pure and simple: They’re eager to slash benefits for those in need, but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we can’t afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.

First, "tax breaks for the wealthy" is nothing more than political talking points, and I have an aversion to academic economists acting like political operatives. Second, Krugman assumes that any cuts in tax rates have as their ONLY effect the lessening of revenue. There are no benefits at all, only costs.

This is interesting, as Krugman is saying that any money spent or invested privately, then, carry absolutely no benefits to anyone except the people whose taxes are cut, and that those benefits are completely offset by pain inflicted on others. This is not even economics; it is nothing but political leftism.

I wish that governments actually WOULD go on real programs of slashing spending and reducing its burden. What I find from Krugman, however, is that he views government spending and taxation as a net plus, but private investment and spending is only a cost. So, why should there be any private spending and property at all? If we are to follow Krugman's logic, then the state should take over everything. Then we could be prosperous like the Cubans and the North Koreans!

The government's "mistake" of the 1930s was not balancing its budget. No, its "mistake" was believing that government could control private enterprise, raise taxes, and increase the burdens that governments place upon individuals, and somehow out of that would rise prosperity. Apparently, Krugman continues to perpetuate that myth.

Paul Krugman: Spreading Economic Myths to Debunk What He Calls "Health Reform Myths"

Economists like to debunk what we call economic myths. For example, I have used this blog to debunk Paul Krugman's Herbert Hoover myths about the Great Depression. However, I must admit that Krugman does all of us one better when he employs economic myths in an attempt to "debunk" what he says are "Health Reform Myths."

...reform still has to run a gantlet of misinformation and outright lies. So let me address three big myths about the proposed reform, myths that are believed by many people who consider themselves well-informed, but who have actually fallen for deceptive spin.

OK, fair enough. What are these myths?

The first "myth" is that government is taking over a sixth of the U.S. Economy. Krugman says that government already controls much of the healthcare sector, and THAT sector runs very, very well. The "failing" healthcare sector, he says is the so-called private part:

The only part of health care in which there isn’t already a lot of federal intervention is the market in which individuals who can’t get employment-based coverage buy their own insurance. And that market, in case you hadn’t noticed, is a disaster — no coverage for people with pre-existing medical conditions, coverage dropped when you get sick, and huge premium increases in the middle of an economic crisis. It’s this sector, plus the plight of Americans with no insurance at all, that reform aims to fix. What’s wrong with that?

The next "myth" is that the proposed law "does nothing to control costs." According to Krugman, "Realistically, health reform is likely to do much better at controlling costs than any of the official projections suggest."

Krugman's third "myth" is that this reform is "fiscally irresponsible." He defends the pending legislation:

How can people say this given Congressional Budget Office predictions — which, as I’ve already argued, are probably too pessimistic — that reform would actually reduce the deficit?

I will try to answer Krugman by concentrating on one item: the notion that this bill will "cut costs" and, thus, reduce the federal deficit.

Perhaps the most charitable thing I can say is that Paul Krugman, being a "macroeconomist," really does not understand costs. To the economist (that is, an economist who actually has real economics training), a cost is an opportunity cost, which is the subjective value of the next-highest-valued alternative. THAT is a cost. Krugman, however, continues to insist that a cost is nothing more than an arbitrary monetary outlay.

Cost ruduction, then, according to Krugman, is nothing more than slapping down price controls. If government decrees lower prices for medical care, then like magic, prices will fall, and there will be ample care for all. Now,I have no idea what Krugman was doing the day price theory was discussed in his graduate micro class, but I doubt he was listening.

No competent economist will endorse such cost controls. For that matter, most pricing in medical care (and especially in hospitals) already is heavily regulated by federal authorities. So, if regulated prices already are spiraling out of control, how does Krugman get away with claiming that another layer of the same stuff is going to do the trick?

Economists like Krugman who do nothing but deal in aggregates have no understanding whatsoever about prices. None. To Krugman, a price is just a number, an arbitrary number, and if government lays down new sets of numbers, then there will be no dislocations whatsoever.

That is nonsense, and dangerous nonsense at that. We know from thousands of years (yes, thousands) of government price controls that such controls are followed by dislocations, economic chaos, and stunted economic growth. If Krugman cannot understand that fact, then he is not an economist, but rather just another political operative.

Is the ObamaCare plan irreponsible? Of course, it is! Anyone who believes that Congress and the Executive Branch can construct by fiat a plan that centrally directs medical care that replaces the voluntary choices of the millions of individuals involved in this industry and not create real problems does not understand economics at all. Why am I not surprised that Krugman cannot and will not understand this simple point?

NOTE: At a session of the Austrian Scholars Conference, economist Lowell Gallaway, a co-author with Richard Vedder of the excellent book, Out of Work, noted sarcastically that Krugman has been vocal in peddling the same high-wage theories that Herbert Hoover promoted during the Great Depression. In other words, far from being the opposite of Hoover, Krugman is his intellectual soul mate!