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Is Krugman Harry Potter? Keynesian Fantasy

Economics / Economic Theory Feb 15, 2010 - 07:59 AM GMT

By: William_Anderson


Best Financial Markets Analysis ArticleOne of the things one learns (or should learn) in an economics graduate program is that while we hold to certain laws of economics, we do not view the world through a template, and especially one structured from political talking points. For example, as an economist, I can say that if one raises the minimum wage during a recession, one of the results will be increased unemployment among lower-skilled workers, and especially teenagers.

That conclusion comes from the laws of supply and demand, and it is sound and can be drawn without going into an ideological frenzy. However, it would be quite another thing if I were to say, "Democrats raised the minimum wage during a recession. Therefore, they want teenagers to be unemployed." Such a statement would be a non sequitur, and is outside of my role as an economist.

In fact, every mentor I have had has told me to be careful when venturing into the world of politics, and certainly not to embrace political talking points. Most, but not all, voted for Republicans, but none was active in any Republican activities and certainly never used the classroom or personal conversation to shill for political candidates. Furthermore, none ever presented a Republican candidate as the Hope of the World. There were and are lines that my mentors did not cross.

Unfortunately, I suppose that the Massachusetts Institute of Technology goes by a different set of rules, as its most famous economics doctoral student has used his position to be a partisan shill and to fudge on the truth. At present, I am researching for a paper on the passage of the financial deregulation initiatives of the early 1980s and I can tell you outright that Paul Krugman is rewriting history, declaring things to be true that never happened.

Thus, I wade into his latest food fight, his "Republicans want to cut Medicare" screed that passes as a column in today's New York Times. It is hard to know where to begin here, but I will try to wade through this morass that clearly does not befit someone whose academic honors put him near the top of our profession.

Krugman accuses Republicans of saying that while they want to save Medicare, they really want to cut its benefits. As "proof," he goes back to the 1995 government shutdown that he claims is due to then-Speaker Newt Gingrich's attempt to "ram through deep cuts in Medicare." Now, I don't know what really happened then, and as I have said before, Krugman has this tendency to rewrite history to his liking.

When Republicans are claiming that Democrats want to "cut Medicare" and that they are the saviors of this open-ended program, I find myself in agreement with Krugman that they are not to be trusted. However, the larger problem is that Medicare itself is not a sustainable program no matter how one slices things. Any competent economist can see this problem up front, but Krugman, while being a "star" in economics, nonetheless looks at government programs through the glasses of a partisan Democrat, which clouds and distorts his vision.

Take the following, for example:

No, what’s truly mind-boggling is this: Even as Republicans denounce modest proposals to rein in Medicare’s rising costs, they are, themselves, seeking to dismantle the whole program. And the process of dismantling would begin with spending cuts of about $650 billion over the next decade. Math is hard, but I do believe that’s more than the roughly $400 billion (not $500 billion) in Medicare savings projected for the Democratic health bills.

Let's take this one apart. If the Republicans wanted to dismantle Medicare, they would have done it when they had control of all three branches of government. For that matter, I remember Democrats claiming in 1980 that if Ronald Reagan were elected, he was going to do away with Social Security. None of those things happened, yet Krugman continues to spout the party line as though it makes sense.

Now, is that because Republicans are compassionate, caring folks? No, it is because they want to be elected and re-elected, and few people in our current welfare state can win elections by promising less. It doesn't happen. Republicans, like Democrats, are political animals and know that if they ever engaged in the behavior that matched some of their "let's be responsible" rhetoric...well, that is not going to happen.

I find Krugman's other point even more interesting. Suddenly, he calculates lower costs of (Ah! His brilliant economist mind at work!) $400 billion, but that amount constitutes "savings"! No. They are real-live payment cuts to people working in the medical system. Here is my question: How is it that Democrats propose "savings" but if Republicans do the same, they are proposing "cuts"?

Keep in mind that Krugman's "savings" do not come from actual "savings" but rather from the implementation of price controls. That's right, we have an economist claiming that price controls do not raise the opportunity cost for anyone, and that price controls actually result in real lower costs. This is nonsense.

We have seen real prices fall over time because people find ways to produce more goods using fewer resources. That is how an economy grows, period, but Krugman is not talking about such things. Instead, as I have pointed out, he is endorsing outright price controls (to be enforced, by the way, with criminal penalties).

Krugman has a history of claiming price controls actually do as advertised. During the California electricity blackouts of a decade ago (caused by the state government implementing price controls in the retail sale of electricity), Krugman claimed that the implementation of price controls across the entire western grid would result in lower prices and more supply. Such things don't happen, people. Price controls, as anyone learns in Economics 101, reduce available supply and thus, exacerbate shortages.

Not to be outdone, Krugman also endorsed increasing the minimum wage during a recession, claiming that it would increase overall spending. (Guess he cannot tell the difference between total utility and marginal utility. Take note, Princeton students.)

Any economist worth his salt, Austrian or mainstream, knows there are immutable laws of economics. The Law of Scarcity, the Law of Demand, the Law of Supply, and the Law of Diminishing Returns all are in an economist's lexicon and for good reason. They are as immutable to human action as the Law of Gravity is immutable to our very existence.

Yet, we have a "decorated" economist claiming that his political party can transcend the laws of economics by fiat. This is not economics, folks. This is Harry Potter Science.

William L. Anderson, Ph.D. [send him mail], teaches economics at Frostburg State University in Maryland, and is an adjunct scholar of the Ludwig von Mises Institute. He also is a consultant with American Economic Services. Visit his blog.

    © 2009 Copyright William L. Anderson / - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Property Rights
16 Feb 10, 03:45

Maybe you have noticed that when Nobel prizes go to economists and the latest, to a president, the recipients have a propensity to want to destroy freedom and personal property, along with the constitution. They are what we used to call "fellow travelers", when I was growing up, determined to make the populace dependent so they can run people's lives, from the air they breathe, to the quality and quantity of the monopoly money they have created from nothing, but which is backed only by debt. This ponzi scheme began in 1913, and is meant to destroy this country and the freedom of the people in it, genuflecting to the plotting of the now deceased communist/socialist John Maynard Keynes. The name of this game is to institute world government, folks, with the blessing of most of the FED-controlled economists and both parties have been compliant with this whole unconstitutional movement, which has used monetary control and fiat currency to accomplish the feat, through the cartel of world central Bankers for the last hundred and ten years, originating with the Bank of England in 1694.


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