Why Mr. Krugman is wrong - every time

Paul Krugman is a frequent columnist for the liberal New York Times.  He is also probably the nation's most prominent liberal Economist.  His most recent post is upside down.  I'll tell you why.

Paul is a "Keynesian".  "Keynesian" economists believe that every economic problem can be solved by the government printing and spending money.  They are named after John Maynard Keynes who tried to sell the strategy beginning in the early 1900s.  They use tricky words like "infuse" money into the economy to "stimulate" it.  They claim that food stamps give people the nutrition they need IN ORDER to work, implying that without food stamps they are too weak to work.  They claim that unemployment checks give a 2:1 return to the government because people who receive the money go out and spend it on goods and services at small businesses, then the small businesses grow and hire more people who then pay taxes on their money.

First of all, does this pass the smell test?  When Paul says that all we really need to do to get out of this recession is SPEND MORE MONEY, does that sound right to you?  Our debt was around $10 trillion when Bush left office.  Obama has now racked up more debt in 3 years than ANY President EVER before in ALL OF HISTORY!  Our debt is now nearing $17 trillion.  Did you know if you took the total combined wealth of the two richest men in America and put it towards America's debt, it would pay for 3 months of INTEREST on the debt?  That's it.  And has this massive spending helped the economy?  Unemployment is still higher than it was when Obama took office - and the spending began even before he took office when President Bush passed the first stimulus to "save the free-market system" - the biggest gaffe statement ever made by Bush.

Even if the Keynesian philosophy could work, is it worth the cost?

Cost:

1. More dependency on government.  People on food stamps and unemployment are dependent on the government for their lives.  They are victims of modern day slavery.

2. Inflation.  Printing money is not free!  Every dollar printed means less value of the dollar that you are holding.  And it is apparent in rising grocery and gas prices.

Big government, big spending solutions go against common sense and conservative principles.  So when will Paul Krugman catch on to common sense?  I suspect never.

Is There Such A Thing As A Free Lunch?

It seems like everyone wants stuff for free now-a-days.  Aly and I use "buy one, get one free" coupons all the time.  When I go to Costco, I like to enjoy the free samples available.  Sometimes I find myself doing or eating things that I don't like, just because they are free.

Liberals seem to want the government to provide free health care, free food, a "free" salary to the unemployed, free homes, free birth control, or even free diapers.  But is anything truly free?  There are 2 unseen problems for getting stuff for "free".

1. Nothing is free.  Everything has a cost associated to it.  Someone is always paying.  Those samples at Costco?  Someone paid a worker to produce that sample, the food itself cost something, someone paid to ship it to Costco, and Costco is paying the employee to distribute it.  Free health care?  Someone has to pay the doctor's salary, and if no one repays the doctor for his work, then it comes out of the doctor's pocket.  The doctor pays.  Free salary to the unemployed?  Where does the money come from?  It may be free to someone, but it is costly for someone else.

2. Things that come from the government, don't actually come from the government.  The government is simply an entity that survives on OUR tax dollars.  They have absolutely no income except that which is given to them from its fruitful citizens.  You may think that the government can print money, so it is free money.  Does that sound right?  If the government actually could print unlimited amounts of free money without a reciprocal affect, don't you think we would have already solved the problem of world hunger along with any other problem in our world?  The truth is, every dollar that is printed makes everyone else's dollar less valuable.  It's kind of like cutting a pizza.  If you have a 16" pizza sliced into 8 pieces but there are 12 people, does cutting the pizza more and more make the pizza bigger?

Next time you hear someone say they think health care should be free for everyone, ask yourself, "but who would pay for it?"

Creative Destruction

Creative destruction is the term economists use to describe industries that die due to better technology.  The classic example is the typewriter.  Before people used computers and after people wrote by hand, people used typewriters.  These machines were so great!  The type came out neatly, and people could write much faster with a typewriter than by hand.  Because of the wonderful invention, sellers of typewriters sprung up across the nation - creating thousands of jobs.  Then the computer came along.  Typewriter shops across the nation and world went out of business.  Thousands of jobs were lost.  People demonized the computer industry and labeled it as a job destroying industry.

Laughable, right?  Computers destroying jobs...  Believe it or not, people are making the same argument today.  Newspaper companies complain that news comes free online.  And the President of the United States demonizes ATM machines for taking the place of bank tellers.  Ignorantly he said, "there are some structural issues with our economy where a lot business have learned to become much more efficient with a lot fewer workers."
  

