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?

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: The USA should borrow and spend itself into prosperity

Paul Krugman is on the austerity kick again, and in part, he is right. The austerity measures that have been imposed upon Ireland and Greece by the European Union, are awful, and they are imposing a lot of suffering.

There are some things that Krugman is not saying, however, and I think they bear mentioning. First, we forget that the banks in Europe, plus the European Central Bank, were all-too-anxious to lend billions to Greece even when it was obvious that the Greek government was irresponsible and that Greece has some of the worst government employee unions in the world.

(I know, I know. Public employee unions are great because they encourage spending, and everyone knows that spending creates prosperity, so the unions in Greece simply were spreading wealth.)

Yet, the average Greek must face a grim future because the banks need to be saved. Yes, the bankers of the world most fear a series of world-wide runs, and so the Greeks must pay back the loans, or at least pay back a lot of the loans.

By the way, one of the features of "austerity" programs is raising taxes and tax rates. Not that Krugman mentions this point; all he says is that it is bad that governments are spending less, and that the road to prosperity is paved with government paper.

I am among those who believe that default is best, and that Greece would be wise to leave the euro. Now, where I believe Krugman is wrong is when he thinks that Greece, if it went back to the Drachma, could inflate itself into recovery. He does seem to believe that the USA definitely could do that:

...the main point is that America does have an alternative: we have our own currency, and we can borrow long-term at historically low interest rates, so we don’t need to enter a downward spiral of austerity and economic contraction.

Yes, the USA can borrow and print itself into economic recovery and beyond. Or so says Paul Krugman.

Will inflation save the European economy?

In his latest column, Paul Krugman believes that he has the answer to saving the European economy from disaster. The solution? In a word, inflation. Yes, if the European Central Bank will show the "courage" to print more money, everything will be fine.

I admit that at one level, Krugman is correct when he writes:

So what does ail Europe? The truth is that the story is mostly monetary. By introducing a single currency without the institutions needed to make that currency work, Europe effectively reinvented the defects of the gold standard — defects that played a major role in causing and perpetuating the Great Depression.

More specifically, the creation of the euro fostered a false sense of security among private investors, unleashing huge, unsustainable flows of capital into nations all around Europe’s periphery. As a consequence of these inflows, costs and prices rose, manufacturing became uncompetitive, and nations that had roughly balanced trade in 1999 began running large trade deficits instead. Then the music stopped.

Note that Krugman does not think that countries like Greece have been irresponsible, or at least he indicates such in this column. Instead, he seems to believe that another round of inflation would pretty much solve everything.

Krugman is correct when he says that the single currency of the euro did impose some requirements, although like a typical Keynesian, he believes that any fiscal discipline really is a bad thing, given that all wealth creation begins with government spending. When Europe went to the euro, it meant that when governments like that of Greece borrowed from European banks, they would have to generate the revenues via taxation to pay back the loans.

Obviously, that would restrict the Greek government's behavior, given that it could not print euros, and borrowing would have to be done at a sustainable rate. Unfortunately, given the fact that Greece, like many other small European countries, has a bloated public sector that is controlled by militant labor unions, it was inevitable that the Greeks sooner or later would borrow well beyond any threshold to pay back the loans, given that fiscal discipline does not exist with the Greek government.

Unfortunately, Krugman believes that fiscal discipline is bad, bad, bad, and that inflation is a much better "solution" to any problem that the Law of Opportunity Cost might pose when governments spend themselves into a corner. (Don't forget that in his book, The Return of Depression Economics, Krugman declares that literally printing money creates a "free lunch" -- his words.) He writes:

If the peripheral nations still had their own currencies, they could and would use devaluation to quickly restore competitiveness. But they don’t, which means that they are in for a long period of mass unemployment and slow, grinding deflation. Their debt crises are mainly a byproduct of this sad prospect, because depressed economies lead to budget deficits and deflation magnifies the burden of debt.

That might be true, although Krugman forgets that if Greece still were on the drachma, then the banks might have been more reluctant to lend to that government -- although the prospect of being backstopped by the European Central Bank might have been enough to encourage the banks to lend even when they figured being paid back in euros was a stretch. Even so, if the loans had been in euros and Greece were on the drachma, then Greece still would have had the same issues, given that the banks would not have been willing to accept drachmas in repayment.

