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.

Krugman: Actually PRODUCING a High Standard of Living is a "Zombie" Idea

Like most Keynesians, Paul Krugman has no idea of how societies prosper. In his view, governments borrow, print, and then spend money and out of that comes, like magic, a prosperous economy. If times are hard, then spend even more and, like the Great Pumpkin, prosperity will rise out of the pumpkin patch.

Take his view of what should be done in Europe, for example, and especially for Greece and Spain. As he has written on numerous occasions, instead of facing the fact that the economies of those two nations cannot produce enough wealth in order to support their bloated unionized government workforces and sustain their ridiculous work rules for private employers. Greece and Spain are in trouble not because they are on the euro, but rather because they used the financial and monetary arrangements of the European Union in a way that was not sustainable.

Now, I agree that most "austerity" packages are wrongheaded because the state swallows much of the GDP of the affected nation and then directs that money to the banks (or, as some libertarians call them, "banksters") that foolishly lent money to those nations for things that ultimately went bust, or to pay for simple operating expenses of the various governments. However, there is another aspect of economics and economies that Krugman not only refuses to admit, but belittles it at every turn: societies that consume much also produce much, and that production is the source of their consumption.

To Paul Krugman, such a notion -- that an economy actually has to produce a standard of living -- is a "zombie idea." Every good Keynesian knows that consumption actually creates production, that one consumes first and then produces later. And, no, Keynesian "demand" is NOT the same kind of demand which entrepreneurs anticipate as they try to move resources from lower-valued to higher-valued uses. Keynesian "demand" is nothing more than new money or wealth transfers being directed to politically-connected people who ostensibly will "spend" that money, and out of which is supposed to come general prosperity. Anything to the contrary is nothing more than "Say's Law," which everyone knows has been discredited. (I mean, people really believe that we can have consumption without production? Get real!)

And so, he demands that Congress, the president, and governments at state and local levels ratchet up their spending, and if the economy is not producing enough wealth to pay the taxes necessary to support this blizzard of spending, no worry. Why? The government can manipulate the Federal Reserve Act of 1913 to permit the Fed to purchase U.S. treasuries in the primary market, so if need be, there would be no barriers at all to vast new amounts of spending and if the shower of new money creates an inflationary environment, all the better! Inflation, as Krugman has written, is a great tool for "deleveraging," which in his view would transfer wealth from rich to the poor.

(For those who insist that Krugman is not an apostle of inflation, note that he strongly endorses the views of Mark Thoma, who is a hardcore inflationist. Like so many other Keynesians, Thoma believes that all it takes is for government to inject new money, which will solve problems painlessly and put the economy back on track. The only problem, people like Thoma and Krugman claim, is that governments are too reluctant to aggressively debase their currencies. The "Inflation Fairy" is hard at work.)

So, yes, do you believe that government wealth transfers are a cost and not a boon to the economy? Do you believe that over time, a nation cannot consume more than it produces? Then you, too, are a "zombie." Wear that moniker proudly.

Krugman: Debt? What Debt?

On occasion, I find myself partially agreeing with Paul Krugman and his most recent column attacking Republicans (yeah, I know, that's a rare thing) on their "concern" about the federal budget deficit deserves at least one cheer. I am wearied of Republicans expressing concern about deficits at a time when they are calling for massive increases in military spending.

Now, Krugman does not mention that point at all in his column, instead claiming that the deficit hawks only want to starve the poor and elderly, deny them any medical care, and force them to sleep under bridges. He does not put things in quite that language, but that is the gist of what he is saying. But, then, this is someone who actually believes that government welfare programs increase wealth because they bring about instant spending, and everyone knows that saving money and investing in capital is evil and brings down the economy.

(Krugman's capital theory seems to be another rendition of "Capital Happens" in which capital magically appears in our economy.)

So, let us look at Krugman in his own words:

At a time of mass unemployment and record-low borrowing costs, a time when economic theory said we needed more, not less, deficit spending, the scolds convinced most of our political class that deficits rather than jobs should be our top economic priority.

 Keep in mind that in Wonderland, when the Federal Reserve System pushes down interest rates to artificially-low levels, that has ONLY good effects. After all, the Laws of Wonderland dictate what we should believe about economic growth and the economy in general:

• Saving is evil and only suppresses economic growth
• We should use all means to confiscate savings either through inflation or outright taxation because we need to spend everything we make in the present
• Don't worry about capital formation because "Capital Happens"
• Anything that encourages present spending is good, and anything that requires any present abstinence from spending right now is evil and must not be permitted
• The only real benefit we might get from capital formation is in present spending for capital goods.

