Bob Herbert's Phony Jobs

In his classic 1981 article, “7 Fallacies of Economics,” Lawrence Reed noted that people believe that production exists “for its own sake.” He wrote:

Although production is essential to consumption, let’s not put the proverbial cart before the horse. We produce in order that we may consume, not the other way around.

He then succinctly pointed out:

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.”

It seems that whenever an industry gets in trouble, some people cry that it must be preserved “at all costs.” They would pour millions or billions of dollars in subsidies on the industry to prevent the market’s verdict from being heard. The bad economist will join the chorus and ignore the deleterious impact that would befall the consumer.

The good economist, on the other hand, does not confuse ends with means. He understands that production is important only because consumption is even more so.

Lest one think that Reed was exaggerating, I would recommend reading the editorial pages of the New York Times for a week, as most of its columnists and editorial writers engage in this fallacy on a regular basis. The latest to recommend “production for its own sake” as a way to end the current depression is Bob Herbert, who seems to be a walking dictionary of economic fallacies. His latest column, “The Magic Potion,” literally treats the government money printing presses as something that can work “magic” in “creating jobs” and restoring the U.S. economy.

There is something perversely humorous when a “journalist” who claims to be a “watchdog of government” literally claims that government policies can work something akin to magic. Furthermore, he has plenty of readers who swoon over his every word, and although I doubt that most readers here will be in that category, nonetheless I include his missives, anyway, if for no other reason than to point out just how silly – and destructive – the media pundits have become, not to mention the economic illiteracy that infects the chattering classes.

The first thing I need to point out is that Herbert believes – really believes – that government is the Source of All Wealth. Thus, a man like that is not going to back down or admit that perhaps government spending just might be destroying wealth. Second, like so many journalists, commentators, and “economists” (Paul Krugman comes to mind), there is this little issue of causality, determining what causes what. Here is an example of what I mean from Herbert:

Those who think some kind of robust recovery is hiding around the corner, just waiting to spring a pleasant surprise on us, are deluded. Too many families and individuals are tapped out. They’re struggling from week to week and month to month just to meet the necessities of housing, food and energy costs. Those crazed, debt-driven buying sprees that held the economy aloft for so long are over.

In other words, consumers cannot spend us back into prosperity. Well, guess what? Consumers don’t “spend” any economy into prosperity. Consumption is the end of production; consumers can spend because they have produced, not the other way around.

To a person, the people who appear regularly on the NYT editorial page, not to mention a jillion other publications and websites, really believe that all that is needed for an economy to grow is for consumers to have lots of money in their hands and then they spend, spend, spend us into prosperity. Herbert is right in that consumers are tapped out, but the question is why.

According to Herbert, it is because jobs are becoming scarce. He writes:

You can’t get back to a robust economy without putting Americans back to work. The economy needs to be rebuilt on a solid foundation of good jobs at good pay, and many of those jobs will have to come from thriving new industries. This is a long-term project that demands big-time government involvement. It will require the kind of commitment — over an even longer period of time — that President Obama and the Democrats in Congress gave to their health care initiative.

Franklin Roosevelt had it right in his first Inaugural Address when he declared, “Our greatest primary task is to put people to work.” He underscored the urgency of the task when he said it should be treated “as we would treat the emergency of a war.”

At this point, a reader might ask, “Who can argue with that? If people are employed in high-paying jobs, they are going to be able to consume.” That is true, but here is the problem: the issue is not the high-paying job; the issue is what is being produced and how do consumers value what is being produced.

Recently, Herbert wrote about “rights of consumers,” yet, he now pens an anti-consumer column. Read the following to understand what I mean:

The administration and Congressional leaders have been touting some recent legislation as “jobs bills,” but they are small-bore initiatives that will accomplish little. What is needed are bold new initiatives on several fronts. The federal government needs to do much more to help state and local governments that are in desperate fiscal straits because of falling tax revenues and are responding by laying off workers and cutting essential services.

A long-term program to rebuild the nation’s infrastructure (which was only made worse by the harsh winter) would create jobs and establish a sound industrial platform for 21st-century industries.

The transformation to a greener economy needs to be accelerated, and most of the manufacturing associated with that newer, greener economy should take place in the United States. And some new variation of the Works Progress Administration and the Civilian Conservation Corps should be developed to put economically distressed young people to work. What is happening to young, out-of-work and poorly educated American kids — not just in the big cities, but increasingly in suburban and rural areas, as well — is tragic.

In other words, he pushes for government to ram “green energy” down the throats of consumers who clearly through their purchases have said they don’t want it. Why is corn-based ethanol an expensive and destructive boondoggle? It is because consumers have spoken already and they have said that they are not willing to pay the full price for corn-based alcohol to be poured into their cars (and wreck their engines).

Herbert makes it absolutely clear that he considers government to be the source not only of wealth, but also the entity that should determine the direction of production. For all his going on about consumers, he actually is anti-consumer. Furthermore, we should not forget that the housing bubble occurred precisely because government agents purposely steered the economy toward building, buying and selling houses, and that artificial “stimulus” ultimately proved to be unsustainable. Consumers purchased houses when they would have been wiser putting their money elsewhere because the government greased the skids (and a few palms) by pushing resources into that market that would not have gone in that direction had there been no government intervention.

Believe me, pushing the housing market was a “bold new initiative” and we see where that went. Unfortunately, Herbert seems to be impervious to logic and ends the column with even more head-scratching words:

As for the budget deficits, they will never be brought under control if Americans are not put back to work. Unemployment drives deficits by depriving the government of tax revenues and dramatically increasing the costs of safety-net programs and other public services. Putting Americans to work will ultimately make it much easier to begin bringing the deficits down.

The closest thing to a magic potion for individuals, families and the American economy is a job. F.D.R. understood that. The longer it takes for the rest of us to catch on, the deeper the long-term damage to the society will be.

What is he really saying? Bob Herbert is declaring that in order to bring budget deficits “under control,” government must run larger deficits. Yet, while apparently that makes perfect sense to Herbert, it does not compute with me. Now, if he is claiming that extra spending now will “prime” the economy to where it will produce “on its own” in the future, I can understand the reasoning, even if it is wrong.

Keep in mind that few people at the NYT have attacked private enterprise more than Herbert, and all of the government initiatives he has been championing are those initiatives that need subsidies to survive. Is he trying to say that massive subsidies to “green jobs” suddenly will result in those lines of production suddenly turning profitable in the future? What portion of the economy will be profitable so the government can have positive numbers with taxes and spending? He doesn’t say.

Instead, he claims that FDR knew something apparently the rest of us don’t know; people need to be able to pay their bills, and in our society, a “job” provides income for them to do so. That is plain silly, as though somehow I did not know that my job gives me an income through which I can support my family.

