Tuesday, August 25, 2009

Paul Krugman's Latest Piece of Economic Quackery

It's my belief that the economics profession suffers from a lack of backbone.  They tend to give their quacks a pass, sometimes they even lionize them.  I don't think you see this nearly as much in other sciences.  But, for purely political reasons, hacks and quacks not only survive in economics, they thrive.  And other academic economists are too scared to call them out.

I'm not a professional economist, so I'll say it:  Paul Krugman is a quack of an economist, and so are most other saltwater school economists.  Yes, I'm a market fundamentalist, and a proud one.  To me, economics is a science, and if you can't see things for the way they are, you shouldn't be an economist.  Economists who can look at the past thirty years of the financial sector in this economy and say it was lightly regulated are quacks.  Any economist who can say market liberalization doesn't bring universal prosperity wherever it's unleashed is a quack.

More dangerous than mere quacks are the people who want to tailor society to their vision, the would-be social engineers.  If you got into economics because you want to change society, you probably won't be a good one, no matter how famous you get or how many awards you win.  If you got into economics to understand and explain how an economy, and thus, the world, and human psychology, works, then you are on the right track.

Greg Ransom said "Paul Krugman received his Nobel Prize for putting into mathematical form insights which older economists say already exited[sic] in economics in non-mathematized presentations."

Exactly.  He's an economic engineer, not an economist.  Oh, he knows the theory, and he knows the facts, but he doesn't truly understand how an economy works.  He has the same understanding of economics that the devil has of the Bible, an understanding that is centered around his own vision.

Which brings me to Krugman's latest column, which is about the healthcare "reform" debate.

Washington, it seems, is still ruled by Reaganism — by an ideology that says government intervention is always bad, and leaving the private sector to its own devices is always good.

Call me naïve, but I actually hoped that the failure of Reaganism in practice would kill it. It turns out, however, to be a zombie doctrine: even though it should be dead, it keeps on coming.

What's laughable about Krugman, and which reveals what's laughable about elite universities and the elite people who teach at and attend them, is that Krugman's articles are always full of the most amateurish debate tactics.  Really, if he weren't a professor at Princeton and the LSE, but just some guy with an opinion, he wouldn't get printed.  Here we have the classic mistake of stating your opponent's argument in black and white terms, as if anybody but an anarchist thinks that intervention is always bad, or that market failures never happen (even the Mises people don't believe that--I think).  So right off the bat we have a straw man argument, a VERY typical Krugman tactic.  Reading on....

First of all, even before the current crisis Reaganomics had failed to deliver what it promised. Remember how lower taxes on high incomes and deregulation that unleashed the “magic of the marketplace” were supposed to lead to dramatically better outcomes for everyone? Well, it didn’t happen.

To be sure, the wealthy benefited enormously: the real incomes of the top .01 percent of Americans rose sevenfold between 1980 and 2007. But the real income of the median family rose only 22 percent, less than a third its growth over the previous 27 years.

Ah, "Reaganomics," the term that can mean whatever a left-winger wants it to mean, but which usually means that cutting taxes tends to stimulate economic growth and CAN raise government revenue.  Both of these are very true.  Some clowns on the right, mostly non-economists, tried to make the case that tax rate cuts ALWAYS lead to higher tax revenues for the government.  This is not always true.  In fact, as Milton Friedman said, if you cut tax rates and revenues rise, you haven't cut them enough, meaning you're still on the right-hand side of the so-called Laffer Curve.

The second paragraph is where Krugman really shoots himself in the foot.  He makes a basic blunder that would get you a lower grade in Econ 101, and what's remarkable is that he knows he is making this blunder.  He discusses "family income," and as anybody who has read even an introductory text on economics can tell you, "family income" figures are highly unreliable as family demographics change.  The big change over the past forty or so years is the dramatic rise in single-parent households, which are still called "families."  To use "family income" or "household income" as a measure of income can be highly misleading and, if used to express incomes in America in recent decades, can make incomes--and income growth over time--seem like less than they are.  This is why left-wingers tend to use these figures rather than more exact and reliable figures which take these demographic changes into account.

In reality, economic growth has been SPECTACULAR from the eighties onwards, a few recessions notwithstanding.  We have become a more prosperous nation by virtually every material measure.  Our standard of living, including the standard of living of the poor, is phenomenal.  A country where the poorest, THE POOREST, have obesity as their number one health problem, would have been, literally, a joke a hundred years ago, and still is in many parts of the world.

