A good way of putting the sequester in perspective

Scale

Caped Crusader sent me a wonderful squiblet that puts the sequester in perspective:

If the Federal budget weighed 200 pounds and went to see Dr. Michelle Obama (world renown weight expert and fat butt reduction subspecialist) would she say losing 3 pounds is so severe it would cause death or permanent impairment? Think about it!

That is what all the caterwauling is about! A government so necessary and efficient they cannot find 1 1/2 % that is not necessary!

The fact that the sequester has actually been in effect for two weeks without the world coming to an end reveals how accurate this little story is and how reprehensible the Democrat Chicken Littles were (and are).

Trying to understand the sequester

Obama is demagoguing the sequester like mad.  David Angelo provides a pleasant breath of common sense:

Incidentally, to the extent Obama says that the sequester will result in federal prosecutors having to abandon cases, that may be a very good thing. The news lately has too many stories about federal prosecutors run amok. Here are just a handful of links:

US attorney Carmen Ortiz strikes yet another sleazy deal.

Prosecutor aids DEA as it tries to seize a $1.5 million building over a $37 pot deal.

Oh!  Carmen Ortiz is in the headlines again for prosecutorial overreach.

And then there’s the corruption….

(Thanks to Earl for all these links.  He has been appropriately concerned for years about prosecutorial abuse.)

Why the market roars as the economy whimpers and sighs

A couple of weeks ago, I asked you all to explain to me why the stock market is so excited, even as the dollar is weak, unemployment is high, and national debt soars.  Naturally, I got many interesting answers back, with inflation being cited as the chief culprit.  Robert Arvanitis, who already provided an information-packed response, hasn’t forgotten that post, and he sent me an interesting update:

To follow-up prior discussions, here’s an excellent exposition at WSJ on inflation. [Note from BW: This article might be behind a paywall. Both Robert and I have accounts, so we can't tell if it is.]

In short, the Fed is fabricating a trillion dollars a year. Direct inflation is already deadly, but for now is buried at the banks.

Even before we suffer the direct inflation, the monetary failure is already having bad effects.

· The markets no longer give us the right price signals, so vast capital is being misallocated.

· Borrowers, most notably Obama himself, are getting a destructive free ride from low rates. More accurately, I should say Obama is “borrowing 1,000 billion a year.” Too many people don’t realize it’s meaningless for Obama to say “We borrow just one trillion but have cut 10 billion….”

· Meanwhile, any thrift is punished harshly by those low rates. Here the elderly suffer most.

As Glenn Reynolds would say, “But watch the whole thing…”

Bookworm here, with my summary:  Big bubbles, big explosions. Or to shift metaphors, the smart ones should be looking to hop off this merry-go-round. It’s about to break down and there’s not going to be anything romantic about it:

In answer to my question about economic issues…. by guestblogger Robert Arvanitis

In an earlier post, I asked several questions about economic issues that confuse me.  Robert Arvanitis wrote a comprehensive reply, but then couldn’t get the Word Press comment system to accept it.  Because it is so comprehensive and informative, I’m putting it up here as an independent post.  All that I ask of the rest of you is that you don’t let its length and depth dissuade you from chiming in with your own two cents (or, with inflation, four cents) on the subject.  There’s a lot to be said here.

And now . . . Robert Arvanitis:

Why, if the economy is contracting and the labor market is flat-lined, has the stock market gone up?

Will the stock market stay up (long-term and short-term predictions, please)?

In normal times, the stock market is a reflection of true economic activity; stocks typically trade at multiples of earnings from 10 to 14 times. So the yield is the inverse of that — if you pay $10 for $1 yield, that’s a 10% return. Likewise if you invest $14 to get $1 then that’s like a 7% return. That’s the norm, 7-10% for “risky” equities in contrast to the “safe” bond yields of 3-4% or “really safe” bank accounts at 2-3%.

Alas, we are not in a yield-trading market. Rather, we are seeing the impact of inflation caused by printing of money at the Fed. Our GDP, the value of everything we produce, is like $16 trillion. But if we suddenly doubled our money supply, then the GDP would be, nominally, $32 trillion. Same loaves of bread and haircuts, but now “worth” twice as many dollars. Kinda like the story of the boy who sold his dog for a million dollars. Dad asks how he got so much money. Boy replies “No, I got two, $500,000 cats…”

Same with our stock market. Right now up to 14,000 on the Dow, but that’s not any more loaves of bread that the 10,000 Dow of just a few years ago.

