The Dwindling Truth

Leave it to Paul Krugman to use his New York Times column to shade the truth. (The NYT's former public editor, Daniel Okrent, hardly a right-wing conservative, complained that Krugman's columns often had numerous factual errors. Why am I not surprised?)

In his latest column, Krugman promotes a number of false points and I will deal with some of them. Before looking at the substantive claims (the federal budget deficit has been "solved"), I'd like to begin with one his use of a deceitful term, "nonpartisan." He writes:

Recently the nonpartisan Center on Budget and Policy Priorities took Congressional Budget Office projections for the next decade and updated them to take account of two major deficit-reduction actions: the spending cuts agreed to in 2011, amounting to almost $1.5 trillion over the next decade; and the roughly $600 billion in tax increases on the affluent agreed to at the beginning of this year. What the center finds is a budget outlook that, as I said, isn’t great but isn’t terrible: It projects that the ratio of debt to G.D.P., the standard measure of America’s debt position, will be only modestly higher in 2022 than it is now.(Emphasis mine)

Sorry, Paul, but even your employer, the NYT, describes the CBPP as "left-leaning," the Times is not the only one to make that claim.Let's try Time, The Washington Post, and The National Journal, with none of them being considered "right-wing." What Krugman means by "nonpartisan" is that the CBPP does not officially endorse political candidates, but it clearly shills for Barack Obama and the Democrats in general.

For that matter, given Krugman's definition of "nonpartisan," he would have to claim the Heritage Foundation and Cato Institute are "nonpartisan," given that neither of them endorse actual candidates. Of course, one already knows what he thinks of those two organizations and considers them to be shills for the Republican Party. Yes, this is a small point, but once again we see how Krugman likes to play fast-and-loose with the truth.

On to the meat of the column itself. He writes:

Consider, for example, the case of Social Security. There was a case for paying down debt before the baby boomers began to retire, making it easier to pay full benefits later. But George W. Bush squandered the Clinton surplus on tax cuts and wars, and that window has closed. At this point, “reform” proposals are all about things like raising the retirement age or changing the inflation adjustment, moves that would gradually reduce benefits relative to current law. What problem is this supposed to solve?

 Assume that Al Gore had taken the office (and I am sure that Krugman would claim that he rightfully won it) and had left tax rates where they were. Would there have been deficits in the next few years? I suspect the "Clinton surplus" still would have disappeared for one important reason: the Tech Bubble popped in 2000 and a recession followed in 2001. Krugman writes: "It’s true that right now we have a large federal budget deficit. But that deficit is mainly the result of a depressed economy...." However, he wants us to assume that the reason we had deficits in 2001 and 2002 was that Congress lowered the top income tax rate from 39.6 percent to 35 percent...in 2003.

This is more of the "head I win, tails you lose" method that Krugman uses for his arguments. Now, I agree with him that Bush's wars cost this economy plenty (I don't believe that the economy will "benefit" from "weaponized Keynesianism" and spoke out against these wars from the beginning), but there also is another point that Krugman does not make: the source of larger tax revenues in the late 1990s versus the Housing Boom.

The Tech Bubble centered upon the stock markets and, not surprisingly, we saw a huge increase in the nominal amounts of taxes coming from capital gains during the second Clinton presidential term. In fact, at the end of 2000, capital gains receipts were $80 billion more than they were at the end of 1996. The following financial post also makes it clear that capital gains receipts fell sharply during the Bush years. (Capital gains rates were cut during the second Clinton term, yet they still rose, which surely must vex Keynesians, since they seem to believe such things are not possible.)

You'd better believe we pay careful attention to capital gains here. Friday, the Congressional Budget Office released an analysis of the rise and fall of federal individual income tax revenues from 1994 through 2004. It showed that capital gains accounted for half of the non-legislative changes to individual income tax revenues over the period. Ironically, capital gains revenues increased 0.7% of GDP from 1994 through 2000 under President Clinton, and they fell 0.6% of GDP from 2000 to 2004 under President Bush.

 They didn't fall because rates were cut; rather, they fell because people were not getting huge gains from "flipping" stocks after the Tech binge came to an end. Furthermore, a much different tax regime falls upon capital gains from the sale of houses, which means that the government was not able to cash in on the Fed's recycled dollars during the Housing Boom as it had done a decade earlier when the Clinton Bubble was on the rise.

Krugman, not surprisingly, leaves out that tidbit because it doesn't fit his narrative. Now, I will agree that deficit reduction should not be at the top of the agenda, but for different reasons than Krugman gives. He correctly points out that the depressed economy is responsible for much of the current deficit, although to him that is a good sign:

It’s true that right now we have a large federal budget deficit. But that deficit is mainly the result of a depressed economy — and you’re actually supposed to run deficits in a depressed economy to help support overall demand.

Unfortunately, throughout the piece Krugman trots out his "heads I win, tails you lose" logic. Government spending now is good; but cutting tax rates during a downturn is bad. (The economy was in recession shortly after Bush took office, and Democrats tried to claim that his talking about the recession and his campaign to cut tax rates was the cause of the recession.) The deficit is bad, but not so bad, and if the government inflates the currency, creates more jobs for bureaucrats and keeps entrepreneurs from starting new enterprises, and if the government continues to pay vast subsidies to politically-favored businesses (especially those in "green energy"), then out of that will come a real recovery.

I'm not sure how that will happen, but Krugman believes it will. Enough said.

Deficit Economics

Thirty years ago, I published an article in The Freeman entitled, "Deficits are Not the Only Problem," and in it I challenged the notion that federal budget deficits in and of themselves are the major economic problem in our society. The deficits, I argued were symptoms of the larger problem of out-of-control government expansion and the spending that accompanies that expansion.

On the surface, it seems that Paul Krugman agrees with me that the federal deficit by itself is not THE economic problem. Furthermore, I will go further and agree with him that much of the current deficit is due to the depressed state of the U.S. economy, and that a stronger economy would, in fact, provide more tax revenues from current tax rates than is now the situation.

