Krugman's Twinkie Economic Myths

I remember when Dan White, the former San Francisco city supervisor employed the infamous "Twinkie Defense" in his 1979 trial for the murder of the city's mayor, George Moscone, and fellow supervisor Harvey Milk. Apparently, the jurors were bamboozled by this nonsense and convicted him not of first-degree murder but rather voluntary manslaughter, leading to a sentence of seven years (for which he served five).

Most of us had not thought much about Twinkies and their supposed threat until Hostess recently announced its intention to shutter its operations because of an ongoing strike and its inability to compete in the present economy. However, in recent years, Twinkies supposedly had become famous because of their long shelf life, something that was exaggerated with people claiming the sugar-laden snacks could survive nuclear holocaust.

Well, the company that created them has not survived Barack Obama's economic holocaust, but the economic myths of the era in which Hostess cakes did very well also have outlasted the combination of sugar and chemicals, and who better to perpetuate these myths than Paul Krugman? In a recent column, Krugman harkens back to the 1950s -- the "Golden Era" for Twinkies -- and claims that the economy then was strong because of high taxes and union workforce dominance. He writes:

Needless to say, it wasn’t really innocent. But the ’50s — the Twinkie Era — do offer lessons that remain relevant in the 21st century. Above all, the success of the postwar American economy demonstrates that, contrary to today’s conservative orthodoxy, you can have prosperity without demeaning workers and coddling the rich.

Consider the question of tax rates on the wealthy. The modern American right, and much of the alleged center, is obsessed with the notion that low tax rates at the top are essential to growth. Remember that Erskine Bowles and Alan Simpson, charged with producing a plan to curb deficits, nonetheless somehow ended up listing “lower tax rates” as a “guiding principle.”

Yet in the 1950s incomes in the top bracket faced a marginal tax rate of 91, that’s right, 91 percent, while taxes on corporate profits were twice as large, relative to national income, as in recent years. The best estimates suggest that circa 1960 the top 0.01 percent of Americans paid an effective federal tax rate of more than 70 percent, twice what they pay today.

Nor were high taxes the only burden wealthy businessmen had to bear. They also faced a labor force with a degree of bargaining power hard to imagine today. In 1955 roughly a third of American workers were union members. In the biggest companies, management and labor bargained as equals, so much so that it was common to talk about corporations serving an array of “stakeholders” as opposed to merely serving stockholders.

Furthermore, Krugman argues that the road to prosperity is for the government to have massive tax increases and a unionized workforce:

Along the way, however, we’ve forgotten something important — namely, that economic justice and economic growth aren’t incompatible. America in the 1950s made the rich pay their fair share; it gave workers the power to bargain for decent wages and benefits; yet contrary to right-wing propaganda then and now, it prospered. And we can do that again.  

So there it is. The economy was prosperous because of high tax rates (the same rates Krugman told me in response to a question in 2004 that were "insane") and because labor unions were driving up the cost of doing business. Capital had nothing to do with it. The fact that the USA was the one industrialized nation that had not been on the receiving end of mass bombing and artillery attacks had nothing to do with it.

No, the prosperity of the 1950s (when at least a third of Americans officially lived in poverty) was due to massive wealth transfers. However, Krugman fails to point out that during this era, business owners and entrepreneurs did not have to deal with the massive influx of  government regulations at all levels, although I am sure that he would tell readers that had government been even more restrictive at that time, the economy would have prospered even more because higher costs of business translate into more wealth for owners of factors of production, and higher costs are the real source of prosperity.

Not surprisingly, Krugman misses a bit of history along the way. By the end of the 1970s, as these unsustainable policies of high taxes and inflation continued, the U.S. economy was in crisis, and the 1980 election occurred in that atmosphere. Far from creating the prosperity of the 1950s, these policies which Krugman praises led to less capitalization down the road, and when they reached their natural end, it was clear that much of the capital stock of this country was still stuck in the postwar decade while Japan and other nations had moved well past the ruins of the aftermath of World War II.

Paul Krugman's economic missives are full of fallacies, and his latest column is no exception. He employes the Post Hoc Ergo Propter Hoc Fallacy, not to mention the Broken Window Fallacy along with his belief that government policies can eliminate the Law of Opportunity Cost.

