Paul Krugman and Comment Policies

A lot of fuss has been stirred up this past week with Paul Krugman's announcement that he was changing the comment policies on his blog to limiting the comments to three inches. After the hostile response by some, Krugman basically said: "Hey, it's my blog and if you don't like it, you can lump it."

A number of people have sent me the recent American Thinker piece on this change in policy, although I must say that I am reluctant to embrace the claim that Krugman is doing this out of sheer paranoia. I don't know, and, frankly, since I rarely write in his comments section, I don't care what his comment policies might be.

On a number of occasions, my own comments section has featured duels between people who agree with Krugman and those who disagree, and once in a while I join in the discussion, although I usually limit my comments to the actual blog post. I figure that the comments section is for people to express their own views and, frankly, to have fun.

So, unless a comment is obscene or potentially libelous, I tend to let it stand, as I am not wounded by disagreements nor do I worry that some people think I am an idiot. When one makes public statements, as I have done, people will disagree and that is OK.

I do think that Krugman has seemed angrier on his blog lately, and certainly has been even more partisan. As an academic economist, I tend to believe that economists should be above political rhetoric, even if we can support political candidates. My hope is that my blog or other articles do not degenerate into political talking points, and all too often, I believe Krugman does just that.

Economists have a lot of intellectual weapons, and I don't believe that we have to let our analysis degenerate into ______ good and _______ bad. Unfortunately, I believe that is just what Krugman has done, and his constant blame of all our current problems on Goldstein, er, Republicans, is just silly and beneath his stature as a Nobel laureate.

Financial Reform 201

Now that ObamaCare has become law, Paul Krugman now is agitating for "financial reform," once again creating straw men, giving us a picture of the regulatory history of finance that is not true, and proposing "solutions" that only will lead to more problems. Other than that, I guess he will offer sound advice.

On the surface, all of us can agree. The financial meltdown on Wall Street came about because huge numbers of "investments," hedge funds, and other financial devices were pyramided atop securitized mortgages, which were being sold as though they were gold, instead of the fools gold they really were. To many people, it was obvious that this whole scheme was unsustainable, and when it went down, it went down quickly and very hard.

(In 2006, when I was appealing a tax ruling on my house, I told an Allegany County tax board that the housing market was, in fact, a bubble that would burst violently. They laughed at me, and one person said, "We don't see that happening." I replied that it would -- and it did.)

It is not hard to see in hindsight what happened. However, Krugman and I disagree on a large number of particulars, and one of them is the role of regulation in this mess, and the other is, well, the role of regulation needed to fix it.

Now, I agree with most (but not all) of what he writes here:

It’s easy to see where concerns about banks that are “too big to fail” come from. In the face of financial crisis, the U.S. government provided cash and guarantees to financial institutions whose failure, it feared, might bring down the whole system. And the rescue operation was mainly focused on a handful of big players: A.I.G., Citigroup, Bank of America, and so on.

This rescue was necessary, but it put taxpayers on the hook for potentially large losses. And it also established a dangerous precedent: big financial institutions, we now know, will be bailed out in times of crisis. And this, it’s argued, will encourage even riskier behavior in the future, since executives at big banks will know that it’s heads they win, tails taxpayers lose. (Emphasis mine)

He is correct about the moral hazard in the system, but the bailout was not necessary; in fact, it has blocked the needed liquidation of bad assets in the system and it is preventing a recovery from happening. Here we see the huge gulf between the Keynesians (and Friedmanites, for that matter) and the Austrians.

To a Keynesian, all assets pretty much are homogeneous, and what really matters is spending. Consumption is little more than people "buying back the products they make" in order to keep the Circular Flow intact. Thus, throwing more money into the economy via borrowing and printing will keep the economy from falling into the pit of deflation and helping set the stage for a recovery. To a Keynesian, the worst thing that can happen in deflation, for it creates an endless downward spiral that ends at an "equilibrium" of high unemployment and hopelessness.

(Robert Murphy in his Politically Incorrect Guide to the Great Depression has a good commentary on this error. He points out that if this were true, then the Federal Reserve System's tightening of money in 1921 would have thrown the economy into a pit from which it would not have emerged. Instead, the economy soon afterward had a robust recovery.)

Austrians take a different tact. First, consumption is a purposeful activity, done by people to meet their needs and desires. Second, the basis of consumption is production; we consume because we produce, and we pay for consumption by exchanging what we have produced for those goods and services we need.

This implies that there is a balance within the economy that must be sustained. The housing meltdown came about because the go-go housing market could not continue, as the pouring of resources into housing pulled the entire system out of balance. Unfortunately, too many economists have claimed that the housing meltdown came about because housing prices fell (Martin Feldstein comes to mind here); no, prices fell because this market could not be sustained no matter how much money the government and the banks threw into it.

In other words, the Keynesians and Friedmanites have made the fundamental error of violating what Carl Menger called the Law of Cause and Effect. They have assumed that the effect really was the cause of the calamity. Furthermore, they continue to demand "solutions" that only prop up the malinvestments -- at the expense of the rest of the economy, the still-healthy portion that will not be healthy much longer if the government continues its path of borrowing, printing money, and propping up the bad investments.

I do agree with Krugman that the moral hazard problem is real, but I disagree with his proposed "solutions" that really only compound the problem. What he proposes is to bring back the banking regulations that existed from the New Deal to the early 1980s, and then putting the rest of the financial system under the same regulatory umbrella. In his view, cited elsewhere, "smart" and "well-meaning" regulators can take over from there and keep calamities from happening.

Before going further, I agree with Krugman that moral hazard was a huge problem and I also agree that under the current mentality that grips the system today, the bankers and financial barons invariably will be successful in asking for new money to clean up the mess they have made. However, Krugman also forgets that the establishment of the Fed in and of itself was a huge moral hazard. The original purpose of the central bank was to be a backstop that would provide newly-printed money to member banks in case of a run or a "panic," which occurred once in a while. The presence of the Fed sent a signal to the bankers that the government had their backs, and that problem continues to this day.

There is another issue I have noted before, and that is the difference between Krugman's view of where regulated banking stood in 1980 and the view of Austrians and others. According to Krugman, the banking cartel (which it really was) was doing just fine, but ideological Reaganites came in and undid the whole carefully and wisely-planned structure, all in the name of ideology. Then they created an entire shadow system, also done from ideology.

In a word, that view is nonsense. The banking cartel was losing capital because the government held down interest rates it could offer depositors even while inflation raged in double-digits. People sought other venues and found them. In the meantime, Michael Milken already was helping to finance ventures that the banks would not touch. (As Daniel Fischel notes in Payback, much of the recovery of the 1980s came from Milken's financing methods.)

As economists such as George Stigler and Sam Peltzman pointed out, regulation has the effect of offering protection to regulated firms, but also serving to keep out competitors. In other words, contra Krugman, regulation creates what in effect are government-sponsored cartels. From this, we see "Capture Theory" emerging, as the regulated industries and their government regulators form a tag team that operates to the benefit of the people in the system -- and against consumers.