By being on the euro and with the liberal lending policies by banks, the Greeks were getting a free ride, and they knew it and believed that they were entitled to it. This is something Krugman never addresses because (1) the inevitable outcome would fall into the Opportunity Cost category, and all good Keynesians know that printing money trumps laws of economics, and (2) government spending CREATES wealth and the more government spends, the better off we are.

Likewise, when Krugman has called for the U.S. Government to borrow money and then give it to state governments, he claims that such actions would "stimulate" the economy and foster economic recovery. When California's government employee unions take an ever-growing bite of the Golden State's revenues and overall economy, Krugman refuses to see this situation as the unions plundering everyone else. Instead, he seems to believe that the unions are the responsible actors, and anyone who thinks otherwise is evil.

Keynesian theory literally turns economics on its head. Spending and printing money create wealth; wealth creation through saving, capital formation, and judicious choices by consumers and investors creates depressions and should be stopped by government, which should use force, if necessary, to keep people from acting responsibly.

Greece: Creating prosperity through spending, Right?

A constant theme of Paul Krugman's columns and blog posts is the idea that prosperity is created through spending, lots and lots of spending. When the economy started tanking seriously four years ago, Krugman and politicians of both parties immediately started to push more spending as a way to end the downturn.

Obama himself after taking office declared that the USA would spend its way out of this recession/depression and the only condemnation that Krugman could muster of this strategy was that the administration wasn't borrowing and spending enough money. Since the government could create its own "money" at a whim, the only limit on spending our way back to boom conditions was a political will to increase the government's debt obligations to future taxpayers.

Then came the Greek crisis. Consistent with his Keynesian viewpoint, Krugman said that the "solution" for Greece either would be huge European Union bailouts or a return of Greece to its own currency, abandoning the Euro. Anyone who might argue that governments were cannibalizing future resources and production in order to maintain current spending was condemned as a promoter of "austerity," which in Wonderland is a Truly Evil Person.

Ever since joining the EU, the Greeks have acted as though Paul Krugman were their Guiding Light. As this article demonstrates, Greece's government, courtesy of EU taxpayers, has created boondoggle after boondoggle complete with a bloated public payroll:

Even on a stiflingly hot summer's day, the Athens underground is a pleasure. It is air-conditioned, with plasma screens to entertain passengers relaxing in cool, cavernous departure halls - and the trains even run on time.

There is another bonus for users of this state-of-the-art rapid transport system: it is, in effect, free for the five million people of the Greek capital.

With no barriers to prevent free entry or exit to this impressive tube network, the good citizens of Athens are instead asked to 'validate' their tickets at honesty machines before boarding. Few bother.

This is not surprising: fiddling on a Herculean scale — from the owner of the smallest shop to the most powerful figures in business and politics — has become as much a part of Greek life as ouzo and olives.

Indeed, as well as not paying for their metro tickets, the people of Greece barely paid a penny of the underground’s £1.5 billion cost — a ‘sweetener’ from Brussels (and, therefore, the UK taxpayer) to help the country put on an impressive 2004 Olympics free of the city’s notorious traffic jams.

The transport perks are not confined to the customers. Incredibly, the average salary on Greece’s railways is £60,000, which includes cleaners and track workers - treble the earnings of the average private sector employee here.

The overground rail network is as big a racket as the EU-funded underground. While its annual income is only £80 million from ticket sales, the wage bill is more than £500m a year — prompting one Greek politician to famously remark that it would be cheaper to put all the commuters into private taxis.

Not that any of this would matter in Keynesian thinking. Indeed, the Greek Underground would be considered the Ultimate Exercise in Creating Prosperity because it spends lots of money, and anyone who might protest that this is a huge waste of resources is an Enemy of the People.

The picture painted of Greece in the above article is a picture you won't read on Krugman's page or in the NY Times, as the omission of Greek wastefulness really highlights where Keynesians and Austrians part company (not that they ever walked together, anyway).

In the Keynesian/Krugman view, spending is separate from production and, to be honest, spending is the key to producing wealth. If you spend, they will produce.

I note this because I can anticipate the objection: Demand drives production, and even Austrians, with their emphasis upon the valuation of the factors of production being imputed by consumers placing value on the "final product," would admit to that. However, when Keynesians and Austrians speak of "demand," they are speaking in two different languages.