Yes, Krugman wants to do what all good Progressives claim is heresy -- "Turn Back the Clock" -- and his views are as mistaken as the notion that Twinkies really constitute health foods. I doubt seriously that if the government were to slap down even higher tax rates and force unionism on every firm that out of that would rise prosperity.

No, out of that would rise Argentina of the 1950s and 1960s, and we know how well that little experiment worked.

More economic illiteracy from the NY Times

Paul Krugman seems to be in a bi-partisan spirit in his latest column, claiming that Mitt Romney is a "closet Keynesian," and he may be right. I'm not sure that Romney is a closet anything other than a guy who wants to be president, and he has the "presidential looks" that come from Central Casting.

I must admit that Romney's economic leanings don't interest me much and I doubt the guy has any real compass other than one in which the needle points to the White House. So, while Krugman tries to convince readers that Romney is another Keynesian, I have decided to comment on other examples of economic illiteracy that have been appearing on the NYT editorial page.

We have a couple of interesting ones. First, there is a claim that the GM and Chrysler bailouts somehow saved the economy as though it is possible to both dig a hole deeper and simultaneously claim one actually is filling it up. (The piece is by Steve Rattner, an Obama auto adviser, which means we are seeing political spin at its worst.)

Since Krugman is in a bi-partisan spirit, I have decided to go after a couple of Republicans for their op-ed on why the government should require automakers to make cars that can run on a bunch of different fuels, including methanol, which Tom Ridge (who distinguished himself as the first Secretary of the Department of Homeland Security, or should I say our future version of the domestic KGB) and former Bush Transportation Secretary Mary E. Peters have written. Why am I not surprised that the article ignores the simple Law of Opportunity Cost?

Let me first look at the bailout. At the time the Obama administration essentially nationalized GM (and partially-nationalized Chrysler), these companies had balance sheets that were billions of dollars out of whack and were hopelessly in the red. Had Obama not been beholden to the United Auto Workers and forced taxpayers to prop up these firms, both would have gone into Chapter 7 bankruptcy, which means all of the assets of these companies would have been liquidated to pay their creditors.

Rattner is correct that the bailouts did keep other companies tied to GM and Chrysler afloat, but like everyone else who writes for the NYT editorial page, his claim that the bailouts were economically-successful depends entirely upon eliminating the opportunity costs involved. He does that by pointing ONLY to one side of the equation and ignoring the other. It is like saying that if my wife hands me $10 from her purse, the economy is $10 wealthier.

Unfortunately, many people believe that governments create wealth by fiat, which is akin to a doctrine of State Economic Creationism, and Rattner is one of them. I don't blame Obama and his minions for their spin, as politicians are famous for that, but nonetheless economics does not permit us to look ONLY at one side and not the other.

The truth about GM and Chrysler is that there were (and still are) consuming more resources than they produce. That's right, the government could not eliminate that sad fact simply through executive order, no matter what Rattner and Obama might claim. As for the assets of GM and Chrysler, they would not have disappeared; the useful ones would have been sold to other auto companies and the industry could have better restructured.

True, the UAW would have taken a hit, but the only way to defend the bailouts from the UAW perspective is to claim that higher factor prices create more wealth. (That is a favorite tactic of Paul Krugman, by the way, which literally turns economics, opportunity cost, and the history of economic growth on their heads.) In truth, the UAW workers were overpaid relative to the auto industry, yet they were less productive than their counterparts.

For all its claims that it wishes to "protect" consumers, the Obama administration has an odd way of doing so. Consumers had spoken loudly in the case of GM and Chrysler, yet Obama slapped them in the face. However, neither the NYT nor Paul Krugman believe that, in the end, consumers should have any say when it comes to politically-protected firms and politically-protected unions.

(In his Playboy interview, Krugman also repeats the same fallacies that high wages by themselves create wealth. This is another rendition of the wrongheaded belief that governments can order wages to rise, which then creates wealth instead of what really happens: governments destroy wealth.)

As for Ridge and Peters, I have one question: If methanol is such a great idea, and if all it takes is a $100 tweaking to ensure that all cars can be flexible in fuel choices, then why haven't entrepreneurs taken that leap? One can go on about "network costs" and the like, but entrepreneurs created gasoline and diesel networks during the 20th Century without government leading the way.