The ultimate irony is that Krugman and others are demanding re-regulation as a form of "consumer protection," which clearly has not been the pattern of regulation. Krugman can deny this point, but he is the one who is wrong.

Krugman can provide this fantasy of regulation all he wants, and I am sure that plenty of people will believe it, but that does not change the fact that "Capture Theory" is real and provides a much stronger view of regulation than does Krugman's Keynesianism. The re-regulation he espouses not only will make the economy weaker (as it protects the current set of malinvestments), but it also sets the stage for crises in the future.

Instead, we need to abolish the government backstops altogether and stop this bailout foolishness, which only provides the economic agony we are experiencing. The problem is not "too big to fail" or "we need more regulation." No, what we need is to clear the moral hazard out of the system and let the economic assets move to their real values.

Only then will we have a real recovery.

Is The Health Care Bill a Political Liability for Democrats?

Now that the Democrats have passed a "healthcare reform" bill that neither reforms nor provides healthcare, what is going to be the political fallout. According to Paul Krugman, it will benefit the Democrats. I have no idea, and I don't care, given that Republicans have not exactly been fiscal stalwarts when in power.

In his blog post, "A Thin Line Between Hate and Love," Krugman contrasts a Wall Street Journal editorial with the results of a Gallup poll in which nearly 50 percent of those polled approved of the plan and only 40 percent said they were against it.

As I see it, the plan will provide whatever "good" results it will bring first, in the short term, but the hammer will come down later -- and it will come down. Americans are going to find out that this "cost-cutting" reform is going to make it more difficult for them to see doctors, and the overall costs they will bear for their medical care will be higher than they are now. That I can guarantee.

So, I suspect that Krugman might be correct regarding the political fallout, although to Krugman, if the Democrats win, that will "prove" that "reform" was a good thing. But, then, his world is so thoroughly politicized that I doubt he can have even a simple conversation without politics entering into it.

The USA and Indonesia

In his recent post comparing the situation in the United States with the dollar versus what happened in Indonesia and Southeast Asia 13 years ago, Paul Krugman smugly makes the following statement:

...US companies have not been borrowing heavily in foreign currencies.

I shouldn’t have to explain this. There have been many, many papers trying to assess the possibility of an Asian or Argentine-style currency crisis for the United States; all of them run up against the simple fact that large foreign-currency indebtedness was central to these crises, and we just don’t have that problem.

That is true as far as it goes. The Asian currencies fell and fell quickly relative to the USD and other holdings. That meant people suddenly found that their money only could purchase about half of what they could buy before the crisis hit.

Why do I bring up this point? Note that Krugman has been calling for the Fed to print money, which would weaken the USD and "make our exports more competitive." From a macro sense, there is some truth to that point, but from the vantage point of individual Americans, that is a disaster. It seems to me that Krugman both is welcoming the demise of the dollar and, at the same time, claiming that our currency and our fates are immune from the economic disasters caused by inflation.

When the crisis hit in places like Indonesia, people rioted (and killed Ethnic Chinese, whom they blamed for all their ills), and millions were plunged into poverty. This was not a happy time.

Yet, if one logically and consistently follows Krugman's policy prescriptions, you see that he wants us to go down the same road. Now, I believe that our policies so far are going to expose Americans in ways they cannot imagine. The dollar IS overvalued, Americans have been financing their consumption by borrowing from the Asians, and this gravy train is going to come to a halt.

The Trojan Krugman

As a faculty member of a state university in Maryland, I am used to hearing other faculty members substitute Democratic Party talking points for conversation, as most of them are True Believers who defend their party with religious zeal. If the Party declares a certain State of Being, then whatever it decrees becomes the New Reality.

It does not surprise me that professors in English or Political Science would hold to such views, as they are open political partisans. However, I expect more from economists, and especially economists who have Nobel Prizes. I cannot imagine ever having heard political talking points from someone like F.A. Hayek, George Stigler, Gary Becker, or James Buchanan, especially in print. These Nobel laureates believed that their job was to promote and apply sound economic theory, not be shills for political parties or their chosen candidates.

Unfortunately, Paul Krugman is not held to the same standards, nor does he hold himself to any standards but those of stooping to the latest set of talking points from the White House, Nancy Pelosi, and Harry Reid. Thus, his latest column demonstrates beyond a doubt that he is willing to promote pure fantasy when it comes to budget numbers, and work in tandem with his part-time employer, the New York Times, to try to convince us that something akin to Harry Potter Economics really exists.

I will go one step further: I believe wholeheartedly that Krugman knows this bill will be disastrous and will create utter chaos in the field of medical care. Into that void will ride the deus ex machina government with a "new" universal plan that will be something out of Canada Care or the British National Health Service. The state takeover of medical care then will be complete. If anything, this bill is the Ultimate Trojan Horse that once passed is going to guarantee that what is left of private enterprise in medical care will be destroyed.

Let me examine some of his statements. First, he gives anecdotes about people who have had their medical insurance revoked for contracting HIV or for other reasons. The new health "plan," he argues, would guarantee that no one could be denied insurance coverage for medical care. He states:

So what’s the answer? Americans overwhelmingly favor guaranteeing coverage to those with pre-existing conditions — but you can’t do that without pursuing broad-based reform. To make insurance affordable, you have to keep currently healthy people in the risk pool, which means requiring that everyone or almost everyone buy coverage. You can’t do that without financial aid to lower-income Americans so that they can pay the premiums. So you end up with a tripartite policy: elimination of medical discrimination, mandated coverage, and premium subsidies.

Now, I can tell you that if automobile or homeowners insurance were put under such rules, premiums would skyrocket, and everyone can understand why. Or, what about life insurance coverage? Should life insurers be forced to charge the same premiums for all applicants, regardless of their health? What would such a move do to the cost of premiums? I think we know the answer.

Therefore, Krugman is supporting a law that is guaranteed to force up the costs of insurance premiums, yet he also is supporting a bill that will impose price controls on medical insurance. My sense is that Krugman understand just what this means, for even he has some knowledge of the very real economic dislocations price controls will bring.

Into the chaos will ride the government, which will offer to subsidize the insurance companies, as they will experience real losses. However, I also think there could be another future, one that would take a page from the Marxist government of Salvador Allende of Chile nearly 40 years ago.

Allende's government printed money in massive quantities, swamping the Chilean economy with worthless paper, driving people to barter and throwing the economy into chaos. The government also imposed draconian price controls in which government-owned businesses were permitted to raise prices, but private enterprises could not. Those private companies that were caught raising prices to cope with inflation were confiscated by the government and the owners not compensated.

I suspect that this will be the future of private health insurance in the United States, and it is what Krugman and his friends hope will be the outcome. The current legislation does impose price controls on insurance premiums, yet also increases the demand for insurance through mandates and subsidies. This guarantees chaos, and even a partisan economist like Krugman can see through this charade.

