Chutzpah Economics

It is nice to see that Paul Krugman learned his Yiddish as a young man, although I'm afraid that he is accusing the wrong people of having chutzpah. You see, when an economist claims that the cause of economic malaise is the lack of "enough" inflation, it seems to me that we are seeing chutzpah on steroids.

His latest column declares:

At this point the economic case for austerity — for slashing government spending even in the face of a weak economy — has collapsed. Claims that spending cuts would actually boost employment by promoting confidence have fallen apart. Claims that there is some kind of red line of debt that countries dare not cross have turned out to rest on fuzzy and to some extent just plain erroneous math. Predictions of fiscal crisis keep not coming true; predictions of disaster from harsh austerity policies have proved all too accurate.

I'm not sure what Krugman means by claiming that the world is in "austerity" when national governments across the globe have accelerated spending and especially borrowing. But then, I have to remember that according to Krugman, the difference between this recovery and other recoveries that actually were "recoveries," is the lack of spending by state governments. State governments cannot print money, and there are borrowing restrictions (state and municipal governments cannot pay back bonds by issuing other bonds -- it's called fraud). Thus, when the economy is weak, state revenues are relatively lower than they are in good times.

As anyone can see, such a situation is the result of an economic downturn, not its cause, yet Krugman insists on turning cause-and-effect upon its head, at least when it suits his point of view. Governments as a whole create little economic wealth, and instead are huge consumers of wealth. Yet, as I read Krugman, he seems to believe that the very act of spending is, in fact, a form of production. In his view, when governments borrow huge amounts of money for consumption purposes, and when governments impose taxes upon private economic production, such things are the epitome of government responsibility.

True, Krugman writes that during "good" times, governments should pay down debt, but he never explains how it is that we will sustain such "good" times for any length of time. Krugman's hostility toward private enterprise is evident (unless the private firm is being subsidized by the government and engaged in outright crony capitalism). I cannot understand how he believes that private enterprise activity could keep an economy going for more than five minutes, given the Keynesian viewpoint that private enterprise creates underconsumption.

I do need to add the following point: Krugman is right in saying that the Republican conservatives are hypocrites in the worst kind of way. The Reagan and Bush (both) administrations were profligate, and none of them were "austerians" in any meaningful way. This did not keep Progressives from claiming that they were running "austere" governments. I remember the howling from the New York Times and CBS News (especially Bill Moyers and Dan Rather) about Ronald Reagan's supposedly austere budgets, even though welfare spending grew in real terms while Reagan was president.

And who can forget the "three million homeless" hoax during the Reagan years. We were told that the spending cuts were so severe that millions of people were on the streets, out of work and living in shelters or worse. My favorite line on this came during one of the Dukakis-Bush debates when Dukakis declared, "There are three million homeless people in America, and a third of them are Vietnam veterans."

I quickly checked some sources and found that about 4.25 million people served in that war, so Dukakis wanted us to believe that nearly a quarter of Vietnam vets were on the streets. And the reason given was that the Reagan administration allegedly was spending less on public housing, as though there suddenly were three million fewer public housing units in the country.

No one is making those claims today, but the idea that the Obama administration is an "austerity" government is a howler. Furthermore, the proclivity of politicians is to spend, and Krugman wants us to believe that politicians all over the world are closely watching the "90-percent threshold" set by that space alien himself, Ken Rogoff, and then spending less.

Although Krugman's words may seem to be hyperbole, there is true method in what he is saying. No matter how much money the government borrows, prints, and spends in search of a fiscal policy that Krugman will accept, it never will be enough spending. Why? Because this spending is not going to bring about a real economic recovery, and according to Krugman's logic, the economy in a "liquidity trap" will recover only if government spends enough. The Debt Fairy will be successful only if the fairy can be given enough steroids.

On the monetary end, the economy can recover only if the Inflation Fairy is summoned and given enough money (magic) dust to break the "liquidity trap" logjam. And when will inflation be high enough? When Krugman says it is.

If this looks like heads-I-win-tails-you-lose logic, then move to the head of the line. If Krugman is claiming that it takes chutzpah to claim that governments cannot spend a country into prosperity, then he truly has redefined the meaning of that word.

You see, by invoking his third fairy, the Spending Fairy, Krugman is the one showing chutzpah. Why? He is the one who truly believes that we can totally uncouple government spending from any constraints that an economy lays upon it.

Yes, Krugman, Empower the Inflation Fairy

Lest anyone think that Paul Krugman is an economist, his latest column bemoaning the lack of hardcore inflation presents every reason as to why he is a crank, although a famous crank. Yes, the Inflation Fairy has the answer: sprinkle magic dust and watch it turn into money, lots of money. We'll all be rich!

Let us read Krugman in his own words:

...at this point, inflation — at barely above 1 percent by the Fed’s favored measure — is dangerously low.

Why is low inflation a problem? One answer is that it discourages borrowing and spending and encourages sitting on cash. Since our biggest economic problem is an overall lack of demand, falling inflation makes that problem worse.

Low inflation also makes it harder to pay down debt, worsening the private-sector debt troubles that are a main reason overall demand is too low.

But it gets better:

So why is inflation falling? The answer is the economy’s persistent weakness, which keeps workers from bargaining for higher wages and forces many businesses to cut prices. And if you think about it for a minute, you realize that this is a vicious circle, in which a weak economy leads to too-low inflation, which perpetuates the economy’s weakness.

And this brings us to a broader point: the utter folly of not acting to boost the economy, now.

One can surmise that Krugman really believes that if Ben Bernanke were to unload his proverbial helicopter and shower Americans with lots of money to the tune of, say, a million dollars apiece, then the economy would have plenty of demand and everyone would be rich. It would be so easy. Granted, the Inflation Fairy would have a beard and her wings would look like helicopter rotors, but she still could turn magic dust into money.

There is another reason I say Krugman is no economist, and the following statement demonstrates my point:

From the beginning, it was or at least should have been obvious that the financial crisis had plunged us into a “liquidity trap,” a situation in which many people figure that they might just as well sit on cash. America spent most of the 1930s in a liquidity trap; Japan has been in one since the mid-1990s. And we’re in one now.

Economists who had studied such traps — a group that included Ben Bernanke and, well, me — knew that some of the usual rules of economics are in abeyance as long as the trap lasts. Budget deficits, for example, don’t drive up interest rates; printing money isn’t inflationary; slashing government spending has really destructive effects on incomes and employment.

Perhaps the most important "rules" of economics to be "suspended" by a "liquidity trap" is the Law of Opportunity Cost and the Law of Scarcity, or so Krugman would have us believe. Interestingly, he wants us to believe that by the simple act of printing lots of money, government essentially is creating real wealth, as in Krugman's view, governments self-generate wealth.

For all of the Keynesians out there who believe that the real problem is "idle resources" that can be "stimulated" by government doling out lots and lots of new cash, one must remember that after the new money has been farmed out to the economy, people will act, whether they pay down debts or use it to spend on consumption goods.

However, what they want us to believe is that after the Inflation Fairy unloads her magic dust and people have gone on a spending spree, somehow the economy then will magically arise and move forward. All that was needed was some "pump priming"!

But why should that be the case. Why should the act of dumping a lot of new money on people give long-term revival to the economy? How is it that a bunch of new money the first time around would awaken the owners of those "idle resources" but not be needed for round two and beyond? Krugman writes of the economy "gaining traction," but he never explains what it means.

This last point is important, for Krugman and his followers want us to believe that after a massive round of distributing new money (and the new money always goes to those most in need), the prosperity that follows will move into ever-widening circles and spreads employment to the unemployed. In other words, Krugman wants us to believe at least a little bit more inflation will bring hope:

I wrote recently about how, by allowing long-term unemployment to persist, we’re creating a permanent class of unemployed Americans. The problem of too-low inflation is very different in detail, but similar in its implications: here, too, by letting short-run economic problems fester we’re setting ourselves up for a long-run, perhaps permanent, pattern of economic failure.

It has been a long time since an economist was publicly willing to claim that inflation would bring prosperity, give that a lot of us still remember the huge inflation that occurred around 1980, and it was not a wonder drug. (Krugman would argue that we were not in a liquidity trap, so the laws of economics were different.)

