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.

Paul Samuelson, RIP

The recent death of Paul Samuelson, the 1970 Nobel Prize winner in Economics, is ironic, for it was Samuelson who popularized Keynesian economics in this country, and the Obama administration has jumped fully onto the Keynesian bandwagon. Thus, Samuelson dies even as his influence grows, at least among the political classes.

I never was a fan of Samuelson, and while I will try not to speak too much ill of the recently departed, nonetheless I think the guy was bad for economics and he leaves a legacy of economic wreckage and bad theory. However, I will concentrate today on one of his legacies: the transformation of economics from something that an educated layperson could understand to a branch of inferior mathematics.

Samuelson published his doctoral dissertation in 1948 with the title of Foundations of Economics. In that book, he argued that economics had to adopt the analysis of the physical sciences if it was to be accepted as a science at all. While his famous textbook was the standard of college economics classes for many decades, it was Foundations that ultimately helped to create the intellectual morass that is academic economics today.

Before Samuelson hit the scene, the top economic journals published essays that could be read by any educated individual. For example, F.A. Hayek's 1945 essay "The Use of Knowledge in Society" in American Economic Review is a real classic which is timeless in its relevance and has been read by thousands of people, including many who have had no training in higher math. Ronald Coase's "The Problem of Social Cost," published in 1960 in the Journal of Law and Economics, is not written in the usual mathematical style that dominates the journals today, yet it is one of the most cited papers in academic economics.

I can think of no advantage that using high-level math brings to economic analysis. None. There are numerous people who can write mundane and irrelevant papers but use lots and lots of "squiggles," and they can be published. Write a cogent essay, however, and one is relegated to the lower-tier journals because of its "lack of rigor."

Unfortunately, academic economists today confuse difficulty in reading with "rigorous" application. If one can write "Mary had a little lamb" in multi-variable calculus to a point where few people can understand what is written, then according to academic economists, one has engaged in writing "rigorous" analysis. What nonsense.

My sense is that even had Samuelson not lived, academic economics would have fallen into its current state of irrelevance. However, it was Samuelson who really got the ball rolling and it was Samuelson who ultimately was the main influence in destroying many of the real foundations of economic analysis. It is doubly ironic that the book that began this destruction of the economic foundations was entitled Foundations of Economics.

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.

Obama attacks the poor -- again

President Obama, who supposedly is a man who cares about the poor, has decided that he needs to prop up some of the wealthiest industrial workers in the world, the American labor unions. By levying a 35 percent tariff against tires from China, Obama not only is forcing people to pay more for tires, but this ruling also will result in more traffic deaths and injuries.

Of course, the New York Times has portrayed this move as a "victory" for this country, as though we "win" by being forced to pay more for goods, and especially goods as important as tires. Unfortunately, the Times, which always claims to be on the side of consumers, says nothing in its article about how this will have a negative effect on our economy, making people poorer in the bargain, but enriching people who already are at the top of the wage ladder.

What does this mean for people of lower incomes? It means that many of them either will pay more for tires or they will put off buying new ones, which almost certainly will result in more auto accidents, and more deaths and injuries on the highway. Of course, most of the people who will be killed and injured are not union members, so what does Obama care?

Like other economists, Krugman also gets it wrong

In 1998 Paul Krugman wrote an attack on the Austrian theory of the business cycle (ATBC), saying that it was about as credible as the “phlogiston theory of fire.” Not surprisingly, he managed not only to mislabel the ATBC (calling it a “Hangover Theory”) but also proved incapable even of describing the theory that had been so well laid out by Ludwig von Mises, F.A. Hayek, and Murray N. Rothbard.

I mention this ten-year-old sarcastic foray into economics because Krugman has struck again, this time in a New York Times Magazine article, “How Did Economists Get It So Wrong?” It turns out, according to the 2008 Nobel Prize winner, that economists falsely claim that capitalism is “perfect”:

Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.

That was not the only problem with economists, as Krugman sees it. Not only did they have a wrong-headed faith about free markets, but they also had forgotten the Great Lessons of Keynesianism:

Keynes did not, despite what you may have heard, want the government to run the economy. He described his analysis in his 1936 masterwork, “The General Theory of Employment, Interest and Money,” as “moderately conservative in its implications.” He wanted to fix capitalism, not replace it. But he did challenge the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps. [Emphasis added.]

