Krugman: Actually PRODUCING a High Standard of Living is a "Zombie" Idea

Like most Keynesians, Paul Krugman has no idea of how societies prosper. In his view, governments borrow, print, and then spend money and out of that comes, like magic, a prosperous economy. If times are hard, then spend even more and, like the Great Pumpkin, prosperity will rise out of the pumpkin patch.

Take his view of what should be done in Europe, for example, and especially for Greece and Spain. As he has written on numerous occasions, instead of facing the fact that the economies of those two nations cannot produce enough wealth in order to support their bloated unionized government workforces and sustain their ridiculous work rules for private employers. Greece and Spain are in trouble not because they are on the euro, but rather because they used the financial and monetary arrangements of the European Union in a way that was not sustainable.

Now, I agree that most "austerity" packages are wrongheaded because the state swallows much of the GDP of the affected nation and then directs that money to the banks (or, as some libertarians call them, "banksters") that foolishly lent money to those nations for things that ultimately went bust, or to pay for simple operating expenses of the various governments. However, there is another aspect of economics and economies that Krugman not only refuses to admit, but belittles it at every turn: societies that consume much also produce much, and that production is the source of their consumption.

To Paul Krugman, such a notion -- that an economy actually has to produce a standard of living -- is a "zombie idea." Every good Keynesian knows that consumption actually creates production, that one consumes first and then produces later. And, no, Keynesian "demand" is NOT the same kind of demand which entrepreneurs anticipate as they try to move resources from lower-valued to higher-valued uses. Keynesian "demand" is nothing more than new money or wealth transfers being directed to politically-connected people who ostensibly will "spend" that money, and out of which is supposed to come general prosperity. Anything to the contrary is nothing more than "Say's Law," which everyone knows has been discredited. (I mean, people really believe that we can have consumption without production? Get real!)

And so, he demands that Congress, the president, and governments at state and local levels ratchet up their spending, and if the economy is not producing enough wealth to pay the taxes necessary to support this blizzard of spending, no worry. Why? The government can manipulate the Federal Reserve Act of 1913 to permit the Fed to purchase U.S. treasuries in the primary market, so if need be, there would be no barriers at all to vast new amounts of spending and if the shower of new money creates an inflationary environment, all the better! Inflation, as Krugman has written, is a great tool for "deleveraging," which in his view would transfer wealth from rich to the poor.

(For those who insist that Krugman is not an apostle of inflation, note that he strongly endorses the views of Mark Thoma, who is a hardcore inflationist. Like so many other Keynesians, Thoma believes that all it takes is for government to inject new money, which will solve problems painlessly and put the economy back on track. The only problem, people like Thoma and Krugman claim, is that governments are too reluctant to aggressively debase their currencies. The "Inflation Fairy" is hard at work.)

So, yes, do you believe that government wealth transfers are a cost and not a boon to the economy? Do you believe that over time, a nation cannot consume more than it produces? Then you, too, are a "zombie." Wear that moniker proudly.

Krugman's New Political Correctness: Entrepreneurs are Parasites (Because anyone who has wealth is a parasite)

There is a new Political Correctness going about, and that is the claim that anyone whose income is above a certain level (say the upper one percent) only can be evaluated as a parasite, and Paul Krugman is one of the forces behind it. You see, the wealthy -- which include Krugman, since his annual income is in the millions of dollars -- have value ONLY in the amount of money that government takes from them via taxation.

When one views the world in Keynesian terms, then government is the only force that can create demand, since all good Keynesians know that Say's Law is wrong and that the source of consumption is not production, but rather printed money. True, inflation did not work well for Zimbabwe, but it will work for us because Krugman says it will.

Let us take Steven Jobs, for example. Some will mistakenly (according to the Holy Doctrines of the Church of Krugman) claim that by anticipating what consumers would want and then directing the production of goods that consumers readily purchased, Jobs ultimately made our economy wealthier. The profits he made were garnered because his entrepreneurial decision-making was correct.

Obviously, such a viewpoint no longer is Politically Correct. Jobs made more money than anyone else at Apple, so that makes him a parasite. His only value to society lay in the amount of taxes he paid, and the government should have taken more.

An economy, in Keynesians-Speak, is only about aggregates, and whenever government inflates the currency or takes huge chunks of income from the rich, it is "creating demand," and creation of demand ultimately creates jobs, and jobs are the source of wealth. (Note that I have not said "productive services" help create wealth; no, the only value that a job has is the income one earns and then spends.)