But even here, it gets worse. Herbert does not understand that a “job” is not a “magic potion” in and of itself. A job is nothing more than a task someone performs in the production of goods. In order to have income, we have to produce something, and for production to be sustainable, over time it must reflect the desires and spending directions of consumers and to be sustained, it must be profitable.

Unfortunately, Herbert is demanding that the government create what Peter Schiff so aptly has called a “phony economy.” Throughout his career as a journalist, Herbert has championed policies that make production of goods consumers want to be difficult, and he now calls for government to use vast amounts of resources to make products that consumers don’t want, and to force consumers and producers to pay for these products, anyway.

Indeed, if this is “magic,” it is a perverse magic in which government takes productive resources and “magically” transforms them into resources that are unproductive. He might say this is a “rich nation,” but it won’t be rich for long if influential people like Herbert continue to demand that government replace the productive economy with one that is phony.

James K. Galbraith: Like Economically Illiterate Father, Like Son

It seems that James K. Galbraith, son of the late Economic Illiterate John Kenneth Galbraith, is trying to outdo Paul Krugman on the issue of public debt and printing money. His article in the Marxist publication, The Nation, called "In Defense of Deficits" has to be one of the most juvenile pieces of work I ever have read.

Take the following quote:

For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in “net financial wealth.” Ordinary people benefit, but there is nothing in it for banks.

Wow! The way to make a country wealthier is to go into debt! And, guess what? Government can just print money to pay back the debt, so we don't have to worry about it! JKG says so!

With government, the risk of nonpayment does not exist. Government spends money (and pays interest) simply by typing numbers into a computer. Unlike private debtors, government does not need to have cash on hand. As the inspired amateur economist Warren Mosler likes to say, the person who writes Social Security checks at the Treasury does not have the phone number of the tax collector at the IRS. If you choose to pay taxes in cash, the government will give you a receipt–and shred the bills. Since it is the source of money, government can’t run out.

Oh, but it gets even better. Read on:

...public debt a burden on future generations. It does not have to be repaid, and in practice it will never be repaid. Personal debts are generally settled during the lifetime of the debtor or at death, because one person cannot easily encumber another. But public debt does not ever have to be repaid. Governments do not die–except in war or revolution, and when that happens, their debts are generally moot anyway.

So the public debt simply increases from one year to the next. In the entire history of the United States it has done so, with budget deficits and increased public debt on all but about six very short occasions–with each surplus followed by a recession. Far from being a burden, these debts are the foundation of economic growth. Bonds owed by the government yield net income to the private sector, unlike all purely private debts, which merely transfer income from one part of the private sector to another.

Why am I not surprised that a publication like The Nation would champion this nonsense? Yes, yes, the source of national wealth is debt and printing money.

Oh, and Galbraith is a professor at the LBJ School of Public Affairs at the University of Texas. Hey, Longhorns! You got a live one there! How fitting that this economic illiterate teaches at the place that honors the profligate LBJ.

My Response to Krugman's Monday, March 22, Column

On my Krugman-in-Wonderland blog, I have this response to Paul Krugman's column today in which he declares that any opposition to the healthcare bill in the name of economic laws is really an act of racism.

There will be much written on this in the future, but for now, this will have to suffice.

Some Current Links

As the Obama administration continues to ram through this disastrous medical care bill, I have some commentary in my weekly "Not So Fast" column with the Foundation for Economic Education. In my piece, I question whether or not this bill really will cut medical costs, as its promoters claim.

On my Krugman-in-Wonderland blog, I take a hard look at Paul Krugman's assertion that the U.S. economy is floundering about in a "liquidity trap."

Government as "Referee"?

I guess I have seen all of it now. President Obama plans to bring the heavy hand of the Entity Formerly Known as the U.S. Department of "Justice" into the college football mix. Egged on by Sen. Orrin Hatch, Obama promises to see whether the Bowl Championship Series that determines the Division-I football national champions each year is, well, legal:

In the letter to Sen. Orrin Hatch, obtained by The Associated Press, Assistant Attorney General Ronald Weich wrote that the Justice Department is reviewing Hatch's request and other materials to determine whether to open an investigation into whether the BCS violates antitrust laws.

"Importantly, and in addition, the administration also is exploring other options that might be available to address concerns with the college football postseason," Weich wrote, including asking the Federal Trade Commission to review the legality of the BCS under consumer protection laws.

Several lawmakers and many critics want the BCS to switch to a playoff system, rather than the ratings system it uses to determine the teams that play in the championship game.

"The administration shares your belief that the current lack of a college football national championship playoff with respect to the highest division of college football ... raises important questions affecting millions of fans, colleges and universities, players and other interested parties," Weich wrote.

Hatch is miffed because the University of Utah in 2008 went unbeaten but was unable to play for the national championship because Florida and Oklahoma were chosen by the BCS point system to be in that one. Now, I have serious doubts that Utah could have beaten Florida that year in any venue, but nonetheless I myself would prefer a playoff.

However, using federal law as a hammer to pound in this nail not only is overkill, but it demonstrates the very arrogance of Washington and the Obama administration, which apparently believes that all of the world is the domain of the president. Now, I am not going to fall into the argument that there are more "pressing matters" for the government to consider, given the state of the economy.

In fact, I might be willing to say that if the president were to "concentrate" on trivial matters like who plays whom for the college football championship, perhaps the economy might recover more quickly. Who knows?

My larger point is that there seems to be nothing that Washington does not claim to own. Yes, economists are fond of saying that government is supposed to be a "referee" in the economy, but this is ridiculous. Enough!

Obama to "Focus on the Economy." Please, No!

After managing to alienate some of his most loyal voters in Massachusetts this last week, President Obama now promises to "focus on the economy." All I can say in response is, "Please, no. Focus on anything else. Please."

With the latest economic reports pointing out that unemployment continues to rise, it would seem that perhaps Obama might abandon his unwise "We're going to spend our way out of the recession" stance. The president promises to boost regulation of financial services, impose new environmental restrictions, raise taxes, and make it more difficult for entrepreneurs to operate.

This is not a prescription for a recovery, folks. It is a prescription for a depression.

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My wife and I will be traveling to Houston and to College Station, Texas, this weekend. More on this later.

What Didn't Happen: Krugman Telling the Truth

In George Orwell's classic 1984, the poor people of Oceania constantly were being fooled. Despite the fact that Big Brother had total control of the media, it seems that the masses were being duped by the ubiquitous Goldstein. For years, Oceania has been at war with Eurasia. Suddenly, Big Brother tells them that Goldstein has tricked them into believing such lies, as OCEANIA IS AT WAR WITH EAST ASIA! (I mean, everyone should have known that!)