Instead of trying to understand why fuels like methanol are not widely distributed, Ridge and Peters succumb to the wonkishness of central economic planning, as though Washington can guide an entire industry by fiat. Because I am not familiar with much of the regulatory structure in the auto industry, I don't know how the government's current set of rules would affect the building and marketing of cars powered by natural gas or methanol.

For example, do the CAFE mileage standards play a role? What about other rules? I don't know, but more often than not, we find that government regulations often stand in the way of good ideas.

Nonetheless, I don't get that sense with Ridge and Peters. Instead, they see something and create the false notion that government successfully can order something into production without there being terrible economic dislocations.

Were we in paradise, but failed to realize it?

Progressives have a narrative that just won't quit, even when the facts contradict them. Whether it is Paul Krugman or Robert Reich or an editorial writer of the New York Times, the narrative goes like this: From the New Deal to 1981, America was a virtuous, prosperous country that flourished on unionized industries and high tax rates, with many key industries heavily regulated by government.

The economy was in perpetual motion, jobs were easy to find, and life was good. Then the ideologues somehow managed to convince prosperous Americans that they really were bad off and that perhaps we needed to change the tax rates and regulatory structure. That was the beginning of the end, and from 1981, the economy continually spiraled into Hell, with a brief respite coming in the Bill Clinton administration, with the economy booming because the top tax rates were raised from 33 percent to 39.6 percent.

Alas, the Evil People took over in 2001, after stealing the presidential election, and the proceeded to lower the top rates from 39.6 percent to 35 percent, and that caused the economy to collapse, first in 2001, and then in 2008, and now it is tanking further because the Evil People don't want high rates of inflation and are against raising the top tax rates to 70 percent.

Thus, if one receives a steady diet of the NYT, the solution to our problems is as follows:

• Raise the top income tax rates at least to 40 percent and preferably back to 70 percent;

• Unionize all American industries, and if workers don't want a union, force one on them, anyway;

• Get the Federal Reserve System to manipulate the monetary transmissions until the rate of inflation reaches at least 6 to 8 percent, with goals of pushing it into double-digits;

•  Create more highway-building schemes with the hopes that middle-class people will be employed, which will enable them to get more money, which means they can spend us into that "virtuous circle" of job creation.

Lest anyone think I am kidding, read the latest op-ed in the NYT from Robert Reich, the former U.S. Labor Secretary and full-time crank. Declares Reich:

Look back over the last hundred years and you’ll see the pattern. During periods when the very rich took home a much smaller proportion of total income — as in the Great Prosperity between 1947 and 1977 — the nation as a whole grew faster and median wages surged. We created a virtuous cycle in which an ever growing middle class had the ability to consume more goods and services, which created more and better jobs, thereby stoking demand. The rising tide did in fact lift all boats.

During periods when the very rich took home a larger proportion — as between 1918 and 1933, and in the Great Regression from 1981 to the present day — growth slowed, median wages stagnated and we suffered giant downturns. It’s no mere coincidence that over the last century the top earners’ share of the nation’s total income peaked in 1928 and 2007 — the two years just preceding the biggest downturns.

Starting in the late 1970s, the middle class began to weaken. Although productivity continued to grow and the economy continued to expand, wages began flattening in the 1970s because new technologies — container ships, satellite communications, eventually computers and the Internet — started to undermine any American job that could be automated or done more cheaply abroad. The same technologies bestowed ever larger rewards on people who could use them to innovate and solve problems. Some were product entrepreneurs; a growing number were financial entrepreneurs.

Yes, ladies and gentlemen, blame cutting tax rates and...Steven Jobs. That's right, read what Reich says. He actually blames the entrepreneurs for increasing wealth through new capital.

So, it seems that economically speaking, we have come full circle. The Golden Age of which Reich speaks was one in which post-World War II, the USA had the capital advantages, but as other countries began to rebuild their economies, like Japan, and also adopt superior capital and production methods, the U.S. advantage began to wane.

