Peter Schiff Takes On Paul Krugman

Even though Peter Schiff is not a Nobel Laureate in economics or has a doctorate in economics from MIT, it is clear he knows economics in a way that Paul Krugman never could. In this video, he refutes Krugman point by point.



(Hat tip to Michael Rozeff and an emailer named Mike)

Krugman: "Mercantilism Works"

Lest anyone think that my recent post on Krugman channeling Bernard Mandeville was an exaggeration, today, the Nobel Laureate lets himself go in a blog post. In his own words, "Mercantilism works." Read on:

As I’ve written many times in various contexts since the crisis began, being in a liquidity trap reverses many of the usual rules of economic policy. Virtue becomes vice: attempts to save more actually make us poorer, in both the short and the long run. Prudence becomes folly: a stern determination to balance budgets and avoid any risk of inflation is the road to disaster. Mercantilism works: countries that subsidize exports and restrict imports actually do gain at their trading partners’ expense. For the moment — or more likely for the next several years — we’re living in a world in which none of what you learned in Econ 101 applies.

I did not make up these things. Krugman is claiming that the very things that Mandeville declared almost 300 years ago all are true.

So, are you cutting back purchases, getting out of debt, and building up your savings? Then you are an Enemy of the People, for you are engaged not only in folly, but folly that is destroying our economy and making us poorer.

Krugman defines the "liquidity trap" (which came from John Maynard Keynes) as such:

In my analysis, you’re in a liquidity trap when conventional open-market operations — purchases of short-term government debt by the central bank — have lost traction, because short-term rates are close to zero.

Now, you may object that there are other things central banks can do, and that they actually do these things to some extent: they can purchase longer-term government securities or other assets, they can try to raise their inflation targets in a credible way. And I very much want the Fed to do more of these things.

But the reality is that unconventional monetary policy is difficult, perceived as risky, and never pursued with the vigor of conventional monetary policy.

It is difficult to point out all of the major fallacies here, as time and space stand in the way, but let me say that anyone who has read Murray Rothbard's America's Great Depression or Henry Hazlitt's classic Economics in One Lesson can see just how badly Krugman misses the mark. In Krugman's world, an economy is not made up of purposeful individuals who engage in mutually-beneficial exchange in order to better themselves.

No, according to Krugman, an economy is a perpetual motion machine, an entity that needs (in Krugman's words) "traction." Just push the thing forward via government spending and -- yes -- inflation, and it will run by itself. However, in the meantime, make sure everyone spends whatever they have, and go into huge debt, if necessary, or the motion machine will stop working.

Krugman claims that the economy is greased by spending, but spending, especially in the Keynesian view, is a much different concept than consumption. Under a spending regime in Keynesian economics, people simply are "buying back the products" that they have produced. In other words, they are clearing the shelves so they can produce more stuff to put on the shelves.

This is not purposeful activity; it is a caricature of an economy and certainly is a caricature of what consumers actually do. People don't spend so they can produce more goods so that they can spend and keep the process going indefinitely.

In this view, there is no particular structure of production. As a professor at the recent Austrian Scholars Conference told me, Keynesianism would hold that it does not matter if the capital improvements at his college involve building new buildings and improving old ones, or if all of the money were spent building a new bell tower that would rival the old Tower of Babel, since the only thing that matters is spending.

The problem is not that consumers are failing to spend enough money. Instead, as the Austrians have pointed out time and again, the problem is that during the past decade, government policies have directed people to create huge amounts of malinvestments that must be liquidated before we can have a recovery. Instead, Krugman and the world's politicians and central bankers are insisting that we just keep going in the same unsustainable direction and somehow the light at the end of the tunnel will be a ray of sunshine instead of the train headed straight at us.

Do We Need Capital Controls?

I meant to blog on this last week, but only now can give the subject of capital controls my attention. In a post of nearly two weeks ago, Paul Krugman praises such restrictions during the economic crisis in Malaysia of more than a decade ago, yet wonders if such controls would work in Greece and Spain.

Such comments once again reveal the "Historicist" Krugman, just as he believes that governments should engage in printing lots of new money (what some call "inflation") during bad times, and refrain from such activity when times are good. Likewise, capital controls might be successful at times and unsuccessful in certain periods.

In other words, outside circumstances dictate economic policies rather than economic policies staying within the bounds of the laws of economics, which are based upon laws of human action. Thus it is with capital controls.