However, instead of promoting economic principles, Krugman promotes outright fabrications. Take the following from his column, for example:

Can we afford this? Yes, says the Congressional Budget Office, which on Thursday concluded that the proposed legislation would reduce the deficit by $138 billion in its first decade and half of 1 percent of G.D.P., amounting to around $1.2 trillion, in its second decade.

But shouldn’t we be focused on controlling costs rather than extending coverage? Actually, the proposed reform does more to control health care costs than any previous legislation, paying for expanded coverage by reducing the rate at which Medicare costs will grow, substantially improving Medicare’s long-run financing along the way. And this combination of broader coverage and cost control is no accident: It has long been clear to health-policy experts that these concerns go hand in hand. The United States is the only advanced nation without universal health care, and it also has by far the world’s highest health care costs.

Krugman never believed the rosy CBO projections when the Republicans were in power, but suddenly that same office is the Promoter of Truth. If anyone truly believes that this plan, with its mandates, restrictions, new criminal penalties, and massive subsidies is going to reduce the real costs of medical care and simultaneously lower the federal deficit, I have some real estate at 1600 Pennsylvania Avenue that I want to sell to you.

This is fraud, pure fraud. However, Krugman also slyly gives away his real goal: Fully Nationalized Medical Care:

Can you imagine a better reform? Sure. If Harry Truman had managed to add health care to Social Security back in 1947, we’d have a better, cheaper system than the one whose fate now hangs in the balance. But an ideal plan isn’t on the table. And what is on the table, ready to go, is legislation that is fiscally responsible, takes major steps toward dealing with rising health care costs, and would make us a better, fairer, more decent nation.

Guess what? As the bedlam that will result from this "fiscally responsible" legislation increases -- and I have no doubt that the House Democrats will cave in the end -- the next step (and the next step after that) will be to create the "single payer" plan that Krugman has wanted all along.

I am no fan of the current system. Third-party payments for rudimentary medical care through insurance are responsible for the costly mess that is U.S. medical care. If we purchased food or automobiles via the same payment system through which we purchase medical care, there would be runaway costs and utter chaos in those markets, too.

I'll go a step further. Even if Republicans were to take back the Congress in the upcoming elections, there is no way this bill would be repealed, no matter what they might have promised in the heat of a political campaign. This is a bill that, in my view, is purposely designed to drive everyone to a "single-payer" government plan, as what exists in Canada. However, it also will be an entitlement, and once entitlements become law, they are politically-impossible to eliminate.

No, Americans are going to be stuck with something that will cost them much more of their earnings -- and produce inferior care -- than a true free-market in medical care would produce. Unfortunately, we now are so far removed now from such markets in that sector that most people would be afraid to take the plunge and eliminate the government controls and subsidies. Thus, we ultimately will be stuck with "single-payer," and the long lines and waits and denial of care that will accompany it. Sooner or later, the Trojan Horse will open and government minions will take over everything in medical care (that they don't already control).

In his promotion of this monstrous bill, I believe that Paul Krugman really does understand that, no, it won't cut costs, no, it won't reduce the deficit, and, yes, it ultimately will lead to an utterly politicized system. For once, I wish he would tell the truth about what is to happen, but Krugman long ago gave up telling the truth in exchange for being a shill and a political operative.

The Most Bizarro Health "Reform" Arugment: ObamaCare Will Cut the Deficit

Is Paul Krugman an economist or a political operative? Seven years ago, I said it was the latter, and nothing Krugman has written since then has changed that opinion. In this blog post, Krugman once again exposes himself as the politically-partisan shill that he has become.

Now, I will say that some of what he says is useful, at least if one is moved by the delusion that the Republicans actually have a decent answer in this healthcare debate. Krugman notes that

...(Republicans) have a problem: Obamacare is very much like the Massachusetts health reform, which was not only implemented by a Republican governor, but by a governor who is a serious contender for the 2012 presidential nomination.

Unfortunately, he quickly breaks from reality with the following statement:

So they insist that the two plans have nothing in common — but the only real difference they can point to is that Massachusetts didn’t fund its plan in part out of Medicare savings.

Of course, it couldn’t. But think about this a bit more: Republicans are saying that what makes Obamacare a socialist takeover, whereas Romneycare wasn’t, is the fact that unlike Romney’s plan, Obama’s plan cuts government spending.

Uh, does Krugman really believe that this plan is going to provide any Medicare "savings" at all? Or that the Obama monstrosity "cuts government spending"? Now, Krugman was all over the proposals from the Bush administration that promised fictitious results, but now that his candidate is in the Oval Office, suddenly the nonsense that is ObamaCare presents the truth and only but the truth.

Anyone who claims that price controls are going to "cut" government spending is not an economist, as real economists understand the price system, how it works, and what happens when government intervenes into market exchanges. That someone of Krugman's stature would spend his political capital on a bogus mess called ObamaCare tells me that the guy is a political operative and nothing else.

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

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

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

OK, fair enough. What are these myths?

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

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

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

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

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

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

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

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

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

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

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

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

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

Krugman and the Hoover Fallacies

One of the economic myths that Paul Krugman, along with most politicians, journalists, and academics, promotes is the outright lie that Herbert Hoover organized his presidency to promote free market economics. Furthermore, he tells us (ad nauseum) that during the last three years of his presidency, Hoover did nothing to stop the Great Depression, leaving it up to Franklin Roosevelt and his New Deal to mitigate the effects of the downturn.

Thus, when Krugman refers to someone as a "Herbert Hoover," he is saying that he or she is not embracing the Keynesian paradigm and, instead, claims that we must "be responsible" in not spending beyond our means. Yes, Krugman believes that such "responsible" behavior actually is irresponsible, at least during a depression.

Thus, in his recent blog post, "Fifty-One Herbert Hoovers," Krugman claims that spending cuts by state and local governments are dragging down the economy:

...I think it’s fair to say that state and local cuts largely offset federal stimulus.

And David Broder thinks this is a good thing, that Washington should be more like the states.

What amazes me is that Broder doesn’t even seem to be aware that there’s an argument on the other side, let alone that most economists are dismayed by the effects of fiscal austerity. If Broder is a guide to Beltway conventional wisdom — which he usually is — we’ve got a big problem. (Emphasis mine)

Krugman even has a graph that "proves" his point:



First, Krugman is more correct than he realizes, if he claims that the states are emulating Hoover. Murray N. Rothbard (a much better economist than Krugman could claim to be) laid out Hoover's many government interventions in his classic, America's Great Depression. However, I don't think that is what Krugman wants us to believe.

Second, Krugman seems to be living in Wonderland if he believes that state and local governments can spend money they don't have. (This is why he is demanding that the federal government print a lot of money and give it to the states.) Third, if one looks at the graph, one can see that the economy recovered after the 2001 recession when state spending was down. (No doubt, Krugman will claim that state and federal spending, which increased during the recession of 2001, was the reason for the recovery.)

Now, the "recovery" after 2001 turned out to be a faux recovery, or what I called a "boomlet," which I predicted would end in a worse downturn. However, to Krugman, boom conditions can last forever, just as long as government provides enough "free" money to keep the punchbowl filled. Unfortunately, that is not the case.