Bad news — wealth effect makes people falsely confident, so they go spend and do other stupid things. Good news — at least it’s something of a hedge against inflation. You can still get the same number of (now more expensive) loaves of bread when you’re hungry.

The IRS says that families will be paying $20,000 for health insurance. It also says that the top penalty for failing to buy insurance is less than $3,000. Medical insurance companies can no longer turn away people with pre-existing conditions. This means that people can avoid the $20,000 fee, pay the small penalty, and buy “insurance” only at the time they need it. (Or, more accurately, buy “cost shifting” when they need it.) Can the insurance companies stay solvent under these circumstances?

If insurance companies cannot stay in business with this non-insurance fee structure imposed upon them from above, how will they change? Most are diversified. Will they simply abandon health insurance? They cannot refuse to pay onerous fees, because payments are forced upon them by law.

Will the death of insurance companies create a medical black market, where people pay cash for services? In a way, this wouldn’t be so bad, because it would do away with the moral hazard that comes from both huge insurance companies and government interference. With those huge systems, people have no incentive to shop around for better or more affordable treatment.

Take a step back. We must separate the various functions. First is health care provision. Doctors, nurses, drugs, hospitals, equipment… That is a service sector that will rise with demand and shrink with price-controls. Obamacare = less service, fewer doctors, worse outcomes.

Second is true insurance. You have a one in a hundred risk of losing 100,000 (car crash, home fire, serious illness). Being rationally risk averse you’ll gladly pay $1,000 (expected value of 1% times 100,000) as a premium. Heck, you’ll even pay like $1,500, just to be safe. That extra $500 pays for agents, and underwriters, and insurers’ capital, and all the rest.

Third is what we have today — redistribution masquerading as insurance. Young/healthy should pay a fair premium of like $4,000. Old/ill should properly pay $20,000. But Obamacare, to hide redistribution, says everyone will pay $12,000 each, the average of the high and the low. Insurers wouldn’t care how they get paid, EXCEPT the young/healthy aren’t stupid. They won’t pay $12,000 for insurance worth (to them!) a mere $4,000. Hence the unconstitutional (shut up Roberts!) mandate.

(Side note — this use of phony insurance to hide redistribution is just the latest iteration of the continuing fraud. It starts with “tax Peter to pay Paul.” Steps then include high rates with unfair deductions, borrowing to tax the unborn, inflation to rob lenders and the poor, unfunded mandates, and finally scams like Social Security and Obamacare. Details on request.)

Ok, that’s the real economics. Now the politics. Even with all the arm-twisting, and bribing, and parliamentary cheats, and brief supermajority, Obamacare could NOT pass with anything close to the necessary punitive taxes needed to get the young/healthy. That’s why the penalty is so foolishly low.

But to the left, that’s a feature, not a bug. It’s OK if insurers get squeezed out of health insurance. They’re just capitalist parasites anyway, and we’re one day closer to single-payer, that is, a government-monopoly on when you die.

Obama’s Consumer Financial Protection Bureau is forcing banks to give unsecured, low-interest home loans again. These loans, and the machinations into which the financial industry entered in order to protect itself from the downside risk of such loans, triggered the 2008 recession. What will happen this time around? Will banks go out of business? Will they come up with some grand new scheme? I assume that, if they do the latter, it will implode. The last time, it took around two decades before the Ponzi scheme collapsed. How long will it take this time?

We have a problem that banks got “too big to fail” because of government distortions of the credit markets. The Fed taught markets that serious losses get “socialized” (fall on taxpayers, not the true failures).

We also have a problem that government misallocated credit via the “Community Reinvestment Act.”

So what does government do? Makes an utterly irrelevant move into more controls. Plus an additional misdirection of credit.

We do not learn from our mistakes. We simply make new and more subtle errors.

It’s like this. A hippo gets into the bathtub. Water overflows everywhere. Hippos declares an emergency and nationalizes all the towels…v

I seek answers from those more economically sophisticated than I am

Begging

I have a few questions to ask, all of which involve economic trends.

Why, if the economy is contracting and the labor market is flat-lined, has the stock market gone up?

Will the stock market stay up (long-term and short-term predictions, please)?