He adds:

It’s important to understand that Keynes did much more than make bold assertions. “The General Theory” is a work of profound, deep analysis — analysis that persuaded the best young economists of the day. Yet the story of economics over the past half century is, to a large degree, the story of a retreat from Keynesianism and a return to neoclassicism.

One should read Henry Hazlitt’s classic The Failure of the “New Economics” to see something other than the fawning prose that Krugman writes about Keynes. There is so much nonsense in these two paragraphs that it would take a large volume to refute it all. I will concentrate on just a few things.

First, it is amusing to see Krugman write that Keynes was concerned about economic “fundamentals,” given that Keynesian theory treats all capital and, indeed, all assets as being homogeneous. There are no economic fundamentals in the Keynesian system; indeed, Keynes (and Krugman) call for inflation, which is general in scope, as a way to end unemployment in specific economic sectors.

Second, like Keynes, Krugman has declared that printing money will solve nearly any economic problem (although he has not used the specific Keynes quote on inflation, that it “turns stones into bread”). As Hazlitt noted in his classic, Economics in One Lesson, inflation always leads to economic disaster.

Third, as the ATBC so aptly points out, it is inflation that creates the boom-and-bust cycles. If inflation is the cause of the problem, then even more inflation cannot be the solution.

Krugman is correct when he says Keynes made “bold assertions,” but one searches The General Theory in vain for something profound. As Hazlitt noted, there is nothing in the book that is both true and original: What is true is not original, and what is original is not true.

Krugman is right that economists “got it wrong.” However, it was not a religious belief in free markets that caused the trouble, but rather government intervention, something Krugman never seems to mention in any of his columns.

Mises, Human Action and Economic Calculation

Six decades ago Ludwig von Mises published his masterpiece, Human Action, and it grows in importance. I was unaware of the book’s existence and its timeless truths through my formative years, but one of Mises’ students, William Peterson, introduced it to me in 1980, and I forever will be grateful.

Because Human Action covers a vast amount of intellectual territory, I will deal only with economic calculation. If there is a Misesian term to which I return again and again, it is “economic calculation,” for that term explains why socialism is fated to fail – always.

Mises dealt with economic calculation at length in Socialism, which he published in the early 1920s, and he returns to the theme again in Human Action, and his points are well-taken. At the time he wrote these books, American, British, and European intellectuals had fallen in love with state-run centralized economic planning. People who should have known better had convinced themselves that the U.S.S.R. had created a paradise via central planning in which all people would prosper, or at least have all their needs met.

Most advocates of socialism believed that improvements in technology had made market economies obsolete, and that economic planners would match technology to scientific knowledge and, Voila!, a prosperous economy would rise from the mix. Mises knew better, and while the “great minds” of the time believed that Oskar Lange had “beaten” Mises in the famous “Socialist Calculation Debates” of the 1930s and 1940s, nonetheless it was Mises who prevailed in the end.

Mises noted that production of goods is not a technological activity, fundamentally speaking, but rather an activity that is economic in scope. He writes in Human Action:

…most means are not absolutely specific; most of them are fit for various purposes. The facts that there are different classes of means, that most of the means are better suited for the realization of some ends, less suited for the attainment of some other ends and absolutely useless for the production of a third group of ends, and that therefore the various means allow for various uses, set man the task of allocating them to those employments in which they can render the best service. Here computation in kind as applied by technology is of no avail. Technology operates with countable and measurable quantities of external things and effects; it knows causal relations between them, but it is foreign to their relevance to human wants and desires. (p. 207)

In other words, technology is a servant of economic activity, not its master. The decisions as to what should be produced, who should produce it, how it should be produced, and who receives the product are determined via a system of prices and private property. However, Mises added one more important point that often is lost in the discussion: economic calculation depends upon profits and losses.