Given that Krugman already has called for the Fed to finance present government spending via Fed purchases of federal debt in the primary market, we know where this whole thing is headed. In fact, as Krugman says, our problem right now is that the federal debt needs to be greater, as we need to borrow trillions of dollars more:

And just to be clear, the danger for next year is not that the deficit will be too large but that it will be too small, and hence plunge America back into recession.

 The last statement really should leave us in a quandary, for earlier in this column, Krugman attacked the "tax cuts for the wealthy" (or what we call Democratic talking points) as helping to create deficit conditions. However, given that we need larger deficits, why raise tax rates at all? If we can borrow at no appreciable opportunity cost -- And what self-respective Keynesian ever would think that government spending always trumps the Law of Scarcity? -- why should we worry if tax rates are "too low"?

As Krugman declares:

This wouldn’t be hard if they had been making a more honest case on the budget: the truth is that deficits are actually a good thing when the economy is deeply depressed, so deficit reduction should wait until the economy is stronger. As John Maynard Keynes said three-quarters of a century ago, “The boom, not the slump, is the right time for austerity.”

 So, Krugman seems to be operating at cross purposes with himself. Using his own logic, it would be stupid to raise income taxes on anyone or to jack up taxes on investment because deficits during a depression are "a good thing." But we have to remember that "Krugman Logic" is not based upon economics, but rather on left-wing politics.

No, Military Keynesianism Does Not Make Us Wealthier

In his latest column, Paul Krugman continues to shill for higher tax rates, claiming that raising taxes somehow will strengthen the economy. I really don't have the time to deal with arguments that we have gone over before, so I will leave it at that. And, yes, Barack Obama won. The economy soon will explode with 12 million new jobs. Bill Clinton said that in a campaign speech, so it must be true.

Instead, I wish to look at a November 4 op-ed in the NYT, "The Permanent Militarization of America," by Aaron B. O'Connell, who teaches history at the U.S. Naval Academy in Annapolis. O'Connell writes that to a certain extent, Dwight Eisenhower's famous warning about the "Military-Industrial Comples" in his farewell speech in January 1961. However, writes O'Connell, much of the government spending in defense has had a positive economic effect and has contributed to economic growth:

The military-industrial complex has not emerged in quite the way Eisenhower envisioned. The United States spends an enormous sum on defense — over $700 billion last year, about half of all military spending in the world — but in terms of our total economy, it has steadily declined to less than 5 percent of gross domestic product from 14 percent in 1953. Defense-related research has not produced an ossified garrison state; in fact, it has yielded a host of beneficial technologies, from the Internet to civilian nuclear power to GPS navigation. The United States has an enormous armaments industry, but it has not hampered employment and economic growth. In fact, Congress’s favorite argument against reducing defense spending is the job loss such cuts would entail.

At one level, he is right. Some new technologies that were developed for the armed forces have found their ways to civilian uses, but the story is much different than what he might think. First, new technologies by themselves are not useful to the economy at large unless entrepreneurs can find a way to integrate these technologies into goods and services that individuals not only find useful, but are willing to give up scarce things in their possession in order to obtain.

Without the entrepreneurial component, vaunted new technologies tend either to be unused or applied in very esoteric ways that have little or no effect upon the general population. Take the Internet, for example. A lot of people have reminded me that government agents developed the first elements of what we know today as the Internet more than 40 years ago. That is true, but also irrelevant.

First, the Internet would not have been invented had entrepreneurs not first developed and applied what we know as telecommunications. I'm sorry folks, but Alexander Graham Bell and those who followed him were not working for the Department of War or Defense. Second, the Internet as we know it was of no commercial or economic use until entrepreneurs both developed and applied technologies like fiber optics and they developed mechanisms by which ordinary people could access what now is a technological and commercial wonder.

Furthermore, O'Connell's claim that this vast amount of government spending "has not hampered employment and economic growth" is one of those "proving a negative" statements. What he really is saying is that since the U.S. economy has been relatively strong since Eisenhower's speech, the diversion of huge amounts of resources from marketable uses to military spending has had no negative economic effects.

One cannot make that statement, economically speaking. First, we don't know if the economy would be stronger than it is now (I believe that it would) had this spending not occurred. Second, for O'Connell to be correct, military spending would have to have moved ALL factors of production from lower-valued to higher-valued uses in all situations involving Pentagon expenditures. If that is not true, then military spending has made us worse off.