Like always, however, I disagree vehemently with Krugman on (1) the role of federal deficits in "providing" or at least enabling economic recovery, and (2) the efficacy of government spending itself. Krugman believes that we need large deficits so that the government spending generated by them can help jump-start the economy; I believe that the very spending he believes provides overall economic benefits actually hampers economic recovery.

Krugman says that out of the current trillion-dollar deficit, about $600 billion of it is due to the depressed economy, and that the remaining $400 billion is "sustainable." (Funny, he wasn't making that claim when George W. Bush was running large deficits. Then Krugman claimed that the cut in the top income tax rate from 39.6 percent to 35 percent was causing huge economic problems and was dragging us into economic hell. Yes, a relatively small cut in tax rates was destroying the economy, which would have been a first in economic history.)

He writes:

First of all, the weakness of the economy has led directly to lower revenues; when G.D.P. falls, the federal tax take falls too, and in fact always falls substantially more in percentage terms. On top of that, revenue is temporarily depressed by tax breaks, notably the payroll tax cut, that have been put in place to support the economy but will be withdrawn as soon as the economy is stronger (or, unfortunately, even before then). If you do the math, it seems likely that full economic recovery would raise revenue by at least $450 billion.

Meanwhile, the depressed economy has also temporarily raised spending, because more people qualify for unemployment insurance and means-tested programs like food stamps and Medicaid. A reasonable estimate is that economic recovery would reduce federal spending on such programs by at least $150 billion.

Putting all this together, it turns out that the trillion-dollar deficit isn’t a sign of unsustainable finances at all. Some of the deficit is in fact sustainable; just about all of the rest would go away if we had an economic recovery.

He continues:

And the prospects for economic recovery are looking pretty good right now — or would be looking good if it weren’t for the political risks posed by Republican hostage-taking. Housing is reviving, consumer debt is down, employment has improved steadily among prime-age workers. Unfortunately, this recovery may well be derailed by the fiscal cliff and/or a confrontation over the debt ceiling; but this has nothing to do with the alleged unsustainability of the deficit.

Yes, we are supposed to believe that things are just fine, and if President Obama is permitted to stick it to some taxpayers (with the middle class to be stuck at a future date) and spend a few billion here and there, that the economy will recover because of it. Furthermore, if the so-called Fiscal Cliff (yet another idiotic slogan from Washington that the media recites in its usual Pavlovian style) kicks into action, then the economy will tumble down the hill like Sisyphus's boulder.

Notice that this contradicts what Krugman claimed a couple of years ago when the tax cuts were supposed to expire and the government extended them. Back then, Krugman said that if it were up to him, he would allow all of the rates to go back to their pre-2003 levels and use the newfound revenues for more current spending projects. For that matter, he claimed in 2010 that even if all rates were raised, the negative effect would be minimal to the economy.

Today, he sings a different tune. If the Republicans don't give Obama everything he wants, then the Republicans will solely be responsible for plunging the economy into something akin to the Dark Ages. Why he claims that Obama's prescription for recovery -- tax, borrow, print, and spend -- will be effective it beyond my comprehension.

When George W. Bush was president, Krugman claimed over and over that the economy was moribund because Bush got Congress to cut the top rate from 39.6 percent to 35 percent, and that the marginal tax rates for everyone else were cut as well. A while back, he was claiming that these tax cuts were "unaffordable" to the tune of four trillion dollars. With Obama in the White Hosue, he has claimed that it doesn't matter how much the government borrows, since interest rates are at "historic lows" and we "owe it all to ourselves," anyway.

In other words, Krugman gives us mixed signals that on the surface seem to be confusing. There is an easy translation, however: Democrats (and especially Obama) always good, Republicans always bad. If Republican administrations borrow and spend, they are dragging us into Hades; if Democrat administrations borrow and spend, they are bringing economic recovery.

So, in his attempt to be the world's most politically-partisan economist, Paul Krugman calls for the very things that in the long run are economically destructive, but claims that if a Democrat implements those things, then the result will be prosperity. I'm not sure how all of this will take place, but I must say that following Krugman does prove to be an interesting ride.

Krugman's Voodoo Economics: Tax, Spend, and Inflate Ourselves Into Prosperity

Paul Krugman is in his element again. The Republicans control the U.S. House of Representatives and the Democrats no longer have a filibuster-proof majority in the Senate. A very liberal Democrat occupies the White House and is governing via executive orders (winning Krugman's approval, although executive orders are good only when Democrat presidents issue them).

So, even though Democrats still have the upper hand, in Krugman's mind the Republicans rule. Why? Because tax rates are not even higher than they are now. Furthermore, because the top individual income tax rate remains at 35 percent instead of being raised to 39.6 percent, all is lost because, in Krugman's view, that 4.96 difference is the difference between having a manageable federal budget and having large deficits. (Well, that 4.96 AND "death panels.")

All of this leads to a very interesting view of the Economy According to Krugman. As he wrote earlier this year, if it were up to him, ALL tax rates would rise, which would give the government more money (supposedly), lead to more spending, and give the economy a boost. (I'm not sure that Krugman's scenario would follow; when Herbert Hoover got Congress to raise taxes in 1932, revenues actually fell, but, then, Hoover was a Republican and did not have the requisite magical Krugmanian touch that Democrats have when it comes to taxes and spending.)

In his column today, Krugman accuses the Republicans of "hypocrisy," because they both support tax cuts and give lip service to balancing the federal budget. Actually, I agree with Krugman on this point, but I'm not sure the guy who accused Sarah Palin of "lying" on "death panels" and then glowingly spoke of "death panels" before denying he had claimed he really didn't mean what he just had said is someone who should call others "hypocrites."