Profits and losses, Mises noted, direct production by demonstrating where resources are most highly valued. If one can take a present-day example, it has been with the meltdown of financial markets on Wall Street. By bailing out firms that directed hundreds of billions of dollars into dead-end investments, the government has interfered with the allocation of capital and has forced markets to place higher “values” on inferior uses of resources, all because politicians have ordered these things.

As I recently pointed out, profits are the reward for entrepreneurs who have directed resources to their highest-valued uses, and a profit system not only is appropriate for medical care, but it is mandatory if we want high-quality care to be made available to as many people as possible. Profits are not an “added cost” to production and distribution of goods; they are a means by which entrepreneurs efficiently use resources.

Mises noted that profits and losses enable entrepreneurs to engage in the necessary economic calculation needed for an economy to meet the needs and wants of people. What he wrote 60 years ago is just as relevant today as it was then, even if policymakers are as deaf and blind today as they were in 1949.

Paul "Hair of the Dog" Krugman

Paul Krugman loves to remind people that he predicted the housing bubble collapse before others did. (Actually, I think he is confusing himself with Peter Schiff, but I digress.) Well, maybe there is another reason why The Great One did such a good self-described job in "predicting" the bubble: He called for the government to create one.

Now, in Krugman's defense, he did not demand that the Fed create a new housing bubble; he just suggested it as a good idea to jumpstart more consumption. He wrote back in 2002:

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

This, my friends, is better known in my home state of Tennessee as the "hair of the dog," which is what some of the Good Ole Boys take after a night of guzzling down lots of "Lynchburg Lemonade." Since the stock market was in the toilet, what better way of trying to "stimulate" consumption without the economy producing anything than to do it in the housing market!

The problem here is not withKrugman's recommendations, as awful and stupid as they were (and still are). The problem is more basic; Krugman's Keynesian "economics" is stupid, wrong-headed, and as crude a "theory" as the economics profession could create.

To his "credit," Krugman actually admits that he wrote that Really Stupid Comment. Furthermore, he does not exactly disown it:

Guys, read it again. It wasn't a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that's just what happened.

Uh, sorry. It was advocacy. Bubbles exist because of easy credit and easy money, and Krugman already is on the record as claiming that inflation will give an economy "traction," which is Keynesian-speak for "stimulating" spending.

Dean (Wormer) Krugman to the Band: Stay the Course

All of us who warmly remember “Animal House” can recall the scene at the end in which the band is trying to walk through the wall at the end of the alley, having been led there by one of the pranksters from Delta House. Obviously, like the rest of the movie, this moment is an absurdity, but nonetheless I can think of no better way to describe Paul Krugman’s latest exhortation to the Obama administration to “stay the course.”

Krugman’s most recent book is The Return of Depression Economics and what he says in his column is consistent with the advice he gives in the book: when in doubt, print money, lots of it. If I am to stick with the “Animal House” analogy, Krugman’s advice would be analogous to Dean Wormer urging the Deltas to have yet another toga party, break out the booze, and get drunk, really drunk.

Krugman himself realizes that his advice sounds a bit off, given that “conventional” economics actually emphasizes things like work, production, and living within one’s means:

For this is the third time in history that a major economy has found itself in a liquidity trap, a situation in which interest-rate cuts, the conventional way to perk up the economy, have reached their limit. When this happens, unconventional measures are the only way to fight recession.

Yet such unconventional measures make the conventionally minded uncomfortable, and they keep pushing for a return to normalcy. In previous liquidity-trap episodes, policy makers gave in to these pressures far too soon, plunging the economy back into crisis. And if the critics have their way, we’ll do the same thing this time.

And what are those “conventional” things? Indeed, they might include concern about federal budget deficits that are approaching numbers so gargantuan that it is difficult to place them in any perspective. The coming deficit, nominally speaking, will be greater than the entire federal budget of just eight years ago. Their also are concerns about inflation, although I would expect an “economist” who claims that inflation cures just about every economic problem not to have a problem with printing money.

Nonetheless, we really should ask just what is this “course” that the Nobel Prize winner claims must be kept in place at all costs, and what would be the real cost of abandoning this “path of wisdom.” To do so, however, we have to remember that Krugman is a fervent disciple of John Maynard Keynes, and to him the General Theory is to economics what the Bible is to Christianity.

