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

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

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

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

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

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

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

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

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

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

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

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

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

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

Is Krugman's Price Wrong? My Reply on the Mises Page

I have this article today on the daily page of the Ludwig von Mises website in which I discuss Krugman's recent blog post, "The Price is Wrong."

Krugman: Capital Stalls Economic Growth and Creates Inequality

One of the differences between mainstream Keynesian (and neoclassical) economists and the Austrians is the view that both sides have of capital. On the Keynesian-socialist side, capital is useful mostly in the spending that is done in capital creation, and future capital improvements and repairs are useful only if these things require more spending.

Before going further, I need to emphasize that Austrians do not endorse all capital expansion, as we do see expansion based upon aggressive efforts by the government via the Fed pushing down interest rates or the government offering all sorts of subsidies and tax benefits (see "green energy") as promoting malinvestment. Since Keynesians such as Krugman do not recognize malinvestment as an economic issue (except for rare times when they think it might aid their arguments, and even then they will not use malinvestment as an economic term), they can endorse things like the massive subsidies for "green energy," since those sectors allegedly "create jobs."

If one ignores the Law of Opportunity Cost, then "green energy" is a great investment. Except, as the Wall Street Journal recently pointed out in an editorial, the Algore Sector of the economy is a disaster, an investor's version of the black hole. If Paul Krugman is interested in the relationship between capital formation and inequality, he need look no further that what has happened to the economic sector that President Barack Obama promised would lead us out of the economic downturn. Time and again we see the government transferring wealth to those who already are wealthy via this unjustified program of capital malinvestment.

(Al Gore, by the way, has managed to become fabulously wealthy living off these taxpayer subsidies while the investors who have helped provide the up-front money that he pockets have taken a financial bath. That is a story for another time and another posting, but I do find it instructive that Krugman never has gone after Gore the way that he has gone after people who actually might be productive.)

So it is today that Krugman takes on the capital bogey, first repeating (with some skepticism) yet another version of David Ricardo's pessimistic "steady state" plateau to be reached at an unnamed time. Ricardo's insistence of decreasing marginal returns to capital is there, as well as the view that at some point, capital formation will run into the proverbial brick wall. To his credit, Krugman disagrees, although not for the right reasons.

For Krugman, growth occurs only if government spending increases. One should not forget his preposterous claim that the recovery was faltering because state government spending was not rising at rates comparable to previous economic recoveries. (It never occurs to Krugman that because states must balance their budgets, they are heavily dependent upon real economic growth from private firms, so if anything, the financial problems in states and municipalities should be the "canary in the coal mine" warning that maybe Obama's policies are not promoting growth.)

Krugman then lets loose with this gem:

So machines may soon be ready to perform many tasks that currently require large amounts of human labor. This will mean rapid productivity growth and, therefore, high overall economic growth.

But — and this is the crucial question — who will benefit from that growth? Unfortunately, it’s all too easy to make the case that most Americans will be left behind, because smart machines will end up devaluing the contribution of workers, including highly skilled workers whose skills suddenly become redundant. The point is that there’s good reason to believe that the conventional wisdom embodied in long-run budget projections — projections that shape almost every aspect of current policy discussion — is all wrong.

Yeah, it is capital creating mass unemployment across the economy just as capital is responsible for the high cost of medical care. True, if it is malinvested capital, then in the long term, the malinvestments direct investment away from truly productive uses, and after the inevitable bust occurs, we see unemployment rising.

On the subject of "inequality," Krugman is insinuating that unless government steps in to limit investment returns to capital, then those returns will enrich some, but at the expense of others. Thus, Krugman reasons, capital that actually might be profitable in a market setting actually helps to create poverty. This is an amazing conclusion, but then we live in amazing time.

Krugman does not address the fact that maybe, just maybe, people purchase goods because they believe use of those goods will make themselves better off. In other words, he recognizes only the returns to investors as having anything to do with economics, while the actual uses of these goods and their economic effects either are ignored or are devalued.

During the 1930s, the New Dealers that Krugman so often praises claimed that the economy was in depression in part because ours was a "mature economy." I remember reading a 1980 Daniel Patrick Moynihan newsletter in which he made essentially the same claim. If that really were true, then I would challenge readers to go back to those eras and see who has a higher standard of living, Americans then or Americans now.

One one last point, Krugman continually claims that our present policies are starving Washington of wealth and that Washington really is on an "austerity" plan. If that is true, then why is the economy of the D.C. area booming at a time when the economy elsewhere is stagnant? Seven of the top 10 wealthiest counties either are contiguous to D.C. or are contiguous to counties that touch the D.C. borders, and the pattern continues. But if D.C. is booming, then why is the rest of the country doing poorly?

The Capitalists are Coming! The Capitalists are Coming!

There is a new specter on the horizon, a blood-sucking monster that will destroy the lives of people even as it makes goods that improves their lives! Yes, the capitalists are coming, but Paul Krugman is ever vigilant against these evil ones!

According to Krugman, the evil robber barons have made a comeback, benefiting from monopolies, and it is up to the government to save us -- and make the economy more "efficient" at the same time. He asks how it is that the economy can be depressed even while corporate profits are at high levels. Is the old Marxist "capital versus labor" argument back in play?

Krugman, apparently not wanting to go quite as far as his forebears like John Kenneth Galbraith, says that maybe a different explanation is needed, writing:

Why is this happening? As best as I can tell, there are two plausible explanations, both of which could be true to some extent. One is that technology has taken a turn that places labor at a disadvantage; the other is that we’re looking at the effects of a sharp increase in monopoly power. Think of these two stories as emphasizing robots on one side, robber barons on the other.

First, the attack language is the type of thing that one has come to expect from Krugman whenever he speaks of private enterprise. He cannot explain how it might be that people who cannot coerce anyone into making an exchange are engaging in acts of theft, but if the government forces someone to do something at the point of a gun, that is "community" or "caring for the poor."

Second, his overall explanation of why we have higher rates of unemployment among college-educated workers harkens back to the days of FDR when the government was claiming that "automation" or "capital" was the cause of the employment problems. He continues:

About the robots: there’s no question that in some high-profile industries, technology is displacing workers of all, or almost all, kinds. For example, one of the reasons some high-technology manufacturing has lately been moving back to the United States is that these days the most valuable piece of a computer, the motherboard, is basically made by robots, so cheap Asian labor is no longer a reason to produce them abroad.

In a recent book, “Race Against the Machine,” M.I.T.’s Erik Brynjolfsson and Andrew McAfee argue that similar stories are playing out in many fields, including services like translation and legal research. What’s striking about their examples is that many of the jobs being displaced are high-skill and high-wage; the downside of technology isn’t limited to menial workers.

Still, can innovation and progress really hurt large numbers of workers, maybe even workers in general? I often encounter assertions that this can’t happen. But the truth is that it can, and serious economists have been aware of this possibility for almost two centuries. The early-19th-century economist David Ricardo is best known for the theory of comparative advantage, which makes the case for free trade; but the same 1817 book in which he presented that theory also included a chapter on how the new, capital-intensive technologies of the Industrial Revolution could actually make workers worse off, at least for a while — which modern scholarship suggests may indeed have happened for several decades.

This reminds me of the Paul Craig Roberts's claim that if capital is mobile across international borders, the Law of Opportunity Cost no longer applies (which is a way of saying that mobile capital eliminates the Law of Scarcity). Actually, the actual "law" is the Law of Comparative Advantage, but in truth, comparative advantage is just a restatement and application of opportunity cost.

However, what Krugman does not say is that government regulation -- and especially the spate of regulation that has come about through the Obama administration -- also results in stratification of the workplace. The reason is that regulations tend to try to classify and formalize everything and force requirements of specific areas of formal education for any number of jobs that really should not require that much education.

Furthermore, government regulations tend to make hiring much more bureaucratic and formalized, which makes it more costly to hire workers. Yes, the government says it is trying to keep employers from engaging in certain kinds of discrimination, but the end result is that the regulatory state forces up real costs of production and hiring, and that those costs ultimately are borne by workers.

When one adds the real costs that governments at all levels impose upon people wanting to start up even small businesses, it should not be surprising that the very kinds of laws of which people like Krugman approve are making the entrepreneurial transitions very costly. (Oh, I forgot. When governments effectively mandate higher business costs, that also is a good thing, since higher costs supposedly mean more spending, and everyone knows that more spending brings back recovery.)