As I have said before, Krugman needs to begin with himself. If he were to give all of his income to the government, then there would be more income equality and more aggregate demand. A long journey, we know, begins with a single step.

Drowning in Keynesian fallacies

Whenever a Keynesian, be it Paul Krugman or even the original Keynesian, try to "refute" Say's Law, they generally create a caricature or straw man, and then refute that instead of dealing with Say's basic point. And Krugman does it again in a recent blog post, this time taking on Grover Norquist.

Krugman first takes a quote from Norquist:

The idea that if you take a dollar out of the economy and then — from somebody who earned it, either through debt, or through taxes — and give it to somebody who’s politically connected, that there are more dollars around, that if you stand on one side of the lake and put a bucket into the lake, and walk around to the other side in front of the TV cameras, pour the bucket back into the lake and announce you’re stimulating the lake to great depths. We just wasted $800 billion on stimulus spending that added to debt, that killed jobs.

Krugman then writes, "OK, this is just Say’s Law." As one who has written much on Say's Law, I ask, "It is?"

In dealing with what Krugman insists is a "fallacy," first we have to remind people that Krugman actually believes that printing money CREATES real wealth, or at least it can lead to the creation of real wealth. When criticized, Krugman usually turns to the alleged "baby-sitting co-op" that "solved" its problems by printing more tickets. (You see, the "co-op" is supposed to be a perfect example of an entire economy with all of its complexities.)

Second, Keynes never "discredited" Say's Law. Instead, Keynes created a caricature and refuted that instead, something Henry Hazlitt notes in his book, The Failure of the New Economics, which thoroughly refutes Keynes' General Theory. Furthermore, in denying Say's Law, Krugman is saying in effect that factors of production for purposes of economic analysis can be treated as homogeneous.

Thus, all it takes to get the factors employed is just a monetary or spending transmission, be it via government spending (which is what is "best" in a "liquidity trap"), or by having monetary authorities drive down interest rates. Under this interpretation, inflation does not have a distorting effect upon the economy but, instead, actually stimulates economic activity and creating new wealth.

Thus, what one produces is irrelevant as long as a government can print money. There is a problem, however, and that is that if all it takes is the "courage" to print money (and most governments ALWAYS have the courage to try to produce something from nothing), then Zimbabwe should be the wealthiest nation on the planet.

Krugman would argue that the U.S. Dollar is different, but if real assets mean nothing, or if all assets for purposes of economic analysis considered to be homogeneous, then it would not matter what was produced in the country represented by a particular currency. And as for Say's Law and the Norquist quote, I would argue that Krugman's next quote does not negate the truth of what Norquist is saying, but rather exposes Krugman's fundamental ignorance of simple opportunity cost:

OK, this is just Say’s Law. We don’t know whether Norquist is honest enough with himself to realize that exactly the same logic applies to any spending, that according to his story anyone who borrows to spend, including companies making investments, is just displacing someone else’s spending.

In other words, everything is reduced to just "spending," when, in fact, investment in a free market is profitable when entrepreneurs are able to move resources from lower-valued uses to higher-valued uses as ultimately determined by consumers.

In Wonderland, no such thing happens, as one "investment" is as good as another, since all that matters is spending. Thus, the Obama administration can throw hundreds of billions of dollars at solar energy, windmills, and ethanol and claim that it is "investing in America's future." Indeed, it is diverting resources from higher-valued uses to lower-valued uses and is destroying the economic future of this nation. Furthermore, we are finding that many of the companies receiving these massive subsidies are firms that have contributed money to the Obama campaign, which to me is utter corruption. Contribute to Obama, and have the president then loot taxpayers to throw good money after bad.

The key to understanding what Krugman is saying is to remember that he does not believe resources can be moved from lower-valued to higher-valued uses, at least economically speaking. It is all spending all of the time.

A "War on Demand" or a War on Reason?

In a recent blog post, Paul Krugman is all atwitter over what he perceives to be a "widespread attack on demand-side economics." Not surprisingly, in his defense of Keynesianism, he manages to launch his own misguided attack on anyone who might think that "aggregate demand" is not an economic concept.

He writes:

...we’re seeing a much more widespread attack on demand-side economics. More than that, it’s becoming clear that many people don’t so much disagree with the idea that demand matters as find it abhorrent, incomprehensible, or both. I fairly often get comments to the effect that I can’t possibly believe what I’m saying about monetary or fiscal policy, that no sensible person could believe that printing money or engaging in deficit spending will increase output and employment — never mind that all I’m saying is what Econ 101 textbooks have been saying for the last 62 years.

