Jeremy Warner Gets It Right On Krugman

Paul Krugman makes light of the recent article by Jeremy Warner in The Telegraph, but I think Warner is spot on. Here is Warner in his own words:

When the self-proclaimed "conscience of liberal America" and a one-time free trader to boot starts arguing for protectionism, you know that things have come to a pretty pass. But that's what's happened over the past week.

Paul Krugman, a Nobel Prize-winning economist, has taken to advocating a 25 per cent "surcharge" – he refuses to use the more descriptive term of "import tariff" – on goods from China as a way of bringing the Chinese leadership to heel over currency reform. So potentially dangerous and out of character is this idea that when I first read it, I assumed he was being ironic. But sometimes the cleverest of people can also be the most stupid, and he's now said it so often that you have to believe he's serious.

What he's advocating is trade retaliation so extreme that it would make the 1930s look like a stroll in the park. Contrary to Professor Krugman's naïve assumption that the Chinese would soon cave in and allow their currency to float if confronted by such hard-ball tactics, I am certain that nothing is more guaranteed to produce the opposite response.

Professor Krugman's suggestion mines a rich seam of populist US thinking and rhetoric which grows ever more vocal and worrying as the recession persists. What makes Krugman and other highly regarded economists who toe the same line so dangerous is that they give intellectual respectability to a fundamentally disreputable idea.

Unlike Krugman, who already has given us a fantasy version of what would happen if the USA were to retaliate against China for officially undervaluing its currency against the dollar. To be honest, I think Peter Schiff's recent comments were far more astute.

Warner makes some important and insightful comments here:

An outbreak of protectionism is just what the still-fragile economic recovery doesn't need. China makes an easy scapegoat for America's ills, but it is not the cause, nor would making it revalue its currency provide the solution. The debate is echoed in Europe, where Germany – an exporter second only to China – finds itself blamed for the eurozone crisis. If only Germany would make itself less competitive, if only Germany would save, invest and export less, then everybody else would be fine. The virtuous find themselves depicted as the villainous. If the argument were not so perverse, it would be laughable.

Let us briefly consider what would happen if Professor Krugman got his way and there was either a 25 per cent devaluation of the dollar against the renminbi or 25 per cent import duties. Almost overnight China would sink into a deep recession as exporters already operating on wafer-thin margins were plunged into insolvency.

American business, which relies heavily on China as the assembly plant of choice (guess where iPods are made), would also find itself deep in the mire. Even in the long term, the revaluation would scarcely be more helpful. Over time, Chinese wages would merely deflate relative to US ones to make exports competitive again.

For all of his "credentials," let us not forget that Krugman is a Keynesian who has no clue whatsoever what happens in a real economy. His world is the imaginary world of aggregates, GDP numbers, crude graphs, and no real people and certainly no real production. There is no such thing as consumption, only spending. And all good Keynesians know that no one has to produce anything, just print a bunch of money, and we'll all be rich!

Gee, Maybe We Need Another War

In a post today, Paul Krugman examines an IMF graph of GDP of "advanced" countries and makes a most startling claim:

The projected pace presumably means the blue line above, which is taken from the IMF’s World Economic Outlook Database. The red line shows what would have happened if growth were to continue at its average pace from 2000 to 2007.

As you can see, what Mr. Lipsky apparently considers an acceptable result, good enough to pull back stimulus, is basically to accept the losses in output during the crisis as permanent, leaving us on a drastically lower trend as far as the eye can see.

You mean, all we need is for government to spend more, and then the GDP trends can go on forever? In other words, just print the money.

As far as I am concerned, this graph is inaccurate because it is too optimistic, not too pessimistic. You will notice that it assumes that the world's economies have recovered, and we are back on track for economic growth, as the figure demonstrates.


To prove his point, Krugman quotes Keynes regarding his view of the economy in 1932:

I predict with an assured confidence that the only way out is for us to discover some object which is admitted even by the deadheads to be a legitimate excuse for largely increasing the expenditure of someone on something!

Krugman's last line? "And it took Hitler to provide that object."

Yeah, a war. Great jobs program. So, the world's politicians did not have the "courage" to print money and spend, spend, spend, and got war, instead.

The USA and Indonesia

In his recent post comparing the situation in the United States with the dollar versus what happened in Indonesia and Southeast Asia 13 years ago, Paul Krugman smugly makes the following statement:

...US companies have not been borrowing heavily in foreign currencies.

I shouldn’t have to explain this. There have been many, many papers trying to assess the possibility of an Asian or Argentine-style currency crisis for the United States; all of them run up against the simple fact that large foreign-currency indebtedness was central to these crises, and we just don’t have that problem.

