Paul Krugman’s Cult Past

I commented on Paul Krugman ridiculing as members of a “cult” people who warn of a coming financial crisis with rising interest rates such that the U.S. is no longer able to finance its enormous debt in a previous post, “It’s Time to Stop Taking Paul Krugman Seriously“. Recall that Krugman said:

[A] chorus of voices has warned that unless we bring down budget deficits now now now, financial markets will turn on America, driving interest rates sky-high.

And:

[T]he prophets of fiscal disaster, no matter how respectable they may seem, are at this point effectively members of a doomsday cult.

And:

Moreover, despite years of warnings from the usual suspects about the dangers of deficits and debt, our government can borrow at incredibly low interest rates…. And don’t tell me that markets may suddenly turn on us. Remember, the U.S. government can’t run out of cash (it prints the stuff), so the worst that could happen would be a fall in the dollar, which wouldn’t be a terrible thing and might actually help the economy.

I commented previously on how the U.S. can borrow at “incredibly low interest rates” not because the “markets” are in its favor, but because the Fed is buying up now 90% of U.S. bonds and is set to offset almost all of next year’s deficit with bond purchases, as well as Krugman’s own abysmal record of having advocated the very Fed policy that was a primary cause of the housing bubble that precipitated the financial crisis that we still find ourselves dealing with the effects of. (See my previous post for more, and my book  Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis.)

Just one more thing… We need to look at what one respected economist has had to say about deficit spending and the threat of rising interest rates:

I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits….

Two years ago the administration promised to run large surpluses. A year ago it said the deficit was only temporary. Now it says deficits don’t matter. But we’re looking at a fiscal crisis that will drive interest rates sky-high….

But what’s really scary… is the looming threat to the federal government’s solvency….

[M]y prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.

And as that temptation becomes obvious, interest rates will soar.

Who is this member of a “doomsday cult” warning of a “fiscal crisis” due to the government’s deficit spending, which “will drive interest rates sky-high”, which will result in the government financing its debt by being “irresponsible” and “printing money”? Peter Klein has the answer:

Yes, that’s Paul Krugman — writing in 2003, when the despised George W. Bush, not Krugman’s beloved Barack Obama, was ruling the banana republic (and presiding over huge budget deficits, which Krugman now endorses). As I remarked on Facebook, for Krugman, “analysis” is what helps your guy and hurts the other guy.

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Now, on another note, in his column last week, Krugman had this to say:

[M]achines may soon be ready to perform many tasks that currently require large amounts of human labor. This will mean rapid productivity growth and, therefore, high overall economic growth.

But — and this is the crucial question — who will benefit from that growth? Unfortunately, it’s all too easy to make the case that most Americans will be left behind, because smart machines will end up devaluing the contribution of workers, including highly skilled workers whose skills suddenly become redundant.

Okay, first of all, how can it both be true that advances in technology can produce “high overall economic growth” and that “most Americans will be left behind”? Doesn’t economic growth by definition mean an overall increase in society’s standard of living?

Secondly, is Krugman seriously trying to argue that technological advancement such that the means of production become more efficient is bad for the working class (or at least that it’s not good for them)? Henry Hazlitt deals with this fallacy in Economics in One Lesson (buy it through that link and help a fella out; it won’t cost you a penny more and I’ll get a referral commission fee). Hazlitt comments facetiously in detail in his chapter, “The Curse of Machinery”:

If it were indeed true that the introduction of labor-saving machinery is a cause of constantly mounting unemployment and misery, the logical conclusions to be drawn would be revolutionary, not only in the technical field but for our whole concept of civilization. Not only should we have to regard all further technical progress as a calamity; we should have to regard all past technical progress with equal horror.

Using the example of a clothing manufacturer, Hazlitt explains the fallacy

After the machine has produced economies sufficient to offset its cost, the clothing manufacturer has more profits than before. (We shall assume that he merely sells his coats for the same price as his competitors, and makes no effort to undersell them.) At this point, it may seem, labor has suffered a net loss of employment, while it is only the manufacturer, the capitalist, who has gained. But it is precisely out of these extra profits that the subsequent social gains must come. The manufacturer must use these extra profits in at least one of three ways, and possibly he will use part of them in all three: (1) he will use the extra profits to expand his operations by buying more machines to make more coats; or (2) he will invest the extra profits in some other industry; or (3) he will spend the extra profits on increasing his own consumption. Whichever of these three courses he takes, he will increase employment.

In other words, the manufacturer, as a result of his economies, has profits that he did not have before. Every dollar of the amount he has saved in direct wages to former coat makers, he now has to pay out in indirect wages to the makers of the new machine, or to the workers in another capital industry, or to the makers of a new house or motor car for himself, or of jewelry and furs for his wife. In any case (unless he is a pointless hoarder) he gives indirectly as many jobs as he ceased to give directly.

But the matter does not and cannot rest at this stage. If this enterprising manufacturer effects great economies as compared with his competitors, either he will begin to expand his operations at their expense, or they will start buying the machines too. Again more work will be given to the makers of the machines. But competition and production will then also begin to force down the price of overcoats. There will no longer be as great profits for those who adopt the new machines. The rate of profit of the manufacturers using the new machine will begin to drop, while the manufacturers who have still not adopted the machine may now make no profit at all. The savings, in other words, will begin to be passed along to the buyers of overcoats—to the consumers.

But as overcoats are now cheaper, more people will buy them. This means that, though it takes fewer people to make the same number of overcoats as before, more overcoats are now being made than before. If the demand for overcoats is what economists call “elastic”—that is, if a fall in the price of overcoats causes a larger total amount of money to be spent on overcoats than previously—then more people may be employed even in making overcoats than before the new labor-saving machine was introduced. We have already seen how this actually happened historically with stockings and other textiles.

But the new employment does not depend on the elasticity of demand for the particular product involved. Suppose that, though the price of overcoats was almost cut in half—from a former price, say, of $50 to a new price of $30—not a single additional coat was sold. The result would be that while consumers were as well provided with new overcoats as before, each buyer would now have $20 left over that he would not have had left over before. He will therefore spend this $20 for something else, and so provide increased employment in other lines….

There is also an absolute sense in which machines may be said to have enormously increased the number of jobs. The population of the world today is three times as great as in the middle of the eighteenth century, before the Industrial Revolution had got well under way. Machines may be said to have given birth to this increased population; for without the machines, the world would not have been able to support it. Two out of every three of us, therefore, may be said to owe not only our jobs but our very lives to machines.

Yet it is a misconception to think of the function or result of machines as primarily one of creating jobs. The real result of the machine is to increase production, to raise the standard of living, to increase economic welfare. It is no trick to employ everybody, even (or especially) in the most primitive economy. Full employment—very full employment; long, weary, back-breaking employment—is characteristic of precisely the nations that are most retarded industrially. Where full employment already exists, new machines, inventions, and discoveries cannot—until there has been time for an increase in population—bring more employment. They are likely to bring more unemployment (but this time I am speaking of voluntary and not involuntary unemployment) because people can now afford to work fewer hours, while children and the overaged no longer need to work.

What machines do, to repeat, is to bring an increase in production and an increase in the standard of living. They may do this in either of two ways. They do it by making goods cheaper for consumers (as  in our illustration of the overcoats), or they do it by increasing wages because they increase the productivity of the workers. In other words, they either increase money wages or, by reducing prices, they increase the goods and services that the same money wages will buy. Sometimes they do both.