Nonetheless, I think that we have a pretty clear picture of what Krugman believes will "revitalized" the American economy: higher taxes, more government spending, and inflation. On top of that, Krugman wants to bring back the old financial cartels that existed from the New Deal until the 1980s, not to mention other economic cartels that were prevalent under the federal government's regulatory schemes.

Those of us where were adults in 1980 can remember the outright stagflation that accompanied the government's economic policies, when inflation was in double-digits, unemployment was rising, and we saw no way out. Yet, Krugman wants to bring back those days via the resurrection of the old regulatory regimes and bursts of government spending and inflation.

Step back, folks, and take a hard look at what Krugman is recommending. This is a recipe for stagflation and lots of it. It is NOT a recipe for revitalizing our economy, period.

Economic laws have not changed. Government cannot repeal the Law of Scarcity nor can it order an economy into prosperity no matter what Krugman tells us. Indeed, what Krugman is recommending is nothing short of True Voodoo Economics.

Krugman's Economic Advice: Shop Until You Drop

Even when Paul Krugman gets it right, he still manages to get it wrong. Thus it is today that in his column, he starts out on the right track, but then misinterprets what is in front of him and then goes off on yet another Keynesian spiel.

First, I present the good stuff. Krugman writes:

The root of our current troubles lies in the debt American families ran up during the Bush-era housing bubble. Twenty years ago, the average American household’s debt was 83 percent of its income; by a decade ago, that had crept up to 92 percent; but by late 2007, debts were 130 percent of income.

All this borrowing took place both because banks had abandoned any notion of sound lending and because everyone assumed that house prices would never fall. And then the bubble burst.

While he is right as far as he goes, unfortunately, Krugman the economist does not ask why the banks played the "band in 'Animal House'" role in thinking they could march through the wall. Why did banks abandon "sound lending" principles?

Krugman would answer that a Republican administration was full of free-market types that believed banks should not be regulated, and that suddenly, all bank regulators believed that market hype. That does not square with what we know about government and governance.

Krugman fails to point out that the housing market is heavily subsidized and regulated by government and was so even before the mortgage industry essentially was nationalized during the last year of the Bush administration. Indeed, as one real estate attorney told me last year, the government actively was urging banks to abandon lending standards in the name of promoting more and more home ownership.

At the same time, the Heritage Foundation and Cato Institute were promoting the "Ownership Society" mantra and the Bush administration was bragging that it had put more minorities into home ownership than ever before. I'll go further. The "subprime market" never would have taken off in a free market, not without real safeguards built into the system, which contrasts with the moral hazard that existed as the government told lenders directly and indirectly that the taxpayers had their backs.

That part never makes it into Krugman's narrative, and no wonder. If government played a role by pushing vast amounts of resources into unsustainable markets and promised to make good on bad loans, then no one should be surprised at what happened. Furthermore, there is no such thing as a free market in which those taking the risks don't have to bear losses, which clearly became the perception.

Unfortunately, that is the soundest argument Krugman makes in this column, and from there he goes off the Keynesian deep end. He writes:

What we’ve been dealing with ever since is a painful process of “deleveraging”: highly indebted Americans not only can’t spend the way they used to, they’re having to pay down the debts they ran up in the bubble years. This would be fine if someone else were taking up the slack. But what’s actually happening is that some people are spending much less while nobody is spending more — and this translates into a depressed economy and high unemployment.

What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained: we’re not talking about a brief burst of aid; we’re talking about spending that lasts long enough for households to get their debts back under control. The original Obama stimulus wasn’t just too small; it was also much too short-lived, with much of the positive effect already gone.

How, pray tell, does the government get the money to make up for all that lost consumer spending? As Krugman has said earlier, he believes that ALL of the Bush tax cuts should be permitted to expire, and that if he were in charge of the government, he would take that extra revenue and spend it.

Of course, taking money from people just makes them poorer, and the idea that government spending would make up for their loss is a howler. Contra Keynes and Krugman, governments make sure that friends are benefited and enemies punished. The second way for government to get money, according to Krugman, is to borrow (and borrow and borrow).

Here is where it gets interesting. Who is on the hook for all of this money? Obviously, the debt must be repaid or there has to be a default. Obviously, the government chooses default by inflation, with Americans being told they can have their cake and eat it, too. I hate to be the bearer of bad tidings this Christmas season, but paying back the debt by inflation is not the "free lunch" Krugman claims it to be.

(Remember, he declares in The Return of Depression Economics that there really is a "free lunch," and that all we have to do is to find it. The "free lunch" is the taking on of huge debt, and then quietly repudiating it by destroying the U.S. Dollar. Yeah, as if there are no consequences from so doing.)

In Krugman's economy, we move seamlessly from the housing bubble to continued full employment, just as long as government, people -- someone -- is spending money. This is a view that says resources don't matter, that factors of production are homogeneous, and that there really are no consequences at all for driving entire markets into a big hole via malinvestments.

In other words, it is economics as though the Law of Scarcity did not exist.

Paul Krugman: Holding Economic Logic Hostage to Keynesian Nonsense, Part I

I must admit I enjoy reading Paul Krugman's material on the NY Times page if for no other reason than he does a good job of explaining bad "economic theory" in the form of what Robert Higgs calls "vulgar Keynesianism." While today's column primarily is political in nature (and no one politicizes economics more than Krugman), he also lays out the keys to understanding how Keynesian "logic" actually works.

Now if one were to have a conversation with Krugman, one would find that he actually believes in the Law of Scarcity, the Law of Demand, and the Law of Opportunity Cost. Furthermore, I doubt seriously that he believes these things can be repealed, even by a mythical President Krugman.

Yet, when put into a macroeconomic framework, Krugman's economic thinking is based upon a view that the "rule" somehow are different at different stages during the business cycle. For example, when things are relatively good, then one set of rules apply, and when the economy is in the tank -- as it is now -- one goes by another set of rules. And so it goes.

