We hear today that the Canadian dollar is almost at parity with the U.S. dollar. A few years ago the Canadian dollar was worth 75 cents USD, but today the U.S. government is  on a money-printing binge—and pretending to be shocked — shocked — when the its dollar plummets.

I am no prognosticator, and I don’t run any doomsday websites, but the long-range forecast looks bad. While most Americans believe this country is invulnerable to the deep shocks that have taken down lesser nations, some of us know that the government’s policies of the past 15 years have been ruinous. Furthermore, there is a country to our south that provides the unhappy roadmap to the destination to which the U.S. government’s policies are leading: Argentina.

Today Argentina is classified by the World Bank as a “secondary emerging market.” That might sound impressive next to Latin American failures like Cuba and Venezuela, but from where Argentina was just 70 years ago, its modern classification is a step backward.

In the first half of the twentieth century Argentina was one of the ten wealthiest nations in the world. That’s right, the world. This was a rich country, relatively speaking, and its future seemed bright. Unlike the European nations, it had not been burdened with wartime destruction; its economy benefitted from being at peace and by exporting agricultural products to nations at war.

Unfortunately, the same populist pressures that gave the United States its New Deal and promoted communism around the world undermined Argentina’s political economy.  The policies of the 1940s and 1950s, under Juan Peron and his wife, Evita, would prove permanently fatal for the country’s economic well-being. First and most important, militant labor unions tied to the Peronists forced up wages well beyond productivity. Not surprisingly, Argentina’s goods soon became uncompetitive on world markets.

Second, to deal with this newly acquired uncompetitive status, the Peronists passed one protectionist measure after another. Inflation soon followed, and the Argentine peso, which once rivaled the U.S. dollar, turned into play money. Yet the 50 percent inflation of the early 1950s was a pittance compared to what Argentina would experience over the next 30 years, as the country spiraled into hyperinflation by 1980.

Economic chaos led to political chaos, with the country witnessing a series of elections of Peronist presidents and subsequent coups to remove them from office as their policies exacerbated the continuing economic crises. Leftist guerrilla groups clashed with national forces in the infamous “dirty war” of the late 1970s and early 1980s that left thousands tortured and dead and still affects the nation’s politics.

Even today, Argentina is synonymous with political instability, high inflation, and an economy that always shows great potential but never meets expectations. Americans believe that such a thing cannot happen here, but it can. Argentina’s problems began with simple government interventions into the economy aimed at artificially propping up wages. From those first interventions came further interventions to deal with the problems caused by the previous actions, and so on. In the end, all that was left was inflation, chaos, political violence, and poverty.

The United States is facing perhaps its second-greatest economic crisis ever, and so far the government has taken page after page from Juan Peron’s playbook. As a result of this economic and political foolishness, the economy continues to shed jobs and hope.

There is a way out, but it is much different from what we have been doing. When one is in a deep hole, the first thing to do is stop digging. That means dispensing with the artificial means to prop up the economy when serious medicine is needed, medicine that will be painful but ultimately will lead to economic recovery. If we don’t go that route, I guarantee that the Argentines will not cry for us.

Today, the champion—the uncontested champion of Orwell’s “truth”—is Paul Krugman, the 2008 Nobel laureate, Princeton professor, and New York Times columnist. For those who read his twice-weekly column or glance at his blogs and commentary elsewhere, it is like reading the latest pronouncements from the “Ministry of Truth,” and, like in Oceania, it seems that the masses believe the nonsense.

Had I not read Krugman’s column, I never would have known that Jimmy Carter, who began the modern deregulation movement, was a right-wing Republican, or that the solution to almost all our economic ills is for the government to raise taxes, borrow, and print more money. However, his latest missive has managed even to outdo the Ministry of Truth itself. Big Brother would have been ecstatic.

There is not enough byte space in the universe to refute Krugman’s latest pronouncement completely, but a couple of the most glaring holes can be discussed here.

As most readers know, the U.S. Dollar has been falling fast against other currencies and members of OPEC are balking at continuing to price crude oil exclusively in dollars. Instead, they have suggested a “basket” of currencies, as they realize that our government’s policies are likely to turn the USD into something like the Zimbabwean Dollar.

Enter Professor Krugman, who writes:

The truth is that the falling dollar is good news. For one thing, it’s mainly the result of rising confidence: the dollar rose at the height of the financial crisis as panicked investors sought safe haven in America, and it’s falling again now that the fear is subsiding. And a lower dollar is good for U.S. exporters, helping us make the transition away from huge trade deficits to a more sustainable international position.

Not so fast.  The USD is falling because the rest of the world understands that the USA no longer is a “safe haven” and investors looking elsewhere. When super investors like Jim Rogers tell us to get out of this country altogether, people need to listen. Rogers does not have a Nobel to his credit, but he is no crackpot and he fully understands (unlike some American Ph.D.s) that the U.S. Government does not create wealth with the printing press.

While it is true that a falling dollar does make U.S. exports cheaper, the question is what can we export other than commodities. The government’s environmental policies alone continue to raise the cost of manufacturing and we are being forced by the political classes to divert productive resources into failed enterprises like General Motors and the zombie financial institutions on Wall Street.

Alas, Krugman does not stop there. No, he claims that what our economy “desperately” needs is—get this—more “easy credit.” That is right; the very thing that gave us massive malinvestments and brought the U.S. economy to near-ruin is what we “desperately” need. As I have written elsewhere, this is like claiming that the best way to deal with alcohol addiction is to imbibe even more.

For all the talk that the government’s policies of bailouts, printing money, and borrowing at record rates have “prevented” a second Great Depression, the truth is that all the government has done is to give the illusion of recovery while setting us up for an even worse Day of Reckoning. By keeping the zombie entities afloat, the government continues to force even more malinvestments at a time when liquidation is the order of the day.

The Keynesian propositions of printing money and borrowing might be popular to the political and intellectual “elites” of this country, but they are utterly destructive in the real world. Unfortunately, we are being fed Orwellian “truths” at a time when what we need to hear is the unadulterated truth.

Yes, the Federal Reserve and the Obama administration have pulled us “back from the brink” — the title of a new paper by Christina Romer, who leads the Council of Economic Advisers. She argues convincingly that expansionary policy saved us from a possible replay of the Great Depression.

But while not having another depression is a good thing, all indications are that unless the government does much more than is currently planned to help the economy recover, the job market — a market in which there are currently six times as many people seeking work as there are jobs on offer — will remain terrible for years to come.

As if on cue, the Times editorialized two days later:

If successful, ambitious goals like health care reform and energy legislation may generate jobs, but officials have not persuasively linked them to job growth. Congress and the administration also have not done enough to directly create jobs. That could be done with more stimulus to spur job creation, or a large federal jobs program, or tax credits for hiring, or all three.

The truth is elsewhere. First and most important, the economy continues to shed jobs more than two years into the recession because government has increased the burdens private firms and individuals must bear. From tax increases to a gaggle of new rules and regulations to the bailouts, government has done nearly everything it should not be doing if it wants a real recovery to take place.

Second, it is clear that the politicians in Washington are just getting started. From the appointment of numerous “czars” over different sectors of the economy to the “ambitious” plans for remaking medical care and imposing huge new environmental burdens, it is clear that President Obama and Congress believe that the economic downturn is an excuse for an upturn of State control of our lives.

If there is any “recovery,” it is a false recovery, one based not on any tangible economic progress but rather on financial trickery and printing money. Our “recovery” is a fraud perpetrated by Washington and its Amen Chorus in elite higher education and the mainstream media.

For the U.S. economy to have a real recovery, the economy first must shed the huge number of malinvestments that piled up like garbage on New York streets during the last unsustainable boom. Unfortunately, as the economy dumps these failed investments, that means people who were employed in those areas also lose their jobs, which simply is unacceptable to the political classes.

Had the Bush and Obama administrations left the economy alone, those malinvestments would have been shed quickly and the economy now would be moving toward a real recovery that could be sustained over time, employing new people in those sectors. Alas, the political classes believe that “inactivity” is anathema, so Bush and Obama engineered hundreds of billions of dollars of “bailouts,” which have served to prop up whole sectors of failing enterprises.

What does that mean, economically speaking? It means that instead of being directed into those sectors that could have grown without aid from the government, resources are being shoveled into the economic equivalents of bottomless pits. Americans are forced to prop up domestic automakers that are bankrupt, keep zombie financial institutions going on life-supports, engage in energy policies that literally destroy wealth and produce less energy, and to be taxed even more so government can destroy the part of the medical sector it has not already ruined.

In other words, Americans in productive entities are being forced to give up a large chunk of their own wealth o prop up firms and institutions that might be bankrupt but also are politically connected. While the New York Times and its elite economists in tow might claim the government needs to continue this course with another “stimulus,” commonsense economics is telling us that this is a policy that benefits the political classes and their allies and no one else.

In a rational political and policy environment, the implication of all this [the fading economy] would be clear: we need more stimulus. Yes, it would add to federal debt — but isn’t that worth doing to help reduce an output gap that’s wasting our potential at the rate of more than a trillion dollars a year?

The “solution,” Krugman says, is for government to create more debt and print more money.  Since he already publicly claims the printing of money creates a “free lunch,” he would approve of nearly any way the money appropriated by Congress would be spent, just as long as there is spending.

Lest anyone think the “stimulus” is spent wisely, think again.  One building block of economic analysis is “utility theory” in which people rank their preferences from highest to lowest.  For example, while I might want to take a vacation, it is more important that I spend my income first on my house payment, then food and other expenses that will support my family.

If there is money left over, perhaps then I can take my trip.  Likewise, when we want governments to spend money on various projects, we assume that the most important items will be first in line.  (One can make a case that just about all government spending is foolish and reckless, but for purposes of this article, I will assume that at least some government spending has social value.)

According to the promoters of the “stimulus,” the money has gone to hard-pressed states and localities to fill in the gaps caused by declining tax revenues.  In some places this has meant that lower-valued projects have been abandoned or put on the back-burner, which fully reflects the human valuation process.

If the “stimulus” were about helping states and localities through hard times, the government would want them to spend it on the most-important projects, or perhaps even hold that money in reserve to ensure solvency through the recession.  Instead, Congress has directed that money be spent on things that local and state governments would never consider to be priorities.

I have to do nothing more than drive to work to see this foolishness in action, as two “stimulus”-funded projects are in my backyard.  I live in Garrett County, Maryland, and have to drive over Big Savage Mountain, a 3,000-foot-high ridge, to go to Frostburg State University, which is five miles east of my home.  If I take U.S. 40 over the mountain, I often have to stop and wait for several minutes while work crews expand the drainage ditches along the steep road on the mountain’s east side.

If ever there were a make-work project, this is it.  In the more than eight years I have lived in this area, I never have witnessed any problems caused by the old drainage ditches and there really did not seem to be any problems there caused by cascading storm water.

However, the other project on I-68 on the east side of Big Savage Mountain makes the drainage undertaking look to be fiscally sound.  The interstate highway has a narrow median with a guardrail down the middle.  This past week, drivers going east and west were shuttled into one lane to accommodate workers putting down rolls of new sod in the narrow median strip.  If ever there were a worthless project, this was it – and even my children commented on its uselessness.

If these “stimulus”-funded undertakings are typical of what the Congress directed for states and localities, then the “leaders” of the U.S. government are even more delusional than I had imagined.  Not only are they handing out money in a manner that imperils our future, but they also are demanding that it be spent on phantom things that intelligent people never would need in the first place.

This is not “change we can believe in.”  This is government as usual.

The Stimulus Helped the Economy? Not So Fast!

Automotive News recently editorialized that the program “worked,” and now it is time to “build on its success.”  The editorial declared:

The August U.S. light-vehicle sales tally reported last week proves that the government’s cash-for-clunkers program was a huge success. Now it’s up to automakers and their dealers to be clever marketers and salespeople to maintain and build on the clunkers momentum.

From the beginning, there were doubters who, for political or other reasons, said the clunkers program was little more than a federal handout to the Detroit 3. But the rising tide of enthusiasm among U.S. consumers for purchasing new cars lifted many automakers, not just those with a fleet full of fuel-sippers.

The writer added:

Better yet, dealers say cash for clunkers sparked a positive shift in consumer attitudes that will lift new-car sales in the months ahead, especially if economists are right about positive indicators.

This editorial was written two weeks ago, The industry has come back to earth with a thud since then.  The Boston Globe reports that things are rather quiet in the aftermath:

[O]nce the federal money dried up, so did the sales rally. Now, customers at dealerships like Silko Honda in Raynham are few and far between, and inventory is once again accumulating.

Manager Adam Silverleib said business was “pretty intense” as a result of the federal stimulus program, with the dealership hustling to accommodate customers and handle the piles of paperwork required for them to receive reimbursement on vouchers. “Now we’re kind of back to where we were in the spring,’’ he said.

And what was it like in the spring?  It was called a recession, with recession-like sales figures to boot.  In other words, one can liken the Cash for Clunkers program to throwing lighter fluid on damp wood.  Flames will rise up for a few minutes, but unless the wood catches fire, the lighter fluid was next-to-worthless.

Contrary to what Automotive News breathlessly declared, the Cash program pretty much was what anyone with common sense and decent economic training could have predicted.  It spurred sales for a while, but after the money dried up, so did the new car sales.

I contend, however, that where Automotive News saw “momentum” for the auto industry, in reality this program has brought long-term economic damage.  To understand why the program was, on net, economically harmful, one first must understand Frederic Bastiat’s “broken window fallacy.”

Since most, if not all, readers are familiar with this fallacy, I don’t need to repeat it.  However, the most important part is that while the townspeople believed the broken window brought prosperity, it actually reduced their wealth because they were forced to use resources to recreate a window which already had existed, thus depriving the community of the use f those resources elsewhere.

