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Yet Another Example of Paul Krugman’s Intellectual Dishonesty

by Jun 3, 2012Articles, Economic Freedom0 comments

Krugman’s argument degenerated into a personal attack on those who disagreed with him in a classic case of psychological projection. Krugman then took that ad hominem argument and compounded upon the fallacy by turning it into a strawman argument for his column.

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Paul Krugman’s intellectual dishonesty never ceases to amaze me. Yesterday I posted about his appearance on BBC Newsnight and commented on the many problems with his arguments.

So after he was on Newsnight, he basically took what he said on the program and turned it into a column that appeared in the New York Times the following day. He begins by quoting John Maynard Keynes saying that government should not cut spending during a recession. And since Keynes said it, it must be true, so in his mind the questions follow:

So why is Britain doing exactly what it shouldn’t? Unlike the governments of, say, Spain or California, the British government can borrow freely, at historically low interest rates. So why is that government sharply reducing investment and eliminating hundreds of thousands of public-sector jobs, rather than waiting until the economy is stronger?

Okay, pause. First, notice that Krugman thinks the solution to the debt crisis is for governments to go even further into debt. Second, notice how he uses the term “investment”. Government “investment”? How is it an “investment” when the government spends money it takes from private citizens by force, either now in the form of taxation, or later in the form of borrowing, or both in the form of perpetual inflation? Third, Krugman omits that the U.K. has actually only increased spending since 2008. This is what he defines as “austerity”:

UK-spending2
UK-spending

Continuing, Krugman alludes to his Newsnight appearance by writing:

Over the past few days, I’ve posed that question to a number of supporters of the government of Prime Minister David Cameron, sometimes in private, sometimes on TV. And all these conversations followed the same arc: They began with a bad metaphor and ended with the revelation of ulterior motives.

Ooh, people who disagree with Krugman have ulterior motives. Shady. We’ll come to that. But first,

The bad metaphor — which you’ve surely heard many times — equates the debt problems of a national economy with the debt problems of an individual family. A family that has run up too much debt, the story goes, must tighten its belt. So if Britain, as a whole, has run up too much debt — which it has, although it’s mostly private rather than public debt — shouldn’t it do the same? What’s wrong with this comparison?

The answer is that an economy is not like an indebted family. Our debt is mostly money we owe to each other; even more important, our income mostly comes from selling things to each other. Your spending is my income, and my spending is your income.

So what happens if everyone simultaneously slashes spending in an attempt to pay down debt? The answer is that everyone’s income falls — my income falls because you’re spending less, and your income falls because I’m spending less. And, as our incomes plunge, our debt problem gets worse, not better.

So Krugman agrees that families should keep their houses in order and not try to solve their debt problems by going even deeper into debt, but this doesn’t apply to government, he argues, because government debt is “mostly money we owe to each other”.

Whoa. Stop right there. Who is “we”? Think about it. When the government runs up huge deficits and plunges the nation deeply into debt, who arrives at your door to hand you this money that is supposedly owed to you? If they come knocking at all, isn’t it only to take this money from you by force in order give it to those to whom it is “owed”?

What Krugman really means, of course, is that most U.S. government debt is held by the public. So if you own government bonds, it is true, those I.O.U.s are a debt representing money, a principle amount plus interest, that the government owes to you, but which money it will get by taking it from other citizens. And this is just a big Ponzi scheme, since ever more purchases of Treasury securities are required to be monetized by the Fed in order to pay off the principle plus interest of the previous debt as it continuously rolls over. This is unsustainable and, as with any Ponzi scheme, it will ultimately collapse, and the inevitable result will be the failure of the U.S. dollar. I guess Krugman has bought into this Ponzi scheme and owns Treasury securities. I don’t, though, so I’m not part of this “we” Krugman is talking about. I’m part of the 99%, not the 1%. I’m on the receiving end of that stick. How about you? And many of the people investing in the dollar will join us on the receiving end of that stick, too, when the bond bubble bursts and the next, even greater financial crisis hits and the music stops and they are left without a chair and still holding the hot potato.

Now let’s think about who else this “we” is. Much government debt is owed to foreign nations, like China. Well, I’m not a citizen of China, so I’m not a part of that “we”, either. I’m still on the receiving end of that stick. How about you?

And then there is the Federal Reserve, which also owns a significant amount of U.S. debt. It is true that money owed to the Fed is returned right back to the Treasury, but only after the Fed has skimmed off the top to pay for its operations and the 6% annual dividend it owes to its member banks, big banks like, you know, JP Morgan. And, again, the Federal Reserve system is the largest Ponzi scheme ever perpetrated upon mankind, printing so-called “money” out of nothing and charging the public interest to use it, requiring ever more and more purchases of government bonds and inflation to pay the principle plus interest on the previous debt so banks like JP Morgan can make a profit.