I will take the liberty to say that Krugman believes that a capitalist economy suffers from what might be "internal contradictions" (I use that term carefully, as Marx used it and Krugman is not a Marxist) that tend to bias economic performance downward. The logical progression goes in the following manner:

• People produce goods and are paid;
• They take that money and "buy back" the goods that they make.

As long as people are able to "buy back" everything they have created, then all is well. However, the "internal contradiction" tends to be seen here:

• People save part of the income they receive;
• Savings tends to be greater than investment (the banks and other savings institutions tend to invest less than they take in as deposits);
• Not enough money is available to "buy back" the created products;
• Therefore, this "underconsumption/overproduction" cycle leads to layoffs as firms quit making goods so that they can sell off their inventories.

That pretty much is the Keynesian explanation of what is happening, and if one reads Krugman, one finds that he is operating on two fronts regarding any cut in tax rates for people he calls "the rich."

• Wealthy people do not consume their entire paychecks at one time, so they have a greater "marginal propensity to save" than do people with lower incomes, which means that their spending/savings ratio creates problems for the economy;
• Wealthy people tend to be more responsible for economic downturns because they don't spend everything at once, which is why they need to have large portions of their income taxed away so that government can do the responsible thing and spend.

Keynesians refer to the "multiplier," which is 1 over the MPS (Marginal Propensity to Save, or 1-MPC, the Marginal Propensity to Consume), and the greater the "multiplier," the better the economy performs. Obviously, the less that is saved, the greater the "multiplier," although Keynes adds that zero savings would bring about hyperinflation.

However, in the Keynesian view, the more government can drive down the savings rate to as close to zero as possible, the better off we will be, and the only way to do that is for government to make saving money as unattractive as possible. This noble goal of government can be accomplished in the following ways:

• Inflate the money supply by enough to discourage present savings, as the value of money depreciates so quickly that to hold any money to spend in the future would be pointless;
• Have high progressive tax rates to confiscate "idle money" from the wealthy so that government can quickly spend and bring the economy back to full employment;
• Have government aggressively borrow money in order to lap up any other idle funds.

As for capital, well, in the Keynesian view, capital simply happens. Furthermore, capital investment at a time like this is useless because of "excess capacity."

There are a number of other implications in all of this, and when one adds Krugman's own belief that a society that is based upon a cradle-to-grave welfare system along with other restrictions is preferable to what he sees as a society governed by the "animal spirits" of capitalism, the logical progressions are obvious. Furthermore, in Krugman's view, markets that are not boxed in by rules set by government agencies always run off the cliff, as all investors are short-term oriented (as are Keynesians) and are not deterred by changes in relative prices, since Keynesians don't believe that prices have any significance except when aggregated in to various price indices.

Furthermore, in Krugman's view, no one would be willing to invest in new capital, given that the economy already suffers from "overcapacity," so any cut in tax rates for wealthy people would be pointless and most likely would further drive down the economy. Only government can make things right, and that government must be run by people who think like he does.

So, when one reads Krugman's columns, these are things that are under-girding his statements. Now, I think that Keynesian thinking was wrong in the 1930s, it is wrong today. I'll address my concerns in my next post.

Krugman Seeks the Herbert Hoover "Solution" to Depression

In 1932, the U.S. economy was in a depression with double-digit unemployment, and the end was not in sight. President Herbert Hoover, faced with both an imploding economy and growing budget deficits, Hoover opted for the Paul Krugman solution: raise taxes.

We know how this story came out. The tax increases not only failed to raise the revenue, but the nation's unemployment rate went up even faster, peaking at 28 percent in February 1933, a month before Franklin D. Roosevelt was inaugurated as Hoover's replacement.

This bit of history has been shoved down the Orwellian Memory Hole by politicians, "distorians," and economists. In his column today, Krugman continues that sorry tradition.

Before going on, I will say that I am not impressed by the Republicans' "low-tax" rhetoric, given that government spending itself is a tax. (One does not even have to hold to perfect Ricardian Equivalence to make that statement.) Nonetheless, I don't think that Krugman's argument here is valid, and the premises from which he builds his argument are ridiculous.

As a "macroeconomist," Krugman operates from a completely different set of "opportunity costs" than what the Law of Scarcity describes. In Krugman's view, the "cost" comes when an individual keeps money he or she has made instead of having it confiscated by the government. (The Keynesian Balanced-Budget Multiplier "proves" that tax increases always have a positive effect and are more economically efficient than the result when individuals keep their money.)

Thus, when money is not confiscated from productive people, that is a "cost" to the country. Obviously, it would not take long to create the Reductio ad absurdum scenario, and I don't think that the person who told a roomful of economists in November 2004 that the pre-1981 70 percent tax rates were "insane" is going to agitate for super-high tax rates. At least not yet.

However, Krugman seems willing to accept anything the Congressional Budget Office produces (at least when the CBO is under control of the Democrats), and I will say that the semi-rosy scenario he claims would be the case if all tax rates rise to their pre-2003 levels is fantasy. He writes:

A few months ago, the Congressional Budget Office released a report on the impact of various tax options. A two-year extension of the Bush tax cuts, it estimated, would lower the unemployment rate next year by between 0.1 and 0.3 percentage points compared with what it would be if the tax cuts were allowed to expire; the effect would be about twice as large in 2012. Those are significant numbers, but not huge — certainly not enough to justify the apocalyptic rhetoric one often hears about what will happen if the tax cuts are allowed to end on schedule.

How the CBO even can come up with something like this is ridiculous on its face. It really seems to be based upon the belief that individuals don't change their behavior at all when taxes are increased or decreased.

Now, I have not read any apocalyptic predictions on the pro-tax cut side, although Krugman has been throwing out enough doom to make up for any ridiculous claims from the Republicans. For example, he writes:

But while raising taxes when unemployment is high is a bad thing, there are worse things. And a cold, hard look at the consequences of giving in to the G.O.P. now suggests that saying no, and letting the Bush tax cuts expire on schedule, is the lesser of two evils.