We have to remember that capital controls are based upon coercion. After all, such controls prevent people from taking things they value out of the country. It is another way of saying that government owns everything, and anything people have in their possession simply is borrowed from the state.

Granted, we are dealing with very different fundamental approaches. Krugman is saying that Malaysia instituted capital controls, and after the crisis ended, investment flowed into the country again. Thus, they were "successful."

Yet, what might be the case had the government of Malaysia declared that the country was a safe place to invest, and that also meant people could bring their possessions into the country and take them out again if they so desired? I don't know the results, since Malaysia did not go that route. However, as I see it, there is a huge fundamental difference between Krugman and the Austrians here, and it is not just based upon potential outcomes.

No, what Krugman endorses is a form of theft. That's right, theft. Capital controls are theft. Krugman might believe that they can be "good theft," but nonetheless, government is taking control of the possessions of others. Since Keynesian economics endorses stealing through the "magic" of inflation, I hardly am surprised that America's loudest Keynesian believes theft is just fine in other forms, too.

Fable of the Krugman

While Paul Krugman likes to present himself as being a Keynesian, in reality, his intellectual roots run back a few centuries to the Mercantilists. If you wish to see the Krugman of 300 years ago, read Bernard Mandeville's "The Fable of the Bees," first published in 1705, to see all of the same economic (and logical) fallacies that haunt Keynesianism and Krugman's columns.

Do you want the "paradox of thrift"? You can find it there. There is "underconsumption" and the emphasis upon spending that has not changed in three centuries, at least when one reads Krugman's columns.

In his column, "Taking on China," Krugman takes his Mercantilist arguments to a new high (or low, which might be more appropriate), blaming, yes, China for the continuing economic depression in the rest of the world. It seems that China has been undervaluing its currency, the renminbi, and that forces the rest of the world into that infamous "liquidity trap." Here is Krugman in his own words:

...it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.

To understand Krugman's logic, first you must turn economic logic upside down. By undervaluing its currency, China is following a policy of exports first, and in the process is amassing a lot of foreign reserves in the process. This, by the way, was the very kind of practice that Adam Smith and other Classical economists railed against, as they successfully argued that such artificial trade restrictions made their own people poorer.

Furthermore, China has been building a huge surplus denominated in fiat currencies from abroad, mostly the U.S. Dollar. However, Ben Bernanke and soon-to-be-his-partner-in-crime Janet Yellen are willing to turn the dollar into worthless paper that cannot compete with the infamous German Mark of 1923, not to mention the fading Euro and Lord knows what else. Maybe we can throw some Bolivian money in the mix and some Argentine Pesos from the Age of Juan Peron.

By pursuing this action, Chinese producers indeed are able to sell their goods more cheaply abroad than are Americans. This much is true. Conversely, this also means that China is willing to ship real wealth overseas and accept our worthless green pieces of paper in return. Yes, we have the situation in which the poorer Chinese are playing the role of philanthropist to the wealthy Americans and European. Hmmm, exploitation, anyone? This is a better deal than Colonialism.

Now, if one has a Keynesian, er, Mandevillian, view of the world, this is terrible. In the Keynesian view of things, spending, not consumption, is the end of economic activity. There IS a difference. Under the Keynesian view of things, consumption and production are two unrelated things. People make products and then hope-to-goodness that they can "buy back" what they have just produced.

In this view of things, producers just "make things," and then the real reason for spending is just to empty the inventories. That way, producers can make more things and then they are cleared off the shelves, and the process begins anew.

This is not an economy; this is a cat chasing its tail. The only purpose I can see here is keeping people occupied. The purpose of "consumption" here only is to "buy back" what has been made; it does not and cannot go any farther.

No wonder that Keynesians emphasize the "circular flow" of the economy, as it fits within their circular logic. Israel Kirzner once parodied this whole set of nonsense with the following dialogue: "Why do you eat breakfast? So I can go to work. Why do you go to work? So I can eat breakfast."

Lest one thinks I am exaggerating or trying to present a caricature of Keynesianism as fact, take the following quote from Krugman, in which he praises Richard Nixon's 1971 action in which he cut ties to gold, devalued the dollar (or, in real-live terms, engaged in a default), and wrote a vital chapter in what would be a disastrous economic decade:

In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies.

