I have tried reading Krugman for several years but I just can’t do it.  I picked up Return of Depression Economics when I was a junior in high school, but I couldn’t finish it.  I use to subscribe to his blog, but I simply found him impossible to read on a . . . → Read More: Book Review: Pop Internationalism by Paul Krugman]]> I give up.

I have tried reading Krugman for several years but I just can’t do it.  I picked up Return of Depression Economics when I was a junior in high school, but I couldn’t finish it.  I use to subscribe to his blog, but I simply found him impossible to read on a daily basis.  I couldn’t even finish Pop Internationalism.

The biggest problem I have with Krugman is that he gets too caught up in his own perceived brilliance, and he has a tendency to become quite smug and condescending.  This usually becomes a problem because he isn’t often right, so reading him just makes me want to find him and then punch him dead in the face.  Arrogance is only amusing when you’re right.

Anyhow, Pop Internationalism isn’t all bad; Krugman manages to make a couple of good points.  They’re mostly contained in the first four chapters, so if you do eventually feel like reading this book, you needn’t bother reading beyond chapter five.

In the first place, Krugman is correct in noting that countries are not corporations, nor are they comparable to corporations, at least in terms of competitiveness.  The idea that the United States “competes” with Japan (or Germany or Britain or etc.) is a rather strange notion, and a fallacious one to boot.   Trade is not necessarily win-lose, which, come to think of it, sounds quite strange coming from Krugman.  As such, trading with Japan isn’t an inherently destructive behavior.  However, it is possible that trade can have negative consequences.  It should simply be noted that trade is neither inherently good nor inherently bad.  It can be either.

In the second place, Krugman correctly notes that, accepting the concept of competitiveness for sake of argument, a nation’s ability to compete in the global market is more closely tied to domestic production policy instead of foreign trade policy.  Stated more clearly, taxes and regulations play a larger role in international competitiveness than do tariffs and trade agreements.  As such, the proper policy prescription for encouraging competitiveness in the global marketplace is deregulation and corporate tax cuts.

Overall, Pop Internationalism starts with a bit of a bang, then dissolves into self-congratulatory mental masturbation.  The first couple of chapters are thoughtful and thought-provoking, but everything after that is nauseatingly narcissistic.  Read at your own peril.

His claim is comparable to saying . . . → Read More: Krugman and Recalculating]]> Paul “MIT wants its PhD back” Krugman is at it again.
Chen government action causes an economy to go bust, people need to
adjust their spending (recalculating). This includes employers and employees. So
unemployment goes up. Krugman can’t understand why this process doesn’t
apply equally to boom times.

His claim is comparable to saying that because the distance between
two floors is equal (the amount of spending adjustment), that it should
take an equal amount of effort (unemployment, as some jobs are destroyed
and others created) to climb the stars as go down. By this metaphor he’s
obviously lost all shred of his former Nobel-inducing glory. All that’s
needed is to show that gravity exists in economies as well as houses.

Causes of gravity: information (in a boom, everybody knows where the jobs
are; in a bust that information is hard to get), confidence (people take
more risks with their jobs if they know a replacement is easy to get),
egoism (everybody wants to get paid more; nobody wants to get paid less),
time (booms happen slowly and busts quickly), and probably a few more
that I can’t think of, but really, these are sufficient on their own. Four
reasons why recalculation results in unemployment on the bust side rather
than the boom side.

It must suck to be Krugman.

…don’t fret about this year’s deficit; we actually need to run up federal debt right . . . → Read More: Kalamitous Krugman]]> In a recent New York Times Op-Ed entitled “Till Debt Does Its Part,” Nobel Prize-winning economist Paul Krugman rebuffs those few reactionary souls who argue that all this debt we are incurring is a bad thing. He assures us,

…don’t fret about this year’s deficit; we actually need to run up federal debt right now and need to keep doing it until the economy is on a solid path to recovery. And the extra debt should be manageable. If we face a potential problem, it’s not because the economy can’t handle the extra debt. Instead, it’s the politics, stupid.

Sometimes you really have to wonder what the standards are for winning a Nobel Prize. We have an economy built on consumer debt which relative to disposable income increased from a low in 1945 to its peak in 2007. As the Daily Reckoning further notes, we have $20 trillion in excess debt to work through over the coming years. Yet while on the private side, we need to pay for our sins, liquidate our debts, allow malinvestments to go belly up and start over on more solid fiscal ground, apparently the public sector can just keep on trucking.

As the sage Mr. Krugman notes,

Right now deficits are actually helping the economy. In fact, deficits here and in other major economies saved the world from a much deeper slump. The longer-term outlook is worrying, but it’s not catastrophic. The only real reason for concern is political. The United States can deal with its debts if politicians of both parties are, in the end, willing to show at least a bit of maturity. Need I say more?