There is another problem, and that is that government regulations that pertain to labor also make the addition of capital more attractive than it otherwise might be in a free market. Yes, I know it might be shocking to admit that government regulations just might change the terms of opportunity cost.

But Krugman is not satisfied there. No, the evil capitalists not only are using robots and permanently displacing workers, but they also are engaging in creating monopolies:

What about robber barons? We don’t talk much about monopoly power these days; antitrust enforcement largely collapsed during the Reagan years and has never really recovered. Yet Barry Lynn and Phillip Longman of the New America Foundation argue, persuasively in my view, that increasing business concentration could be an important factor in stagnating demand for labor, as corporations use their growing monopoly power to raise prices without passing the gains on to their employees.

Earth to Krugman: every academic economist should know that wages and salaries are not "passed on" by employers; they are payments to owners of the factor of production known as labor. Second, while economists like Krugman (and, of course, the usual places like the leftist Daily Kos) make the assumption that profits exist at the expense of workers, the truth is that in a free market, profits are what an entrepreneur will earn if he or she makes the correct assumption regarding present prices for factors of production versus perceived future prices for final goods. Without the possibility of profits, those jobs and, more important, the quality of the goods people can purchase, would not exist.

Investor and writer Kel Kelly notes that at the present time, the inflationary policies of the Federal Reserve System have more to do with the present state of corporate profits than any entrepreneurial success of many of these firms. When one adds that the Obama administration actively has promoted what essentially is crony capitalism, or corporatism, we should not be surprised if politically-favored firms tend to do better.

On a larger point, it would seem that high corporate profits would invite more entrepreneurial activity and more competition, but that clearly is not happening. In a free market, there would be nothing out of the ordinary that would would block entrepreneurs and entrepreneurial firms from pursing those opportunities and, in the process, compete for those profits. However, given the overt hostility of the Obama administration to entrepreneurs in general (or at least entrepreneurs that seek to compete in real markets rather than the government's crony markets) and the fact that every year or so, there is a huge political tug-of-war regarding business and individual tax rates, we should not be surprised that there is not more long-term business investment.

Of course, Krugman holds that the best way to deal with this problem is through government coercion and specifically through anti-trust litigation and higher taxes. Now, someone will have to explain to me how we can revitalize the business sector by unleashing regulators, federal prosecutors, and the IRS on business owners and investors, but I guess that since those people drive up costs, we will assume that they will "spend" their largess and make the economy stronger.

The Forgotten "Millions" (and Billions and Trillions) of Government Spending

Yes, millions of people are out of work, and Paul Krugman takes note. Anyone who has lost a job is in the position of losing income, and if a head of household loses a job, the income losses can be a crisis.

In advocating for a new "jobs program," Krugman first gives his pat answer for funding the whole affair:

(D)espite years of warnings from the usual suspects about the dangers of deficits and debt, our government can borrow at incredibly low interest rates — interest rates on inflation-protected U.S. bonds are actually negative, so investors are paying our government to make use of their money. And don’t tell me that markets may suddenly turn on us. Remember, the U.S. government can’t run out of cash (it prints the stuff), so the worst that could happen would be a fall in the dollar, which wouldn’t be a terrible thing and might actually help the economy. 

 In other words, we should not worry about it, as the government can inflate away the debt, and that is a good thing. But there is another issue that Krugman ignores, and that is why there would be the need for a "job" at all. (In other words, just borrow the money and give it directly to anyone who is unemployed.) Hear me out on this.

Krugman writes:

(L)ong-term unemployment remains at levels not seen since the Great Depression: as of October, 4.9 million Americans had been unemployed for more than six months, and 3.6 million had been out of work for more than a year.

When you see numbers like those, bear in mind that we’re looking at millions of human tragedies: at individuals and families whose lives are falling apart because they can’t find work, at savings consumed, homes lost and dreams destroyed. And the longer this goes on, the bigger the tragedy.

There are also huge dollars-and-cents costs to our unmet jobs crisis. When willing workers endure forced idleness society as a whole suffers from the waste of their efforts and talents. The Congressional Budget Office estimates that what we are actually producing falls short of what we could and should be producing by around 6 percent of G.D.P., or $900 billion a year.

He is correct in his assessment of the human tragedy, but simple spending with government "creating new jobs" is pretty meaningless. First and most important, to a Keynesian, a "job" is important because it is a source of income. People work in order to earn money so that they can consume. Yet, in the real world, a job is a mechanism through which someone produces something that meets the needs of others, and for which that person is compensated.

Keynesian theory separates production and consumption, as though they were two separate and unrelated things. Goods are randomly produced and then one only can hope there is enough money floating around to allow people to purchase those goods and clear the shelves so the circular process can continue. There is nothing purposeful about it; this is just a description of a big production/consumption circle with the chief end of consumption being the creation of an opportunity for more production (so that people can earn incomes and buy more goods so they can support their jobs).

Second, a real economy (as opposed to what Peter Schiff calls our "phony economy") creates employment opportunities out of the natural progression of economic growth. People in a real economy do not have to implore politicians to borrow a few hundred billion dollars to employ people in a new bureaucracy and call it "job creation" or "putting America back to work."

If Krugman is going to write about the "forgotten millions," perhaps he needs to recall those millions of tax-and-borrowed dollars that were spent yesterday to employ people for a while so that the president could be seen as enabling a fake recovery. For that matter, the mirage of recovery continues. At the present time, the government is borrowing 46 cents of every dollar spent (according to the Congressional  Budget Office), and the upshot has been a huge increase in...government jobs.

What Krugman apparently wants is for that rate of borrowing to increase so that we can turn more and more Americans into bureaucrats. Not that bureaucrats produce anything, but I guess they can spend and spend. So, if this is going to be our "employment" future, why not just print a bunch of money, load it into helicopters and dump it. The effect on the economy would be about the same as "creating" fake government occupations.

Krugman's Snow Job on Economics

Thirty years ago, I saw a local TV debate in Chattanooga between the late William H. Peterson and a Marxist professor at the University of Tennessee-Chattanooga, Phillip Giffin. Peterson had just returned from a trip to Romania, which then was living in the era of the execrable Nicolae Ceaușescu, and spoke about the poverty and misery he observed.

"But," interrupted Giffin, "There's no unemployment there."

Indeed, that is the mentality of much of the economics profession, or at least the left side of the profession, including Krugman. (No, Krugman is not a Marxist, but his Keynesian analysis is built upon many of the same foundations Marx used, including the overproduction/underconsumption paradigm.) So, I see once again that Krugman is killing trees this week to once again preach that if Barack Obama is elected, he will "create more jobs" than will Mitt Romney.

Notice that this really has nothing to do with economics per se. The Romanian regime "created jobs," although in reality, many jobs were nearly useless and the vast majority or Romanians lived in grinding poverty. Yet, we continue to hear the "creating jobs" arguments given by economists who should know better.

For most people, a job carries a transmission of income, which is why we obviously think about our jobs. However, if one thinks that a job's only use is that of an income transmitter, then one clearly does not understand employment. After all, the government could mail everyone checks for whatever amount a job would pay, and that would substitute for the income transmission.

Obviously, there would be a problem if everyone stayed home and just received a check, and it would become abundantly clear that a job is NOT just a means of providing income, but jobs also are the mechanism through which we have labor services throughout the economy, and without those service, there IS no economy. At one level, I am sure that even Paul Krugman would understand that point, but it also is clear to me that he seems to think that the importance of work really is in the income that individuals receive, and not the wealth creation itself that a job can help achieve.

For example, when interviewed about the Keystone Pipeline that Obama blocked, Krugman approved the president's actions, using environmental criteria. (Note that Krugman also praises the building of wind farms, which have their own negative environmental effects and, unlike Keystone, stay alive only through massive subsidies, tax breaks, and government requirements that electric utilities purchase power from those farms, so if one thinks that Krugman is being selective in his environmental concern, one might be correct.)

However, after announcing his opposition to Keystone, Obama then declared that increased government payments to the unemployed would have a more powerful and important economic effect than the building of an oil pipeline, and I do not recall reading a word of criticism from Krugman about that statement. Keep in mind that what Obama is saying is that essentially borrowing or printing money creates more wealth than does the application of capital in moving resources from lower-valued uses to higher-valued uses. This is stunning, for it demonstrates just how economically-illiterate Obama really is, and it also exposes people like Krugman who apparently can see no difference in printing money and creating wealth or, even worse, seem to believe that printing money actually creates wealth.

