The View From 1776

The Wall Street Journal’s March 5, 2010, edition, in its Best of the Web feature, carries an interesting look at the contradictory opinions expressed by Mr. Krugman: 

Former Enron adviser Paul Krugman takes note in his New York Times column of what he calls “the incredible gap that has opened up between the parties”:

Today, Democrats and Republicans live in different universes, both intellectually and morally.

“What Democrats believe,” he says “is what textbook economics says”: But that’s not how Republicans see it. Here’s what Senator Jon Kyl of Arizona, the second-ranking Republican in the Senate, had to say when defending Mr. Bunning’s position (although not joining his blockade): unemployment relief “doesn’t create new jobs. In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.”

Krugman scoffs: “To me, that’s a bizarre point of view--but then, I don’t live in Mr. Kyl’s universe.”

What does textbook economics have to say about this question? Here is a passage from a textbook called Macroeconomics:

Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. . . . In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of “Eurosclerosis,” the persistent high unemployment that affects a number of European countries.

So it turns out that what Krugman calls Sen. Kyl’s “bizarre point of view” is, in fact, textbook economics. The authors of that textbook are Paul Krugman and Robin Wells. Miss Wells is also known as Mrs. Paul Krugman.

It seems Krugman himself lives in two different universes--the universe of the academic economist and the universe of the bitter partisan columnist. Or maybe this is like that episode of “Star Trek” in which crewmen from the Enterprise switched places with their counterparts from a universe in which everyone was the same, only evil.

Like Spock, the evil Krugman is the one with the beard.

The continuing dismal unemployment picture is captured by Investor’s Business Daily in a news analysis article.

The true unemployment rate, including people who have ceased to look for jobs, is somewhere between 16.8% and 19.8% of the full workforce.

A key element is businessmen’s fear and uncertainty induced by Obama’s business-bashing, higher taxes, continual threats of strangling new regulations, take-overs of banks, insurance companies, auto manufacturers, threatened nationalization of private health insurance, and by far the greatest government debts and deficits in history (both scheduled to climb even farther and faster).

Historian Joyce Appleby’s just-published The Relentless Revolution: A History of Capitalism explains why Keynesian macroeconomic computer models fail to live up to liberal-progressive expectations of managing the economy from on high.

Before readers of this website denounce Ms. Appleby as deficient in credentials to opine on such matters, let me note that she has taught history for many years at UCLA and is a past president of the American Historical Association.  The origin and unfolding history of capitalism has been one of her focal points since 1967.  Moreover, she is no conservative.  She writes, “I’m a left-leaning liberal with strong, if sometimes contradictory, libertarian strains.”

Quote:

Our present [Keynesian] method of analyzing economies obscures their entanglement with society and culture.  Professional [Keynesian] economists [like New York Times propagandist Paul Krugman] analyze capitalism with mathematical precision.  Building mathematical models to explain how markets behave, they tend to ignore the messiness that any set of social relations is bound to produce.  All the economists’ precise projections assume ceteris paribus - all other things remaining equal - but they rarely do.  Philosophers use the word “reify” to indicate when concept is being talked about as a real thing rather than as a way of talking about something.  [Keynesian] Economists talk about their subject as though it were a unitary thing rather than a mixed bag of practices, habits, and institutions.

Keynesians, who construct the models for Obama’s stimulus programs, oversimplify the factors at work in a vast economy such as ours.  To them, government deficit spending, on no matter what, will automatically raise consumer spending and create real, new jobs.  Keynesians ignore consumers’ fears for job security and consumers’ resultant inclination to pay off debt and to increase savings, rather than rushing to spend short-term government handouts.

Similarly Keynesians ignore the greatly different time scales for businesses ranging from retail sales, wholesale distribution, transportation, manufacturing of consumer goods, manufacturing of intermediate producers’ goods, machinery and equipment, mining and production of basic raw materials.  Recent upticks in GDP have been almost entirely the result of businesses, to a limited degree, restocking some inventory items or simply not reducing inventories as rapidly as before.

Austrian-school economists, in contrast, eschew mathematical modeling, placing heavy emphasis instead upon consumers’ and businessmen’s expectations and incentives.  Austrian economists foresaw months ago the current high unemployment, when President Obama and Democrat/Socialist Party leaders began to blame the recession on businessmen and bankers.  See, for example, Government Action Causes Unemployment.

