Mankiw Weighs In On Obama's Economic Team

Econ textbook dollar leader, Greg Mankiw, (His books sell for over $100 and are the most popular texts used at the college level, you figure out how many millions he is raking in.) explains Obama's econ team to Nina Easton at Business Week:

Team Obama doesn't mind leaving critics on the roadside because of an über-confidence that the facts are on their side. Goolsbee, an economist who has been at Obama's side since day one of the campaign, likes to call the economic team "data dogs" who bring post-partisanship to policymaking because they are driven by evidence rather than ideology. But Greg Mankiw, the Harvard economist who chaired Bush's CEA for two years - and who counts many of Obama's picks as friends - offers a more politically charged label: Keynesians, after the British economist who championed interventionist policy. "They are extremely committed Keynesians," he says. "I hope they show the requisite humility that not all economists share their view."

Nice comment for a mainstream guy, not too harsh, but gets the point across.

As for the Obama Econ Team being "data dogs", puhleeze. Think Geithner's bailout presentation for what is really going on at this White House.

Keynes at Harvard is Now Online

Back in December, I noted an Ilana Mercer column about the book, Keynes at Harvard. She wrote:

John Maynard Keynes was a Fabian socialist strongly opposed to private enterprise. The Fabian society was formed in England in the late 1880s and spread throughout the British Empire. The Fabians aimed to replace the market with "an efficient administrative bureaucracy," as F.A. Hayek put it. Its emissaries also came to infect almost every nook and cranny of the American state and civil society.Fabians departed from communists on the use of force. Whereas the communists believed in "attaining power by violence," Fabians perfected a form of Islamic takiya – lying to spread the faith, in their case, state-socialism."Easing into absolute power by deceit" was to be achieved by infiltrating every societal institute under the guise of moderation (and by deploying impeccable manners, once terribly important among the British elites).

I bought a used copy of the book and found it fascinating. I have not commented on the book further here at EPJ because I want to read the book again, think about the book some more and check out some of the references in the book. The book makes some strong charges and certainly goes beyond anything you are apt to read anywhere else. For example, the book calls Joseph Schumpeter, a neo-Marxist. The charge is referenced with some of his writing, but obviously that reference has to be checked and thought about before one can buy into or dismiss such a charge.

The latter chapters on Keynes and the Fabians are shocking, but seem to have a ring of truth. From what I know about Fabian socialists and their methods of infiltration and manipulation the book has all that correct.

I bring all this up because EPJ reader Joel Lefevre writes to inform me that Keynes at Harvard is now online.

So I say go for it. It is fascinating reading. But, please, realize I am not endorsing the book at this point, only because I want to do some more independent research on the charges made. If the charges prove sound, it will provide fascinating insight into the Keynesian revolution and a lot of other peculiar things that happen in and around politics and government.

GOP Leaders Doubt Stimulus Bill Will Pass Senate

Senate Republican leader Mitch McConnell said Sunday on CBS's Face the Nation that the massive stimulus bill backed by President Barack Obama and congressional Democrats could go down to defeat if it's not stripped of unnecessary spending and focused more on housing issues and tax cuts.

Note to McConnell: It's all unnecessary spending.

Sen. Jon Kyl of Arizona, the No. 2 Republican in the Senate, said he was seeing an erosion of support for the bill and suggested that lawmakers should consider beginning anew.

Fear mongering continued on the Democrats' side of the aisle.

"We cannot delay this," said Sen. Dick Durbin of Illinois, the Senate Democrats' No. 2 leader. "We can't engage in the old political rhetoric of saying, 'Well, maybe it could be a little bit better here and a little bit better there.' We've got to pull together."

Despite the Republican challenge to the package, they are likely to simply tweak it, when it needs to be junked in full. As I have blogged before, the Keynesian foundation for the economic stimulus is based on a faulty economic theory that has nothing to do with the cause and effect of the business cycle.

Greg Mankiw has also been pounding away at the fact that tax cuts are the way to go.

However, the Keynesian spending myth remains popular with big spending lawmakers, and the most we can hope for from this Senate is that the Republicans will force a few additional tax cuts. Tax cuts are always a good thing, but so are spending cuts. The economy doesn't need larger deficits, larger government spending or larger government. Larger deficits, larger government spending will simply make the inevitable dollar crash that much more severe, since the Fed will most assuredly be called in to print dollars to absorb a good portion of the new debt created because of the "stimulus" package.

Quick, Mail the Fire Department!