That is true as far as it goes. The Asian currencies fell and fell quickly relative to the USD and other holdings. That meant people suddenly found that their money only could purchase about half of what they could buy before the crisis hit.

Why do I bring up this point? Note that Krugman has been calling for the Fed to print money, which would weaken the USD and "make our exports more competitive." From a macro sense, there is some truth to that point, but from the vantage point of individual Americans, that is a disaster. It seems to me that Krugman both is welcoming the demise of the dollar and, at the same time, claiming that our currency and our fates are immune from the economic disasters caused by inflation.

When the crisis hit in places like Indonesia, people rioted (and killed Ethnic Chinese, whom they blamed for all their ills), and millions were plunged into poverty. This was not a happy time.

Yet, if one logically and consistently follows Krugman's policy prescriptions, you see that he wants us to go down the same road. Now, I believe that our policies so far are going to expose Americans in ways they cannot imagine. The dollar IS overvalued, Americans have been financing their consumption by borrowing from the Asians, and this gravy train is going to come to a halt.

Peter Schiff on Krugman, the Nobel Prize, and the End Game for the Dollar

Earlier this week, I posted a video in which Peter Schiff takes on Paul Krugman for his recent call to declare what essentially would be a "trade war" against China. In this column, Schiff goes into more detail to explain the problems in Krugman's reasoning.

I think that Schiff really lays out Krugman's thinking in these paragraphs:

According to Krugman, our secret weapon of economic invincibility is the Fed's ability to print dollars endlessly. If China were to foolishly decide to attack us by selling our debt, the Fed could simply step in and buy the excess with newly printed greenbacks. (In other words, Krugman sees no difference between funding the debt and monetizing it. See my latest video blog on the subject.) For Krugman, China would gain little from such an attack, but would lose the ability to export to its best customer and suffer severe losses in the value of its dollar holdings. Krugman's worldview is reassuring – but it has absolutely nothing to do with reality.

There is a huge difference between selling your debt to another and "selling" it to yourself. When China buys our debt, it uses its own savings. In order to purchase a trillion dollars of U.S. Treasuries, the Fed would have to expand our money supply by a corresponding amount. Even Krugman acknowledges that this would cause the dollar to lose value; however, he feels that a weaker dollar is good for America and bad for China.

This is correct. In reading Krugman's columns and blog posts, I find that same theme: printing U.S. Dollars will create prosperity, while having "sound money" leads to depressions. For example, in his book The Return of Depression Economics, Krugman claims that printing money in most economic crisis situations will "solve" the crises.

For that matter, if one thinks Schiff is off-base with his characterization of Krugman's statements, this Krugman post lays out his belief that the dollar is nearly invincible:

There have been many, many papers trying to assess the possibility of an Asian or Argentine-style currency crisis for the United States; all of them run up against the simple fact that large foreign-currency indebtedness was central to these crises, and we just don’t have that problem.

At one level, that is true, but Krugman also wants to have it both ways. On one side, he claims that the USD pretty much is invincible, but then he also claims that at least some of our problems stem from the dollar being too strong, and that it needs to be weakened.

I think that Schiff's point about Krugman's confusion between China buying U.S. debt and the Fed making such purchases is well-taken. On the one side, when China purchases our treasuries, it ultimately sends real goods our way. There is no increase in the number of dollars circulating; Americans simply are borrowing from the Chinese to fuel their own consumption.

However, if the Fed buys treasuries, that is done essentially with newly-printed dollars, which will lower the value of everyone's dollar holdings, from China to the guy on the street with a few dollars in his pocket. As the new money circulates throughout the economy, prices go up, and we experience directly the negative effects of the Fed's actions.

Furthermore, by calling for tariffs and other measures to "punish" China for its currency policy, Krugman is demanding that the U.S. Government make everyone else worse off in the name of "helping the economy." Schiff writes:

Most economists, Krugman included, see cheap money as a panacea for all ills. And while it's true that a falling dollar, by lowering the real value of U.S. wages, would help make U.S. goods more competitive, it would also lead to skyrocketing consumer prices, rapidly rising interest rates, and a collapse in American living standards. Make no mistake: this is the end game of Krugman's "get tough on China" policy.

Now, I do think that Krugman's articles are consistent with what he believes: printing money is a good thing, as it creates inflation, which fuels current spending, which then gives the economy "traction." At some point, he reasons, the economy (which operates in the circular flow like a perpetual-motion machine) simply starts moving again. It just needs a "push," and government spending combined with inflation is what "primes the pump."