No, I am not arguing for complete cessation of military spending. Certainly keeping this country from being invaded is a good use of resources, but that has not been the case with the USA for a long, long time. And, as O'Connell unwittingly notes, members of Congress are violently opposed to cutting any spending in their districts or states because that means some people there lose their jobs, at least in the short run.

But government employment is not the same as economic growth, even if O'Connell cannot see that (and few history professors these days are able to move beyond their own socialistic views). As for the rest of the article, I agree much with him, but I also find it interesting that he completely left out the militarization of the civilian police forces, and the militarization of the enforcement arms of federal agencies.

In fact, other than having our living standards lowered by gargantuan military spending, the one way we will come in meaningful contact with militarization is an encounter with the police. Why am I not surprised that a history professor missed that important point? You supply your own answer.

Krugman the Political Operative

Paul Krugman is a True Believer in FEMA, or at least FEMA run by Democrats. Despite the many news stories of chaos and violence in New York and New Jersey following the ravages of Hurricane Sandy (which only was a Category 1 hurricane, whereas Katrina was a Category 3), Krugman insists that the True Believing Obama administration's version of FEMA has performed magnificently.

(One can hear Krugman telling Obama, "You've done a heckuva job.)

Not satisfied with assuming that the damage to the New York area was comparable to much of New Orleans being flooded after a canal levee collapsed (Sorry, Paul, not even close), he then tells an outright falsehood regarding the response to the tragedy in Hoboken:

I could do a point-by-point — and it’s definitely worth it, if you’re curious, to revisit the 2005 Katrina timeline to get a sense of just how bad the response really was. But for me the difference is summed up in two images. One is the nightmare at the New Orleans convention center, where thousands were stranded for days amid inconceivable squalor, an outrage that all of America watched live on TV, but to which top officials seemed oblivious. The other is the scene in flooded Hoboken, with the National Guard moving in the day after the storm struck to deliver food and water and rescue stranded residents.

In other words, the National Guard immediately took care of things. (By the way, the National Guard and even FEMA were on the ground quickly in New Orleans, but government agents there acted like government agents, telling Wal-Mart its deliveries of thousands of bottles of water was "not needed," and forcing rescue workers to undergo two days of "sexual harassment" prevention training. One would think Krugman would approve, given he hates Wal-Mart and loves government haranguing of private citizens.)

Notice that Krugman did not mention Staten Island, where apparently FEMA did not perform its Krugmanesque heroics and chaos reigns as people cannot find food or anything else. Nor does he mention the gas shortages created by price controls, but Krugman is not much for prices, anyway, unless they are part of an index.

His biggest howler comes with his lavish praise of Bill Clinton's FEMA. He writes:

...Bill Clinton came in, put FEMA under professional management, and saw the agency’s reputation restored.

James Bovard would beg to differ. In his outstanding book, Feeling Your Pain, in which he chronicles the abuses and exploits of Clinton's administration, Bovard devotes an entire chapter to FEMA, which, contra Krugman, had the largest percentage of political appointees of any federal agency and handed out post-disaster checks, whether people wanted them or not. An Amazon review says:

His chapter on disaster relief is especially good, showing how the Federal Emergency Management Agency is "determined to spend tax dollars to rescue citizens, regardless of how irresponsible or negligent they have been and regardless of whether they have requested help."

Krugman's column is not so much a piece about federal agencies but rather is just another partisan political screed. He also forgets something else, and that is the brunt of Katrina did not hit New Orleans but rather the Gulf Coast of Mississippi and Alabama. In those areas, the FEMA presence was not as noticeable and, not surprisingly, the Gulf Coast recovered more quickly than did New Orleans.

You see, huge numbers of private volunteers, church groups, and other citizens went to the Gulf Coast to help, something that Krugman ignores because, after all, these people were not in the employ of the government, which means they are irrelevant and useless. As for New Orleans, the government told volunteers to get lost.

Maybe Obama Doesn't Believe in Government, Either

In the aftermath of Hurricane Sandy, a storm that not only washed away New York and New Jersey neighborhoods but also dumped about three feet of snow where I live, cutting power lines and wreaking general havoc, I have come to a conclusion regarding the response of the U.S. Government and specifically the Federal Emergency Management Agency (FEMA): Barack Obama just does not have enough faith in government.

