Disdain for Economics

I find it quite interesting that Paul Krugman has decided to recast himself as a populist, as though he is part of the "rest of us." (Anyone who has attended conferences and seen Krugman interacting with others can say quite assuredly that the guy hardly fits into the category of the "common man," especially since he is a multi-millionaire and an academic.)

As usual, in his latest column, he pretends to be Paul Krugman The Populist and excoriate Mitt Romney for his recent remarks at the Boca Raton fundraiser. What I find interesting, however, is that Krugman reverts to stereotypes, which hardly is what academics are supposed to do. Moreover, in other columns, he has claimed that inflation actually benefits the poor and middle class over the rich, which simply is not true.

Furthermore, instead of providing insight, Krugman provides Keynesian stereotypes. I find it interesting that Tim Carney, who hardly is a celebrated economist, gives much more insight into the whole Romney affair than Krugman ever could. Carney writes:

By tagging 47 percent of America as irresponsible, Obama-supporting government dependents, Romney showed again that his politics are grounded in false liberal premises.

Romney's statement at a closed-door fundraiser reflected the mistaken liberal view that the growth of government mostly redistributes wealth downward -- it doesn't. He also implicitly bought into the Left's narrow view that both tax cuts and welfare programs mostly benefit the immediate recipients. Finally, Romney conflated tax cuts with government aid, reflecting the perverse mindset that all wealth originally belongs to the state.

He then lays it out quite nicely:

Romney was correct that a portion of America backs President Obama because they "are dependent upon government" and "believe that they are entitled." We even know these dependents' names: Duke Energy CEO Jim Rogers, General Electric boss Jeff Immelt, Pfizer lobbying chief Sally Sussman, Solyndra investor George Kaiser and millionaire lobbyist Tony Podesta, to list a few.

In the last few years of bailouts, stimulus, Obamacare and government expansion in general, we have seen median income fall and corporate profits soar. Industries are consolidating as the big get bigger while the little guys shut down.

But it gets better:

When government controls more money, those with the best lobbyists pocket most of it. The five largest banks hold a share of U.S. assets 30 percent larger today than in 2006. Also, as Obama has expanded export subsidies, 75 percent of the Export-Import Bank's loan-guarantee dollars in the past three years have subsidized Boeing sales.

Romney, however, wasn't talking about corporate welfare queens. He was talking about the 47 percent of the population that pays no federal income tax.

Think about Romney's perverse logic here: He disparaged people as "dependent" for not owing income taxes. Many of these people are retired and living off the life savings they earned. A family of four earning $40,000 could owe zero federal income tax even without tax credits.

Keeping your own money isn't being "dependent on government." Sure, Obama speaks as if it were, lambasting the GOP for "giving" tax cuts to the wrong people. But Republicans are supposed to distinguish between government giving you something and government leaving you alone.

The real issue is not disdain for workers but rather disdain for investment and for economic growth. Romney certainly does not get it and neither does Krugman. (Nor does Obama, but we already knew that.) When I read Romney's quotes, all I can do is to shake my head, and when I read Krugman's quotes, I am reminded once again that he is a political operative, not an economist.

Krugman Endorses Insanity (His Own Words)

On the Sunday before Thanksgiving in 2004, I attended a session at the Southern Economics Association annual meeting, held in New Orleans, and the speaker was Paul Krugman. Joseph Salerno and I sat next to each other to hear the Great Wisdom from The Master. To be honest, I cannot remember anything he said, but I do remember his answer to my question during the Q&A.

My question dealt with tax rates. I asked that since he was critical of the current tax setup, would he endorse the 70 percent rates that existed before 1981? "Oh, no!" he exclaimed, "Those rates were insane!"

Since that time, Krugman seems to be doing everything he can to endorse insanity, and he does it again today in a column that totally misses the mark on the issue of economic growth. To be honest, the question he seems to be raising is a fair one -- Can we have both strong economic growth and high marginal tax rates? -- but his view of economic growth is so skewed that one hardly can answer it on his terms.