Krugman would have us think that when the government runs up a debt by borrowing to pay for present spending, that money just gets returned to us in the end, anyways. But tell me, are you among the “we” Krugman is talking about here? Do you own government bonds? Are you a Chinese citizen? Are you the CEO of a big bank or invested in JP Morgan stock? I’m guessing most of you probably do not qualify to be a part of this special club Krugman obviously considers himself belonging to.

All right, let’s continue. It is “even more important”, Krugman writes, that when you spend money to buy some good or service, that expenditure is, to the person whose good or service you have purchased, an equal amount of income. Well, that is certainly true. And obviously, it is equally true (though Krugman doesn’t mention it) that if you don’t purchase that good or service, that is more money in your own pocket that isn’t in the pocket of the person selling goods or services. So what is Krugman really trying to say here?

Krugman thinks economic growth comes from spending, rather from people deferring consumption and saving, from the creation of capital for investment into bettering the means of production and raising society’s standard of living. So if people would rather save their hard-earned money than spend it, Krugman thinks this “hoarding” is bad for the economy. Now, since he seems to agree that households should not incur more debt to solve the problem of their existing debt burden, he instead thinks the government should take over the role of spending. He is arguing that when government spends money, it will just find its way into your pocket, and then you’ll be better off by having more money to spend yourself.

But this is just the “broken window” fallacy identified by Frederic Bastiat over a century and a half ago, the fallacy of considering only what is seen but not that which is not seen. Where does the money that government spends come from? Well, we’ve already covered that, but, again:

1) They can tax it out of people. But that would obviously be counterproductive, wouldn’t it, since the goal in Krugman’s view is to get more money into people’s pockets rather than taking more out? In fact, if Krugman wants people to have more money to spend, why doesn’t he argue that government should slash spending and cut taxes, so then all that money can remain in people’s pockets so they have it to spend?

2) They can borrow it, which only increases the debt burden we are placing on future generations, which only means deferring taxation to the future rather than raising taxes in the present, the latter of which is always politically unpopular for the obvious reason that people prefer to keep their money and spend it as they please rather than have it taken from them by force to be spent by some government bureaucrats on things like war, death, destruction, corruption, waste, IRS bureaucracy, the TSA, Fatherland Insecurity, $17,000 drip pans for helicopters, etc., etc., etc.

3) They can print it, which just means extracting it from the public through the hidden tax of inflation, which is also responsible for causing the “business cycle” of booms and busts, such as the housing bubble that precipitated the financial crisis we currently continue to face in the first place, which housing bubble was created by the very Fed policy Krugman advocated of artificially lowering interest rates to spur investment in the housing sector, as I discuss in my book Ron Paul vs. Paul Krugman.

Krugman’s argument that government spending will create economic “growth” is an illusion. It’s sleight-of-hand. It is true, a certain elite club—this minority “we” Krugman is talking about—benefit when the government runs up huge debts and inflates the money supply. The military/security industrial complex, for example, is loving it. And the bankers surely must enjoy taking in private profits while having their increasingly risky ventures backed by the promise of taxpayer bailouts. There is indeed a transfer of wealth when the government spends money, but it isn’t a transfer that puts money back into all of our pockets. On the contrary. Why do you think the rich keep getting richer while everyone else is suffering? Our monetary system itself is the primary culprit, but since Krugman is a leading defender of that system and has benefited from doing so, you’ll never hear him tell it to you. As I’ve commented elsewhere:

Krugman is a shill for the banks, but he really is brilliant because he always manages to make it sound like he is their biggest critic. The man is a con artist whose whole purpose in life seems to be to maintain the status quo and protect the institutionalized confidence game that is our monetary and banking system from any serious scrutiny or reform.

Continuing, Krugman writes:

This isn’t a new insight. The great American economist Irving Fisher explained it all the way back in 1933, summarizing what he called “debt deflation” with the pithy slogan “the more the debtors pay, the more they owe.” Recent events, above all the austerity death spiral in Europe, have dramatically illustrated the truth of Fisher’s insight.

Krugman is referring to Irving Fisher’s argument in 1934 that the cause of “the great booms and depressions” is “over-indebtedness to start with and deflation following soon after” (emphasis in original). Fisher wrote that:

When over-indebtedness stands alone, that is, does not lead to a fall of prices, in other words, when its tendency to do so is counteracted by inflationary forces…, the resulting “cycle” will be far milder and far more regular.

In other words, a depression will be less severe if the Federal Reserve runs the printing presses to inflate the money supply to counteract any deflationary tendency in the market. See, when people save and pay down their debt, that is deflationary. Why is that?