Bear in mind that Republicans want to make those tax cuts permanent. They might agree to a two- or three-year extension — but only because they believe that this would set up the conditions for a permanent extension later. And they may well be right: if tax-cut blackmail works now, why shouldn’t it work again later?

America, however, cannot afford to make those cuts permanent. We’re talking about almost $4 trillion in lost revenue just over the next decade; over the next 75 years, the revenue loss would be more than three times the entire projected Social Security shortfall. So giving in to Republican demands would mean risking a major fiscal crisis — a crisis that could be resolved only by making savage cuts in federal spending. (Emphasis mine)

This really is akin to the scene in "Animal House" in which the band tries to march through a wall. Does Krugman really believe that the ONLY change would be revenues, and that the U.S. economy would perform just as before with the only difference being that the government would be in possession of $4 trillion more than if the lower rates remain? Furthermore, when government takes money from individuals, does that mean that the "country" always is better off?

This is an interesting line of thinking. According to Krugman, the government is the "country," and the "country" is us. So, if the government has more money, then "we" always are better off -- except for those millionaires who always gain their wealth at the expense of everyone else.

There is nothing in Krugman's writings that would suggest that the optimum tax rate would be 100 percent on ALL private income. I am serious. If Krugman's view of the "country" is the government itself -- and his language points to that belief -- then the "country" is at its best when it has everything that everyone has produced.

Now, I doubt that even Krugman would be willing to give us this kind of scenario, although I never have read anything from him in recent years that would refute it. Instead, he tries to convince us that if individuals are permitted to keep $4 trillion of income (which I doubt would be the case -- those are unrealistic numbers, in my view), that it would be a "cost" to the "country." However, if the government is permitted to confiscate that $4 trillion, then we are better off, since "we" would be the "country."

In Krugman's world, if an individual is permitted to keep any income, that is a "cost" to the country, and even though the individual is made worse off if the money is confiscated, it is a "benefit" to the "country," given his own rhetorical definitions. So, we can have the scenario in which all individuals are made worse off, but the "country" is made better off.

That is economics? I don't think so. It is nothing but absurd set of political talking points.

Krugman Freezes Out Obama

When Paul Krugman won the Nobel Prize in economics in 2008, blogger Don Luskin wrote tongue-in-cheek that it was the first time that the Swedish central bank had given the award to a "dead economist." Luskin was joking, of course, as everyone knows that Krugman is a living and breathing human being, but his point was that Krugman long ago had given up economics for political partisanship and for what Robert Higgs calls "vulgar Keynesianism."

Lest anyone think that Krugman actually tries to make an economic argument from his New York Times perch, well, think again. Here is someone supposedly of intellectual stature trying to claim that if governments only spend enough money, that the spending somehow will permanently revitalize the economy. In other words, we spend ourselves rich.

When Barack Obama was elected President of the United States two years ago, Krugman was among those shouting the "hosannas" and throwing palm branches at the feet of the Messiah. (Of course, Obama did not ride into Washington on the back of a donkey colt, but rather in a gas-guzzler limo.)

Today, however, the hosannas have stopped, at least on Krugman's page, and while he is not yet in the mob shouting, "Crucify him!" nonetheless, I can see that the Messiah already has lost favor and most likely Krugman will be looking elsewhere -- perhaps to Hillary Clinton. In today's column, Krugman essentially rejects Obama because he thinks that the president is not doing enough to spend ourselves into recovery.

This is couched in the language of the federal deficit of course, and Krugman's view that the government under Obama is not confiscating enough income from everyone else:

After the Democratic “shellacking” in the midterm elections, everyone wondered how President Obama would respond. Would he show what he was made of? Would he stand firm for the values he believes in, even in the face of political adversity?

On Monday, we got the answer: he announced a pay freeze for federal workers. This was an announcement that had it all. It was transparently cynical; it was trivial in scale, but misguided in direction; and by making the announcement, Mr. Obama effectively conceded the policy argument to the very people who are seeking — successfully, it seems — to destroy him.

So I guess we are, in fact, seeing what Mr. Obama is made of.

Now, given that millions of Americans have lost their jobs or taken pay cuts, the fact that federal employees will not be receiving pay raises for a couple of years is pretty mild stuff, and Krugman's over-the-top reaction tells us more about his priorities and agenda than it does about anything Obama has done. He goes on:

The truth is that America’s long-run deficit problem has nothing at all to do with overpaid federal workers. For one thing, those workers aren’t overpaid. Federal salaries are, on average, somewhat less than those of private-sector workers with equivalent qualifications. And, anyway, employee pay is only a small fraction of federal expenses; even cutting the payroll in half would reduce total spending less than 3 percent.

So freezing federal pay is cynical deficit-reduction theater. It’s a (literally) cheap trick that only sounds impressive to people who don’t know anything about budget realities. The actual savings, about $5 billion over two years, are chump change given the scale of the deficit.

Of course, it is political theater, as though anything a president does these days is anything but. However, Krugman goes to his own political theater in his insistence that we pretty much can cure all of our economic ills if the tax rate for families making $250K or more a year goes from 35 percent to 39.6 percent, and we steeply raise capital gains taxes and inheritance taxes.

I have no idea as to the tax revenue that would be "lost" if the current tax rates are made permanent (although "permanent" in federal budget language is rather a fluid concept), but I do think that the political theater that Krugman is making is rather telling. You see, Paul Krugman really does want us to believe that we don't need capital investment (other than "massive public works"), and that our economy can prosper just as long as the government spends and spends and spends.

For that matter, I wonder why Krugman does not advocate a 100 percent tax on all of our income, and just let the government spend money, given that the "multiplier" would be at its highest level with such a scenario. Given that governments are not "income constrained," we can end this recession immediately.

Krugman's "no tax cuts for the rich" rhetoric largely is symbolic, as his real beef with Obama is that the government has not confiscated enough of our wealth. As he has written before, if it were up to him, he would let ALL tax rate cuts expire and then have the government go on a spending spree.