He writes:

The first thing you need to know is that America wasn’t always like this. When John F. Kennedy was elected president, the top 0.01 percent was only about a quarter as rich compared with the typical family as it is now — and members of that class paid much higher taxes than they do today. Yet somehow we managed to have a dynamic, innovative economy that was the envy of the world. The superrich may imagine that their wealth makes the world go round, but history says otherwise.

He is correct in that in the early 1960s, the U.S. economy was still the strongest in the world even though its highest marginal rate was about 90 percent. Thus, he reasons, tax rates really don't matter and we can raise rate much higher than they are today and still have lots of economic growth. In past columns, he has noted that a number of key sectors such as rail, truck, and air transportation all were organized into regulated cartels (though he does not use "cartels" even though that is what they were), and banking and finance were tightly organized into similar kinds of cartels. Things were so good back then, he argues, that any change in such legal arrangements could not have had any overall economic benefits and, in fact, the only reason things were changed was because people with the wrong ideology took power.

(Nowhere does Krugman acknowledge the Elephant In The Living Room. In 1961, the other economies of the world were recovering from that destruction of World War II. Japan's economy was in its infancy of productivity, Great Britain had moved to socialism and stagnation, Eastern Europe was walled off by the U.S.S.R., most of Asia was still in its ancient agricultural mode. The U.S. economy was in a position that would be changing, even if Krugman refuses to acknowledge that simple fact.)

Krugman seems to be saying that since this arrangement seemed to be successful in 1961, it ALWAYS would be successful, and he also seems to hint that the economy was successful BECAUSE of the tax and regulatory environment. For Krugman, it is post hoc, ergo propter hoc. Thus, if we were to return to such arrangements, we could then emulate the success of that era.

This brings me to the subject of his column, and that is his discussion of "the rich." If I read Krugman correctly, he is saying that Mitt Romney and his supporters are claiming that those who are wealthy really are the "engines" of a market economy, and that to raise taxes on them would stifle economic growth. Those supporters, Krugman, argues, are wrong because we had high marginal rates before along with economic growth.

Unfortunately, Krugman's entire analysis is based upon a very typical Keynesian "snapshot" view of the economy in which, to quote Robert Higgs, the individual factors of the economy are treated as just "goo" in which the only relevant analysis is to use pure aggregates. This has much political usefulness, as one can see, for Krugman does not have to deal with long-term trends or any underlying weaknesses within the economy. Furthermore, in his views, changes to the legal and regulatory structure have nothing to do with problems that  came about because of the structures of incentives and relationships created by tax laws and regulation. Instead, any changes to what had been a near-perfect system came about ONLY because of "conservative ideology."

Notice a word that never appears in any of Krugman's columns; never. It is "entrepreneurship." I have come to believe that Krugman thinks than an economy is totally administrative and very mechanistic: producers know the production function and then they produce things based upon their projections of how future spending patterns will go. The only things needed for a "successful" economy, then, are productions functions and spending.

The Krugman Economy is one in which economic growth would be due to changes in technology (and government researchers can "invent" anything that is necessary and innovative) and spending, lots of spending. Markets are useful only if they fit the pattern of "perfect competition" in which each firm is tiny and it faces a horizontal demand curve. Firms are simple production functions with given cost curves, with the sole decision by managers being where to set output.

Since entrepreneurship really is not necessary in the Krugman Economy, anyone who gains wealth via entrepreneurial activities is no different than a person who has inherited wealth, like the Kennedys. High marginal tax rates would have no effect upon production or wealth creation, since a government-run firm would be just as productive as a private one and probably more socially useful, since government agents and regulators -- at least if they are Democrats -- always govern with the best of intentions, and everyone know that intentions are all that matters. (Thus, if government agents intend to have high-quality "universal" medical care, then such a program is both morally superior to anything else and also will have the intended results.)

In the Krugman Economy, a Steven Jobs is no more useful than someone living in the Hamptons who lives off a huge trust fund, with the only real social use of either being the potential for government to take large portions of their incomes via taxation, which then can be converted into government spending, which is the REAL source of economic growth. There are no such things as incentives; corporations and entrepreneurs will not change their behavior or outlook a whit if the top rates go back up to 90 percent. Like the band in "Animal House," they will continue to march forward even if a wall blocks their way.