Keynesians couch demand in simple spending; put money into the hands of people, let them spend, and the economy magically will appear. (Chartalists go even further, claiming that because governments can claim a legal monopoly over money creation, that the amount of "demand" governments can create is infinite, since government is not "revenue constrained.")

Austrians, on the other hand, note that one cannot consume when one is not producing, and that Say's Law -- yes, that "tyrannical" Say's Law that Keynesians hate so much -- has something to tell us. The only way out of this world-wide depression is for governments to stop this massive borrowing and spending and permit the malinvestments -- and they are legion -- to liquidate and for the lines of production that are sustainable to be permitted to develop.

The current tragedy in Greece is the product of reckless spending and malinvestment. Unfortunately, neither the Greeks nor the economics faculty at Princeton are willing to face the facts.

We're Not Greece, But We're Closer Than Krugman Thinks

In his latest column, Paul Krugman pronounces the obvious: the political and economic situation in the USA is not what it is in Greece. Glad that he could pontificate on the obvious. The question that is relevant, however, is this: Are we headed in that direction? I believe we are.

Furthermore, Krugman seems to contradict his own Keynesianism in the following statement:

We’d be better positioned to deal with the current emergency if so much money hadn’t been squandered on tax cuts for the rich and an unfunded war. But we still entered the crisis in much better shape than the Greeks.

According to Keynesian doctrine, however, it would seem that both the tax cuts (actually, rates at all levels were cut, not just the top rates) and U.S. wars abroad would have "stimulated" the economy, especially since the economy was sluggish when both things were put into place. Furthermore, if budget deficits and government spending were bad then, how are they good now? (Yes, the Democrats are in charge, so whatever they do is good, and while I am non-partisan in my economic approach, Krugman's partisanship is not exactly appealing.)

So, why is Krugman so optimistic now, even though the lower tax rates remain (through this year) and the wars continue? In his own words:

...we have a clear path to economic recovery, while Greece doesn’t.

The U.S. economy has been growing since last summer, thanks to fiscal stimulus and expansionary policies by the Federal Reserve. I wish that growth were faster; still, it’s finally producing job gains — and it’s also showing up in revenues. Right now we’re on track to match Congressional Budget Office projections of a substantial rise in tax receipts. Put those projections together with the Obama administration’s policies, and they imply a sharp fall in the budget deficit over the next few years.

This does not compute if the Bush policies of, well, "fiscal stimulus and expansionary policies by the Federal Reserve," led us into recession. In other words, Krugman has no real causality theory as to why we got into recession in the first place.

Now, Krugman will tell you that the reason things got this was that the government did not effectively regulate the financial markets, which jumped into the housing bubble feet-first. Yet, he ignores the fact that the Fed was pumping money into the system, directing it to housing, and that whole issue of home ownership itself has been pushed by the federal government for more than 70 years, which has meant all sorts of programs aimed at putting people into home ownership that, to be frank, should not be buying houses.

In fact, he has claimed elsewhere that the Fed should be holding down interest rates while the government, at the same time, should make sure that it effectively determines the "safe" havens for the new money. Furthermore, Krugman forever confuses cause with effect by claiming that the recession occurred because people stopped spending, as opposed to the Austrian view that people slowed down their spending precisely because the economy moved into recession.

As for the current "recovery," Krugman still sticks to the false belief that the Fed can print us out of the downturn, and as for claiming our future will not mirror that of Greece simply because this government "controls" its own currency, he needs to get an education. Why? Much of the reason that Greece is not able to make the necessary adjustments is that government spending accounts for a much larger percentage of GDP than our own.

Moreover, the public employee unions in Greece are extremely militant, and they will fight any cuts in government spending. And what does Krugman recommend here? He believes that we need more unionization to push for higher wages (which, in his view, "stimulate" spending) and an expansion of the reach of government.

So, let me get this straight. Greece is worse off than the USA, but the way that we can improve our economy is to be more like Greece -- except for one thing. Greece cannot inflate its currency, given it is on the euro, but the United States Government can print unlimited amounts of dollars, which the ancients once called inflation.

There we have it. Inflation is our economic security. Amazing.

Krugman: A Central Government Solves All Economic Problems. Yeah, Right

I am thankful for Paul Krugman, if for no other reason he has helped me keep my thinking diversified even as the Tonya Craft sham of a trial goes on and takes most of my attention. As the "Greek tragedy" unfolds and Krugman makes his commentaries, once again we see the difference between the Keynesian approaches and the Austrian ones.