With Cash for Clunkers people turned in vehicles on which they were making small if any payments..  In normal situations, if they had wanted another vehicle, many would have traded in what they had for another used car or truck.  Instead, even though they were given a fairly large down payment, many purchased cars that substantially raised their personal debt.

To make matters worse, the government ordered the dealers to destroy the engines of the so-called clunkers, many of which were not clunkers at all.  Thus the government managed to destroy a huge amount of wealth, all in the name of creating wealth.  Furthermore, if any automakers or dealers used the Clunker  program as a reason to engage in new capital expansion, they quickly will find that those “investments” really are malinvestments, which means they will be worse off in the long run because they diverted resources to lines that won’t be profitable.

Like so many government programs, Cash for Clunkers, while creating some short-run benefits for a few people, will have negative effects in the long run.  I suspect that even the editors of Automotive News will realize sooner or later that it was a lemon.

I flyspecked the New York Times, and while there were editorials and columns condemning Serena Williams’s outburst at the U.S. Open and a call for lawmakers to criminalize “texting” while driving, the was silent about the tariff. Likewise, I saw nothing on the sites that claim to care about the poor, from the leftist “God’s Politics” blog to the Daily Kos and the Huffington Post.

This should be amazing, but it is not. However, before I explain why I believe this latest presidential action to be especially harmful to the poor, let me first say that most people on the left who claim to care about the poor really don’t care what happens to them. Poor people are a great prop, a nice bit of background, for those who push the collectivist agenda. We know that throughout history, collectivism always has been a disaster for the poor, and from India to Cuba to North Korea to Haiti, state control and interference in peaceful, private exchange has forced many people to live in absolute squalor.

(India has been undergoing changes and has become friendlier to private enterprise, as has China and other former communist countries, but the Indian bureaucracy has been resistant in giving up its power over the lives of ordinary people. Nonetheless, whenever governments give up even some power to control economic exchange, we see higher living standards for large numbers of people.)

Why have these “we love the poor” leftists and left-liberals been silent in the aftermath of this terrible deed? It is because they are slavishly tied to labor unions, which have promoted this latest outrage. In fact, unions always have supported protectionism, from the infamous Smoot-Hawley Tariff to President Ronald Reagan’s “voluntary” quotas for Japanese auto imports.

On the other side, the people accused of “supporting the rich” have reacted vociferously against this new tariff. From the Wall Street Journal to the Foundation for Economic Education, writers have rightly condemned this new policy as being anticonsumer and a danger to us all. I will add one more argument against it.

Before doing so, however, I wish to point out that by historical and constitutional standards, the President is on shaky ground, made shakier by the abdication of Congress and the courts to “protect and defend” the Constitution. The Law of the land clearly states that it is Congress that has the power to levy taxes, and tariffs, be they revenue or protectionist tariffs, are taxes.

There is nothing–nothing–in the Constitution that permits the executive branch to impose a tax. While it is true that Congress has passed legislation that gives the president the authority to impose tariffs in certain situations, nonetheless Congress has done so in violation of separation of powers, and the courts have done nothing to stop it.

As for the tax, it is imposed on something that anyone who drives needs: tires. What happens when government artificially raises the price of a good–which is the intent of Obama’s latest move? People buy less of it, and that includes tires.

What will happen–and this is an absolute certainty–is that people will put off buying new tires and will drive longer on their worn ones. This will lead to more accidents, more injuries, and more deaths. People in lower-income brackets will be more likely to bear the brunt of this policy.

Obama imposed new tariffs (which will lead to retaliation by the Chinese, as we have already seen) to please some of the highest-paid workers in the world: American union members. The lower-paid workers in our country, however, will pay the deadly price, all in the name of “social justice” and “protecting American workers.”

I mention this ten-year-old sarcastic foray into economics because Krugman has struck again, this time in a New York Times Magazine article, “How Did Economists Get It So Wrong?”  It turns out, according to the 2008 Nobel Prize winner, that economists falsely claim that capitalism is “perfect”:

Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.

That was not the only problem with economists, as Krugman sees it.  Not only did they have a wrong-headed faith about free markets, but they also had forgotten the Great Lessons of Keynesianism:

Keynes did not, despite what you may have heard, want the government to run the economy. He described his analysis in his 1936 masterwork, “The General Theory of Employment, Interest and Money,” as “moderately conservative in its implications.” He wanted to fix capitalism, not replace it. But he did challenge the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps. [Emphasis added.]

He adds:

It’s important to understand that Keynes did much more than make bold assertions. “The General Theory” is a work of profound, deep analysis — analysis that persuaded the best young economists of the day. Yet the story of economics over the past half century is, to a large degree, the story of a retreat from Keynesianism and a return to neoclassicism.

One should read Henry Hazlitt’s classic The Failure of the “New Economics” to see something other than the fawning prose that Krugman writes about Keynes. There is so much nonsense in these two paragraphs that it would take a large volume to refute it all.  I will concentrate on just a few things.

First, it is amusing to see Krugman write that Keynes was concerned about economic “fundamentals,” given that Keynesian theory treats all capital and, indeed, all assets as being homogeneous.  There are no economic fundamentals in the Keynesian system; indeed, Keynes (and Krugman) call for inflation, which is general in scope, as a way to end unemployment in specific economic sectors.

Second, like Keynes, Krugman has declared that printing money will solve nearly any economic problem (although he has not used the specific Keynes quote on inflation, that it “turns stones into bread”).  As Hazlitt noted in his classic, Economics in One Lesson, inflation always leads to economic disaster.

Third, as the ATBC so aptly points out, it is inflation that creates the boom-and-bust cycles.  If inflation is the cause of the problem, then even more inflation cannot be the solution.

Krugman is correct when he says Keynes made “bold assertions,” but one searches The General Theory in vain for something profound.  As Hazlitt noted, there is nothing in the book that is both true and original: What is true is not original, and what is original is not true.

Krugman is right that economists “got it wrong.”  However, it was not a religious belief in free markets that caused the trouble, but rather government intervention, something Krugman never seems to mention in any of his columns.

All these things and more are symptomatic of the modern age, but the problems we face today are the legacy of a movement that occurred more than a century ago: the Progressive Era, which ran from the late 1800s to the end of World War I.  Because most people are not aware of Progressivism and its legacies, I would like to educate the readers a bit.

First, and most important, Progressivism is portrayed by historians as a time of “reform,” in which people fought against the alleged ills created by industrial growth and capitalism.  According to the pundits, American businesses were monopolizing the economy, “gobbling up the wealth,” and leaving most Americans worse off in their wake.  Railroads supposedly were victimizing Americans with their rebates and long and short-haul rates.

Second, Progressives believed that they could apply “scientific principles” to political-economic decisions in order to make U.S. society a better place to live.  Among the things that Progressives advocated were a stronger executive branch (exemplified by the Progressives’ Progressive Teddy Roosevelt), centralization of the political structure, and the creation of “independent” agencies supposedly insulated from politics.  The crown jewel of the agencies was the Federal Reserve System.

The notion was that market systems and the relatively decentralized and congressionally dominated political system of the United States were “outdated” and could not be quickly marshaled for Progressive causes.  Furthermore, the relatively decentralized systems of education, both government and private, were unacceptable to Progressives, such as John Dewey, who believed that children must be trained to serve the state, which was to be the embodiment of all of society.

In 1913, thanks to a number of congressional initiatives and addition of amendments to the Constitution, the United States saw the establishment of the Fed, the national income tax, and direct election of U.S. senators, who until then were appointed in most states by the state legislatures.  It was, according to Prof. Thomas DiLorenzo, the “Revolution of 1913.”

Perhaps it is not surprising that a great Progressive cause, World War I, followed soon afterward, with the United States entering in 1917.  As Murray Rothbard noted in his essay “World War I as Fulfillment,” the war permitted the intellectuals to impose nearly all their ideas, from industrial cartelization to prohibition of alcoholic beverages, on American citizens.

Although many of the features of the war economy disappeared during the 1920s, the Fed and the income tax remained, and the former would play a major role in dragging the United States into the Great Depression.  If World War I was the Progressives’ war, the Great Depression was the era in which many Progressive ideals could be put into place permanently.

Fast forward to 2009.  We have seen the Fed create two consecutive financial bubbles that have broken, the collapse of the Progressive-style entities Fannie Mae and Freddie Mac, and yet another attempt by the government to create that ultimate Progressive goal, nationalized medical care.  We have seen the executive branch operate almost unencumbered by Congress and the courts bail out one firm after another and create a number of “czars” to oversee everything from Wall Street to the automobile industry.

Indeed, the Progressive “solutions” to our current set of economic problems are no solutions at all; they are the cause of the economic downturn.  From the Fed to the staggering weight of government spending and debt, we can see that Progressivism truly has run its course.  Unfortunately, while it runs its course, Progressivism also is running this country into the ground.  The solution is not more government power.  The solution is liberty. It is high time we rediscovered our roots of freedom.

Because Human Action covers a vast amount of intellectual territory, I will deal only with economic calculation. If there is a Misesian term to which I return again and again, it is “economic calculation,” for that term explains why socialism is fated to fail – always.

Mises dealt with economic calculation at length in Socialism, which he published in the early 1920s, and he returns to the theme again in Human Action, and his points are well-taken. At the time he wrote these books, American, British, and European intellectuals had fallen in love with state-run centralized economic planning. People who should have known better had convinced themselves that the U.S.S.R. had created a paradise via central planning in which all people would prosper, or at least have all their needs met.

Most advocates of socialism believed that improvements in technology had made market economies obsolete, and that economic planners would match technology to scientific knowledge and, Voila!, a prosperous economy would rise from the mix. Mises knew better, and while the “great minds” of the time believed that Oskar Lange had “beaten” Mises in the famous “Socialist Calculation Debates” of the 1930s and 1940s, nonetheless it was Mises who prevailed in the end.

Mises noted that production of goods is not a technological activity, fundamentally speaking, but rather an activity that is economic in scope. He writes in Human Action:

…most means are not absolutely specific; most of them are fit for various purposes. The facts that there are different classes of means, that most of the means are better suited for the realization of some ends, less suited for the attainment of some other ends and absolutely useless for the production of a third group of ends, and that therefore the various means allow for various uses, set man the task of allocating them to those employments in which they can render the best service. Here computation in kind as applied by technology is of no avail. Technology operates with countable and measurable quantities of external things and effects; it knows causal relations between them, but it is foreign to their relevance to human wants and desires. (p. 207)

In other words, technology is a servant of economic activity, not its master. The decisions as to what should be produced, who should produce it, how it should be produced, and who receives the product are determined via a system of prices and private property. However, Mises added one more important point that often is lost in the discussion: economic calculation depends upon profits and losses.

Profits and losses, Mises noted, direct production by demonstrating where resources are most highly valued. If one can take a present-day example, it has been with the meltdown of financial markets on Wall Street. By bailing out firms that directed hundreds of billions of dollars into dead-end investments, the government has interfered with the allocation of capital and has forced markets to place higher “values” on inferior uses of resources, all because politicians have ordered these things.

As I pointed out last week, profits are the reward for entrepreneurs who have directed resources to their highest-valued uses, and a profit system not only is appropriate for medical care, but it is mandatory if we want high-quality care to be made available to as many people as possible. Profits are not an “added cost” to production and distribution of goods; they are a means by which entrepreneurs efficiently use resources.

Mises noted that profits and losses enable entrepreneurs to engage in the necessary economic calculation needed for an economy to meet the needs and wants of people. What he wrote 60 years ago is just as relevant today as it was then, even if policymakers are as deaf and blind today as they were in 1949.

I said nothing at the time, although Jane Orient later told me that I should have told him that doctors don’t profit from an illness; instead, they earn a profit (or have the opportunity for profit) when they attempt to help cure the illness or at least alleviate some of patient’s problems.  For that matter, my mechanic does not profit because my car has broken down; he earns a profit when he tries to fix the problem so I can have my car back in good shape.

The problem is not just with misidentifying why someone might profit; the problem is that most people do not understand the very nature of economic profit, nor do they understand that profits actually make their own lives better when they are earned in a free market.  Instead, their reaction is captured in a recent column by Cynthia Tucker, the editorial page editor of the virulently anti-capitalist Atlanta Journal-Constitution:

The for-profit health insurance industry is in the business of maximizing profits for their shareholders, and the only way they can do that is to hold down the payments they make for medical care. That means they spend a lot of their time (and a lot of their money) figuring out ways to deny claims.

She adds:

At recent townhall-style forums held by members of Congress or administration officials, some belligerent tea-baggers have held up signs saying, “What’s wrong with profit?” The answer is this: It has no place in the health insurance industry. It distorts and disrupts the provisions of health care, adding costs without adding quality of care.

The health care market doesn’t function like the market for automobiles or artichokes or flat-screen TVs. If you don’t like the price, you just don’t buy. But you walk away from expensive health insurance at your own risk.

Before answering this statement, I need to point out that I do not believe that the third-party insurance system for paying for most routine medical care is a good thing, and if there is any distorting factor in medical care, it is the proliferation of third-party payments.  (I will add that if we had such third-party payments for groceries, we would have a “grocery crisis,” as well.)

Nonetheless, Tucker is wrong about the role of profits, including those of  health-insurance companies.  Now her reasoning appeals to the “person on the street,” but that does not make it right.  She is saying that (1) health-insurance companies earn income from their premiums, and (2) the more claims they deny, the more they profit, since they pay out less money.

The first thing to note is that if health care is a scarce good, then the market for it will function like the market for automobiles, artichokes, and flat-screen TVs.  In fact, if the market for care were not so heavily regulated by government, and if government were not intervening through its own payment programs like Medicare, people would have more choices and face lower real costs for care just as they do with nearly everything else that has been improved by capitalism and, yes, the profit system.