As I see it, Krugman argues that high tax rates will not hurt economic growth because entrepreneurs are both economically and socially unnecessary. He has not gone as far as John Kenneth Galbraith, who argued that entrepreneurs were parasites because they produced useless "private" goods that took away from "needed public investment," although is clearly is in Galbraith's neighborhood.

I would argue that Krugman is much closer to the views of his former professor, Paul Samuelson, who depended solely upon GDP models which permitted him to claim that the planned economy of the former Soviet Union was superior to that of a market economy because the U.S.S.R.'s aggregate numbers showed high growth. That the economy of the U.S.S.R. was primitive, blocked by massive shortages, poor quality of goods, and outright idiocy. Instead, people like Samuelson look at the overall production of goods, such as automobiles and then assumed that, for the purposes of economic analysis, a clunky, 1948-style East German Wartburg was no different than the superior cars made in the West and in Japan. All that mattered were aggregates.

Since entrepreneurship in the old communist bloc economies was illegal and those economies were growing rapidly, Samuelson and his followers reasoned that entrepreneurship at best was a dinosaur, historically interesting but unneeded in the modern, "sophisticated" economies in which wise planners armed with MIT doctorates could run via the creation and solving of simultaneous equations.

In a word, Krugman really does not understand the role of the entrepreneur, nor will he ever understand it. All he sees is someone with money who isn't spending enough of it at the present time. Furthermore, he cannot tell the difference between an entrepreneur and someone who lives on inherited wealth, nor can he tell the difference between market entrepreneurship and political entrepreneurship (i.e. Solyndra).

So, in the Wonderland of Krugman's economy, 90 percent tax rates make perfect sense. It might be "insanity," but in Wonderland, the insane is sane.

Should capital gains tax rates reflect ordinary income tax rates? Maybe in Wonderland

[Update]: In his column today, Krugman continues the theme that capital gains taxes should be higher, although he does not say HOW high. His reference toward Ronald Reagan invokes another logical fallacy, as though whatever Reagan did regarding taxes always should be acceptable to people who hold to free-market principles.

Krugman also fallaciously assumes that wealthy people pay ONLY 15 percent of their entire income in taxes. However, this interesting chart appeared today in the Wall Street Journal that lists ALL federal taxes paid by people in different income groups, and it tells a much different story. (Of course, Krugman is well-known for making up history, whether it be tax or regulation history. One might expect such behavior from a political operative.)

Now, why would Krugman try to be deceptive here? Why is Krugman nearly always deceptive? It is because he has traded whatever academic integrity he had to be a political operative. It is one thing to argue about tax rates and quite another to present a false picture of a situation -- when accurate information is available. [End Update]

In his post on the post-war history of capital gains taxes, Paul Krugman points out that the rates have been higher in the past than they are now. That obviously is true, but it opens up other arguments. For example, he declares this:

Here’s how Romney’s low taxes will be defended by smarter conservatives (the less smart ones will just shout “class warfare”): they’ll claim that there are compelling reasons to have low taxes on capital gains, and that there is therefore nothing wrong with having very high-income people paying lower tax rates than the middle class.

Like Barack Obama, he is slippery with his language, for even with lower rates, people who gain most of their income via investment are going to pay significantly higher amounts in taxes than others. Unfortunately, in a speech the other day, Obama first mentioned tax rates and then he claimed that the wealthy thus pay "lower taxes" than do people in the middle class. That simply is false, but a president who claims that paying unemployment benefits will "create more jobs" than the construction of an oil pipeline (and, by insinuation, more wealth) simply is delusional about the economy. Keynesianism will do that to people. The U.S. economy did well relative to the rest of the world (which was recovering from World War II) at this time, so does Krugman also believe, in the name of "fairness," that the capital gains rates also should have been 91 percent? I don't know, but I don't see, using his own logic, how he can argue against that modest proposal.

In fact, during that time, even some of the LOWEST rates were higher than 25 percent or slightly under 25 percent. Thus, will Krugman and Obama complain that the capital gains rates in the 1950s were unjust because they were lower than tax rates that people earning small incomes were paying? I don't know, although it seems that Krugman seems to be fixated on the current situation while claiming that the 1950s were prosperous years, and I suspect he believes that the high tax rates were part of the reason for the prosperity.