There is a lot wrong with the Obama "Stimulus" Package, mostly because it is simply a transfer of funds from one group to another. And, not much of anything else. But even based on the Keynesian principles upon which the package was designed, it is a bit short in the logic department. Thomas Sowell explains the problem from this angle, based on the CBO's analysis showing only $26bn of Obama's $355bn public works package will be spent this year:

Using long, drawn-out processes to put money into circulation to meet an emergency is like mailing a letter to the fire department to tell them that your house is on fire.

There is a lot of smoke and mirrors to this program, which is not necessarily a bad thing, since it is a bad program, smoke and mirrors, rather than creating actual distortions in the economy is a good thing.

FDR's Grandson: "New Deal Was Not Big Enough"

Whoa.

FDR's grandson is an economics professor at Sarah Lawrence College in Yonkers.

And the grandkid, Frank Roosevelt, now 70, doesn't think his grandfather went far enough to get the economy out of the Great Depression. The Gannett News Service reports:

"FDR never did get the Keynesian thing, and therefore the whole New Deal effort was not big enough," said Roosevelt, 70. "I mean, it didn't get us out of the Depression, really, until World War II came along, and then government spending really got big enough to really employ everybody and then some."

"I think Obama has to learn from that and forget about balancing the budget," Roosevelt said. "Spend, spend, spend until we've done enough to stop this decline.

"So if I could talk with him I would say go for broke," he said. "Literally, go for broke."

One has to wonder what Frank has been doing for the last few decades. He needs to catch up on the literature instead of reading his grandfathers scrapbooks. The Chicago Tribune reports:

John Cochrane, a professor at the University of Chicago Booth School of Business, says that among academics over the last 30 years, the idea of fiscal stimulus has been discredited and in graduate courses, it is "taught only for its fallacies."

New York University economist Thomas Sargent agrees: "The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research."

In an article in the August issue of the Journal of Political Economy, UCLA economists Harold L. Cole and Lee E. Ohanian blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933 for prolonging the Great Depression for 7 years.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

And Robert Higgs in his book, Depression, War, and Cold War: Studies in Political Economy, has exposed the fallacy in the commonly held belief that World War II ended the depression. According to Higgs, the war gave only the appearance of recovery, when in reality private consumption and investment declined while Americans fought and died. A return to genuine prosperity did not occur until after the war ended.

Big, big, big spender Frank needs to chill. You don't "Literally go for broke" with the United States economy. That's an outrageous idea. We are not at a craps table in Vegas with the economy on the pass line. What needs to be done is that stability needs to be brought to the entire economy by stopping all these erratic interventions. Otherwise, we might as well mail the keys to the entire economy over to President Kim Il-sung of North Korea. He's about the only expert left on how to run a heavily regulated command economy.

Was Keynes Just Joking?

Sheldon Richman poses the intriguing possibility, here, that Pozzo was just joking when he wrote The General Theory.

BTW, Richman mentions Henry Hazlitt's The Failure of the “New Economics” in his post. This book is must reading for anyone who wants to understand what is wrong with Keynesian economics. Hazlitt's blow-by-blow analysis is masterful.

From Ponzi in 2008 to Pozzo in 2009

The closing weeks of 2008 resulted in the public exposure of a spectacular Ponzi scheme run by Bernard Madoff. Losses, still not exactly known, are estimated, by the schemer himself, to be around $50 billion. The size of the scam has caught the attention of the world, and yet, it pales in comparison to the Pozzo scam headed directly our way.

International diplomat and manipulator Carlo Andrea Pozzo di Borgo of Corsica was a childhood friend of Napoleon who eventually turned against Napoleon. He also turned against his political sponsor, Paoli, to more quickly advance his own career. It is with this background, that while studying at Cambridge University, John Maynard Keynes was tagged by fellow students with the nickname, Pozzo. The nickname lasted for the remainder of his life.

It is the economic beliefs of John "Pozzo" Keynes, centering on spending money as a method to boost an economy, that will impact modern day America. The incoming Obama Administration has already announced a $700 billion spending program. There is even more likely to come. This, we hasten to add, is on top of the "rescue" programs of the Bush Administration.

The economic justification for such spending programs exists in the writings of Pozzo Keynes. But the tremendous spending results in few considering the "take away" that accompanies every Pozzo penny spent. The take away is the source from where Pozzo money must come from. If $700 billion is spent, $700 billion must be taken from somewhere to fuel the spending. Like the crazy aunt in the attic, the "take away" is rarely spoken about. But it is most important to understand it.