In his latest column, Krugman accuses Mitt Romney of snowing voters on jobs, asking: "But does he have a plan to create any?" That is not the right question. Instead, Krugman should be asking whether or not Romney -- or Obama, for that matter -- have any "plans" to encourage capital formation, and to let entrepreneurs and entrepreneurial firms move resources from lower-valued to higher-valued uses. Krugman's claim that Obama's record can be defended, yet Obama has done almost nothing to encourage the things I have mentioned.

(I forgot. Like Obama, Krugman believes that government can print, borrow, and subsidize an economy into a real recovery. In the end, the "plan" is called by another name: inflation.)

And what is a Paul Krugman column without at least one real howler? How about this?

Just for the record, one study concluded that America might gain two million jobs if China stopped infringing on U.S. patents and other intellectual property; this would be nice, but Mr. Romney hasn’t proposed anything that would bring about that outcome. Another study suggested that growth in the energy sector might add three million jobs in the next few years — but these were predicted gains under current policy, that is, they would happen no matter who wins the election, not as a consequence of the Romney plan.

Notice that there is no cost assumed to enforcing the intellectual property laws, and I don't know how one can extrapolate the kind of wealth creation needed for two million new jobs by the use of increased police powers, but when one is spouting rhetoric, careful thought need not intervene. Furthermore, the only significant wealth-producing portion of the energy sector is in fossil fuels, and Krugman already is on the record as saying those are evil and should be abandoned altogether. As for "creating jobs" through subsidies, apparently Krugman cannot understand that subsidies ultimately must come from those sectors of the economy that are profitable, which means that jobs are lost elsewhere.

Oh, I forgot. Being a Keynesian means that one believes government can do away with the Law of Scarcity and the Law of Opportunity Cost by fiat and with a printing press.

Krugman: If You are Not Awed by the Latest Employment Figures, Then You are "Deranged"

When Paul Krugman was awarded the Nobel Prize in economics four years ago, Donald Luskin wrote tongue-in-cheek that the committee from the Swedish central bank had given the honor to what essentially was a "dead economist."  Luskin's point was that Krugman a decade before had traded in his economist's hat for the headgear of a political operative, and today's column is a case-in-point.

Last week the U.S. Department of Labor announced that the nation's unemployment rate had fallen to 7.8 percent, and the same Paul Krugman who would excoriate the George W. Bush administration (which, truthfully, deserved to be excoriated) when unemployment was under six percent, now is undeniably giddy over the data:

On the employer side, the current numbers say that over the past year the economy added 150,000 jobs a month, and revisions will probably push that number up significantly. That’s well above the 90,000 or so added jobs per month that we need to keep up with population.

He goes on to claim that had Goldstein, er, the "scorched-earth Republicans," not sabotaged the whole recovery, we might be near-swimming in prosperity. Krugman declares:

...that’s the truth that the right can’t handle. The furor over Friday’s report revealed a political movement that is rooting for American failure, so obsessed with taking down Mr. Obama that good news for the nation’s long-suffering workers drives its members into a blind rage. It also revealed a movement that lives in an intellectual bubble, dealing with uncomfortable reality — whether that reality involves polls or economic data — not just by denying the facts, but by spinning wild conspiracy theories.

It is, quite simply, frightening to think that a movement this deranged wields so much political power.

So, there you have it. If you are not convinced that Operation Twist, QE Forever, massive subsidies to windmills and corn-based ethanol, inflation, and make-work schemes have not put us on the road to prosperity, then you not only are "deranged," but you are in league with Goldstein.

Let me put it another way: Does anyone think that if a Republican (Goldstein) were in office and unemployment was over 8 percent all during the person's time in office and the rate fell to 7.8 percent a month before the election, that Krugman would be claiming that the True Recovery had arrived? No, I didn't think so.

Is Krugman an Economist or Just a Partisan Shill?

According to Paul Krugman, the failure of Republicans to pass the American Jobs Act is the reason there is at least a little bit of doubt about Obama's re-election victory this fall. You see, according to Krugman, the economy would be close to booming right now if only, if only, if only.

And how does Krugman know that this piece of legislation would have been the magic bullet? Because some bloggers said it would. Yes, a bunch of Keynesians claim that a law that did not passed was the Answer to the Great Secret, but now we never will know if this act -- THIS act -- would have set the world aright.

This is the kind of stuff that stuns me. I was taught by some very good economists not be be a cheerleader for politicians, and certainly not to be someone who repeats political talking points and pretends that they really are economic truths. At least Alan Blinder is paid to be a partisan shill, and spews his propaganda on Obama's payroll.

At the same time, Ben Bernanke is trying to rev up the inflation engines in hopes that he can give Obama at least a small boost before the election to make it seem as though the economy is better off than it really is. Gee, maybe it is a Princeton thing; academic economists as nothing but shills for politicians, paid and unpaid.

[Update]: In his latest column, Krugman repeats his tired canard that it was Goldstein's "obstructionism" that is responsible for the current downturn. Along the way, he gives some very curious economic analysis:

There were good reasons for these positive assessments. Although you’d never know it from political debate, worldwide experience since the financial crisis struck in 2008 has overwhelmingly confirmed the proposition that fiscal policy “works,” that temporary increases in spending boost employment in a depressed economy (and that spending cuts increase unemployment). The Jobs Act would have been just what the doctor ordered.

 Wow! We were almost there, almost to prosperity! Goldstein destroyed the recovery again! However, Krugman is not through "proving" that Goldstein was the evil force behind this depression. He writes:

The most important consequence of that stonewalling, I’d argue, has been the failure to extend much-needed aid to state and local governments. Lacking that aid, these governments have been forced to lay off hundreds of thousands of schoolteachers and other workers, and those layoffs are a major reason the job numbers have been disappointing. Since bottoming out a year after Mr. Obama took office, private-sector employment has risen by 4.6 million; but government employment, which normally rises more or less in line with population growth, has instead fallen by 571,000. 

 Now, I can see a politician writing this, but an economist really has some explaining to do in order to successfully claim that government jobs will lead a recovery. First, however, Krugman does more of his aggregate tricks when he tries to essentially claim that private sector employment pretty much has recovered.

Here is the problem: the kinds of jobs that disappeared versus the kinds of jobs that have grown in number in the past four years are not the same. It is clear that the private sector is not as robust as it was before the downturn, and the lack of tax revenues being generated is the main reason that employment is lagging in state and local government jobs.

Krugman, however, wants us to believe state and local government jobs are the source of economic growth. That literally is impossible. These are not wealth-creating jobs, for the most part; instead, they consume wealth. The lack of growth in those jobs is proof that the private sector still is not producing enough to fund levels of government to where they were four years ago.

Like most Keynesians, Krugman has the cart before the horse. He wants us to believe that government is a net wealth creator when it is not. Furthermore, he wants us to believe that government can inflate the economy into prosperity, which is an illusion, but a convenient illusion.

"Seriously, that was an awesome speech."

Lest anyone think that Paul Krugman is anything more than a political operative, read his blog post on Bill Clinton's speech at the Democratic National Convention. Krugman writes:

Seriously, that was an awesome speech. Clinton isn’t just an amazing political talent; he has the ability to make wonkery accessible and compelling. Of course, he had one major advantage over the supposed wonks on the other side (still shaking my head over the Ryan implosion), namely, the well-known liberal bias of the facts.

 Whatever. Actually, if Bill Clinton is right and there are three millions jobs going begging in this country because of mismatches with appropriate workers, I'd say that was a problem. No, that is not the main cause of high unemployment, but it is just one more nail in the coffin of the U.S. economy.

By the way, Peter Schiff has done a great job of exposing the mentality of some delegates to the DNC with this video on a call to ban all corporate profits. To be honest, I doubt there is one delegate at that convention who could adequately explain why profits AND losses are important in a free-market system. But, then, I doubt Krugman could explain, either.

Do leveraged buyouts destroy the economy? Krugman thinks so

It is interesting to watch the millionaire Paul Krugman turn into a populist, as the more he goes off on "taxing the rich," the more he demonstrates his own economic ignorance. In a recent column, he attacks Mitt Romney for being a "job destroyer" because Romney's firm, Bain Capital, engaged in leveraged buyouts, likening him to the villain of Oliver Stone's move, "Wall Street."

Not having seen "Wall Street" or its sequel, I'm not particularly interested in Oliver Stone's view of the world, especially since Stone worships dictators such as Fidel Castro and Hugo Chavez, both of whom have reduced their respective countries, Cuba and Venezuela, into economic basket cases. Nonetheless, the theme that Krugman wants to portray is that leveraged buyouts usually are bad and that they "destroy jobs."