The IRS says that families will be paying $20,000 for health insurance.  It also says that the top penalty for failing to buy insurance is less than $3,000.  Medical insurance companies can no longer turn away people with pre-existing conditions.  This means that people can avoid the $20,000 fee, pay the small penalty, and buy “insurance” only at the time they need it.  (Or, more accurately, buy “cost shifting” when they need it.)  Can the insurance companies stay solvent under these circumstances?

If insurance companies cannot stay in business with this non-insurance fee structure imposed upon them from above, how will they change?  Most are diversified.  Will they simply abandon health insurance?  They cannot refuse to pay onerous fees, because payments are forced upon them by law.

Will the death of insurance companies create a medical black market, where people pay cash for services?  In a way, this wouldn’t be so bad, because it would do away with the moral hazard that comes from both huge insurance companies and government interference.  With those huge systems, people have no incentive to shop around for better or more affordable treatment.

Obama’s Consumer Financial Protection Bureau is forcing banks to give unsecured, low-interest home loans again.  These loans, and the machinations into which the financial industry entered in order to protect itself from the downside risk of such loans, triggered the 2008 recession.  What will happen this time around?  Will banks go out of business?  Will they come up with some grand new scheme?  I assume that, if they do the latter, it will implode.  The last time, it took around two decades before the Ponzi scheme collapsed.  How long will it take this time?

I will appreciate any and all answers to these questions.  I truly don’t understand what’s going on in today’s economic world.  Incentives are flipsy-wopsy and trends make no sense.

Money

More thoughts on robots and the future

Robot

I wrote last week about the fact that the lapdog media is finally catching up with Obama’s claim that the problem with America’s economy is that ATMs are job destroyers, and that’s why our economy is a mess.  Many of you commented that, in your own industries, you’ve seen automation chip away at jobs so that a handful of people are doing what it once took dozens or even hundreds of people to do.  I agree completely.  Technology definitely destroys jobs.

What I was trying to say, though, is something different.  What’s unique about this ongoing recession/depression, is that the government has been working overtime to depress the new jobs that usually arise as a result of technology.  Absent government intervention, our transitions in the wake of a major technological change have usually been beneficial to the majority, even though there’s no doubt that a minority saw itself lost to history’s backwash.  For the first time, though, we’ve got a government so busy grieving for the minority who are becoming obsolete, that it’s enacted policies to ensure that the majority will suffer too.

I speak quite personally about this, because I’m a perfect example of someone who took modern technologies and spun off a new career.  My new career has been less profitable than my old one, but infinitely more enjoyable, not to mention a better match with parenting.

My graduating year from law school was one of the last years that saw new associates arrive at law firms that didn’t have desktop computers.  We had Word Processing departments, which would use primitive word processing machines (who else remembers old Wang systems?) to finalize briefs or, if they were particularly sophisticated, they had primitive software to do the same task.  To get a brief done, the attorney would hand write or dictate a brief, and then walk it over to a secretary, who would transcribe it.  It was a very time-consuming process.

Law books

Legal research was also done the old-fashioned way, which meant surrounding oneself with heavy books.  To research a legal question, you’d go to the Westlaw Digests.  You’d start by perusing the Decennial Digests (massive volumes that broke the law down into categories).  These were good, because you could do ten years worth of research in a single category.  If it had been nine years since the last Decennial Digest, though, you’d then have to go through nine years worth of annual digests, including the pocket updates stuffed in the back.  Once you had hand written a long list of potential cases, you’d head for the stacks and pull out volume after volume of case reporter.  You’d page through to your cases, and hope that at least some of them were on point.  Once you found them, you’d either write notes by hand, or you’d spend hours (and dollars) photocopying.

Both Westlaw and Nexis did have computer research available, but it had to be done on dedicated machines and it cost a small fortune.  It was much cheaper to pay an associate to do fifty or even one hundred hours of research, than to go onto Westlaw and spend a couple of hours writing and printing.  (Keep in mind that, back in those days, all connections were dial-up and were incredibly slow.)

Old desktop computers

Within a few years of my starting to practice law, the world turned upside down.  Lawyers got desktops and dedicated word processors became obsolete.  That’s when I fell in love with Word Perfect, which is still my favorite word processing software because you have the best control over the look of the final product.