In reading Paul Krugman's missive today in the New York Times, "What Didn't Happen," I am reminded of Orwell. According to the Great Nobel Laureate, Krugman insists that we believe the following:

• The "stimulus" was "too small"
• The Obama administration was not "tough enough" with the banks (he should have nationalized them, I suppose -- but, then, they pretty much are nationalized already)
• Obama did not do as did Ronald Reagan and blame the previous administration.

I must admit that I admire Krugman's chutzpah at one level. Here is a guy to has the guts to claim things that patently are not true and are easily debunked, but he is able to do with (without any sanctions) in the editorial section of the NYT and get away with it, mostly because his employers at Princeton University and in New York are happy to promote his untruths.

In debunking this latest set of claims, let me begin with the last one first, that Obama refuses to blame Bush for his troubles. Writes Krugman:

Finally, about that narrative: It’s instructive to compare Mr. Obama’s rhetorical stance on the economy with that of Ronald Reagan. It’s often forgotten now, but unemployment actually soared after Reagan’s 1981 tax cut. Reagan, however, had a ready answer for critics: everything going wrong was the result of the failed policies of the past. In effect, Reagan spent his first few years in office continuing to run against Jimmy Carter.

Mr. Obama could have done the same — with, I’d argue, considerably more justice. He could have pointed out, repeatedly, that the continuing troubles of America’s economy are the result of a financial crisis that developed under the Bush administration, and was at least in part the result of the Bush administration’s refusal to regulate the banks.

But he didn’t. Maybe he still dreams of bridging the partisan divide; maybe he fears the ire of pundits who consider blaming your predecessor for current problems uncouth — if you’re a Democrat. (It’s O.K. if you’re a Republican.) Whatever the reason, Mr. Obama has allowed the public to forget, with remarkable speed, that the economy’s troubles didn’t start on his watch.

Yes, Krugman sneaks yet another one of his post hoc ergo propter hoc claims that it was the tax cuts of 1981 that must have created the recession of 1982. Now, remember that in 1981, Congress voted to bring down the top marginal personal income tax rate from 70 percent to 50 percent. Funny about that move. At the Southern Economic Association meetings in New Orleans in 2004, I attended a talk by Krugman, and in the Q & A I asked him if he recommended going back to the 70 percent rates.

"Oh, no!" He replied forcefully. "Those rates were insane!" (Yes, he used the i-word.) Thank goodness, I had a number of economists in the room with me, including Joe Salerno of Pace University and the Mises Institute sitting in the next chair, and I suspect that Prof. Salerno's memory is as sharp as mine.

As an economist, I always like to see the Law of Cause and Effect in action, and I would like to know how those 1981 tax cuts created massive employment. For that matter, Krugman continually claimed throughout the Bush administration that the lowering of the top rate from 39.6 percent to approximately 33 percent played a major role in the recession of 2001, despite the fact that the rates were not even changed until after the recession began.

Has Obama not been blaming the Bush administration, as Krugman claims? Let us look at the recent record. On Saturday, January 9, 2010, the Associated Press had the following piece:

He says "the buck stops with me," but nearly a year into office, President Barack Obama is still blaming a lot of the nation's troubles — the economy, terrorism, health care — on George W. Bush.

Over and over, Obama keeps reminding Americans of the mess he inherited and all he's doing to fix it. A sharper, give-me-some-credit tone has emerged in his language as he bemoans people's fleeting memory about what life was like way back in 2008, particularly on the economy.

(No doubt, the AP must be run by...Republicans! Goldstein himself is president of that faux organization!)

Lest anyone think that just the AP has noticed this from Obama, one of his staunches political allies in the media, Roland Martin of CNN, wrote last month:

...instead of bringing up Bush, maybe they ought to spend more time driving home their message of making the right moves at the right time to get the country moving in the right direction. Bush has gone into retirement, choosing not to speak negatively of President Obama (unfortunately, we still have to hear Cheney and his rants).

If we are to move into a new year and a new way of governing, going back and talking about the past doesn't help. It only gives the impression that you don't have enough good things to say about your own agenda.

We don't have ol' Bush to kick around anymore. Now the heat will be applied fully to Obama, and we'll have to see if Mr. Calm, Cool and Collected can handle the tough moments as easily as he's basked in the praise and adulation.

Now, I find this curious, given that Krugman has had no problem himself blaming Bush's tax cuts for nearly every economic problem, and I doubt seriously that this current White House is so high-minded that it really takes ownership of the rising rates of unemployment and the current economic free fall. Nonetheless, Krugman's column is not about the truth; it is about continuing his partisan narratives couched in the language of The Economist Who Knows Everything.

What about the "stimulus" or alleged lack, thereof? First, Krugman leaves out the role of the Federal Reserve System which has spent trillions of dollars on all sorts of bailout nonsense, and all on the whim of the administration and its own chairman, Ben Bernanke.

Second, there is a more obvious question: How can a government that is flat broke, running more than a trillion dollars in the red, come up with trillions more to spend? Krugman's answer is to print more money (as he points out in his 2008 best-seller The Return of Depression Economics. (I am having my MBA students this spring read that book in order to compare and contrast Krugman's statements to those of the Austrian Economists.)

If printing money works so well, according to Krugman, then why collect taxes at all? In fact, why work at all? Last year, Krugman claimed that the purpose of the "stimulus" was for its spending, not for any real work that might have been done. Well, as I see it, if the work being done is not useful for any purpose other than spending, why use the scarce resources at all and just line up people and hand them their paychecks?

The "stimulus" is a failure not because of any paucity of government spending but because the politically-oriented disbursements don't address the imbalance of the economic fundamentals and the massive malinvestments of the Bush years that still have not been fully liquidated. (That is due in large part because the government continues to try to prop up the owners of the failed assets, with predictable results.)

Last, but not least, there are the banks. Let's face it; if Krugman really believes that the Bush administration "failed to regulate the banks," then I'd like to sell him a few bridges from Brooklyn. While trying to promote his own pathetic narrative of "the bankers serve THEM, but the people in the White House are on OUR SIDE," he forgets that the symbiotic relationship between Wall Street and the banks is not one of reckless free-enterprisers versus wholesome and good Democratic politicians.

There is good reason that the politicians are cozy with Wall Street. Like Willie Sutton, the know "where the money is," and don't mind helping themselves to a few million or more here and there. Economists I respect much more than I do Krugman (like Bruce Yandle of Clemson University, for starters and Jeffrey Miron from Harvard) have noted for years of the real nature of regulation has been for there to be a "revolving door" between the regulators and the industries they supposedly regulate.

Furthermore, as Eugene Fama (perhaps the most distinguished financial economist in the country from the University of Chicago) pointed out in a recent interview with the New Yorker, it was a mistake to bail out the banks in the first place because -- contrary to Krugman and his friends at the NYT -- no institution is "too big to fail." (I love his line that Krugman "wants to be czar of the world." No doubt, the Big K would run everything perfectly.)

