The Meaningless GDP Growth Numbers

The latest GDP numbers were released Friday and, no, despite what the Associated Press tells us, the economy in the last three months of 2009 did not boom. Yes, 5.7% is a gaudy number, but even Paul Krugman says that it is a "blip." (Yes, when I agree with Krugman, I put that one on, too. Broken clocks can be correct twice a day.)

The current situation, as Krugman explains, is based upon what is called an "inventory bounce." He writes:

Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

It is interesting that Krugman brings up "long-term investment," because at the current time, we don't see businesses investing for the long haul, especially in this country. This is not due to myopia on part of business owners, but rather because we have a situation of what Robert Higgs in this excellent paper calls "regime uncertainty."

During the 1930s, the Roosevelt administration was openly hostile to business owners, forcing up taxes to confiscatory levels (FDR even tried to have a 100 % tax on all income above $25,000 a year), and making open threats to seize companies or force them to shut down. Now, this made him popular with lots of voters, as "populism" does seize upon the resentments of people.

If you notice, Obama is doing the same thing. Now that many of his initiatives are being beaten into the ground with the loss of the 60th Democrat in the U.S. Senate, he is resorting to Huey Long-style threats against private enterprise. No doubt, this will please the Paul Krugmans of the world, but it also means the end of long-term investment here.

And the end of long-term investment here means that businesses will try to keep current operations going but also are going to have an exit strategy, just as they had during the 1930s. However, during that decade, they did not have the option of investing in places like China, which has shown itself to be much more friendly to capital investment than the United States.

To a Keynesian like Krugman, I might as well be speaking gibberish. Keynesians believe that all that is necessary is for the government to print lots of money, make sure that people receive it, and then watch them spend. The more people spend, the more the economy magically grows, since in the Keynesian mind, all assets are homogeneous and spending is the yeast that makes the economic bread rise.

Remember, Krugman holds that investment is useful only because it is another mechanism for spending. The concept that capital investment means more production in the future, and creates the means for people to obtain a higher standard of living simply does not exist in the Keynesian thinking. It is always spending all the time.

March of the Princeton Peacock

In his January 29 column, "March of the Peacocks," we see proof of what I have been saying for years: Paul Krugman is not an economist. He is a political operative, period.

OK, why do I claim that a NOBEL LAUREATE in economics is not an economist? Is not the Nobel given to someone who has contributed something important to economic science? (Not really, but that will not be the topic of discussion today, as this column is dedicated to debunking the wit and wisdom of Paul Krugman, not trashing the Swedish Academy of Sciences, which gives the award.)

Instead, we deal with Krugman's latest missive of rage that Obama has announced a toothless "spending freeze," which apparently turns the poor president into a ... Republican. Besides Krugman's gratuitous insults of President Obama, however, I also think this column presents a very good view of what Robert Higgs calls "vulgar Keynesianism." So, let us begin.

Right out of the box, Krugman proclaims:

Last week, the Center for American Progress, a think tank with close ties to the Obama administration, published an acerbic essay about the difference between true deficit hawks and showy “deficit peacocks.” You can identify deficit peacocks, readers were told, by the way they pretend that our budget problems can be solved with gimmicks like a temporary freeze in nondefense discretionary spending.

Horrors! Obama has endorsed such a scheme, and The Great One is enraged:

What’s going on here? The answer, presumably, is that Mr. Obama’s advisers believed he could score some political points by doing the deficit-peacock strut. I think they were wrong, that he did himself more harm than good. Either way, however, the fact that anyone thought such a dumb policy idea was politically smart is bad news because it’s an indication of the extent to which we’re failing to come to grips with our economic and fiscal problems.

So, let us stop for a moment and think. What is a "dumb policy idea"? Why, according to Krugman, it is anything that lessens the burden that government place on individuals. And it gets better:

The nature of America’s troubles is easy to state. We’re in the aftermath of a severe financial crisis, which has led to mass job destruction. The only thing that’s keeping us from sliding into a second Great Depression is deficit spending. And right now we need more of that deficit spending because millions of American lives are being blighted by high unemployment, and the government should be doing everything it can to bring unemployment down.