In the beginning, those desktop computers were stand-alones, so you still had to walk to your secretary’s desk, only this time you’d hand over a floppy, rather than a sheaf of yellow paper or a little tape recording.  Just a year or so later, with the firm’s four walls, those floppies were obsolete, as the firms had become networked.  Suddenly, you didn’t even need to stand up to send your secretary that pleading that needed to be finalized.  Instead, you just pushed a button.

Online legal research continued to be expensive, but Lexis and Westlaw now had software that enabled you to use your laptop to connect directly to those services.  This was another technological advance that meant you didn’t need to get up from your chair.  (Right now, I’m seeing, not only a technological trend, but a trend in lawyers getting flabby and gaining weight!)

Woman at computer

One day, I sat at my desk and realized that I was totally self-sufficient. I didn’t need a secretary, since I’ve always been a better typist and word processor than any secretary I ever had, and I didn’t need access to a law library, since my desktop had become a law library.  I also realized that home computer prices were dropping and that the case-reporting services were dropping their prices in response to the increased competition that accompanied increased demand.  Since I hated going to court, and loved doing research and writing, I quit my job and set up a home practice.

Floppies

As the years went by, having a home office became easier and easier.  In the old days, I still had to put my documents on floppies, or print them up, and then hand-deliver them to my clients.  Within a short time, however, either my clients got email, so I could just send an attachment, or they upgraded their network services so that I could connect from home and simply upload my work onto their systems.

The new systems made hoards of young lawyers unnecessary.  While it had once been cheaper to give a second or third year associate a fifty hour research job, it was now much cheaper to contract the work out to me.  With my on-line research, home computer and printer, and network or email connections, I was not only faster and better than a young associate, I didn’t force the firm to carry me during the dead times, nor did it have to pay any benefits to me.  Technology would have destroyed my old job, but instead it created a new job for me, and one that I liked much better.

In the Obama economy, though, I have no work.  If I were a young lawyer done out of a job by new research and writing technology, it would be impossible for me to set up my own thriving business (and it did thrive for many years), because there is no work to be had for anyone, whether in a firm or outside of it.  The old jobs are dying, but the economy is too regulated, taxed, and constrained to create new niches.

And that’s what I meant when I said only Progressives believe that robots are job killers.  Their belief is true only to the extent they’ve made it so.  I fervently believe that, in the normal, non-Obama world, even as technology kills many jobs, a free market, coupled with human initiative, can create many more (better ones too).

Only Progressives could believe that robots will destroy the economy

ATM

The newest Ivy Tower Leftist explanation for the economy’s disastrous jobless recovery riffs off of Obama’s remark a couple of years ago about the disastrous effect of ATMs.  You remember that, don’t you?

President Obama explained to NBC News that the reason companies aren’t hiring is not because of his policies, it’s because the economy is so automated. … “There are some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers. You see it when you go to a bank and you use an ATM, you don’t go to a bank teller, or you go to the airport and you’re using a kiosk instead of checking in at the gate.”

Robot

It took a little while for Obama’s minions to catch up with his genius, but catch up they have.  First, 60 Minutes ran a segment in which two MIT thinkers earnestly explain that Americans are going to be increasingly jobless as robots take on more and more of the jobs laborers used to do.  (I didn’t despair when I watched this.  Instead, I was absolutely fascinated by the way warehouse robots save human backs and feet.) AP then got in on the act, explaining with equal earnestness that technology is killing jobs and therefore keeping the economy stagnant.  Typically for the Left, these great thinkers are conflating two actually unrelated things:  the first thing is jobs that are replaced by technology; the second thing is a weak economy that stubbornly refuses to grow.

1912 Model T Ford

In times past, the innovation and a stagnant economy were not related.  Yes, the wheelwrights vanished when cars came along, but cars were part of America’s stunning early 20th-century leap into the modern era.  The economy went crazy, not just because the car industry itself created new jobs, but because the ability to travel speedily and with almost no limits on distance created other opportunities.  People could now travel to jobs that would have been unavailable to them before.  Factories previously powered by steam or water (or humans), suddenly had the internal combustion engine.

1920s tractor

Cars also brought about mechanized farm work and agricultural transport.  These not only made it possible for American farmers to feed a growing, mobile, vastly dispersed nation, but they also improved the nation’s overall health.