The problem is that Krugman (once again) does not understand the simple Law of Opportunity Cost, which is pretty common among Keynesians. He writes:

So Mr. Romney made his fortune in a business that is, on balance, about job destruction rather than job creation. And because job destruction hurts workers even as it increases profits and the incomes of top executives, leveraged buyout firms have contributed to the combination of stagnant wages and soaring incomes at the top that has characterized America since 1980.

It is hard to know where to begin, but I will start by saying that the official rate of unemployment by itself is no measure of prosperity or even the health of the economy. I recall watching two economists debate each other on television about 30 years ago, with one of the economists having come back from a trip to Romania and talking about the poverty that he witnessed there.

"But there's NO unemployment there," the other economist shot back. (The second economist is a Marxist and teaches at a university where I used to live.) To the Marxist, "unemployment" was the trump card: "Aha! You claim Romania is a bad place to live, BUT EVERYONE THERE HAS A JOB! SO THERE!!"

Indeed, after the communist regime fell there, the curtain was lifted and people found out just how poor Romania was and how even the government's official "we have no unemployment" line was fraudulent. Nonetheless, people on the left still hold that unemployment really is the only variable that matters, economically speaking.

When it comes to issues of leveraged buyouts, Krugman's logic goes south, especially on the employment situation. First, we have to remember that a viable firm is one in which the value of the whole is greater than the sum of its parts. This is important, because Krugman wants us to believe that firms like Bain buy healthy and viable companies, destroy them from within, and then pocket the money and throw people out of work. Furthermore, it is the creation of unemployment, according to Krugman, that creates the "wealth" for people like Romney.

Now, we have to understand that the ONLY way for Bain or any other firm in this situation to make money is for the standard "buy low, sell high" and the only way that such a thing can happen with a leveraged buyout is for the sum of the parts of the firm be greater than the value of the firm as a whole. In other words, the firm has to be in trouble, whether it be mismanagement or something else that has made the company decline in value.

For example, Bain could NOT have purchased Apple for a leveraged buyout, since the value of Apple as a firm would be greater than all of the individual assets that Apple possesses. Yet, if one reads Krugman's column, he wants to paint a picture of Bain purchasing a company that is doing great, and it just destroys it so that some rich guy can walk off with money in his pocket.

Logically speaking, that is not possible. One cannot purchase a viable, healthy firm, sell off its assets, lay off its workforce, and make money. For that matter, the kind of cost-slashing measures that might occur if a corporate raider actually tries to save the firm are not arbitrary; they are done because the value of the sum of the parts is greater than the value of the whole.

Employees who go through such buyouts generally don't have happy stories to tell about it, but one should remember that if a firm is in a situation in which it finds the value of the sum of its parts to be greater than the value of the whole, the hard truth is that those employees most likely are going to lose their jobs, anyway. Why? A firm in that condition is not likely to last long, as it has an illness that either can be fixed only with new management or entrepreneurial ideas, or is going out of business (where its assets will be sold at a bankruptcy auction).

An analogy is the junkyard for cars. Many of the cars that are brought to junkyards still can be operated, and many of them could be fixed to the point where they might work. Junkyards, however, don't make money from fixing the cars on the lot. Instead, they make money by selling the parts taken off the junked cars to mechanics and dealers or selling the components as scrap to be recycled.

That is the hard reality of the world of leveraged buyouts. A firm is not a candidate for such a fate unless buyers perceive either that the company is going out of business or is so mismanaged or has unnecessarily-high costs of production. As everyone knows, leveraged buyouts are risky in that the raiders sometimes don't get what they anticipated, and when people lose their jobs, there are hard feelings.

However, Krugman would have us believe that leveraged buyouts are the CAUSE of unemployment, as opposed to the fact that job losses in such situations come about because the firm no longer was as viable as it once was. True, I realize that Keynesians probably are incapable of thinking of something in terms of opportunity cost, and they certainly can find no value in someone breaking up a firm and selling off the assets when the conditions allow them to do so.

In Wonderland, economies grow because of the nebulous thing called "aggregate demand," which is created by governments creating money. There is no such thing as opportunity cost in that world, and the entrepreneurial processes of creating more goods while using fewer resources does not spell growth to them, but rather unemployment.

Krugman wants us to believe that people get rich in a market economy by causing large-scale unemployment. In a market economy, people become wealthy by providing something that others want and are willing to give up something scarce that has value to others in order to obtain that new good or service. In the process of doing so, entrepreneurs create employment opportunities that enable more and more people to be able to obtain things that they previously could not.

Unfortunately, Krugman has chosen another path of explanation and the end result of governments following his advice is more poverty, inflation, and, in the end, more unemployment.

Do you want to protest at Ground Zero for our current economic ills? Then Occupy Princeton!!

After reading Paul Krugman's latest anti-Wall Street screed, I have decided that I agree with him on principle: We need to occupy the place that is more responsible not only for the financial meltdown, but for the world depression that has followed it.

That's right, I am calling for an immediate occupation of...Princeton University, and specifically, its economics department. There is no other place on earth that has given us more players and more enablers of the financial madness that has gripped this economy for many years.

First, the chief architect of the depression, Ben Bernanke, was the chair of Princeton's economics department, and it was on his watch that Krugman was hired at Princeton away from MIT, Krugman's doctoral alma mater. Bernanke then went on to a position on the Federal Reserve System's Board of Governors and help create the inflationary policies that followed in the wake of the Tech Bubble of the Bill Clinton years and then the Housing Bubble.

Bernanke always has been a champion of inflation, and one of his first speeches as a Fed governor, "Deflation: Making Sure it Doesn't Happy Here," set out the infamous "Bernanke Doctrine" which claims that inflation can be a cure-all for economic ills. (He and Krugman are of one mind on this subject, as both consider government-generated "money" to be a "free lunch" on which everyone can feast.)

Let us not forget where the "Bernanke Doctrine" (and its predecessor, the "Greenspan Doctrine") has led. If I can restate these doctrines, it would be the following message to Wall Street: "Don't worry about the financial bubbles you create because when you run over the cliff, Uncle Fed will be there to provide you with precious 'liquidity'.

Thus, in his attempt to keep a deep recession from happening, Ben Bernanke has created a depression, and according to him and his followers, the only thing that keeps us in this mess is that Goldstein, er, Ron Paul and others like him, is raising too much hell about the inflation. The only man alive who might have done more damage than Bernanke has been Greenspan, but the combination of the two inflationists has been the destruction of the economy.

Of course, Bernanke (and his alter ego Krugman) are utterly contemptuous of anyone who might think that spreading dollars around the world, bailing out this and that, might not have the desired effects of restoring the economies of the nations. Why would anyone even have the temerity to think that propping up unsustainable capital and directing investment away from those entities that actually are profitable might make things worse? After all, EVERYONE KNOWS that creating more money creates more "aggregate demand," and greater "aggregate demand" means more prosperity.

Second, one of Bernanke's main shills is Alan Blinder, another faculty member at Princeton and a longtime advocate of...inflation. I'd like to say that the current depression has been a case of the Blind (Bernanke) leading the Blinder, but from my perch, it looks as though the whole bunch has been blind from the start.

However, Blinder has managed to do damage not only in backing up Bernanke's inflationary urges, but also in advising the Obama administration on the disastrous "Cash for Clunkers" program. When an economics department is as destructive as Princeton's it is important to spread the destruction to all frontiers.

Third, there is Alan B. Krueger, the Princeton professor who claims that raising the minimum wage will result in...more employment. At his urging, the Obama administration prevailed upon Congress to jack up the minimum wage during a severe recession, with one of the worst results being the record unemployment among young black men. Yes, on one end we have Princeton giving us inflation, and on the other, Princeton making sure more people are out of work, a great one-two roundhouse against the economy.

And then there is Krugman. Yes, the Paul Krugman who advocates the destruction of capital through taxation and regulatory policies. The Paul Krugman who is demanding that the U.S. economy have the capital structure of a Third World economy, but with First World results.

With respect to Albert Einstein, I'd say that this was an economic definition of insanity: Following the disastrous policies of Third World governments, but expecting the results of an economy that welcomes real and profitable capital into its overall structure of production.

Setting the Economy on Fire

In briefly praising President Obama's bold-but-apparently-not-bold-enough plan, I am struck by how Paul Krugman holds to the view of the homogenized economy: it doesn't matter where one spends, as all spending will "create jobs." That he believes Obama's program would "make a significant dent in unemployment" does not deviate from his overall Keynesian theory.