But here is the problem: over time, a new bounce in the economy becomes dependent upon yet another round of inflation. At first, inflation seems to be a miracle cure, as no doubt a bunch of new money in the hands of at least some people will make them better off relative to others. They will spend or maybe pay off some debts and be able to purchase things at prices that reflect the time before the surge of new money. (It takes a while for the money to work its way through the economy and finally push up prices, although the process of increasing prices will be uneven.)

But then what? Because it was the inflation that produced the temporary surge in activity, the only way to replicate the economic bounce is to inject another round of new money. This time, the "good" effects are not quite as good and the "bad" effects become a little more pronounced. One can understand what happens as this process is repeated time and again.

When the 1960s began, even though the economy was in a recession, nonetheless times overall were pretty good and inflation was low. As the government began to grow massively during the next decade and the American military venture into Vietnam metastasized, the government, through the Fed, turned to more and more inflation. By 1965, all silver coins were gone (although the government insisted that the new "sandwich" coins were just as valuable as the old silver ones), and by 1971, there was a monetary crisis.

The theme of Krugman's column is that inflation itself can bring prosperity to an economy languishing in a "liquidity trap." I have no doubt that a massive injection of money into the hands of people like me would have a stimulative effect -- at first. As I noted before, this would not be real prosperity, but rather a trap. Unfortunately, Krugman really does believe that inflation -- the debasing of the marginal unit of money -- is the key to a new prosperity.

And it all comes out in three words: not enough inflation. It is better spoken in two words: Inflation Fairy. Or maybe it is better spoken in one word: insanity.

The Fairy Tale of Our Time

Paul Krugman is nothing if not consistent. Once again, we are told that Kenneth Rogoff is the main reason that our economy is not roaring along like boom times, and that massive consumer spending is what fuels an economy, and that by employing the Debt Fairy and the Inflation Fairy, or, more specifically, putting them on steroids, we can lick this thing and have yet another boom.

Writes Krugman:

Families earn what they can, and spend as much as they think prudent; spending and earning opportunities are two different things. In the economy as a whole, however, income and spending are interdependent: my spending is your income, and your spending is my income. If both of us slash spending at the same time, both of our incomes will fall too.

And that’s what happened after the financial crisis of 2008. Many people suddenly cut spending, either because they chose to or because their creditors forced them to; meanwhile, not many people were able or willing to spend more. The result was a plunge in incomes that also caused a plunge in employment, creating the depression that persists to this day.

Why did spending plunge? Mainly because of a burst housing bubble and an overhang of private-sector debt — but if you ask me, people talk too much about what went wrong during the boom years and not enough about what we should be doing now. For no matter how lurid the excesses of the past, there’s no good reason that we should pay for them with year after year of mass unemployment.

Thus, the Twin Fairies should make their grand entrance:

So what could we do to reduce unemployment? The answer is, this is a time for above-normal government spending, to sustain the economy until the private sector is willing to spend again. The crucial point is that under current conditions, the government is not, repeat not, in competition with the private sector. Government spending doesn’t divert resources away from private uses; it puts unemployed resources to work. Government borrowing doesn’t crowd out private investment; it mobilizes funds that would otherwise go unused.

Now, just to be clear, this is not a case for more government spending and larger budget deficits under all circumstances — and the claim that people like me always want bigger deficits is just false. For the economy isn’t always like this — in fact, situations like the one we’re in are fairly rare. By all means let’s try to reduce deficits and bring down government indebtedness once normal conditions return and the economy is no longer depressed. But right now we’re still dealing with the aftermath of a once-in-three-generations financial crisis. This is no time for austerity.

(I can envision the debate in the halls of government around the world in which politicians declare their utter fealty to Ken Rogoff and tremble in fear at the prospect of violating his "90 percent" Rule. Yes, politicians that invariably benefit from spending schemes meant to gain votes are going to tremble in fear lest they disturb The Rogoff.)

Understand that Krugman defines "austerity" as anything short of a massive increase in government spending, with debt and inflation leading the charge, since the economy is not producing enough in order to pay for this spending with taxes. Whatever increases in spending that have come from the Obama administration, they are not enough, not nearly enough.

In Krugman's view, money coming from the sources of borrowing and creating new money is a near-perfect substitute for real wealth, as money borrowed at low interest rates essentially is "free" money and more spending will bring about more capital investment, although Krugman has made it clear elsewhere that capital investment is pretty much irrelevant in the scheme of things, except for the spending that comes with that investment.

Krugman also seems to believe that money borrowed essentially for consumption purposes really is no different than money borrowed for private capital investment. (J.M. Keynes in The General Theory surmised that changes in investment spending were what caused ups and downs of the business cycle, and those changes centered around the "animal spirits" of investors.) In the end, it is the spending and only the spending that matters.

Furthermore, as Krugman wrote last week, the real villains behind supposed austerity are the wealthy "one percent" who benefit from others being out of work. He continues today with that theme:

Is the story really that simple, and would it really be that easy to end the scourge of unemployment? Yes — but powerful people don’t want to believe it. Some of them have a visceral sense that suffering is good, that we must pay a price for past sins (even if the sinners then and the sufferers now are very different groups of people). Some of them see the crisis as an opportunity to dismantle the social safety net.

There really is no way to bridge the intellectual gap between Austrians and Keynesians. In the Keynesian view, the "social safety net," massive subsidies for "green energy," and other instances of government spending are the economic equals of private investment. Perhaps Obama said it best when he announced he was delaying action on the Keystone Pipeline and declared that an increase in unemployment benefits actually would be economically superior to investment in an oil pipeline, since new benefits (which would be financed by new borrowing) would fuel immediate consumer spending, as opposed to the spending that would accompany creation of Keystone.

(This is not an endorsement of the pipeline itself. Instead, I am demonstrating how Keynesians and fellow travelers like Obama see an entire economy in terms of nothing but current spending.)

In contrast to the Keynesian position, Bill McNabb of the Vanguard Group writes that what Robert Higgs has called "regime uncertainty" is behind the dearth of private capital investment:

Companies and small businesses are also dealing with the same paradox. Many are in good shape and have money to spend. So why aren't they pumping more capital back into the economy, creating jobs and fueling the country's economic engine?

Quite simply, if firms can't see a clear road to economic recovery ahead, they're not going to hire and they're not going to spend. It's what economists call a "deadweight loss"—loss caused by inefficiency.

Today, there is uncertainty about regulatory policy, uncertainty about monetary policy, uncertainty about foreign policy and, most significantly, uncertainty about U.S. fiscal policy and the national debt. Until a sensible plan is created to address the debt, America will not fulfill its economic potential.

Yes, Krugman derides such thinking as the "Confidence Fairy," but Krugman and the Keynesians want us to believe that as long as government borrows and spends, business investors are going to ignore the heated anti-enterprise rhetoric from the administration, and are not going to be affected at all by hostile regulators from the EPA and Department of Labor, and the new burdens of ObamaCare, not to mention all of the new taxes that Obama is demanding as part of any budget deal. Keynesians can speak all they want about businesses simply waiting for people to spend, but if they believe that the president wants to impose new policies that will negate any future profits, they are not going to invest at all.

As I see it, the biggest fairy tale of all is that government can bring back prosperity by borrowing, printing and spending and substituting Crony Capitalism for the real thing. There is a reason this economy wallows in depression, and empowering the Twin Fairies and a president who believes private enterprise is evil will magically turn around our fortunes. It is more likely that a poor maid can spin straw into gold.

Krugman's 1 Percent Fallacy

I know all readers are shocked, SHOCKED that Paul Krugman still is going off on the Reinhart-Rogoff paper, but today he ups the ante. Anyone who believes that setting off yet another unsustainable boom is not good policy actually is a people-hating moralist who sides with the Evil 1 Percent.

In other words, folks, it's Goldstein (or maybe "Scoldstein") time again. Yes, everyone knows that the way to "fix" the economy is for the government to borrow vast sums of money for consumption goods, and the spending that comes with that and printing money will give the economy enough "traction" to move on itself -- at least until the next boom runs out of steam and government has to repeat the process.

Krugman goes on to explain that anyone who might question this economic "wisdom" does so out of malevolence and (maybe) some ignorance or a false belief in some sort of economic "morality," writing:

...austerity maintained and even strengthened its grip on elite opinion. Why?