Keypunching computer data in the 1950s

In our own lifetimes, computers didn’t do away with jobs.  Instead, they changed old jobs and created new ones.  Between 1960 and 2008, computers also helped supercharge the economy, especially when it came to the advent of personal computers and, later, the internet.  It’s absolutely true that people got left by the wayside; that economic bubbles grew and burst; and that start-ups broke down — but overall, these amazing technological advancements created a bigger economic pie, not just at home, but abroad too.

The carpet beater

Another way of thinking about this is to look at changes in the domestic sphere.  Women used to boil water to do their laundry, wring it out by hand, and then hang it on lines.  To clean their carpets, they’d have to roll them up, drag them out, hang them on a line, and beat them.  Every dish needed to be hand washed and, if there was no counter space, hand dried.  Before flush toilets, someone had to empty those chamber pots and before modern plumbing, servants drew baths by hand.

Victorian house servants

In a pre-modern age, these tasks required massive human labor.  It wasn’t that middle class Victorians didn’t do laundry, clean carpets, wash dishes, or carry water.  They did those tasks; or more accurately, a phalanx of servants did those laborious tasks.  Even a young middle-class couple, just starting out, would have a cook and a housemaid.  And then on laundry day, a laundry woman would come in to help out too.

The world economy did not collapse when labor-saving appliances destroyed the necessity for these domestic jobs.  Instead, the same economy that produced labor-saving devices required people to make, deliver, and market these devices.  The economy shifted and opened ever further.  That’s why I’m writing on a computer, rather than sitting in a darkened room dipping a quill pen in ink.

Bankrupt Solyndra

Why is this changing economy different?  Simple:  in other times, when the jobs shifted, the government didn’t put into place policies that deliberately destroyed economic alternatives that would create employment for those whose jobs become obsolete.  In today’s America, though, the avenues for new forms of commerce and employment are closing, thanks to ever-increasing taxes, regulations, hostility to corporations and industry, and an obsessive government focus on a green energy sector that does not have the chops to grow on its own.

In other words, the Left is only able to conflate obsolete jobs and permanent unemployment because it’s looking at a particular moment in time, one in which the remnants of our once-thriving private sector are still introducing labor-saving devices, even as the Progressive government’s heavy hand is simultaneously suppressing that start-ups that would have piggy-backed on this new technology and provided different (and often better) employment opportunities.

Segregated drinking fountain sign

Ultimately, Progressives, despite their forward-looking label and their “Forward” slogans, are relentlessly reactionary and regressive.  They live in a finite economic world, blind to history’s ever-repeating lesson that, when there is individual freedom, the economy always expands.  Still fighting the battles of the 1960s, they believe Jim Crow is America’s default racial setting, that Muslims are picturesque people on Cook’s tours, and that unwed mothers’ only choices are using coat hangers or becoming social outcasts.

Oh!  I almost forgot.  They also think that, when it comes to aging and medicine, Americans die young, after the hoary old doctor with his stethoscope has done what he could.  As to this last delusion about our modern world, Charles Krauthammer, in summarizing Barack Obama’s historically polarizing, blatantly statist inaugural address, says it best:

At its heart was Obama’s pledge to (1) defend unyieldingly the 20th-century welfare state and (2) expand it unrelentingly for the 21st.

The first part of that agenda — clinging zealously to the increasingly obsolete structures of Social Security, Medicare, and Medicaid — is the very definition of reactionary liberalism. Social Security was created when life expectancy was 62. Medicare was created when modern medical technology was in its infancy. Today’s radically different demographics and technology have rendered these programs, as structured, unsustainable. Everyone knows that, unless reformed, they will swallow up the rest of the budget.

(Credit for some of the ideas in this post has to go to a delightful book I’m reading: Lucy Worsley’s If Walls Could Talk: An Intimate History of the Home. It is a charmingly written reminder that the world is not static, and that fighting yesterday’s battles without an eye to today’s knowledge is a fool’s game. The Left is certainly masterful at the fight, but its ultimate aims are hopelessly and dangerously retrograde.)

Too tired to work

Had an interesting conversation at Church today. One of my friends, a Polish immigrant and self-made millionaire was discussing the immigration issue with a upper-middle class, white-bread soccer mom (let’s call her “Nice Liberal Lady”. My entrepreneur friend and I both agreed that some form of legalized immigration was needed for people with low educational skills because, sadly, too many Americans are unwilling to do jobs that demand physical labor.