Today (Friday, May 7), Krugman once again gives the standard Keynesian theme: A central government can save the day because it can print money. If you think I jest, read on:

The problem, as obvious in prospect as it is now, is that Europe lacks some of the key attributes of a successful currency area. Above all, it lacks a central government.

Now, how would a strong central government be able to rescue Greece from its current crisis? Krugman explains:

First, Greek workers could redeem themselves through suffering, accepting large wage cuts that make Greece competitive enough to add jobs again. Second, the European Central Bank could engage in much more expansionary policy, among other things buying lots of government debt, and accepting — indeed welcoming — the resulting inflation (emphasis mine); this would make adjustment in Greece and other troubled euro-zone nations much easier. Or third, Berlin could become to Athens what Washington is to Sacramento — that is, fiscally stronger European governments could offer their weaker neighbors enough aid to make the crisis bearable.

So, the idea would be for all of Europe to have more inflation via action from the central bank, and thus all of the Europeans could damage their economies simultaneously, creating new crises that Krugman conveniently fails to mention. (Inflation has a way of doing that.)

But, Krugman is not finished, as he also lays out another scenario: Greece leaves the Euro and goes back to the Drachma. In his own words:

What remains seems unthinkable: Greece leaving the euro. But when you’ve ruled out everything else, that’s what’s left.

If it happens, it will play something like Argentina in 2001, which had a supposedly permanent, unbreakable peg to the dollar. Ending that peg was considered unthinkable for the same reasons leaving the euro seems impossible: even suggesting the possibility would risk crippling bank runs. But the bank runs happened anyway, and the Argentine government imposed emergency restrictions on withdrawals. This left the door open for devaluation, and Argentina eventually walked through that door.

If something like that happens in Greece, it will send shock waves through Europe, possibly triggering crises in other countries. But unless European leaders are able and willing to act far more boldly than anything we’ve seen so far, that’s where this is heading.

Here is the problem that Krugman forgets: if Greece leaves the Euro, its currency will be considered "soft" on the world markets, like the currencies of Third World nations or of the old communist bloc. Combined with the big increase in inflation as Greece tries to print its way out of the crisis will be the fact that the Greeks will find the costs of imported goods skyrocketing, and they will be reduced quickly to poverty.

Krugman does not understand that deflation and recession would be the BEST things to happen to Greece, as while there might be default, the Greeks once again would be able to get their fiscal house in order. Yes, there would be a quick drop in their standard of living, but they not only would get past that quickly as the economy recovers, but they also would have a brighter future.

The Krugman "solution," however, only extends the problem into the healthier economies of Europe and with inflation, the "good" effects come first, and the "bad" effects are felt later. With deflation, it is the other way around. The Greeks will have troubles up front, but things will get better.

What Krugman does not understand is that the inflation "solution" only will distort the Greek economy even more without solving ANY of the underlying problems. Look, the Greeks are headed for very rough times no matter what they do. However, it would make sense for them at least to be able be doing something that would give them a decent economic future.

Instead, Krugman insists that printing money will solve all problems. I don't think so.

My Big, Fat Greek Disaster

The old saying, "Beware of Greeks bearing gifts," might now be changed to, "Beware of Greeks bearing debt." Indeed, after yesterday's murderous riots, people also need to beware of Greeks bearing Molotov Cocktails, as Greek government employees, after living high on financial bubbles, do not believe they should have to face financial reality.

In a blog post, Paul Krugman acknowledges that the "Greek end game" is going to be disastrous no matter what, as no one there is willing to face the truth: Greece was living in a bubble economy, and when the bubble bursts, there is nowhere to hide. Unfortunately, as a true Keynesian, Krugman believes that the Very Worst Thing that can happen Greece is deflation.

But even Krugman admits that the Greeks need to get their economy into some kind of balance, and that is amazing, given that Keynesians believe that all factors of production, for purpose of economic analysis, are homogeneous, and the way to get costs of factors (especially labor) and prices of goods into "balance" is through inflation. Yet, even that bit of wisdom is tempered with Keynesian foolishness. He writes:

The only thing that could reduce that need for austerity would be something that helped the economy expand, or at least not contract as much. This would reduce the economic pain; it would also increase revenues, reducing the needed amount of fiscal austerity.