Part of the answer surely lies in the widespread desire to see economics as a morality play, to make it a tale of excess and its consequences. We lived beyond our means, the story goes, and now we’re paying the inevitable price. Economists can explain ad nauseam that this is wrong, that the reason we have mass unemployment isn’t that we spent too much in the past but that we’re spending too little now, and that this problem can and should be solved. No matter; many people have a visceral sense that we sinned and must seek redemption through suffering — and neither economic argument nor the observation that the people now suffering aren’t at all the same people who sinned during the bubble years makes much of a dent.

However, we find that this brand of economic fundamentalism really is nothing more than a dastardly plot hatched by the Evil 1 Percent (or maybe just the Evil One himself, namely Scoldstein):

What, after all, do people want from economic policy? The answer, it turns out, is that it depends on which people you ask — a point documented in a recent research paper by the political scientists Benjamin Page, Larry Bartels and Jason Seawright. The paper compares the policy preferences of ordinary Americans with those of the very wealthy, and the results are eye-opening.

Thus, the average American is somewhat worried about budget deficits, which is no surprise given the constant barrage of deficit scare stories in the news media, but the wealthy, by a large majority, regard deficits as the most important problem we face. And how should the budget deficit be brought down? The wealthy favor cutting federal spending on health care and Social Security — that is, “entitlements” — while the public at large actually wants to see spending on those programs rise.

You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do.

Could Krugman be engaging in...conspiracy theories? Read on:

Does a continuing depression actually serve the interests of the wealthy? That’s doubtful, since a booming economy is generally good for almost everyone. What is true, however, is that the years since we turned to austerity have been dismal for workers but not at all bad for the wealthy, who have benefited from surging profits and stock prices even as long-term unemployment festers. The 1 percent may not actually want a weak economy, but they’re doing well enough to indulge their prejudices.

And this makes one wonder how much difference the intellectual collapse of the austerian position will actually make. To the extent that we have policy of the 1 percent, by the 1 percent, for the 1 percent, won’t we just see new justifications for the same old policies?

This is a most interesting position he is taking. There are two sets of policies in which government policy directly enriches that "1 percent." The first involves the massive bank and financial bailouts that have been at the heart of the "austerity" policies imposed upon countries like Greece, Ireland, Portugal, and Spain, not to mention the continuing bailouts being pushed by the central banks of Europe, the USA, and Japan.

And guess what? Krugman supports the bailouts, even though he believes that they should be financed, at least in Europe, via booms, the very kind of booms that collapsed and created the financial crises in the first place. To put it mildly, Krugman demands another round of "hair of the dog" economics.

The second enrichment-of-the-wealthy policy is crony capitalism, but when David Stockman speaks out against this get-rich-by-being-politically-connected set of schemes, Krugman lambasts him for being a "scold." So, it seems that The Great One wants it both ways: cry crocodile tears about how government policies hurt the poor, and then endorse economic schemes that...hurt the poor.

What about the so-called morality play of which Krugman speaks? He is saying that Austrians believe that somehow booms are "sinful," and that if Wall Street and the rest of the economy get drunk, then it is time to hide the alcohol and everything else. No soup for you!!

Yet, what is it that Austrians have been saying? We hold that credit-fed booms, and especially the credit-fed booms that involve heavy borrowing for purchasing consumption goods, are going to run aground because they are not sustainable. The borrowing and investment patterns do not match consumer spending and saving preferences, which means that the boom runs out of steam on its own.

If the economy is to have a real recovery, then entrepreneurs must be able to find those assets that are potentially profitable and be able to move resources from lower-valued uses to higher-valued uses. But, the Krugman plan is to have government subsidize moving resources from higher-valued uses to lower-valued uses, and keep doing it until one day things magically turn around.

The housing boom crashed when it became apparent that most Americans could not afford the super-high prices created by the boom and when a wave of mortgage defaults hit the system, it went down. Krugman, apparently not appreciating the hard fact that a family making $50K a year probably cannot afford the payments on a house selling for $500K, says that trying to keep an asset bubble alive not only is economically feasible, but also the only moral policy that can be implemented.

Austrians are not calling for "austerity" for austerity's sake or because they want people to be thrown out of work, but rather because they believe the current sets of policies are not economically sustainable. The American economy cannot subsidize itself into prosperity via "green energy," nor can the economy continue to exist as a series of asset bubbles. Furthermore, while the Fed can mask the problems by purchasing financial instruments like mortgage securities in order to prop up their prices, it cannot repeal the Law of Demand or the Law of Scarcity.

And Austrians certainly are not "austerians" of the European variety. We simply are saying we don't believe in the Debt Fairy or the Inflation Fairy, and we don't need Scoldstein to convince us that we cannot rebuild an economy by having Ben Bernanke pull financial rabbits from his hat.

Krugman, on the other hand, fervently believes that even though debt piled up during the last boom, which finally ran aground, the way to create a stronger economy -- and somehow magically pay down some of the debt, at least in the future -- is for more of the same. So, who is practicing a religious fundamentalism?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Krugman: We Need a Debt Fairy to Accompany the Inflation Fairy

Paul Krugman has become the master of picking up the stray phrase and claiming that it is standard policy. The Wall Street Journal, for example, years ago used "bond vigilantes" in an editorial warning about taking on more debt, and now Krugman wants us to think that every editorial in the WSJ repeats the same error.

Someone in the Austrian camp said that large-scale inflation could be in our future, so now every Austrian is predicting hyperinflation all of the time. And since we don't have hyperinflation, why then every aspect of Austrian Economics must be totally wrong.

Today, Krugman is claiming that an error in an influential paper written by Carmen Reinhart and Kenneth Rogoff of Harvard is responsible for "destroy(ing) the economies of the Western world." According to the paper, if a government's debt exceeds 90 percent of a nation's GDP, then economic growth will tail off "sharply." However, some researchers looking at the data have concluded that the paper's methodology was fatally flawed and that there was no real 90 percent threshold, although higher levels of debt did correlate with lower growth rates.

According to Krugman, this paper was the deciding factor in "austerity" plans for governments in the West, and since "austerity" is bad, the paper played an important role in economic destruction. However, there is only one problem with that thesis: Krugman's commentary itself undercuts the paper's influence. He writes:

For the truth is that Reinhart-Rogoff faced substantial criticism from the start, and the controversy grew over time. As soon as the paper was released, many economists pointed out that a negative correlation between debt and economic performance need not mean that high debt causes low growth. It could just as easily be the other way around, with poor economic performance leading to high debt. Indeed, that’s obviously the case for Japan, which went deep into debt only after its growth collapsed in the early 1990s.

Over time, another problem emerged: Other researchers, using seemingly comparable data on debt and growth, couldn’t replicate the Reinhart-Rogoff results. They typically found some correlation between high debt and slow growth — but nothing that looked like a tipping point at 90 percent or, indeed, any particular level of debt.

OK, here is the problem. If economists from the start doubted its accuracy, then how can one also say that this paper -- THIS paper -- had such a powerful impact that most of the political leaders of the western world fully embraced everything these economists claimed and then designed their economic plans accordingly. This just does not make sense.

The U.S. Government continues to borrow at an astounding rate, Japan is openly attempting to print jillions of yen, and the European Central Bank and the Federal Reserve System are flooding the world with euros and dollars. Furthermore, as Bob Murphy already has pointed out, the only thing Krugman and other Keynesians deem to be acceptable as economic recovery is another boom, yet it was the unsustainable boom that got us into trouble in the first place.

Does Krugman think that this time governments will be better able to manage future financial bubbles or that booms won't run aground if Krugmanites are calling the shots? Somehow, I doubt seriously that another unsustainable boom is the answer.

So, we have Krugman claiming that what the world economies needed was more debt and, thus, also more printing of money. To put it another way, what Paul Krugman is claiming is that an Inflation Fairy is not enough. No, we also need a visit from the friendly Debt Fairy.

Paul Krugman Hates Money

I used to think that Paul Krugman just misunderstood money, but now I realize that he really hates the stuff. Hates it.

His recent blog post on Adam Smith and Bitcoin pretty much says it all:

There have been many good pieces written on the dubious economics of Bitcoin; I especially liked this one by Neil Irwin. One thing I haven’t seen emphasized, however, is the extent to which the whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression — a retrogression that Adam Smith would have scorned.