I want to say one more thing about incomes, and that's there are a few other factors affecting statistics which, on paper, downplay our spectacular economic growth over the past several decades.  The first is that health care benefits, which many people get through their employer, as well as other non-pecuniary benefits, are taking up a larger and larger chunk of our total compensation, thus the actual dollar figure in take-home pay doesn't rise as much as you might think in many instances, but our total incomes are going up, up, up.  The second is that, even "adjusted for inflation," incomes have grown beyond more than just their dollar amount, as their purchasing power has gone up.  Many things, especially technology, have come down in price so much that even an income that has remained flat--even adjusting for inflation--over twenty years is actually a higher income because it buys more stuff.  A problem here is that when a figure is "adjusted for inflation" that doesn't mean exactly what you think it does, depending on how it was adjusted.  Adjusting based on measures such as the Consumer Price Index (a popular method) is unreliable, as these figures don't take into account the enhanced purchasing power of money, as well as changing technology itself.  An "intro-level four-door sedan" in 1982 is not the same as an "intro-level four-door sedan" in 2009.  Power windows, cruise control, CD players, etc., the list goes on.  We have prospered in many ways that crude income statistics, even the best ones, do not fully reflect.  This has allowed unscrupulous hack economists to say that the spectacular economic growth of the past three decades never really happened.  This is purposefully forgetting one of the most important economic lessons, and one of the oldest:  wealth isn't money, wealth is made up of actual goods and services.

By any measure, we have the greatest abundance of wealth we've ever had.  And Krugman knows all this.  He knows he's making a phony argument that any economist could tear to shreds in five minutes.  Why is he doing it?  Because he thinks most of his readers don't know the truth about his cooked statistics.

There’s a lot to be said about the financial disaster of the last two years, but the short version is simple: politicians in the thrall of Reaganite ideology dismantled the New Deal regulations that had prevented banking crises for half a century, believing that financial markets could take care of themselves. The effect was to make the financial system vulnerable to a 1930s-style crisis — and the crisis came. 

“We have always known that heedless self-interest was bad morals,” said Franklin Delano Roosevelt in 1937. “We know now that it is bad economics.” And last year we learned that lesson all over again.

Krugman's "short version" is a bunch of crap.  One thing hack economists like him don't do is explain how the removal of a few regulations, most of which had nothing to do with the area of the financial sector that collapsed, caused this crisis.  Economists are still piecing together exactly what has happened, from one year to the next, to cause this recession, and there are almost as many views as there are economists.  But this meme of deregulation is a purely political one, it's not economics.  The financial sector is the second-most tightly regulated and controlled sector of the economy, and has been, ever since the Great Depression.  Nothing about that has changed.  Tell somebody actually working in the financial sector, either in banking or stocks or bonds or whatever, that their industry was deregulated, and then get out of the way as they laugh their heads off.  Most people do not work in the financial sector, so most people are unaware of how much red tape there is and how all of this regulation stifles competition, raises prices, and turns the industry into a bunch of oligopolies.

Krugman has a soft spot for FDR and the New Deal, even though neither ended the Great Depression.  In fact, the New Deal simply made it worse by tying up money and resources that otherwise would have gone towards economic growth.  Krugman likes to imply, without actually saying, that the Great Depression was caused by a market failure.  As we now know, and as Milton Friedman had been teaching since at least the early 60s, the Great Depression had one simple cause:  The Federal Reserve.  Not market failure.  GOVERNMENT failure.

But it’s much the same on other fronts. Efforts to strengthen bank regulation appear to be losing steam, as opponents of reform declare that more regulation would lead to less financial innovation — this just months after the wonders of innovation brought our financial system to the edge of collapse, a collapse that was averted only with huge infusions of taxpayer funds.

The bad innovation Krugman is alluding to is the "stock market crash" of this recession, the evil boogey man, the alleged cause of the recession, rather than simply being seen as a symptom of the underlying problems in the financial sector.

I want to finish this up by making it clear to everybody what's going on here.  Countless times I have seen sentence fragments here and there such as "laissez faire capitalism is dead," or "libertarian economics is discredited" or "we are all socialists" or "markets don't work," etc.  The key word is "discredited," and that's on purpose, and I'll tell you why.

For decades, from the Great Depression onward, statists economists of one stripe or other, let's call them Keynesians (although this isn't entirely accurate but let's keep it simple), ruled the roost in mainstream economics.  They ruled academia.  They had the ears of prime ministers, presidents, and financial people.  They assured everybody--and for a while it seemed like they were right--that they could successfully engineer the economy as one might run a train or a power station.  And adjustment here, a correction there, lower inflation there, raise unemployment there, lower unemployment here, raise inflation there.  This went beyond party lines (economics isn't about political parties, so don't fall for the line that there is such a thing as "Democrat economics" or "Republican economics").  Nixon said, in 1970 I think, "We are all Keynesians now," and people who believed in a mostly unfettered free market, people who identified as libertarians, were a joke, they were seen as the economic equivalent of doctors who balance humors and use leeches to cure cancer.  I don't want to paint things too black and white, but the situation was grim if it was 1959 and you were against Social Security.  The University of Chicago was the one place where economists like that could thrive, and thrive they did.