The take away can only occur in three ways from taxation, borrowing or money printing. Each has a vicious negative impact on the economy. It's as though the crazy aunt has been put in charge of driving the family to church in the family car.

Taxation, of course, cuts into the saving and spending ability of those taxed. The Obama insiders have leaked to the press that the "take away" will not come via taxation. This leaves borrowing and money printing. Borrowing crowds out the borrowing of the business man, so less is produced. During a downturn, the last thing you want is less production. The money printing option fuels the inflation machine.

Thus, the Pozzo Plan is one of less production or more inflation. It succeeds in capturing the imagination of the shallow thinking public in much the way the razzle dazzle that accompanies a Ponzi scheme catches their eye. They see what is going on directly in front of them, but nothing is said about the source of the money. This is the 2009 we face.

If the choice is between a Ponzi scheme and a Pozzo scam, a Ponzi scheme is always preferable, since it is voluntary and thus can be avoided and, secondly, it never grows to the size of a Pozzo, and is thus much less damaging to the overall economy. But, the big Ponzi scheme of 2008 is yesterday's news. The news for 2009 is all about John "Pozzo" Keynes and the wonders of Pozzo spending. It is going to choke, hurt and do nothing but mess up the economy, and you are going to have to be very quick, sharp and lucky to keep away from its clutches. Happy New Year.

Hayek on Keynes

Here's a great audio clip from the old William F. Buckley show, Firing Line, when Buckley had Nobel Prize winning economist Friedrich Hayek as his guest.

In this clip, Hayek discusses Keynes and Keynesianism, and makes the charge that Keynes did not know that much economics outside of the Cambridge school and that Keynes' General Theory was really no such thing, but rather a theory suited only for a very specific time period in England, when prices dropped but wages stayed up.

Hayek sometime after Keynes had written the General Theory said to Keynes, whom he knew well, that Keynes' disciples were getting much too inflationary because of the General Theory and Keynes replied that if things got out of hand he would write another book and change public opinion. It never happened as Keynes died six months Hayek's talk with him about it.

(Via Bob Murphy)

Martin Feldstein: Billions for Defense

Marty Feldstein, chairman of the Council of Economic Advisers under President Reagan, professor at Harvard and a member of The Wall Street Journal's board of contributors, is Keynesian to his core.

He needs to get a little more hip. Even his fellow Harvard colleague, Greg Mankiw, has thrown Keynes under the bus.

Feldstein in today's WSJ writes:

A temporary rise in DOD spending on supplies, equipment and manpower should be a significant part of that increase in overall government outlays...The increase in government spending needs to be a short-term surge with greater outlays in 2009 and 2010 but then tailing off sharply in 2011 when the economy should be almost back to its prerecession level of activity. Buying military supplies and equipment, including a variety of off-the-shelf dual use items, can easily fit this surge pattern.

For the military, the increased spending will require an expanded supplemental budget for 2009 and an increased budget for 2010. A 10% increase in defense outlays for procurement and for research would contribute about $20 billion a year to the overall stimulus budget. A 5% rise in spending on operations and maintenance would add an additional $10 billion. That spending could create about 300,000 additional jobs. And raising the military's annual recruitment goal by 15% would provide jobs for an additional 30,000 young men and women in the first year.

Of course, in typical Keynesian fashion, Feldstein only looks at half the equation, and not for a minute does he discuss where the money for this spending is to come from, what jobs will be lossed becasue of the transfer of wealth, what inflation may be created if the spending is financed by Federal Reserve money printing.

What Exactly Is "Priming the Pump"?

I have always had a rough idea of what the Keynesian use of the metaphor for economic stimulus, "priming the pump", was about, but never exactly, until now.

In a column for Culture11.com, Timothy Carney, figures it all out and shares his discovery with the world:

While it has a bias towards spending, Keynesian thought professes that deficits per se — even if brought about by tax cuts — are good because getting money into the hands of consumers “primes the pump” of the economy.

What the heck is “priming the pump”?

Until this week, every time I heard someone talk about government spending priming the pump,” I envisioned the primer button on my parents’ lawnmower, which I pumped a couple of times to get gasoline into the engine. But that’s “pumping the primer” or “priming the engine,” not “priming the pump.”

“Priming the pump” has to do with pumps — like water pumps. The metaphor is pretty opaque to the modern eye, once you start thinking about it. How does one prime a pump, and why?