The big warning should have been the currency crisis of 1971, but notice that people like Reich consider this to have been a triumph, since the 1970s was a decade of inflation, and Reich and his fellow Keynesians are champions of destroying the value of money. An economy, in their view, is nothing more than a big circle in which people spend and spending creates jobs and jobs allow us to spend, and the circle continues.

So, if all it takes is spending, I have a better idea, one that I am sure that Reich, Krugman, and the NYT would support: Just give everyone lots of money. Don't worry about jobs at all. Just give people money, and since production is automatic, the goods will be there as long as the government puts money into the hands of everyone.

Such a scheme should not be difficult, and we need not worry about the costly monetary transmission mechanism of "the job." Why bother when all that is needed is more spending?

So, why don't we see Reich, Krugman, and others promoting this scheme? After all, it is consistent with what they are demanding whenever they take to print or the airwaves. I mean, jobs are dangerous, bosses can be mean, and they are so, so unnecessary when all that is needed is spending.

And please don't pull a "work ethic" line on me. Progressives for years have denigrated the world of work, speaking of "dead-end-jobs" and accusing employers and business owners of exploitation of workers -- and worse. Krugman, Reich, and the NYT editorial writers and other Progressives see "jobs" mainly as transmission devices for providing incomes to the middle class, so that those people can spend us back into prosperity.

Apparently, that is what they wanted us to believe was the case in post-war America. The government taxed the rich at very high rates, unions forced up wages, and people spent like crazy, creating Reich's "virtuous circle." As one who was working in the late 1970s, I don't remember the U.S. economy being in the great shape that Krugman and Reich claim it was.

Furthermore, for all of the talk about ideology and deregulation, it was the liberal Democrats like Ted Kennedy, Jimmy Carter, and Alfred Kahn that were at the forefront of those initiatives. However, that narrative doesn't fit the current set of false facts, so like everything else, it must be shoved into the Orwellian Memory Hole so that Americans can be told by Progressives that giving the state more regulatory powers, high tax rates, and lots of inflation will bring back prosperity.

Krugman Discovers the Dastardly "Plot" in Wisconsin

No doubt, Paul Krugman makes fun of people who indulge in conspiracy theories, although it seems that he constantly comes up with wild theories of his own. Do you question "stimulus" spending on public works projects? Why, you are a racist who wants to bring back slavery.

Do you have a problem with Ben Bernanke's plan of showering the world with dollars, and with government creating a blizzard of paper money in general? Why, you are a racist who wants to bring back slavery.

Indeed, like a good parrot, Krugman recites the Party Line and calls it argument. So, why am I not surprised when he weaves together yet another conspiracy theory about what is happening in Wisconsin. Yes, it seems that Gov. Scott Walker is in league with Paul Bremer and everyone else who was involved with the invasion of Iraq, or maybe he is part of the world-wide cabal that wants to impose the "shock doctrine" on an unsuspecting world.

He also surmises that this whole thing is nothing more than a plot by the Koch Brothers to take over Wisconsin. Wisconsin today! Tomorrow the world!! (The only problem is that George Soros -- who really does bankroll internationalist groups that believe that what we need is One Single Bureaucracy to rule over us all -- gives more money to his "causes" in a year than the Koch Brothers have given in their lifetimes. Does Krugman get any Soros money? Inquiring minds would like to know. And, no, I don't get Koch dollars. Sorry.)

Krugman gives us the following statement, and I will point out afterward just what a howler it really is:

What’s happening in Wisconsin is, instead, a power grab — an attempt to exploit the fiscal crisis to destroy the last major counterweight to the political power of corporations and the wealthy.

First, the notion that public employee unions are a "counterweight" to unwarranted "corporate power" is a very sick joke. Keep in mind that the process which he praises consists of a cabal of politicians who are elected through the efforts of the unions of government employees and the unions themselves then imposing their will upon people who are not in that circle.

In other words, we have something akin to a soviet in which the government employees elect their paymasters. The problem is that the arrangement depends upon the people on the outside being able to pony up the cash to pay for the whole thing, and they no longer are willing and able to do so.

Krugman's academic Keynesian mind claims that this is bad because the party being fleeced consists of the Evil People Who Don't Want More Spending. Don't they know that if they just accede to having their bank accounts cleaned out, that all the spending will create new prosperity? Haven't they heard of circular logic, er, flow?