One of the main beliefs of economic engineers at the time was that there was an inherent tradeoff between inflation and unemployment, and that if you raised one, the other would go down.  There were also a lot of kooky ideas about inflation back then, about what caused it and what its effects were.  I have one econ textbook from the 70s which argues that inflation has no negative effect on workers because their wages rise along with inflation and thus it doesn't harm them!  Oh, BTW, one of the authors of this textbook is an advisor to Obama.

Anyway, during the 70s something happened called "stagflation."  Unemployment AND inflation rose at the same time, and they rose pretty high (and yes, it hurt workers).  The seesaw effect between the two (which seemed to fit available data at the time) was broken.  The economic engineers, the statists, could explain this.  But Milton Friedman and the other Chicago School economists could.  Their achievements started getting recognized.  As Larry Summers, big wig econ advisor to Obama says, Friedman was once viewed as a devil figure in his youth (he economically came of age in the 70s, like Krugman), then earned grudging respect, and then open admiration.  A half dozen Nobel Prizes later, and the Chicago School economists were made in the shade.  They turned out to be right about all sorts of things (ESPECIALLY monetary policy), and the public and politicians, who had been sold on the "sure, we can manage the economy" line for decades now, soured on the economic engineers.  It was even said at the time that Keynesianism had been "discredited," and it seemed like libertarian economics had a shot at becoming the mainstream school of thought in econ.

Then the other shoe dropped.  The Soviet Union rapidly, and unexpectedly collapsed.  Now, throughout the Cold War, statist economists in the free world would say that a command economy (such as the Soviets had) might not only work, but might even be superior to any kind of free market or mixed economy.  With the right people in charge (hint hint) and the right policies, making all of the right decisions, a centrally planned economy might work.  Hayek defeated this in theory, but statistics from behind the Iron Curtain, including those from the CIA itself, were used to bolster the theory that command economies might actually be more productive and prosperous.

After the Soviet Union fell, and there was no communist party to protect communist secrets, the truth came out, and settled the debate once and for all.  The statistics had been utterly, totally, phenomenally WRONG all along.  Centrally planned economies not only failed, they failed for exactly the reasons Hayek and other economists of the Chicago School had said they would--the lack of a free price mechanism to coordinate the economy would ultimately mean its utter ruin.  They would have gluts of one thing and shortages of another, and with no market prices based on supply and demand, but rather, based on what economic engineers decided to set, there was no way of correcting these gluts and shortages.  It is now universally agreed, even among the Krugmans and Blinders of the world, that a centrally planned, command economy cannot work, and many of those economists who saw that the economic engineering policies and theories they'd been pushing their entire careers, be they mixed economy or command economy, repented of their sins, saw the light, and converted.

Some didn't.  In fact, some harbor a big grudge, and they've been waiting, desperately, for the moment when they could turn the tables and say "free market economics has failed," and "libertarianism has been discredited," and "nobody serious now believes in the free market," etc.  You saw much of the same rhetoric after the Great Depression (which, as I've said, was the creation of the Federal Reserve, and if you don't believe me, go ask Ben Bernanke, Great Depression expert, Princeton economist, and CURRENT HEAD of the Federal Reserve, who will tell you exactly what I said), and that rhetoric has been confined to the ash heap of history as we now know.  This too shall pass.  But right now it's gaining a lot of traction, in spite of the fact that Reagan wasn't nearly as much of a deregulator or government-shrinker as he's been made out to be (rather he was a tax reformer and cutter), and even though the financial sector, where the crises began, was the second most tightly-controlled industry in the country (and that's before the great recession), and even though the government, and its role in the economy, continues to get bigger and bigger every year in spite of the odd deregulation here or there.

It's a convenient myth for the hacks like Krugman who want to engineer society, and who don't want people to take a good long look at them and the burdensome regulations and market interventions that they've endorsed over the years.

Thursday, August 13, 2009

The Fatal Conceit of City Planners

Read this article.  It's about how America's "fastest dying cities" are sending government representatives (that is, representatives of the governments of these cities, not the people) to a summit in Dayton to come up with ideas to bring these cities back.

Of course, nobody is asking the questions, "is it even in our power to restore the population and economic growth of these cities, and it is right to use the taxes of what citizens remain to subsidize this effort?"