There is another point as well. One of the reasons that we are not seeing a real recovery (and only one of the many reasons) is that state governments have become hostages of public employee unions. (Steven Greenhut has written a great book on this subject, appropriately called Plunder.)

State spending has become extremely voracious, and states are raising taxes left and right to fund their generous pensions and pay that unions extracted when the economy seemed to be in better shape. The notion that states raise even more taxes to continue spending at a drunken rate is irresponsible, and the notion that most economists believe that such actions would be good for the economy is pretty pathetic. If most economists believe this nonsense, then the academic profession is in worse shape than I had thought.

Note: I am blogging from the Austrian Scholars Conference at the Ludwig von Mises Institute in Auburn, Alabama.

How Little He Knows Economics

Apparently, believing that whenever government not only does things to create unemployment, but also subsidizes it is going to have the effect of there being even more unemployment is immoral. How do we know that? Why, Paul Krugman tells us so.

His proof? He takes a partisan screed from Washington Monthly as an unquestioned authority. Then he finished with some lines from "Treasure of the Sierra Madre" (a great movie, by the way) as even more proof of the intelligence and morality of his position.

What happened, as I pointed out in my last post, is that Krugman claims that he was not contradicting himself at all, but rather turns to Historicism as his claim that in a recession, all of the rules of economics are turned on their heads.

So, when times are good, he says, generous welfare benefits to the unemployed create more unemployment, but when unemployment is high, then generous welfare benefits stop unemployment slide. Go figure.

Krugman's Chilean Fantasy

Paul Krugman never ceases to amaze me with how he dishonestly rewrites history. Indeed, he does not so much give us history as he does Democrat-Socialist talking points, which he shouts out while holding his ears shut.

In this blog post, Krugman claims that relative free markets established after the Marxist Allende government fell in 1973 had nothing to do with Chile's prosperity today or the fact that the recent earthquake that hit the country -- one of the most powerful earthquakes ever recorded -- had a relatively small death toll, especially compared to the carnage in Haiti. As usual, the post has a number of howlers. Take the following, for example:

Actually, as you can see from the chart above, what happened was this: Chile had a huge economic crisis in the early 70s, which was, yes, partly due to Allende and the accompanying turmoil. Then the country experienced a recovery driven in large part by massive capital inflows, which mostly consisted of making up the lost ground. Then there was a huge crisis again in the early 1980s — part of the broader Latin debt crisis, but Chile was hit much worse than other major players. It wasn’t until the late 1980s, by which time the hard-line free-market policies had been considerably softened, that Chile finally moved definitively ahead of where it had been in the early 70s.

So: free-market policies are applied, and presto! prosperity follows — fifteen years later.

Ah! Where does one begin? First, Krugman glosses over the fact that Allende was trying to establish a full communist state. His government seized businesses, both foreign and domestic, printed money out the wazoo (creating 1,000 percent inflation), erected huge tariffs and trade barriers, and decimated civil liberties. Yeah, I guess that would cause some economic problems.

Next, just why might have Chile experienced some capital inflows following the overthrow of Allende? Maybe it was because the new government promised not to seize capital invested in Chile by foreign firms, and maybe because the government lowered many of its trade barriers.

Chile was hardly the only country to experience a serious recession in the early 1980s. As I recall, a country named the United States of America suffered its biggest downturn since the Great Depression, and, like Chile, had a robust recovery. There is no doubt that Chile has a much more free economy than do most Latin American countries, and also has a higher standard of living. (I'm sure Krugman has another explanation for Chile's prosperity. Maybe it finally is experiencing the "good effects" of all that money Allende printed nearly 40 years ago.)

As for the country's survival rate following the earthquake, Krugman writes:

As a number of people have pointed out, there’s this little matter of building codes. Friedman wasn’t exactly fond of such codes — see this interview in which he calls such codes a form of government spending, because they “impose costs that you might not privately want to engage in”.

First, building codes by themselves are meaningless. One must have the wherewithall to build structures that actually meet codes. Second, Chile has a strong record of private property rights.

Haiti, on the other hand does not. I recently read that about 80 percent of Haitians live on land of which no one holds clear title. That means that people basically are squatters, and squatters do not build strong buildings. (I am sure that Haiti also has building codes, but even the presidential palace was heavily damaged and the Haiti earthquake was not nearly as strong as what recently hit Chile.)

Being a good socialist, however, Krugman is going to claim that Chile's survival rate following the earthquake is due entirely to state power. And there is one more issue to address: the false notion that economic booms immediately follow economic liberalization.

That often is not the case, as what we saw in the early 1980s. Economies that are heavily regulated or have a lot of state ownership engage in malinvestments that cannot stand after an economy is liberalized. Indeed, given the massive malinvestments and the utter chaos that accompanied the Allende government, I would expect Chile's recovery to take a long time after liberalization, and that is what happened.

However, Keynesians believe that all economies are homogeneous, and that all a government needs to do is add money. Interestingly, that is exactly what Allende did, and even Krugman's little graph does not show that the communist government brought prosperity.

Guess Krugman needs to go back to the drawing board.

What Constitutes "Financial Reform"?

In a recent column, Paul Krugman raises a very important issue, and while he goes through his usual partisan attacks, nonetheless I think this is something that should be up for discussion. What actually constitutes legitimate "financial reform"? Indeed, what does?

First, everyone is in agreement that Wall Street, not to mention financial houses across the globe, are in big trouble. Why? The fundamental reason is that they throw trillions of dollars into investments that ultimately could not give the anticipated returns and, in fact, many of those investments completely went bust.

Second, I think most people are in agreement that we cannot go back to business as usual, or the arrangement that gave us the actions by bankers and others in the financial world that brought about the meltdown and subsequent depression. Thus, the question is not if we should have reform, but rather what kind of reform should it be.

That being said, one can be sure that Krugman and the Austrians (including me) are going to be on opposite sides of the issue. Krugman wishes to bring back what Austrians refer to as banking cartel that was established during the New Deal. Beyond that, we also are in major disagreement about the role of the Federal Reserve System in financial reform. (OK, I'll be honest. We Austrians want the Fed to have no role at all because we don't want the Fed to be in existence.) Krugman writes the following:

Many opponents of the House version of banking reform present their position as one of principle. House Republicans, offering their alternative proposal, claimed that they would end banking excesses by introducing “market discipline” — basically, by promising not to rescue banks in the future.

But that’s a fantasy. For one thing, governments always, when push comes to shove, end up rescuing key financial institutions in a crisis. And more broadly, relying on the magic of the market to keep banks safe has always been a path to disaster. Even Adam Smith knew that: he may have been the father of free-market economics, but he argued that bank regulation was as necessary as fire codes on urban buildings, and called for a ban on high-risk, high-interest lending, the 18th-century version of subprime. And the lesson has been confirmed again and again, from the Panic of 1873 to Iceland today.