He adds that the Evil Republicans don't want people to go back to work (because Krugman believes they enjoy making people suffer), so the Great Plan won't be implemented, anyway. I should add that Krugman apparently does not differentiate between a "plan" that simply throws money at the economy which, at best, would employ lots of politically-connected people (most of the people who would be paid directly under this plan are members of labor unions), and something which would be economically sustainable. Like Keynes, he believes that only short-term measures are meaningful and that an economy is just a homogeneous mass of factors that automatically are employed in even proportions when governments add more money.

In his September 9 column, Krugman gives a lot of space to a recent speech by Charles Evans, the president of the Federal Reserve of Chicago, and both the speech and Krugman's reaction continue the myth of the "do-nothing Fed" that is becoming the newest mantra among Progressives. Krugman writes:

As Mr. Evans pointed out, the Fed, both as a matter of law and as a matter of social responsibility, should try to keep both inflation and unemployment low — and while inflation seems likely to stay near or below the Fed’s target of around 2 percent, unemployment remains extremely high.

So how should the Fed be reacting? Mr. Evans: “Imagine that inflation was running at 5 percent against our inflation objective of 2 percent. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.”

But the Fed’s hair is manifestly not on fire, nor do most politicians seem to see any urgency about the situation. These days, the best — or at any rate the alleged wise men and women who are supposed to be looking after the nation’s welfare — lack all conviction, while the worst, as represented by much of the G.O.P., are filled with a passionate intensity. So the unemployed are being abandoned.

Now, given what the Fed has done these past four years, I am not sure how anyone can claim that Ben Bernanke is fiddling while Rome burns, but I suppose that if one repeats something enough times, it becomes Truth. (With Progressives, they only need to say it one time, since Progressives Speak Only Truth. Just ask them.)

So, let us look at a few things that Uncle Ben has done since 2007:

• He provided the liquidity for the restructuring of Fannie and Freddie when they finally collapsed under the weight of their leveraged portfolios;

• He provided the backstop to the TARP funding that bailed out the Wall Street banks and financial houses;

• He continued and expanded the policies of the infamous "Greenspan Put" in which it was understood that no matter how reckless the banks and financial houses behaved with their "investments," the Fed would be there with the Big Checkbook to set all things right and to provide Holy Water (read that, "liquidity") to pour on the red ink;

• The Fed purchased hundreds of billions of dollars of private securities, as shown by the image below, after The Great Toga Party Unofficially Ended in 2007, in an attempt to shore off the disaster from the huge amounts of leverage that threatened to collapse;

• The Fed issued $1.2 trillion in secret loans to Wall Street and beyond following the 2008 crisis, and even firms like McDonald's received loans from Uncle Sugar;

• The Fed has helped to prop up central banks around the world, most notably the European Central Bank, which faces the same kind of crisis;

• The Fed has continued to purchase U.S. Government long-term debt as part of its "Quantitative Easing" initiative;

• Bernanke continues to push interest rates down to near-zero levels in its attempt to encourage lots of borrowing, especially on behalf of the U.S. Government and other governments.

This hardly reflects a "do-nothing" Fed, but the larger problem is that Krugman and Evans seem to be True Believers who follow a belief that if the Fed truly were doing its job, we would have relatively low-inflation AND low unemployment. In other words, they really believe that the Phillips Curve actually is economic law and not an empirical observation. The problem is not that the Fed has failed to "do something," but rather its "something" constitutes actions that do not get at the heart of the massive malinvestments that have thrown economies around the world over the cliff.

(Keep in mind that the inflation-unemployment relationship as espoused by Keynesians holds that there can be no such thing, theoretically speaking, as stagflation, and when it DOES happen, they give us convoluted things like "oil shocks" or some other even that supposedly happens randomly. And there always is a random event occurring, in their minds, that can explain the unexplainable. The Keynesian view is that increasing the rate of inflation serves to CUT wages across-the-board, which then makes labor relatively cheaper, which encourages more hiring.

I find this interesting, given that Krugman is among the economists claiming that INCREASING wages during a depression will increase EMPLOYMENT because the opposite -- cutting wages -- results in a downward-spiral of spending and ultimately deflation. So, we are in that absurd situation in which Krugman both demands real wages rise AND real wages be cut through inflation, and somehow all of this will turn into economic recovery. Only at Princeton at the New York Times, I guess, but we have to remember that These People Are Smarter Than We Are.)

Let us turn now to Krugman's praise of Obama's newest Pull-The-Rabbit-Out-Of-Our-Hats Scheme. Krugman writes:

O.K., about the Obama plan: It calls for about $200 billion in new spending — much of it on things we need in any case, like school repair, transportation networks, and avoiding teacher layoffs — and $240 billion in tax cuts. That may sound like a lot, but it actually isn’t. The lingering effects of the housing bust and the overhang of household debt from the bubble years are creating a roughly $1 trillion per year hole in the U.S. economy, and this plan — which wouldn’t deliver all its benefits in the first year — would fill only part of that hole. And it’s unclear, in particular, how effective the tax cuts would be at boosting spending.

Still, the plan would be a lot better than nothing, and some of its measures, which are specifically aimed at providing incentives for hiring, might produce relatively a large employment bang for the buck. As I said, it’s much bolder and better than I expected. President Obama’s hair may not be on fire, but it’s definitely smoking; clearly and gratifyingly, he does grasp how desperate the jobs situation is.

None of the things that are named in the above list will generate wealth in the U.S. economy, or at least put us on a road to real recovery. Instead, it funnels money to politically-favored groups and to Obama's pet projects of "high-speed rail" and "green energy," neither of which can exist without massive subsidies that have to come from somewhere.

In other words, the Obama program that Krugman praises would work by draining the profitable entities in the economy and diverting resources from higher-valued uses to lower-valued uses. Somehow, I think that this is what Krugman WANTS to see happening.

That's right; I believe that Krugman, like so many other Progressives, sees this crisis as an opportunity for force recalcitrant Americans into changing their lifestyles into something that would reflect how Progressives believe they should be living. What is delusional about all of this is that what Krugman, Bernanke, and all of the other Progressives believe will transform the U.S. economy actually is going to further drag it into oblivion.

Not that wealthy people like Paul Krugman are going to be hurt by all of this. No, he will have a view of the carnage from the luxury box, and all the while he will decry this moral theater, he will be demanding that more people will be thrown into the arena to be devoured by the lions of depression.

Why do I say this? I say this because had the powers-that-be permitted the malinvestments to follow their natural courses -- as opposed to governments trying in vain to prop them up -- when the balance sheets were groaning with red ink, we would be in a real economic recovery now. Instead, we have Krugman and the Progressives insisting that the malinvestments continue on their merry way and that the government add to them the unsustainable burdens of "green energy," corn-based ethanol, high-speed rail, and unionized government that are resulting in millions of people losing their livelihoods.

Let's say what needs to be said: In the name of ending unemployment, Paul Krugman is insisting that we expand the reach of the state, and if people are going to get jobs, they have to be in the areas of employment that meet HIS approval. If they have different ideas, then let them eat cake.

The President's "Let's-continue-the-depression" speech

We arrived in the USA at about 1 p.m. Thursday, got through customs, picked up our van, and navigated the traffic through New York and finally reached our hotel in Bethlehem, Pennsylvania, at about 5. By then, we were very tired, our body clocks telling us it was midnight.

We ate supper and then went to bed before 8 p.m. and woke up at 5:30 this morning. Now, why do I include such seemingly irrelevant details when I am writing about President Obama's speech? I say it because I did a very useful thing when Obama was giving his supposed "epic" address: sleeping soundly.

No, I did not hear a word Obama said, and I will admit that even had I been awake, I either would have had the TV off (which is more likely, given that we are not television watchers), or might have watched something entertaining, or even semi-educational, like the Ice Truckers.

Since I knew that the New York Times and Paul Krugman were on the job, I would have all that I need for commentary today and I must say that these folks did not disappoint. When I read words like "bold" and "passionately" and "authoritative," I knew that I had come to a place that was just one step below the White House PR room.

Hey, Obama might be presiding over the destruction of the U.S. economy, its currency, and its social fabric, but they still love him at the NYT and Princeton. So, let us deconstruct a bit what Obama has said, along with the commentary from the Expensive Seats at the NYT. (I will deal directly with Krugman's "Setting their hair on fire" column in a later post.)