But, hold on, said Nice Liberal Lady. Her son, it seemed, lived at home with his unused college degree because working in a fast-food restaurant or other similar menial job would only distract him from his career path. Not so, responded my entrepreneurial friend – “when my father died when I was young, I worked any job that I could get – even two or three jobs at a time, just to get money on the table. We Polish people know that when times are bad, you work extra hard instead of preoccupying yourself with feeling sorry for yourself (I am paraphrasing, but that was pretty much the gist).

Whoa, said Nice Liberal Lady: “I have a problem with that, especially having grown up with a workaholic father. The fact is, I am too exhausted to be constantly looking for a job or working more-than one job.” She let it be known that she really resented the implication that she should be expected to go out and work hard to earn her own financial support. The proper solution, it appeared, was that is was therefore OK to let other people exhaust themselves to pay benefits to the members of our perpetually exhausted non-working classes.

I pointed out to my friend, afterwards, “the reason that you were able to rise up and take on all these jobs is because you did not begin with the assumption that you were owed a certain standard of living.”

We really do live in two very different and irreconcilable worlds.

Ironically, a headline article in today’s Chicago Tribune focused on Polish people in Chicago returning to Poland in search of better opportunities. ’nuff said.

Progressives truly don’t understand the difference between wealth and money

Paul Krugman, looking smug

Paul Krugman is a Nobel Prize winning economist.  He’s also remarkably ignorant (or stupid or, maybe, both).  Only someone lacking in brains and understanding would think that the U.S. could get out of its debt problem, not by printing paper money, but by minting a platinum coin and then denominating it a “$1 trillion coin.”  Nevertheless, that’s exactly what Krugman proposes.  He thinks (probably wrongly, as it turns out) that there’s a Constitutional loophole that allows the president to “print” a trillion-dollar coin:

Enter the platinum coin. There’s a legal loophole allowing the Treasury to mint platinum coins in any denomination the secretary chooses. Yes, it was intended to allow commemorative collector’s items — but that’s not what the letter of the law says. And by minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling — while doing no economic harm at all.

Did you get that last little bit?  Magically creating a trillion dollars will do “no economic harm at all.”  It’s worth exploring Krugman’s reasoning, to which he helpfully links (since he is, after all, judge, jury, and executioner when it comes to all thinks economic).  I’ll quote him at length, because only then can one fully appreciate his reasoning:

In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back. So this is all a gimmick — but since the debt ceiling itself is crazy, allowing Congress to tell the president to spend money then tell him that he can’t raise the money he’s supposed to spend, there’s a pretty good case for using whatever gimmicks come to hand.

But leaving the debt ceiling on one side, isn’t it true that since spending can currently be financed by Fed money printing, we shouldn’t care at all about the notional debt owed to the Fed? Alas, no.

It’s true that printing money isn’t at all inflationary under current conditions — that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. So even though right now that debt is just a claim by one more or less governmental agency on another governmental agency, it will eventually turn into debt held by the public.

What those three paragraphs circle around is the magic word: inflation. Krugman believes that magically pulling a trillion dollars out of the air won’t produce inflation but that, at some magical point in the future, President Obama will have borrowed so much money that he will be able to pay back the trillion dollars before inflation occurs.  One suspects that Krugman is envisioning a scheme along the lines of check kiting, with Obama borrowing a trillion from the feds, so he can borrow a trillion from someone else, and then use that second trillion to pay back the first.

Dunce cap

The fundamental flaw with Krugman’s whole theory, of course (which even he acknowledges is a “gimmick”), is that it ignores the difference between money, which merely a symbol of varying value, and wealth, which is the real measure of a healthy, rich economy.  Apparently I need to give Krugman my “Economics 101″ lecture, the same I used when my kids were nine to help explain to them the difference between money and wealth, and the concept of inflation.  Here goes:

In the old days  – the really old days  – there was no money. Instead, there were goods. For example, you might have had wheat to spare, but you needed a cow. I, on the other hand, had a cow and but was short of wheat. The two of us were a match made in heaven, trading our goods to fulfill our desires.

Cow

Problems arose, of course, when I wanted the wheat, which you had, but you wanted a chicken, not a cow. Or perhaps you had wheat, but only a little, and certainly not worth enough to trade for an entire cow.