Second, profits do not “distort” a market (unless the government provides perverse incentives, as we recently saw in the Wall Street meltdown).  Profits and losses serve as a mechanism by which entrepreneurs are able to direct resources to their highest valued uses, and they send signals to producers as to what is working and what is not.  If there are distortions in any market, they are caused by government (such as states mandating health insurers to pay for politically popular treatments that drive up costs for everyone else).

In a capitalist system, people prosper by providing goods and services that people need and want.  It is not the free market that creates distortions; it is and always will be government.

In fact, not only have Obama’s policies made this downturn worse, the policies have not yet begun to run their full course, and that means we have further to go before we hit bottom.  I do not say this in any partisan spirit; indeed, I believe that the Obama policies pretty much are what John McCain would have done had he been elected.

No, the problem is not partisan politics; the problem is bad economic policy.  Really bad economic policy.

Why am I saying this, given that it contradicts what many professional economists are claiming?  For example, Joe Davis, chief economist at Vanguard in Valley Forge, Pennsylvania, says:

It [the drop in the jobless rate] suggests the recession will be ending before the end of the year. There isn’t any part of the economy that hasn’t shown some slowing in deterioration.

I respectfully disagree, although I realize that people are not willing to pay me the large bucks that Davis earns for his prognostications.  My reasoning is simple but forthright: The Obama administration continues to subsidize the weak sectors of the economy and punish the healthy sectors to pay for this largess.  It is an unsustainable pattern.  Furthermore, many of the worst aspects of his policies have not yet kicked in, and when they do, the damage will be severe.

First, we have to realize that the trends of mass layoffs had to end, albeit temporarily.  Bankrupt Wall Street firms and General Motors already have shed huge numbers of workers and are having a lull, as the government bailout cash has stabilized these outfits – for the time being.  There still are healthy firms out there, but they won’t be healthy for long, as the government is going to punish any company that is profitable with higher taxes, more onerous regulations, and other wealth-stunting.

Second, the effects of the environmental policies such as “cap and trade” and other new regulations have not yet been fully felt by U.S. employers.  Don’t kid yourselves about how onerous these new laws and regulations are going to be.  They will put many companies out of business, drive other business overseas, and add to our unemployed.

Don’t be fooled by the “millions of new green jobs” rhetoric coming from Congress and the New York Times. For every “green” job created by building windmills or other horse-and-buggy technology items, many regular jobs will be eliminated.  If ever there were a Frédéric Bastiat “broken window” moment, it is the “green jobs” nonsense.

Third, increases in the minimum wage will take their toll on lower-wage workers, while other new labor and “workplace safety” policies are going to make it more costly to run a business.  That will translate into layoffs soon enough.

Last, whether or not Obama’s health plan will pass Congress intact is irrelevant.  The government is going to make medical care more costly, less available, and a greater financial burden on employers and employees.  That is a given, and it also translates into higher rates of unemployment.

At best, the “stimulus” has created a lull in the downturn, an eye in the economic hurricane.  There is nothing – I repeat, nothing – that the government has done in the past few years to alter the course of a real tragedy.  From its expensive wars abroad to its multitrillion-dollar borrowing to the continued criminalization of routine business practices, the government has sent a message to private enterprise that it is the enemy.  The rest of us will feel the blunt edge of government policy as we watch the economy implode.

Right-wing opponents of reform would have you believe that President Obama is a wild-eyed socialist, attacking the free market. But unregulated markets don’t work for health care — never have, never will. To the extent we have a working health care system at all right now it’s only because the government covers the elderly, while a combination of regulation and tax subsidies makes it possible for many, but not all, nonelderly Americans to get decent private coverage.  (Emphasis mine)

Now, I hardly would be surprised to read such a comment from a politician or political science professor, but when a supposedly-august economist makes this claim, I believe the statement needs to be further analyzed before we can utter the phrase, “Not so fast.”

In doing this, however, we have to define our terms.  First, we have to define what an “unregulated market” is, and second, we then have to define the term “work” as he applies it.

Now, when Krugman refers to an “unregulated market,” he is describing a “market” in which the government does not set the terms of exchange, the prices, and govern the output.  In his view (expressed elsewhere) an “unregulated” market is chaotic, full of gaps, and generally operates out of control.  For example, he has described the turmoil on Wall Street as being the result of “unregulated markets” in finance.

I don’t know what academic world Krugman inhabits, but I would say that there is no such thing as an “unregulated” market.  Even a market in which government plays no role absolutely is going to be regulated by the Law of Scarcity and by profits and losses.  Indeed, markets exist precisely because of scarcity; non-scarce goods (like the air I am breathing right now) do not have to be allocated because my use does not deprive anyone else of using this good.  I give up nothing to breathe this air, and neither does anyone else in my house.

If a good is scarce, however, it not only must be produced, but also distributed, and markets are those entities that govern the process of production and exchange.  The only goods that can avoid some kind of market process are precisely those that are non-scarce, and no one, not even Krugman, is claiming that medical care is a perfectly free and abundant good.

However, that clearly is not true.  Krugman is saying that the medical markets cannot function unless government is directing the production and exchange.  What he means is that the medical market is different than the market for, say, cars or CDs.  From what I can decipher from his and other claims to support “universal” medical care, a “market failure” occurs when someone is not able to access immediately all of the medical care he or she “needs” immediately.

Now, if this is what he means by a “market failure,” then every market (including the distribution of government-produced goods) falls into that category.  If I cannot afford a Rolls-Royce, is that due to “market failure”?  Lest one think I am exaggerating, read on:

…government involvement is the only reason our system works at all.

The key thing you need to know about health care is that it depends crucially on insurance.

This is a non sequitur. There is nothing inherent about medical care that requires insurance or any other third-party payment for ordinary treatment.  In fact, health insurance first came about as a mechanism to deal with paying for catastrophic events, not routine care.  Government involvement in medical care, and especially the advent of Medicare with its third-party payments for nearly all medical care hastened the invasion of the modern mess.

From an economic point of view, a scarce good is a scarce good, whether it is medical care or sirloin steak.  The problem is that government has piled intervention on top of intervention, and driving up the costs and making care less available in the process.  The “failure” of the present system is a government failure, period.

The Austrian school of economics, however, has long pushed an alternative theory, developed by Ludwig von Mises and F. A. Hayek.  Unlike the Keynesian view (what economist Robert Higgs calls “vulgar Keynesianism”), the Austrian theory actually looks at the economic fundamentals and their relationships to one another.

Austrian business-cycle theory states that when government monetary authorities follow an aggressive expansionary policy, the artificially lower interest rates entice entrepreneurs and business owners to expand lines of production.  The new money flows into the economy and sets off a boom, especially in those businesses most positively affected by lower interest rates.

However, the boom is unsustainable, a fact that only the Austrians point out.  (Keynesians believe that a boom must be sustained at all costs, which means that government spending must replace private spending in order to “fill the hole,” as Paul Krugman calls it.)  After declaring the Austrian theory to be “as worthy of serious study as the phlogiston theory of fire,” Krugman declares:

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.

The question, of course, is simple: Spend more with what?  The answer that Krugman and other “vulgar Keynesians” give is that government either should borrow in large amounts, print more money, or both.  Governments then should spend on special projects or give the money to state and local governments and let them spend on whatever they wish – as long as they spend, spend, spend.  Thus, we have the “intellectual underpinnings” of the current “stimulus.”

Unfortunately for the Keynesians, there is a problem in the analysis; the booms launched via government’s “expansionary” policies cannot be sustained. It is not a government choice but rather a simple reality.

The reason booms must run aground is because the spending habits of consumers will not sustain the investment activity that has created the boom in the first place.  For example, in the “dot-com boom” of the late 1990s, hundreds of billions of dollars poured into the newly begun Internet-based companies that supposedly were going to revolutionize how people purchased goods. Firms like WebVan, Pets.com, and E-Toys made a huge splash when they first appeared, but it soon was apparent that consumers did not prefer to use these firms as their founders and investors had anticipated, and most dot-coms went bankrupt.  The stock market bubble that accompanied this boom also popped, as stock prices were well out of kilter with the actual performances of these firms.  In other words, fundamentals mattered.

Likewise, the recent housing boom went bust because the huge increase in housing prices could not be sustained relative to incomes.  (As Peter Schiff has pointed out, the typical house payments at the height of the boom were substantially higher than rents, which meant the housing fundamentals were out of balance.)

Simple supply-and-demand (something “vulgar Keynesians” usually ignore) could not permit these booms to continue since there was nothing to support the accompanying inflated asset values.  Vast increases in government spending would not be directed (nor could they be directed) toward the specific areas where asset prices have collapsed.

The economic damage can be repaired only by the liquidation of the malinvestments so that the economic fundamentals again can be put into balance.  Government “stimulus” programs not only ignore this fact, but actually keep that realignment from occurring.  Thus the “stimulus” only prolongs the downturn and ensures that a future day of reckoning only will be worse.  We cannot understand the boom and bust cycle unless we understand the role of malinvestment, and only the Austrians demonstrate that understanding.

Paul Krugman's Chart Explaining How Deficits "Saved the World"

Last week, I wrote about the crudeness of so-called Keynesian economic theory in which one assumes that all assets and capital “investment” are “homogeneous” in character, which means that their only contribution to the economy is from the money that is spent in their creation and continued operation. This view contrasts with the Austrian paradigm, which emphasizes the structure of production within an economy and the unsustainability of capital that is malinvested during a boom.

Unfortunately, too many people in high places are prone to believe what on its face is unbelievable: running huge federal deficits somehow is a good thing for the economy. The latest outburst comes from Paul Krugman, who recently claimed that deficits “have saved the world.”

Krugman reports a quote from a Goldman Sachs analyst who pointed out that at the present time, private savings is greater than private investment. In his July 15, 2009, New York Times blog, the 2008 Nobel Prize winner writes:

That’s an interesting way to think about what has happened — and it also suggests a startling conclusion: namely, government deficits, mainly the result of automatic stabilizers rather than discretionary policy, are the only thing that has saved us from a second Great Depression.

He concludes by stating,

… absent the absorbing role of budget deficits, we would have had a full Great Depression experience. What we’re actually having is awful, but not that awful—and it’s all because of the rise in deficits. Deficits, in other words, saved the world.

Unfortunately, Krugman has confused cause with effect. The supposed imbalance between savings and planned investment is not causing an economic downturn; it is the result of the downturn. Likewise, the reluctance of people to spend as they did before is not causing a recession, but rather is occurring because of the recession.

In the Keynesian world, it is all so simple. People spend and the economy does well. However, if people don’t spend money like before, then the economy is in the doldrums and needs to be bailed out by government spending.

Once upon a time, people would have seen through this nonsense, but since Keynesian theory dominates the academic world and, unfortunately, the investment world, too many people are beguiled by such beliefs. However, for all of its supposed simplicity, the Keynesian theory is loaded with fallacies and just plain bad ideas.

First, and most important, deficits have not “saved the world.” They only have extended the unsustainable “boom” (or, more appropriately, what is left of the boom) and are postponing the day of reckoning. Second, they are guaranteeing that future generations are going to be faced with the devil’s bargain of either having to tax themselves mightily to pay off the debt or to repudiate it with inflation. Neither is a satisfactory outcome.

Keynesians seem to believe that a boom can be sustained forever, providing that governments fill in with extra spending. However, that is extremely unsound thinking. As Ludwig von Mises and the Austrians long ago noted, the very nature of the crisis at the end of a boom is built upon the fact that a boom cannot be sustained because the longer the boom goes on, the greater the malinvestments.

Indeed, the only way out of the crisis is for the malinvestments to be liquidated or diverted to other, more sustainable, uses. Once the fundamentals of an economy are put back into balance, a recovery can begin.

Unfortunately, because of the action taken by presidents Bush and Obama, as well as the Federal Reserve System, the excesses of the original boom still have not been fully shaken from our economy. That means that the recession still has a way to go before it hits bottom, which means bad news for a lot of Americans.

One wishes that the nation’s policymakers would realize that their actions to sustain the boom not only are ineffective, but downright harmful. Likewise, the “second stimulus” only would keep the malinvestments from liquidating and put off that awful day of fiscal reckoning in the future. And it will arrive, and Washington cannot do anything about it.

For the past 30 years, we’ve been told that government spending is bad, and conservative opposition to fiscal stimulus (which might make people think better of government) has been bitter and unrelenting even in the face of the worst slump since the Great Depression. Predictably, then, Republicans — and some Democrats — have treated any bad news as evidence of failure, rather than as a reason to make the policy stronger.

In dealing with the crude analysis that accompanies such Keynesian thinking, I use Krugman’s columns because he is the most popular exponent of that viewpoint. If one wishes to learn Keynesianism, read Krugman’s columns.

The Keynesian economic “theology” holds that only spending matters. Keynesians believe that it does not matter who does the spending, although it is preferable for government to do it, since politicians love to buy votes with other people’s money.

A recent quote in a Krugman column demonstrates this point. He claims that since private borrowing is down, even with the government’s current rapid accumulation of debt, overall borrowing is less than what it was during the boom. Thus he concludes the overt worrying of some over the massive increase in government debt is just another tale of woe from the “economic Cassandras.”

In other words, Krugman does not differentiate between private and government borrowing, even though business borrowing mainly is done for capital investment and government borrowing is done so governments can spend more than they take in with taxes. Keynesians seem to believe that the only benefit business borrowing provides is the spending that takes place, so if government does the borrowing and spending instead, then all the better.

Now to deal with the quote from Krugman’s column. Austrian economists do not respond negatively to what Krugman says because we “hate” government for “ideological” reasons (even though most of us look askance at government and its coercive ways), but rather because we understand the differences between private and government spending. They are not mirror images of each other, no matter what Krugman says.