Only in Paul Krugman's Wonderland can such a series of words be put into one supposed coherent thought. We are in a severe financial crisis because the financial institutions followed the government's directive and went bonkers in lending money for housing, paying no attention to the growing bubble. Furthermore, they took these risks not because the bank regulators had been seized by "Reaganite free market ideology," but because of the explicit and implicit guarantees by government authorities and especially the Federal Reserve System.

Furthermore, deficit spending is making things worse, not better. It adds to our crushing debt and it further distorts the fundamentals of the U.S. economy in a way that makes us worse off now than when presidents Bush and Obama began their attempts to "spend our way out of the recession."

Unfortunately, as they say on the late-night infomercials, "Wait! There's more!"

In the long run, however, even the U.S. government has to pay its way. And the long-run budget outlook was dire even before the recent surge in the deficit, mainly because of inexorably rising health care costs. Looking ahead, we’re going to have to find a way to run smaller, not larger, deficits.

How can this apparent conflict between short-run needs and long-run responsibilities be resolved? Intellectually, it’s not hard at all. We should combine actions that create jobs now with other actions that will reduce deficits later. And economic officials in the Obama administration understand that logic: for the past year they have been very clear that their vision involves combining fiscal stimulus to help the economy now with health care reform to help the budget later.

The sad truth, however, is that our political system doesn’t seem capable of doing what’s necessary.

If anything exposes the shallow thinking that comprises Keynesianism, here it is. First, Krugman resorts to, well, gimmicks. Only a Keynesian-socialist would believe that a program based upon a 2,000-plus page bill that uses a combination of criminal law, government spending mandates, and price controls would lower the federal deficit.

Second, he uses rhetorical trickery in declaring that somehow the government can identify those very jobs (and then create them) which will result in later deficit-reduction. Does he mean more tax collectors? Perhaps we need more people to run printing presses, since he tries to tell us that printing money actually creates a "solution" to our economic problems.

In fact, why create "jobs" at all? For Krugman, everything is based upon spending, spending, spending. Why not just give everyone bagfuls of money and let them quit working? After all, in the Keynesian world, an economy magically appears when we start spending money. Economic fundamentals? Why those are just the creations of sick, "Reaganite" minds!

Here is the problem. Krugman has endorsed time and again government initiatives that increase the burdens that private businesses must bear. (No problem to a Keynesian, as the increases costs require more spending which -- Presto! -- creates prosperity.) In the real world, when businesses bear heavier burdens and consumers cannot pay higher prices, we have this thing called bankruptcy.

Furthermore, when companies like General Motors and Chrysler are no longer solvent, that means that the sum of their assets is greater than the whole of the company, the very definition of being bankrupt. But instead of allowing those assets to be liquidated and turned over to companies that can run them profitably, Krugman and his Keynesian-socialist friends demand that government prop up those companies, which creates a further drain on the economy.

During the past two years, we have seen the burden of U.S. debt grow to insurmountable levels. The government has increased its spending wildly, has increased the minimum wage (and, not surprisingly, teenage unemployment is at record levels), and is ramping up environmental rules that make it even more costly for businesses.

Unfortunately, the Keynesian mind cannot see any of this. All it can see is spending, and if spending is up, then unemployment must be falling. Keynesians simply cannot fathom the obvious: the more government increases its burdens, the more difficult it is for people to engage in simple economic transactions, and that means the destruction of wealth.

Now, I will give Krugman credit for saying the political system is incapable of doing what is necessary. However, he is making the absurd statement that politicians are not willing to spend even more money, which is an oxymoron. (I agree that the American political system, which is geared to increased spending, is incapable of taking any long-run action to stop the bleeding and put the U.S. economy back on a sound, or at least semi-sound footing.)

Perhaps it is ironic that Krugman uses the peacock as the symbol for someone who believes that cutting government spending is a good thing. After all, the guy has been strutting about for a long time, advocating unsound economic policies, demanding more inflation, and generally calling for the destruction of private enterprise.