Keynes argued that the standard views of economics were mistaken. Thrift was bad, especially if lots of people saved at the same time. There was no particular “structure of production” in which an economy dealt with a mix of capital and consumption goods. An economy simply was (and is) a “blob” in which only spending matters, and it does not matter on what one spends, just as long as enough spending exists to place resources at “full employment.”

This is a strange economy, indeed, and it fails to address an important point about just what an economy really is. In the real world, an economy is the social organization that comes about when large numbers of people act to alleviate scarcity. Economies are based upon exchange, since all production itself is a form of exchange, something Murray Rothbard makes abundantly clear in his classic Man, Economy, and State.

Contrary to what Krugman seems to believe, an economy does not just happen. Capital does not appear out of nowhere, and people do not develop special employment skills just to be doing something. Furthermore, there is no decent causal mechanism in Krugman’s pushing of Keynes’ “liquidity trap” theory. In Krugman’s world, people suddenly stop spending, the economy moves into the “liquidity trap,” and then government must rescue it by spending, spending, and more spending.

To come up with such an interpretation of events, Krugman must become creative with his facts. Witness the following claim:

The U.S. economy grew rapidly from 1933 to 1937, helped along by New Deal policies. America, however, remained well short of full employment.
Yet policy makers stopped worrying about depression and started worrying about inflation. The Federal Reserve tightened monetary policy, while F.D.R. tried to balance the federal budget. Sure enough, the economy slumped again, and full recovery had to wait for World War II.

Whatever economic recovery there was in the 1930s was hampered by the New Deal, not driven by it. The first New Deal was an attempt to organize the U.S. economy into a series of hundreds of cartels in which firms held back output in order to keep prices high. On the agricultural front, the government ordered the destruction of thousands of acres of crops, once again to keep agricultural prices high.

This is not policy that drives recovery; this is an attempt to keep a recovery from happening. There was “rapid” growth (or at least by GDP numbers) because the economy had fallen so far into a hole by 1933 that any growth would look spectacular. However, the rate of unemployment was still well in double-digits in 1937, which hardly was a recovery.

There is something else Krugman does not mention, although Robert Higgs does in his classic 1997 paper on “Regime Uncertainty.” Indeed, if one reads Krugman regularly, one finds out that in the period from 1936 to 1938, the Franklin Roosevelt administration was following the Krugman playbook. First, FDR railed against the “economic royalists” just as Krugman has done from his own perches. Second, the tax increases that Krugman believes were harmful were the “soak the rich” taxes that Krugman and others of his ilk have supported. (I remember Krugman blaming tax cuts for the recession of 2001-02, so the man cannot have it both ways. If cutting taxes causes a recession, then raising them cannot cause one, too, not even by Krugman’s logic.)

To add to the Krugman playbook, the U.S. Supreme Court ruled in favor of the National Labor Relations Act in 1937 (in response to FDR’s announced plan to “pack the court”) and upheld a number of other government initiatives to raise business costs, make it easier for labor unions to organize businesses, and make it easier for the government to attack private property rights. Indeed, this would be a Krugman paradise, a plan for permanent prosperity.

In Krugman’s world, prosperity is created by spending, and it does not matter who spends what on whom just as long as someone is spending. If consumers cannot empty their wallets fast enough, then government can do it, and when governments run out of revenues, they can create them via the printing press. Borrowing and printing simply are different sides of the same coin, and to do anything less, Krugman argues, would be disastrous:

Well then, what about all that government borrowing? All it’s doing is offsetting a plunge in private borrowing — total borrowing is down, not up. Indeed, if the government weren’t running a big deficit right now, the economy would probably be well on its way to a full-fledged depression.

If that is a “course” to economic recovery, then the brick wall in front of the “Animal House” band was nothing more than a temporary obstacle. Understand that businesses do not borrow simply to be spending money; they borrow because they believe the investments they are making with borrowed money will lead to future growth of their businesses, which will enable them to pay back those loans. It is that simple.

Unfortunately, Krugman’s “Wonderland” is devoid of such logic. Krugman is like Dean Wormer himself butting his head against the wall and demanding that the rest of us do the same. Wall? What wall?