This argument has been made for centuries and will always be made by the people who don't understand the concept of creative destruction.  When industries are replaced by better or more efficient methods because of changing demands of the customers, the jobs seem to disappear.  The fact is though is that it is an ever-revolving cycle.  The jobs don't disappear, they change hands.  And society is better off.  Any product you can imagine probably destroyed an industry, but made the world better.

This post was inspired by George Will's blog post today.

Minimum Wage

You may have heard of supply and demand.  In the labor market, the suppliers of labor (employees) are represented by the "S" curve, and the employers (McDonalds) represent the "D" curve.  The market will naturally, via Smith's "invisible hand", determine the correct wage for the amount of labor being offered in the economy.  This wage is represented by the intersection of the S and D curves (P1 below), or when Supply = Demand.  When the government decides that this wage is not "fair", they mandate a minimum wage that employers must pay.  This sounds great, right!  Now the little guy gets more money!  Not so fast.  Lets say the equilibrium wage represented by P1 is $6.00.  When the government steps in and requires employers to pay $8 (P2), look at where P2 intersects with the supply curve and the demand curve.  Who is willing to supply labor at $8/hour?  A lot more people, right?  But how many employers demand labor at $8/hour?  Quite a bit less (Q2).  What ends up happening is employers become more efficient with the laborers they already employ.  They do this by laying some of their workers off and increasing the productivity of the workers left over, or by employing machines - which don't require wages.  The government's intent was to raise the quality of living for the equilibrium number of workers (Q1), but the effect is that people get laid off, and the people left with the jobs in the end most likely are not the people that the mandate was trying to help.  

You may be saying, "Sure, that's what the graph says, but that's not what really happens."  There are actually many example of this effect.  Walter Williams describes multiple scenarios on his blog, and here, and proves that the law of supply and demand actually does hold even in this scenario.  The law being: The higher the price of something, the less people will take of it; and the lower its price, the more people will take of it.

More from Walter Williams: First here, Second there, Third somewhere.

Presidential Profile: Rick Santorum

Rick Santorum has a lot of problems when it comes to Economics.  He has the most baggage in his voting record, or at least as much as Newt Gingrich.  Rick Santorum has been an "active duty" politician for 16 years, first serving in the House of Representatives and then a Senator for Pennsylvania for 12 years straight.  During this time, he cast a lot of votes.  His voting record can be found here (via votesmart.org). 

He made a few bad Economics votes, such as voting to raise the minimum wage which seems like a good thing for lower-income workers, but in fact has been proven to hurt more people than it helps by forcing employers to lay their workers off instead of increase their wage.  Employers then either double the work load of the remaining workers, replace workers with wage-free machines, or produce things in China where they can pay remarkably low wages.  

Rick Santorum voted for No Child Left Behind.  There are arguments as to whether this program is successful or not, but regardless, it is bad policy.  It has huge expenses and gives more power to the Department of Education.  This federal department should not exist - it creates too much waste and inefficiencies.  The responsibility to educate should lie with the States and local government.  Let the states come up with their own programs, and let the people migrate to the state with the best program.  Competition between the states will improve education while decreasing cost and inefficiencies.  

Rick Santorum has voted to increase military spending every single time that he has had the chance, and he has voiced that he will continue to do so (to be fair, so has every other candidate but Ron Paul).  But Rick seems to be the one who is most emotionally and religiously attached to protecting our allies and destroying our enemies.  Emotion and religion should not play a part in defense spending and military action.  Keep in mind, that defense spending is our 2nd largest budget item leading to our $15,300,000,000,000 debt.

Rick Santorum has increased the debt limit 5 times since he has been in office.  The debt limit increases allow Congress to spend more and more and more and more.  We need someone with the courage to vote against these debt increases, forcing us to default on our payments to our debtors, causing them to downgrade our credit, thus causing us to cut our welfare and military spending.  Rick Santorum could not make this tough decision, so how can he make tougher decisions as President?

These are a few reasons why Rick will not win my vote.  

Presidential Profile: Ron Paul

Ron Paul is running as a Republican, but is known mostly as a Libertarian.  He believes in following the American Constitution in determining the role of government.

This means that drastic changes would occur with President Paul, and they would pretty much all represent free-market philosophy.

President Paul would phase out Medicaid, Medicare, Social Security, Food Stamps, Unemployment insurance, and almost any other federal program that you can think of.  If it's not in the Constitution, he is not for it.