So, to follow Krugman's chain of logic, Obama is now out-of-favor because he is not spending and taxing enough. Maybe Hillary Clinton will be the Chosen One. Or maybe Krugman himself.

Krugman, Brooks, and Hijacked Good Sense

Every once in a while, Washington trots out a "commission" that consists of Very Wise People Who Have Served In Government, happily gobbling up what taxpayers have provided. The "commission" meets (and meets and meets) and after a while, its members stand before the news cameras and announce that they have a Very Wise Pronouncement to make.

Not surprisingly, after the Very Wise Commission declares its Oracle, the Usual Suspects denounce whatever what was said, people go back to work, and the Report of the Very Wise People goes onto a shelf where it remains until the next Very Wise Commission is formed. Thus it is with the latest dog-and-pony show of Washington, the National Commission on Fiscal Responsibility and Reform.

Because nothing can occur in Washington without fanfare and moral theater, the latest Very Wise Commission has its website, photo ops, and even a report. These people -- who helped create the very conditions that we now face -- solemnly have told us that we need to pay higher taxes, cut spending, and live within our means. Obviously, even that (as phony as it might be) is financially and morally intolerable.

In the name of being an equal-opportunity annoyer, I present the side-by-side views of Paul Krugman and David Brooks, to columnists who really deserve each other. On the one side, we have an "economist" who hasn't a clue about capital or factors of production in general, who has no idea as to what entrepreneurship is, and really believes money is nothing more than a quantity variable to be placed within a mathematical algorithm.

On the other side, we have an Apostle of "National Greatness," that code term that comes from the Abbott and Costello of Neoconservatism, Brooks and William Kristol (who apparently is now a close adviser to Sarah Palin, Lord save us) telling us that we have to love "National Greatness" more than ourselves if we want to stay on this side of the cliff. It is hard to know where to begin, my day job beckons, and, dammit, it IS my birthday. However, duty calls....

Krugman is angry not because the commission has recommended this or that, but rather because the commission actually thinks that government should consume less, not more, of the country's wealth. He writes:

Start with the declaration of “Our Guiding Principles and Values.” Among them is, “Cap revenue at or below 21% of G.D.P.” This is a guiding principle? And why is a commission charged with finding every possible route to a balanced budget setting an upper (but not lower) limit on revenue?

Should we make Social Security -- a true Ponzi scheme -- on more solid footing? Perish the thought!

Let’s turn next to Social Security. There were rumors beforehand that the commission would recommend a rise in the retirement age, and sure enough, that’s what Mr. Bowles and Mr. Simpson do. They want the age at which Social Security becomes available to rise along with average life expectancy. Is that reasonable?

The answer is no, for a number of reasons — including the point that working until you’re 69, which may sound doable for people with desk jobs, is a lot harder for the many Americans who still do physical labor.

But beyond that, the proposal seemingly ignores a crucial point: while average life expectancy is indeed rising, it’s doing so mainly for high earners, precisely the people who need Social Security least. Life expectancy in the bottom half of the income distribution has barely inched up over the past three decades. So the Bowles-Simpson proposal is basically saying that janitors should be forced to work longer because these days corporate lawyers live to a ripe old age.

How does one "reform" a Ponzi scheme? I guess raise taxes, which solves everything. But Krugman does not stop there. No, he engages in what I think is a rather bizarre attack that apparently undercuts what he has been claiming on his pages: that ObamaCare actually will cut healthcare costs. Read on:

It’s true that the PowerPoint contains nice-looking charts showing deficits falling and debt levels stabilizing. But it becomes clear, once you spend a little time trying to figure out what’s going on, that the main driver of those pretty charts is the assumption that the rate of growth in health-care costs will slow dramatically. And how is this to be achieved? By “establishing a process to regularly evaluate cost growth” and taking “additional steps as needed.” What does that mean? I have no idea. (Emphasis mine)

It’s no mystery what has happened on the deficit commission: as so often happens in modern Washington, a process meant to deal with real problems has been hijacked on behalf of an ideological agenda. Under the guise of facing our fiscal problems, Mr. Bowles and Mr. Simpson are trying to smuggle in the same old, same old — tax cuts for the rich and erosion of the social safety net.

Anyone who has read Krugman regularly knows that Krugman is a True Believer when it comes to Congressional Budget Office claims about the future of the cost of healthcare, now that the government will be controlling it. (See the chart below to get a better understanding of how this process will work. I'm sure you will conclude that the system is in very, very, very good hands.)

Now, why is it heresy for Krugman to claim that ObamaCare will cut costs, but it is not OK for Alan Simpson and Erskine Bowles to do the same? I don't know, although I do believe that any notion that what Congress passed earlier this year will cut anything but the quality and supply of medical care is ludicrous. Nonetheless, Krugman believes the CBO pronouncements like Jerry Falwell believed in Biblical inerrancy -- except when someone else who Krugman doesn't like says the same thing.

Then there is David "National Greatness" Brooks. What can I say, except to include the following from his latest column:

It will take a revived patriotism to get people to look beyond their short-term financial interest to see the long-term national threat. Do you really love your tax deduction more than America’s future greatness? Are you really unwilling to sacrifice your Social Security cost-of-living adjustment at a time when soldiers and Marines are sacrificing their lives for their country in Afghanistan?

Like the civil rights movement, this movement will ask Americans to live up to their best selves. But it will do other things besides.

It will have to restore the social norms that prevailed through much of American history: when narcissism and hyperpartisanship was mitigated by loyalties larger than tribe and self; when competition between the parties was limited and constructive, not total and fratricidal.

This movement will have to build institutions to support the leaders who make the hard bargains. As in the civil rights era, politicians won’t make big changes unless they are impelled and protected by a social upsurge.