Krugman: Post Hoc Ergo Propter Hoc

One of the first lessons we learn in statistics is that correlation does not necessarily mean causality, and the farther one goes in learning stats, the more one understand just how important that point becomes. Unfortunately, the "elites" in American education have not learned that lesson, and heading the list is none other than -- drumroll, please -- Paul Krugman.

In his latest blog post, Krugman gives us a graph which shows that unemployment in the United States increased after the Reagan tax cut of July 1981. He puts in graph in answer to a comment made by House Minority Leader John Boehner of Ohio that the Obama stimulus program has been followed by higher unemployment.

Once again, we see Krugman's dishonesty in action. First, and most important, Krugman elsewhere has blamed recessions on tax cuts, as he was doing in the early years of the Bush administration. Now, an economic downturn must have a cause, so when Krugman declares that tax cuts cause recessions, he needs to have a causal mechanism. Not surprisingly, he fails to give one. (When one is a political operative, as is Krugman, one does not need to bring logic into the picture, and especially economic logic.)

Second, if he is going to blame the tax cut for higher unemployment because higher unemployment followed the tax cut, then such logic needs to be applied to the stimulus as well. Instead, we see the infamous post hoc ergo propter hoc fallacy in action.

Now, I would not be surprised to see someone like Rahm Emmanuel or Boehner use this fallacy, as politicians are famous for butchering logic. However, when a Nobel Prize-winning economist does it, we have to ask questions. Krugman carries a heavier burden than do politicians, for we expect nothing less than lies from them.

When Krugman butchers the truth, we have to ask questions as to his motivation. Krugman is famous for assigning mad motives to anyone who disagrees with him, but I would like to turn this back on him. Why should Krugman be free to fudge on the truth?

The thing to keep in mind is that to Krugman, there are no such things as economic fundamentals. There is no structure of production, and there is no capital malinvestment. Instead, the entire economy is a "blob" that operates on a mysterious "circular flow." Thus, if Krugman's logic is correct, then the implementation of a government "stimulus" should have immediate results. After all, this is a guy who wrote in his latest book that nearly all economic problems can be solved simply by having the government print more money. He really said that. No kidding.

Krugman's Healthcare Fantasies

The more I read Paul Krugman's column in the New York Times, the more I realize the guy is not an economist. Yes, I know he is the current winner of the Nobel Memorial Prize for Economic Science (given by the Swedish central bank), which supposedly is bestowed upon real-live economists, but this time the committee gave its prize to someone who cannot even define something as simple as a cost.

Krugman's greatest political passion -- after demanding that the government go trillions into debt to finance his wild spending schemes -- is socialist medical care. In his Friday, June 5, column, Krugman lets himself go (again). The reason that medical costs are rising is ... private insurance.

Now, I agree that third-party payments in general are the main reason medical costs have gone up at unprecedented rates over the last three decades. Yet, study after study tells us that the big engine in medical cost increases has been government payments and mandates, and especially beginning with the implementation of the Medicare program in 1965.

At one level, it makes sense. If we could buy "grocery insurance," no doubt grocery prices would go through the roof. Third-party payments remove the consumer from the service provider and create an atmosphere in which someone else is spending someone else's money, a sure recipe for making sure that no one minds the store.

When you add the fact that medical professionals are forever being sued by the tort lobby, which pretty much owns the Democratic Party, Krugman somehow manages to leave out that part. Instead, he elsewhere has given a pretty stupid reason for explaining increasing medical costs: new technology.

Now, in every other industry involving a scarce good, the addition of new capital lowers costs. (Think fiber optics and the Internet.) However, in Krugmanworld, capital forces up costs. This makes no sense, but illogic is part-and-parcel to Krugman's analysis.

However, according to Krugman, if the government takes over medical care and the limits costs as they do in Canada and elsewhere -- by making people stand in line or deny care altogether -- then Americans are going to be in for a real shock. Granted, the Paul Krugmans and others who are politically-connected won't have to worry about being at the back of the line, but others who have thought that a government-run system will provide unlimited care at zero cost, well they are going to learn some painful lessons.