Now, as a hardcore partisan Democrat, Krugman cannot utter the N-word, except in derision, yet he is praising what Austrians see as a dishonest approach to the real problem of runaway government spending, fiat currencies, and a mountain of government debt. To Krugman, all of the things I have mentioned are virtues, just as Mandeville praised profligacy as being virtuous and thrift as a vice.

I would pose a different scenario. Indeed, China should end its pegging of the renminbi to the U.S. Dollar, but for different reasons. Chinese workers have toiled in factories, yet government policies are overpricing those goods at home. This is similar to what Japan did in the 1980s and we see how well that worked for the Japanese.

Yes, Wal-Mart is full of Chinese consumer goods that are artificially cheap for us, and as long as we can keep this arrangement going, who is to complain? Krugman does not like it for all of the wrong reasons. To him, when he sees Americans buying something at Wal-Mart (well, let's face it, I'm sure Krugman never lowers himself to step into a Wal-Mart and mingle with the Great Unwashed), he sees trade imbalances. I see American consumption made possible by the philanthropic Chinese government acting to the detriment of the Chinese consumer.

Granted, one must understand Keynesian and Mandevillian logic. Domestic consumption, according to this "logic," is "buying back the product," but the real goal of American production should be to let someone in another country consume what Americans have produced. If that does not make sense to you, don't worry. It means you are thinking clearly.

As for the Krugman "solution," he advises the Nixon strategy of raising tariffs (Krugman calls for a 25 percent import surcharge) and telling the Chinese that while they amassed those dollars, the heck with them if they wish to spend them at least here. Who would have thought that Mr. Democrat would be channeling the policies promoted by the Republican that Democrats Love to Hate, Richard Milhous Nixon?

Of course, this would work wonders at home. Americans, who are struggling to make ends meet, would discover that prices were shooting up and their dollars would purchase less than before. There would be international tensions and the dollar would become the worthless paper in a scenario that the Austrians have been predicting for a while.

Yes, this is the Mercantilist world of Paul Krugman. Peaceful private exchange is an act of aggression, and aggression will bring us from an imaginary "liquidity trap." Indeed, War is Peace, Slavery is Freedom, and Ignorance is Strength.

The Most Bizarro Health "Reform" Arugment: ObamaCare Will Cut the Deficit

Is Paul Krugman an economist or a political operative? Seven years ago, I said it was the latter, and nothing Krugman has written since then has changed that opinion. In this blog post, Krugman once again exposes himself as the politically-partisan shill that he has become.

Now, I will say that some of what he says is useful, at least if one is moved by the delusion that the Republicans actually have a decent answer in this healthcare debate. Krugman notes that

...(Republicans) have a problem: Obamacare is very much like the Massachusetts health reform, which was not only implemented by a Republican governor, but by a governor who is a serious contender for the 2012 presidential nomination.

Unfortunately, he quickly breaks from reality with the following statement:

So they insist that the two plans have nothing in common — but the only real difference they can point to is that Massachusetts didn’t fund its plan in part out of Medicare savings.

Of course, it couldn’t. But think about this a bit more: Republicans are saying that what makes Obamacare a socialist takeover, whereas Romneycare wasn’t, is the fact that unlike Romney’s plan, Obama’s plan cuts government spending.

Uh, does Krugman really believe that this plan is going to provide any Medicare "savings" at all? Or that the Obama monstrosity "cuts government spending"? Now, Krugman was all over the proposals from the Bush administration that promised fictitious results, but now that his candidate is in the Oval Office, suddenly the nonsense that is ObamaCare presents the truth and only but the truth.

Anyone who claims that price controls are going to "cut" government spending is not an economist, as real economists understand the price system, how it works, and what happens when government intervenes into market exchanges. That someone of Krugman's stature would spend his political capital on a bogus mess called ObamaCare tells me that the guy is a political operative and nothing else.

Krugman Cheers Fed Appointment of Fellow Inflationist Janet Yellen

Oh, joy! The Regime of Printing Worthless Money lives! Janet Yellen, the president of the San Francisco Federal Reserve Bank is going to take her place with Ben "Throw Money from the Helicopter" Bernanke as the Number Two Inflationist at the Fed.

Not surprisingly, Dr. Inflation Himself, Paul Krugman, heartily approves. He writes:

She’s open-minded, a good counterweight to the inflation hawks who think that any day now we’ll be partying like it’s 1979.

Yep. That is what we need, a good, "open-minded" inflationist, a monetary crank. For all of her "distinguished" career, any economist who advocates inflation as a way to bring a real recovery is promoting something akin to Harry Potter Science.