Like his rewriting of the history of regulation and deregulation, Paul Krugman begins with the narrative, and then proceeds to pound square pegs into round holes. That hardly is unusual, as most of us perform that exercise from time to time. However, when most of us are caught, we listen to reason.

Krugman, on the other hands, listens only to himself and the daily set of talking points coming from left-wing Democrats. As I have said many times before, the man is not an economist; he is a political operative. Period.

Krugman Without a Clue

Even when Paul Krugman gets it right, he still gets it wrong. Now, I am not someone who is a knee-jerk critic of the guy, although I generally expect Krugman to blame the wrong people and recommend the wrong “solutions.”

Thus, when I saw the title of his most recent column, “Bankers Without a Clue,” I thought that this might be the day that I can read a Krugman column without cringing. Perhaps, I imagined, he might even use the “bankster” term that I have seen from so many libertarians and Austrian economists. Ah, hope!

Unfortunately, Krugman gave us his tired analysis, and in doing so, he also demonstrated that he was clueless himself about the stagflation of the 1970s. (After all, Krugman being a True Believing Keynesian believes that we should not have both rising unemployment and rising unemployment, since he already has written elsewhere that almost any economic problem can be solved by…printing more money.)

He writes:

Consider what has happened so far: The U.S. economy is still grappling with the consequences of the worst financial crisis since the Great Depression; trillions of dollars of potential income have been lost; the lives of millions have been damaged, in some cases irreparably, by mass unemployment; millions more have seen their savings wiped out; hundreds of thousands, perhaps millions, will lose essential health care because of the combination of job losses and draconian cutbacks by cash-strapped state governments.

And this disaster was entirely self-inflicted. This isn’t like the stagflation of the 1970s, which had a lot to do with soaring oil prices, which were, in turn, the result of political instability in the Middle East. This time we’re in trouble entirely thanks to the dysfunctional nature of our own financial system. Everyone understands this — everyone, it seems, except the financiers themselves.

The first paragraph is correct, although that is because he is stating the obvious. The second paragraph, however, reveals his ignorance of economic history. However, given that Krugman is ignorant on, well, about everything dealing with a real economy, his “Jake Blues-style” series of excuses for missing his bride at the altar (“There was an earthquake, IT WASN’T MY FAULT!!”) seems about par for the guy.

For the record, the stagflation of the 1970s occurred because of a lot of reasons, none of them rising oil prices, which were largely a result of U.S. inflation that occurred after President Richard Nixon in 1971 ended all ties of the U.S. Dollar to gold and gave us a pure fiat currency. (Keynesians want us to believe that rising oil prices caused inflation, when, in reality, the causality chain ran the other way.) Furthermore, he goes back to his tired and wrongheaded narrative about the U.S. financial system:

…there was nothing accidental about the crisis. From the late 1970s on, the American financial system, freed by deregulation and a political climate in which greed was presumed to be good, spun ever further out of control. There were ever-greater rewards — bonuses beyond the dreams of avarice — for bankers who could generate big short-term profits. And the way to raise those profits was to pile up ever more debt, both by pushing loans on the public and by taking on ever-higher leverage within the financial industry.

Yes, yes, it was all about the lack of regulation and the greed of those capitalists who were just following the Ideology of Free Markets. (I am sure that each of those bankers had copies of Atlas Shrugged in their back pockets.) Had the system been regulated by those Wise and Generous Regulators That Populated Washington after the New Deal, all of this could have been averted. What Krugman does not say, of course, is that we had both deregulation and the growth of moral hazard. (In fact, I never have seen Krugman refer to moral hazard, even though the perverse incentives that the various government backstops created made for a “heads I win, tails you lose” atmosphere in which the banks could fall into the “we’re too big to fail” nonsense.)

During the 1970s, Congress vastly expanded both the regulatory apparatus and government spending, and for the first half of the decade, the U.S. Armed Forces were bogged down in Vietnam. The top tax rate stood at 70 percent, the financial system was relatively small and highly-stratified and, as Michael Milken demonstrated, funding for the new high-technology initiatives that drove the economy through the 1980s and beyond came in large part from outside the regulated banking sector, something Krugman ignores (since it does not fit his own ideological narrative).

Furthermore, as the government taxed and regulated the economy into oblivion, thus destroying economic opportunities, it made up for the lack of economic growth (and the extra tax revenues growth would bring) by turning to the Federal Reserve System, which was all-too-happy to accommodate the growth of government by cranking up the printing presses.

Not surprisingly, the rate of inflation exploded during the 1970s and it was not, as previously noted, due to those greedy Arabs jacking up the price of oil on a whim. No, as the government expanded its jihad against private enterprise, the Fed responded by applying the “Krugman Solution” of printing more money in hopes that the activity generated by the new cash would cover the obvious economic bare spots.

As a result of this government “mismanagement” (to use a nice term), the economy experienced bouts of stagflation throughout the decade. Since Krugman cannot bring himself to believe that government taxation, regulation, and a rapidly-expanding fiat currency could have caused this debacle, it must have been OPEC and those greedy oil executives.

Likewise, he wants us to believe that American bankers in the last decade suddenly were seized by Ayn Rand Fever and decided to be greedy, ideology-directed financiers who recklessly leveraged their institutions and then hypocritically begged for money afterwards. Sorry, but these guys were on the dole all along, and given that Krugman never mentions moral hazard, one can see just how clueless (or maybe dishonest) the guy has been all along.

As I see it, the bankers are not clueless at all. They understand the game, they understand that the government is going to clean up the mess that they and their friends in Congress and the Bush and Obama administrations have created, and they understand that their antics are going to give them what they always have wanted: a nice, cozy, financial cartel which will provide sweet political contributions for the political classes, bonuses and high pay for themselves, and very little for everyone else.

And if Krugman cannot see it, then the guy truly is clueless. However, my take on the matter is much more cynical, and I don’t think I need to go any further on that subject.

Prosperity through Road Construction: Shoveling Something other than Dirt

One of the constant themes of modern socialism (and Keynesianism) is the belief that we can create prosperity through government spending on roads. Mind you, roads can help an economy if they are located in places where they can aid commerce by making it possible for relatively cheap transportation that permits wider uses of division of labor.

However, that is not why people like Paul Krugman and other socialists champion tax-funded road building. Instead, they insist that the money spent in itself will revitalize the economy, and that is pure nonsense. Interestingly, this past year has seen a huge amount of government "public works" spending, but the effects have not been what the Krugmanites/Socialists have claimed.

A recent AP article notes that a number of economists have examined the results of this road building, and find them wanting:

Ten months into President Barack Obama's first economic stimulus plan, a surge in spending on roads and bridges has had no effect on local unemployment and only barely helped the beleaguered construction industry, an Associated Press analysis has found.