Smith actually wrote eloquently about the fundamental foolishness of relying on gold and silver currency, which — as he pointed out — serve only a symbolic function, yet absorbed real resources in their production, and why it would be smart to replace them with paper currency....

This is not so much a defense of Bitcoin, given I have not followed it and most likely will not be following it, but I do find that his post demonstrates his disdain for money itself. Why do I say that? I say it because he actually believes that mining for gold and silver which were used as money (and for other uses, too) was foolish and wasteful.

Money is a productive asset contra Krugman, for it enables exchanges to occur that would not have happened under a pure barter system. No one things it foolish to dig for silica or for copper or to expend resources to create capital. Yet, money being productive means that one can apply a marginal cost/marginal benefit analysis to it.

Krugman, quoting Smith, argues that paper money is better because one uses fewer resources to create it, but he fails to admit that it is much easier to inflate paper money than it is gold or silver. Yes, yes, all of the Keynesians will point out the Wonder and Majesty of Inflation, and how the Inflation Fairy will save our economy if we just crank out enough dollars.

Yet, inflation lowers the value of the marginal unit of money, and enough of that will lead to the demise of money altogether. (Zimbabwean dollar, anyone?) So, Krugman is saying that in order for money to be useful, governments need to print a lot of it and debase the whole thing, and if governments debase it enough, then the Inflation Fairy will wave her magic wand and make our economy whole again.

Update: Krugman continues his Bitcoin rant in his latest column. Paper money is superior to gold or anything else:

...paper currencies have value because they’re backed by the power of the state, which defines them as legal tender and accepts them as payment for taxes.

In other words, according to Krugman, things have value because government declares they have value. Furthermore, Krugman declares that Ben Bernanke's money printing is not "irresponsible" because we have not yet had hyperinflation. While it is true that the USA has not become Bolivia in the 1980s, nonetheless we are seeing big increases in the prices of food and fuel, two things that are sensitive to monetary changes, and we are witnessing what seem to be twin bubbles in housing and the stock market.

Once again, we are seeing the Krugman insistence that the Inflation Fairy is all we need. Just print money, borrow, and spend ourselves into prosperity. So far, it hasn't worked very well.

Lust for Lying

As I have written many times before, Paul Krugman no longer is an economist, if he ever was one. Instead, he is a political operative, someone who gives partisan political rants and pawns it off as Deep Economic Thinking.

His recent column on gold and people who favor it is more of the same, and he once again impugns the character of anyone who might disagree with him on the subject. It is not enough for Krugman to have an intellectual disagreement; no, to disagree with him is to be evil:

Conservative-minded people tend to support a gold standard — and to buy gold — because they’re very easily persuaded that “fiat money,” money created on a discretionary basis in an attempt to stabilize the economy, is really just part of the larger plot to take away their hard-earned wealth and give it to you-know-who.

No doubt, the "you-know-who" would be African-Americans or some other minority. You see, according to Krugman, to favor gold as money is to be a racist, someone who hates others. (Krugman is permitted to hate and spew out hatred because he is part of the Favored Political Classes that have the NYT stamp of approval.)

Also, anyone who does not believe in Krugman's Inflation Fairy does so out of hatred, prejudice, and evil.

Furthermore, to oppose Federal Reserve money printing and its QE Forever programs is also to be racist and diabolical. Why? Because Krugman says so.

Borrowing and Spending: The Way to Wealth

Hey, big spenders! It's Paul Krugman to the rescue! In the aftermath of David Stockman's recent New York Times article, Krugman is assuring his faithful readers that the massive debt financing of the Obama administration's spending spree is no big deal and that it is not real debt at all, figuratively speaking.

Why? According to Krugman: "...debt does not directly impoverish us, because it’s money we owe to ourselves."

What does he mean by that?

...think about the macroeconomics; did America really put itself $30 trillion in hock to someone else? No, some Americans lent to other Americans, which is a very different issue.

In other words, it essentially is free money, and the government can engage in this financial trick indefinitely without there being any negative consequences. Essentially, what Krugman is saying is that internal bond finance (mostly by the Federal Reserve System) essentially gets rid of the Law of Scarcity. Government, through money printing and issuance of bonds, is an unlimited fountain of wealth creation, and if there is inflation with all this, all the better, according to Krugman, because inflation will help U.S. exports, creating jobs and making us wealthier. (That is Krugman's Inflation Fairy at work.)

(Gee, I wish whoever is holding my mortgage would buy into this: I don't have to repay you! Don't you see, WE OWE IT TO OURSELVES!! Any harm that would accrue by my default would be perfectly internalized into a zero-sum outcome. I gain, you lose, America is not harmed at all!)

Understand that Krugman is the most decorated academic economist of our time. His face is all over the talk shows, and he is treated with the kind of reverence in academe once reserved for someone like Einstein. Yet, his central message is this: internal bond finance of government trumps scarcity. Yes, the guy actually believes this, or at least one can say he provides the Obama administration with cover for its destructive policies.

Remember, Obama declared that unemployment payments from the government create more wealth than does an oil pipeline, and that a welfare system actually makes the economy stronger and is not an economic burden, but a provider of wealth. Yes, for all of the supposed sophistication of American Progressives (and especially the ones that worship Krugman and Obama), it seems that in the end they confuse financial trickery with wealth creation.

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.

Krugman's Cyprus Solution: Seize Property and Print Money

In answer to the "What would you do about Cyprus if you were dictator?" question, Paul Krugman has shared his Nobel-level of economic intelligence with the rest of us, and it comes down to two actions: the Cyprus government should seize as much private property as it can, go off the euro and print its own currency, lots of it. Krugman writes:

...Cyprus should leave the euro. Now.

The reason is straightforward: staying in the euro means an incredibly severe depression, which will last for many years while Cyprus tries to build a new export sector. Leaving the euro, and letting the new currency fall sharply, would greatly accelerate that rebuilding.

He continues:

If you look at Cyprus’s trade profile, you see just how much damage the country is about to sustain. This is a highly open economy with just two major exports, banking services and tourism — and one of them just disappeared. This would lead to a severe slump on its own. On top of that, the troika is demanding major new austerity, even though the country supposedly has rough primary (non-interest) budget balance. I wouldn’t be surprised to see a 20 percent fall in real GDP.

What’s the path forward? Cyprus needs to have a tourist boom, plus a rapid growth of other exports — my guess would be agriculture as a driver, although I don’t know much about it. The obvious way to get there is through a large devaluation; yes, in the end this probably does come down to cheap deals that attract lots of British package tours.

Getting to the same point by cutting nominal wages would take much longer and inflict much more human and economic damage.

At one point he is correct in that the boom that Cyprus enjoyed by playing the role of bankster is over, kaput. (The biggest offender of banksterism, the government-owned bank Laiki, does seem to contradict Krugman's belief that government usually is a responsible entity and only private enterprise is reckless.) But the party is over, truly over, although Krugman seems to want us to believe that Cyprus can avoid consequences by engaging in yet more financial tricks and that a Cyprus with its own government-issued scrip will be just fine.

By the way, Krugman (as a true Keynesian) believes that no one will notice that by getting out of the euro and printing its own money (and converting the deposits in its banks into Cyprus-scrip) that Cyprus has gone bankrupt. In reality, everyone there still will be getting a major head-shaving. We are talking about a currency that would be as popular in world markets as the Zimbabwe dollar at the height of that country's hyperinflation. Imports would fall to near-zero, to be paid only by the euros and other currencies in the seized bank accounts.

In other words, we are not looking for a happy ending. On one side, Cyprus and its people could face the truth, take the up-front medicine, and then try to create a real economy producing things people actually might want to purchase. On the Krugman side, Cyprus goes on with its "let's pretend" game of slashing real wages through inflation and continuing the Big Lie that the only problem there is a currency problem.

My sense is that Krugman's easy solution might be less attractive than what he might predict. First, given the proclivity of the government there to seize the property of others, I doubt seriously that the government would offer a true market exchange rate when those hordes of British tourists invade Cyprus looking for the Good Deal. Instead, we will see the infamous Third World "dirty rates" that are notorious elsewhere.

Second, people who are the victims of outright theft -- and that is what Krugman has been advocating -- are not going to take their situations lightly. Tourists are not going to want to come to a place where mobs are pillaging and burning -- and robbing tourists. (Well, completing the robbery process that would start when the government cheated on the exchange rates.)