This old system also had a problem with mobility. It’s simply not feasible to carry bushels of wheat with you wherever you go, unless you have a really big purse. And cows are hard to lead into the pub in exchange for a nice pint o’ beer. Not to mention the fact that you’d need a lot of pints to equal one cow.

Something better needed to come along. And it did: Gold.

Very heavy gold

Gold’s a great substance. It’s beautiful; infinitely malleable; it blends well with other metals; it doesn’t degrade; and it can be replenished, although the effort needed to replenish it ensures the rarity that’s necessary to its value as a commodity.

The only downside to gold is that it’s heavy. Very, very heavy. Get enough gold together, and you’ve suddenly got the weight of that cow to carry around  – and, once again, your purse isn’t big enough.

In all societies, some people, whether through trade, warfare, or outright theft, proved more adept at amassing wealth (whether wheat, cows, or gold) than others did, and they assumed leadership positions. Once in those positions, they tended to demand that their subordinates pay them protection money. These funds protected the hapless payor both from harassment by that same leader and from attacks launched by enemies outside the kingdom.

Bully

Eventually, this protection racket got formalized as taxes. Leaders also discovered that, in addition to providing protection for their subjects, there was a virtue in paying for basic services within the kingdom, such as roads, minimal care for the very poor, etc. A well-run kingdom increased everyone’s wealth.

But back to those grand clumps of heavy, heavy gold. Someone eventually got the idea that, rather than schlepping around gold, it would be a good idea to have currency made from lighter weight metals or even paper. These could be used to purchase myriad things that were worth less than a single gold coin and were easier to transport.

Money

Because you couldn’t have random sheets of paper or chunks of silver or copper roaming around in the guise of currency, these money substitutes were useful only to the extent people believed them to be backed by the genuine gold article — and the only way to ensure that people could trust these substitutes was to delegate to a single entity the task of guarding the real gold and issuing the substitute coinage or paper. The entity that ended up responsible for holding the gold and backing the substitutes is government.

There are two important things to remember at this point: First, the substitute money’s worth is always relative to the gold. If the gold is finite, but you mint more coins or print more paper, each coin or note is worth less as it becomes a smaller fraction of the available gold. Put another way, imagine that over a six month period the government keeps printing notes until it has six times as many notes as it has gold. Milk that cost one piece of paper in January will cost six pieces of paper in June. The milk’s value in gold is the same; it’s the paper that became less valuable. (This, I helpfully explained to my kids, is inflation.)

Second, and this is the really important thing, one must remember that, nowadays, unlike the feudal lord of old who went and out ravaged another country to get gold, today’s governments doesn’t go out and amass gold; they just generate the coins and paper. To the extent the government has wealth, it’s because it uses its police power to demand that its citizens give it their wealth in the form of taxes. The government hasn’t created anything. In today’s America, as in all modern economies, only the people create wealth.

Platinum coin

For Obama to mint a platinum coin does nothing to increase the country’s wealth.  It’s just generating a piece of metal to which the Leftist government assigns an arbitrary value to justify taking on more debt that America cannot afford and cannot repay.  For Paul Krugman to advocate this course of action isn’t just ignorant and stupid, it’s reckless to the point of national economic homicide.  Too bad Krugman is incapable of feeling ashamed of himself.

Barack Obama’a America: Keynesian economics on steroids

When I was in junior high school, high school, and college, my American history classes always preached the same message:  Franklin Roosevelt saved America by “priming the pump.”  That is, he took money away from the rich, filtered it through the government, and then used the brain-power built into government to decide upon the infrastructure projects we know and love today, everything from Hoover Dam, to the Tennessee Valley Authority, to the cool art deco post offices dotted around the nation.  It was only when I was in college that the teachers put a name to this wondrous system:  Keynesian economics.

Keynes wasn’t a communist.  He just wasn’t a believer in marketplace efficiency.  He advocated a privately-owned economy, with the government making the important decisions.  (The Nazis, incidentally, used this economic approach, which they called “National Socialism.”)  More than that, Keynes and his acolytes believed that, when times were tough, the only entity that could respond rationally and effectively to market chaos was the government.  Keynesians therefore believed that economic downturns should be met with higher taxes from the rich and more government spending directed at the poor.  The theory was that the poor would take this money and pour it back into the economy, thereby priming the pump.