Now, you might think that every dollar you hold represents an asset, but that is not true. Every dollar you hold represents a debt. It is a liability, not an asset. This is because every dollar that exists was borrowed into existence at interest. Through the magic of fractional-reserve lending, banks pyramid off of the base money supply and loan even more “money” into existence by creating it out of thin air and charging people interest for the use of the digital numbers that appear in their account when they sign a loan agreement. When people pay off their debts, those digits return to the place from whence they came, which is to say that they cease to exist. Ergo, paying down debt is deflationary.

Now, if everyone were to repay all of principle on their debt to the banks, both private and public, there wouldn’t be any “money” in circulation—and the interest on that debt would still be owed. So where does that money come from. Well, it also has to be created out of nothing. Hence the need for steady, constant inflation. The Fed sets a target rate of about 2%, measured in terms of the government’s Consumer Price Index (CPI), so that all this debt can be rolled over onto future generations, to perpetuate this Ponzi scheme.

Hence we are supposed to believe, if we are good obedient sheeple, that “deflation” is bad. Notice that Irving had no problem with the Federal Reserve system itself. On the contrary, he believed it played the important role of inflating in order to keep prices stable (that is, to keep prices from falling, as they would naturally do over time in a healthy economy, all else being the same, as advancements in the means of production are made).

Look again at what Fisher argued above, that inflating to keep prices stable would lessen the severity of a recession. The problem with that argument, is inflating the money supply and thereby counteracting market forces pushing prices downward, thereby keeping prices relatively stable is precisely what the Federal Reserve did during the 1920s, as Murray N. Rothbard shows in his book America’s Great Depression, which I highly recommend. So according to Irving’s argument, it seems there shouldn’t have been a “Great Depression”.

Krugman would have us listen to guys like John Maynard Keynes or his contemporary Irving Fisher. Two days after the peak of the bull market in 1929, Fisher said that the turnaround in stock prices “will not be hastened by any anticipated crash, the possibility of which I fail to see.” He said on October 15 that stocks had reached a “permanently high plateau” and he expected “to see the stock market a good deal higher than it is today within a few months”. On October 22 he reiterated his believe that “we will have a ragged market for a few weeks and then the beginning of a mild bull movement that will gain momentum next year”. He said on November 3 that stock prices were “absurdly low”—they would fall much further.

As Mark Thornton points out (emphasis added):

What he would not understand is that artificial monetary inflation is what prevents true economic signals (i.e., market prices and interest rates) and the rational economic calculation that they provide. Fisher’s so-called scientific approach of using price indexes to manage the economy and the money supply was what actually caused the biggest economic policy mistake in history.

Naturally this insight could not penetrate Fisher’s ego because he had recommended those monetary injections to prevent any decrease in the price level, and he never lost faith in scientific management of the economy or his devotion to the idea of a stable dollar.

This is much like how Paul Krugman advocated that the Fed lower interest rates by inflating the money supply in order to create a housing bubble to replace the dot-com bubble (again, see my book on that subject).

Are we really supposed to listen to guys like Fisher and Krugman, who advocated policies that caused the Great Depression and the Great Recession, respectively, as opposed to guys like Ludwig von Mises and Ron Paul, who predicted each, respectively, and warned against those policies? Fisher’s protégé, Milton Friedman, has said that “theory is to be judged by its predictive power”.

While Fisher couldn’t see the depression coming, Mises was commenting in 1928 on how each bust cycle is followed by a boom that “must eventually expend itself as another crisis”. This situation was “due only to the circumstances that the ideology which dominates all influential groups—political economists, politicians, statesmen, the press and the business world—not only sanctions, but also demands, the expansion of circulation credit” (emphasis added). The year before the crash, he wrote that “It is clear that the crisis must come sooner or later” as a consequence of this inflationary policy, and the “only way to do away with” the business cycle was “to reject the fallacy that prosperity can be produced by using banking procedures to make credit cheap.”

As for Ron Paul’s record of accurate predictions and prescient warnings in contrast to Paul Krugman’s abysmal record on the housing bubble, you can get my book in paperback or Kindle edition from Amazon.

Returning to the argument by Fisher cited by Krugman, he continued on to argue that if the Fed doesn’t react to falling prices by inflating the money supply, then debt would have to be repaid with dollars of even greater value. This was the context in which he made the comment quoted by Krugman (emphasis in original):

While it [i.e., paying off debt coupled with deflation] diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed. Then, the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owed. Then we have the great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe.

It is equally true that while debtors may have to repay loans in dollars worth more than those they initially borrowed, in the event of monetary deflation, savers and debtors alike benefit from the greater purchasing power their dollars would have. And if the problem is in the first place, as Fisher puts it, “over-indebtedness”, how can inflating and thereby artificially lowering interest rates, which incentivizes even more borrowing and more debt and which punishes savers, be the solution?