In the Keynesian viewpoint, all assets and all capital are homogeneous. It does not matter if one spends money on a “bridge to nowhere” or invests in a new line of production; what is important is that money is spent.

Furthermore, in Keynesian thinking, as long as there are “idle resources,” then government spending — if it is enough and enough money is printed — ultimately can result in “full employment” of those resources. Why those resources might be idle in the first place is not up for discussion; the important thing is that government “stimulates” enough spending to put those resources back to work.

This is short-sighted and crude analysis. In the real world, capital matters, for it is in the development of capital that we make workers more productive, thus increasing individual wealth and the overall standard of living in a society. Capital spending is not just money dropped from a helicopter; it is undertaken for a specific productive purpose.

Austrians hold that typical Fed-created credit booms are not sustainable and that when once-productive assets become idle in the downturn, it is because the capital was malinvested. Granted, to understand the entire concept of malinvestment, one must be able to differentiate between the kinds of capital investment that can be sustained and what will have to be abandoned. Keynesians, unfortunately, have decided to ignore that kind of thinking or unilaterally to declare it “discredited.”

Yet when one applies simple logic, it is not hard to see which set of economic ideas should be discredited, and it is not the Austrian theory.

Last Saturday was July 4, a day in which Americans celebrate the Declaration of Independence from Great Britain. However, in the centuries since Thomas Jefferson penned those wonderful words of freedom, the United States of America has embraced a system of criminal law that King George himself would have decried as tyrannical and unfit for any Englishman.

As I investigated her case, I came to realize that not only is this woman not a criminal, but that she was railroaded into a conviction. This hardly is unusual today, and because many Americans have lost their capacity for outrage or are likely to believe whatever prosecutors declare to be true, most people are not going to share my point of view on this or any other federal criminal case.

I won’t go into the details of this particular case except to say that as one who has devoted much of his research and writing time over the past seven years to the subject of federal criminal law, even I am shocked at what the prosecutor was able to do. She secured the services of a competent attorney for her sentencing hearing and appeal, and he has told her that he can only read her trial transcript for a couple of hours at a time. After that, he said, he becomes too angry and must stop.

In the past seven years, I have written articles and papers on this subject and I must say that I still find myself surprised at what the courts allow to happen. This is a system in which federal prosecutors are able to engage in double jeopardy, regularly breach the attorney-client privilege, and generally do away with the entirety of the Bill of Rights. Prosecutors can take legal acts by individuals, bundle them into a fictitious “crime” of “fraud” or “racketeering,” and criminalize them.

Many targets today are businesspeople, as prosecutors now are able to use the law as a means to fight capitalism. That was the original dream of the man who coined the phrase “white-collar crime,” a sociologist and socialist named Edwin Sutherland. He believed that all private economic transactions were inherently criminal, but because the United States had a relatively free-market economy, people were able to get away with committing acts that should have been labeled as crimes. Sutherland set out to change that state of affairs, and as U.S. law schools became more socialist and radical in their teachings, a new generation of lawyers was trained to put into law what Sutherland could not.

During the 1980s, as the U.S. economy began to grow in the wake of financial and economic deregulation, others sulked and named that time the “Decade of Greed.” Investment banker Michael Milken became a household name as his financial innovations enabled companies like Cable News Network and MCI Communications to grow in a way that would have been impossible in earlier times.

Rudy Giuliani, who then was the U.S. attorney in New York City, saw an opportunity to score political points, and he aimed squarely at Milken and others on Wall Street. He had his Greek Chorus in the New York Times, Time, and Newsweek, all of which saw Giuliani as a potent weapon in their never-ending battle against capitalism. In the end, Milken went to prison, pleading guilty (after Giuliani threatened to indict most members of his family) to “crimes” that the courts later ruled were not crimes at all.

As the U.S. economy continues to implode, federal prosecutors are finding that juries are all-too-eager to assign blame to those capitalists who allegedly caused this recession. Of course, the real culprits in the Federal Reserve System and elsewhere in the government have nothing to fear.

President Barack Obama recently expressed faux surprise that anyone would oppose his latest proposal, a government-run insurance company that will offer coverage in competition with private insurers. The president’s surprise came in the form of asking why people would claim that government cannot operate efficiently, yet simultaneously run an insurance company that would be a lower-cost producer than private firms.

While seemingly clever, President Obama’s point is irrelevant. The question is not about the “efficiency” of insurance plans, but rather the simple fact that government schemes are responsible for driving up the cost of medical care to consumers. From the huge regulatory burdens (with accompanying paperwork) on medical people to the third-party payments, government actions on all fronts have turned medical care into something akin to a Rube Goldberg cartoon.

Talk to any doctor and he or she will tell you that they spend many hours per week doing paperwork, almost all of it required by government and insurers. The government paperwork is especially pernicious because errors or disagreements on billing – even innocent ones – can lead to criminal charges. The legal aspect of medical care has turned into a minefield for the providers, and that has to impact overall costs.

The main issue, however, is quite simple, yet also profound: Medical care is a scarce good and thus is subject to the laws of economics. All too often, we hear that medical care is not like other goods and services and is set apart from economic laws. All we can say in return is, “Not so fast, my friend.”

Application of economic theories does not discriminate between the kinds of goods and services rendered. If something is scarce, the same laws apply whether we speak of brain surgery or pork bellies. Such words are disconcerting to people who believe that medical care should be a right that should be provided to everyone regardless of one’s personal wealth. Unfortunately, all government interventions – all of them –carrying out this “rights” mandate only serve to make medical care less available (and less effective) for everyone.

Think of a simple supply-and-demand example. If anything increases the cost of providing something, the supply curve shifts to the left, making the good less available and higher-priced. There is no exception to that point for anything that is scarce.

So, let us think of the ways that government makes it more difficult to provide medical care. First, and most important, government sets huge barriers in the path of people seeking to engage in medical occupations, especially through licensing and strict regulations. In other words, government purposely limits the supply of medical providers to protect the incomes of doctors.

It is the equivalent of the government’s forcing all of us to purchase a BMW or Cadillac instead of letting us choose between a high-end and lower-end vehicle. If such restrictions existed in the auto industry, we would have demands for “cost containment” in autos.

Second, as previously noted, the legal side of medical care forces doctors and nurses to spend time doing paperwork rather than providing care. Furthermore, the constant threat of criminal and civil action forces medical care providers to play defense, which further limits the supply of their services.

Last, the third-party payment system that dominates medical care further separates the consumers from their choices. If we had the same system to pay for food and automobiles, we would have “cost crises” in those markets as well.

Most people cannot fathom decoupling government control and medical care, as though cost-raising controls actually improve medical service. Yet if we wish to have innovative and affordable medical care, that is precisely what must be done.

Knowing the details of this latest plan is not necessary to conclude it is bad. The reason it is bad is because it operates on the impossible premise that government can force up real costs of medical care while making it cheaper and more available. In other words, President Obama and his supporters are claiming that government can lower costs when it actually is increasing them.

Normally, this is known as a fraud, but today it is politics. Let us understand what is happening and, more important, why it is happening so that we can better realize just why such fraudulent ideas gain any traction in the first place.

For politicians, it is easy. Medical care “costs” too much. Thus, the government either should establish price controls or simply control all payments to medical personnel. Krugman and other economists have been parroting that line for years, and they are correct in that medical care is more costly than it should be. However, there is a problem in the typical analysis, and that is this little issue of just what is a cost.

To the political classes and their court economists, a “cost” is a payment to individuals and organizations in the medical field. For example, if one pays $50 for a doctor visit, that is a “cost” to that person. If one pays $1,000 for a particular test, that is the “cost” to the patient.

However, that is superficial analysis. For example, Krugman has claimed that devices like CAT scans and MRIs “drive up” the cost of health care. If that were true, then it would be the first time in history that a labor-saving capital device would be responsible for making goods more costly. In both cases, a patient can quickly and bloodlessly be examined and doctors generally can gain near-pinpoint evidence of the problem.

For example, my father had knee surgery in 1966, and he was in the hospital for a week. The doctor cut a huge incision in his leg, took back a large flap of skin, and then went to work. It took Dad many months to recover.

When I had knee surgery in 2003, I came to the hospital in the early morning and left by noon. Instead of a huge scar, I had two tiny, pinprick marks on my knee, and I was at work four days later. Within a few weeks, I was hiking on a nearby mountain. Yet, according to Krugman’s logic, my father’s operation was a “lower-cost” affair. To an economist, however, my opportunity costs were much lower.

To someone like Krugman, the “cost” would be reflected solely in the medical bill, with the MRI costing one thing and the surgery something else. Somehow, had we eliminated the MRI, then the whole thing would have cost less. However, that test had shown the doctor exactly what he needed to do, which was why he was able to do it quickly, efficiently, and have me working within a few days.

The problem is not the presence of medical capital; the problem is that government has forced the use of resources when they are not needed (either for doctors to avoid lawsuits or because political authorities are demanding their use). The so-called “cost crisis” did not come about until after the passage of Medicare in 1965.

From that point on, more and more medical decisions have been made by bureaucrats, which means that medical people must devote more and more resources to filling out forms and satisfying the government. Apologists for government insist that such actions somehow lower the cost of healthcare, but “not so fast, my friend.” When government forces people in the medical fields to expend resources in areas away from medical care, it makes care less available and more costly.

Stalin, the intellectuals claimed, had created a country and an economy that was impervious to the internal collapses that were endemic to capitalism, an economy that provided jobs and food for everyone.  However, there were nasty rumors from the Land of Plenty that there was famine in Ukraine.

One influential newspaper, however, openly and authoritatively denied there was any famine at all.  This was the “Newspaper of Record,” the most important newspaper in the United States and perhaps the world.  The newspaper was the New York Times, and it said there was no famine and that any reports to the contrary were lies from Trotskyites and disgruntled capitalists.

Later that decade, Stalin proceeded with his now-infamous “show trials” in which he claimed that a number of the original Bolsheviks that put him into power actually had plotted with Leon Trotsky to overthrow the “Man of Steel” and re-impose capitalism.  While some people expressed doubts, the New York Times, led by its man in Moscow, Walter Duranty, insisted that Stalin had uncovered massive plots against him.

We now know that the “Newspaper of Record” engaged in suppression of the truth, and the man most responsible, Duranty, still has his picture hanging in the lobby of the Times building as one of the paper’s many winners of the prestigious Pulitzer Prize.  That his stories were lies apparently does not bother either the Times management or the committee that hands out the prizes.

When the Hitler regime was slaughtering Jews in Europe, the Times also suppressed or played down those reports.  The reason, according to the publisher, was that the paper did not want to be seen overly emphasizing “Jewish causes.”

I make these points because the Times recently championed the legislation placing tobacco products under the regulation of the Food and Drug Administration, and the editorial praising the government had a number of howlers, but none bigger than this statement:

It has now been proved beyond a shadow of a doubt that cigarette makers have spent decades making false statements, suppressing evidence of harm, and manipulating the design of cigarettes to increase their addictiveness.

I cannot recall any time in the near-56 years of my life in which I have not been told in the media and elsewhere that tobacco can cause cancer.  Yes, tobacco executives wanted Americans to have a different picture of smoking than the cancer ward, but in a country with a free press, the word was spread far and wide.

The idea that the tobacco industry could keep health information out of the news is laughable, given the unrelenting hostility to the industry, which has been forbidden by law to advertise on television for the past 40 years.  There is a huge difference between executives making claims and “suppressing the news.”

But there’s more.  The editorial also said:

The bill is not perfect. It will not allow the F.D.A. to ban cigarettes or nicotine — a concession made years ago to avoid drawing intense opposition from smokers and free-market advocates.

Yes, we have the newspaper that was against prohibition of alcohol now endorsing prohibition against tobacco, and blaming “free-market advocates” for that omission of even more government control of our lives.

So, the newspaper that actively suppressed news of millions of people in Europe being slaughtered by totalitarian governments now blames individuals who believe the authorities should not be interfering with peaceful private exchange for keeping a “perfect bill” off the books.  And that “perfect” bill would impose yet another round of prohibition and all the destructiveness we know it would bring.

The Newspaper of Duranty, Jayson Blair, and the most skewed and dishonest coverage in the country of the infamous Duke lacrosse case now declares prohibition to be “perfect.”  Even for the totalitarian Times, this is a new low.

The usual canards thrown at GM include (1) GM did not build cars consumers wanted, (2) the quality of GM cars was lower than the quality of competitive brands, (3) GM’s management was not responsive to consumers, and (4) GM concentrated on building “gas-guzzling” SUV’s instead of building smaller cars that did not use as much gasoline.  All are true, in one sense, but they did not originate with GM or its management as much as they came about because of government policies.

Mises understood that in a free market, no business would bureaucratize itself, as such a move would generate costs upon costs for which there would be no market for the end result.  Businesses exist only because of the decisions made by consumers to purchase their goods, and for no other reason.  They do not exist to provide employment for workers; employment opportunities exist only as long as consumers are willing to purchase those goods made by the employees.

As long as consumers have choices, they will use them, especially if a particular business is unresponsive to them.  In the case of GM, the real story is not with any deliberate intransigence on behalf of the GM management, but why it chose to be intransigent in the first place.  This certainly was not the case with GM during the Great Depression, when the company still managed to eke out a profit.

Government moved against GM on many fronts.  First, the government made it clear it stood behind the United Auto Workers union when it organized GM and whenever the union went out on strike.  Second, the unions were able to take what once had been a mark of efficiency – GM’s vertical integration – and turn it into a liability by holding the company hostage at various stages of production.

Second, government employment mandates created the requirement for GM to create a bureaucracy to deal with the huge amounts of forms and regulations that were levied by various departments of the state and federal governments.  Furthermore, because labor unions are primarily political creatures, the politics of organized labor forced GM and other firms to adopt bureaucratic methods to please their government “superiors.”