This is the typical macroeconomist's view of an economy. All assets are homogeneous, there is no real connect between production and consumption, and unless government intervenes in the economy via new spending and printing money, the economy naturally will implode because of the negative effects of saving (paradox of thrift).

People, this is not economics. It is model-building, and highly-stylized model-building at that. It does not reflect economic reality, and it can lead only to inflation and ruin in the long run. No wonder Schiff makes the following declaration:

In his latest weekly New York Times column, Nobel Prize-winning economist Paul Krugman put forward arguments that were so nonsensical that the award committee should ask for its medal back.

I concur wholeheartedly. What Krugman puts forward is not "economics" in any sense of the word. Instead, it is nothing but state-inspired manipulation of an economy, period.

The USD is not invincible. At the present time, with all of the other fiat currencies floating around, it still is relatively viable, but that situation cannot last forever or even for a few years. Krugman really seems to believe that the Fed endlessly can print dollars, and only good things can come from it. That is not economics, folks, that is madness.

The Trojan Krugman

As a faculty member of a state university in Maryland, I am used to hearing other faculty members substitute Democratic Party talking points for conversation, as most of them are True Believers who defend their party with religious zeal. If the Party declares a certain State of Being, then whatever it decrees becomes the New Reality.

It does not surprise me that professors in English or Political Science would hold to such views, as they are open political partisans. However, I expect more from economists, and especially economists who have Nobel Prizes. I cannot imagine ever having heard political talking points from someone like F.A. Hayek, George Stigler, Gary Becker, or James Buchanan, especially in print. These Nobel laureates believed that their job was to promote and apply sound economic theory, not be shills for political parties or their chosen candidates.

Unfortunately, Paul Krugman is not held to the same standards, nor does he hold himself to any standards but those of stooping to the latest set of talking points from the White House, Nancy Pelosi, and Harry Reid. Thus, his latest column demonstrates beyond a doubt that he is willing to promote pure fantasy when it comes to budget numbers, and work in tandem with his part-time employer, the New York Times, to try to convince us that something akin to Harry Potter Economics really exists.

I will go one step further: I believe wholeheartedly that Krugman knows this bill will be disastrous and will create utter chaos in the field of medical care. Into that void will ride the deus ex machina government with a "new" universal plan that will be something out of Canada Care or the British National Health Service. The state takeover of medical care then will be complete. If anything, this bill is the Ultimate Trojan Horse that once passed is going to guarantee that what is left of private enterprise in medical care will be destroyed.

Let me examine some of his statements. First, he gives anecdotes about people who have had their medical insurance revoked for contracting HIV or for other reasons. The new health "plan," he argues, would guarantee that no one could be denied insurance coverage for medical care. He states:

So what’s the answer? Americans overwhelmingly favor guaranteeing coverage to those with pre-existing conditions — but you can’t do that without pursuing broad-based reform. To make insurance affordable, you have to keep currently healthy people in the risk pool, which means requiring that everyone or almost everyone buy coverage. You can’t do that without financial aid to lower-income Americans so that they can pay the premiums. So you end up with a tripartite policy: elimination of medical discrimination, mandated coverage, and premium subsidies.

Now, I can tell you that if automobile or homeowners insurance were put under such rules, premiums would skyrocket, and everyone can understand why. Or, what about life insurance coverage? Should life insurers be forced to charge the same premiums for all applicants, regardless of their health? What would such a move do to the cost of premiums? I think we know the answer.

Therefore, Krugman is supporting a law that is guaranteed to force up the costs of insurance premiums, yet he also is supporting a bill that will impose price controls on medical insurance. My sense is that Krugman understand just what this means, for even he has some knowledge of the very real economic dislocations price controls will bring.

Into the chaos will ride the government, which will offer to subsidize the insurance companies, as they will experience real losses. However, I also think there could be another future, one that would take a page from the Marxist government of Salvador Allende of Chile nearly 40 years ago.

Allende's government printed money in massive quantities, swamping the Chilean economy with worthless paper, driving people to barter and throwing the economy into chaos. The government also imposed draconian price controls in which government-owned businesses were permitted to raise prices, but private enterprises could not. Those private companies that were caught raising prices to cope with inflation were confiscated by the government and the owners not compensated.

I suspect that this will be the future of private health insurance in the United States, and it is what Krugman and his friends hope will be the outcome. The current legislation does impose price controls on insurance premiums, yet also increases the demand for insurance through mandates and subsidies. This guarantees chaos, and even a partisan economist like Krugman can see through this charade.

