Paul Krugman Pines For A Command Economy

Sometime in late 2008 we waxed philosophically about what we thought had happened to the US pool of real funding (i.e., the pool of saved real goods that funds all economic activity) in the wake of the 1990's/Nasdaq bubble. We wondered how it was possible, in spite of preliminary evidence that the pool of real savings was in trouble, to create yet another, even bigger bubble from 2003-2007.

As we noted at the time, since it is not possible to measure the state of the subsistence pool, one must consult circumstantial evidence if one wants to get an idea whether it is still growing or stagnating or even declining. One of the pieces of circumstantial evidence that we believed would indicate that the pool of real funding was in trouble would consist of a failure of the  stock market  to rise in spite of the central bank lowering rates and pumping money into the economy (more on this idea follows in our next article).

This had indeed happened in 2000-2002, so we felt that an important indication was in place that suggested that the pool of real funding was severely weakened, something that seemed quite logical at the time (the boom of the 1990's had surely consumed a lot of capital and savings). So what enabled the creation of another bubble? Our idea at the time was that due to the advanced global division of labor,  relatively free trade and free capital flows, the US had simply availed itself of other people's savings,  this is to say it had begun to consume the real savings of other nations. Naturally we wondered in late 2008 what could be done for an encore.

If for instance the pool of real funding of the rest of the world were also in trouble, who could possibly provide the capital for yet another iteration of the boom? We concluded that space aliens from Rigel II were the only viable option left, and noted in this context that Japan's then defense minister Shigeru Ishiba was  considering  how to prepare Japan for a possible invasion from outer space or a visit from Godzilla.

In this he was supported by chief cabinet secretary Nobutaka Machimura, who  professed his firm belief in visitors from outer space as well. This seemed a highly creative way of justifying an increase in Japanese defense spending, so the idea possibly originated in the military-industrial complex…we'll never know for sure. Erecting an intergalactic version of our fiat money Ponzi scheme to bail us out one more time seemed an obvious next step to these ruminations.


Plan 9 From Outer Space Takes Shape

Little did we know that Paul Krugman is hoping for the intercession of space aliens as well, whom he believes should be invented if they don't show up of their own accord. Why? Because it would help to fling aside all objections to deficit spending and inflation – we'd be on a war footing, and don't you know, 'World War 2 ended the depression' because it allowed the country squire in the White House to spend and inflate his head off.

Krugman even admits that he gets the inspiration for his economic ideas from episodes of the 'Twilight Zone' these days, which we think is quite fitting.

Better sit down and put down the coffee before you watch this one (note the increasingly bemused facial expression of Kenneth Rogoff on the split screen as Krugman launches into his space aliens spiel):





Evidently, the debate is about fiscal spending and how it can 'help' the economy, in spite of the glaring evidence that it hasn't helped one iota thus far (as an aside to this, at the time the bulk of the 'Recovery and Reinvestment Act' spending was actually implemented in 2010, the economy weakened instead of improving).

Regular readers of this blog are of course aware why this is so – Keynesian deficit spending, as we have often pointed out, very likely has a 'multiplier' of less than one, i.e., it weakens rather than strengthens economic activity (this can be shown by way of logical reasoning and is also supported by empirical studies). This is because it results in waste and resource misallocation, is beset by corruption, is viewed by private sector actors as deferred taxation and has to be financed entirely by the private sector anyway, which is thereby forced to pay for things people would not voluntarily pay for. No surer road to ruin can be imagined, except by combining the exercise with massive money printing.

The clip begins with Kenneth Rogoff – who is normally hostile to amassing vast fiscal debt but is all for more money printing – somewhat reluctantly declaring himself d'accord with state spending on 'infrastructure', if only it is 'done right', this is to say, if no white elephants costing a fortune are erected, as for instance Boston's infamous 'Big Dig'. They might as well have played a laugh track at that point. From then on it becomes positively surreal.