Third, the UAW made it extremely difficult for GM to be flexible and to adopt production methods that would have enabled it to be competitive.  (Indeed, we have seen the same problems at Ford and Chrysler, and Chrysler essentially is bankrupt like GM.  Ford barely hangs on.)

The government and union-created inflexibility that became institutionalized at GM magnified both successes and failures.  Furthermore, because GM’s comparative advantage was in trucks and sport utility vehicles, the company also became hostage to spikes in gasoline prices.

It is true that GM did not make many small, fuel-efficient cars, but it was due to the hard fact that GM’s labor contracts were so costly and so inflexible that the company could not step out and take any chances and make those cars.  Unfortunately, because the Obama administration is pretty much a wholly-owned subsidiary of the UAW, the new “Government Motors” will be just as inflexible, which means that even though GM will be building new “small” cars, nonetheless the company still will lose money (like Amtrak and the Postal Service) as the modern-day “Trabants” move along the assembly lines.  And when we stop buying these lousy products?  Well, the hard truth is that the government, in an attempt to prop up the UAW, will hamstring GM’s foreign competitors.  That means shoddy products and “service with a snarl.”

In a recent talk at the National Press Club, the U.S. Secretary of Transportation, Ray LaHood, declared that the government wants to “coerce people out of their cars.” He was not advocating direct force per se, but rather a series of incentives to make alternate transportation more appealing.

Nonetheless, he did utter the “C-word,” and we need to understand that it was not an accident. Government economic “incentives” are born of coercion, and while government agents often do not advertise that they are going to use real force to “encourage” us to make certain politically favored choices, that does not change the hard facts.

LaHood was describing how the government wishes to create more “opportunities” for people to use public transportation or to ride bicycles or walk to work or shop in order to avoid traffic gridlock:

I mean, look, people don’t like spending an hour and a half getting to work. And people don’t like spending an hour going to the grocery store. And all of you who live around here know exactly what I’m talking about. You know, the dreaded thing is to have to run an errand on a weekend around here or to try and get home at 3:00 in the afternoon or even 5:00 in the afternoon.

Now, look, every community is not going to be a livable community. But we have to create opportunities for people that do want to use a bicycle or want to walk or want to get on a streetcar or want to ride a light rail.

He was speaking of life in the Washington, D.C., area where traffic, indeed, is a nightmare. However, one must remember that one reason for the density of traffic in that location is the huge density of population, which is due to the fact that the federal government plays such a huge entity in our lives. Washington was not always such a major player, but the New Deal and World War II and its aftermath changed that.

Today the Washington, D.C., area has become a huge combination of government employees, lobbyists, and the rest of the government-industrial complex that has redirected huge swaths of our economy to making sure that city and its environments have a very high standard of living. In short, it drains the rest of us.

To combat what LaHood sees as a problem associated with such population densities and government roads, he wants to force a lifestyle on everyone that only a relatively small number of people want. For example, if one really wishes to have one’s life centered around public transportation and away from the automobile, then one should move to New York City. (Whenever I go to NYC, I stay outside the city and take the train and subway while there, as I refuse to drive in that kind of traffic.)

But LaHood is not talking about freedom of choice. Rather, he is speaking of diverting our incomes, via taxation, away from things we would want to do with them to things of which government approves. Government for years has been trying to force us to use public transportation, even as people resist.

It is not as though large-scale privately owned public transportation never existed. Numerous cities and towns had such systems until they either were regulated out of business or people freely changed their living habits. However, that aspect of history is not good enough for LaHood.

Keep in mind that he and other cabinet officials don’t have to worry about driving themselves anywhere: They are chauffeured by limousine, something not available to those us of who are forced to pay for his favored transportation.

Another thing I constantly heard in grad school was: “We are not interested in your inputs.  We care about your outputs.”  In other words, they were not going to judge my work on the basis of my own efforts, but rather what I produced. The first paper I read in grad school was Milton Friedman’s 1953 classic, “The Methodology of Positive Economics,” which said that the accuracy of a theory did not depend upon the reliability or reality of its assumptions, but rather on the theory’s ability “to predict events.”  To put it another way, the outputs of analysis are much more important than its inputs.

I cannot say I disagree completely with that.  Bad theory will produce bad outcomes, yet when one puts together the so-called market test with outcomes-based theory, something does not make sense.  Why?  There is no worse theory out there than Keynesian theory, yet it is taught in the economics textbooks as though it were an unvarnished truth.

The fundamental tenet of Keynesianism is that there cannot be a simultaneous rise in inflation and unemployment, the Phillips Curve being the Holy Grail.  However, when the U.S. and British economies suffered severe stagflation during the late 1970s, people began to wonder what was happening.

I specifically remember seeing ABC’s economic correspondent, Dan Cordtz, around 1979 say that the theory no longer was working, as inflation and unemployment were increasing at the same time.  It was then that the supply-side theory–cutting taxes and encouraging capital formation and production–appeared, and while I have had some real disagreements with the supply-siders, nonetheless they made some good points.

The Keynesians, led by President Jimmy Carter’s advisers and leftists such as John Kenneth Galbraith, declared such notions as cutting taxes and encouraging capital formation to be nonsense.  The cartoonist Bill Mauldin, after Ronald Reagan adopted the supply-side model for his campaign, had a picture of Reagan throwing gasoline (labeled “tax cut”) onto the raging fires of inflation.  The New Republic declared after Reagan’s election that his policies would lead soon to wage and price controls.  Instead, the Consumer Price Index settled into its lowest increases in more than a decade and the economy grew nicely after the 1982 recession.

One would think that this episode would discredit the Keynesian paradigm, but it seems that the beast has more lives than a magic cat.  Today the economics textbooks are dominated by Keynesian theories and Paul Krugman, who openly espouses the Keynesian paradigm, is the latest winner of the Nobel Prize in economics despite the fact that every Keynesian “solution” that the government has applied to the economy has not stopped the economic freefall.

Surely we are speaking of the failure of the Keynesian paradigm to produce satisfactory “outputs,” yet even such failures have not derailed this ideological train.  Are we supposed to assume that even with its lack of ability to predict anything, that Keynesianism still “passes the market test”?

If one compares the Austrian analysis with that of Keynesianism, one sees that Austrian economics wins hands down.  Not only have the Austrians been precise in their assessment of how the financial bubbles have brought down the economy, but also they have accurately demonstrated–through their theories–that the current government plan of borrow-and-print-money-and-spend-wildly is not going to revive the U.S. economy.

If there is a real “market test” of economic theory, it is the test of accuracy.  That academic economists are not willing to junk their Keynesian theories for something that really works is not “proof” that Keynes was right.  Instead, it demonstrates that many economists prefer to keep their heads in the sand.

My fellow Americans, we are going to provide sustainable energy and lots of jobs for you by junking the automobile and all other fossil-fueled engines and going back to animal power.  We also are going to make all coal-fired electric power plants illegal, so if you want electricity, you are going to have to depend on windmills or just live in the dark.

Needless to say, the speech would be greeted by something other than thunderous applause (except from Al Gore and the Sierra Club headquarters), and the Obama’s presidential career would be quite short.  However, the policies coming from Washington these days, while not quite as draconian as what I described, nonetheless are bad and are going to make us poorer.

For years we have been bombarded with the “clean energy” line, the idea being that electricity that comes from burning of fossil fuels is “dirty,” while electricity that comes from windmills, solar, or “geothermal” sources or anything else that meets with Gore’s approval is “clean.”

(Gore has a website that claims that in the next decade, the United States can switch entirely to what he calls “clean energy.”  This is sheer fantasy made worse only because the President seems to believe it, or at least wants that to be our energy future.)

Unfortunately, the government does seem to be pushing hard to force Americans to accept energy sources that are going to make us much poorer, retard (if not eliminate) the economic recovery, and make our lives much more difficult.  Let me count the ways.

First and most important, it is true that switching to windmills will “create” jobs in that particular industry.  No one is denying that.  However, there is this little problem that occurs whenever government destroys wealth: It also destroys meaningful employment opportunities.

What the government is going to do is to count every job in an “alternative energy” field as proof that its energy policies are “creating jobs.”  What the government won’t do, however, is report the employment opportunities that are lost because the authorities have artificially forced up the costs of efficient energy sources.  In other words, in net terms, this whole thing is a loser.

Second, the issue is not jobs per se but rather economic growth.  The government could give us all “jobs” tomorrow by telling us we had to scratch out a living by hand.  For that matter, one can argue that Pol Pot and the Khmer Rouge created “full employment” in Cambodia during their murderous regime three decades ago, but the “employment” was not particularly desirable.

The real problem is that the energy proposals this administration is demanding, from “clean” (and extremely inefficient and costly) energy to ramping up the corn-based ethanol fraud, will make fuel and electricity much more expensive, which is going to result in much slower – or even negative – economic growth.

To put it another way, this country cannot have both enactment of these energy proposals and a robust economic recovery.  They are mutually exclusive, and there is no way around this point, no matter how much rhetoric President Obama and his supporters may use.

The great Henry Hazlitt once wrote that each generation has to learn the economic lessons all over again because it is easily seduced by what he called (after Frederic Bastiat) the “broken window fallacy” — the failure to understand that in a world of scarcity, resources commandeered by government are diverted from the uses that consumers and entrepreneurs would have chosen. Indeed, if any fallacy can be applied to the notion that forcing this country into a “horse-and-buggy” energy future will be an economic plus, it is the fallacy of the broken window.

With the economy performing worse than hoped, revised White House figures point to deepening budget deficits, with the government borrowing almost 50 cents for every dollar it spends this year.

The deficit for the current budget year will rise by $89 billion to above $1.8 trillion — about four times the record set just last year. The unprecedented red ink flows from the deep recession, the Wall Street bailout, the cost of President Barack Obama’s economic stimulus bill, as well as a structural imbalance between what the government spends and what it takes in.

This no longer is a “problem.”  It has become a calamity, and there are no political forces in Washington willing or able to stop what seems to be a runaway train.  Furthermore, the political arrogance that is the nation’s capital prevents people from understanding the obvious: we are witnessing an episode of ruinous government spending that is going to have severe ramifications for years to come.

After the latest numbers came out, White House Budget Director Peter Orszag declared that the deficits are being driven by the recession, which this government inherited, so the numbers are not the fault of the current set of policymakers at 1600 Pennsylvania Avenue.  I am no defender of George W. Bush and his spendthrift government, but even a Bush critic like me can see that the incoming Obama government decided the speeding train was not going fast enough, so they opened the throttle wide open and tied it down.

Some perspective is needed here.  In nominal terms, the deficits are far and away greater than anything we have seen.  According to the Statistical Abstracts of the United States, if one adds up all of the budget deficits of the Bush administration, they about equal the deficits for this fiscal year alone.  Now keep in mind that many of us believed that the Bush deficits were ruinous, with its profligate spending and monetary “creation” through the Federal Reserve System –  and the boom and bust pattern of the economy proved our point.

However, it is as though the Bush policymakers were skinflints compared to what we are seeing now.  Furthermore, there are economists who claim that the present government is not spending enough.  Recent Nobel Prize-winner Paul Krugman claims that the unprecedented surge in federal spending is only a “half-measure” that won’t revive the economy.  The solution?  Even more spending!

My first reaction is simple: Spend with what?  Borrowers need lenders, and that means that someone out there has to believe that a U.S. bond is a good investment.

Much of the U.S. deficit has been funded by Asian governments such as China and Japan which accepted dollars for goods and then rolled those dollars into U.S. government debt.  However, that gravy train is slowing down rapidly, as the seller is running out of suckers.

There is one buyer, however, that seems ready and willing to buy what Uncle Sam throws its way: the Fed.  As the recent statements by the Fed have demonstrated, the central bank is increasing its purchases of both government and private securities at an increasing rate, revving up its printing press in the process.

This cannot lead to recovery; when the government throws out this much paper, there is no way we will not see a “crowding out,” which strips the very funds needed for business investment. Rather, it will lead to inflation and lots of it.  Never mind that the Obama administration has announced that this economy will enjoy a 3.5 percent increase in output by the year’s end; the only things that are going up are the inflation and unemployment rates.

One does not have to wish this administration to fail in its economic policies.  This government is doing that without any help from the opposition.

In the years after World War II, the British government went on a binge of nationalization, and after the economy became even more tenuous and less competitive, the government nationalized failing firms, an action dubbed “lemon socialism.”  Now, one would think that with this sorry example being available, U.S. policymakers might try to refrain from allowing the British Disease to slip into our body politic, but apparently arrogance is overshadowing good sense and the understanding of history.

The latest government caper is the attempt to nationalize General Motors and Chrysler, with the government taking large ownership shares in each company, along with the United Autoworkers.  Taking up the rear are the people who actually lent money to those companies and who now are being given the back of the hand.  When some Chrysler bondholders recently balked at the government’s “permitting” them to gain about 30 cents on the dollar, President Obama denounced them as “speculators” and worse. Even though Chrysler right now is in bankruptcy court, I suspect we are looking at a fixed outcome based on what the government wants.

For all of the talk of calamity if GM and Chrysler shut down for good in a Chapter 7 bankruptcy (which the government will not permit to occur, unfortunately), we have to remember that the losses being sustained by these two companies mean one thing and one thing only: their continued existence in their present state is destroying wealth.  That makes the economy worse not better.

Supporters point to the millions of people employed in the GM and Chrysler production and sales chains and then claim that if the companies went under, the job losses would be “devastating.”  That is true, but only partly true.  The job losses would be devastating to those individuals and regions connected to those companies.