Unfortunately, he cannot see the damage behind him because his tail feathers are in the way.

Krugman and Obama's "Conservative" Ideology

Until reading the Great Wisdom of Paul Krugman's blog, I had no idea that Barack Obama really was a Reaganite Conservative, but the Great Nobel Laureate has made this secret discovery and shares it with the common folk:

These days quite a few people are frustrated with President Obama’s failure to challenge conservative ideology. The spending freeze — about which the best thing you can say in its favor is that it’s a transparently cynical PR stunt — has, for many, been the final straw: rhetorically, it’s a complete concession to Reaganism.

According to what I heard on the radio yesterday, the government plans to "freeze" spending in a way that will "save" about $25 billion a year -- this from a multi-trillion-dollar budget. And this is a "complete concession to Reaganism"? (It is not as though Ronald Reagan froze government spending, and under his presidency, the budget grew, and grew.)

To let us know that he always has been on the case, Krugman shares a column he had a couple years ago that "proves" Obama must be a secret admirer of Reagan. (Maybe he has a candle shrine to the Gipper somewhere in a secret room in the White House.)

According to Krugman, the 1980s was a time when the rich got richer and the poor got poorer, a veritable (let's hear it) "decade of greed." However, if one can think back to the time when personal computers were in their infancy and the high-tech sectors began to grow, that was the 1980s. Everything you are using now just to read this article came to the fore during that time.

Furthermore, Krugman claims all over his columns that the only true way to fight a recession is through huge increases in Keynesian spending, and that permitting inflation to fall and not trying to prop up failing sectors is the way to disaster. Well, he might remember that the Reagan administration was the last one to permit the liquidation of malinvested resources, and out of it came not only a strong recovery, but the base for gains in productivity that lasted nearly 20 years.

Look at what has happened in the last year. The government has been printing money and throwing it everywhere, yet unemployment is growing, and we are farther from a real recovery now than we were when Obama took office. Krugman's typical Keynesian response is that the government has not spent enough. Right. The USA now has debt that guarantees either an outright default or repudiation of debt through inflation, and Krugman still is not satisfied and wants even more profligacy.

Ludwig von Mises and the Austrians were on the Keynesian scam from the beginning. Just because the latest Prophet of the Hoax has a Nobel Prize does not mean Keynesianism has stopped being fraudulent. It was and always will be a pathetic excuse for economic analysis.

Krugman and the Senate Filibuster

For most of the time from 1995 to 2007, Republicans controlled the U.S. Senate. For most of the same period (since 1999), Paul Krugman was writing columns for the New York Times. I have not read all of his columns, obviously, but I think I safely can say that he never wrote a column attacking the Democrats for using the filibuster to block legislation.

In other words, when his party was in the minority, the filibuster was (and is) a good thing because it could block legislation he did not like. However, now that Democrats have worked for more than a year with a filibuster-proof majority only to lose that advantage in the stunning win last week by Scott Brown in Massachusetts, suddenly the filibuster is turning this country into a "banana republic."

Why, Krugman even points out that the filibuster is not in the Constitution! Wow! A "Progressive" who has discovered the U.S. Constitution! What next? Will Krugman ask where in the Constitution can we find the authorization for all of the power that is controlled by the executive branch? Maybe, just maybe, he will start asking where the Constitution authorizes Social Security, Medicare, and a whole host of other things he supports.

What truly is pathetic is that he resort so the "Goldstein" accusations. For the past year, Republicans have been toothless, falling before Democrat supermajorities in the House and Senate and a president who has done what he darn well pleases, yet any lack of "progress" is due to those Republicans! Goldstein lives!

Krugman's Liquidation Fetish

Oh, sadness! Paul Krugman is beside himself, as President Obama has announced a tiny (and I mean tiny) spending freeze on about $25 billion a year. Yet, to hear the Great Nobel Laureate put it, Obama has decided to destroy the economy. In Krugman's own words:

A spending freeze? That’s the brilliant response of the Obama team to their first serious political setback?