Although I'm sure the citizens of these cities may be wondering that.  The truth is, people and businesses are not geographically confined, in theory they can go anywhere.  And cities, like businesses and individuals, rise and fall.  Cincinnati used to be America's second city, then that became Chicago.  Now it's LA.  In twenty or thirty years it could be Houston or Atlanta, and in a hundred years it could be some place none of us has heard of.  The number one retailer in this country used to be Sears.  Now it's Wal-Mart.  I could come up with a jillion more examples to prove my point, but this is a blog, not an academic paper.

These cities shrank because of the combined actions of thousands, and, actually, millions of people.  Individuals made choices about where was the best place for them to live, whether one place was more affordable or had better policing or schools or whatever other community amenities were important.  Business leaders, led by the profit motive, made decisions about whether to stay in these cities or if they could have larger profits by moving elsewhere (either to escape taxes, find better labor supplies, or whatever).  Nobody planned for these cities to shrink, although the actions of a small number of political decision makers certainly inadvertantly contributed to this decision, either by raising taxes, extending business regulations, providing poor public services, or whatever.  Other reasons are beyond the control of anybody.  Frankly, people like to live in a place that's attractive and where the weather is nice.  As air conditioning becomes affordable, it makes sense that people would move further south and away from the largely unattractive and featureless terrain of the north.

In short, people weighed up the costs and benefits of staying versus moving (led primarily by the price system), and many moved.  A greaty many of them probably don't want to move back.  My father recently told me that, after moving back to the town he grew up in, he was shocked by how bored he was living there, when all his life away from his hometown he imagined he'd love living there again.

It's only natural that as economies change, and technology changes, and tax and business conditions change in various areas, that new generations of workers will change their location.  These "dying cities" aren't filled with young people, they are filled with older people.  It is primarily the younger and more educated people (who otherwise would have replenished the community's population) who have moved out of the rust belt and other "dying cities."  In other words, society is saying, through the combined actions of millions of people, "we want these cities to shrink."

So why stop a natural process?  Part of it is nostalgia and hometown pride, it's not nice to see the city you grew up in and love become a dystopia.  Part of it is money.  The bigger the city, the bigger the tax base and the more money the politicians have to spend on things (particularly themselves).  Big city mayors can make six figure incomes.  Small town mayors make much less.  There are also the government employees.  As the city shrinks, the need for public services dwindles, which necessitates layoffs.  This makes the gangsters that run the labor cartels (IOW the unions) unhappy.  Another reason is sheer vanity.  Every mayor of a sizeable city wants their city bigger, they all want to be the mayor of NYC, LA, Seattle, Chicago, or some other huge cosmopolitan town.  They want huge, ornate opera halls and sports teams, promenades, piazzas, "revitalized downtowns," shopping centers with upscale boutiques.   You often see city governments throw away tax-payer money on such glittery, showy projects, which often fizzle.

I see three ways for these cities to grow.  Either they need to lure new citizens, bring back the citizens who left, or somehow get their existing citizens to reproduce more.  The latter is unthinkable.  The first two can be done only by giving people an incentive to move to your town, not just urging them.  How do you give incentives?  Create a better business climate, lower taxes, improve public services (if they stank), and generally becoming a leaner, meaner, more efficient government.  This is hard if not impossible for most governments to do.  Another way of creating an incentive is to, essentially, pay people to move to your town.  In desperate circumstances, it can even mean paying people to *stay* in your town.

Ohio gives out money to college graduates to have a down payment on a home (most Ohio college grads plan to leave the state after graduation because if you don't want to be a teacher or a nurse or work at a pizza or sub place, Ohio is not the state for you).  Many times you will see states or cities or counties give tax cuts to a particular industry or a particular business.  This (in theory) amounts to a subsidy, as other businesses which are not so favored by the government pay normal tax rates, so the business in question benefits from government services such as police, trash collection, courts, etc. without paying as much as the other businesses.  Again, I said "in theory," as our tax system is so convoluted and perverse that many other factors are at work besides this one principle.  And, finally, sometimes governments will simply give money to businesses.

Do any of these ways sound very good?  I think the only one that sounds appetizing to an informed, economically literate, thinking person is for the government to clean its own act up.  In the rust belt, one of the biggest things governments could do to improve their economies would be to become right-to-work states, where unions cannot force businesses to make contracts with them or force workers to join them, in short, where unions must stand or fall on their own merits, and not because they receive special "rights" from the government.  More likely than this is more of the same old tactics: handouts, bribes to bring in businesses and hopefully people.  This amounts to ripping off existing citizens, making the place even less amenable.

These city planners are exhibiting just a small example of the fatal conceit of government planners everywhere, the fatal conceit that not only do they know what's best for everybody, but that it is also in their power to make it happen.