By the way, Krugman and Yellen forget that by wringing out our high inflation rates of the late 1970s and early 1980s, former Fed President Paul Volcker promoted a policy that really worked, as it took the malinvestments that our economy had piled up, trashed them, and then gave us a real recovery. Unfortunately, the Bernanke-Yellen Tag Team promises more of the same failed policies that are putting our economic future in permanent jeopardy.

But never to worry. After the economy continues its implosion, I'm sure that Krugman will find a way to blame it on everyone but himself and the policies he has championed.

Paul Krugman: Spreading Economic Myths to Debunk What He Calls "Health Reform Myths"

Economists like to debunk what we call economic myths. For example, I have used this blog to debunk Paul Krugman's Herbert Hoover myths about the Great Depression. However, I must admit that Krugman does all of us one better when he employs economic myths in an attempt to "debunk" what he says are "Health Reform Myths."

...reform still has to run a gantlet of misinformation and outright lies. So let me address three big myths about the proposed reform, myths that are believed by many people who consider themselves well-informed, but who have actually fallen for deceptive spin.

OK, fair enough. What are these myths?

The first "myth" is that government is taking over a sixth of the U.S. Economy. Krugman says that government already controls much of the healthcare sector, and THAT sector runs very, very well. The "failing" healthcare sector, he says is the so-called private part:

The only part of health care in which there isn’t already a lot of federal intervention is the market in which individuals who can’t get employment-based coverage buy their own insurance. And that market, in case you hadn’t noticed, is a disaster — no coverage for people with pre-existing medical conditions, coverage dropped when you get sick, and huge premium increases in the middle of an economic crisis. It’s this sector, plus the plight of Americans with no insurance at all, that reform aims to fix. What’s wrong with that?

The next "myth" is that the proposed law "does nothing to control costs." According to Krugman, "Realistically, health reform is likely to do much better at controlling costs than any of the official projections suggest."

Krugman's third "myth" is that this reform is "fiscally irresponsible." He defends the pending legislation:

How can people say this given Congressional Budget Office predictions — which, as I’ve already argued, are probably too pessimistic — that reform would actually reduce the deficit?

I will try to answer Krugman by concentrating on one item: the notion that this bill will "cut costs" and, thus, reduce the federal deficit.

Perhaps the most charitable thing I can say is that Paul Krugman, being a "macroeconomist," really does not understand costs. To the economist (that is, an economist who actually has real economics training), a cost is an opportunity cost, which is the subjective value of the next-highest-valued alternative. THAT is a cost. Krugman, however, continues to insist that a cost is nothing more than an arbitrary monetary outlay.

Cost ruduction, then, according to Krugman, is nothing more than slapping down price controls. If government decrees lower prices for medical care, then like magic, prices will fall, and there will be ample care for all. Now,I have no idea what Krugman was doing the day price theory was discussed in his graduate micro class, but I doubt he was listening.

No competent economist will endorse such cost controls. For that matter, most pricing in medical care (and especially in hospitals) already is heavily regulated by federal authorities. So, if regulated prices already are spiraling out of control, how does Krugman get away with claiming that another layer of the same stuff is going to do the trick?

Economists like Krugman who do nothing but deal in aggregates have no understanding whatsoever about prices. None. To Krugman, a price is just a number, an arbitrary number, and if government lays down new sets of numbers, then there will be no dislocations whatsoever.

That is nonsense, and dangerous nonsense at that. We know from thousands of years (yes, thousands) of government price controls that such controls are followed by dislocations, economic chaos, and stunted economic growth. If Krugman cannot understand that fact, then he is not an economist, but rather just another political operative.

Is the ObamaCare plan irreponsible? Of course, it is! Anyone who believes that Congress and the Executive Branch can construct by fiat a plan that centrally directs medical care that replaces the voluntary choices of the millions of individuals involved in this industry and not create real problems does not understand economics at all. Why am I not surprised that Krugman cannot and will not understand this simple point?

NOTE: At a session of the Austrian Scholars Conference, economist Lowell Gallaway, a co-author with Richard Vedder of the excellent book, Out of Work, noted sarcastically that Krugman has been vocal in peddling the same high-wage theories that Herbert Hoover promoted during the Great Depression. In other words, far from being the opposite of Hoover, Krugman is his intellectual soul mate!