Here is the crux of the problem: government employee unions cannot cannibalize themselves. Like all parasites, they need a host, and they and Krugman are very, very upset that the current hosts are rebelling. In fact, their rebellion must be part of a plot by the Koch Brothers TO TAKE OVER THE WORLD!

So, in the end, Paul Krugman resorts to conspiracy theories. Now, while I might agree with him about backroom deals and other sorts of cronyism that can occur with privatization, does he really expect us to believe that the current socialistic arrangement is free of such things?

Krugman seems to be one of those folks who believes that union-created socialism is pure, pure, pure. Public employee unions are bravely serving as a counterweight to those evil corporations, and that these unions are the heart and soul of America's middle class. Yes, Paul Krugman really seems to believe that we can have a large and thriving "middle class" that consists of bureaucrats, and the more we expand the bureaucracy, the more we expand our wealth.

And if you are not part of this arrangement, then Krugman instructs that you sit back, let the state insert the needle, and then drain you of your blood. By so doing, you are helping to create prosperity.

Krugman's New Fight Song: "On Wisconsin"

There are a number of college fight songs that have become memorable -- and copied -- throughout the country. There is "Cheer, Cheer, for Old Notre Dame," "Hail to the Victors" (University of Michigan), "Tiger Rag" (Clemson and LSU), and even from my old alma mater, Tennessee, the infamous "Rocky Top."

("Down the Field" was our fight song when I first came to UT in 1971, but "Rocky Top" continued to move into the picture, and now it dominates any UT football or basketball game. At least I can play it on my violin, although not easily in the key that the band uses.)

From what I can tell, Paul Krugman has decided to push "On Wisconsin" for his fight song today, and I cannot say I am surprised that he took on the cause of public employee unions. Once one takes on the viewpoint that all (or almost all) government spending is "good for the economy," then what is not to like about government unions?

At one level, this is something that was inevitable, and we have to separate the politics from the larger picture. First, Krugman is correct when he writes that this is not just about cutting spending. The Wisconsin state union leaders have agreed to engage (at least in principle) to engage in negotiation.

Second, ironically, Krugman is correct when he writes the following, but not in the way that he might think:

Why bust the unions? As I said, it has nothing to do with helping Wisconsin deal with its current fiscal crisis. Nor is it likely to help the state’s budget prospects even in the long run: contrary to what you may have heard, public-sector workers in Wisconsin and elsewhere are paid somewhat less than private-sector workers with comparable qualifications, so there’s not much room for further pay squeezes.

So it’s not about the budget; it’s about the power.

In principle, every American citizen has an equal say in our political process. In practice, of course, some of us are more equal than others. Billionaires can field armies of lobbyists; they can finance think tanks that put the desired spin on policy issues; they can funnel cash to politicians with sympathetic views (as the Koch brothers did in the case of Mr. Walker). On paper, we’re a one-person-one-vote nation; in reality, we’re more than a bit of an oligarchy, in which a handful of wealthy people dominate.

Given this reality, it’s important to have institutions that can act as counterweights to the power of big money. And unions are among the most important of these institutions.

You see, Krugman is painting false picture here, a caricature that began during the Progressive Era and continues to the present time. According to Krugman, we have the Big, Bad Oligarchs on one side and then the poor, downtrodden workers on the other.

By unionizing, these poor workers are able to have a fair say in what is happening to them, so any attempt to weaken the power of unions really is nothing more than an attempt to bring back the Bad, Old Days. There is a problem with Krugman's analysis, however, a big problem.

First, we can see what has happened to those private industries in this country that have had powerful unions, from steel to autos. The only truly competitive industries in those areas today are non-union, such as the various Japanese auto firms that have built facilities in this country.

Now, Krugman would have you to believe that the workers at the various Nissan, Toyota, and BMW plants here are starving, working for mere pennies because they are not organized. Tell that to the employees who are doing just fine. Furthermore, they have jobs, as they have not forced their employers out of business, as has the UAW, which helped drive General Motors into bankruptcy, with American taxpayers being the ones now propping up this bankrupt monstrosity.