I’ve never done it, and neither has my dad, who may be the oldest guy on the planet. I poked around a bit, and came up with this explanation for “priming the pump”:

Think of a pump coming up out of a well. It works by suction. If air gets in the pipe, then it may be nearly impossible to get water out of it.“Priming the pump” appears to be pouring water down the pipe to flush out the air. This makes the pump actually work.

So, returning to the analogy: maybe the economy is weak, and so people’s labors (pumping the handle) aren’t generating wealth (water). Only by taking some wealth (water) that’s sitting around, and injecting it back into the economy (pouring it down the pipes) in the form of government spending, can you make labor (pumping) productive.

Unfortunately for Keynes, the economy is not like a pump.There is no air and no pipe. What is going on is a readjustment period. It is more like water seeking its own level after the government takes its bloated body out of a bathtub, because if it doesn't take its body out and continues to inflate itself, the water is going to flow over the side, causing a loss of water (wealth.)

So we shouldn't be "priming the pump", but, rather, "getting the bloated beast out of the water."

Mankiw Says Abandon Inflation Fight, Wants 30% Inflation Over Next 10 Years

When inflation takesoff in the not too distant future as a result of current out of control monetary policy (Three month annualized growth in M2 nsa is now at 17%), look no further than Harvard Professor and best selling economic text author, Greg Mankiw, for egging Ben Bernanke on in his money printing ways.

Mankiw wants the Fed to write this in their next press release:

The Committee recognizes that moderate inflation would be desirable under the present circumstances. In particular, the overall level of prices a decade hence should be about 30 percent higher than the price level today. The committee anticipates keeping the stance of monetary policy sufficiently accomodative to achieve that degree of inflation over the coming decade.

Then he writes this nonsense:

The abandonment of "price stability" would be the modern equivalent of Roosevelt's abandoning the gold standard. Of all the things that Roosevelt did to get the economy out of the Depression, jettisoning the gold standard was the most successful.

FDR's "abandonement" of the gold standard was a big scam. It was a government insider scam to help Bernard Baruch (who was advising FDR) and John Maynard Keynes make huge profits during the depression.

First, FDR confiscated privately held gold from all citizens. Baruch and Keynes then scooped up gold stocks. With all U.S. gold now in Fort Knox, FDR instituted a gold buying scheme that pushed the price of gold higher and higher, and resulted in huge insider profits for Keynes and Baruch.

Yeah, FDR's "abandonment" of the gold standard worked well for schemers Baruch and Keynes, for the average American it has created a situation where there is now no restraint on the Fed's ability to print and print more money.

Books could be written about the errors and complications of calling for a 30% decade of inflation. First, it will cause distortions in the economy, in favor of those who get the money first. Second, its true impact can not be measured without knowing what productivity gains are doing to the price level. Further, Mankiw's proposal could very well result in a rock and roll business cycle during the entire decade, and its ultimate inflationary impact could be much more than 30%, depending where we are in the business cycle and what is happening to productivity.

And, there is no upside to 30% inflation! Helluva a recommendation.

John Nash Disses Keynesianism; Calls for Gold Standard

John Forbes Nash Jr., Ph.D., winner of the 1994 Nobel Memorial Prize in Economic Sciences, recently spoke to Fordham University about solutions to the downturn in the national and global economy.

Nash told the audience that such financial crises would be less likely to occur if there was some international monetary standard, such as the gold standard or competition among worldwide currencies, to curb inflation and prevent the rise of mortgage abuse, reports the Fordham Universty newsletter.

Nash said that various interest groups that subscribe to Keynesian, or short-term, economic theories have sold the public on the notion that inflation is acceptable or that “bad money is better than good money.” Such a notion, he said, led to the dangerous proliferation of bad mortgage loans—loans made on the gamble that house values would continue to rise and eventually turn a profit.

“A fixed-rate 30-year mortgage would be reasonable under the gold standard,” Nash said. “Now, there are variable rates, and adjustables, and convertibles, and it is very complicated” for homeowners to figure out what they are getting into. In fact, Nash said, nobody really knows the depth of the financial crisis.

Nash shared the 1994 Nobel Memorial Prize with two other economists for research in game theory He and his wife, Alicia, became the subject of the movie A Beautiful Mind. The film was nominated for eight Oscars and won four.
(Via LRC)

Mankiw Jumps on the Head of Keynes and Then Throws Him Under the Bus: Part 3

Greg Mankiw writes:

A key issue facing the new Obama administration is to what extent the economic stimulus should take the form of spending increases versus tax reduction. One way to think about the issue is the size of the fiscal policy multipliers. The multipliers measure bang for the buck--the amount of short-run GDP expansion one gets from a dollar of spending hikes or tax cuts.