Apparently Keynes and his friends had never read Frédéric Bastiat’s “broken window parable” or, if they had, they dismissed it as a foolishly simplistic parable that wouldn’t meet the demands of the Ivory Tower and elite governance:

A broken window is not an economic upswing

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son has happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—”It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

But back to history as I learned it.

Factory girls during world war ii

After their almost rote teaching about Roosevelt’s brilliant Keynesian save of the economy, my instructors would always add, sort of as an addendum that wasn’t really important, that WWII finally broke the Depression’s back.

War does represent the perfect Keynesian paradigm, with the government directing the whole private-sector economy towards a single martial goal.  Putting aside the twenty million dead, war was good for the Soviets too.  And right up until D-Day, the Germans weren’t doing so badly with a war economy either.

British rationing coupon from 1950

As the British discovered, though, once war is over, continuing a war-time economy (complete with government rationing) doesn’t work.  The government may be good when everyone’s efforts are directed to national survival, but it’s a lousy wealth creator during peace time.  Only when rationing ended in the 1960s did the British economy start to recover, and its real boom happened after Maggie Thatcher de-nationalized major industries.

In America, the post-War period was the anti-Keynesian period, and that — not Roosevelt’s taxing and spending — is what really broke the Depression’s back.  The late 40s and the 1950s celebrated American individualism, innovation, capitalism, and freedom.  With Communism as a foil, America was almost aggressively free.  And when it periodically tried to put the brakes on that freedom by raising taxes, the market foundered.  John F. Kennedy got it:

John F. Kennedy

“In today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarges the federal deficit – why reducing taxes is the best way open to us to increase revenues.” — John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”

Although Kennedy did get his lower taxes, pressure from the Left resulted in another Keynesian experiment in the 1970s.  The economy cratered.  Reagan released the economy from tax pressure and it was revitalized.  Bush Sr. (“Read my lips:  no new taxes”) raised taxes again, and down the economy went.  Clinton, under pressure from Republicans, decreased spending, which helped the economy grow again.  Bush Jr. went one step further and lowered taxes, and the economy roared again — and that was true despite 9/11 and a long war.

Meanwhile, though, the Democrat controlled Congress that Bush got in 2006, while it didn’t address taxes, starting putting the government thumb on the scale again.  Rather than backing off of banks (as McCain and Bush suggested), it increasingly limited what they could and couldn’t do.  This government pressure resulted in banks being forced to give loans to people with no equity.  The banks got creative to avoid risk, packaged, and resold these loans.  It looked good for a while, and then, in 2008, the bubble burst.

Bankrupt Solyndra

Enter Barack Obama.  Obama spent the first half of his presidency doing classic Keynesian pump priming by pouring massive amounts of government money into his pal’s pet projects.  Many of those projects went bankrupt, others ran over cost, others never got off the ground.  Obama also laid the foundation for an ostensibly private, but still government-controlled medical sector (1/6 of the American economy).  The economy alternately stagnated or sagged.  Romney fully understood the problem, but was never able to articulate the solution.  Since he couldn’t sell the public on the free market (not to mention that he was trying to push back against the appalling character attacks leveled against him), the public in 2012 chose the devil it knew:  Obama.

Obama has now begun the second half of his presidency by doing Keynes on steroids:  on New Year’s Day, he got significant tax increases on producers, without in any way stopping his spending.  Obama, though, has done something Keynes never imagined.   Obama has not used the pump priming money to put shovels (or even spoons) in the hands of those who are supposed to reinvigorate the economy.  Doing that at least gives those receiving government money a job (which is good for the resume and a sense of self-worth) and it gives them an ownership interest by allowing them to create a lasting benefit to society.  What Obama is doing is just handing out money in the form of pure welfare.  He’s not creating a working class; he’s creating a parasite class.

Food shortages Great Depression

Classic Keynesian economics has never worked.  Obama is now trying the un-classic version.  If I were a betting woman, I’d say that, not only will Obama’s experiment fail, it will fail on a much vaster level even than Roosevelt’s Keynesian debacle.  (And if you want to know just how bad Roosevelt’s failure was — and how grossly misleading my public school history education was — you must read Amity Shlaes’ The Forgotten Man: A New History of the Great Depression. Roosevelt’s economic experiments were a disaster, and it was only through the aggressive propaganda flowing out of Hollywood, media, and educational institutions, propaganda that escalated after WWII, that we remember his presidency as an economic success.)