But the only route to economic expansion is higher exports — which can only be achieved if Greek costs and prices fall sharply relative to the rest of Europe.

He admits, however, that Greece is not a cohesive society, so the most likely scenario is for Greece to "leave the Euro" and go to printing Drachmas again. That, Krugman admits, will be disastrous, triggering bank runs and worse.

Yet, Krugman does not realize that the problem of leaving the Euro would create even more problems for Greece than bank runs. Should Greece leave the Euro and go back to the Drachma, the currency markets will treat the Drachma as "soft money" and give it the same status as money from Zimbabwe, which does not trade on any currency markets.

To put it another way, Greece will become essentially a Third World country. How did this happen? It happened because central banks around the world engaged in Keynesian "expansion" by creating Dollars, Euros, you name it. Keynesians believe that such action can go on forever without creating any consequences. As you can see, that simply is not true.

Greece is living the consequences. They either can get their house in order and suffer the short-term consequences, or they can go on living in the inflationist fantasy that is Keynesian "economics."

Krugman: Greece Could "Solve" Its Problems if it Could Print More Money

In his best-seller, The Return of Depression Economics (which I am having my MBA students read this spring), Paul Krugman declared that most economic problems can be "solved" rather easily: the government prints more money. I am not making up that declaration, nor am I embellishing it or putting it out of context. That is what he said, and, like Sgt. Friday, just the facts, ma'am.

Today, he looks once again at the crisis in Greece, which has spread to Spain and where Austrians see fiscal folly and wages and work policies that are totally out of line with the structures of production in those country, a situation that must be put back into balance to end the crisis, Krugman sees the lack of inflation being at fault. Don't take my word for it. Read on:

The fact is that three years ago none of the countries now in or near crisis seemed to be in deep fiscal trouble. Even Greece’s 2007 budget deficit was no higher, as a share of G.D.P., than the deficits the United States ran in the mid-1980s (morning in America!), while Spain actually ran a surplus. And all of the countries were attracting large inflows of foreign capital, largely because markets believed that membership in the euro zone made Greek, Portuguese and Spanish bonds safe investments.

Then came the global financial crisis. Those inflows of capital dried up; revenues plunged and deficits soared; and membership in the euro, which had encouraged markets to love the crisis countries not wisely but too well, turned into a trap.

What’s the nature of the trap? During the years of easy money, wages and prices in the crisis countries rose much faster than in the rest of Europe. Now that the money is no longer rolling in, those countries need to get costs back in line.

But that’s a much harder thing to do now than it was when each European nation had its own currency. Back then, costs could be brought in line by adjusting exchange rates — e.g., Greece could cut its wages relative to German wages simply by reducing the value of the drachma in terms of Deutsche marks. Now that Greece and Germany share the same currency, however, the only way to reduce Greek relative costs is through some combination of German inflation and Greek deflation. And since Germany won’t accept inflation, deflation it is.

Krugman, of course, supports Germany having a round of inflation. We have been down this road before, people, and it ends in disaster. In the late 1920s, Great Britain did not want to devalue the Pound, which at that time should have been trading at about $3.50 instead of the $4.86 "official" rate.

To keep the $4.86 rate intact, Benjamin Strong, who then was the chairman of the New York Federal Reserve Bank, cut a deal with Montagu Norman, Britain's equivalent of the Secretary of the Treasury, to inflate the U.S. Dollar. This led to the infamous stock market bubble that burst in October, 1929, and President Hoover's response to that crash (to try to prop up failing firms, as well as prop up high prices and wages) led to the Great Depression.

The Germans have their own history with inflation (1923 anyone?) and are not about to go the Benjamin Strong route, as to do so would create a series of troubles down the road. Unfortunately, inflation ultimately distorts an economy's structure of production, leads to unsustainable booms, and then to disaster. However, Keynesians like Krugman hold that the Very Worst Thing that can happen to an economy is deflation, and that prosperity is possible only through inflation.

Here is the problem with Krugman's prescription (Germany inflate, Greece continue as is): It does nothing to get the Greek fundamentals back into order and it distorts the economic fundamentals in Germany. In other words, it does nothing to solve the real, underlying problems in Greece, but it lays the foundation for a future crisis in Germany, as inflation will create its own problems.