So what are these multipliers? In their new blog, Bob Hall and Susan Woodward look at spending increases from World War II and the Korean War and conclude that the government spending multiplier is about one: A dollar of government spending raises GDP by about a dollar. Similarly, the results in Valerie Ramey's research suggest a government spending multiplier of about 1.4. (Valerie does not present her results in multiplier form, but she emails me this translation: "The right column of figure 5A of my paper shows that for a log change of government spending of 1, log GDP rises by 0.28, implying an elasticity of 0.28. To back out the implied multiplier, we can use
the fact that government spending averages around 20% of GDP. This implies a
multiplier of 1.4.")

By contrast, recent research by Christina Romer and David Romer looks at tax changes and concludes that the tax multiplier is about three: A dollar of tax cuts raises GDP by about three dollars. The puzzle is that, taken together, these findings are inconsistent with the conventional Keynesian model. According to that model, taught even in my favorite textbook, spending multipliers necessarily exceed tax multipliers...

And now, from Mankiw, the jump on the head of Keynes (My emphasis):

My advice to Team Obama: Do not be intellectually bound by the textbook Keynesian model. Be prepared to recognize that the world is vastly more complicated than the one we describe in ec 10. In particular, empirical studies that do not impose the restrictions of Keynesian theory suggest that you might get more bang for the buck with tax cuts than spending hikes.

Harvard Alumni Uncover the Real Keynes

Writes Ilana Mercer:

"Keynes At Harvard" provides commendably detailed and scrupulously documented answers:

John Maynard Keynes was a Fabian socialist strongly opposed to private enterprise. The Fabian society was formed in England in the late 1880s and spread throughout the British Empire. The Fabians aimed to replace the market with "an efficient administrative bureaucracy," as F.A. Hayek put it. Its emissaries also came to infect almost every nook and cranny of the American state and civil society.

Fabians departed from communists on the use of force. Whereas the communists believed in "attaining power by violence," Fabians perfected a form of Islamic takiya – lying to spread the faith, in their case, state-socialism.

"Easing into absolute power by deceit" was to be achieved by infiltrating every societal institute under the guise of moderation (and by deploying impeccable manners, once terribly important among the British elites).

Mercer's full column on Keynes is here , and is must reading.

Keynesian Delusions of Grandeur

Greg Mankiw recently wrote that John Maynard Keynes is the most important "defunct economist" to learn from for 2008. Tyler Cowen has piled on by proposing to do a book club reading on his blog for Keynes's General Theory.

Peter Boetteke has written a must read response to these goings on, here.

The Obama Press Conference: John Maynard Keynes and the Oligarchs Are Alive and Well

John Maynard Keynes and Oligarchs appear to be alive, well and ready for the Obama Administration.

In Barack Obama's first press conference, since winning the presidential election, Obama sounded like a typical big spending Democrat. In opening remarks, he called for a "rescue package" for the middle class, unemployment extensions and other fiscal stimulus. He also said that something had to be done for the automobile industry since it is "the backbone of the country." Somewhere, John Maynard Keynes and Marx are blushing.

Obama did not address how any of these proposals would be paid for.

I took special note of some of the members of his "economic transition advisory team", most of whom stood behind him as he promised to do vasts sums more spending than Imelda Marcos ever did during a good shoe shopping trip to New York City. It was a politically correct mixed crowd that included many women, a Latino and even another African-American, interspersed with oligarchs. Just what you need to fight a downturn in the economy, a politically correct group and oligarchs.

The oligarchs we were told included Warren Buffett (who, golly shucks, usually just represents himself) and Robert Rubin (former Goldman Sachs CEO, now running the Rubin/Citigroup wing of Goldman),but both failed to appear in chorus line fashion behind Obama for the press conference, as did the politically correct and other oligarchs and oligarch representatives.

At the press conference chorus line, the towering Paul Volcker was there, who has been a career long Rockefeller operative. The tiny Robert Reich was there, who was most likely invited as a reward for his regular bashing, on his blog, of Hillary, during the primaries.