The real effect of these positions is not that any of these programs would be abolished.  As President, you don't have the authority to do that.  The greatest power given to a President is his power to veto.  This power allows him to nullify bills that pass through congress.  Using this power, Paul would not pass any increase in growth to these programs, thus forcing congress to pass budgets that would keep these programs from growing any more.  Then he would advocate slowly decreasing these benefits until they are gone (over a huge generational time span).  These social programs are the largest budget item and are the culprit of our ever-increasing federal deficit.  They must be reformed, and if you're a believer in the Constitution, these government dependency programs must be phased out.

President Paul would decrease military spending to Constitutional levels.  He would close down the hundreds of bases that we have spread out across the world.  This "defense" spending is currently the second largest culprit to our federal deficit.  President Paul would follow the Constitution and only spread our military power when we declare a war - something that hasn't been done since World War II.

President Paul wants to get rid of the Federal Reserve (blog post forthcoming).  This is the private company who controls the supply of the dollar.  Currently our dollars are backed by nothing but the "full faith and credit" of the United States government.  Paul would advocate that a resource (such as gold) backs our currency.

Economically and constitutionally, Paul is the best choice for the Presidency.  He would balance our budget and get rid of unconstitutional social programs.  He would have no interest in subsidies or special interest spending.  Paul is my man.

Presidential Profile: Mitt Romney

Mitt Romney is a moderate or middle-right conservative.  This means that, although he represents a lot of the Republican views, he is able to attract some Democrats - especially the ones that believe in a balanced budget.

Mitt Romney believes in balancing the budget.  His work in the private sector has helped him to do that.  Since you can't survive in the business world without making profits, he has been forced for most of his life to do it.  Mitt Romney is the only candidate that has more experience in the private sector than in politics.

Mitt Romney "saved" the Olympics.  The Salt Lake City Olympics had a projected budget shortfall of almost $400 Million.  We came out of it with a $50 Million surplus.

I learned from reading his book, "No Apology" that Mitt Romney believes in "free-market" economic interactions.  He knows how the "invisible hand" helps control the supply and demand of products and services, and he believes that government intervention in these markets creates inefficiencies.

He is attractive to some Democrats because he doesn't talk much about slashing huge government programs.  He has said that he will help make Medicaid, Medicare and Social Security "more solvent", meaning he will balance their budgets.  Right now, we are paying out trillions more in these programs than we are receiving from tax revenues.  We are able to do this by printing money and borrowing money from China.  To balance these budgets would require a tax hike, which I don't think Romney would propose, or a change to the program that will make it more expensive for people dependent on these programs.

I think Mitt Romney would be a good President because he would stop the current outrageous trend set by Obama of spending twice as much as we take in.  He would encourage the markets to interact without much government intervention.  However, I don't think he would make the difficult decisions that our country needs to make eventually (like abolishing Medicare, Medicaid, and Social Security - SLOWLY) in order to bring the American government back to its small Constitutional size.

Election 2012

Before 2007, I voted for whoever and whatever my mom told me to vote for.  Turns out she was always right, but I decided then that I wanted to study the issues myself and make my own decisions when it comes to elections.  I think that everyone has a responsibility to be somewhat informed of the issues each election cycle.  But it's time-consuming!  And you don't know who to listen to!  Well, the next couple of posts will be 60-second bios on each of the Presidential candidates.  Let it be known that I WILL show some bias, but I'll stick to economic issues.  Hopefully it will be semi-informative.  A great place to go for unbiased direction is votesmart.org.  Go to their vote easy page to find the candidate that best represents your views.

Incentives and Solyndra

The most important part of the study of Economics is the effect of incentives.

Case 1:

Solyndra - a solar company that recently went bankrupt.  Obama reiterated in Tuesday's State of the Union that "green energy" would continue to receive support from the Federal Government (also known as the American people).  In 2009 Obama allowed more than $500,000,000 to be sent to Solyndra as a "loan".  What incentive does this create?

The truth is, massive loans create an incentive to fail.  How?  Well after Solyndra received the loan, they had 2 options.

1. Work efficiently and pay lower than average wages in order to pay down their debt and hopefully pay the loan back within 30-40 years (if solar panels miraculously became ridiculously popular).

or

2. Supply 1,100 people with a couple years of wages (off the backs of the tax-payer), be inefficient by paying high wages to administrators, build luxurious facilities, and calmly go bankrupt 2 years later - and never have to pay back the loan!

Why would they want to work to pay back the massive loan when they could instead just use it as a handout?

If you doubt that Solyndra wasn't completely reckless with the money they received from us, see here how they treated the hundreds of brand new parts that they had stocked in their facility when they found out that they were going bankrupt.