Explain this to me exactly. When are deficits a help to an economy in distress? If the whole reason we are in economic distress is because of a glut of debt, then why is the answer to pour more gasoline on the fire? Any company that still functions in any semblance of a free market knows that if it can’t service its debt, it will be forced to make difficult decisions, potentially opting for bankruptcy. It cannot continually slop at the trough of the debt market.

But Krugman seems to think that the government can have its cake and eat it too. Where a sober person might argue that in hard times, a government must tighten its belt, like an business or a man, cutting back to the bare minimum, Krugman seems to think that incurring more and more debt, in essence stretching out the inevitable painful liquidation whilst creating another debt/currency crisis down the road is better. Why have one financial crisis when you can have two or three stretched out over a longer period of time? You get the sense that Krugman’s agenda is more political than economic sometimes.

Which brings me to my next point. Krugman believes the only reason for concern over the debt is “political.” Proud of this claim, Krugman states “Need I say more?” Well yes, I think you need do so. Our currency, and the debts run up by our government denominated in our currency are backed by the full faith and credit of the United States government; which is to say our money and debt are backed by our economy, our people. If we are in for a prolonged period of negative growth, high unemployment and increased intervention in all aspects of life, especially our economy, how can Krugman make the assumption that the ability to continue adding to our debt solely rests on the “maturity” of the politicians? Can Barney Frank snap his fingers and suddenly make the world buy our paper?

If the government wishes to be “immature,” it can do so through intervention and coercion. Alternatively, if the politicians wish to be mature, they can remove themselves from the private sector, slash their spending and taxes, let whole swaths of industry go belly up and allow people to foreclose on their homes.

But Krugman as one might expect opts for the former, immature route. Mind-numbingly, he proclaims:

If governments had raised taxes or slashed spending in the face of the slump, if they had refused to rescue distressed financial institutions, we could all too easily have seen a full replay of the Great Depression. As I said, deficits saved the world.

In fact, we would be better off if governments were willing to run even larger deficits over the next year or two. The official White House forecast shows a nation stuck in purgatory for a prolonged period, with high unemployment persisting for years. If that’s at all correct — and I fear that it will be — we should be doing more, not less, to support the economy.

Krugman, going along with all the other Keynesians and socialists under the sun forgets about all of the interventionism even before his idol FDR ever got into power during the Depression, in addition to the misguided policies (which he of course advocated) over the last two decades in Japan. The same illogical government gobbledygook that merely prolonged the Depression has been followed to a tee, all the way up to “cash for clunkers”, the modern day equivalent of FDR’s forced killing of crops and slaughtering of pigs in order to raise the price of agricultural products. Mr. Krugman seems to think that interventionism is what saves economies. Might I ask then, why not intervene from the start? If the state is so good at managing crises, why not let it manage all industry in good times as well? Is the free market only sufficient when the Dow is rising? And if deficits are the cure-all, then why do nations ever default on their debt? Why is Zimbabwe the way Zimbabwe is? Could it be that perhaps the central planners are not so divine after all?

To be fair, Krugman, digressing notes:

But what about all that debt we’re incurring? That’s a bad thing, but it’s important to have some perspective. Economists normally assess the sustainability of debt by looking at the ratio of debt to G.D.P. And while $9 trillion is a huge sum, we also have a huge economy, which means that things aren’t as scary as you might thinkHere’s one way to look at it: We’re looking at a rise in the debt/G.D.P. ratio of about 40 percentage points. The real interest on that additional debt (you want to subtract off inflation) will probably be around 1 percent of G.D.P., or 5 percent of federal revenue. That doesn’t sound like an overwhelming burden.

Even though all this debt we’re adding on might not actually be so great, we have a huge economy. Ah, the panacea of the huge (albeit shrinking) economy – an economy based on consumption, services and debt, the hallmarks of any economic powerhouse. He also argues that a rise in debt/GDP of 40% is OK, since this debt will only be 5% of federal revenue, which doesn’t sound so overwhelming. So essentially, because it’s only 5% of a massively-sized federal government which will have ever-decreasing tax revenues necessitating continued debt financing (to pay for more boondoggles), we should be OK to pay off our debt (with devalued dollars I suppose?).

What might our lenders think about that? Krugman has an answer for this too.

Now, this assumes that the U.S. government’s credit will remain good so that it’s able to borrow at relatively low interest rates. So far, that’s still true. Despite the prospect of big deficits, the government is able to borrow money long term at an interest rate of less than 3.5 percent, which is low by historical standards. People making bets with real money don’t seem to be worried about U.S. solvency.