Most important, this movement will have to develop a governing philosophy and a policy agenda. Right now, orthodox liberals and conservatives have their idea networks, and everybody else is intellectual roadkill. This coming movement will have to revive the American System: a governing philosophy that believes in targeted federal efforts to arouse growth, social mobility and responsibility.

Like the chairmen’s report, this movement could demand that Congress wipe out tax loopholes and begin anew. It could protect federal aid to the poor while reducing federal subsidies to the upper-middle class.

The coming movement may be a third party or it may support serious people in the existing two. Its goal will be unapologetic: preserving American pre-eminence. It will preserve America’s standing in the world on the grounds that this supremacy is a gift to our children and a blessing for the earth.

There are some things that simply don't need a reply, as they are ridiculous enough on the face. Brooks' column is one of those things.

Krugman's Tax-Cut Dishonesty

I wondered when Paul Krugman was going to make his misleading points about the upcoming tax increases, and he did not waste time. Today, he once again provides more fodder for the "Krugman Truth Squad," as well as giving me an excuse to sit on my couch and write yet another blog post.

First, let me provide a Krugman statement and then go from there:

So, about those tax cuts: back in 2001, the Bush administration bundled huge tax cuts for wealthy Americans with much smaller tax cuts for the middle class, then pretended that it was mainly offering tax breaks to ordinary families. Meanwhile, it circumvented Senate rules intended to prevent irresponsible fiscal actions — rules that would have forced it to find spending cuts to offset its $1.3 trillion tax cut — by putting an expiration date of Dec. 31, 2010, on the whole bill. And the witching hour is now upon us. If Congress doesn’t act, the Bush tax cuts will turn into a pumpkin at the end of this year, with tax rates reverting to Clinton-era levels.

In response, President Obama is proposing legislation that would keep tax rates essentially unchanged for 98 percent of Americans but allow rates on the richest 2 percent to rise. But Republicans are threatening to block that legislation, effectively raising taxes on the middle class, unless they get tax breaks for their wealthy friends.

That’s an extraordinary step. Almost everyone agrees that raising taxes on the middle class in the middle of an economic slump is a bad idea, unless the effects are offset by other job-creation programs — and Republicans are blocking those, too. So the G.O.P. is, in effect, threatening to plunge the U.S. economy back into recession unless Democrats pay up. (Emphasis mine)

As I note below, Krugman already is on the record as calling for the repeal of ALL of the tax-rate cuts from the last decade, and then taking the money and having the government spend it. (Guess what, Paul? If government takes the money, it will spend it, period.) So, is Krugman now claiming that raising taxes (since we already know government WILL spend that new revenue) will cause the economy to go downhill? And this after earlier calling for expiration of ALL lower tax rates? The guy needs to make up his mind.

OK, let us look at the actual rate cuts. This recent AP article does a good job of explaining what actually will occur, as opposed to Krugman's partisan rant:

Here's some pressure for lawmakers: If they don't reach agreement on extending soon-to-expire Bush-era tax cuts, nearly all their constituents back home will get big tax increases.

A typical family of four with a household income of $50,000 a year would have to pay $2,900 more in taxes in 2011, according to a new analysis by Deloitte Tax LLP, a tax consulting firm. The same family making $100,000 a year would see its taxes rise by $4,500.

Wealthier families face even bigger tax hikes. A family of four making $500,000 a year would pay $10,800 more in taxes. The same family making $1 million a year would get a tax increase of $52,300.

The estimates are based on total household income, including wages, capital gains and qualified dividends. The estimated tax bills take into account typical deductions at each income level.

Democrats have been arguing for much of the past decade that tax cuts enacted in 2001 and 2003 under former President George W. Bush provided a windfall for the wealthy. That's true, but they also reduced taxes for the working poor, the middle class, and just about everyone in between. (Emphasis mine)

So, according to Krugman, for a family making $100K a year, $4,500 is just chump change, a tiny sliver of cash. I don't think so. Tax rates were cut at every level of income and one of the ironic results was that the tax payments became even more progressive than they had been before, with about half of all U.S. households paying no federal income tax at all. (However, they do pay Social Security tax, which for many families takes more money from them than does the federal income tax.)

Furthermore, Krugman recently called for raising ALL taxes at all levels:

If we could wave away political reality, I’d let all the Bush tax cuts expire, and use the improvement in the budget outlook to justify a large, temporary increase in public spending.

Let me translate: If the government takes a bigger bite of taxes during the recession, then it can spend more money, and we will be better off than before. Now, I'm not sure how that works, and maybe the Great One Can explain to me how this would help lead us back to prosperity and full-employment, but I'm confused.

Furthermore, if raising all tax rates to take more income would be good for the economy, why not a tax of 100 percent? I mean, just think of all the wonderful things government can do for us if it just has enough money to spend!

One of the hard realities that is about to hit American families is that at all levels, they will be paying substantially more in taxes than before, once the current rates expire. Krugman has been denying this reality for years, claiming that the cut in the top rate from 39.6 percent to 35 percent has been responsible for almost all of the federal deficit. This is nonsense, pure nonsense, and it is nonsense on its face.

So, Krugman wants it both ways. He wants to claim that if government takes a bigger chunk of money from all of us -- and then spends it on "jobs programs" -- the economy will improve. If the tax rates for everyone but those making past the $200K threshold are kept at current levels, the economy will improve.

So, which is it? Now, I am not going to say that if the second option listed above is implemented, that the economy will plunge into oblivion. Furthermore, government spending, no matter how it is financed, is a tax, period. The money may not come from direct revenues, but nonetheless it is a tax.

(Yes, yes, I know that Chartalists have declared that when it comes to government gaining revenues, the Law of Scarcity is repealed, but we are dealing with economics here, not fantasy.)

In the end, Krugman wants us to believe a number of things that are mutually-exclusive. By disguising it in a partisan rant, he is able to present the "Good Democrats versus Evil Republicans" morality play that no doubt will make his groupies happy, but he does so by engaging simply in partisan politics, not economics.