Fisher, like Krugman, was focused on the symptoms rather than the disease: our Federal Reserve monetary system itself, in which banks inflate the money supply by creating money out of nothing on a fractional-reserve basis—in other words, legalized counterfeiting. Printing money does not create wealth.

Now getting back to Krugman’s column, notice that he took Fisher’s quote out of context. What Fisher was saying is that deflation means loans are repaid in dollars of greater value, which is true. But Krugman isn’t talking about that here. Instead he tries to reinvent what Fisher meant by “debt deflation” to suit his own purposes, falsely implying that Fisher was talking about how if I don’t buy the good or service you are selling, you don’t get that money as income, which means now you don’t have those dollars to spend in turn, which means that some other poor guy or gal doesn’t have that same money as income to spend on yet another person’s goods or services, and so on.

Notice that in Krugman’s simplistic equation, it doesn’t matter whether everyone spends every dollar they receive in turn or whether everyone saves these dollars instead—the same number of dollars remains in the economy either way. The only question is to what purpose they are being used and whether the spending of those dollars comes now or later. Krugman seems to think that economic growth comes magically from people passing Federal Reserve notes around to each other. But what happens when people save instead of spend? Well, in most cases, they probably put it into the bank, where it becomes available to others to borrow, such as entrepreneurs or investors seeking to invest in capital goods to increase production to meet the future demand implicit in the public’s decision to defer spending, which is all that saving (“hoarding”) really means. And it is that advancement in the means of production that results from people choosing not to consume today that leads to economic growth, measured in terms of a rising standard of living, as ever more affordable goods become available to more and more people. In fact, a general price deflation is hardly something to be feared. What’s wrong with the fact that we can buy a computer today for less than we would have paid for one ten years ago, for example, even though today’s computers are far superior in every respect? Don’t all of our lives improve when prices fall over time due to advancements in the means of production that result from capital investment?

Krugman doesn’t stop with taking Fisher’s quote out of context; he also uses it to imply that Fisher was arguing, as he is, that governments should spend more during a recession since the private sector is spending less. But Fisher wasn’t making that argument in the context of his quoted statement. Rather, again, he was arguing that the Fed should inflate to keep prices “stable” rather than letting them fall, which, again, is actually precisely what the Fed did in the run up to the Great Depression.

Krugman then repeats his argument that the lack of a recovery in Europe somehow proves that “austerity” is the cause of its current woes, which I’ve already commented on. My question is: What austerity? How is it “austerity” when government spending only increases? Shouldn’t that prove Krugman’s argument wrong, by the same logic?

Krugman actually has a hilarious answer to this, which I’ve commented on previously:

So basically Krugman’s argument is that spending on social “safety net” programs and jobs (i.e., “stimulus”) and bank bailouts is supposed to be counted and is considered part of “Big Government” if the economy seems to be improving; but if things aren’t looking so good, then we must ignore them completely and blame the situation on “austerity” rather than “Big Government”.

Krugman just ignores any facts that don’t suit his arguments. He is just willfully ignorant. And I haven’t even gotten to the main example of intellectual dishonesty from this column of his yet. We now come to it (emphasis added):

As I said, this isn’t a new insight. So why have so many politicians insisted on pursuing austerity in slump? And why won’t they change course even as experience confirms the lessons of theory and history?

Well, that’s where it gets interesting. For when you push “austerians” on the badness of their metaphor, they almost always retreat to assertions along the lines of: “But it’s essential that we shrink the size of the state.”

You have to realize that this whole column is essentially a rehash of the exact same thing he said during his appearance on Newsnight. Here is why this, the whole crux of his argument in this column, is intellectually dishonest:

It wasn’t his interlocutors on the program that “retreated” to the argument that “it’s essential that we shrink the size of the state”; on the contrary, it was rather Krugman himself who accused them of being insincere and not really caring about the economy but just trying to advance their conservative ideology.

In other words, on the program, Krugman’s argument degenerated into a personal attack on those who disagreed with him in a classic case of psychological projection. Krugman then took that ad hominem argument and compounded upon the fallacy by turning it into a strawman argument for his column.

As I commented in my previous post on his Newsnight appearance:

Pay close attention to how Krugman’s argument degenerates into an ad hominem attack on Moulton and Leadsom; they aren’t honest, they aren’t sincere, they do not care about fiscal responsibility, he says. They only care about irresponsibly advancing their own ideological viewpoint of a smaller state; unlike Krugman, who would never act irresponsibly—such as by advocating that the Fed create a housing bubble, which would later burst and lead to the unemployment he now wants to address by generating more debt—in order to advance his own ideological desire for a bigger state.

The man’s dishonesty is matched only by his hypocrisy.

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