Taking Krugman to School and a Few Economic Lessons

John Tamny rips into Paul Krugman today for his insinuation of racism by Thomas DiLorenzo, Ron Paul, and Republicans in his column last Friday. While Krugman's arguments are normally lacking, Tamny is right in that he has sunk to a new low:

Libertarian objections to Lincoln and the Civil War have to do with the tariffs imposed by northern manufacturing interests on imports that made it difficult for southern agricultural interests to export their goods.  One can't export without importing, and the libertarian view is that absent the tariffs, the war is less likely.

And while the Civil War was also of course about slavery, individuals such as Ron Paul certainly don't decry it for ending slavery; rather they correctly point out that slavery was already dying around the world without shots being fired.  How unfortunate then that the U.S. needed to suffer the death and destruction of war to rid itself of a tragic institution that would have disappeared soon enough based on its own, anti-human contradictions.

From an economic perspective, Lincoln's decision to suspend the dollar's convertibility to gold was on its face a bad idea, and to ascribe racial motives to those who question it, is to reveal a Paul Krugman misunderstanding of economics. To fight wars, countries need strong economies and devaluation works against just that.

It goes without saying, but Tamny lists why libertarians, and good economists, disagree with slavery:

Furthermore, DiLorenzo, and Paul are libertarians, and to know libertarians is to know that they viscerally despise the notion of slavery for it violating our basic rights as human beings. Libertarians then take it further in noting that those who enslave others develop within themselves indolent qualities that reduce their own productivity, not to mention that work without reward (something lost on Krugman given his support for nosebleed rates of taxation) always leads to reduced output. To ascribe racism to libertarians is to reveal an impressive misunderstanding of the philosophy.

Doug French has a good Mises Daily today that contains two great passages from Mises and Professor Peter G. Klein.

Mises on why the stock market raises initially during a Fed induced boom:

the moderated interest rate is intended to stimulate production and not to cause a stock market boom. However, stock prices increase first of all. At the outset, commodity prices are not caught up in the boom. There are stock exchange booms and stock exchange profits. Yet, the "producer" is dissatisfied. He envies the "speculator" his "easy profit." Those in power are not willing to accept this situation. They believe that production is being deprived of money which is flowing into the stock market. Besides, it is precisely in the stock market boom that the serious threat of a crisis lies hidden.

Others are speculating this right now due to the Dow's rise after QE2.  I wonder if Krugman, Bernanke,and the like will continue the "emerging markets" excuse in the face of this.

French and Klein on the impossibility of one business/corporation controlling everything:

When firms expand, company overhead expands. And there is difficultly in allocating overhead or any fixed cost for that matter amongst various divisions of a firm. "If an input is essentially indivisible (or nonexcludable), then there is no way to compute the opportunity cost of just the portion of the input used by a particular division," explains Klein. "Firms with high overhead costs should thus be at a disadvantage relative to firms able to allocate costs more precisely between business units."

This should put "too big to fail" to shame, but without a true free market, it just isn't the case.

Check out this guest post on Zerohedge on what separates our credit economy from Zimbabwe's monetary economy:

Credit is not cash, and creating credit is not the same as printing cash. Shoveling $1 trillion in zero-interest credit into the banking system does not necessarily mean that $1 trillion flows into the real economy--that can only happen if someone or some entity borrows the credit.

This is why some claim that hyperinflation has never occurred in a credit-based system; it can only arise in a monetary system in which cash itself is printed (i.e. Zimbabwe et al.)

I am not making any such broad claim, but to identify the two as identical seems to me to be a profound confusion.

This distinction plays out in a number of ways. If the Fed had actually printed $1 trillion in cash and dropped it from helicopters, then those collecting the cash on the ground might have spent it, creating more organic demand for goods and services.

If the Fed creates credit and loans it to banks at zero-interest rate, the credit only flows into the real economy if somebody borrows it.

Without borrowers, the "money" just sits in reserves, where it does not spark inflationary organic demand for resources, goods or services.

If someone borrows the "money" to refinance existing debt, the only money that flows into the real economy is the difference between their original debt servicing costs and their new debt servicing costs, presuming the new costs are lower than the original. (Not always the case if said borrower had an interest-only "teaser rate" mortgage that he/she is now rolling into a mortgage with principal payments and a market rate interest payment.)

Or a large speculator (trading desk, hedge fund, etc.) could borrow the credit-money to speculate in commodities, driving prices up on the widespread expectation of higher costs in the future. In this case, the credit-money does influence the real world economy by driving commodity prices above levels set by organic demand.

This is what separates the monetary base from M0 and other M measurements.  Robert P. Murphy explains a bit here.

So the Medal of Freedom ceremony was today at the White House.  People like George H.W. Bush, Warren Buffet, and Dr. Maya Angelou are set to receive what is supposed to be the highest honor any citizen can get.

Not to be a downer, but where is administering a Medal of Freedom authorized in the Constitution?  It is a medal, not a form of money.  In the ever-inspiring words of Walter Sobchak:

Has the whole world gone crazy?! Am I the only one around here who gives a shit about the rules?!