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Krugman Agonistes

Mises Daily: Friday, January 26, 2001 by

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19th Century Depiction of the Tax BurdenWhen I was in graduate school, my fellow graduate students and I liked to blow off steam during study breaks by dissecting the political columns of the columnist Molly Ivins. Sitting around a table, eating our peanut butter and banana sandwiches, we would occasionally parse through a 750-word Ivans column, paragraph-by-paragraph, looking for economic fallacies. The record, as I remember it, was seven. We were quite impressed.

Of course, Ivins is no economist, and never pretended to be. Princeton University’s Paul Krugman, on the other hand, is another story. He writes a thrice-weekly op-ed for The New York Times named "Reckonings."  His work reflects what one would expect from an economist who is acceptable to the Times, and Krugman rarely lets his masters down.

In a recent Sunday column entitled "Jerking the Other Knee," Krugman went well above his call to duty. He labeled those who object to increases in taxes or a reduction of the regulatory state as "knee-jerk conservatives."  These are people who "view too much government as the root of all evil, believe what’s good for big business is always good for America and think that the solution to every problem is to cut taxes and allow more pollution."

If there is anything original in this boorish caricature of Krugman’s antagonists, someone please point it out. Here is an attempt to demean all classical liberals, supporters of small government, and lovers of freedom with their own moniker. In trying to copy an original term first coined by his intellectual foes, Krugman shows the same originality of thought that he does with monetary policy.

In fact, the term "knee-jerk monetarist" could more truthfully be applied to Krugman’s approach to economics. This school of thought has three tenets:  (i) go heavy on the monetary pump when government statistics indicate an impending slump; (ii) ease up on the monetary pump when government statistics indicate that the economy is growing too fast; and (iii) hire Krugman and people like him to tell you exactly when to employ (i) and (ii).

What’s great about this approach to economics is that, if you are successful in selling it, then you assure yourself a central and powerful role among the shapers of government policy. (It is also good enough to get you into The New York Times.)

But it ignores the causes of economic fluctuations requiring such intervention. They are simply a given, and thank heavens for the Keynesian monetarists that can minimize their impact. Ignored are the long-term effects of these policies that cause fluctuations in the first place. As Henry Hazlitt pointed out in his classic book, Economics in One Lesson, a good economist considers the long-term effects of any action. For Krugman, like Keynes, it is only the short run that matters.

But we all know that economic decisions made in the short run will have certain and predictable economic effects, in accord with economic theory. What if an expansionary policy in 1997 brings about seemingly good economic times in 1998 and 1999, but a recession in year 2000?  Such analysis doesn’t fit into the mathematical models of the short term-oriented monetarists.

Other economists, especially those of the Austrian School, know better. By forcing lower interest rates by increasing the money supply, investment in labor and capital may make the economy look good for a while, without abetting the necessary savings to purchase the consumer goods that result from that investment. That, in a nutshell, is one of the major causes of recessions.

Krugman’s solution is simple, even knee-jerk. In the case of an economic downturn, press even harder on the monetary pump, force rates even lower, and when the resulting malinvestments start taking a toll in the labor and goods markets, start the whole process over. The Bank of Japan has instituted this policy over and over since the late 1980s, with Krugman’s full approval, and the result has been negative interest rates and successive recessions, with each one being worse.

Such analysis also ignores the important cleansing effect that recessions have in capitalist economies. We need failure—indeed, it is crucial to the market system. Firms that make bad business decisions must pay the costs for their actions, if only to encourage them to engage in more efficient resource use by either changing their capital and labor mix or by getting out of business altogether.

By constantly manipulating monetary policy to avoid recessions, there is no incentive to engage in such corrective measures. Walter’s Widget Factory may be poorly run, but since I am constantly getting new money to spend on his output, he has little incentive to engage in reform. In the aggregate, this result is multiplied throughout the economy, as firms retain surplus capital and heavy debts.

In the same column, Krugman attacks those selfish masses that demand tax cuts. These policies are never popular with knee-jerk monetarists because aside from the moral case against conscripting capital, it diffuses power to the masses, which makes monetary policies that much harder to carry out. In the process, it proves that economic growth is possible without their interventions.

Unfortunately, the 1990s saw many of these interventions. Krugman was a staunch supporter of Clinton’s tax increases. But just as U.S. citizens frequently vote with their feet when choosing the state and municipal economic regime under which to live, they also vote with their capital, and tax cuts give them more of it.

In fact, one of the most astonishing developments in capital markets that took place in the 1990s was the movement of money from Fed-regulated depository institutions to money market mutual funds, which are subject to more market-based regulation. Funds kept in these accounts are not insured and the Fed enjoys less direct control over them. This trend leaves the Fed far from impotent, but it shows that investors and savers will opt out of direct open market manipulation whenever financial markets make it possible, and that tax cuts would result in more funds being diverted in this direction.

Later in the same column, rising to the Ivins standard, Krugman called Bush’s response to a question about the energy crisis in California "revealing."  Bush, notes Krugman:

"summarily rejected the idea that the federal government might impose a temporary cap on wholesale electricity prices. One wouldn't have expected him to endorse such a cap just yet. Although there is actually a very good case for a price cap as an emergency measure—under current circumstances it would probably lead to increased production—that case takes some explaining."

What takes explaining is Krugman’s belief that a price ceiling would increase electricity production. It would be the first time in history such a result occurred (without extra-market force bringing it about). Such a statement shows the extent to which Krugman is willing to contradict the basic laws of supply and demand when doing so supports the Left’s economic agenda.

Bush also criticized environmental regulations as causes that restricted the ability of the market to respond to higher electricity prices by increasing the supply. Such a situation may contribute to the crisis, writes, Krugman, but it is not central to it.

Krugman offers no citations to support this belief, however, and his espousal of it shows how totally out of the loop he is on the question of California’s energy travails. California's energy consumption has increased by 30 percent in the past decade, while its generated power has increased only 6 percent. Environmentalists are in the front and center of every major effort to respond to market demand for electricity, and as a result, the state has not seen a major new power plant in 12 years.

Krugman saves room in the same column to criticize the recent mergers of major airlines as a threat to competition "in an industry where monopoly pricing is already a big problem."  Aside from whether airline pricing schemes are monopolistic, he ignores the state’s role in encouraging such mergers. Airline regulations are costly, and increasingly, only large firms can comply with them. That the government promotes such mergers by increasing costs only to impose antitrust laws to break up these firms to preserve competition is a huge double standard. But as we have seen, it is a double standard espoused with a straight face by our knee-jerk monetarist.

Even Molly Ivins wouldn’t be so bold. Such musings might be helpful if your intent is to ingratiate yourself with the dominant intellectual class of New York and New England, a class that runs the gamut from neoconservative to paleo-Marxist. However, if there is one thing that turns off the country-at-large more than this group of quasi-intellectuals, it is smarmy attempts to impress them. These efforts can become all-consuming, which explains why The New York Times loses readership while being scooped by the National Enquirer. It also explains Krugman’s thoughtless reckonings.

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Christopher Westley teaches economics at Jacksonville State University. See his archive and send him MAIL.