An oligarch stepped a bit out of the shadows for the chorus line, Chicago-based Penny Pritzker, who was an early Obama backer, was there. Pritzker served as Obama's National Finance Chair. She and her husband hosted a $28,500 per plate fundraiser for Obama's campaign in Chicago with Warren Buffett and his wife, and Obama advisor Valerie Jarrett. She is also a member of the Council on Foreign Relations. She is 135th richest person on the Forbes 400 list of "America's wealthiest," with an estimated net worth of $2.8 billion US. If one was forced to come up with one name that Obama answers to, Penny Pritzker would not be a bad choice. They are on each others cell phone speed dials, guaranteed.

The Chicago Political Machine was well represented by Mayor Richard Daley's brother William, who also is a member of the executive committee at JP Morgan Chase.

Google's Chairman Eric Schmidt was part of the chorus line.

Much to my surprise, Los Angeles Mayor Antonio Villaraigosa was the token Latino. Readers will recall I had a Q & non-A encounter with the mayor, only a few weeks back.

In short, no one in this group strikes me as the type that understands Say's Law, never mind the business cycle. They all are very good, though, at protecting the very powerful interests that they are aligned with, nothing else. The oligarchs are sleeping very well tonight.

The Strange Mind of Nobel Laureate Paul Krugman

By Robert Wenzel

I have never before read writing so twisted, deceiving and evil as an article written, 10 years and some months ago, by the new Nobel Laureate, Paul Krugman. A quick reading of the piece will give one the impression that the piece is vicious, yet elegant. A deeper analysis reveals such evil that one has to wonder what twisted conditions faced Krugman as a child that he chose to use his mind in such an ugly manner.

I will dissect this article paragraph by paragraph so the article finds its justly spot, tossed onto an ash heap.

This is paragraph 1 from Krugman's piece, Hangover Theory:

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.

Notice the vicious launch, "I regard [Austrian Theory] as being about as worthy of serious study as the phlogiston theory of fire".

Interestingly, it was the great Austrian economist, Ludwig von Mises, who taught that one should study all economic theories so that one could argue and point out the faults in weak theories. Apparently, Krugman has a superior method of understanding so that he does not even have to study a theory before he dismisses it. This nonsensical start by Krugman is enough to toss the paper. But, let us do something he claims he does not need to do, let us review arguments contra to our own thinking, that is, let us give the rest of his article full hearing.

He then writes: "the incident set me thinking—not so much about that particular theory as about the general worldview behind it". This is twisted cleverness if there ever is such a thing, because for the rest of the article he does nothing but discuss the theory, with one subtle deviation, when he attempts to force Austrian Business Cycle Theory ("ABCT") into a subtle box as a moral quasi-religious theory, as opposed to the well reasoned economic theory that it is.

He then begins discussing the theory, "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."

There are a couple things that need to be pointed out here. First,in debus ex machima fashion, he begins the theory with the boom already in place. In ABCT, how the boom starts is integral to an understanding of the theory. ABCT holds that central banks create an artificial boom by printing money that ends up in the capital goods sector.

Thus, not all booms will cause the negative consequences of a bust. An increase in productivity can cause a roaring boom that every ABCT theorist would agree has no reason to end in recession.

And notice the deceiving use of the word "punishment". Nowhere do ABCT theorists use the word. It has the connotation that ABCT is some moral theory about those who party too hard getting their just desserts, in a moral sense. This is pure twisted evil Krugman. He is much too good a wordsmith not to know the deception he is spinning here.

On to paragraph 2:

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.

Ah yes, the use of the word "punishment" now sets the reader up for this poppycock paragraph about a "morality play" , hubris and downfall. Thus, the evil Krugman digs the deception deeper. And, notice the use of the word "seduction", for a theory that has perhaps 1.0% of the followers of Krugman's Keynesian religion.

Paragraph 3:

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. Nor is this merely an academic argument:

The hangover theory can do real harm. Liquidationist views played an important role in the spread of the Great Depression—with Austrian theorists such as Friedrich von Hayek and Joseph Schumpeter strenuously arguing, in the very depths of that depression, against any attempt to restore "sham" prosperity by expanding credit and the money supply. And these same views are doing their bit to inhibit recovery in the world's depressed economies at this very moment.

Notice the sly Krugman here, this “seductive” ( which accounts for 1.0% of trained economists) morality play (A morality play which is a strawman, created by Krugman's twisted and deceiving use of the word "punishment") "must be resisted."

Krugman then goes on to remarkably blame the Austrians for the Great Depression, a period during which FDR instituted more controls on the country than ever seen before. UCLA economists Harold L. Cole and Lee E. Ohanian have shown that FDR drove up wages and prices and was responsible for extending the length of the 1930s economic downturn by years.