(He certainly has not made any statements in public to the contrary except to tell me in a 2004 Q&A at the Southern Economic Association meetings that the 70 percent rates of 1980 were "insane." I have not seen him making any similar statements in any of his writings since then.)

If Paul Krugman believes that capital gains taxes always should be at the top rate, since it would be unfair for investors to pay the same rates (or less) than the middle class, perhaps we need to look at the various marginal rates of income taxation to see if Krugman is trying to pull a fast one. For example, during the time in the 1950s when capital gains rates were 25 percent, the top income tax rate in the USA was 91 percent.

The following table that lists inflation-adjusted income tax brackets since 1913 might make things a bit more clear:

Partial History of Marginal Income Tax Rates Adjusted for Inflation
	Income	First	Top Bracket
Year	Brackets	Bracket	Rate	Income	Adj. 2011	Comment
1913	7	1%	7%	$500,000	$11.3M	First permanent income tax
1917	21	2%	67%	$2,000,000	$35M	World War I financing
1925	23	1.5%	25%	$100,000	$1.28M	Post war reductions
1932	55	4%	63%	$1,000,000	$16.4M	Depression era
1936	31	4%	79%	$5,000,000	$80.7M
1941	32	10%	81%	$5,000,000	$76.3M	World War II
1942	24	19%	88%	$200,000	$2.75M	Revenue Act of 1942
1944	24	23%	94%	$200,000	$2.54M	Individual Income Tax Act of 1944
1946	24	20%	91%	$200,000	$2.30M
1954	24	20%	91%	$200,000	$1.67M
1964	26	16%	77%	$400,000	$2.85M	Tax reduction during Vietnam war
1965	25	14%	70%	$200,000	$1.42M
1981	16	14%	70%	$212,000	$532k	Reagan era tax cuts
1982	14	12%	50%	$106,000	$199k	"
1987	5	11%	38.5%	$90,000	$178k	"
1988	2	15%	28%	$29,750	$56k	"
1991	3	15%	31%	$82,150	$135k
1993	5	15%	39.6%	$250,000	$388k
2003	6	10%	35%	$311,950	$380k	Bush era tax cuts
2011	6	10%	35%	$379,150	$379k

In the end, I don't think Krugman is making much of an argument. For example, as one who was in college in the early 1970s and then being in the workplace for more than half the decade, the 40 percent capital gains rates also coincided with an era of high inflation and high unemployment. If Krugman believes that capital gains rates should reflect normal income tax rates, then he is saying that we need 40 percent capital gains rates again.

For that matter, the 1970s were a time of economic stagnation, not unbridled prosperity, as Krugman wants us to believe. He might hate the 1980s, but that also was a time of huge private investments in the high-tech sector and telecommunications, and Daniel Henninger of the Wall Street Journal has an excellent column about that era, including the corporate raiders that Krugman claims did so much damage. The article deals with the actual state of business entrepreneurship at that time, something that Krugman is incapable of understanding, since all of his economic analysis is done with the crude aggregates of the Keynesian models, and there is no way to fit entrepreneurship into those contraptions.

There is a larger issue, however, and that is private investment as a whole. Krugman, being a good Keynesian, holds that economically speaking, government "investment" is just as good as private investment, so it doesn't matter if the government is building nuclear weapons or a farmer is growing crops. If the GDP numbers of both are equal, then both are equal in their wealth component.

Is this a ridiculous example, since even Krugman would admit we cannot eat nuclear weapons? In one way, yes, but in the Keynesian structure, it is not ridiculous. And given that Krugman has given us his "confidence fairy" ditty numerous times, it is clear that he does not hold private investment to be anything but another form of spending, and if government can spend in equal amounts, then it is just as well and perhaps better, since in Wonderland, State Power equals freedom and prosperity.

A delusion agenda, anyone?

[Update]: Graham Dugas sent me a link of Richard Nixon's infamous August 15, 1971, speech after closing the gold window because of constant runs on the dollar. Staying true to his name of "Tricky Dicky," Nixon proceeded to blame the "international speculators" for actually buying gold and essentially shorting the dollar, which Nixon dishonestly calls the "cause" of the trouble.