First, the fact that something might appear in a textbook -- even for 62 years -- does not make it correct. It seems that Krugman is taking a chapter out of the "market test" view of economics that the Chicago School has used in an attempt to discredit the Austrian School.

Krugman, like Keynes, bases his viewpoint on a misstatement of Say's Law, in which he presents a caricature of what J.B. Say wrote in his Chapter XV of Book I in A Treatise on Political Economy. He writes:

First, Keynes was right: Say’s Law — the notion that income must be spent, and hence that supply creates its own demand — really is at the heart of the issue. Many, many people just can’t see how it’s possible for there to be an overall shortfall of demand.

Number one, what Krugman writes is NOT Say's Law, not even close. It is what Krugman and others of his intellectual generation WANT Say's Law to proclaim, yet as one who has read this chapter many times and who published a paper a year ago on it, I can say that what Krugman has written is nonsense.

The chapter in question dealt with the very issues Krugman raises, although it was done more than 130 years before The General Theory was written. In Krugman's caricature, he misinterprets Say's chapter as being written to claim that "aggregate demand" always is sufficient to purchase everything that is produced, as though it is impossible for there to be what Thomas Malthus and others claimed would be a "glut of commodities" that would exist because people would not spend their income.

Say did not deny that there could be a "glut" at times; in fact, he addresses that very issue, beginning with a situation in which there are unsold goods and the economy seems to be in the tank. (This should be a tipoff to the intellectual dishonesty of Krugman's position; Say addresses the very thing that Krugman claims that Say claimed was impossible.)

What Say did argue, and what I have argued in the paper I linked, was that there could be proportional imbalances in the economy, that there would be -- at least temporarily -- "too much" of something produced (Housing bubble, anyone?) and simultaneously, too little of something else.

However, what Say does not do is to lay out the causes of such problems. In his chapter, he only addresses the pre-Keynes/Krugman argument that the problem is due to a lack of "aggregate demand" (they did not use that term in 1803) brought about by a lack of money or a "general overproduction."

The issue Say covered was the source of demand itself: production of goods that could be traded for other goods. Keynes, and later Krugman, would argue that because people are paid in money for producing things, and because they have a tendency to save (and especially the wealthy, which is why Krugman believes that they should be taxed at higher rates -- so government will spend that money), that the market system itself has an internal contradiction that always leads to the problem of overproduction/underconsumption.

Say demolishes that argument in his Chapter XV, and I would invite readers to look at it for themselves, as opposed to taking Krugman's interpretation as gospel. However, Krugman is not satisfied at just attacking that point of view. No, he has to claim that anyone who thinks J.B. Say had a good point is doing so because of irrational moral scruples:

It’s becoming clear to me that a substantial number of writers on economics find the whole idea that the economy can suffer because people are too thrifty, insufficiently willing to spend, deeply repugnant. I’m the sort of person who finds the notion that sometimes virtue is vice and prudence folly interesting; but it’s clear that a number of people find that notion just plain evil. The world shouldn’t be like that — and therefore it isn’t.

And so he continues:

It’s kind of shocking if you think about it. Here we have a huge, hard-won intellectual achievement, one that accounts very well for the world we actually see, and yet it’s being thrown away because it doesn’t go along with ideological preconceptions. Once that sort of thing starts, where does it stop? The next thing you know, the theory of evolution will get the same treatment. Oh, wait.

In other words, this is not an argument about the efficacy of savings versus investment or even the perceived role of "aggregate demand." No, it is an argument between the Smart People (like Krugman) and the Yahoos who are so stupid that they might even believe in Creationism, which every writer at the NY Times knows is a notion that only Really Stupid and Immorally-Ignorant People will embrace.

In other words, in the end, this isn't even an argument about economic theory. No, it is not worthy even of argument. Krugman is saying that those people who disagree with his Keynesian views are so ignorant and so lacking of any regard at all that it would be better for the world if they were not alive. And they certainly deserve not even to be in the presence of Krugman at all, unless, of course, they agree to be treated as people once regarded children: people to be seen but not heard.

Krugman Agonistes: We Are In the "Dark Ages" of Economics

While Paul Krugman has a column today alleging that the Obama administration really has not significantly ramped up domestic spending (which is why he says the economy is mired in the doldrums), I want to go back to something he wrote in January 2009, in which he lays out some opposing lines of economic thought (and stays out of partisan politics, for a change).