However, the net effects of a shutdown of these firms would be positive, and they would be realized at various margins throughout the economy.  Contrary to Paul Krugman’s “Depression Economics” view that an economy gains when government “stimulates” the use of “idle or underutilized resources,” in truth, the Law of Scarcity does not disappear.  There is a reason as to why these resources are “underutilized,” and it has nothing to do with an alleged fall in “aggregate demand.”

Instead, it has everything to do with the fact that American consumers prefer the vehicles made by GM’s and Chrysler’s competitors.  Furthermore, the extravagant labor packages that these companies had with the UAW highlights the further irony: the two entities that had the most to do with the demise of the domestic auto industry, government and labor unions, now are taking charge of GM and Chrysler.

Obviously, the only way that these companies can survive now is through massive taxpayer subsidies, which further will destroy wealth and make our economy worse off.  I cannot imagine the government permitting GM and Chrysler’s competitors to go unmolested, so look for all sorts of contrived action against the U.S. subsidiaries of foreign companies such as government probes and union-organizing attempts.  The last thing a government firm is going to tolerate is competition, and honest competition at that.

Thus one charitably can say that this new edition of Government Motors is going to be an economic disaster.  The venture will destroy wealth and make it even harder for people who are not politically connected to make a decent living.  It certainly is not a recipe for economic recovery, but somehow, I doubt that the powers that be in Washington really care.  They are going to have their very own “lemons” as socialist play toys.  O joy.

First and most important, why do we have the constant reminders of the 1918-1919 flu pandemic that killed people all over the globe?  For that matter, why doesn’t the government and the New York Times repeat the stories of the Black Death that swept Europe and Britain from 1347-1351 or the 1603 Plague in London or the Russian Plague of 1770-1772?

Lest one think I am being facetious, the conditions that gave the world the pandemic of 1918-1919 hardly exist today.  The flu spread rapidly in the United States as crowded troop ships returning from Europe were packed with young men, giving rise to conditions that permitted the sickness to spread quickly.  In the United States, huge war bond rallies brought thousands of people in close proximity to one another.  Europeans were recovering from the war, and many people were weakened by hunger and other maladies from the conflict.

Furthermore, that was an era in which people were not as healthy as they are today (despite the gloom and doom one might hear from the Ralph Naders of the world).  Life expectancy for Americans at that time was considerably less than it is today, and it was not unusual then for large number of people to be stricken with epidemics.

Second, and in light of the demands for emergency government powers, what is the U.S. government’s record in heading off pandemics?  Many of us remember the swine flu fiasco of 1976, when President Gerald Ford was vaccinated on television and Congress quickly voted huge sums of money for vaccines. (Rep. Ron Paul reports that only he and the late Larry McDonald, both physicians, voted against the appropriation.)

According to government statistics, one person—one—actually died of swine flu in the United States at that time.  However, about 30 people died after reactions to the vaccines, and many more were stricken with serious illnesses.  Unfortunately, even that sorry history has not reduced the True Believers’ faith in the government’s ability to save us from the pandemic the government insists is just around the corner.

For example, Howard Markel, who directs the Center for the History of Medicine at the University of Michigan and is a consultant for the Centers for Disease Control, recently was feted in Time for his trust in the wisdom of the government:

Markel says the political climate in the U.S. is much less combustible today than in the post-Watergate era, when Ford faced a skeptical public. Even so, he says, citizens still need to trust that the government is working for the greater good. He says, “The good news is that our surveillance, methodology and public health professionals have never been better. But we are human and mistakes may be made—as happened with the 1976 swine flu affair—and we may jump the gun in the hope of preserving life. The current outbreak is a situation in flux. The American public has to be forgiving and patient and do [its] part too.”

Yet what is it that government is doing?  It is demanding emergency powers, and once those powers are seized, government officials are loathe to relinquish them.  Yes, government employs “experts,” but all too often “experts” are wrong.  It is one thing for an expert to have a mistaken opinion, but give that expert both a mistaken opinion and “emergency power” and there is a tragedy in the making.

If someone in government wants to give me an educated opinion of what to do, that is fine.  However, people in government generally don’t stop with issuing opinions.  It is the set of orders coming from those officials that worries me.

We are aware of Paul Krugman’s semi-weekly New York Times complaints that the Obama administration is not profligate enough in borrowing, printing money, and spending.  (Such missives even have earned him a coveted spot on the cover of Newsweek in which he expanded his criticisms of the president’s economic “plan.”)

However, former George W. Bush economic adviser Gregory Mankiw, also of Harvard, has done Krugman and Feldstein one better: he has endorsed the proposals of perhaps the most famous “crank” in history, Silvio Gesell.  It was Gesell, a German economist of the late 19th Century who advocated that governments issue money which would officially depreciate via a tax on people who held money instead of spending it quickly.

John Maynard Keynes, in his General Theory, went as far as to call Gesell a “prophet,” and while Mankiw does not bestow such an august label upon Gesell, nonetheless he implicitly endorses this scheme, but relying on the old friend of money-monopolizing governments: inflation.  He writes in the April 18 New York Times:

If all of this seems too outlandish (taxing people who hold money), there is a more prosaic way of obtaining negative interest rates: through inflation. Suppose that, looking ahead, the Fed commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates — interest rates measured in purchasing power — could become negative. If people were confident that they could repay their zero-interest loans in devalued dollars, they would have significant incentive to borrow and spend.

Having the central bank embrace inflation would shock economists and Fed watchers who view price stability as the foremost goal of monetary policy. But there are worse things than inflation. And guess what? We have them today. A little more inflation might be preferable to rising unemployment or a series of fiscal measures that pile on debt bequeathed to future generations.

Keep in mind that Mankiw is a “respected” economist, and is considered to be, relatively speaking, a “free-market economist,” as is Feldstein.  Yet, in a time of crisis, Mankiw, Feldstein, and others instinctively turn to inflation as a solution.

As I see it, this latest “mad scientist” scheme exposes a greater weakness in mainstream economics, and that is the lack of a real understanding of how an economy works.  It seems ironic, and perhaps arrogant on my part, for me to accuse economists – and prominent ones at that – of being ignorant of economics, but that is what I am doing.

It is not just that economic journals are full of esoteric mathematical models that can be deciphered only by someone with training in math, nor is it just that economists depend upon models that are full of “givens” which are not “given” at all, such as factor prices.  The larger problem is that many “prominent” economists cannot explain the real nature of exchange, they do not understand money at all, and they lack a coherent theory on capital.

Most economics textbooks give the standard definitions of money (medium of exchange, store of value, etc.), but fail to understand that money itself is a good used exclusively for exchange and that it, too, is subject to the same laws of economics as other goods.  Instead, they tend to see it as a quantity variable that can and should be manipulated by government in order to ensure “sufficient aggregate demand.”

What they don’t see is that manipulating and inflating money creates numerous dislocations within the economy itself, especially in capital markets, driving the fundamentals out of balance and furthering malinvestments.  Furthermore, the latest Mankiw scheme would ensure the deterioration of current capital stock and retard future capital investment.

The Austrians, however, have not drunk the Gesell-brand Kool-Aid, and one hopes that their theories of capital development, free markets, and sound money someday will resonate with the public and policy-makers.  The alternative is depression and inflation.

Unfortunately, so the morality tale goes, rampant free enterprise led to economic collapse, as entrepreneurs took huge risks and brought the economy to ruin. Had government been in charge, none of this would have happened.

As usual, Krugman rewrites history, ignoring key events and pretending they never happened. For example, he writes that what he calls the “era of boring banking” and regulation of other firms resulted in “spectacular economic growth” in the 1950s and 1960s.

This is an example of the logical fallacy known as post hoc ergo propter hoc, or “after this, therefore because of this.” The most famous example is the sun rising because the rooster crows. However, there is more, much more to this story.

If anything, the strict regulation that enveloped the economy during the 1930s held back economic growth. While it is true that the U.S. economy recovered quickly after World War II, it was pretty much the only one left standing. Furthermore, Great Britain, which had been an industrial power before World War II, was moving into socialism and nationalization of key industries, which meant that once-trusted British products would lose their quality as socialist planning and production took its toll. There were no other real economic competitors on the planet in the decade or so following the war’s end.

Krugman ignores another important development during the 1960s; the advent of inflation. At the time, the dollar was the key currency in the fixed exchange rates set by the Bretton Woods agreements of 1944, and the Kennedy and Johnson governments took full advantage of that by inflating it. That meant Americans could buy more goods from abroad even though U.S. productivity at the time was rapidly slowing.

The gravy train came to a halt in 1971, when it was clear that the dollar no longer was “good as gold” and really not even “good as paper.” During the next decade, stagflation was the rule, not the exception. (Krugman always likes to skip the 1970s in his analysis, as stagflation does not fit into the Keynesian paradigm.)

By the late 1970s a number of things were clear. First, the regulated cartels (banking, transportation, telecommunications) were failing badly. Inflation was driving people out of banks and their regulated savings accounts and into money-market funds and hard goods, such as gold. Second, the regulated railroads were going bankrupt and their general condition was poor.

Thus the administration of Jimmy Carter, which hardly fell into the “conservative Republican” category, began long-range plans to deregulate finance, transportation, and telecommunications. Airlines were deregulated in 1978, and by the time Ronald Reagan became president, all deregulation efforts were well underway. (Reagan received an endorsement from the Teamsters Union by promising to delay trucking deregulation. So much for deregulation and ideology.)

A little-known fact is that many of the entrepreneurial initiatives based on the new computer technologies were funded outside the regulated banking cartel because the it was not equipped to finance them. From CNN to MCI to personal computers to cellular-phone technology to new ways of retailing, many of these pioneering firms were financed by Michael Milken and his so-called junk bonds, something Krugman fails to point out.

To put it another way, if we had kept the regulated banking cartel that Krugman so praises, you would have to read this article in print, since the Internet and almost all the technologies that accompany it would not have been in existence or would be in much more primitive states than they are. Somehow, I doubt that fact ever will be trumpeted on the editorial page (or any other page) of the New York Times.

One way to gauge the success of a political gathering such as the G-20 is to read the comments from the politicians – and the economists.  If they claim “success,” then one can be assured that the results were an utter failure, and the latest meeting in London does not disappoint in that department.  First, President Barack Obama declared that this meeting was “a turning point in our pursuit of global economic recovery.”

But the real harbinger of doom came from economist Jeffrey Sachs, who wrote in the Huffington Post:

The results were beyond what most, including myself, expected. IMF resources were raised significantly, to provide a liquidity cushion for global trade and production. The World Bank and regional development banks (such as the African Development Bank) were encouraged to boost lending, backed by commitments of the G-20 to raise the capital base of these multilateral banks. Taken together, the combination of new credit lines of all sorts – in effect, new liquidity — is on the order of $1.1 trillion.

He added: “Serious progress was also made on a framework of tighter global financial regulations, including controls on executive compensation, crackdowns on tax havens, controls over hedge funds, and much-needed regulation of the ‘shadow banking system….”

Keep in mind that Sachs believes these developments to be a good thing.  Somehow, he is telling us, if government can just print enough money, raise taxes, and establish enough control over the economic choices of individuals, that the result will be a global economic recovery.

One would like to ignore all of these statements and hope that the people who made them either are not serious or are not influential but, alas, that is not the case here.  It seems that the consensus among those holding political power as well as among professional mainstream economists is that the real problem is a “lack of aggregate demand.”  Thus they continue to throw gasoline on the flames in the mistaken belief that they are putting out a fire.

Not surprisingly, those in power lay the blame directly at the feet of private enterprise.  “It’s hard to deny that some of the contagion did start on Wall Street,” Obama said, asserting that some firms took “wild and unjustified risks” and some government regulators were “asleep at the switch.”

Indeed, the President is partially correct, but this did not “start” on Wall Street.  This crisis began in Washington, D.C., when the Federal Reserve held down interest rates to try to mitigate the recessionary fallout from the burst stock-market bubble it had created previously.  This helped bring on the housing bubble.

For all of the blame that governments are giving to private enterprise for creating the current crisis, it is easy to forget that this basically is a monetary failure – and governments have the monopolies on creating money.  It is not a failure of government to collect taxes, nor is it even a failure of regulation.  It is a failure of public policy, and an utter repudiation of the notion that governments can manipulate money, tax, borrow, and spend economies into prosperity.

None of the G-20 governments can “create” prosperous economies.  However, they can wreck them, and it seems so far that their efforts are taking everyone down a path that becomes darker and more uncertain.  Unfortunately, government officials and the “experts” such as Sachs are as blind as the journalists and the protesters who descended on London.

For all the tough talk about responsibility, the Barack Obama administration should not go into the automobile business (or the banking business, or the insurance business, or the mortgage business). We can be assured that the automobile industry in this country will be thoroughly politicized, the last thing the American economy needs now.

Beyond the consternation about the “loss of jobs,” we need to understand why GM and Chrysler are in their present fixes and why permitting them to experience bankruptcy – real bankruptcy – actually will save jobs. Second, we have to point out why saving these companies through government directives actually will damage the U.S. economy and make things worse, and potentially much worse.

While GM and Chrysler are at death’s door, we cannot say that for every automaker. Honda, Nissan, Toyota, and other companies with operations in the USA are doing fine, and while times are hard everywhere, they are not candidates for the undertaker.

Government critics of GM and Chrysler claim that they did not build the right kinds of cars: the small, fuel-efficient vehicles that people on the left want to force us to buy (when they are not trying to force us to take public transportation). The reason GM did not build those cars was that they could not make them profitably thanks to their labor contracts, which guarantee the highest industrial wages paid anywhere. (And that includes pay given to people who don’t work at all, per the United Autoworkers contracts.)