The best way to avoid a crisis is not to create one in the first place. Booms created through monetary tricks and inflation have a way of blowing up, and starting a second boom to replace the first is not as easy as Krugman thinks it is.

Robert Murphy notes that Krugman's "solution" is to "ignite a boom" in place of the boom that has crashed. Of course, Krugman does not come clean and tell us what will happen when that boom inevitably crashes. No doubt, his "solution" is to create yet another boom, but in reality, financial trickery has a way of being exposed and at some point, not only is the party over, but people who have been fed a diet of inflation become so addicted to it that they cannot and will not do what is necessary to fix their economies.

In the end, Keynesianism is not about long-term solutions. It is about monetary manipulation in hopes that something -- Anything! -- can hide the fact that inflation is destroying the economic fundamentals. But to the homogeneous-factors Keynesians, there are no fundamentals, just the printing press and government, lots of government. Krugman's Inflation Fairy turns out to be a wicked witch after all.

Who is Flimflaming Whom?

Folks, things are getting serious. Paul Krugman and the Progressives have found the solution to all of our problems: spend money now, borrow, print, and then tax the rich (even higher) in the future and stick it to business. We'll all get rich!

You see, this is what Krugman calls a "serious" proposal. Anything that is grounded in reality -- you know, that fact-based world -- is what The Great One calls a "flimflam." First, however, he had to take his usual shot at Paul Ryan and the budget Krugman attacks. (Not that such things are news. While I have no plans to shill for Ryan, nonetheless I would say that what Ryan does is much more serious than Krugman's fantasy of spending ourselves into prosperity.)

However, one has to realize what Krugman calls a "serious" proposal: the budget plan recently released by the Congressional Progressive Caucus, which is a nice way of describing a group of people who believe in near-total State control of every aspect of your life. (Except abortion on demand, of course, as only that should be left out of any governmental regulation, according to "Progressives.")

Called "Back to Work," Krugman describes the plan in his own words:

But there’s a plan that does: the proposal from the Congressional Progressive Caucus, titled “Back to Work,” which calls for substantial new spending now, temporarily widening the deficit, offset by major deficit reduction later in the next decade, largely though not entirely through higher taxes on the wealthy, corporations and pollution.

Yes, we are supposed to believe that after the government spends trillions more on "job creation" (which is yet another euphemism for "massive public works" that socialists are fond of demanding), sometime in the next decade Congress will get around to trying to figure out how to pay for all of this. This "serious" proposal has the usual stuff about public works, "green energy," and all of the things that Obama has been pushing already. And there is yet another promise that socialist medical care will both lower costs and improve delivery.

What I do find interesting is that Krugman declares the following when describing another budget proposal, this one by Senate Democrats who apparently are not "Progressive" enough for Krugman:

...the Senate plan calls for further deficit reduction, through a mix of modest tax increases and spending cuts. (Incidentally, the tax increases still fall well short of those called for in the Bowles-Simpson plan, which Washington, for some reason, treats as something close to holy scripture.) But it avoids large short-run spending cuts, which would hobble our recovery at a time when unemployment is still disastrously high, and it even includes a modest amount of stimulus spending.

If unemployment is "disastrously high," then one would have to say that President Obama's programs then have had "disastrous" results. However, Krugman has been shilling for Obama for the past five years and continues to shill for him. Yet, he describes the results of what Obama has done to lower unemployment as "disastrous"? Very interesting.

In other words, this is more of Krugman's "heads I win, tails you lose" reasoning. And when it comes to "serious" budget proposals (as though Congress and the president are going to agree on a budget when that has not occurred for many years), the most serious is the one that spends and borrows now and then 10 years from now leaves to a future Congress as how to pay for all of it. No doubt, the Inflation Fairy is going to have to do a lot of work to pay for this one.

The Federal Deficit is a Symptom, Not a Disease

Member of Congress are infamous for attacking symptoms of a problem instead of going straight to the heart of the disease, and the current "discussion" on the massive federal deficits are yet another case in point. While I do find myself in some agreement with Paul Krugman on the issue of deficits in his most recent column, nonetheless I also find that once again Krugman sets up the straw man argument and falsely portrays himself as a lonely voice of sanity.

I will say it again; the federal budget deficits are symptoms of the larger problem of federal spending and lawmakers and economists should not be fixated upon them while ignoring more important issues. While I agree with Krugman that as the economy improves, deficits will grow smaller, I contend that the Keynesian prescription -- spend like crazy during the recession -- actually has made the economy worse and has prevented a more robust recovery.

Then there are following statements like this that make me scratch my head in disbelief:

What’s really remarkable at this point, however, is the persistence of the deficit fixation in the face of rapidly changing facts. People still talk as if the deficit were exploding, as if the United States budget were on an unsustainable path; in fact, the deficit is falling more rapidly than it has for generations, it is already down to sustainable levels, and it is too small given the state of the economy.

Yes, readers are told simultaneously that (a) the deficit is dwindling because the economy is improving and, (b) the deficit needs to be bigger to help the economy. This is the classic non sequitur in which (a) does not imply (b). His logical chain, I believe, runs as such:

• Deficits should be large if the economy is depressed because extra spending (as long as the revenues come from borrowing or outright money printing or taxes on the "idle hoards" of the rich) boosts the economy, as more deficit spending ultimately will lead to less deficit spending;
• The current federal deficit is dwindling even as government spending increases because the U.S. economy is rapidly improving;
• Therefore, the current U.S. federal deficit is too small.

The idea behind Krugman's thinking here is that the U.S. economy has been mired in a "liquidity trap," a set of circumstances in which individuals as a whole are mired in a perverse Nash Equilibrium in which no one will seek better gains from trade because no one else is willing to do the same. If government does not try to break the logjam with massive new spending (no worry of where to spend, just spend), then the economy will permanently be stuck at a miserable steady-state of high unemployment and low output. Only new government spending can change the circumstances.

Keep in mind that U.S. Government policies before 1929 pretty much adhered to what Krugman says not to do, yet the economy always recovered from downturns. Only from 1929 to 1940 did the government actively intervene, and we call that era the Great Depression, yet today we are told that the New Deal programs actually ended the Depression, which clearly is not true.

Murray Rothbard wrote about the penchant of governments to try to internally bring prosperity by more spending, and he predicted (accurately) that the programs would fail. This section from America's Great Depression is a very poignant commentary on what has been done in the past five years:

If government wishes to see a depression ended as quickly as possible, and the economy returned to normal prosperity, what course should it adopt? The first and clearest injunction is: don't interfere with the market's adjustment process. The more the government intervenes to delay the market's adjustment, the longer and more grueling the depression will be, and the more difficult will be the road to complete recovery. Government hampering aggravates and perpetuates the depression. Yet, government depression policy has always (and would have even more today) aggravated the very evils it has loudly tried to cure. If, in fact, we list logically the various ways that government could hamper market adjustment, we will find that we have precisely listed the favorite "anti-depression" arsenal of government policy. Thus, here are the ways the adjustment process can be hobbled:

1. Prevent or delay liquidation. Lend money to shaky businesses, call on banks to lend further, etc.


2. Inflate further. Further inflation blocks the necessary fall in prices, thus delaying adjustment and prolonging depression. Further credit expansion creates more malinvestments, which, in their turn, will have to be liquidated in some later depression. A government "easy money" policy prevents the market's return to the necessary higher interest rates.


3. Keep wage rates up. Artificial maintenance of wage rates in a depression insures permanent mass unemployment. Furthermore, in a deflation, when prices are falling, keeping the same rate of money wages means that real wage rates have been pushed higher. In the face of falling business demand, this greatly aggravates the unemployment problem.


4. Keep prices up. Keeping prices above their free-market levels will create unsalable surpluses, and prevent a return to prosperity.


5. Stimulate consumption and discourage saving. We have seen that more saving and less consumption would speed recovery; more consumption and less saving aggravate the shortage of saved-capital even further. Government can encourage consumption by "food stamp plans" and relief payments. It can discourage savings and investment by higher taxes, particularly on the wealthy and on corporations and estates. As a matter of fact, any increase of taxes and government spending will discourage saving and investment and stimulate consumption, since government spending is all consumption. Some of the private funds would have been saved and invested; all of the government funds are consumed. Any increase in the relative size of government in the economy, therefore, shifts the societal consumption-investment ratio in favor of consumption, and prolongs the depression.