Paragraph 4:

The many variants of the hangover theory all go something like this: In the beginning, an investment boom gets out of hand. Maybe excessive money creation or reckless bank lending drives it, maybe it is simply a matter of irrational exuberance on the part of entrepreneurs. Whatever the reason, all that investment leads to the creation of too much capacity—of factories that cannot find markets, of office buildings that cannot find tenants. Since construction projects take time to complete, however, the boom can proceed for a while before its unsoundness becomes apparent. Eventually, however, reality strikes—investors go bust and investment spending collapses. The result is a slump whose depth is in proportion to the previous excesses. Moreover, that slump is part of the necessary healing process: The excess capacity gets worked off, prices and wages fall from their excessive boom levels, and only then is the economy ready to recover.

This is simply another twisted paragraph . Now it appears that Krugman has slyly changed the debate. He is no longer discussing ABCT, but all "hangover theories", and whatever happened to discussing ABCT's "worldview"?

Paragraph 5:

Except for that last bit about the virtues of recessions, this is not a bad story about investment cycles. Anyone who has watched the ups and downs of, say, Boston's real estate market over the past 20 years can tell you that episodes in which overoptimism and overbuilding are followed by a bleary-eyed morning after are very much a part of real life. But let's ask a seemingly silly question: Why should the ups and downs of investment demand lead to ups and downs in the economy as a whole? Don't say that it's obvious—although investment cycles clearly are associated with economywide recessions and recoveries in practice, a theory is supposed to explain observed correlations, not just assume them. And in fact the key to the Keynesian revolution in economic thought—a revolution that made hangover theory in general and Austrian theory in particular as obsolete as epicycles—was John Maynard Keynes' realization that the crucial question was not why investment demand sometimes declines, but why such declines because(sic)the whole economy to slump.

Again we have Krugman using a loaded term, the supposed ABCT view of the "virtue" of recessions. ABCT theorists see recession as the readjustment period necessary from a previous central bank inspired boom. Krugman wants to keep his near-religious “morality play” going, so he uses the word “virtue". As for arguing that Keynes has made ABCT theory obsolete, by simply stating such, that’s as strong an argument as my saying, Henry Hazlitt made Keynes obsolete. But at least there is a book by Hazlitt, The Failure of the New Economics, that did make Keynes obsolete.

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Here's the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn't that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?

So much for not discussing ABCT, and to just look at some worldview. Of course, the person that gets laid off does not automatically find a job the next hour, a search for a new job must take place. Further, Keynesian unemployment programs extend the unemployment! Since why should anyone rush to find a job when they are being paid not to work?

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Most modern hangover theorists probably don't even realize this is a problem for their story. Nor did those supposedly deep Austrian theorists answer the riddle. The best that von Hayek or Schumpeter could come up with was the vague suggestion that unemployment was a frictional problem created as the economy transferred workers from a bloated investment goods sector back to the production of consumer goods. (Hence their opposition to any attempt to increase demand: This would leave "part of the work of depression undone," since mass unemployment was part of the process of "adapting the structure of production.") But in that case, why doesn't the investment boom—which presumably requires a transfer of workers in the opposite direction—also generate mass unemployment? And anyway, this story bears little resemblance to what actually happens in a recession, when every industry—not just the investment sector—normally contracts.

Notice the viciousness, “supposedly deep Austrian theorists “.

As for as Krugman’s question as to why there isn’t a rise in unemployment during the boom part of the cycle , this clearly demonstrates his lack of a deep understanding of ABCT. Before a boom starts, the economy can be said to be in equilibrium between the consumer goods production and capital goods production. When a central bank then pumps in new money, new demand is created for labor in the capital goods sector causing bidding for labor away from the consumer goods sector. Thus, there is no point where rising unemployment would be a factor in this part of the cycle. However, during the downturn part of the cycle, it is not a case that the central bank is pumping money into the consumer sector. What is occurring, instead, is that a transfer of money is taking place from the capital goods sector to the consumer goods sector. It is this money drain from the capital goods sector that causes the unemployment. During the central bank induced boom, money isn’t being drained from anywhere.

As for every industry being impacted by a recession, Krugman just doesn’t get what a capital good is. What I have identified as Wenzel’s Observation # 2 states that you need to know the purpose a good is being put to, to know if it is a capital good or consumer good, as I explained recently with regard to NBA tickets and how some purchases are consumer good purchases and other purchases are capital good purchases. Likewise, a hot dog sold on a summer day in a park is different from a hot dog sold at a construction site.