However, instead of promoting economic principles, Krugman promotes outright fabrications. Take the following from his column, for example:

Can we afford this? Yes, says the Congressional Budget Office, which on Thursday concluded that the proposed legislation would reduce the deficit by $138 billion in its first decade and half of 1 percent of G.D.P., amounting to around $1.2 trillion, in its second decade.

But shouldn’t we be focused on controlling costs rather than extending coverage? Actually, the proposed reform does more to control health care costs than any previous legislation, paying for expanded coverage by reducing the rate at which Medicare costs will grow, substantially improving Medicare’s long-run financing along the way. And this combination of broader coverage and cost control is no accident: It has long been clear to health-policy experts that these concerns go hand in hand. The United States is the only advanced nation without universal health care, and it also has by far the world’s highest health care costs.

Krugman never believed the rosy CBO projections when the Republicans were in power, but suddenly that same office is the Promoter of Truth. If anyone truly believes that this plan, with its mandates, restrictions, new criminal penalties, and massive subsidies is going to reduce the real costs of medical care and simultaneously lower the federal deficit, I have some real estate at 1600 Pennsylvania Avenue that I want to sell to you.

This is fraud, pure fraud. However, Krugman also slyly gives away his real goal: Fully Nationalized Medical Care:

Can you imagine a better reform? Sure. If Harry Truman had managed to add health care to Social Security back in 1947, we’d have a better, cheaper system than the one whose fate now hangs in the balance. But an ideal plan isn’t on the table. And what is on the table, ready to go, is legislation that is fiscally responsible, takes major steps toward dealing with rising health care costs, and would make us a better, fairer, more decent nation.

Guess what? As the bedlam that will result from this "fiscally responsible" legislation increases -- and I have no doubt that the House Democrats will cave in the end -- the next step (and the next step after that) will be to create the "single payer" plan that Krugman has wanted all along.

I am no fan of the current system. Third-party payments for rudimentary medical care through insurance are responsible for the costly mess that is U.S. medical care. If we purchased food or automobiles via the same payment system through which we purchase medical care, there would be runaway costs and utter chaos in those markets, too.

I'll go a step further. Even if Republicans were to take back the Congress in the upcoming elections, there is no way this bill would be repealed, no matter what they might have promised in the heat of a political campaign. This is a bill that, in my view, is purposely designed to drive everyone to a "single-payer" government plan, as what exists in Canada. However, it also will be an entitlement, and once entitlements become law, they are politically-impossible to eliminate.

No, Americans are going to be stuck with something that will cost them much more of their earnings -- and produce inferior care -- than a true free-market in medical care would produce. Unfortunately, we now are so far removed now from such markets in that sector that most people would be afraid to take the plunge and eliminate the government controls and subsidies. Thus, we ultimately will be stuck with "single-payer," and the long lines and waits and denial of care that will accompany it. Sooner or later, the Trojan Horse will open and government minions will take over everything in medical care (that they don't already control).

In his promotion of this monstrous bill, I believe that Paul Krugman really does understand that, no, it won't cut costs, no, it won't reduce the deficit, and, yes, it ultimately will lead to an utterly politicized system. For once, I wish he would tell the truth about what is to happen, but Krugman long ago gave up telling the truth in exchange for being a shill and a political operative.

Krugman on Inflation and Stagflation

Being that Paul Krugman has attempted to rewrite the financial history of the 1970s and 1980s, I am surprised that he even admits that there was stagflation -- a combination of high inflation and unemployment -- during the 1970s. After all, under Keynesian doctrine, rates of inflation and unemployment supposedly have a negative relationship, and Keynesians supposedly believe that stagflation is an oxymoron.

Since the numbers did not lie, Keynesians decided that they had to create a one-time scenario in which oil prices somehow were the culprit. Writes Krugman:

The kind of inflation we had in the 1970s, the famous era of stagflation — high inflation combined with high unemployment — was quite different (than some of the famous hyperinflations). Deficits weren’t the issue — actually, US deficits were much smaller in the inflationary 70s than in the disinflationary 80s. Instead, what you had was a combination of excessively expansionary monetary policies, based on an unrealistic view of how low the unemployment rate could be pushed without causing accelerating inflation (the NAIRU), plus oil shocks that pushed up inflation across the board thanks to widespread cost-of-living clauses in contracts. There was never any risk of hyperinflation; the only question was whether and when we’d be willing to pay the price in high unemployment of bringing inflation back down.

Now, Krugman does not explain why unemployment and the rate of inflation went down together during the 1980s, but that is an issue for another post at another time.