6. Subsidize unemployment. Any subsidization of unemployment (via unemployment "insurance," relief, etc.) will prolong unemployment indefinitely, and delay the shift of workers to the fields where jobs are available.

Both the Bush and Obama administrations have done all of these things in spades, yet even now Krugman complains that we need larger budget deficits (although the current shrinking deficit reflects economic improvement). The above suggestions definitely set Keynesians to fits of apoplexy, but they pretty much have summed up what the government did before, and the economy always recovered.

The Keynesian response always is the same: we haven't spent enough money. How much is enough? The Keynesians will let us know when we have reached that point - but we haven't reached it yet.

Krugman is correct; the issue is not finding ways to cut the deficit per se, as much of the deficit is due to the condition of the economy. However, as Rothbard so clearly stated above, the massive government interventions have not helped the economy, but instead have slowed the recovery and have made it much harder for entrepreneurs to find those lines of production that are going to be profitable.

The fixation should not be on balancing the budget, both of us believe. However, we part company when we look at how to deal with the issue at hand.

I would ask this final question: If what Krugman has claimed earlier is true - that the U.S. Government's response to the crisis has essentially been one of "austerity" - then how is the economy growing fast enough to shrink the deficit? Furthermore, let me ask if this quote from Krugman even makes "Keynesian" sense:

“People are exhausting their savings,” he (Krugman) said. “People are running out of hope.”

Isn't the destruction of savings during a recession a key to bringing back prosperity? How can this be a sign of "losing hope" if the actions actually stimulate consumption, and every good Keynesian knows that consumption actually is the form of production that creates real prosperity? Furthermore, are we not supposed to be cheering on the Inflation Fairy as it destroys savings and raises real costs to individuals? Inquiring non-Keynesians really would like to know.

Is Paul Krugman Really a Martyr?

Paul Krugman operates with numerous themes, although for the most part they revolve around his belief that (1) the U.S. economy is in a "liquidity trap," and (2) government must spend, borrow, raise taxes (ostensibly to seize "idle" money holdings), print money, and spend some more. Anyone who does not agree, according to Krugman, is not worthy of existence and certainly should not be allowed to make any public utterances.

(The Austrians, in Krugman's view, are nothing more than an evil cult who apparently are trying to foist things like the Law of Scarcity and Marginal Utility -- What? Marginal Utility? -- upon the world. Everyone but the Austrians knows that government can create prosperity by printing and borrowing.)

Lately, however, Krugman has fastened himself to another theme: Paul Krugman, martyr. Yes, Krugman is fashioning himself as the Lonely Voice In The Wilderness, the ignored prophet, the abused Holy Man, and now the Last Hippie (or at least until Ben Bernanke testified to Congress that showering the world with freshly-printed dollars was sound economic policy -- that made Bernanke an Honored Hippie).

To be honest, I find this amusing. Martyrs do not receive Nobel Prizes, nor do Sunday television news shows compete literally every week for the man's appearance. Nor do martyrs make millions of dollars a year, and martyrs certainly do not have positions on a faculty of one of the world's top-ranted universities.

What Krugman seems to mean is that if anyone -- Anyone -- publicly criticizes what he is saying, then whoever had the temerity to utter such blasphemies also has inflicted a grievous wound upon The Great One and has thrown him into the pit of martyrdom. Those who refuse to believe in the Inflation Fairy or who would deny that governments can create more wealth by forcing up real costs have no place in the discussion of economics.

Ben Bernanke, Inflationist

Hail, Ben Bernanke! He has received praise from on high, or at least from someone on the Princeton faculty (lavishing accolades upon the former chair of the economics department). Paul Krugman has taken notice that Bernanke isn't about to be the skunk at the party. No, Uncle Ben wants us and our government to spend as though there is no tomorrow. (And with Bernanke running things at the Fed, there very well might not be a tomorrow.)

Krugman compares Bernanke's call for more inflation and expansion of government spending with the earlier opposition some people had to the war in Iraq. (The idea here is that having the courage to speak out against a war in its early stages when the war was popular is the same as having the "courage" to call for the Fed to print more money.)

That's right. Krugman wants us to believe that it takes real courage for someone to demand that the government pretend as though the economy is doing well by borrowing, taxing, printing, and, of course, spending. (Of course, wars entail government spending, lots of government spending, so how could a Keynesian be against that?) Yes, yes, Ben Bernanke also believes in the Inflation Fairy.

In reading Krugman and now Bernanke, I have come to understand that these men see no downside at all in runaway government spending. There is no transfer of wealth from individuals to the state and then to politically-connected people; no. government spending in and of itself creates wealth. Thus, when governments spend money, they actually are producing consumption (or something like that).

Krugman gives all of the usual accolades to government spending (We don't have near enough of it), but my favorite portion of his column is what follows:

The point is not that Mr. Bernanke is an unimpeachable source of wisdom; one hopes that the collapse of Alan Greenspan’s reputation has put an end to the practice of deifying Fed chairmen. Mr. Bernanke is a fine economist, but no more so than, say, Columbia’s Joseph Stiglitz, a Nobel laureate and legendary economic theorist whose vocal criticism of our deficit obsession has nonetheless been ignored. No, the point is that Mr. Bernanke’s apostasy may help undermine the argument from authority — nobody who matters disagrees! — that has made the elite obsession with deficits so hard to dislodge.

And an end to deficit obsession can’t come a moment too soon. Right now Washington is focused on the idiocy of the sequester, but this is only the latest episode in an unprecedented run of declines in public employment and government purchases that have crippled our economy’s recovery. A misguided elite consensus has led us into an economic quagmire, and it’s time for us to get out.

So,there you have it. The CAUSE of the current economic malaise is the lack of government spending. Now, since government spending comes the wealth government confiscates from private individuals who actually produce it might lead us to think that the reason government spending is not as high as Krugman wants it to be is that the economy is depressed. If the economy were doing better, government would be able to take more in taxes and, thus, increase its spending.

In Wonderland, however, things are backward. Government spending creates the wealth that comes from private firms. The more government spends, borrows, prints, and takes in taxes, the wealthier all of us become. Why? Because Krugman, Joe Stiglitz, and now Ben Bernanke tell us that is so.

Kick That (Keynesian) Habit

One think I do like about Paul Krugman's columns extolling Keynesian theory is that they are predictable and easy to follow. I cannot say they really constitute economics, given that Krugman seems to believe that government can eliminate the Law of Scarcity if the economy allegedly is in a "liquidity trap," but at least one can follow them.

Krugman's latest creation, "Kick That Can," is more of the same. The Evil Republicans want to downsize spending, ostensibly to reduce it to the size where it can be drowned in a bathtub, and then throw the economy into depression where there will be poverty, starvation and, of course, weeping and gnashing of teeth:

While it’s true that we will eventually need some combination of revenue increases and spending cuts to rein in the growth of U.S. government debt, now is very much not the time to act. Given the state we’re in, it would be irresponsible and destructive not to kick that can down the road.

Start with a basic point: Slashing government spending destroys jobs and causes the economy to shrink.

This really isn’t a debatable proposition at this point. The contractionary effects of fiscal austerity have been demonstrated by study after study and overwhelmingly confirmed by recent experience — for example, by the severe and continuing slump in Ireland, which was for a while touted as a shining example of responsible policy, or by the way the Cameron government’s turn to austerity derailed recovery in Britain.

He adds:

But aren’t we facing a fiscal crisis? No, not at all. The federal government can borrow more cheaply than at almost any point in history, and medium-term forecasts, like the 10-year projections released Tuesday by the Congressional Budget Office, are distinctly not alarming. Yes, there’s a long-term fiscal problem, but it’s not urgent that we resolve that long-term problem right now. The alleged fiscal crisis exists only in the minds of Beltway insiders.

In other words, it really does not matter that the debts the U.S. Government has accumulated -- especially in the current downturn -- cannot and will not be repaid. After all, the government can print whatever it wants or have the Fed buy and hold all its debts and if bondholders are paid back with dollars worth a tenth of what they were when the bondholders purchased those bonds, well, it is good for exports!

The Keynesian paradigm always points to a non-existent future in which a rush of present spending will produce magical "traction" for the economy, the product of Krugman's Inflation Fairy. Unfortunately, Krugman refuses to admit that what he touts as new spending, or "stimulus," actually is nothing more than a thinly-disguised wealth transfer. Yes, we can transfer spend ourselves into prosperity.