Krugman: Higher Taxes Are A Net Plus

As I have noted before, Paul Krugman told me during a Q&A in a session at the 2004 Southern Economic Association meetings (Dr. Joseph Salerno was sitting next to me and he can verify what I am writing) that the 70 percent tax rates that existed before 1981 were "insane." Given what Krugman has written in a recent blog post, my sense is that he has repudiated his 2004 statement.

He writes:

If we could wave away political reality, I’d let all the Bush tax cuts expire, and use the improvement in the budget outlook to justify a large, temporary increase in public spending.

However, he notes, so he goes to the next best thing: raising only the top marginal rates. His justification is pure Keynesian and it leads to asking the following question: If government spending always is better than private spending, then why not have a 100 percent tax rate on ALL income? Let me explain.

Krugman declares that wealthy people might not spend all of the income that accrues to them (they save it, and everyone knows that Keynesians believe that saving is bad, bad, bad), so government must confiscate as much as possible, since government always spends what it gets (and more). As for lower-income people, they are not so willing to save, so they spend their money, which is good for the economy:

It comes down to the dual fiscal problem the U.S. economy faces: short-term, the government needs to do all it can to prop up spending; long-term, it needs to reduce the deficit. The latter concern means that it would be a terrible idea to make the high-end tax cuts permanent; that would be a huge drain on the public finances, serving no good purpose. But why not a temporary extension? Because it would do very little to promote spending.

The basic framework we have for thinking about consumer spending goes back to none other than Milton Friedman, whose “permanent income” hypothesis says that people will save most of any income change they see as merely transitory. Telling rich people that we’ll keep their taxes low for a couple more years is, for them, a transitory income gain; they’ll save the bulk of it.

Isn’t the same true for lower-income people? Not to the same extent. Permanent-income reasoning doesn’t fully apply when some people are “liquidity-constrained” — they have depressed income, which would make them want to spend more than they earn right now, but they’re out of assets and unable to borrow, or unable to borrow except at relatively high interest rates. People in that situation will spend much or all of any temporary windfall.

So if we give money to people likely to be liquidity-constrained, they are likely to spend it. That’s why aid to the unemployed is an effective stimulus; it also suggests that tax cuts for lower-income workers will be relatively effective at raising demand. But the affluent, who typically have lots of assets and good access to borrowing, are much less likely to be in that situation. So tax cuts for the lower 60 or 80 percent of the population are an OK, not great but OK, form of stimulus; tax cuts for the top 2 percent, not at all.

Notice that Krugman says that letting lower-income people keep some of their money is "OK," but not "great." What is "great," obviously, is government spending.

So, I ask the question again: Given Krugman's logic, is it not better for government to confiscate ALL earnings from everyone and spend the money on what the Political Classes believe to be important? After all, Krugman clearly states in this post that government spending is better for the economy than private spending, so it seems to me that logic should prevail and all of us work for the government for free.

Krugman: Post Hoc Ergo Propter Hoc

The Post Hoc Ergo Propter Hoc Fallacy is an important tool in Paul Krugman's arsenal of arguments that he presents from his page in the New York Times. In his column today, he argues in a roundabout fashion that if the Congress permits the so-called Bush Tax Cuts to expire in 2011, that we can expect economic recovery to follow.

No, he does not say that, but he does make this point:

When Bill Clinton raised taxes on top incomes, conservatives predicted economic disaster; what actually followed was an economic boom and a remarkable swing from budget deficit to surplus. Then the Bush tax cuts came along, helping turn that surplus into a persistent deficit, even before the crash.

Everything he says there is true, but he also leaves out some important things. First, the economic boom of the 1990s did not happen until the latter part of the decade, with the nation's rate of unemployment dipping below five percent in 1997. That boom, of course, produced a huge stock market bubble, something Krugman leaves out (since it does not fit his narrative), and Americans found out in 2001 that much of that "prosperity" was phony.

Second, when Krugman refers to the "crash," he is not speaking of the crash of the stock market (and especially the NASDAQ) in late 2000 and early 2001, which was part of the Clinton presidency. Indeed, even had tax rates remained the same as they were before Congress cut the rates in 2001, the phony surplus quickly would have morphed into deficit, which is what happens during recessions.

Just as Krugman indicates (in a backdoor approach) that had tax rates not been cut in 1981, that there would have been no recession, Krugman now is trying to tell us that there only will be positive effects when the Bush tax cuts expire next year.

Since he insists upon using partisan political talking points ("tax cuts for the wealthy"), perhaps some perspective is in order. When the tax cuts expire, we are not looking at just the top rates going back to 39.6 percent. No, we are looking at ALL rates going back up, as the lowest rate jumps from 10 percent to 15 percent and so on.

In other words, every person reading these words today will see his or her federal income taxes go up next year, and you can bet that the tax increases for some of you will be much higher than you had believed. After all, Krugman has insisted that ONLY the wealthy received tax relief, and you are going to find out that Krugman was wrong.

Now, I must add that I am not defending the talking points from Republicans. When we have a federal government invading other countries and jacking up spending (when Republicans controlled the White House AND Congress) at levels that would have made Lyndon Johnson proud, we are not talking about a "low tax" environment. There really is no free lunch, and higher government spending equates to people bearing a greater burden of deadweight losses imposed by the state. There is no way around it, and I have no intention of repeating Republican talking points about "dynamic scoring" or anything else about cutting tax rates.

One of my graduate school professors, Robert Ekelund, wrote this article six years ago about the record of Republicans in office, and it is instructive to anyone who believes that even if Congress changes hands next year that we are going to see any relief. I have no confidence in the current Congress, and will have none in the next, no matter what the political rhetoric might be.

So, will higher taxes lead to more prosperity, as Krugman seems to insist? We shall see, but the last major tax increase during a depression took place in 1932 under Herbert Hoover. We know how that move turned out.