Before taking a brief look at Obama's proposals, however, let me first deal with something the editors declared, which tells me that this whole thing is a religious exercise with these very secular folks:

Though he went on too long, he was authoritative in demanding that Congress pass his plan quickly and in laying out its benefits for average Americans. He directly, even mockingly, challenged the increasingly nihilistic Republican view that government’s very presence is noxious. Just as Lincoln helped start the transcontinental railroad and land-grant colleges, he said, the two parties must together push the country past its economic crisis. Waiting for the next election will waste valuable time, he said. (Emphasis mine)

I decided to look up the meaning of "nihilism" and found that it is a negation of the very meaning of life or "that life is without objective meaning, purpose, or intrinsic value." So, according to these supposedly secular people, government itself is the meaning of life, and even to question the role of the state in our lives is to engage in "nihilism."

To be honest, that tells me that the editors are arguing this whole issue from a religious viewpoint. It is not enough that something needs to be done to end this whole downturn, but it MUST BE DONE through the mechanisms of the State, or else such action will be meaningless.

That point cannot be ignored. The U.S. economy suffers from a dearth of new private capital investment in large part because we have a government full of people that are hostile to private capital investment, or at least private capital investment that does not coincide with the State's various schemes of "green energy" or some other aspect of Crony Capitalism. The editors of the NYT, who are part of the Political Class in this country, simply cannot stand the very idea of people acting in a way that both creates wealth and does it without letting members of that odious class "wet their beaks."

Thus, what we get are various schemes in which the government tries to pull yet another rabbit out of the hat. For all the talk of "boldness," we get more of the same: more money to state governments to prop up state employee unions for another year, more "infrastructure" schemes to build roads and tunnels to nowhere and to prop up (What else?) more labor unions, and short-term tax and credit schemes that might make it less expensive to currently hire employees, but do absolutely nothing to promote the very long-term capital investment that we need.

This last point is most instructive, because what the NYT and the Political Classes are demanding are nothing less than a bunch of short-term "fixes" that over time will "fix" less and less. There is no use trying to explain to these people what an economy really is because, frankly, they already have the answer: a machine that ultimately funnels money and power to the Political Classes. Anything else is unacceptable, and when we see the Mouthpiece of the Political Classes, the NYT, declare that even to question the role of the State is to question Meaning Itself, then we can be assured that Washington and those who believe that the nation's capital is as much a symbol of Religious Faith as Mecca is to the Moslems or Jerusalem to Judaism, then there really is nothing more to discuss.

As for the speech, as I said before, Obama is demanding that the Depression continue. He clearly is not interested in doing anything to improve the economy that actually might require that he and his cronies get themselves out of the picture.

No, Obama on Thursday night declared that his administration is about short-term schemes to continue the bogus magic show that has become the White House, Congress, and the rest of Washington. In the end, it is not about the economy at all; it is about the very people who have been dragging down the hopes and dreams of others continuing to make sure that they are on the lifeboats when the Titanic sinks.

Against learned economic laws

In a recent column, Paul Krugman rightly calls unemployment a "terrible scourge" across our country and much of Europe. And as usual, Krugman not only misdiagnoses the problem, but he then calls for a "solution" that will make matters worse.

Why are people unemployed? What can be done? Krugman explains:

Bear in mind that the unemployed aren’t jobless because they don’t want to work, or because they lack the necessary skills. There’s nothing wrong with our workers — remember, just four years ago the unemployment rate was below 5 percent.

The core of our economic problem is, instead, the debt — mainly mortgage debt — that households ran up during the bubble years of the last decade. Now that the bubble has burst, that debt is acting as a persistent drag on the economy, preventing any real recovery in employment. And once you realize that the overhang of private debt is the problem, you realize that there are a number of things that could be done about it.

For example, we could have W.P.A.-type programs putting the unemployed to work doing useful things like repairing roads — which would also, by raising incomes, make it easier for households to pay down debt. We could have a serious program of mortgage modification, reducing the debts of troubled homeowners. We could try to get inflation back up to the 4 percent rate that prevailed during Ronald Reagan’s second term, which would help to reduce the real burden of debt.

Krugman is correct that the bursting of the housing bubble unleashed a lot of the problem, but once again he fails to understand the larger and more underlying problems. First, while I doubt that even Krugman would want a return of the housing bubble, he still refuses to see it as an economic "correction," but rather just a temporary bump in the onward march of "aggregate demand." In other words, he refuses to admit that vast amount of resources were malinvested, and that we cannot have a meaningful recovery until most of these malinvestments either have been liquidated or moved to other uses.

Instead, he claims that the government should give us "a serious program of mortgage modification," although he fails to mention that the Obama administration already has thrown billions of dollars into housing, yet the slump continues as it has for the past four years. Maybe his claim would be that the current program is "not serious" or that maybe someone like Krugman should have developed it. As I see it, however, any program that attempts to prop up prices that are going to fall no matter what is not going to be successful.

Second, I would hope that we someday could move beyond the notion that the WPA was a great and wonderful program. As numerous researchers have pointed out, it was politics-ridden and mostly involved make-work jobs that did not move the economy to recovery. Yes, Krugman has claimed that the WPA was pure and absolutely uncorrupted, but the facts speak otherwise, not that Krugman ever would misrepresent history.

Yes, I am sure that turning every unemployed person into a road-crew worker would result in some better roads, although I am not sure from where Krugman believes the resources to finance all of this, other than more borrowed money. (Oh, I forgot. All we have to do is to raise the top rate on all incomes above $250K a year to 39.6 percent from 35 percent, and the economy magically will jump back into shape.)

In the end, he resorts to calling for inflation. After all, he reasons, if inflation was 4 percent during Ronald Reagan's second term, then we should be willing to accept it, as though inflation is a good thing. Yes, I know that Krugman really believes that by inflating the currency and reducing the value of the monetary holdings of most people, government can bring about economic recovery, but once again, we see that he never addresses some of the real issues of unemployment.

Thank goodness, there is Robert Murphy. His recent article on unemployment sheds some light on the subject and is a wonderful antidote to Krugman's latest screed.

Krugman ends with this:

So there are policies we could be pursuing to bring unemployment down. These policies would be unorthodox — but so are the economic problems we face. And those who warn about the risks of action must explain why these risks should worry us more than the certainty of continued mass suffering if we do nothing.

In other words, because the economy is in what Krugman claims is a "liquidity trap," we can dispense with the Law of Opportunity Cost and just pretend we are prosperous by printing and borrowing money and spending as though we were in a time of prosperity. Economics does not work that way.

Jobs programs and the stratified society

[Update]:Here is the link to my appearance last night on "Freedom Watch" with Judge Andrew Napolitano. I'm not sure exactly where on the list I am, but I'm in there somewhere. (My thanks to the makeup team at Fox Business News, as they managed to make me look younger than I am!)[End Update]

For years, elites of the academic, media, and political classes have argued that we should be more like Europe, but now that we have managed to create something akin to the European economy -- high rates of unemployment and high job stratification -- Paul Krugman and others don't like it.

Today, he argues that we need more "jobs programs," that young people cannot find work and that the Bad People in Congress aren't interested in spending billions more in "creating" new jobs for people who cannot find work. Now, I don't make light of people who lose their jobs and often lose their homes and face other financial calamities. Furthermore, it is very discouraging for young people who are graduated from college or even graduate school and then find door after door closed to them.

This is what we have seen in Europe for a long time, and I don't think we should be surprised that this country adopts European-style policies, that we get European-style results. I doubt Krugman recognizes this, and even if he did, he still would advocate that the government create what essentially would be "make-work" jobs.

In the past, Krugman has pointed to the "success" of the WPA during the Great Depression, a program that Krugman has claimed was devoid of politics. The truth is much, much different. Some WPA programs (which tended to be run by local Democratic politicians) required that anyone with a WPA job pay donations to the Democratic Party, and nationally, Harry Hopkins, FDR's right-hand-man who ran the program, used it as a way to buy votes for his party.

(William Shughart and James Couch in their book The Political Economy of the New Deal, do a lot of myth busting in this book, and I would tend to trust some people doing real research as opposed to a guy who has become a party shill under the guise of being an academic economist.)

Today, Krugman claims that the government not only should avoid cutting the budget, but should EXPAND this already unsustainable budget because, after all, interest rates are now very low. (Gee, think that the Federal Reserve might have something to do with this?) Thus, we are dealing with near-free money, he reasons:

Yet polls indicate that voters still care much more about jobs than they do about the budget deficit. So it’s quite remarkable that inside the Beltway, it’s just the opposite.