The question is this: Why is this proposal a "fantasy"? I suspect Krugman would answer that in nearly every banking crisis, it always has been government to the rescue. For that matter, Murray Rothbard, who cut his teeth on banking crises by writing THE authoritative book of the Panic of 1819 (from his doctoral dissertation at Columbia University), pretty much has said the same thing.

Thus, Krugman would argue that when it comes to finance, we always must operate within a Second Best atmosphere, that the "best" form of regulation is not available because governments never fail to rescue the banks after they begin to fail systematically. OK, but that now brings us to the second problem: If we are agreed that government intervention is inevitable (and Austrians are not convinced that it is or has to be this way), then what is the best way to do it?

Krugman has argued for a return to what essentially was a banking and finance cartel that existed from the New Deal all the way until the early 1980s. He claims that Ronald Reagan was the culprit, bringing in "free-market ideology" in which banks somehow were totally deregulated and that banking regulators fell prey to the same myopic ideology that bewitched the politicians.

Here is the problem. We are looking at two different philosophies of regulation. The one that Krugman espouses is this: Regulators (who truly believe in the Greatness of Government) hover over the system, dispensing wise advice, stopping banks from making loans for idiot investments, and generally directing the system toward creating a wonderful economy.

This is what Progressivism always was about. Progressivists believed that "good government" would hire the "best and brightest" as regulators and decision-makers, and they would guide all of us with their expertise. The belief was (and, apparently, still is) that the experts knew all of the answers in how to successfully run an economy.

One does not even need to have read F.A. Hayek's "The Use of Knowledge in Society" to enlist one's b.s. detectors. Rothbard once noted that if these regulators were so brilliant and far-seeing -- indeed, much more far-seeing than most entrepreneurs -- then they obviously would have the requisite skills for taking part in the markets, making lots of money. Furthermore, under the kind of regulatory system that Krugman and others favor, people who have no vested interest in the success or failure of a set of investments nonetheless would be the ones making the decision of whether or not it should be allowed.

This should ring alarm bells on its face, for there is no way that such a system is sustainable. Ultimately, as we know, the system tends to be "captured" by the participants, and specifically the politically-connected producers. Furthermore, what ultimately happens is that the government essentially forms a cartel for producers. Whether in transportation, production of electrical power, or finance, government regulatory bodies have stifled innovation, forbade the entry of new firms into a regulated industry (at the behest of established firms), and held back economic growth.

For all of Krugman's reminiscing about the good old days of finance, it is easy to forget that the moves to "deregulate" the system did not come about because of ideology, as I outline in an academic paper I recently sent to a journal. Instead, the movement came because the system with its regulations on interest rates could not attract new money because inflation was outstripping interest gains, and people were putting funds into alternative investments, such as money market accounts, which not only were liquid but also were paying upwards of 8 percent or more. Banks simply could not compete.

Another problem was that banks were not prepared to deal with the new generation of technology and investments. For example, Ted Turner could not finance his proposed Cable News Network operation with conventional bank financing (banks were not interested in this far-flung idea that had, they believed, no chance of success). Instead he turned to Michael Milken of Drexel Burnham Lambert. Milken underwrote the operation by issuing low-rated, high-return bonds (what detractors called "junk bonds").

Because Milken was not part of the banking-finance cartel, ultimately his detractors were able to join forces with Rudy Giuliani and the New York Times (which is eternally fighting capitalism), and destroy Milken and his company. Perhaps the greatest financial mind of our generation was lost because of this.

I can say forthrightly that no great financial minds come out of the kind of regulated system that Krugman and others are demanding. However, I will concede this important point: throughout history, whenever the banks have fallen into trouble, the government has responded by trying to prop up these failing institutions, and the Federal Reserve System has been the mode of choice in the last three recessions. Furthermore, by promising not only help from the Fed but the expansion of deposit insurance has raised the moral hazard problems and made it inevitable that not only will the banks and financial houses take unnecessary risks, but that they are more likely to engage in what Austrians call malinvestment, that is, investing in unsustainable lines of production.

In my view, the only real financial reform would be to cut the banks and financial houses loose from central banking and from government deposit insurance. They would have to bear the costs of errors and would not be able to rob the taxpayers when the markets have declared their investments null and void. Unfortunately, even though this cold shower would not be politically acceptable, it is the only kind of reform that actually would work.

Krugman can quote Adam Smith all he wants, but somehow, I don't think that Ben Bernanke makes for a very good "invisible hand." We can argue about reform all we want, but in the end, the standard "reform" is not reform at all, but just the establishment of another financial cartel.

Was Financial Deregulation the Result of Free-Market Ideology?

Paul Krugman has made a lot of hay recently about free-market ideology and the financial deregulation initiatives that occurred during the early 1980s, which I have covered in a paper that is being co-authored by Amit Shah, one of my Frostburg State colleagues, and me. I presented the paper today at a conference, and am making it available for anyone who wishes to read it.

The paper conducts some casual empiricism about whether or not Krugman's "Reagan Did It" contention is correct. To make a long story short, we simply don't find the frenzy of conservative ideology in passage of either the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 or the Garn-St. Germaine Act of 1982. Both bills had many Democratic co-sponsors and in both situations, Democrats controlled the House of Representatives.

Our larger point is that these laws, for better or worse, were passed because conditions had changed in finance in which banks and S&Ls were in serious financial trouble, and Congress realized that much of the trouble was due to the regulatory structures that shackled those institutions. Unfortunately, Congress also build moral hazard into the equation and a number of other perverse incentives which led to a number of problems later.

Because I don't know how to download a pdf file to this blog, I will send a pdf copy to anyone who requests it. My email is william.anderson1953@gmail.com.

Yes, Yes, Inflation Solves All Economic Problems

If inflation really could save the world, then we would be looking to Zimbabwe as our savior, given that its government over the past few years has been producing some memorable moments in the history of crankdom. Alas, inflation is a scourge, not an economic solution.

Unfortunately, Paul Krugman does not seem to get it. In his latest column, "Making of a Euromess," he blames the economic crisis in Spain on...the Euro. Now, I am no more fond of the Euro than I am of the 1923 German Mark, but Krugman's reasoning is something to behold. In his own words:

And there’s not much that Spain’s government can do to make things better. The nation’s core economic problem is that costs and prices have gotten out of line with those in the rest of Europe. If Spain still had its old currency, the peseta, it could remedy that problem quickly through devaluation — by, say, reducing the value of a peseta by 20 percent against other European currencies. But Spain no longer has its own money, which means that it can regain competitiveness only through a slow, grinding process of deflation.

Notice that he is saying that Spain really is in trouble because it cannot engage in inflation, since it does not control the Euro, unlike its former fiat currency, the peseta. However, devaluation really does nothing but put off the Day of Reckoning for a while, but that day will arrive.

On the other hand, perhaps the best thing that Spain needs is the "grinding process of deflation," as that simply means that the prices paid for overvalued Spanish factors of production (and especially labor) are going to have to fall into line with economic reality. Most people, and especially the heavily-unionized Spanish workforce, don't want to hear that "option," as they would like to continue the charade that economic recovery is not going to require some short-term painful medicine.