Interviewer Freed Zakaria asks:

'But wouldn't John Maynard Keynes say that employing people to dig a ditch and then fill it up again, that would be just fine? They'd be productively (sic!) employed and pay taxes, so maybe, Boston's 'Big Dig' was just fine after all…'

Leaving aside for a moment why anyone would want to know what Keynes would have recommended after his recipe has failed over and over again, watch Krugman's face when Zakaria invokes his master. He is chomping at the bit…you can sense his eagerness to jump into the conversation. And then it comes:

'Think about World War 2…' –  Krugman then recounts the widespread fallacy that the war was somehow 'good for the economy'. As we have pointed out in 'The Myth Of War Prosperity' (which we urge readers to check out), where we extensively quoted the invaluable work Robert Higgs has done on the subject, this is an erroneous interpretation based on solely looking at 'statistical data' that are completely devoid of meaning. In reality, the so-called 'war prosperity' was a period of rationing and severe economic destitution. As Ludwig von Mises noted:

“War prosperity is like the prosperity that an earthquake or a plague brings. The earthquake means good business for construction workers, and cholera improves the business of physicians, pharmacists, and undertakers; but no one has for that reason yet sought to celebrate earthquakes and cholera as stimulators of the productive forces in the general interest.”

We are very reluctant to correct Ludwig von Mises, but it is not true that 'no-one' has yet sought to celebrate the destruction wrought by natural catastrophes as a boon for the economy. The broken window fallacy is alive and well, as we have most recently been able to observe on occasion of the tsunami that has hit Japan in March.

Paul Krugman is in effect pining for instituting a command economy, which is what the US economy was during the war. He might as well demand that we follow the example of Josef Stalin – after all, Soviet industrial production showed 'impressive growth' in the 1930's, right? Of course, as Krugman's master himself once said in the foreword to the German edition of the 'General Theory':

'Trotzdem kann die Theorie der Produktion als Ganzes, die den Zweck des folgenden Buches bildet, viel leichter den Verhältnissen eines totalen Staates angepaßt werden als die Theorie der Erzeugung und Verteilung einer gegebenen, unter Bedingungen des freien Wettbewerbes und eines großen Maßes von laissez-faire erstellten Produktion.“


„The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire.“


We therefore shouldn't be terribly surprised that a command economy is  Krugman's preferred solution to the economic depression. As one of the premier 'philosopher kings' of the statist religion, he probably expects that he himself wouldn't be subjected to its deprivations.

Krugman asserts that the 'war brought us out' (of the depression). This is patently untrue, unless you are willing to substitute 'economic statistics' for 'economic well-being'. What ended the depression was the fact that Congress repealed the worst excesses of FDR's disastrous 'New Deal' legislation in 1946. After all, if it were true that 'the war ended the depression', then the depression should have returned in full force when the war ended. It didn't, and it was the decision of Congress to do away wtih a great many New Deal laws and regulations that was the decisive factor in the economy's revival.

Krugman then continues, 'look, we could use some inflation,  Ken and I both are saying that (Rogoff, who favors money printing to end recessions still nods enthusiastically at this point)…this is anathema to a lot of people in Washington, but it is what the basic logic says…'

Whose 'basic logic' is saying that? Let us see if Krugman's assertion has any connection whatsoever with 'basic logic'. When he says 'inflation', we assume he refers to rising prices for consumer goods.

However, the proper definition of inflation is an increase in the money supply, and rising prices of consumer goods are but one possible effect of this policy. There are numerous other, more important and more damaging effects, such as a distortion of relative prices in the economy, as the effects of inflation percolate through the economy unevenly. It isn't as though everybody were getting the same percentage of freshly printed money credited to his account concurrently and that all prices then rise by the same percentage simultaneously (if that were to happen, inflation would be completely 'neutral' and it would be immediately obvious to all that no-one has become any richer by the issue of additional money). 

Which prices rise first depends on where in the economy freshly printed money is first inserted. As a rule, the prices of capital goods more distant to the consumer goods they will eventually produce tend to rise the most when monetary pumping is pursued. This is due to the fact that a lower discount rate makes longer production processes seemingly more profitable – the distortion of prices percolates from the stage of production immediately preceding the final stage in the direction of the earlier stages of production, with the result that in the end, price information all along the economy's productive structure is distorted. Malinvestment of capital is the inevitable result and it will equally inevitably lead to another liquidation phase, a.k.a. 'recession'. Businessmen will wrongly believe the pool of real savings to be larger than it really is and will be faced with the inability to complete many of the investment projects they undertake once this error becomes manifest.

In short, fighting a recession with inflation is akin to fighting a fire by throwing gasoline on it.

Let us briefly consider for argument's sake that the only effect of higher inflation would be an increase in the prices of consumer goods according to the 'official definition' of inflation.

Obviously, both rising and falling prices create winners and losers. Let us say you are one of the many people that have joined the ranks of the unemployed. Suddenly you are forced to make ends meet by relying on your savings and the meager income from unemployment insurance.