We don't need to "kick the can" down the road; we need to kick the Keynesian habit.

Paul Krugman: The Real Friend of Fraud

One of Paul Krugman's constant themes is that financial regulation, if done by people who properly have been schooled as Democrats, will guard against fraud, and he is at it again in his most recent column. The flip side of that point, of course, is that Republicans want fraud to happen because they are evil and beholden to Wild West Capitalism.

Before I deal with Krugman's own enthusiastic support for outright financial fraud, let me address one point that he claims: Barney Frank had absolutely no influence regarding the collapse of Fannie and Freddie. Krugman writes:

How can the G.O.P. be so determined to make America safe for financial fraud, with the 2008 crisis still so fresh in our memory? In part it’s because Republicans are deep in denial about what actually happened to our financial system and economy. On the right, it’s now complete orthodoxy that do-gooder liberals, especially former Representative Barney Frank, somehow caused the financial disaster by forcing helpless bankers to lend to Those People.

In reality, this is a nonsense story that has been extensively refuted; I’ve always been struck in particular by the notion that a Congressional Democrat, holding office at a time when Republicans ruled the House with an iron first, somehow had the mystical power to distort our whole banking system. But it’s a story conservatives much prefer to the awkward reality that their faith in the perfection of free markets was proved false.

This is one of those True Krugman Moments when he claims that (1) Frank had absolutely no influence in Congress even though he was the Democrat's Congressional point man on banking and financial matters; (2) the government never attempted to have large sums of money funneled to borrowers in the "sub-prime" category; and (3) the financial system that existed during the housing boom was pure free market without a hint of government intervention anywhere.

(Given Krugman's belief that Democrats are pure of heart and never would engage in financial fraud, I am surprised that he does not go after Jon Corzine, who was responsible for more than a billion dollars in very questionable losses for investors. Oh, I forgot. Corzine was a Democrat politician; he lost the money honestly trying to help his dear clients. And Bernie Madeoff also was a Democrat.)

As that famed right-wing publication, The Boston Globe, declared in a feature on Frank:

When US Representative Barney Frank spoke in a packed hearing room on Capitol Hill seven years ago, he did not imagine that his words would eventually haunt a reelection bid.

The issue that day in 2003 was whether mortgage backers Fannie Mae and Freddie Mac were fiscally strong. Frank declared with his trademark confidence that they were, accusing critics and regulators of exaggerating threats to Fannie’s and Freddie’s financial integrity. And, the Massachusetts Democrat maintained, “even if there were problems, the federal government doesn’t bail them out.’’

Now, it’s clear he was wrong on both points — and that his words have become a political liability as he fights a determined challenger to win a 16th term representing the Fourth Congressional District. Fannie and Freddie collapsed in 2008, forcing the federal government to buy $150 billion worth of stock in the enterprises and $1.36 trillion worth of mortgage-backed securities.

Now, I absolutely agree that Frank did not cause the meltdown nor did he cause the collapse of Fannie and Freddie, but even though his party did not hold a majority in the House of Representatives, nonetheless he did have influence and lots of it. (The influence comes out in the committee action, not the actual vote on the floor.) Furthermore, I do not recall any prominent Democrats during that period calling for lending restrictions on people with bad credit.

The blame for the meltdown is bipartisan, although Krugman will never admit to such. As for the Consumer Protection Bureau which he champions throughout the column, I do not believe that Washington and the Democrats are ready to jettison the very tenets of political liberalism and call for strict lending standards and to shut out people with bad credit from mortgage markets. That really would be a first!

Krugman's enthusiastic support for massive fraud, however, comes in his enthusiastic calls for inflation and lots of it, and inflation is a fraudulent way to repudiate debt (although Krugman has written that such a method is perfectly moral). As I have pointed out before, Krugman has openly agitated for government financial measures such as the Fed purchasing worthless financial instruments in order to jack up their market prices (if a private firm does the same, it is called "manipulation," which is against the law).

The difference is in the sheer numbers. While the meltdown featured head-scratching decisions by banks, nonetheless the actual losses due to the Corzine-Madeoff kind of fraud (where people actually set out to deceive others) were small compared to the over-the-cliff losses that came from lots of people jumping into the housing market because it was hot.

Krugman, like most Keynesians, believes that regulators have excellent foresight and know beforehand what lines of production will be profitable and which will not. (One remembers the Democrats pushing "industrial policy" in the 1980s, a brainchild of Bill Bradley and Gary Hart, both of whom believed that government agencies should target upcoming industries and then subsidize them. We see how well that works with "green energy.")

As Murray Rothbard once put it, if regulators actually had the kind of knowledge Krugman believes they have, then they would be in the markets themselves making lots of money employing their great foresight instead of making paltry government salaries. Instead, we find that regulators mostly will try to block any innovation, since they never will get credit for market successes, but surely will be blamed for market failures.

When it comes to fraud, however, keep in mind that it was the players in the market that realized Madeoff was running a scam, not the regulators. In fact, the lack of insight by regulators actually permitted Madeoff to run his operation longer than it should have gone, as people tended to think that if the regulatory agencies were OK with the guy, then he must be on-the-level.

The kind of fraud I fear, however, is not the fraud of some people being scammed in the financial markets. The greater and more dangerous fraud is that which Krugman heartily endorses: government money printing and the destructive inflation that follows it. Krugman's Inflation Fairy is as dishonest as Bernie Madeoff and much more dangerous.

"Deficit Hawk Down," Financial Delusion Up

Yes, readers, I do agree with Paul Krugman when he says that the federal budget deficit is not the central fiscal issue that the U.S. Government and the U.S. economy face today. However (and you KNEW there would be a "however" coming), we disagree for opposing reasons.

In his latest column, Krugman attacks what he calls the "deficit hawks" (thus, the clever title for the column) who he says have always been wrong on the real effects of federal budget deficits:

Mr. Obama’s clearly deliberate neglect of Washington’s favorite obsession was just the latest sign that the self-styled deficit hawks — better described as deficit scolds — are losing their hold over political discourse. And that’s a very good thing. Why have the deficit scolds lost their grip? I’d suggest four interrelated reasons.

His reasons are as follows:

• A true Greece-style meltdown has not happened; therefore, it cannot happen here;
• Deficit spending as a share of GDP supposedly has started to decline, and the "deficit hawks" had predicted a reverse secular trend, i.e. recent deficits have become slightly smaller than previous years;
• Advocates of government "austerity" are wrong because "austerity" did not immediately bring about full economic recovery where it was practiced;
• The anti-deficit agenda really was a not-so-secret attempt by Evil Republicans to impose an unrelated evil political agenda.

 There is what I would call a "fifth reason" that Krugman says is a reason why the deficit hawks should not worry: the deficit is a good thing, not bad:

...it was, in fact, a good thing that the deficit was allowed to rise as the economy slumped. With private spending plunging as the housing bubble popped and cash-strapped families cut back, the willingness of the government to keep spending was one of the main reasons we didn’t experience a full replay of the Great Depression.

Whether or not one believes that the government's bank bailouts and subsequent "stimulus" spending prevented a return to 1933 is not answerable because one would have to prove a negative. What we are supposed to believe, however, is that "trickle-down" economics works when the government is in charge.

What happens? The government gives money or financial credits to politically-connected financial institutions and everyone pretends that the market values of the assets of those institutions are higher than what everyone understands is the case. (If you try to do this in private, the government will charge you with "fraud." However, if it is done by the government, it is called "saving the economy.")

Under outright stimulus, the government directly issues funds to politically-favored groups and the individuals then spend the money with the idea being that the good effects will "trickle down" to the rest of us who do not have the same political connections. Somehow, after we spend what money is left over, the effects will be such that the economy will magically have "traction" and it will move forth on its own.

Moreover, as Krugman argues, since the Fed has managed to push interest rates for U.S. securities to near-zero, then there is almost no opportunity cost for borrowing (and more borrowing). As he declared in a blog post a while back, it is "free money." Because the Fed and the Social Security Administration own the largest single blocs of U.S. debt, we "owe it to ourselves" which apparently means that there are no problems associated with the high debt of the U.S. Government.