It’s appalling on every level.

It’s bad economics, depressing demand when the economy is still suffering from mass unemployment. Jonathan Zasloff writes that Obama seems to have decided to fire Tim Geithner and replace him with “the rotting corpse of Andrew Mellon” (Mellon was Herbert Hoover’s Treasury Secretary, who according to Hoover told him to “liquidate the workers, liquidate the farmers, purge the rottenness”.)

Now, there is a bit of a problem here. With the Obama administration running up deficits of more than a trillion dollars a year, we have to ask ourselves just where the government is going to find all of these excess funds. Oh! I forgot! We print the money, the Zimbabwe solution.

(By the way, had Hoover actually listened to Mellon instead of rejecting his advice, there would have been no Great Depression. Mellon understood then -- as some of us understand now -- that there were huge amounts of malinvested assets that needed to be liquidated before the economy could begin to recover.)

The problem in the economy is not inadequate demand, no matter what Krugman claims. The problem is that the government continues to try to resurrect dead or dying assets with yet another infusion of cash, and with predictable results. These assets soak up resources and continue to distort the economic fundamentals. Granted, a Keynesian cannot understand that simple point because to a Keynesian, there are no economic fundamentals, just an amorphous mass called an "economy."

In this blog posting, Krugman lays another attack on Ronald Reagan and the Recession of 1982 without telling the whole story. (Krugman is quite adept at leaving out the important parts, especially if the facts don't coincide with his narrative.) Even though Krugman wants us to forget this point, people were predicting defeat for Reagan in 1984, as the Keynesians predicted another Great Depression.

Instead, Reagan did not try to use inflation to prop up malinvested assets, did not try to "stimulate demand" with lots of printed money, and within a year, the economy was well on the road to recovery. You might recall that he won every state except for Minnesota (his opponent, Walter Mondale, came from Minnesota, and Reagan barely lost that state) and Washington, D.C., which always votes for Democrats.

True, Krugman tries to spin a Keynesian recovery from that one, too, but it does not work. But, then, most of what Krugman wants does not work.

The Hayek-Keynes Rap

If you want to get a sense of the Austrian versus Keynesian viewpoints, then this little rap, the brainchild of Russ Roberts of George Mason University, will help. And it is fun to watch.

If you want to know about the "stimulus," then know something about the "hair of the dog" cure for hangovers. They are pretty much the same thing.

Krugman and the Tyranny of Markets

The Great Nobel Laureate is upset that someone is worried about the response of the markets (this means Wall Street, of course). Now, I happen to agree with some of what Krugman says, but for very different reasons. As usual, even when Krugman starts to get it right, he ultimately veers into Wonderland.

Krugman is reacting to Tim Geithner's argument that the Senate needs to reconfirm Ben Bernanke in order to calm the markets, and declares that the government should not base its actions on possible reaction of others:

Nobody really knows how the markets will react; the right thing, always, is to pursue policies that look right on the substance.

At one level he is right; markets generally will react short-term to anything that upsets the current political calculus. However, the idea of "substance" in Krugman's Wonderland is for the government to be printing more money and for the state essentially to nationalize the markets. This is not substance, folks. It is something akin to what Hugo Chavez is doing in Venezuela, and we all know how well that is working.

Like so many Keynesian economists, Krugman looks at markets with the wisdom of John Maynard Keynes himself, who declared markets to be run by "animal spirits." To Keynes, there was no rhyme or reason to markets and furthermore, the sale of secondary assets in any kind of market had no economic value, anyway. Therefore, the markets don't tell the government what to do; the government tells the markets how to act.

So, if there is to be tyranny, he wants it to come from Washington. No doubt, Paul Krugman has the Great Wisdom necessary to run all of our economic affairs, just as the central planners of the old Soviet empire were able to do. (One of Krugman's mentors, the late Paul Samuelson, was full of praise for Soviet Socialism, all the way until the empire collapsed.)