If you wish to see an important difference between Austrians and Keynesians, here it is. Keynesians really don't see economic fundamentals, nor do they see any issues with factors of production. Instead, in their view, the economy is a homogeneous mix that works when government throws lots of money into the recipe. If there are imbalances (and the theory does not allow for that to happen, although Krugman himself recognizes that imbalances could be an issue), then inflation can solve everything. Unfortunately, what happens when governments engage in policies of inflation is that the seeming good effects come first, but then when the factor prices get out of balance with what is being produced, the economy moves toward an inevitable bust, and any attempts to "fix" things through another round of inflation only make things worse.

Austrians, on the other hand, look first at the factors of production for the distortions in the entire structure of the economy. Deflation, far from being the enemy of the economy, allows those factors to get back into balance with the overall structure of production, and direct production to consumer desires. It is the opposite of inflation: the bad effects come first (unemployment and initial dislocation), but the "good" effects come later (a recovery).

There is no way to bridge the gap between Keynesians and Austrians. Today, it is the Keynesians that rule, and it is economy that ultimately will suffer because their "theories" ultimately lead to disaster.

No, Greece cannot "solve" anything by going back to the Drachma and printing out the wazoo. Instead, it is up to that country to get its house back in order by letting the factors, including labor, get back into balance. That means, in the initial stages, that Greeks will find their wages being cut and their standard of living will fall. Yet, that initial stage is absolutely necessary if, in the long run, Greeks want to enjoy a higher standard of living in the future with an economy that is sustainable.

[Note]: It is good to be posting here again. I have been following the Tonya Craft trial in Ringgold, Georgia, and it is a fiasco. The prosecutors are running the show, and they are acting like typical high school bullies. It is a tragedy and a train wreck in progress.

Paul Krugman: We Need Inflation, and Lots of It

As I have said before, I appreciate Paul Krugman's openness in explaining his Keynesian views. True, he gives a few platitudes toward fiscal responsibility, but basically he recommends that government spend lots and lots of borrowed and printed money, and by doing so, will bring about economic recovery and prosperity.

The problem is not Krugman's saying such things; it's a semi-free country, after all. No, the problem is that when government follows these recommendations, disaster follows, even while Krugman and others are denying it or blaming the free market and sound money for economic evils. In today's column, he gives us more of the same.

As everyone knows, the government of Greece is in deep trouble. It overspent, went into deep debt, and now cannot pay back the debts. Even Krugman recognizes that fact, but then (as usual) draws the false conclusion that the way to deal with financial irresponsibility is, well, to be even more irresponsible:

Yes, Greece is paying the price for past fiscal irresponsibility. Yet that’s by no means the whole story. The Greek tragedy also illustrates the extreme danger posed by a deflationary monetary policy. And that’s a lesson one hopes American policy makers will take to heart.

Now, to say that any country now has a "deflationary monetary policy" is to be hallucinating. No one, I repeat, no one is engaging in deflation. Would be that were the case.

Here is Krugman in his own words about the crisis:

The key thing to understand about Greece’s predicament is that it’s not just a matter of excessive debt. Greece’s public debt, at 113 percent of G.D.P., is indeed high, but other countries have dealt with similar levels of debt without crisis. For example, in 1946, the United States, having just emerged from World War II, had federal debt equal to 122 percent of G.D.P. Yet investors were relaxed, and rightly so: Over the next decade the ratio of U.S. debt to G.D.P. was cut nearly in half, easing any concerns people might have had about our ability to pay what we owed. And debt as a percentage of G.D.P. continued to fall in the decades that followed, hitting a low of 33 percent in 1981.

So how did the U.S. government manage to pay off its wartime debt? Actually, it didn’t. At the end of 1946, the federal government owed $271 billion; by the end of 1956 that figure had risen slightly, to $274 billion. The ratio of debt to G.D.P. fell not because debt went down, but because G.D.P. went up, roughly doubling in dollar terms over the course of a decade. The rise in G.D.P. in dollar terms was almost equally the result of economic growth and inflation, with both real G.D.P. and the overall level of prices rising about 40 percent from 1946 to 1956.

Unfortunately, Greece can’t expect a similar performance. Why? Because of the euro.