What puts the USA in the "catbird's seat" (as opposed to other countries like Greece) is that this country has its own currency, which means that the government essentially can pay its bills with printed money, and since the U.S. Dollar effectively has been the "world currency" for a long time, we can get away with it, while countries like Zimbabwe could not. Unlike Greece, which is on the euro, we can print and devalue forever, and the rest of the world simply has to take it.

The federal deficit is not the problem in and of itself; instead, it is a symptom of a much larger fiscal problem, and that is that the U.S. Government is spending at rates that impose huge burdens on everyone else. In Krugman's Wonderland, government spending always is a net plus, especially when the economy is down.

(Yes, I know that Krugman calls for "austerity" during a boom, but in reality, politicians spend even more if they think the funds are available. Furthermore, I don't recall hearing Krugman call for massive cuts in government spending during the last few years of the Clinton Stock Bubble or during the Bush Housing Bubble.)

Furthermore, in Wonderland, those who are productive are the real "takers," entrepreneurs are irrelevant to a growing economy, the most desired industries are those that receive massive subsidies, and it is the people receiving direct government benefits that are most likely to take the entrepreneurial risks that our economy needs to grow. (Face it, that was the gist of Barack Obama's "Progressive" inauguration speech, and Krugman himself declared that there was "a lot for progressives to like" in that speech.

So, if the government spends enough money, if enough people can receive new benefits that they will spend quickly, if the spending "trickles down" to those not receiving the direct benefits, if the government continues to massively subsidize politically-favored "green energy" firms and "green" research, if the Fed continues to keep interest rates low, if the government continues to print money, if the "Inflation Fairy" does its magic, and if everyone just believes in the Greatness of Barack Obama, we someday will have real prosperity. That is the financial delusion that apparently rules in "elite" academic and political economics these days.

The Big Shill

Readers of this blog know that I believe academic economists ought not to be shills for politicians and bureaucrats and let one's writings and pronouncements be infected with political partisanship. I have made that point many times and try to hold to it myself with everything that I write. (And that includes Ron Paul, even though I agree with him on many things. Nonetheless, academic economists should be willing to keep their distance, even from people they like.)

Second, academic economists ought to be able to differentiate between political "victories" by a politician and the economic outcomes. Unfortunately, Paul Krugman in this column manages to violate to principles and once again identifies himself as a shill, a lowly political operative.

It is no secret that Krugman worships Franklin Roosevelt and the New Deal, holding it to an almost mystical standard. That FDR's New Deal attempted to organize the entire U.S. economy into a series of cartels, destroyed agricultural products despite widespread hunger (the destruction financed by a tax on agricultural products), criminalized the kosher killing of chickens, and unleashed petty bureaucrats to burden entrepreneurs with useless rules is utterly irrelevant to Krugman. In fact, he wants us to believe that the New Deal -- which actually kept unemployment higher than it would have been had FDR just stuck to engaging in his adulterous liaisons -- in essence created an economic miracle: "...the New Deal had a revolutionary impact, empowering workers and creating a middle-class society that lasted for 40 years...."

In other words, Krugman wants us to believe that no U.S. "middle class" existed before the New Deal and that by empowering the state to move well beyond previous boundaries, FDR accomplished what no one ever before was able to do. Now, I have no idea how the New Deal could have done that, except that Krugman thinks that empowering labor unions and vastly expanding what truly is an unproductive bureaucracy managed to increase overall wealth in the U.S. economy.

This defies the imagination. The New Deal, from its inception, openly attempted to throw sand in the wheels of production and, thus, result in less wealth in the form of goods and services. Destruction of crops destroyed wealth; creating and maintaining cartels destroyed wealth. This is fundamental, yet Krugman turns the whole thing upside down by claiming that the use of violence (which enabled unions to gain higher wages for themselves -- at the expense of non-union workers) and the expansion of the bureaucracies, which are funded by taxpayers who are forced to give up some of their own wealth, somehow made all of us wealthier.

Krugman's gives himself away by telling readers that making some people poorer somehow is good for the economy. He writes:

That said, health reform will provide substantial aid to the bottom half of the income distribution, paid for largely through new taxes targeted on the top 1 percent, and the “fiscal cliff” deal further raises taxes on the affluent. Over all, 1-percenters will see their after-tax income fall around 6 percent; for the top tenth of a percent, the hit rises to around 9 percent. This will reverse only a fraction of the huge upward redistribution that has taken place since 1980, but it’s not trivial.

There is a huge problem here; Krugman explains that the new tax laws will make a portion of our population less well-off, but he does not adequately explain how that benefits the rest of us. Yes, ObamaCare allegedly will make it easier for some people to have access to health insurance, but ObamaCare itself, with all of its new rules, regulations, and criminal penalties, will result in less medical care overall being made available. Even Krugman admits that the health care law created a "Rube Goldberg device of regulations and subsidies...."

Is it my imagination, or is Barack Obama a magician? One would think that by adding rules and procedures (which, according to the Law of Opportunity Cost will increase overall costs), the government is going to force the medical care "supply curve" to the left (to use economists' jargon). How this is a "victory" for the economy, I have no idea.

In Krugman's view, making one group of people less-well-off is the same thing as making everyone else better off, yet he offers no mechanism other than pure transfer payments. However, transfer payments only distribute existing wealth and they create no new wealth. This is the classic "Zero-Sum Economy," and if that is Krugman's view of things, then how does he explain the fact that overall standards of living for everyone are substantially higher than they were during the New Deal. For that matter, they are substantially higher for everyone than they were during Ronald Reagan's presidency.

I would ask anyone to explain how Paul Krugman's theory of political economy actually demonstrates any causal relationship between New Deal and "Big Deal" policies and an overall rising standard of living. Krugman never has explained how an economy might grow in the first place, except to claim that inflation somehow creates economic miracles. (But even there, he does not explain a causal relationship between inflation and real economic growth.)

Furthermore, his explanation of "capital theory" really is nothing more than a spending theory. The new Apple iPhone, he surmised, might boost the economy because people will buy new ones. Come again? Does the iPhone do away with the Law of Opportunity Cost?

In the end, what Krugman is reduced to shilling for Barack Obama because he is a Democrat who has vastly expanded the reach of the State. And according to Krugman, an expanded and more powerful State through coercion makes us all richer. I'm not sure how that happens, but maybe Krugman will explain everything in a future column.

Japan Steps in It

What do you know? Japan now is out of Paul Krugman's doghouse, and all it took was some inflation. Writes Krugman:

For three years economic policy throughout the advanced world has been paralyzed, despite high unemployment, by a dismal orthodoxy. Every suggestion of action to create jobs has been shot down with warnings of dire consequences. If we spend more, the Very Serious People say, the bond markets will punish us. If we print more money, inflation will soar. Nothing should be done because nothing can be done, except ever harsher austerity, which will someday, somehow, be rewarded.

But now it seems that one major nation is breaking ranks — and that nation is, of all places, Japan.  

Even though Japan's massive Keynesian spending plan in the 1990s did not prevent the "lost decade," nonetheless it seems that the Japanese are ready for their own version of Phase II. (True to form, Krugman claims that Japan's trouble was that it did not build enough roads and bridges to nowhere to have a sustained recovery.)

I'll let Krugman go on with his newest version of the magic of inflation, but I would like to share a great article on the Japanese experience, written by Doug French. Japan, says French, engaged in massive amounts of malinvestment during the 1980s, but the government did everything it could to keep the necessary liquidations from happening:

Between 1992 and 1995, the Japanese government tried six stimulus plans totaling 65.5 trillion yen and they even cut tax rates in 1994. They tried cutting taxes again in 1998, but government spending was never cut. Also in 1998, another stimulus package of 16.7 trillion yen was rolled out nearly half of which was for public-works projects. Later in the same year, another stimulus package was announced, totaling 23.9 trillion yen. The very next year an ¥18 trillion stimulus was tried, and, in October of 2000, another stimulus for 11 trillion was announced. As economist Ben Powell points out, "Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession," with Japan's nominal GDP growth rate below zero for most of the five years after 1997.

 That, folks, means a lot of bridges to nowhere. Unfortunately for Japan, when this latest experiment with inflation and new government spending provides results similar to what happened before, Krugman will claim that the problems was a lack of spending and inflation. I doubt seriously that the Inflation Fairy will grant Japan or Krugman their wishes: a booming economy.