What makes this even more remarkable is the fact that the economic arguments used to justify the D.C. deficit obsession have been repeatedly refuted by experience.

On one side, we’ve been warned, over and over again, that “bond vigilantes” will turn on the U.S. government unless we slash spending immediately. Yet interest rates remain low by historical standards; indeed, they’re lower now than they were in the spring of 2009, when those dire warnings began.

On the other side, we’ve been assured that spending cuts would do wonders for business confidence. But that hasn’t happened in any of the countries currently pursuing harsh austerity programs. Notably, when the Cameron government in Britain announced austerity measures last May, it received fawning praise from U.S. deficit hawks. But British business confidence plunged, and it has not recovered.

Now, the only references I have seen to "bond vigilantes" in recent times have been in Krugman's columns. Second, cutting government spending is only one aspect of getting our economic house in order.

Krugman approaches the subject purely from standard macroeconomic viewpoints. An economy is a homogeneous mass of factors that will become "fully employed" when enough money flows through the system, a "just add money." He has absolutely no idea of what entrepreneurs do, or that they even matter.

The problem, from an Austrian viewpoint, is not that of "idle resources," but instead we have massive amounts of malinvested resources. This country, like other countries in Europe, went whole hog in throwing money into housing at a rate that clearly was unsustainable, and when the crisis finally hit, the government's response was sad, but predictable: it ratcheted up the spending in hopes of propping up the housing market and everything else.

In the end, Krugman really does not believe that there is opportunity cost, or he seems to believe that opportunity cost does not matter when "interest rates are at the zero bound," as though the laws of economics are superseded by high rates of unemployment. The U.S. Government has thrown literally trillions of dollars at this economy and yet we are dead in the water.

It does not have to be like this, but we get the worst of both worlds. We have just enough "spending" to at least give the Keynesians a few bones, but then the government does everything it can to block real entrepreneurs through regulations and tax policies, which means the government is blocking a recovery.

Contra Krugman, contra the "Liquidity Trap" doctrines, the Law of Opportunity Cost is not repealed by low interest rates and high rates of unemployment.

Krugman: It's Not Inflation Until I Say It's Inflation

So, Paul Krugman finally has taken notice of rising commodity prices, although the price of gold has escaped his notice. (Krugman, of course, is a true gold hater, although I would be interested to know if he has any gold holdings in his own investment portfolio.)

In his most recent column, Krugman claims that rising food and fuel prices are nothing more than evidence of an economic recovery. Nothing else. He writes:

What the commodity markets are telling us is that we’re living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices. And America is, for the most part, just a bystander in this story.

As for inflation, Krugman claims it is low, but what he means is that the government's Consumer Price Index is not rising by nearly as much as prices are rising for commodities. As I see it, however, the "Scarcity" argument really does not hold much water.

Krugman apparently believes that although the Federal Reserve System has been flooding the world with dollars via bailout loans around the world and an aggressive monetary expansion policy at home, all of those extra dollars really have no effects on prices. Yet, I believe that to be shortsighted, as the commodities markets are extremely sensitive to changes in the value of money.

However, Krugman claims that any dissent from his wisdom is nothing more than right-wing nonsense:

What about commodity prices as a harbinger of inflation? Many commentators on the right have been predicting for years that the Federal Reserve, by printing lots of money — it’s not actually doing that, but that’s the accusation — is setting us up for severe inflation. Stagflation is coming, declared Representative Paul Ryan in February 2009; Glenn Beck has been warning about imminent hyperinflation since 2008.

Yet inflation has remained low. What’s an inflation worrier to do?

One response has been a proliferation of conspiracy theories, of claims that the government is suppressing the truth about rising prices. But lately many on the right have seized on rising commodity prices as proof that they were right all along, as a sign of high overall inflation just around the corner.

Uh, I would say that stagflation (a parallel increase in the rates of inflation and unemployment) already is here, although it is not as pronounced at it was 30 years ago. But since Krugman denies that stagflation is here, then I guess it is not here no matter what the numbers tell us.

As I have said before, people have been too quick with the predictions of hyperinflation and imminent economic collapse, but given that the Obama administration's economic "recovery" program consists of spreading dollars abroad, spending, expanding government regulation, empowering federal prosecutors against business figures, demonizing businesses, continuing costly foreign wars, and expanding an already bloated and abusive "security" apparatus at home, there isn't going to be anything akin to a real recovery.

However, the things I have listed seem to be on Krugman's list of what will bring us into recovery, although I am not sure how any of what I have listed is going to result in more goods being produced and American entrepreneurship being unleashed. But Krugman is too busy creating "Jake Blues" excuses as to why commodity price increases really have nothing at all to do with the state of the U.S. Dollar. (Remember "Jake's" encounter in the sewer tunnel with his jilted lover, played by Carrie Fisher? He gives a litany of excuses, and Krugman takes the cue.)

So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources.

But that’s for the future. Right now, rising commodity prices are basically the result of global recovery. They have no bearing, one way or another, on U.S. monetary policy. For this is a global story; at a fundamental level, it’s not about us.

I don't think so. Resources have not suddenly become finite; the Law of Scarcity did not come about yesterday. To deny ANY relationship between the surge in commodity prices (including gold and silver, Paul) and the dollar losing value is to deny reality. But Krugman is good at denying reality -- and demonizing anyone who disagrees with his Great Wisdom.

Robert Murphy Takes On Krugman's "Hangover Theory" Caricature

In recent blog posts, Paul Krugman has been claiming that the Keynesian paradigm has been vindicated by recent employment and financial statistics, but that officials foolishly are listening to the "hangover theory" nonsense.

Since Krugman does have a perch at the NY Times, he is able to control his side of the debate, but he cannot control the facts. Robert Murphy, who in my view is a much better economist than Krugman ever will be (given that Krugman has decided that being a political partisan is much more fun -- and lucrative -- than being an economist), demonstrates that two can play the graph game.

In a recent post on the Mises site, Prof. Murphy takes on Krugman's contention that the breakdown of employment numbers "proves" his points correct. First, he posts a graph used by Krugman that "proves" that the downturn is due to a general fall in "aggregate demand," as opposed to problems within the structures of production (as Austrians maintain). (I post the graph below, including Krugman's explanation):

I tried, in that old piece on hangover theorists, to explain what's wrong with this view in general. Among other things, "this story bears little resemblance to what actually happens in a recession, when every industry — not just the investment sector — normally contracts."

And this is strikingly true this time around. Kocherlakota would have us believe that there's a big problem of mismatch because manufacturing is trying to hire, while construction has slumped. But here's the employment reality:

Manufacturing employment has slumped, not risen — in fact, it has fallen more than construction employment. The problem is lack of overall demand, not worker mismatch.

However, Prof. Murphy does what any good economist should be doing: breaking down the data to see what trends lie in numbers dehomogenized from their aggregates. He writes:

First of all, Austrians can easily explain why there is a general drop in employment after a bubble pops, rather than just drops in (say) capital-goods industries. The problem in the aftermath of a bubble isn't merely that a "given" level of demand switches from one sector to another. On the contrary, people in general are poorer than they thought they were at the height of the boom.

In particular, during the boom, people unwittingly consumed capital. In a simplistic Keynesian model with "no time and no capital," it's not surprising that Krugman finds the Austrian story nonsensical. But as I spelled out in my "sushi article," a distortion in the interlocking capital structure of a modern economy can quite obviously lead to a general rise in unemployment across many sectors, as the mistaken investments are flushed out of the system.

Prof. Murphy then directly takes on the employment issue by noting that a breakdown of employment in construction trades and in durable and non-durable goods does demonstrate -- contra Krugman -- that the kind of employment shifting that Austrians would predict actually has happened. The graph is shown below:

Add Prof. Murphy:

I submit that the above chart is entirely consistent with the Austrian explanation of business slumps following an unsustainable boom period. Contrary to Krugman's misleading chart, in percentage terms the construction sector has taken a larger hit than "manufacturing" in general, and construction has been brutalized compared to the mild downturn in nondurable-goods manufacturing.

Moreover — and this is presumably what motivated Kocherlakota's comments — a naive extrapolation of year-to-date trends suggests that the manufacturing sector has bottomed out and is on the road to recovery. Construction employment, on the other hand, is still falling.

The Austrians can easily interpret the above chart. How does Krugman? If the recession is really just about falling aggregate demand, then why did construction fall so much more than nondurable manufacturing, and why has durable manufacturing risen in 2010 while construction still languishes?

