Paul Krugman Rides Into The Sunset

Authored by William Andersen via The Mises Institute,

After spending 25 years as a columnist for the New York Times, Paul Krugman is finally retiring from that position – 25 years too late, if one wishes to be honest. It is hard to measure the influence he had from that perch, but his columns surely were the deciding factor in his winning the Nobel in economics in 2008 after eight years of lambasting the George W. Bush administration.

[ZH: Yes, we know that isn’t a picture of Krugman, but it always makes us laugh…]

(His Nobel Prize was given, ostensibly, for “his work in economic geography and in identifying international trade patterns,” but one should have no doubt that, without having the power and influence of the New York Times behind him, it is doubtful that the Nobel Committee would even have known of his existence. I weighed in on the Nobel selection in a column in Forbes, hastily-written during a short break between classes I was teaching at Frostburg State University.)

Not surprisingly, the response from his peers is hagiographic. Kathleen Kingsbury, quoting from Krugman’s first column, declares:

That lede and the column were signature Krugman: The authoritative voice. The lively writing. The direct style. The clear hand guiding readers through a thicket of policy, data and trade-offs. The big ideas — in that column, they were about the First Global Economy and the Second Global Economy and how the interplay of political and economic questions would shape life worldwide in the 21st century. In little time, Paul became an essential read in Opinion, helping countless readers become more fluent in and mindful of how trade, taxes, technology, the markets, labor and capital intersected with political leadership, ideology and partisanship to shape the lives of people across America and the world.

Indeed, Krugman has been influential, but his influence hasn’t been a good thing. He is a disciple of John Maynard Keynes and has played an important role in legitimizing the application of Keynesian schemes by governments to “stimulate” their economies. Those governments were unsuccessful, Krugman claimed, because they had failed to inflate their economies enough to break out of the Keynesian “liquidity trap,” an imaginary state of affairs that Murray N. Rothbard fully debunked.

Krugman even resorted to fantasy in his quest to fight the mighty “liquidity trap,” claiming that if the US were to prepare for a never-to-come alien invasion, the burst of government spending would revitalize the economy. That nonsense alone should have discredited him as a serious economist, but instead cemented his status as the great advocate for the Keynesian trope that government spending is the key to economic prosperity.

To his credit, Krugman did condemn the tariffs proposed by President-elect Donald Trump, but the truth is that he never has truly understood economics from the praxeological vantage point, nor has he ever been interested in seeing economics in that way. An economy, to Krugman, is a series of aggregates—consisting of homogeneous labor, natural resources, and capital—all to be manipulated by government agencies and central banks. The idea that demand springs from what we produce in a market economy was anathema to Krugman, who hated that economic doctrine so much that he referred to Jean-Baptiste Say as a “cockroach.”

Given Krugman’s inability to understand the basics of economic logic, perhaps it isn’t surprising that he made the wild prediction: “By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.” Someone who cannot understand how production of goods drives demand for other goods most likely isn’t going to comprehend how improving pathways for information will also improve commerce.

Krugman was just as uncharitable to the Austrians as he was toward Say—although he never really understood Austrian economics and, to be honest, was happy to remain in blissful ignorance. He referred to the Austrian Business Cycle Theory wrongly as “The Hangover Theory,” turning a well-developed theory that meticulously explains the processes of booms and busts and reducing it to a morality play. He wrote:

A few weeks ago, a journalist devoted a substantial part of a profile of yours truly to my failure to pay due attention to the “Austrian theory” of the business cycle—a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire. Oh well. But the incident set me thinking—not so much about that particular theory as about the general worldview behind it. Call it the overinvestment theory of recessions, or “liquidationism,” or just call it the “hangover theory.” It is the idea that slumps are the price we pay for booms, that the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion.

The hangover theory is perversely seductive—not because it offers an easy way out, but because it doesn’t. It turns the wiggles on our charts into a morality play, a tale of hubris and downfall. And it offers adherents the special pleasure of dispensing painful advice with a clear conscience, secure in the belief that they are not heartless but merely practicing tough love. Powerful as these seductions may be, they must be resisted—for the hangover theory is disastrously wrongheaded. Recessions are not necessary consequences of booms. They can and should be fought, not with austerity but with liberality—with policies that encourage people to spend more, not less.

In other words, government spending on wars was just as economically useful as spending money on new capital and research that increases crop yields because, after all, someone is spending money. To Krugman, an economy is a purely circular thing in which we produce something to put on the shelves and spending is the process by which we remove the goods from the shelves so we can produce something else to put on the shelves—and so on.

It is not surprising that regime-minded elites worshiped his every declaration. Governments were not spending too much money; they were spending too little! Those who print money hand-over-fist, who intervene in the markets to direct resources to politically-favored winners are the real public benefactors. Those who question the wisdom of untrammeled government spending are the true enemies of the people.

At a Southern Economic Association meeting in 2004, I asked Krugman if he was endorsing the 70 percent tax rates that existed before 1981. “No,” he replied emphatically, “Those rates were insane!” When Rep. Alexandria Ocasio-Cortez called for the return of 70 percent marginal rates in 2019, Krugman said he believed those rates were “reasonable.” No doubt, he would attribute that change of heart to personal “growth” or just an evolutionary change in his thinking.

In truth, believing in an all-powerful state that can, in Keynes’ own words, turn “stones into bread” through the magic of spending and creation of new credit does not require personal growth or maturity. Instead, it reflects a mind that prefers fantasy over reality, lies over truth. Paul Krugman can retire peacefully, knowing that he has sanitized the use of raw state power in place of mutually-beneficial exchange that characterizes the marketplace.