I do find it curious that Keynesians will resort to the "cost-push" inflation line when it suits them, as they are trying to claim that prices go up because, well, prices go up. I have likened the Keynesian (and Krugman) explanation for deflation to that famous scene in "The Blues Brothers" in which Jake Blues (played by the incomparable John Belushi) tries to talk his fiancee out of gunning him down in the sewer:



Indeed, the idea that the changes in price of one commodity -- even a commodity as important as oil -- causing huge fluctuations in the U.S. economy makes Jake Blues' appeal sound true. By the way, inflation in the 1980s did not go down because unemployment went up, no matter what Krugman says. (He cannot have it both ways.) Inflation went down because the Federal Reserve System put down the brakes on money creation and held them down for a long time.

By the way, unlike our current situation, the USA had a real recovery after the recession of 1982. But, then, Paul Krugman was not influencing the government to print, borrow, and spend wildly.

A Krugman in Wolf's Clothing

Paul Krugman's jihad against China continues and he now enlists the help of Martin Wolf, who claims that China and Germany are "uniting" in their nefarious plan to "impose deflation." Yes, Krugman has decided to continue his theme that "Mercantilism" is the proper path to prosperity, which means that wealth really is created when governments manipulate the system.

Today, he insists that not only are his views correct, but that they fall within the very scope of the laws of supply and demand. For a guy who insists that the laws of economics are turned upside down during depressions and that "none of what you learned in Econ 101 applies," I find it curious that suddenly these laws really matter. (Well, they matter when Krugman says they matter and their application is seen to be to his advantage.)

I think a larger view is in order here. Krugman has claimed elsewhere that the real culprit in the bubble was Chinese savings, and now the dastardly Chinese are giving us the one-two punch with its pegged exchange rates. Furthermore, by doing so, China supposedly is preventing our government from properly engaging in policies of inflation! What's a Nobel Laureate to do?!?

Furthermore, he likens the Chinese currency policies to the policies pushed by Latin American countries in the 1950s. In his own words:

As I read this debate, one thing that’s truly amazing is the way China defenders are recapitulating some old fallacies from, of all places, Latin America. Back in the 50s it was common for Latin economists to insist that getting realistic exchange rates wouldn’t solve their persistent balance of payments problems because imbalances were “structural” — now we’re hearing the same thing about China, with the only difference being that this time it’s a surplus, not a deficit, that is supposedly immune from the usual rules of supply and demand.

Hmmm. As I recall, the Latins were overvaluing their currencies relative to the U.S. Dollar, creating what were called "dirty rates." (Indeed, that has been a staple of Third World countries, not to mention the old Communist Bloc during the Cold War.)

I also remember that Americans accused Japan of undervaluing the yen during the 1980s, and that was the reason for the huge trade surpluses in Japan's balance of payments accounts. In the end, the Japanese spent their surpluses on U.S. real estate. (I remember the hysteria fueled by the politicians and the media when Japanese investors purchased the Rockefeller Center, as though the Japanese were going to tow those buildings back to Japan.) That little venture, as one might recall, turned out badly for the Japanese, as real estate prices plummeted, along with the value of Japan's stock market. (Can someone spell "m-a-l-i-n-v-e-s-t-m-e-n-t-s"?)

For all of the Mercantilist fallacies pushed by Krugman, we have to remember that to Krugman and Keynesians in general, production is done for its own sake. Lawrence Reed noted this fallacy in his wonderful article in the April 1981 Freeman, "7 Fallacies of Economics." The fourth fallacy, "production for its own sake," has this gem, which I think perfectly applies to Krugman:

A bad economist who falls prey to this ancient fallacy is like the fabled pharaoh who thought pyramid-building was healthy in and of itself; or the politician who promotes leaf-raking where there are no leaves to be raked, just to keep people “busy.”

When Reed wrote those words, few people had heard of Paul Krugman. However, if one wishes to better understand Krugman's economic worldview, read "7 Fallacies of Economics," and you will find that nearly everything the Nobel Laureate writes falls into one of the categories listed in that piece.

I hate to say it, but the Chinese are not the source of our problems, no matter what Krugman, Martin Wolf, the New York Times, and our politicians might be saying. The problem has been the massive malinvestments that defined the economies of the USA and Europe, malinvestments that Krugman and our government insist need to be kept going.

However, the more we try to prop up the unhealthy portions of the economy at the expense of those portions that are healthy, the worse things will become. The Austrians understand this in spades, but the "wise" Keynesians are clueless. So, like Wolf and Krugman, they look elsewhere for blame instead of looking in the mirror.