Spend a lot or spend nothing at all, it didn't matter, the AP analysis showed: Local unemployment rates rose and fell regardless of how much stimulus money Washington poured out for transportation, raising questions about Obama's argument that more road money would address an "urgent need to accelerate job growth."

This is not surprising, but no doubt the Krugmanites/Socialists will have an answer declaring that the real problem was that the government did not spend enough. Spend more, they tell us, and then you will see the positive results.

Why has this spending not had the desired effect? To answer that, one has to understand that an economy is not an amorphous blob into which one pours money in order to make the recipe complete. An economy has a very complex set of relationships in which all factors are valued relative to one another, and in the end the value of those factors of production is determined by the value that consumers place upon the final product that those factors create.

In other words, coal is valuable because it helps to make electricity, which we value. Electricity does not receive its value from coal; coal receives its value from electricity.

Furthermore, an economy that is functioning correctly is one in which the factors either are in balance or are not prevented from finding their proper relationships with one another. By piling on spending and forcing factors to be expended on pet government projects, the Obama administration (like the Bush administration before it) actually is diverting factors from the use that consumers prefer to uses that the political classes and their allies prefer.

This move actually makes economic activity more distorted and prevents the recovery from occurring. In fact, I can say confidently that this forced "massive public works" emphasis is making us poorer because it actually is a massive wealth transfer from the productive to the non-productive economic sectors.

To use a term from Peter Schiff, the government is destroying wealth, and that makes us poorer. Furthermore, as government continues to pound square pegs into round holes, the net effect will be to destroy more wealth and throw many more people into unemployment and poverty.

This is something the Austrian Economists understand instinctively. Keynesians and Krugmanites are clueless, and while they revel in their cluelessness and their ignorance is celebrated in the media as Great Wisdom, nonetheless, they are ignorant people, but (unfortunately) ignorant people who are influencing the government to destroy what is left of our economy.

Indeed, the "shovel-ready" projects are shoveling something, alright, but it is not dirt. I don't think I need to emphasize that the nonsense they are shoveling at us comes from the back end of a bull.

Krugman (Of Course) Ignores Moral Hazard

In his continuous war against anything free market, Paul Krugman thinks he is attacking Wall Street and their behavior because they were "free market." In Krugman's view, financial bubbles are a natural consequence of markets that are not absolutely overseen by government regulators.

In his latest missive, Krugman claims that financial regulation will be "helped" by the formation of a new government "consumer protection agency." He writes:

A lot of the public debate has been about protecting borrowers. Indeed, a new Consumer Financial Protection Agency to help stop deceptive lending practices is a very good idea. And better consumer protection might have limited the overall size of the housing bubble.

Well, there is a problem here. Why were the subprime loans being made in the first place? It was government policy to "encourage" banks to make these loans. Yes, Krugman might deny that the Community Reinvestment Act of 1977 had anything to do with the subprime disaster, but history tells us something different.

The government was demanding that banks loosen their underwriting standards in order to promote the "Ownership Society" nonsense that came from the Heritage and Cato institutes. While some of the ideas were good, the idea that the government push home ownership no matter what was a disaster.

Furthermore, I never have read anything from Krugman that deals with the institutional moral hazard that has existed with the banks and financial insitutions in general. No Greenspan Put, not bailouts of politically-favored firms, no nothing.

So, Krugman gets it wrong once again. Not that he or anyone else in the economics profession cares. Krugman has spoken and since he is a Voice of a God, that is all that is needed. Standards of truth don't matter.

Today's Links, January 8, 2010

A Bremerton, Washington, jury demonstrates why one simply cannot trust an American jury to do what is right. Read the comments section to see that Americans are perfectly happy with a police state and unjust laws.

Yep, we have a couple feet of snow in our yard, and I must admit that the X-C skiing today was as good as I ever have experienced. I'll also admit to being absolutely tired at the end of 90 minutes of up and down skiing. Oh, and more snow is on the way. So much for Albore and "global warming" in Finzel and the surrounding area.

On the Freeman Online site, Mike Van Winkle interviews Becky Akers about the TSA and the idiocy of U.S. airport "security."

I have a commentary about the special tax breaks that corporations receive and how some communities are trying to take back those breaks.

Doug Bandow asks an obvious (but often ignored) question: Why is a country that is flat broke spending so much on military adventures overseas?

Paul Krugman's Christmas Carol

It is the year 2014 and Tiny Tim is ill, but he does not need the generosity of Ebenzer Scrooge to bring him back to health. No, as Paul Krugman insists, the Cratchits

have health insurance. Not from their employer: Ebenezer Scrooge doesn’t do employee benefits. And just a few years earlier they wouldn’t have been able to buy insurance on their own because Tiny Tim has a pre-existing condition, and, anyway, the premiums would have been out of their reach.

But reform legislation enacted in 2010 banned insurance discrimination on the basis of medical history and also created a system of subsidies to help families pay for coverage. Even so, insurance doesn’t come cheap — but the Cratchits do have it, and they’re grateful. God bless us, everyone

Now, Krugman admits that this is just a story, but he has seen the Ghost of Christmas Future and declares:

O.K., that was fiction, but there will be millions of real stories like that in the years to come. Imperfect as it is, the legislation that passed the Senate on Thursday and will probably, in a slightly modified version, soon become law will make America a much better country.

Indeed, we know that the legislation that will place more chains upon us than which bedeviled Jacob Marley is going to be costly, much more costly than Krugman will admit, and I am not about to say that imposing new costs and taking the individual out of medical care will make this a better country. In fact, I would not be surprised if it made the USA a place that people will want to leave, if only to find a place where they can receive adequate care.

Being a skeptic about this impending legislation places me in Krugman’s gunsights. You see, the only possible reason that I could oppose this attempt to impose “universal” medical care is that I want the Tiny Tims of the world to become sicker, and ultimately to die. Lest one think I exaggerate, here is Krugman in his own words:

First, there’s the crazy right, the tea party and death panel people — a lunatic fringe that is no longer a fringe but has moved into the heart of the Republican Party. In the past, there was a general understanding, a sort of implicit clause in the rules of American politics, that major parties would at least pretend to distance themselves from irrational extremists. But those rules are no longer operative. No, Virginia, at this point there is no sanity clause.

Actually, he is wrong, as many of the “tea party” and “death panel” folks are not Republicans, at least in the mainstream sense of the word. They are libertarians and supporters of Ron Paul and others like him, but since Krugman considers Paul and other adherents to Austrian Economics to be ignorant nuts and financial illiterates, they obviously are going to be targets of his scorn. Furthermore, the prospects of “death panels” are quite real; they exist in all of the other countries that have the kind of “universal care” that Krugman endorses.