However, if the Spanish were willing to take the medicine, they would be hurting now, but their economy would recover and become a beacon in Europe. Inflation, while delivering the "good effects" in the short-run, runs the economy off the rails as bout after bout of money devaluation takes its toll.

Not surprisingly, Krugman advocates inflation and denounces deflation. Yet, the only hope for Spain is deflation. The European Union is not going to bail out Spain, and that is a good thing. No, Spain needs to get its house in order. Likewise, on this side of the Pond, perhaps the USA needs to get its own house in order and stop preaching the Gospel of Inflation.

Krugman's New Oracle at Delphi

As everyone knows, the Greek government is in serious trouble, and the nation's economy is taking a hit. Defaults are a terrible thing, and Greece is taking a page from Wall Street and demanding a bailout by the EU Central Bank. (Apparently, Germany is standing in the way, demanding -- Horrors! -- that the Greeks put their own house in order, something that the socialist Prime Minister George Papandreou is denouncing. Gee, why should socialists have to shoulder the costs of, well, being socialist?)

Not surprisingly, Paul Krugman has weighed in on the Greek crisis and at least some of his commentary has truth. Unfortunately, since many of his pronouncements seem to be something akin to the Oracle at Delphi, in which the Pythia (after sniffing some gas from a vent in the earth) would mumble something that the Greeks would hold as true prophecy, it is hard to separate what makes sense from what does not. My rule of thumb in examining anything Krugman says is to pay attention to his analysis of what is happening, but to ignore his Keynesian "solutions," just as the ancient Greeks should have ignored the priestess.

Like so many other countries, Greece drank the Kool-Aid Bubble, and now is experiencing the pain of the inevitable economic contractions that accompany the bubble's collapse. Krugman seems to recognize it, and he even declares (correctly) that "now it faces a prolonged era of grinding deflation as it works its way back to competitive costs."

I absolutely agree. However, what is Krugman's "solution" to this problem? Why, inflate, inflate, inflate. As I pointed out in my post on Krugman and Spain, Krugman laments the fact that Spain no longer can devalue its own currency, since it uses the Euro. This is like complaining that after the alcoholic checks into rehab, those mean people running the place will not let the guy imbibe in his "hair of the dog" solution to alcohol withdrawals.

Where Krugman and I differ is here: Krugman sees inflation as the solution, while I believe it is the problem. He sees nothing good coming from deflation, as he believes (as did Keynes) that it creates a permanent downward spiral. However, as I have written elsewhere, deflation begins with what we see to be "bad effects," but ultimately helps to put the economy back into order again.

Inflation, however, provides the "good effects" first, but ultimately deteriorates. Where Krugman is so very wrong is that he believes that the "good effects" can be made to last indefinitely, just as long as government has the "courage" to continue inflating its currency. In other words, the alcoholic can remain the "happy drunk" indefinitely, just as long as he can keep drinking! So, in the end, Krugman sniffs the gas and then makes a pronouncement that makes about as much sense as came from the Pythia.

Krugman, Medicare, and Republicans

One of the things one learns (or should learn) in an economics graduate program is that while we hold to certain laws of economics, we do not view the world through a template, and especially one structured from political talking points. For example, as an economist, I can say that if one raises the minimum wage during a recession, one of the results will be increased unemployment among lower-skilled workers, and especially teenagers.

That conclusion comes from the laws of supply and demand, and it is sound and can be drawn without going into an ideological frenzy. However, it would be quite another thing if I were to say, "Democrats raised the minimum wage during a recession. Therefore, they want teenagers to be unemployed." Such a statement would be a non sequitur, and fully is outside of my role as an economist.

In fact, every mentor I have had has told me to be careful when venturing into the world of politics, and certainly not to embrace political talking points. Most, but not all, voted for Republicans, but none was active in any Republican activities and certainly never used the classroom or personal conversation to shill for political candidates. Furthermore, none ever presented a Republican candidate as the Hope of the World. There were and are lines that my mentors did not cross.

Unfortunately, I suppose that the Massachusetts Institute of Technology goes by a different set of rules, as its most famous economics doctoral student has used his position to be a partisan shill and to fudge on the truth. At present, I am researching for a paper on the passage of the financial deregulation initiatives of the early 1980s and I can tell you outright that Paul Krugman is rewriting history, declaring things to be true that never happened.

Thus, I wade into his latest food fight, his "Republicans want to cut Medicare" screed that passes as a column in today's New York Times. It is hard to know where to begin here, but I will try to slog through this morass that clearly does not befit someone whose academic honors put him near the top of our profession.

Krugman accuses Republicans of saying that while they want to save Medicare, they really want to cut its benefits. As "proof," he goes back to the 1995 government shutdown that he claims is due to then-Speaker Newt Gingrich's attempt to "ram through deep cuts in Medicare." Now, I don't know what really happened then, and as I have said before, Krugman has this tendency to rewrite history to his liking.

When Republicans are claiming that Democrats want to "cut Medicare" and that they are the saviors of this open-ended program, I find myself in agreement with Krugman that they are not to be trusted. However, the larger problem is that Medicare itself is not a sustainable program no matter how one slices things. Any competent economist can see this problem up front, but Krugman, while being a "star" in economics, nonetheless looks at government programs through the glasses of a partisan Democrat, which clouds and distorts his vision.

Take the following, for example:

No, what’s truly mind-boggling is this: Even as Republicans denounce modest proposals to rein in Medicare’s rising costs, they are, themselves, seeking to dismantle the whole program. And the process of dismantling would begin with spending cuts of about $650 billion over the next decade. Math is hard, but I do believe that’s more than the roughly $400 billion (not $500 billion) in Medicare savings projected for the Democratic health bills.

Let's take this one apart. If the Republicans wanted to dismantle Medicare, they would have done it when they had control of all three branches of government. For that matter, I remember Democrats claiming in 1980 that if Ronald Reagan were elected, he was going to do away with Social Security. None of those things happened, yet Krugman continues to spout the party line as though it makes sense.

Now, is that because Republicans are compassionate, caring folks? No, it is because they want to be elected and re-elected, and few people in our current welfare state can win elections by promising less. It doesn't happen. Republicans, like Democrats, are political animals and know that if they ever engaged in the behavior that matched some of their "let's be responsible" rhetoric...well, that is not going to happen.

Now, I find Krugman's other point even more interesting. Suddenly, he calculates lower costs of (Ah! His brilliant economist mind at work!) $400 billion, but that amount constitutes "savings"! No. They are real-live payment cuts to people working in the medical system. Here is my question: How is it that Democrats propose "savings" but if Republicans do the same, they are proposing "cuts"?

Keep in mind that Krugman's "savings" do not come from actual "savings" but rather from the implementation of price controls. That's right, we have an economist claiming that price controls do not raise the opportunity cost for anyone, and that price controls actually result in real lower costs. This is nonsense.