Anyone who has studied Franklin Roosevelt’s record of prolonging the 1930s Depression for eight years, with unemployment in the teens throughout that period, understands that governments don’t create meaningful, productive jobs and that, while their accusatory tactics may be good short-term politics, they drown business incentives to expand full-time employment.

The proof of the pudding is that current Democrat/Socialist Party stimulus spending, at the highest levels in world history, has produced very few real jobs, but a great expansion of government employment that swells the ranks of the socialist Service Employees International Union (SEIU) members.  The SEIU, of course, is a major contributor of campaign funds and free labor for electing Democrat/Socialist Party candidates.

Inflation is a silent tax.  As with the frog gradually heated in a pot of water until it’s too late to jump out, inflation wipes out the value of a life’s work, politicians hope, so gradually that the victims don’t notice it.

The Federal Reserve, as it manages the fiat dollar supply, has hitherto set an inflation target of 2% - 3% per annum.  Unofficial gossip pegs possible future inflation targets at double that: 4% - 6% per annum.

At 2% annual inflation, the dollar loses half its purchasing power in 36 years, roughly a lifetime of work.  At 6%, it loses half its purchasing power in only 12 years.  Like the Red Queen in Alice in Wonderland, you will have to run faster and faster to stay in the same place.  A $40,000 per year college education would cost $80,000 12 years later.

For details, read Induced inflation feared as way to cut debt.

Government stimulus spending is largely taking tax revenues from one group of workers, or borrowing from banks money that businessmen might otherwise have borrowed to pay workers, and giving it to politically favored classes of citizens.  The overworked metaphor of rearranging the deck chairs on the sinking Titanic remains an apt description.

A delayed and serious additional shifting, from Federal manipulation to state budget squeezes, will become more apparent in 2011, when stimulus spending winds down.  Read the Investor’s Business Daily analysis: State Budget Woes A Drag On Growth, And Will Get Worse

Tom Emerson forwarded the Wall Street Journal’s European editorial opinion, which recounts the readily available information regarding the wasteful and feckless efforts of the Spanish and German governments to create green jobs.

No matter how one fudges the numbers or rationalizes about environmental benefits, green jobs require enormous government subsidies.  The extra money for those subsidies is forcibly taken via taxes from businesses that would have been able to to use the money for more productive purposes.  Thereby is an economy diminished.  Green jobs, for example, in production of ethanol have raised food prices for the world’s poor and used more petroleum energy in production of ethanol than would have been used without ethanol.

The Journal’s editorial commences:

As he did for health care, President Obama has turned to Europe for inspiration on the environment. Countries such as Spain and Germany are “making real investments in renewable energy” and are “surging ahead of us,” he has warned. In last week’s State of the Union speech, Mr. Obama proposed to reverse the trend: “The nation that leads the clean energy economy will be the nation that leads the global economy,” he said. “America must be that nation."

To say, “The nation that leads the clean energy economy will be the nation that leads the global economy,” is equivalent to saying that those who waste the most money will become the richest.  To suggest that green jobs will increase the productivity of our economy is nonsense. 

Productivity increases come from discovering more efficient ways to produce existing goods and services, or to create new goods and services that people find useful.  Green jobs reverse the process by making production less efficient and more costly and by producing goods and services that few people, given free choice, will want.

The president’s views make sense only under the rubric of Keynesian macroeconomics.  Keynes, during the 1930s Depression, proclaimed that the only way to revive a depressed economy was application of large amounts of government spending.  What the money was spent for was immaterial.  Digging holes one day, filling them then next day, then endlessly repeating the cycle, would work nicely, Keynes thought.

“Green"jobs conform to that senseless paradigm.  Green jobs add little if anything to the goods and services that people outside the rarified enclaves of the Northeast and Beverly Hills will pay for if given the opportunity to choose.  Moreover, the product of green jobs is worth less than the cost to produce it, hence the necessity for government subsidies to producers and to buyers.

Economics is the study of allocating most efficiently and productively the limited amounts of resources available at any one time to a political society.  Green jobs, CO2 regulation, and the whole clap-trap of smarter-than-you collectivist control favored by liberal-progressives is assuredly not economics.  It is a wasteful sacrifice on the altar of the secular religion of socialism.