A better way to tax

Greg Mankiw is a Harvard economist who served with George Bush and wrote my Introduction to Economics text book.  He also contributes a column to Sunday's NYTimes every once and a while.  Yesterday's column was great - it was about simplifying and maximizing the efficiency of the tax code.

Here are some highlights:

"TAX CONSUMPTION RATHER THAN INCOME Almost four centuries ago, the philosopher Thomas Hobbes suggested that taxes should be based on consumption, not income. Income measures a person’s contribution of labor and capital to society’s production of goods and services. Consumption measures the quantity of those goods and services he gets to enjoy. Hobbes reasoned that because consumption better reflects the benefits a person receives as a member of society, it is the proper basis of taxation."


"TAX BADS RATHER THAN GOODS A good rule of thumb is that when you tax something, you get less of it. That means that taxes on hard work, saving and entrepreneurial risk-taking impede these fundamental drivers of economic growth. The alternative is to tax those things we would like to get less of."


I personally like the idea of a federal sales tax because it discourages spending, incentivizes savings and encourages the sale of used goods (which might not be good for the "economy" but I think it is generally more healthy for a person).


One Bush tax cut that should be permanently implemented (but currently is set to expire at the end of the year) is the 55% tax on inheritance.  This tax is simply immoral.  Your parents pay taxes their entire life.  If they responsibly save money to pass on to their kids, the government should not take more than half of those savings (which have already been taxed at least once) when they die.

Was Bain Capital Bad?

Bain Capital is a "venture capital" firm.  What is a venture capital firm?  A venture capital firm accumulates money from investors and invests that money into small, usually start-up companies.  A struggling company (of its own free will and choice) would hire Bain Capital to help them thrive.  As you can imagine, sometimes Bain can help them grow and sometimes they can't.  Either way, Bain Capital doesn't do this work for free.  Romney and Bain are being criticized for being paid for laying people off (of course, they never laid people off - the employer would always make the decision to close its doors or lay people off - not Bain).

Venture capital firms are GOOD.  Without them, many huge companies today would not exist (including the ones that Romney saved like the often used example of Staples and Dominos).  They finance risky companies through the money of investors who believe in the company and hope to help them thrive.  

A new documentary from Newt Gingrich's "Winning Our Future" campaign uses misleading and flat-out false accusations to smear Mitt Romney.  It also uses music, a deep narrator voice, and the tears of children and people who lost their jobs to make Romney and Bain look bad.  It is despicable.

Here is the 28-minute documentary:

http://www.webcasts.com/kingofbain/

Here are a few of the lies debunked by CNNMoney:

http://finance.fortune.cnn.com/2012/01/12/the-bain-bomb-fizzles/

And here's some commentary by my two favorite radio personalities:
http://www.glennbeck.com/2012/01/11/newts-legendary-flip-flop-on-romney/

Newt Gingrich obviously does not like Capitalism (the system which allows venture capital firms to exist) and for this reason I will not vote for Newt.

Lesson #1: Economics Defined

Wikipedia defines Economics as: The social science that analyzes the production, distribution, and consumption of goods and services.

There are basically 2 ways for an economy to run.

1. An economy can be a free exchange of those goods and services, or
2. An economy can be coordinated and enforced by "smart" people (social planners)

The United States of America was founded using structure #1.  #1 is most often referred to as a "free market" economy and has two specific advantages.  First, a free market gives the citizens the most liberty.  For those of you who think liberty is important, and people should be able to trade their goods or services at their own will to receive the goods and services that they want or need, a free market is for you.  The second advantage of a free market is that it is most efficient.  People will make perfectly fair trades all day long.  See The Wealth of Nations by Adam Smith (1776)

The Soviet Union under Joseph Stalin utilized structure #2.  The advantage of a social planning structure is that goods are allocated fairly or at least a fair allocation is attempted.  Social planners believe it is morally wrong for productive people to receive food for their labors while unproductive people starve.  So they decide which goods are produced, how much, and who gets them.  See The Communist Manifesto by Karl Marx and Friedrich Engels (1848) and Wikipedia - Soviet Union

If you discovered an island and wanted to start your own country, which system would you choose? Would you take away people's liberty to ensure everyone is fed?  If so, think of the incentives that might create for people to become lazy.  Why would people produce if they are guaranteed the same goods as a producer without doing anything?  Or would you choose a free market, where everyone is free to produce and consume at will, but the unproductive or lazy citizens are either fed by charity, or they die?