How would I draw that conclusion? Following the disaster in New Orleans from Hurricane Katrina (which was a Category 3 storm), Krugman said that the federal government's response was bad because the Bush administration was filled with people who don't believe in government:

... the federal government's lethal ineptitude wasn't just a consequence of Mr. Bush's personal inadequacy; it was a consequence of ideological hostility to the very idea of using government to serve the public good. For 25 years the right has been denigrating the public sector, telling us that government is always the problem, not the solution. Why should we be surprised that when we needed a government solution, it wasn't forthcoming?

 So, Krugman had an explanation as to why FEMA was incompetent in New Orleans. However, now that the Obama administration's response to the aftermath of Hurricane Sandy (a Category 1 that quickly weakened into a tropical storm) has been exposed as utterly inept, so far there is silence from the Great Man at Princeton. After all, there is no ideological barrier keeping FEMA from being the Super Agency Krugman has claimed it should be (and allegedly was under Bill Clinton), so why the failure?

While it should be logical to an economist (except Krugman, who is not an economist, but rather a political operative who can do math), centralized government planning in which agents from Washington dictate policy to people who actually have more information is a loser from the beginning. Furthermore, the so-called price-gouging laws are responsible not only for horrific shortages but also discourage entrepreneurs from bringing supplies into the stricken areas, which means the recovery takes longer.

(Krugman is a Keynesian, and Keynesians really don't worry about price controls since everyone knows that prices really don't matter, except when they can be put into indices so that Keynesians can put them on the vertical axis of the Aggregate Demand--Aggregate Supply graphs.)

So, we can say that governments at all levels are involved in the aftermath of the storm, with FEMA taking the lead. And we can see how this is working. Not very well. I guess Obama just doesn't believe enough in the power of the State to work miracles. He needs to make a call to Princeton -- if the lines are not still down.

Krugman the Extremist (and Distorian to Boot)

Goldstein might win! Goldstein might win! He wants to destroy our economy, deny us healthcare, and put all of us into misery!

So rants Paul Krugman today. And to go along with his rant that taxes might be too low, he gives us some bad history. He writes:

During the first two years of Mr. Obama’s presidency, when Democrats controlled both houses of Congress, Republicans offered scorched-earth opposition to anything and everything he proposed. Among other things, they engaged in an unprecedented number of filibusters, turning the Senate — for the first time — into a chamber in which nothing can pass without 60 votes.

 There is a problem with this bit of history, however: the Democrats had a huge majority in the House and a filibuster-proof majority in the Senate, or at least from June, 2009, until early January, 2011. (The 60th Democrat came after Al Franken stole, er, won the election in Minnesota.)

So, there essentially was no Republican opposition in the first two years of Obama's presidency, contra Krugman and nothing in the way of Obama imposing his agenda, which he did with a vengeance. Furthermore, his regulatory agencies, and especially the EPA, engaged in a "Crucify Them" strategy against business owners, or at least that is what one of the key EPA regulators bragged to a friendly group before his speech found its way onto the Internet and the public outcry cost him his job.

But Krugman is not satisfied with giving a dishonest political history of the Obama years. No, he also adds this gem:

If President Obama is re-elected, health care coverage will expand dramatically, taxes on the wealthy will go up and Wall Street will face tougher regulation. If Mitt Romney wins instead, health coverage will shrink substantially, taxes on the wealthy will fall to levels not seen in 80 years and financial regulation will be rolled back.

 Now, I am not exactly sure how a medical program with what Krugman admitted contained the infamous "death panels" and piles on the government paperwork -- complete with draconian criminal penalties for doctors who don't properly dot every "i" and cross every "t" -- is going to "dramatically" expand healthcare coverage. Yes, it might on paper, but in the real world -- where people have to see doctors and actually get care -- that is not going to happen. ObamaCare has not magically altered the production function, nor has it lowered opportunity costs, which means that this new set of laws is not going to do what Krugman claims.

A real economist would know that instinctively. A real economist also would know instinctively that making it more difficult to invest, making it more difficult to build something, and moving factors of production from higher-valued to lower-valued uses through political subsidies and outright intimidation is not going to result in a better economy.

I am not a Mitt Romney supporter and if he is elected, neither he nor Congress will be willing to do what is necessary to bring this economy back to real growth mode. Instead, President Romney (unlike Candidate Romney) will lean on Ben Bernanke to have the Fed try to inflate us into recovery, which is not going to happen.

But, then, Paul Krugman is not an economist. He is a political operative, period.