Although Krugman claims that any “horror story” about medical care in places like Great Britain are nothing but lies, I will present a real-live horror story that tells volumes not only about socialist medical care, but also people like Paul Krugman, who believe that egalitarianism is the highest principle of all, even if it leads to someone unnecessarily dying a horrible death.

Debbie Hirst, a woman living in Great Britain, suffered from breast cancer, which had metastasized. As the New York Times explains, the British National Health Service refused to provide her with Avastin, a drug widely available in the USA and Europe, because the government declared it to be too costly. As the NYT (ironically, given that it is Krugman's employer) explains:

…with her oncologist’s support, she decided last year to try to pay the $120,000 cost herself, while continuing with the rest of her publicly financed treatment.

By December, she had raised $20,000 and was preparing to sell her house to raise more. But then the government, which had tacitly allowed such arrangements before, put its foot down. Mrs. Hirst heard the news from her doctor.

“He looked at me and said: ‘I’m so sorry, Debbie. I’ve had my wrists slapped from the people upstairs, and I can no longer offer you that service,’ ” Mrs. Hirst said in an interview.

“I said, ‘Where does that leave me?’ He said, ‘If you pay for Avastin, you’ll have to pay for everything’ ” — in other words, for all her cancer treatment, far more than she could afford.

Officials said that allowing Mrs. Hirst and others like her to pay for extra drugs to supplement government care would violate the philosophy of the health service by giving richer patients an unfair advantage over poorer ones.

Patients “cannot, in one episode of treatment, be treated on the N.H.S. and then allowed, as part of the same episode and the same treatment, to pay money for more drugs,” the health secretary, Alan Johnson, told Parliament.

“That way lies the end of the founding principles of the N.H.S.,” Mr. Johnson said.

Indeed, this is a most telling story, and according to the NYT, Hirst was not alone as many other people had similar tales. (Most likely, Krugman would accuse all of them of lying or, worse, wanting to upset those egalitarian principles that will make these sorry events inevitable.)

Keep in mind that the National Health Service in this case was acting as a “death panel.” (Of course, “death panels” don’t exist under socialist care; Krugman tells us so.) However, because of the adverse publicity, the NHS backed down and paid for Hirst’s Avastin. Nonetheless, this episode gives us an important window in examining the institutional nature of socialist medicine.

As anyone who ever has dealt with a bureaucracy knows, the most important thing is that the people working in those bureaus protect themselves and the government. The real purpose of socialist medicine is not making sure that everyone who needs medical care can receive it.

Instead, the real purpose of such a medical regime is to ensure that all people receive the same care, even if that care is substandard. (There is an exception: people who are politically-connected will be jumped to the head of the line and will find that the finest health facilities are reserved for them. For example, when Michael Moore took Americans to Cuba so they could experience medical care under socialism, he took them not to the facilities that regular Cubans frequent. Instead, they went to the care facility that exists exclusively for political elites, something Moore failed to tell his audience.)

I wish that Krugman’s invective was limited to the “death panels” crowd, but he next turns on those who are concerned about the costs of this legislation:

A second strand of opposition comes from what I think of as the Bah Humbug caucus: fiscal scolds who routinely issue sententious warnings about rising debt. By rights, this caucus should find much to like in the Senate health bill, which the Congressional Budget Office says would reduce the deficit, and which — in the judgment of leading health economists — does far more to control costs than anyone has attempted in the past.

But, with few exceptions, the fiscal scolds have had nothing good to say about the bill. And in the process they have revealed that their alleged concern about deficits is, well, humbug. As Slate’s Daniel Gross says, what really motivates them is “the haunting fear that someone, somewhere, is receiving social insurance.”

How do we know that this bill will “reduce the deficit”? Why, the bill declares it to be so, and the accounting methods contained in this bill “prove” it. Now, according to Mark Hemingway, there are some accounting tricks in this legislation, and I suspect that if private firms used the same accounting methods, some people would be hauled off to prison, and Krugman would lead the cheerleading squad for the prosecution.

For example, according to Hemingway:

In order to make health care legislation sound cheaper than it is, the Senate health care bill begins collecting major tax increases and fees immediately and delays the bill's major spending provision for four years. So cost projections bandied about in media reports are taken from from 2009 to 2019 and appear substanially cheaper than when the legislation's spending is in full effect from 2014 to 2024.

Even this dishonesty is built upon the assumption that the projected revenues of these massive tax increases will match the actual revenues, something that is highly doubtful in the current economic climate. One might recall that Jeffrey Skilling went to prison in part because Enron aggressively counted all accounts payable as present income, as opposed to Enron’s counting the income when the money actually came in. (This was legal, but the government still found a way to criminalize it.)

Furthermore, Krugman commits the logical fallacy of “appeal to authority” in his declaration that since the “leading health economists” have approved this bill and its fiscal language, then there is nothing left to argue. Thus, Krugman reasons, those critics who are concerned about the costs of the bill really are saying this because they want others to get sick and die.

As for “controlling costs,” Krugman demonstrates once again that he is not an economist. No government can successfully mandate “lower costs.” Governments can place price controls and do like the British NHS and deny certain care, which means that individuals suffer and die prematurely. Such actions might show up on official balance sheets as “lower costs,” but economically speaking, that is fiction.

Whenever governments attempt to impose “cost controls,” they create other dislocations that are costly to people who cannot obtain certain goods precisely because of the “cost control” mechanisms. When people must suffer because government authorities have denied medical care, that is a cost borne by the individuals and their families. When people die prematurely, that is a cost that is borne by others, and it is every bit as real a cost as anything that appears on a government spreadsheet.

Given the record of government medical care, it is easy to envision a completely different outcome to the Tiny Tim Cratchit affair. Instead of assuring that Tiny Tim receives the medical treatment he needs to survive, the government health authorities declare that it is too costly to treat the lad and suggest that he take lots of painkillers (which the government provides for free) that will keep him out of pain until he dies (and, thus, stops costing the government so much money).

Outraged at this situation, Ebenezer Scrooge declares that he gladly will pay for all of Tiny Tim’s treatment, only to be rebuffed by the government, which declares that paying for Tim’s care will undercut the very basis of the government’s health policies. The government announces that because Scrooge does not have enough money to pay for everyone’s medical care, then he cannot be permitted to pay for anyone’s care, including care for himself.

When this situation becomes public, Krugman declares that it only is a “scare story” and is patently untrue. And, if it is true, Krugman continues, it is a necessary event, since one “must break some eggs to make an omelet.”

God bless us everyone, for when this bill becomes law, we will need to invoke God’s blessing if only to stay healthy.

Climategate and the End of Science

For “climate change” skeptics like me, the recently revealed emails from scientists who aggressively have promoted the current political doctrine are very telling. Not surprisingly, those at the center of this controversy are claiming that the words we have read mean nothing, and that governments must continue their environmental policies – or else.