I'm not always enamored with the "my statistics are better than your statistics," but I do think that Prof. Murphy has added some important things to the current debate. Now, I doubt that all the statistical "proof" in the world would dislodge Krugman from his position, but at least I can appreciate someone like Bob Murphy who takes on Krugman at the very points where the Princeton Prof believes he is triumphant.

Bob Murphy Takes on Krugman's History and Krugman's Curious Definition of Prosperity

Paul Krugman is fond of claiming that Herbert Hoover was a "liquidationist" (he was not) and that the Hoover administration responded to the downturn by having the Federal Reserve System raise interest rates and by cutting spending.

Bob Murphy, who in my view is a real economist (not a Keynesian), takes on the Krugman version of American economic history in this article, which I believe is worth reading. He not only debunks the Krugman-Robin Wells (Krugman's wife) thesis, but also anticipates the counter-criticisms.

In his column today, Krugman continues his theme that the Fed and the government are not doing enough borrowing and spending to prop up the economy. I guess that trillion-plus-dollar deficits still are not enough for him.

However, I do wish to take on one element of his analysis, that being the definition of "prosperity" as being associated only with the rate of unemployment. Now, he only has the word in the title, but it is clear that he is saying that the rate of unemployment (or employment) is the key to prosperity.

I would like to argue that it is the other way around: a prosperous economy will provide employment opportunities. But there also is another point that Keynesians seem to forget: employment is a MEANS to an end, not an end in itself.

During the Cold War, I remember hearing a Marxist (card-carrying Marxist) "economist" claiming that Romania had a better economy than that of the USA because there was "no unemployment there." Now, he said this during the recession of 1982, when the rate of unemployment then was close to what it is today. Indeed, I remember hearing the critics claim (including men like John Kenneth Galbraith) that not only was the supposed "full employment" of the U.S.S.R. and its satellites "proof" of a "superior" economy, but THEY HAVE FREE MEDICAL CARE.

Now, what they did not point out was that the real standard of living for people in those countries was dismal, and medical care for the mundanes (those that were not part of the Communist Party ruling class) was pretty bad, to put it mildly. Furthermore, as James Bovard points out in this recent article, Romania, for all the lovefest showered upon it from different quarters, in reality was a most miserable place.

I bring up these points to note that full employment in itself is NOT an appropriate "goal" for an economy. Furthermore, I would say that "economies" do not have "goals." Instead, individuals have goals. An economy is a mechanism by which individuals produce and distribute things that help to meet their needs, in which individuals participate as part of their own means-ends frameworks.

The question we should ask is this: Why are there impediments to individuals being able to engage in those things which help us to meet our goals? If you are wondering why this is so, try starting your own business to make goods or provide services that others might want, and you will find that government provides a large number of barriers.

In some cases, such as delivering documents from one person to another, one might find that it is against the law, given the legal monopoly held by the U.S. Postal Service. Places like Cleveland, Ohio, which has been losing population for years, make it very difficult for entrepreneurs to get started, as Nick Gillespie notes in this recent article on the Reason website.

To the Keynesian, however, all of this is gibberish. An economy to them is nothing but a series of numbers to be stacked into GDP figures. In that view, assets are homogeneous and all that is needed is a little bit of inflation and -- Presto! -- we have an "economy."

There is a "great gulf fixed" between how Paul Krugman and I view an economy. Krugman despairs because the government is not spending enough money and the Fed is not printing enough to create high rates of inflation. I despair because the government is doing everything it can to destroy what still is relatively healthy in the economy in order to help its sick friends, like corn-based ethanol, "alternative" energy, and firms on Wall Street that are politically-connected.

Is Fiscal Sanity the Inflicting of "Pointless Pain"?

Paul Krugman is a popular fellow in many circles because he both represents the "Progressive" political views of liberal Democrats (and some Republicans, let's face it) and also gives very clear explanations of what economist Robert Higgs calls "vulgar Keynesianism." And, as I have explained in previous posts, the Keynesian view holds that an economy is little more than a perpetual motion machine that needs to be greased with newly-printed government money in order to keep running smoothly.

Thus it is that Krugman has become the champion of "stimulus," and given the set of assumptions under which he operates, what he says makes perfect sense. If assets are homogeneous, which means that there are no real economic fundamentals to fall out of balance, then all it takes to keep the economy going is an infusion of new money. In fact, as Krugman writes in this blog post, to pull back on "stimulus" now would be an act of madness, the infliction of "pointless pain."

He writes:

And even this figure conveys a misleading impression of the importance of stimulus spending. First, since cutting stimulus would weaken the economy, it would reduce revenues — that is, a substantial part of the debt growth the IMF attributes to stimulus would have happened even without stimulus, through lower revenue. Second, for the US at least the core reason for long-run budget concern is rising health care costs — in fact, health cost control is the sine qua non of long-run solvency — which has nothing whatever to do with how much we spend on job creation now.

So how much we spend on supporting the economy in 2010 and 2011 is almost irrelevant to the fundamental budget picture. Why, then, are Very Serious People demanding immediate fiscal austerity?

The answer is, to reassure the markets — because the markets supposedly won’t believe in the willingness of governments to engage in long-run fiscal reform unless they inflict pointless pain right now. To repeat: the whole argument rests on the presumption that markets will turn on us unless we demonstrate a willingness to suffer, even though that suffering serves no purpose.

And the basis for this belief that this is what markets demand is … well, actually there’s no sign that markets are demanding any such thing. There’s Greece — but the Greek situation is very different from that of the US or the UK. And at the moment everyone except the overvalued euro-periphery nations is able to borrow at very low interest rates.

So wise policy, as defined by the G20 and like-minded others, consists of destroying economic recovery in order to satisfy hypothetical irrational demands from the markets — demands that economies suffer pointless pain to show their determination, demands that markets aren’t actually making, but which serious people, in their wisdom, believe that the markets will make one of these days.

If one wishes to find a quick study in modern Keynesian thinking, here it is. The entire operation is circular -- if governments want more revenue, they need to borrow and print money and it will come back to them in, well, revenue.

Yet, let us step back for a second and examine the larger picture. Krugman is saying that the the only way for governments to pay back their debts in the future is, well, to get into more debt. This is most interesting and deserves a harder look. First, debt comes with interest, so any newly-acquired debt will mean that principal AND interest payments will be in our future, so the debt will grow automatically.

Second, if there really are no economic basics and if assets are homogeneous, then there is no way for the economy to grow or improve. The Keynesian viewpoint is not intellectually or theoretically positioned to explain how an economy can grow, except to say that more spending has a magical effect upon economic processes that miraculously enable the factors of production to create more goods.

However, such a "miraculous" process cries out for an explanation. If factors are homogeneous and their output increases only when spending increases, then how can these assets produce more goods and services from more spending? Should more spending somehow enable entrepreneurs to change the productive processes to where producers can make more goods and services from the same amount of resources, then the Keynesian argument no longer holds.

That is because the Keynesian viewpoint has no mechanism for this extra burst of production, except to say that somehow before there was "enough" spending, that assets were not operating at "full capacity." In other words, that the only thing that can enable these "underused" or "underutilized" assets to operate at "full employment" is for government to print lots and lots of money.

While the Keynesian might think that the "capacity" example explains economic growth, it actually explains nothing. How did the "capacity" get there in the first place? What made entrepreneurs and producers arrange resources to create the particular means of production?

In the Keynesian view, this simply "happens." It is random, and it involves no real purposeful behavior, yet that makes no sense. Production does not simply happen, and an economy does not just appear out of a new blizzard of paper money.

No, the Keynesians don't have an answer, so for Krugman to claim that cutting back on stimulus would simply inflict "pointless pain" is to misunderstand what his happening. Instead, if one sees assets, resources, and factors of production as being heterogeneous, and if one holds that the structures of production within an economy matter, then this "hydraulic Keynesianism" in which politicians and bureaucrats simply pull and push levers is no explanation of the economy at all.

I doubt that the policymakers of the G20 really understand what I have pointed out, but they do realize that something is amiss. If they really did understand what was happening, not only would they demand governments pull back on this reckless spending, but that their bureaucrats and politicians get out of the way of entrepreneurs and let them find those assets that are profitable, and let them go to work.

The current Keynesian prescriptions are leading to disaster, just as they led to disaster during the 1930s. If we want years and years of high unemployment and no economic growth, then all we have to do is to follow what Krugman is demanding. While I have no confidence in the "austerity" of the G20, I have even less confidence in Krugman's Keynesianism.