We have seen real prices fall over time because people find ways to produce more goods using fewer resources. That is how an economy grows, period, but Krugman is not talking about such things. Instead, as I have pointed out, he is endorsing outright price controls (to be enforced, by the way, with criminal penalties).

Krugman has a history of claiming price controls actually do as advertised. During the California electricity blackouts of a decade ago (caused by the state government implementing price controls in the retain sale of electricity), Krugman claimed that the implementation of price controls across the entire western grid would result in lower prices and more supply. Such things don't happen, people. Price controls, as anyone learns in Economics 101, reduce available supply and thus, exacerbate shortages.

Not to be outdone, Krugman also endorsed increasing the minimum wage during a recession, claiming that it would increase overall spending. (Guess he cannot tell the difference between total utility and marginal utility. Take note, Princeton students.)

Any economist worth his salt, Austrian or mainstream, knows there are immutable laws of economics. The Law of Scarcity, the Law of Demand, the Law of Supply, and the Law of Diminishing Returns all are in an economist's lexicon and for good reason. They are as immutable to human action as the Law of Gravity is immutable to our very existence.

Yet, we have a "decorated" economist claiming that his political party can transcend the laws of economics by fiat. This is not economics, folks. This is Harry Potter Science.

More Krugman Chutzpah

In one of his blog posts today, Paul Krugman decries what he believes is Republican double-dealing on Medicare. Now, I hardly want to get involved in a food fight between Republicans and Democrats on Medicare payments.

What is interesting, however, is Krugman's last statement:

You almost have to admire the audacity: Republicans are denouncing Obama for proposing Medicare cuts, while themselves proposing much deeper Medicare cuts. And they’re getting away with it.

Now, this is the same Paul Krugman who has constantly decried the 1981 income tax rates that were done in the first year of the Ronald Reagan administration. And, yes, when I asked him during the Q&A of a session at the 2004 Southern Economic Association meetings in New Orleans if he supported the 70 percent rates that stood before they were cut to 50 percent, he said (to a roomful of economists), "Oh, no! Those rates were insane!"

And who now is getting away with what?

Spain, Unemployment, and Recession

One of the great weaknesses of Keynesian analysis is its lack of any coherent theory of causality. John Maynard Keynes laid the "problem" of volatile investment spending (which he claimed was the cause of sudden downward shifts in "aggregate demand") to the "animal spirits" of investors.

Now, I hate to break it to people, but the manifestation of "animal spirits" within the investment community does not count as a causal mechanism in the turn of the business cycle. It is mere gibberish.

In his recent blog post on the rising unemployment and recession in Spain, while Krugman does not resort to "animal spirits," nonetheless he gives no sense of causality as to why there is high unemployment in that country. He writes:

...Spain’s troubles are not, despite what you may have read, the result of fiscal irresponsibility. Instead, they reflect “asymmetric shocks” within the eurozone, which were always known to be a problem, but have turned out to be an even worse problem than the euroskeptics feared.

After explaining how the real estate bubble also hit Spain (not surprisingly, contributing to the boom there), he then says:

But then the bubble burst, leaving Spain with much reduced domestic demand — and highly uncompetitive within the euro area thanks to the rise in its prices and labor costs. If Spain had had its own currency, that currency might have appreciated during the real estate boom, then depreciated when the boom was over. Since it didn’t and doesn’t, however, Spain now seems doomed to suffer years of grinding deflation and high unemployment.

Here is the problem: Spain's troubles ultimately are not due to the Euro or its lack of a currency it can manipulate (as though currency manipulation is an economic solution at all). The troubles are due to the fact that the government there is hostile to productive people. Spain's policies of forcing up wages and having draconian anti-employer labor laws are the major reason that Spain is not well-positioned for a recovery.

While I don't think that so-called economic freedom indices are perfect, nonetheless I think this recent rating by the Heritage Foundation has some merit. Notice, especially, the very low rating on "labor freedom" in which Spain falls into the "repressed" category. Guess what? In a downturn, strict and inflexible labor policies are going to translate into mass unemployment. Look for Spain to have numbers well above 20 percent in the coming months and years.

Unfortunately, you will not see Krugman deal with that central issue. Instead, he will call for general debasement of the Euro as a "solution" when inflation is no solution at all.

Krugman on the Decline of the USA: It's Goldstein's Fault

Every once in a while, I read the title of a Paul Krugman column and hope against hope that he will say something that makes sense. Unfortunately, the hope always is dashed, as the column degenerates into the kind of partisanship that is not worthy of one of the most decorated economists of our time.

(Not to worry. Krugman spews out invective against any economist who might disagree with his Great Wisdom, and when it comes to the Austrians, he creates a ridiculous straw man argument, attacks his own creation, and then claims to have won the debate.)

Today is one of those hope against hope moments. In "America is Not Yet Lost," Krugman laments the decline and fall of the USA and then offers a solution: change the rules of the U.S. Senate. Yes, that's right. The same person who in the past has championed the filibuster and other Senate tactics when Republicans were in the majority suddenly has seen the light and wants the legislative body to essentially be something like the House of Representatives but with fewer people.

Why does Krugman believe America is declining? Because the Senate is not able to ram through legislation that Krugman favors:

The truth is that given the state of American politics, the way the Senate works is no longer consistent with a functioning government. Senators themselves should recognize this fact and push through changes in those rules, including eliminating or at least limiting the filibuster. This is something they could and should do, by majority vote, on the first day of the next Senate session.

In other words, American no longer is "great" because the Senate has not passed ObamaCare. Forget about this country's foreign wars that it cannot afford or the fact that it essentially is printing money to pay for record budget deficits. (Krugman is on the record as declaring that most economic problems can be solved simply by creating new currency out of thin air.) Forget about the fact that we now have a regime in which federal prosecutors pretty much can charge whomever they want with any crimes of their choosing.

Furthermore, does Krugman want the rules changed for partisan purposes, or on the basis of principle? Here is the test: if Republicans ever take a majority again in the Senate, will Krugman still demand the end of the filibuster? (His employer, the New York Times, demanded that the Senate filibuster the nomination of Samuel Alito to the U.S. Supreme Court. In other words, a filibuster for me, but not for thee.)

None of this is written with approval for what Republicans are doing in Congress. Now, I happen to believe that ObamaCare would be a disaster, with the results showing up sooner than later. Krugman for years has demanded state-run medical care, so I am not surprised at his outburst when it lacks one Senate vote to pass.

Unfortunately, most Senate Republicans support our disastrous foreign adventures and they were instrumental in furthering unwarranted state power into our lives when they held a majority. In short, they were as bad then as the Democrats are now.

At the same time, Republicans are all-but-invisible in Washington these days, just as Goldstein was invisible in Orwell's Oceania until the moments when Big Brother would flash the man's face on the screen during the Two-Minute Hate. Unfortunately, Krugman's column, which at least used to have some legitimate economic commentary, has morphed into little more than an semi-weekly screed of Orwellian propaganda of blaming Goldstein, er, the Republicans, for all our ills.