Second, we are dealing with another animal, that being government unions. There is a huge difference that Krugman fails to point out, and that is that public employee unions are allied with politicians (mostly Democrats), creating what essentially is a soviet in which the government employees provide enough clout to make sure that their chosen paymasters are elected.

The only problem for them is that the unions cannot extract good pay and benefits from themselves, so they have to go after the people who actually produce something in the real economy. What we have is an arrangement in which the unions elect the politicians who then strip others who are not part of the arrangement of their possessions to give to the unions.

This arrangement works as long as those being fleeced are able to do so and don't gain enough political power themselves to break up this soviet at the ballot box. However, this past year, despite record spending from labor unions to prop up the Democrats, they lost big in the elections and now are taking their big stand.

With the Obama administration taking an active role in organizing and supporting the protests, we can see where lines are being drawn. But there is even more, something more insidious that Krugman ignores but that I cannot and will not ignore.

The Obama administration has aggressively prosecuted and imprisoned doctors whom prosecutors claim write prescriptions that "have no medical purpose." However, at the rallies at the Wisconsin Capitol, doctors (yes, real-live M.D.s) have been handing out fake "sick" excuses to teachers in order to make their unauthorized absences be made to look as though they were away from work for a legitimate reason.

This, people, is fraud, and literally a federal crime. So, we have doctors on camera committing felonies -- and that is what they are are -- to be seen by federal authorities, and I will bet that nothing -- nothing -- will be done. In other words, Obama and his supporters (including Krugman, of course) will support felonious behavior for political reasons.

Krugman may claim that these are poor, downtrodden workers trying to stand up against the Oligarchs, but in reality, what we have been seeing are people who are able to use coercion in order to create pay and benefits for themselves that are not available to others -- the others who have to pay for these arrangements.

Moreover, many public employees have real power over the rest of us, and anyone who has dealt with unionized state and federal bureaucrats can attest to the abuse that they heap on others, and the fact that they are not accountable for that abuse. Let us be honest here, people. Paul Krugman is endorsing what in effect has been a gravy train for those people privileged to be tied to the politicians who have wielded power.

Now that the arrangements are different, the same "public servants" who enjoy pushing others around now are trying to tell us that they are nothing more than poor, oppressed workers toiling for pennies a day. And the fact that Krugman is willing to shill for this tells us a lot about the guy.

Krugman's Snow Job

In writing about the recent seeming inability of New York City workers to remove snow from city streets, Paul Krugman spouts what would be the usual party line: Mayor Bloomberg was not up to the job, and it was "Bloomberg's Katrina." Why? Well, Bloomberg is not ideologically pure enough for Krugman, or so the Great Economist says.

Writes Krugman:

But he just faced a major test of crisis management — and it’s been a Brownie-you’re-doing-a-heck-of-a-job moment.

I was wondering why NYC’s storm response was such a mess; it turns out that the city administration basically refused to take the warnings seriously, long after anyone watching the Weather Channel knew that a blizzard was coming.

We have yet to find out exactly why. But this was a major fail.

However, as the New York Post writes, it seems that there also was something that Krugman ignored: union sabotage:

Selfish Sanitation Department bosses from the snow-slammed outer boroughs ordered their drivers to snarl the blizzard cleanup to protest budget cuts -- a disastrous move that turned streets into a minefield for emergency-services vehicles, The Post has learned.

Miles of roads stretching from as north as Whitestone, Queens, to the south shore of Staten Island still remained treacherously unplowed last night because of the shameless job action, several sources and a city lawmaker said, which was over a raft of demotions, attrition and budget cuts.

"They sent a message to the rest of the city that these particular labor issues are more important," said City Councilman Dan Halloran (R-Queens), who was visited yesterday by a group of guilt-ridden sanitation workers who confessed the shameless plot.

Halloran said he met with three plow workers from the Sanitation Department -- and two Department of Transportation supervisors who were on loan -- at his office after he was flooded with irate calls from constituents.

Of course, given that Krugman believes that municipal unions are good for the economy and fit his ideology, somehow that little tidbit of news managed to slip by him. No doubt, I am sure that the union leaders who made sure the streets weren't plowed also knew that the Usual Suspects and the NY Times and people like Krugman would be quite happy to cover for their ideological soulmates.

Krugman really should call his blog: No Conscience of a Liberal.