Until recently, being a member of the euro zone seemed like a good thing for Greece, bringing with it cheap loans and large inflows of capital. But those capital inflows also led to inflation — and when the music stopped, Greece found itself with costs and prices way out of line with Europe’s big economies. Over time, Greek prices will have to come back down. And that means that unlike postwar America, which inflated away part of its debt, Greece will see its debt burden worsened by deflation.

Once again, Krugman gets it wrong. The USA followed pro-growth policies after World War II, unlike Greece (you know, where people actually are allowed to produce real goods without the government trying to put them out of business). However, Krugman, while admitting that Greece is not going to be so fortunate, then blames the semblance of sound money.

Like most Keynesians, Krugman believes a boom can last forever, just as long as government provides lots and lots of money, even if it leads to, well, double-digit (and worse) inflation. According to Krugman, the worst thing that can happen is deflation, and the real lesson here is that we need to debase the currency even more. Read on:

But what are the lessons for America? Of course, we should be fiscally responsible. What that means, however, is taking on the big long-term issues, above all health costs — not grandstanding and penny-pinching over short-term spending to help a distressed economy.

Equally important, however, we need to steer clear of deflation, or even excessively low inflation (Emphasis mine).

While Krugman does not define "excessively low inflation," nonetheless his point is clear. We need lots and lots of inflation, and anything else will be a disaster.

This is foolish advice, and it does not surprise me to read such nonsense from a Keynesian. After all, Keynesians believe that money is nothing more than a quantity variable that is to be manipulated to make aggregate models "work better." Is there unemployment? No problem; just add inflation, which will increase "aggregate demand" (because the demand for money falls as it loses value and velocity increases) and result in "full employment."

You see, to a Keynesian, this trick can be repeated time and again, as there are no real consequences from higher inflation except that prices go up. However, as Austrians point out, when inflation continues, malinvestments distort the structure of production, changing relative values of assets and ultimately leading to a crisis.

For example, contra Krugman, the housing boom could not continue because ultimately the factor prices in housing relative to everything else became too distorted to continue the charade. When the whole market depends upon being able to cram family incomes of $50K into paying a mortgage for a $500K house, the system cannot be sustained no matter how much new money government throws into the mix. Even Krugman recognizes that the housing market went bad, but then he reasons that it came about because of a lack of regulation, not because government was holding down interest rates and trying to direct that new money into housing. As I wrote in this post, such notions make no sense at all.

As I have stated many times before, the central problem is that Krugman and the Keynesians work from models in which all capital and all other assets are homogeneous. There can be no distortions in the structure of production, which always responds negatively to deflation and positively to inflation. This is a methodology that appeals to politicians and the modern, mainstream media, but it is not economics; it is Harry Potter Science.

Furthermore, we need deflation. That's right, far from avoiding it, we need to experience it. Yes, the initial results will be very painful (as though we are not experiencing pain now), but soon enough the factors of production will become balanced again, relative prices will make sense, and then the economy can find new lines of production that actually can be sustained.

However, because the initial stages of deflation are painful, Krugman says me must avoid it at all costs, even to the cost of destroying our money via inflation. Now, Krugman also believes that deflation will lead to a permanent downward spiral in which the economy ultimately becomes stuck at low production and high unemployment.

That is not true, not by a long shot. If Krugman were right, then the economy never would have recovered in 1982, when President Ronald Reagan and Fed Chairman Paul Volcker (who is the real hero here) permitted interest rates to rise, yet we had a real recovery in 1983 and beyond. While Krugman tries to claim that the recovery came about because of Keynesian-inspired deficit spending, the real results of that recovery contradict his story.

Had it been a "Keynesian recovery" (which in Austrian terms is an oxymoron), we would have seen growth in the usual sectors of manufacturing instead of seeing the growth centered on high-technology and telecommunications. Furthermore, Keynesians hold that one cannot have a recovery and have high interest rates, yet that is exactly what happened in the mid-1980s.

I agree with Krugman that the fact that Greece is on the Euro means that the government cannot inflate its way out of this mess -- and create a bigger mess. Yes, that means some real pain in the short run, but, contrary to what Krugman is claiming, in the long run it actually presents the Greeks with the opportunity to get things right.

Yes, there is a lesson from the fall of Greece. It is this: get your house in order and keep it in order. Don't keep printing money and claiming you are "saving the economy." Inflation is like heroin. It might feel good at the beginning stages, but in the end it destroys everything.