I can understand Krugman's frustration that just when it seems that the Democrats have been holding all of the political cards, they lose what supposedly is a safe seat and the socialist medicine rock rolls to the bottom of the hill. However, I also expect a decorated academic to rise above political partisanship and to write copy that actually differs from the Moveon.org or Daily Kos talking points. So far, Krugman has demonstrated himself to be little more than a highly-paid shill for the left wing of the Democratic Party.

Goldstein Strikes Again! (Or, Krugman Says Not to Worry About Deficits)

It seems that Goldstein is at work again, like the nefarious Count Olaf in A Series of Unfortunate Events. This time, however, Goldstein (who, like Olaf, wears lots of disguses) is disguised as a Republican telling people that the current gargantuan deficits are bad.

Pay no heed to these poseurs! Don't listen to Goldstein! Instead, Paul Krugman tells us to listen to the economists, who "take a much calmer view of budget deficits than anything you’ll see on TV." Anything else is a "scare tactic" dreamed up by Goldstein, uh, Republicans.

Krugman has an analogy: scaring people about the deficit is like what the Bush administration did just before invading Iraq:

To me — and I’m not alone in this — the sudden outbreak of deficit hysteria brings back memories of the groupthink that took hold during the run-up to the Iraq war. Now, as then, dubious allegations, not backed by hard evidence, are being reported as if they have been established beyond a shadow of a doubt. Now, as then, much of the political and media establishments have bought into the notion that we must take drastic action quickly, even though there hasn’t been any new information to justify this sudden urgency. Now, as then, those who challenge the prevailing narrative, no matter how strong their case and no matter how solid their background, are being marginalized (emphasis mine).

Furthermore, the Nobel Laureate declares:

Let’s talk for a moment about budget reality. Contrary to what you often hear, the large deficit the federal government is running right now isn’t the result of runaway spending growth. Instead, well more than half of the deficit was caused by the ongoing economic crisis, which has led to a plunge in tax receipts, required federal bailouts of financial institutions, and been met — appropriately — with temporary measures to stimulate growth and support employment.

The point is that running big deficits in the face of the worst economic slump since the 1930s is actually the right thing to do. If anything, deficits should be bigger than they are because the government should be doing more than it is to create jobs.

It is hard to know where to begin. First, and most important, Krugman and his minions are not being marginalized. Please. The guy is earning sums of money with his speeches and articles that would make a professional athlete jealous. The Keynesians are in positions of power and influence, occupying the top positions at the Federal Reserve System, the Ivy League professorships, and are the subjects of fawning pieces in the leading U.S. newspapers and periodicals. So, let's cut the crap about these guys being shoved into a corner somewhere.

What Krugman means about being "marginalized" is that some people dare disagree with him in public forums and in print, which he sees as something akin to blasphemy. Has he not faithfully proclaimed the Keynesian Gospel, yet there still are infidels out there?!? How dare they contradict the General Theory!

Second, Krugman himself claimed that the unemployment rate would peak somewhere in the eight-percent range if the stimulus were passed. Guess what? The stimulus passed, and we are at 10 percent and climbing. (Krugman's excuse that the stimulus was not large enough is yet more Nobel-Prize nonsense.)

So, are we to believe that the only thing between us and the abyss is the size of the deficit, and the more the government borrows and spends, the better off we shall be? That is what Krugman is claiming, because, as we all know, should the federal debt become greater, all that government needs to do is to print lots of money, which will repudiate the debt, and if the Chinese don't buy it, we can accuse them of being "mercantlists" or worse.

In other words, there always is someone else to blame. Right now, it is those pesky Republicans who, after being defanged in the past two elections (in part, for involving us in wars and for running huge deficits and giving us the Housing Bubble), apparently really are the "shadow government" after all. How do I know that? Here are the words of the Master Himself:

The main difference between last summer, when we were mostly (and appropriately) taking deficits in stride, and the current sense of panic is that deficit fear-mongering has become a key part of Republican political strategy, doing double duty: it damages President Obama’s image even as it cripples his policy agenda. And if the hypocrisy is breathtaking — politicians who voted for budget-busting tax cuts posing as apostles of fiscal rectitude, politicians demonizing attempts to rein in Medicare costs one day (death panels!), then denouncing excessive government spending the next — well, what else is new?

The trouble, however, is that it’s apparently hard for many people to tell the difference between cynical posturing and serious economic argument. And that is having tragic consequences.

For the fact is that thanks to deficit hysteria, Washington now has its priorities all wrong: all the talk is about how to shave a few billion dollars off government spending, while there’s hardly any willingness to tackle mass unemployment. Policy is headed in the wrong direction — and millions of Americans will pay the price.

Well, Houston, we have a problem. According to Krugman, deficits are bad if they occur in a Republican administration, but are good when the Democrats are in charge. Such thinking is not worthy of an acclaimed economist who really should be above spouting political talking points. Does Krugman really want us to believe that opportunity cost - the bedrock of all economic analysis - really becomes nonexistent when the economy tanks? That deficits are bad when the wrong people are in charge, but the same conditions are good when politicians approved by Princeton University and the New York Times are in control?

Such sentiments really are not worthy of a decorated economist. Thus, I have concluded that Goldstein himself has kidnapped the economist Paul Krugman and is disguised as Princeton's finest. Yes, Goldstein is writing Krugman's column!

Should We Blame the Chinese for the Recession?

When the economies of Singapore, Indonesia, and other Southeast Asian countries crashed more than a decade ago, mobs of people rampaged in the streets, seeking out ethnic Chinese merchants and workers and beating and killing them. Why? Well the Chinese were convenient scapegoats.

Today, Paul Krugman, while not advocating mayhem and murder against Chinese (thank you for being civilized, Paul), nonetheless is trying once again to blame China for at least some of our current troubles. China, he declares, is using a "beggar-thy-neighbor" policy against us.

China's "crime," it seems, is undervaluing the Renminbi relative to the U.S. Dollar, having an official exchange rate that values its currency lower than it could get in the market. This makes Chinese exports cheaper relative to U.S. goods, which is one reason that American consumers can purchase inexpensive Chinese products.

However, such a policy encourages China to send its goods abroad, and it also means that such goods are more expensive at home than they would be in a free market. Thus, if anyone is being "beggared," it is Chinese consumers, who are being fleeced in order to permit Americans to consume more goods from China.

Obviously, this is a situation of poorer people subsidizing those who are wealthier. It is welfare in reverse, philanthropy from the poor to the rich.

American consumers are not the ones complaining. U.S. producers are not happy, and for all of the talk in Washington of protecting consumers, it is the producers who tend to be politically connected. Furthermore, if we are going to speak of real-live victimization, then perhaps the fact that the Chinese central bank has been purchasing boatloads of near-worthless U.S. Treasuries is the real scam.

Let's be honest, folks. For years, we have sent dollars to China, dollars that, frankly, are overvalued. The Chinese people have sent us goods, such as cell phones and computers, and in return the government has taken the money and purchased U.S. paper that depreciates daily. Who is getting the good deal, and who is being cheated?

I think that is a legitimate question, one that Krugman does not want to answer.