Thus , the “supposedly deep Austrian theorists” are much deeper on this topic than Krugman.

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As is so often the case in economics (or for that matter in any intellectual endeavor), the explanation of how recessions can happen, though arrived at only after an epic intellectual journey, turns out to be extremely simple. A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time. Yet, for all its simplicity, the insight that a slump is about an excess demand for money makes nonsense of the whole hangover theory. For if the problem is that collectively people want to hold more money than there is in circulation, why not simply increase the supply of money? You may tell me that it's not that simple, that during the previous boom businessmen made bad investments and banks made bad loans. Well, fine. Junk the bad investments and write off the bad loans. Why should this require that perfectly good productive capacity be left idle?

Here Krugman wants to become an inflationist. He decries an economy wide demand for cash, but wants to pump money through the banking sector, which benefits debtors at the expense of savers. If it is an economy wide increase in the demand for cash, why not just let the new lower price structure settle on the economy? Why would an increase in the demand for cash cause “good productive capacity to be left idle” unless ABCT is correct?

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The hangover theory, then, turns out to be intellectually incoherent; nobody has managed to explain why bad investments in the past require the unemployment of good workers in the present. Yet the theory has powerful emotional appeal. Usually that appeal is strongest for conservatives, who can't stand the thought that positive action by governments (let alone—horrors!—printing money) can ever be a good idea. Some libertarians extol the Austrian theory, not because they have really thought that theory through, but because they feel the need for some prestigious alternative to the perceived statist implications of Keynesianism. And some people probably are attracted to Austrianism because they imagine that it devalues the intellectual pretensions of economics professors. But moderates and liberals are not immune to the theory's seductive charms—especially when it gives them a chance to lecture others on their failings.

“The hangover theory, then, turns out to be intellectually incoherent,” writes Krugman, This again from a man who says at the start of this article that he is not gong to examine the theory but the “worldview”. It is not the ABCT that is incoherent, it is Krugman’s article.

Then , he is back to the “emotional” appeal of ABCT. He then goes on to tell us the reasons that “some” are attracted to ABCT. This is very close to a Marxian view of class logic, again all subtlety slipped in.

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Few Western commentators have resisted the temptation to turn Asia's economic woes into an occasion for moralizing on the region's past sins. How many articles have you read blaming Japan's current malaise on the excesses of the "bubble economy" of the 1980s—even though that bubble burst almost a decade ago? How many editorials have you seen warning that credit expansion in Korea or Malaysia is a terrible idea, because after all it was excessive credit expansion that created the problem in the first place?

“Moralizing on the region’s past sins”? Again another attempt to make ABCT sound as though it is a religious moral theory , and not a theory based on sound principles and reasoning.

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And the Asians—the Japanese in particular—take such strictures seriously. One often hears that Japan is adrift because its politicians refuse to make hard choices, to take on vested interests. The truth is that the Japanese have been remarkably willing to make hard choices, such as raising taxes sharply in 1997. Indeed, they are in trouble partly because they insist on making hard choices, when what the economy really needs is to take the easy way out. The Great Depression happened largely because policy-makers imagined that austerity was the way to fight a
recession; the not-so-great depression that has enveloped much of Asia has been worsened by the same instinct. Keynes had it right: Often, if not always, "it is ideas, not vested interests, that are dangerous for good or evil."

Raising taxes in the middle of a recession was a hardly smart move by the Japanese. Keynes was right, though, about ideas that can be dangerous for good or evil. And as can be seen in this article, Krugman’s ideas are evil in their tone and they attack ABCT in a twisted, and deceiving manner. But, at this point, the Austrian economic analysis must stop and the other Austrians, lead by the foundational thinking of Sigmund Freud, must take over to explain what would cause a mind to write the twisted deceiving article that Krugman did.

Robert Wenzel is Editor & Publisher of  EconomicPolicyJournal.com and Target Liberty. He also writes EPJ Daily Alert and is author of The Fed Flunks: My Speech at the New York Federal Reserve Ban .and most recently Foundations of Private Property Society Theory: Anarchism for the Civilized Person Follow him on twitter:@wenzeleconomics and on LinkedIn. His youtube series is here: Robert Wenzel Talks Economics. The Robert Wenzel podcast is on  iphone and stitcher.