Unfortunately, GM and Chrysler (and Ford to a lesser extent) could not compete with other auto manufacturers when gasoline prices skyrocketed, which were brought about in large part because of concern about the strength of the rapidly inflating U.S. dollar. Furthermore, because of their bloated labor contracts, the Little Three (formerly the Big Three) had fewer profits squeezed out of automobile sales, which is a nice way of saying they were paying more for production than their foreign competitors. Start multiplying this times the numbers of cars sold and a definite pattern arises: Domestic companies were uncompetitive because they and their unions chose a higher cost structure.

One of the enduring myths in economics is that the higher the cost, the greater the wealth created. People still insist that Henry Ford “created the American middle class” when he doubled the pay of his autoworkers from $2.50 to $5 a day. That is nonsense. Higher costs do not create more wealth. Increased productivity does. On the other hand, higher costs imposed through government or coercive union contracts destroy wealth. The infamous UAW contracts required that the Little Three use more resources than were necessary to build cars and trucks, which meant those resources couldn’t be employed at their highest-valued uses, making everyone else poorer.

Even though the government is talking responsibility and even bankruptcy, nonetheless the market already has spoken on GM and Chrysler. At present the sum of the parts is greater than the value of the whole, which means these companies would be worth more by having their physical assets sold in a bankruptcy proceeding than kept together by government fiat.

By artificially keeping GM and Chrysler alive, the government not only is wasting scarce resources and forcing lower-income Americans to create “make-work” for higher-income people, it is also placing a hardship on those U.S. subsidiaries of foreign auto companies. Given the realities of American politics, I can imagine that sooner or later the government will take aim at those subsidiaries in hopes it can damage them in order to protect its “investment” in GM and Chrysler. Stay tuned.

There can be no doubt anymore as to what the government is doing as the economy implodes; it is printing money as fast as it can in hopes that people will grab the cash and start spending. Furthermore, the Fed’s actions bring together the twin frauds of monetary and fiscal policy in a double-whammy on what is left of the economy. It is true that the markets jumped when the news of Bernanke’s move hit the streets, but within a day, buyers’ remorse had set in along with the very things that one might expect to see when inflation has become the economic watchword.

According to Keynesian macroeconomists, governments can follow two sets of policies when attempting to “fine tune” the economy. The first is monetary policy, in which the central bank manipulates bank reserves to expand or contract the amount of money in the system. The second is fiscal policy, in which the government attempts to drive and guide the economy through taxation, spending, and borrowing.

Keynesians admit, unfortunately, that there are limits to both actions. On the monetary side, the Fed can fill up bank reserves (as it has done recently through both its bailouts and purchases of government bonds), but if banks do not see good lending opportunities, the new money does not circulate, a situation Keynesians call a “liquidity trap,” while others refer to it as the Fed “pushing on a string.”

Thus the Keynesians (including Paul Krugman) believe that active fiscal policy is needed to stimulate an economy in the doldrums. Government borrows from the credit markets or takes in taxes and then spends the money on various “stimulus” activities such as public works or anything else politicians want. (Tax cuts also are part of “fiscal policy,” although it is clear that the current administration does not want any part of reducing taxes.)

However, there also are limits to what fiscal policy can do, given the limitations of taxation and borrowing. There is only so much a government can take in taxes, and not everyone is jumping to purchase the Treasury’s latest round of debt. Therefore, what is a government to do?

Bernanke has provided the “solution,” if one can call it that. The Fed is going to become a buyer of “first resort” for a lot of government paper, which means that Bernanke is not going to make the government go through the possibly-humiliating experience of putting bonds out for sale with no takers.

(Secretary of State Hillary Clinton recently told Chinese monetary authorities they had better continue to purchase U.S. Treasuries, since, in her words, “We are all in this together.” Because the U.S. government is steering the economy over the cliff, everyone supposedly will be much happier if the Chinese and Japanese also point their economies in the same direction. Call it the March of the Lemmings.)

For all of the talk of boldness, however, there is nothing courageous about government authorities printing wads of money. The government in Zimbabwe has been doing it for some time, and the results have followed the proud tradition of Germany in 1923, Argentina, and Bolivia. Unfortunately, Bernanke and his Ivy League-educated friends seem to believe that their “vast intelligence” and knowledge of monetary issues will keep them from steering the country in the same disastrous direction that other inflation-minded cranks of the past have gone.

Inflation and the disaster it brings are no mystery. Instead of putting the economy back on the right road, Bernanke, Congress, and the Obama administration are shunting the economy down the wrong track and tying down the throttle. The markets soon enough will let everyone know what is happening – even if the voters and the state-worshiping media never catch onto the government’s latest inflationary caper.

It is not enough to mock these editorials, given that it seems I might be piling onto yet another troubled company. The larger point is that our government, not to mention the mainstream of public intellectuals, is claiming that if it, as well as governments around the world, can spend enough, perhaps we can climb out of this recession.

If one believes that public intellectuals like Paul Krugman are beyond reproach, then there is nothing to read here. Should the U.S. government be able to print enough money and shove it out into the larger economy, then somehow that is supposed to magically lift the economy back into a state of prosperity, or at least preserve it until a recovery occurs.

It is time someone understood and told the truth. Actually, some people have been telling the truth, but many public intellectuals, not to mention newspaper editorialists and those who now hold power in Washington, have been telling a much different story: all it takes is a little more borrowing and spending. (Actually, they are saying that it takes a lot more borrowing and spending and that the printing press will work magic.) Unfortunately, people who tell the truth are neither in political power nor in control of the major editorial offices.

We have to remember that understanding the truth and power are not exactly synonymous. In fact, those who often have held power have not understood or told the truth, and that is what is happening today. Americans are being told that all it takes to make the economy recover is for the U.S. government to borrow trillions of dollars and direct it to be spent wherever the politicians wish.

It is intuitive to most people that we cannot spend our way to prosperity. For example, if I were to tell someone who was going through hard economic times that all it would take to pull them out of their troubles would be to obtain a few more credit cards and max out, they most likely would think I had lost my mind. Yet, we are told that governments somehow can spend profligately and create prosperity.

The reason that people seem to think governments can magically create prosperity is that governments have a legal monopoly on creating money. As I emphasized several weeks ago, the creation of new “money” by governments does not create wealth. Indeed, it does the opposite; it makes most people worse off than before the new money was created.

There is another reason that governments cannot spend a country into prosperity: an economy is not a perpetual motion machine that is driven by new money, despite what one might read on the New York Times editorial pages. Economies grow when entrepreneurs can take resources and create more goods than before. Period. They cannot grow any other way, and they certainly cannot grow when governments shower people with newly printed money. If that were the case, the countries like Zimbabwe, Bolivia, and Germany in 1923 would have been the richest countries in the world.

The U.S. economy will grow only when people begin to save money and entrepreneurs have the freedom to find new and improved ways to use resources. Unfortunately, the powers that be have decided otherwise, and we are going to have to learn some painful lessons–again.

Most commentators I have read are treating the “stimulus” as a mechanism through which the government is able to “get money into the hands of consumers” in order to cover a supposed “large hole” in consumer spending until the economy “recovers.”  Thus, according to this reasoning, Obama simply is throwing out a lifeline to people who really can use the money.

However, that is not what is happening, and the sooner we understand what the government is doing, the sooner we can speak out against it.  I am going to make a statement that will seem almost conspiratorial in nature, and I am decidedly not a conspiracy theorist.  Nonetheless, I am going to say it: there will be no recovery, and the government is going to make sure that it does not happen.

Yes, I know this seems counterintuitive.  Everyone supposedly knows that the politicians in power want a strong economy so they can get credit for it.  Sorry, people, but that is not how politicians operate.

First, no politician–no president, senator, representative, or judge–can “provide prosperity.”  At best, they can help create a playing field in which the participants in an economy can face consistent laws, protection of property rights, enforcement of contracts, and the other things that entrepreneurs and business owners need to create a prosperous economy.  In other words, the “positive” role that legislators can play is largely negative in practice; it is those things that legislators and others do not do that often help to determine whether or not a nation’s economy will be prosperous.

Second, politicians love to be seen as doing something.  Look at the press treatment given to those members of Congress who have voted against the “stimulus” and to those few governors who have said they won’t take the cash.  (The editorial page of the New York Times seems to be “Stimulus Promotion Central,” and anyone who opposes this legislation is portrayed either as evil or just plain stupid.)

Third, and most important, politicians do not gain votes by doing nothing for their constituents.  A politician who stands before voters and declares, “I have not voted to send you money, but instead voted to create an arena in which entrepreneurs and business owners can help create a stronger economy without government largess,” is not a politician who is going to win an election.

Politicians cannot help individuals who are able to find work in a recovering economy.  However, if an economy consistently has 10-15 percent unemployment and people have to ask politicians for lots of favors, especially when it comes to employment, that presents a wonderful opportunity for those in power.

Indeed, I believe that this administration plans to institutionalize double-digit unemployment and turn the United States into a European-style social-welfare system in which unemployment is high and the economy grows slowly at best, a condition that has been called “Eurosclerosis.”  To those who claim Americans will not put up with this state of affairs, I remind readers that during the New Deal, Franklin Roosevelt and his political allies won election after election despite high unemployment and slow growth.  A recent Thomas Friedman column approvingly lays the new roadmap to this brave, new economy.

From the new financial restrictions to new draconian environmental policies, the government clearly is going to stand in the way of new economic growth.  The “green jobs” path to greater employment is just a myth.  For every new “green job” created, many other sources of employment are destroyed.

Right now, the government is talking recovery.  A year from now people will be trying to survive, and it always is easier to survive when those in power are on your side.

[W]e entered the slump with a core inflation rate of about 2.5 percent. If we experienced a disinflation comparable to that of the 1980s, that would mean ending up with deflation at a rate of -3.5 percent.

And bear in mind that neither the CBO nor the Obama team really explains where recovery comes from; it’s just assumed.

So tell me why we aren’t looking at a very large risk of getting into a deflationary trap, in which falling prices make consumers and businesses even less willing to spend. Tell me why this risk wouldn’t remain high, though lower, even with the Obama plan, which as far as I can tell is expected to reduce cumulative excess unemployment by about a third.

We also see headlines like “Deflation risk stalks global economy” (Oxford Analytica’s Daily Brief Services) and read warnings of deflation from St. Louis Federal Reserve President James Bullard, who:

urged policymakers to take steps to guide the economy away from the deflationary outcome, warning that failure to prevent ongoing deflation could be “particularly pernicious,” warning that the already crumbling housing market could see further deterioration.

“With sustained deflation, the foreclosure experience that we have seen in the subprime market could generalize to a wider spectrum of homeownership,” he warned, an outcome that would likely prolong the recession.

The scenario supposedly works as follows: (1) consumer prices fall, (2) producer prices then fall, cutting the “purchasing power” of workers, (3) consumer prices fall even more, and (4) payrolls fall even more.  This allegedly is a never-ending process until the economy is obliterated in Krugman’s “deflationary trap.”  Thus supposedly the only thing that can stop the bleeding is for government to print money and spend it directly in the economy–which Keynesians call “fiscal policy.”

However, there is another story that never seems to be told: deflation is not an act of destruction but rather the economy’s healing itself from the inflationary boom that has busted.  That’s right; far from being disastrous, deflation is a sign that the economy is moving in the direction of recovery.

The key to understanding this is realizing that money is not a neutral good.  As a medium of exchange used in a proper way, money is a productive marvel that makes the modern economy a possibility.  However, we should not forget that in an economy, there are real relationships between goods and factors of production.  When these relationships are in reasonable balance, the economy does not fall into the boom and bust stages.

However, when government authorities expand the amount of money, they also change the relationships between goods and factors, which means that we have relative changes in the values of things.  Certain goods and factors during the early stages of an inflation-fed boom become more valuable relative to other things.  (We saw this during the housing boom, when housing prices skyrocketed even though prices of other goods were not rising as quickly.)

Resources quickly are poured into the production of these highly valued goods, but that boom cannot be sustained.  As the Austrian theory of the business cycle tells us, the overvalued goods and factors now find their real value is less than what originally it was predicted to be, which means that in order for the economy to get back into balance, prices for those goods and factors used to make those goods must fall.

Contra Krugman, this is not a downward spiral.  It is the economy getting things back into balance so a recovery can begin.  When the government tries to reflate the financial bubbles, as we see now, such actions actually prevent the recovery from occurring.  That is what happened during the 1930s with the New Deal, and apparently the government today wants to repeat that sorry tale.

Two hundred years after Adam Smith, some economists still have not learned to apply basic principles of human nature. These economists speak of “increasing output” but prescribe the stick rather than the carrot to get the job done.

Humans are social beings who progress if they cooperate with one another. Cooperation implies a climate of freedom for each individual human being to peacefully pursue his own self- interest without fear of reprisal. Put a human in a zoo or in a strait jacket and his creative energies dissipate.

Why did Thomas Edison invent the light bulb? It was not because some planner ordered him to!

Why don’t slaves produce great works of art, Swiss watches, or jet airplanes? It’s rather obvious, isn’t it?

Take a look around the world today and you see the point I am driving at. Compare North Korea with South Korea, Red China with Taiwan or Hong Kong, or East Germany with West Germany.

One would think, with such overwhelming evidence against the record of coercion, that coercion would have few adherents. Yet there are many economists here and abroad who cry for nationalization of industry, wage and price controls, confiscatory taxation, and even outright abolition of private property. One prominent former U.S. senator declared that “what this country needs is an army, navy, and air force in the economy.”

There’s an old adage which is enjoying new publicity of late. It reads, “If you encourage something, you get more of it; if you discourage something, you get less of it.” The good economist realizes that if you want the baker to bake a bigger pie, you don’t beat him up and steal his flour.

Unfortunately, the government has responded to the present economic crisis (which government caused in the first place) by applying raw force to “get the economy moving again.”  For example, earlier this year, bank executives whose institutions had received federal “bailout” money were dragged before congressional committees whose members demanded to know why the banks were not lending as they had done before the crisis.