A gaggle of scientists, journalists, academics, and politicians have been telling us for years that unless governments can push through policies that will end modern life as we know it, then “global warming” will, uh, end modern life as we know it. Another way to put it is that unless the governments of the earth agree with one another to commit suicide, we are going to die.

Perhaps, the best analogy for this entire affair is the Wizard of Oz’s telling Dorothy and her friends to “pay no attention to the man behind the curtain.” When scientists explain in private emails how they try to make sure that only their views are published in academic journals, but now tell us they really are just trying to keep “bad science” out of the discourse, then one only can conclude that this is an update of the famous movie scene.

As one who has published a number of academic papers, I can recognize a rigged system, and what Americans have had foisted on them for the last decade is fraudulent. However, we need to understand how the game is played and how the outcomes are fixed.

In 1998 three researchers published a paper that claimed that for thousands of years global temperatures had held steady, but in the last century, as people allegedly released more carbon dioxide into the atmosphere, world temperatures suddenly shot upward, creating the infamous “hockey stick” effect. For environmentalists and politicians like Al Gore, this was a godsend. We had “proof” that human beings were causing “global warming,” and unless something was done now, we were going to burn up the earth.

A decade earlier, NASA scientist James Hansen had testified before Al Gore’s Senate committee that not only had “global warming” arrived and that it was human-caused, but the drought that hit much of the U.S. farm belt that summer was a direct result of that warming. (That the next summer was relatively cool and wet also was attributed, perversely, to warming. In fact, the True Believers have attributed every cold day and every snowstorm to the same thing: global warming.)

The “hockey stick” was all that was needed to move the process from creating mass hysteria to “doing something,” which has meant draconian environmental policies that already are creating perverse economic effects. Not surprisingly, Gore made the “hockey stick” the centerpiece of his An Inconvenient Truth documentary, which won him both an Oscar and the Nobel Peace Prize.

However, the “hockey stick” itself had huge problems. The first was that other scientists could not replicate the results using the same data. When one publishes a paper with statistical analysis, one is supposed to make the data available so that others can try to find the same results, which is a powerful tool in keeping researchers honest.

It turned out that the mathematical algorithm used to transform the data was created in a way that no matter what one put into the equation, one received the same results. This is fraud, pure and simple, but because the “hockey stick” resonated with environmentalists and their political allies, it became the centerpiece for anyone who wanted to claim that modern economies are killing the planet.

Furthermore, governments have rigged the game by funding most “climate science.” How likely are they to finance studies that don’t justify the political class’s ambition to control the lives of others?

Hansen demanded to Congress that the executives of energy companies be tried for crimes against humanity and nature because they have given the public “misinformation” about global warming. And Gore has called for energy executives to be charged with securities fraud for denying its severity.

Their “science” may be a joke, but these people are dead serious about imposing their will.

Krugman: Blame the Speculators

Paul Krugman sees lots of villains in the current downturn. Of course, there are those people who think that free markets are a good thing, so they obviously are to blame. Then there are the Bushites, who did not believe enough in the wonder and majesty of governmental powers, so they failed to create Paradise on Earth.

But there is more. Krugman on other occasions has blamed the Chinese for our economic malaise, but now he has another culprit: those "socially useless" speculators.

I find it most interesting that Krugman resorts to the Last Refuge of an Economic Scoundrel when he points the finger at those people who do not have everlasting trust in the promises made by politicians. Now, there are times when Krugman rejects the "speculators are at fault" argument. For example, I don't recall Krugman agreeing with Ken Lay's contention that the short sellers brought down Enron, although given Krugman's explanations of the downturn, Lay's point would be as legitimate as anything from Krugman.

(Note: I believe that Lay was wrong. Short-sellers by themselves cannot make a stock price plunge and stay down permanently any more than they can bring down an entire economy.)

When the government of Great Britain 40 years ago was inflating like mad and engaging in all sorts of accounting trickery, currency buyers began to short the Pound. Of course, the officials of Britain's Labor government did not blame their reckless policies; no, it was the fault of the "Gnomes of Zurich." Yes, those bad men in Switzerland were conspiring to bring down the Pound.

Unfortunately, that mentality exists today, and I am not surprised that it is Krugman leading the anti-speculation charge. Anyone familiar with finance know that speculators and short-sellers do not control markets; they expose the shortcomings of market participants. Speculators did not short Enron stock because they thought it would be fun; they shorted it because they believed (correctly) that it was overpriced.

In his column today, Krugman declares that a lot of financial transactions are "socially useless," and should be taxed. My guess is that he would include short-selling among those transactions, and in that he is aping his spiritual mentor, John Maynard Keynes, who believed that the sale of stock in secondary markets also was "socially useless."

Krugman, in his condemnation of the "speculators," ignores the 800-pound gorilla sitting in the room: the moral hazard that government created in the financial markets that ultimately led to the financial meltdown. Why does he ignore things like the "Greenspan Put" and the various bailouts? Easy, government-caused moral hazard does not fit his socialist worldview.

In Krugman's world, private enterprise itself is the cause of instability, and government (as long as the Right People are in Charge) is the white knight. Thus, it hardly surprises me that he resorts to the "Gnomes of Zurich" nonsense.

Unemployment Nation

The rate of unemployment in this country continues to grow, and in response the government is trying to bankrupt us with even more spending. This map outlines the growth of unemployment county-by-county since January 2007.

Of course, Paul Krugman will claim that this "proves" that the government must print even more money, as all True Keynesians believe that printing money is how an economy generates wealth. For those who wish to learn more about the man who gave us the "Keynesian solution," here is a great piece by Murray Rothbard about John Maynard Keynes.

ObamaCare: It will be an unmitigated disaster

It now seems inevitable that the Congress will pass the "healthcare" bill, and we are going to be stuck with a huge financial disaster. I wrote commentary for the website of the Foundation for Economic Education, in which I compare this moment to the 1938 disaster at Munich.

One thing we need to understand is this: the government of the United States is broke. It is as broke as the government of California, of Michigan, and of nearly every other state. The notion that the Federal Reserve and Congress have "stopped" the recession by pouring newly-printed money everywhere is pure foolishness. This government cannot take on a new, multi-trillion-dollar program for which the means to pay is going to be invoking confiscatory taxation.

This will be disaster for the U.S. economy. Americans have come to believe that the government can order anything, and it will be done. That is not how an economy works; if that were true, North Korea would be the world's wealthiest nation, and the Iron Curtain never would have fallen.

Furthermore, we can look for massive numbers of new criminal penalties in this "law," and that means that increasing numbers of medical providers will be arrested and imprisoned. Don't think this won't affect you and your family; as the government criminalizes more and more actions that formerly were legal, an increasing number of people will be caught in the federal maw and have their lives destroyed.