Ask yourself this: would you, under these circumstances, rather see rising or falling prices for consumer goods? If Krugman has his way, your savings will definitely not last as long as they otherwise might, so it should be easy to see what is preferable.

Ostensibly, Krugman wants to help all those people that have ended up unemployed because the Fed and the government took Krugman's previous advice to heart – namely to create a housing bubble to combat the recession of the early 2000ds. He apparently wants to make amends by proposing more of the same disastrous policies.

Who would be 'helped' by an increase in consumer goods prices? It is not at all certain that this would help the business sector, as the only variable that counts for business profits is the difference between the cost of the factors of production and the prices received for the final goods produced.

As far as we can tell, the only people who might profit from inflation are the rich as well as the profligate who are up to their neck in debt (this includes of course the government). Everybody else will end up a loser. As we have noted before, the inflationary policy of the Federal reserve is the major factor in creating income and wealth inequality, as it lowers the real incomes of workers while the rich can easily protect themselves and will usually even profit from inflation  due to rising asset prices. In short, what Krugman asserts to be 'basic logic' will lead to a redistribution of wealth from the poor to the rich – bless his liberal bleeding heart.

Krugman then continues:

'It is very hard to get inflation in a depressed economy, but if you have a program of government spending plus an expansionary policy by the Fed you could get that. If you think of using all of these things together, you could accomplish, you know, a great deal.'

Well, we have had both – in spades. Why then is the economy still 'depressed'? What precisely was 'accomplished', aside from soaring commodity prices and a downgrade of US government debt by Standard & Poors?

It then becomes utterly bizarre as Krugman proceeds to invoke the imaginary space aliens threat. If only space aliens were threatening to invade, reservations about deficit spending and inflation would become 'secondary concerns', as the government would presumably spend and inflate all out to counter the threat. If that were to happen, so Krugman, then 'this slump would be over in 18 months'.

Why 18 months? Why not 12, or 16 months? Krugman doesn't say, but presumably he already has a 'space aliens attack' model in a drawer somewhere that proves beyond a shadow of doubt that 18 months is how long it would take.

Krugman then continues, 'if then we discovered, oops, there wasn't actually a space aliens threat …' at which point the by now slightly uncomfortable Rogoff interrupts 'we need Orson Welles, that's what you're saying' (this is a reference to Welles' famous radio show about an invasion from Mars that many people took to be a news announcement at the time – it created a brief panic, but we doubt it created any improvement in the economy).

No,  Krugman informs Rogoff, it is not Orson Welles whom we have to thank for this patent medicine against economic depression, it is in fact the 'Twilight Zone'. In the episode concerned, scientists invent a space alien threat to achieve world peace, but we actually don't need it for that – we need it to 'get more fiscal stimulus'.

This is where he is harkening back to what interviewer Fareed Zakaria alluded to at the beginning: if there is no real space aliens threat, but you have spent a lot of money and resources on fighting this imaginary threat as though it were real, you have in fact acted out the equivalent to the Keynesian prescription of 'digging ditches and filling them up again'.

You couldn't make this up.

Needless to say, wasting resources on non-existent problems is only bound to make the economic slump worse, not better. It would once again interrupt the efforts of market participants to rearrange the productive structure so as to best serve actual consumer demands. Since the pool of resources available to fund economic activity is limited, the employment of capital to fight imaginary space aliens would leave fewer resources to be employed in productive and wealth generating economic activity.

Krugman's proposal would not 'end the slump' as he avers, it would only create the conditions for an even worse depression. Why anyone still listens to this dangerous charlatan is truly beyond us.



Paul Krugman: if all else fails, let's go to war with invaders from outer space.

(Photo via



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    As you point out, Krugman, like the majority of our political economists from academia, has shaped a philosophy that is nothing more than personal interest. The approaching storm surge will engulf the ivory towers of tenure and prestige, leaving nothing but a foundation in its wake. Little wonder that academic economics has been reduced to a self congratulatory system of inbred references built on discredited economic principles.

    Paul Krugman and and men like him would gladly sacrifice America’s middle class in return for a seat in the halls of power. But then again, that’s our history and the ultimate outcome is well recorded. Krugman’s just hoping that Keynes’ “long run” can be extended beyond his natural life span. Unfortunately for us all, I think he and his fellows miscalculated the velocity of the great unwinding.

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