I would challenge the assumption that the US government’s credit will remain good. As Krugman notes, our debt/GDP is going to rise significantly, “

The official White House forecast shows a nation stuck in purgatory for a prolonged period, with high unemployment persisting for years,” and as I mentioned government is intervening in the economy on an unprecedented scale, but relax, our friends in the Far East will continue to bankroll us. Krugman should take a page from Milton Friedman’s playbook (along with pages from the playbooks of Hayek, von Mises and Bastiat) and remember that there is no such thing as a free lunch. All government can do for “revenue,” is directly tax, or indirectly tax through issuing debt (taxing future generations and/or devaluing the currency) or printing money.

While Krugman argues that the people “making bets” don’t seem worried about our solvency, as numerous publications have noted, the Chinese are buying less treasuries and stockpiling commodities (however short-lived the Times may think it will be), indicating that they are diversifying out of dollar-denominated assets. Meanwhile, the government has had to take the drastic measure of purchasing its own Treasuries, with the Fed committing to buy $300bn in notes (i.e. printing $300bn) and also monetizing the debt more discretely. In other words, the government has had to keep its own borrowing costs down artificially, making up for the lack of demand of its primary dealers by bidding for its own debt. But look at the YTD yield curve for the 10-Year Treasury, and tell me that the markets aren’t reacting at all to our fiscal recklessness:

Moreover, just because rates haven’t spiked by 500bps in the last year, does that mean that market participants really aren’t scared about our solvency? Markets can stay irrational for long periods of time, just look at the housing bubble or any of the other bubbles which after the fact we have said were obvious. Further, I would argue that creditors like China are being perfectly rational. They are trying to shift their money towards assets with real tangible value like commodities, while doing as little as possible to spook the government debt markets, because doing so would hurt the value of their own paper. If they flooded the markets with Treasuries, all of their dollar-denominated assets would plummet in price. It’s not in their interest for there to be a run on the US government yet. But that doesn’t mean that they won’t slowly but surely make their exit from US paper assets, leading to higher borrowing costs for our government and less confidence in our dollar. As I mentioned, there is no free lunch.

Krugman notes that other governments with comparable profligacy like Belgium and Italy never faced financial crises in the early 1990s, but there are obvious notable differences. We are the biggest economy in the world, and were the most prosperous one. We have the world’s reserve currency. Our people are not used to the kind of fiscal stagnancy faced in Europe. I just do not see Krugman’s comparisons hold water. A more apt comparison in my eyes would be the US versus the Roman or British Empires circa their collapses.

Regardless, I want to return to the fundamental point that going into more debt to solve a problem caused by too much debt makes no sense. One might argue that sometimes debt can be beneficial and not cause long term harm. One might cry that parents are right to take out a mortgage on a house to raise their children. If the family can reasonably expect to generate the cash flows to retire this debt over time, then this will certainly be fine. But the US is like one giant family of drug-addled deadbeats looking to buy a mansion in the Hamptons, having already foreclosed on its subprime mortgage, maxed out all of its credit cards and traded in its Rolex’s to the local pawn shop.

Debt is OK if you can reasonably expect to pay it off. To incur even greater debt in the face of debt that you will already be unable to service is downright immoral and will lead to severe consequences for the people.

These deficits in and of themselves are not productive. They represent a stealing of wealth from future generations. As I mentioned, the only way to pay down the debt will be to tax future generations, either directly or indirectly through inflating the money supply and thus devaluing the currency. Further, regarding what the deficits are actually being used to finance, as I have argued in accordance with sound Austrian economics, the deficits used to bail out failing ventures stop the market from naturally adjusting, and lead to less productive if not downright destructive “jobs” being diverted from the private sector.

So in some respects again, Krugman is right that our politicians need to be mature. But the people get the government they deserve, and as of yet though there have been some bright signs, the majority of people don’t seem to want to deal with the pain that mature servants of the citizenry would allow them to withstand today for a brighter tomorrow.

It is worth noting that in Krugman’s delusion, he actually makes a redeeming comment noting,

Over the really long term, however, the U.S. government will have big problems unless it makes some major changes. In particular, it has to rein in the growth of Medicare and Medicaid spending.

He actually has me for a second, until the subsequent stanzas:

That shouldn’t be hard in the context of overall health care reform. After all, America spends far more on health care than other advanced countries, without better results, so we should be able to make our system more cost-efficient.

But that won’t happen, of course, if even the most modest attempts to improve the system are successfully demagogued — by conservatives! — as efforts to “pull the plug on grandma.”

Keep it classy, Paul.