Of course, the cause of the trouble was the fact that the government was rapidly expanding the supply of dollars -- with a predictable result. Flash forward to 40 years later and we see Washington still trying to claim that the government wants to protect our money and our lives.[End Update]

The editors at the NY Times believe that they have discovered something that apparently no one else notices: a lot of people are out of work. Of course, the Grey Lady's perception that in the past year "Congress and the Obama administration have spent the year focused on budget cuts" is a pretty sick joke, considering that the government continues to spend and borrow into oblivion.

Now, the editorial is worth reading if only for its huge leaps in logic. First, the "serious" stuff: "Without more jobs, both the economy and the budget will deteriorate further."

Notice the causality here; the NYT is claiming that "jobs" help create an economy. So, we are supposed to believe that the economy is bad because people are out of work instead of dealing with the logical point that unemployment is high because the economy is bad. This is simple economic logic, something that always seems to escape the people in the august NYT offices.

But, it gets even better, as all of these grandiose jobs projects ("Let's rebuild this and that....") need to be funded, of course. How to do that?

Washington, in thrall to austerity, has abandoned one of the most immediate and powerful tools for supporting growth and jobs, namely, borrowing at today’s low rates to provide direct fiscal aid to states. But Mr. Obama can and should make the case for targeted new jobs today, to be paid for over time by closing tax loopholes.

This is hilarious (unfortunately). First, Washington is not "in thrall to austerity" by any stretch, given the explosion not only in government spending, but also in government obligations over the past four years. Washington might be delusional, but "in thrall to austerity" is a product of a fertile imagination.

Second, while the suggestions are couched in the language of capital spending, it is clear that what the editors mean is that the government needs to continue its record borrowing simply to funnel it to certain favored political groups. This basically is the government using the bond markets as a giant credit card to continue a spending spree.

The last one -- "closing tax loopholes" -- also demonstrates utter delusion at the Grey Lady. What constitutes a "loophole"? While the NYT and Paul Krugman seem to believe that the government can balance the budget and end the recession by raising the top rates to, perhaps, 70 percent (a rate Krugman tool me seven years ago was "insane," but I guess Krugman now is re-defining "inanity").

For the past four years, the NYT has shown utter hostility to those industries that are profitable and can lead us out of a recession. Instead, we get the incomprehensible nonsense that if the government borrows at even higher rates, jacks up taxes, and props up favored "green industries" with huge subsidies, that this mishmash will result in a recovering economy.

It seems to me that the editors of the NYT need to spend some time in "recovery" from the delusion of Keynesian thinking. These are people who are laying out the very path to depression and are calling it prosperity. I don't think so.

Krugman endorses insanity (and I almost missed it)

When Paul Krugman spoke at the 2004 Southern Economic Association meetings, I attended his session and asked him specifically if he was endorsing going back to the 70 percent income tax rates that prevailed before 1981. Krugman's response? "Those rates were insane." (emphasis added)

Well, I guess that the recession and the failure of the Obama administration to perform its "Messiah" role for the economy have driven Krugman top endorse insanity. Yes, he says that 70 percent rates would be just fine.

That is in line with the current academic and political Left that wants to turn back the clock (to use their own term). Robert Reich seems to be leading the charge, but I found this piece by Krugman from nearly a year ago in which he says that 70 percent tax rates would not discourage people from producing.

Of course, Krugman does not point out that pre-1981, the 70-percent rates came with a lot of possible deductions and shelters, most of which have been eliminated in subsequent tax law changes. So, I guess Krugman believes that even if the federal government confiscates 70 percent (and it would be more than that, given the other government taxes out there) of marginal income, that people will work, save, and invest as they always have.

What is interesting is that we have been down that road before. In 1932, the Herbert Hoover administration drastically raised taxes at all levels, including the top income tax rate from 25 percent to 63 percent. We see how well THAT strategy worked, as by the following February, just before Franklin Roosevelt took office, the nation's unemployment rate had risen to about 28 percent.

Yes, and sooner or later, the band in "Animal House" will manage to march through the wall.