Furthermore, I find myself agreeing with Krugman that we are in a "Dark Ages" of economic thinking, but for very different reasons. Krugman is alleging that too many economists are accepting Say's Law as being legitimate, when every good Keynesian knows that J.M. Keynes "discredited" Say's Law in the mid-1930s. I disagree wholeheartedly on many fronts.

The difficulties are legion. First, like Keynes, Krugman really gets Say's Law wrong, creating a caricature of what Say wrote in 1803 and then demolishing the straw man he has created. (One has to keep in mind that Say's Law really is a huge obstacle to Krugmanomics, and, like Keynes, Krugman instinctively understands that point.

Second, the argument really goes to the heart of what constitutes what we call an economy. On one side, we see people like J.B. Say and the Austrians write that an economy consists of real things, real assets, and real relationships between goods. On the other side, we see people like Krugman and Alan Blinder and Ben Bernanke insist that governments can create wealth simply by creating money or borrowing and spending. In their view, an economy is little more than a mechanistic entity in which people robotically create goods with the requirement being that they have enough "purchasing power" so consumers can clear the shelves via spending so that the process can repeat itself.

I would urge people to read Krugman's entire blog post to see the perspective from which he is coming. I will include this quote, which I believe is instructive. Calling the perspectives from Eugene Fama and John Cochrane "pure Say's Law," Krugman writes:

There’s no ambiguity in either case: both Fama and Cochrane are asserting that desired savings are automatically converted into investment spending, and that any government borrowing must come at the expense of investment — period.

What’s so mind-boggling about this is that it commits one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship. Yes, savings have to equal investment, but that’s not something that mystically takes place, it’s because any discrepancy between desired savings and desired investment causes something to happen that brings the two in line.

First, and most important, what we call Say's Law is not about accounting identities or even the infamous S=I. Instead, it is about the fact that consumption and production are intricately related, not by a circular patterns, but rather by the simple fact that one's ability to consume MUST arise from the ability of someone to be able to produce something.

I deal with all of this in a paper I published last year on Say's Law in which I take a telling quote from Benjamin Anderson:

The prevailing view among economists, . . . has long been that purchasing power grows out of production. The great producing countries are the great consuming countries. The twentieth-century world consumes vastly more than the eighteenth-century world because it produces vastly more. . . . Supply and demand in the aggregate are thus not merely equal, but they are identical, since every commodity may be looked upon either as supply of its own kind or as demand for other things. But this doctrine is subject to the great qualification that the proportions must be right; that there must be equilibrium.

This view contrasts with the Keynesian/Marxist views that the real problem with a recessionary economy is that there is the problem of overproduction/underconsumption which can be "solved" by the injection of "purchasing power" into the hands of individuals via government intervention. Call it "pump priming," "giving the economy traction," or "enabling workers to buy back the products they created," but nonetheless all three viewpoints operate on the notion that production and consumption are two unequal and unrelated activities, and that the purpose of consumption (or "spending") is to clear the shelves of the goods that workers made so that the workers can be employed making more of them.

Now, the Keynesian argument -- which Krugman repeats -- is that in the real world, savings are greater than investment, especially when the "animal spirits" of investors are quieted. When that is the case, and investment spending is down, it is up to government to fill in the hole by ratcheting up spending. Now, I don't believe I have mischaracterized Krugman's position here, but, nonetheless, I strongly disagree with it.

First, even if I were to give Krugman his point that S>I, nonetheless (and I have not seen this discussed anywhere) the nature of fractional reserve banking would take the existing savings/deposits and loan them out to where the actual new money created would be substantially greater than the savings base. It is true that banks rarely are going to be fully "loaned up," but Krugman ignores the money multiplier that occurs in lending, something that any student who has taken Money and Banking or even a Macro class would understand.

Second, there is something even more fundamental here, and that is the fact that the Krugman position almost seems to be that the Law of Scarcity is abolished when interest rates approach the "zero bound" (in his words). This also is where Krugman and the Austrians really part company, for in Austrian Economics, the Law of Scarcity is not abandoned at the "zero bound" or the presence of unemployed resources.

Instead, Austrians look to reasons as to why the resources are unemployed, as opposed to the Keynesian argument that people and government simply are not spending enough. Instead, we wish to look beyond to why there no longer is demand for certain things, and to the larger issue of how the proportions involving the factors of production have been disturbed or distorted.

As I have said many times, the Keynesian argument depends upon seeing factors of production as being homogeneous and having no particular special relationships. Everything from mine output to making of cotton candy is just one amorphous and homogeneous set of factors. This is not economic theory; it is a theory of convenience to justify the presence of government spending.