What people forget is that when government criminalizes activity that should be legal, we will see less and less medical care provided, and fewer people willing to risk medical careers. Now, most Americans now approve of the fact that the USA has one quarter of the world's prisoners, but some of them will change their tunes when either they or their friends and loved ones will be paraded before the TV cameras wearing chains and orange jumpsuits.

This will be touted as a huge political victory for Obama and the Democrats. However, I predict that as the reality of this horrible bill comes to the fore, there are going to be some Democrats next year who are going to wish they had voted against it.

Krugman: It is China's Fault

A friend of mine suggested calling this site, "Krugman in Wonderland," but my wife objects, so it is obvious I need to keep peace in the family. Nonetheless, I am grateful to Paul Krugman for providing so much material that helps keep me writing. Granted, this perch is not as lucrative as Krugman's New York Times location on the editorial page, but a person has to do what he can.

The latest outrage comes today in his column that blames China for much of the economic downturn. Granted, today's column is not as outrageous as his column last Friday in which he claims that the way to end unemployment in the United States is for Congress to write laws making it nearly impossible to fire workers. Yeah, they have tried that in Spain, which has had double-digit unemployment for years, as employees carry liabilities that make it a real danger for companies to employ anyone.

Without going into a lot of detail about how currencies work in relation to one another, Krugman attacks the Chinese government for following a policy to keep its currency, the yuan, low relative to the U.S. Dollar. China does this in order to make its goods attractive for export, as the government there is trying to emulate what Japan did in promoting its own export-first policy.

Because I am no fan of government fiat currencies, I am not going to approve of China's policies, which actually punish the Chinese workers who must pay much more for their goods than they would if the yuan could float in a free market. Nonetheless, Krugman contends that somehow China is making itself better off at the expense of everyone else. That simply is not true. He writes:

So picture this: month after month of headlines juxtaposing soaring U.S. trade deficits and Chinese trade surpluses with the suffering of unemployed American workers. If I were the Chinese government, I’d be really worried about that prospect.

Unfortunately, the Chinese don’t seem to get it: rather than face up to the need to change their currency policy, they’ve taken to lecturing the United States, telling us to raise interest rates and curb fiscal deficits — that is, to make our unemployment problem even worse.

And I’m not sure the Obama administration gets it, either. The administration’s statements on Chinese currency policy seem pro forma, lacking any sense of urgency.

That needs to change. I don’t begrudge Mr. Obama the banquets and the photo ops; they’re part of his job. But behind the scenes he better be warning the Chinese that they’re playing a dangerous game.

No, the Chinese are not playing a "dangerous" game; they are playing a stupid game, because they are not permitting themselves to enjoy the fruits of their very hard labor. At the same time, one must remember that the U.S. Government has played a very dishonest game with the Chinese.

Why do I say that? Well, because it is true. For the last decade, the U.S. Government has sold trillions of dollars of debt (which the Federal Reserve System is rapidly depreciating with inflation-ravaged dollars) to China, and in return, Americans get consumer goods. Now that the Chinese realize that they have been played for suckers, our "experts" now accuse them of starting the problem in the first place, as though it was the Chinese who created the housing bubble and run the Fed.

Granted, that kind of logic is hard for someone like Krugman to understand, as he believes an economy is nothing more than a "blob" into which we throw newly-printed money. Like Aaron, who told Moses that the Golden Calf simply appeared after he threw gold jewelry into a fire, Krugman believes that an economy magically appears simply when governments print money. Which story is less believable? I'll let readers decide.

Did Cash for Clunkers “Revitalize” the Auto Industry?

During a recent conversation with a friend, he told me that the Cash for Clunkers program had “done wonders” for the auto industry. Indeed, he hardly is alone.

Automotive News recently editorialized that the program “worked,” and now it is time to “build on its success.” The editorial declared:

The August U.S. light-vehicle sales tally reported last week proves that the government’s cash-for-clunkers program was a huge success. Now it’s up to automakers and their dealers to be clever marketers and salespeople to maintain and build on the clunkers momentum.

From the beginning, there were doubters who, for political or other reasons, said the clunkers program was little more than a federal handout to the Detroit 3. But the rising tide of enthusiasm among U.S. consumers for purchasing new cars lifted many automakers, not just those with a fleet full of fuel-sippers.

The writer adds:

Better yet, dealers say cash for clunkers sparked a positive shift in consumer attitudes that will lift new-car sales in the months ahead, especially if economists are right about positive indicators.

This editorial was written two weeks ago, The industry has come back to earth with a thud since then. The Boston Globe reports that things are rather quiet in the aftermath:

...once the federal money dried up, so did the sales rally. Now, customers at dealerships like Silko Honda in Raynham are few and far between, and inventory is once again accumulating.

Manager Adam Silverleib said business was “pretty intense” as a result of the federal stimulus program, with the dealership hustling to accommodate customers and handle the piles of paperwork required for them to receive reimbursement on vouchers. “Now we’re kind of back to where we were in the spring,’’ he said.

And what was it like in the spring? It was called a recession, with recession-like sales figures to boot. In other words, one can liken the Cash for Clunkers program to throwing lighter fluid on damp wood. Flames will rise up for a few minutes, but unless the wood catches fire, the lighter fluid was next-to-worthless.

Contrary to what Automotive News breathlessly declared, the Cash program pretty much was what anyone with common sense and decent economic training could have predicted. It spurred sales for a while, but after the money dried up, so did the new car sales.

I contend, however, that where Automotive News saw “momentum” for the auto industry, in reality this program has brought long-term economic damage. To understand why the program was, on net, economically harmful, one first must understand Frederic Bastiat’s “broken window fallacy.”

Since most, if not all, readers are familiar with this fallacy, I don’t need to repeat it. However, the most important part is that while the townspeople believed the broken window brought prosperity, it actually reduced their wealth because they were forced to use resources to recreate a window which already had existed, thus depriving the community of the use of those resources elsewhere.

With Cash for Clunkers people turned in vehicles on which they were making small if any payments.. In normal situations, if they had wanted another vehicle, many would have traded in what they had for another used car or truck. Instead, even though they were given a fairly large down payment, many purchased cars that substantially raised their personal debt.

To make matters worse, the government ordered the dealers to destroy the engines of the so-called clunkers, many of which were not clunkers at all. Thus the government managed to destroy a huge amount of wealth, all in the name of creating wealth. Furthermore, if any automakers or dealers used the Clunker program as a reason to engage in new capital expansion, they quickly will find that those “investments” really are malinvestments, which means they will be worse off in the long run because they diverted resources to lines that won’t be profitable.

Like so many government programs, Cash for Clunkers, while creating some short-run benefits for a few people, will have negative effects in the long run. I suspect that even the editors of Automotive News will realize sooner or later that it was a lemon.