The theme of the show trials was this: We gave you money, so you had better lend – or else!  Now, even if one ignores the fact that these executives were benefiting from receiving money that was taken by coercion from taxpayers, we are left with the stark realization that members of Congress really don’t care if banks lend to firms that actually can pay back the loans.  In other words, the very behavior that brought about the crisis in the first place – a mass of bad loans which were tied to mortgage securities which lost value – is ignored.  Congress demands that banks loan money, period.

How soon members of Congress forget that economics by coercion was a major cause of this crisis.  Banks and lending agencies found themselves forced by the Community Reinvestment Act to loan money to people who did not qualify for conventional mortgages – and the “subprime” market that came from this practice ultimately blew up, bringing down banks, brokerage houses, and whole sections of the economy.

Unfortunately, as the economy goes further into the tank, the politicians are demanding that government employ even more coercion (as though government agents needed encouragement to seize property and brutalize other people).  We are going to find out the hard way that economics by coercion is always doomed to failure because the laws of economics are more powerful than any set of laws that can come from the halls of government.

Reed wrote:

In a sense, this fallacy is a summary of the previous five.

Some actions seem beneficial in the short run but produce disaster in the long run: drinking excessively, driving fast, spending blindly, and printing money, to name a few. To quote the venerable Henry Hazlitt again, “The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences.”

Politicians seeking to win the next election frequently support policies which generate short- run benefits at the expense of future costs. It is a shame that they sometimes carry the endorsement of economists who should know better.

The good economist does not suffer from tunnel vision or shortsightedness. The time span he considers is long and elastic, not short and fixed.

Today the prime example of this fallacy is the so-called stimulus bill, which President Barack Obama and his supporters are touting as a way to save our declining economy.  According to the President and others, a short-term burst of spending will fill the hole of lost consumption and enable the economy to repair itself.  New York Times columnist Bob Herbert, an Obama supporter,  declares as he excoriates those who oppose this latest orgy of borrowing and spending:

[The opponents] act as if they don’t understand that in this radical economic downturn the demand for goods and services has fallen off a cliff, and that government spending is needed — and needed quickly — to replace a large portion of that lost demand.

The goal is twofold: to alleviate some of the enormous suffering (something that is easily understood if you have a heart), and to revive the battered economy (equally easy to understand by anyone with a brain).

Herbert approvingly quotes Obama to rebut those who say the “stimulus” bill was really just a spending bill. “What do you think a stimulus is? [Spending] is the whole point.”

Herbert has based his defense of the “stimulus” precisely on short-run thinking.  People are hurting now.  They need help now.  We must spend and spend now. Somehow, the future will take care of itself if only we act now.

Yet not a thought is given to the consequences of taking on almost a trillion dollars more in debt overnight—the inflation, the economic distortion, the future taxes, and the hardship they will bring. The very resources that are needed for economic recovery will be consumed by politicians and bureaucrats.

Pointing out the fallacy of the short run is not nitpicking.  Those who fall to its lure really are paving the way for a bigger crisis later.  The “battered economy,” as Herbert calls it, cannot be repaired by more government borrowing, spending, and printing money.  Whatever short-term fix that might occur will give way to even longer-term tragedy.

Good economists recognize this important fact.  Unfortunately, bad economists seem to be controlling the debate. We will be poorer for it.

Next Week: The fallacy of economics by coercion

That’s a lot of money, but some people, including recent Nobel Prize winner Paul Krugman, believe that the amount being proposed is too stingy.  Krugman writes that $800 billion isn’t “enough to fill the looming hole in the U.S. economy, which the Congressional Budget Office estimates will amount to $2.9 trillion over the next three years.”

There is term to use for someone who insists that government can costlessly come up with hundreds of billions of dollars to throw out in new spending; it is called someone who believes in the “fallacy of the ‘free lunch.”  Fortunately, Lawrence Reed dealt with this point nearly three decades ago.  He wrote:

The Garden of Eden is a thing of the distant past yet some people (yes, even some economists) occasionally think and act as if economic goods can come with no cost attached. Milton Friedman is one economist who has warned repeatedly, however, that “there is no such thing as a free lunch!”

Every “something for nothing” scheme and most “get rich quick” plans have some element of this fallacy in them. Let there be no mistake about this: if economics is involved, someone pays!

An important note here regards government expenditures. The good economist understands that government, by its very nature, cannot give except what it first takes. A “free” park for Midland, Michigan is a park which millions of taxpaying Americans (including Midlanders) actually do pay for.

A friend of mine once told me that all one needs to know about economics is “What is it going to cost and who is going to pay for it?” That little nutshell carries a kernel of advice for the economist: don’t be superficial in your thinking!

All of this relates to the story told by Frederic Bastiat about the young boy who becomes a “public benefactor” by throwing a brick through a shop window.  The people who gather after the incident become convinced that the money the shop owner has to pay to replace his window will circulate through the economy, creating new wealth, providing jobs, and generally helping to bring new prosperity.

What the crowd – like many “sophisticated” economists today – had forgotten is what good economists call “opportunity cost,” which is the value of the forgone alternative.  Since the shop keeper has to buy a window, he can’t spend his money on something else. There is no gain to the community.

The “lunch” is not free precisely because it is a scarce good, and all scarce goods have an opportunity cost. There is no way around that little truth.  Let us look at the opportunity cost of the proposed “stimulus.”

The “stimulus” will be financed by huge amounts of government borrowing, which means that taxpayers will have to pay back that amount plus interest in the future.  Furthermore, the funds raised by the huge government borrowing will be diverted from other uses.  The “jobs” funded by the “stimulus” will go to people with political connections, which imposes the real cost of politicizing the economy.

Unfortunately, President Obama and Krugman are touting the “stimulus” as something akin to a “free lunch”—as though in a free market the resources would otherwise be left idle.  They argue that unless government spends these “new” funds — and quickly — the economy will go into a freefall.  That is nonsense.  As Reed has eloquently noted, this kind of action imposes a real cost on the economy. While the media no doubt will focus their coverage on the people receiving the “benefits,” those who have to bear the costs will be invisible

Next Week: The Fallacy of the Short Run

While he could not have predicted the present crisis when he first wrote “7 Fallacies of Economics” in 1981, nonetheless the wisdom from FEE President Lawrence Reed is relevant. About government job creation, Reed writes:

Although production is essential to consumption, let’s not put the proverbial cart before the horse. We produce in order that we may consume, not the other way around.

I enjoy writing and teaching but I enjoy sunning in Acapulco even more. I have labored to produce this piece and to teach its principles in my classes instead of going to Acapulco first because I know that’s the only way I’ll ever get out of Michigan. Writing and teaching are the means; sunning in Acapulco is the end.

A free economy is a dynamic economy. It is the site of what the economist Joseph Schumpeter called “creative destruction.” New ideas supplant old ideas, new products and methods replace old products and methods, and whole new industries render obsolete old industries.

This occurs because production must constantly change shape to conform with the changing shape of consumer demand. As Henry Hazlitt has written, “it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow.”

A bad economist who falls prey to this ancient fallacy is like the fabled pharaoh who thought pyramid-building was healthy in and of itself; or the politician who promotes leaf-raking where there are no leaves to be raked, just to keep people “busy.”

It seems that whenever an industry gets in trouble, some people cry that it must be preserved “at all costs.” They would pour millions or billions of dollars in subsidies on the industry to prevent the market’s verdict from being heard. The bad economist will join the chorus and ignore the deleterious impact that would befall the consumer.

The good economist, on the other hand, does not confuse ends with means. He understands that production is important only because consumption is even more so. Want an example of this fallacy at work? How about the many proposals to prevent consumers from buying Japanese autos in order to “protect” the American auto industry from competition?

Indeed, that last statement rings true today, as the government tries to keep the domestic automobile industry afloat although these firms no longer can turn a profit and most buyers prefer cars made by foreign producers. Unfortunately, many economists have joined the “bailout chorus,” including the latest Nobel Prize winner in economics, Paul Krugman, who has demanded that government run trillion-dollar deficits and spend the economy into “prosperity.”

The problem, as Reed so aptly pointed out, is that jobs simply are a means to the end of consumption; they are not ends in themselves. People become confused because they fail to recognize the connection between production and consumption. Yes, jobs produce income for individuals, but they can provide real income only if the job contributes to the production of goods people are willing to purchase.

In today’s political economy, so-called jobs programs are aimed at producing goods that people don’t want or at least would not purchase on an open market. For example, most of the alleged “green jobs” that might be created in this latest wave of proposed spending would be for producing expensive and inefficient “energy” goods such as huge electricity-generating windmills. Likewise, the biofuels that are heavily subsidized involve diverting huge amounts of resources from uses more valued by consumers to lower-valued uses.

Ironically, most “jobs” programs, by diverting resources, actually destroy employment opportunities on a large scale. That is why the nation’s unemployment rate during the New Deal stayed in double-digits. Jobs for their own sake do not create wealth; they destroy it.

Next Week: The fallacy of the “free lunch”

The mercantilists of the 1600s raised this error to the pinnacle of national policy. Always bent upon heaping up hoards of gold and silver, they made war on their neighbors and looted their treasures. If England was richer than France, it was, according to the mercantilists, because England had more precious metals in its possession, which usually meant in the king’s coffers.

It was Adam Smith, in The Wealth of Nations, who exploded this silly notion. A people are prosperous to the extent they possess goods and services, not money, Smith declared. All the money in the world—paper or metallic—will still leave one starving if goods and services are not available.

The “money is wealth” error is the affliction of the currency crank. From John Law to John Maynard Keynes, great populations have hyperinflated themselves to ruin in pursuit of this illusion. Even today we hear cries of “we need more money” as the government’s monetary authorities crank it out at double digit rates.

The good economist will recognize that money creation is no short-cut to wealth. Only the production of valued goods and services in a market which reflects the consumer’s wishes can relieve poverty and promote prosperity.

Those words are still true, if only because our political and financial “leaders” want us to believe that they can end the current recession if the Federal Reserve System creates “liquidity.”  Thus, we see the Fed doing whatever it can to push more money into the economy.

One reason that the “money is wealth” fallacy has thrived for so long is that many people – including academic economists – fall prey to another fallacy, the fallacy of composition (discussed last week).  In the case of money, it is especially pernicious.

Assume, for example, that I had a printing press in my house which could crank out undetectable counterfeit money.  I could print huge amounts and purchase whatever I pleased.  No doubt, I would be better off (as long as the authorities did not discover what I was doing), but others would be made worse off.

First, and most important, is the nature of money.  Money is a good that is used to trade for other goods, and by making trade easier (and more abundant), it is a productive asset.

However, as Adam Smith understood, money itself is not wealth; instead, it is a good that we use in order to obtain wealth.  (Pieces of government-produced green paper do not qualify as historical “money.”  Government’s monopoly on money has led to its debasement.)

Second, money follows the same economic laws that govern all other goods.  The more money created, the less its marginal value.  (In other words, money is subject to the Law of Decreasing Marginal Utility.)  Many economists have missed this point.

In typical academic classes, money is described as a quantity variable.  Double the amount of money and the “price level” doubles as well, but the monetary increase has brought about no real harm.  Other academic models note that an increase in the amount of money will increase the amount of wealth (call it “Gross Domestic Product”), even if it also raises the “price levels.”

While such models are easy to teach (and to use for solving math problems), nonetheless they are inaccurate at best and dangerous at worst.  They do not demonstrate what really happens when the amount of money in an economy is increased.  If the process of creating more and more money by fiat (called inflation) goes on unchecked, as it did during the past decade, then not only does the value of money on the margin fall, but its growth triggers an unsustainable boom that ultimately collapses in a bust.

This process has repeated itself time and again, which demonstrates that most policy makers do not understand that money is not wealth.  The lesson still has not been learned.

Next Week: The Fallacy of Production for its Own Sake

This error also involves individuals. It holds that what is true for one individual will be true for all others.

The example has often been given of one who stands up during a football game. True, he will be able to see better, but if everyone else stands up too, the view of many individual spectators will probably worsen.

A counterfeiter who prints a million dollars will certainly benefit himself (if he doesn’t get caught) but if we all become counterfeiters and each print a million dollars, a quite different effect is rather obvious.

Many an economics textbook speaks of the farmer who is better off because he has a bumper crop but may not be better off if every farmer has one. This suggests a widespread recognition of the fallacy of composition, yet it is a fact that the error still abounds in many places.

The good economist neither sees the trees and ignores the forest nor sees the forest and ignores the trees; he is conscious of the entire “picture.”

In looking at policies coming from Washington, D.C., I employ this fallacy in two ways.  First, I apply it as written; second, I show how economists and pundits wrongfully apply this fallacy, and make false claims with it.

The latest “stimulus” package has governors, mayors, farmers, college presidents, auto and steel executives, scientists, and other interest groups lining up.  Auto executives claim that bailing out domestic producers will “save American jobs.”  The “alternative energy” crowd does one better: they claim that they will “create new jobs.”

Indeed, new government money given to these groups will benefit people who receive the dollars first.  One benefactor is Al Gore, who is a partner in an investment fund that helps bankroll these subsidized industries.  Obviously, he believes that these subsidies are “good for the country,” when, in fact, they are good only for a small group of people with a huge public relations machine.  Those who are forced to pay higher energy costs (in order to buy inferior ethanol fuel and high-priced electricity) are made poorer, and no amount of rhetoric can change that sorry fact.

However, the wrongful use of the “Fallacy of Composition” also must be addressed.  Perhaps the worst example is the “Paradox of Thrift,” coined by Keynesians, but really goes back to the Mercantilists of the 16th and 17th centuries.

The “Paradox of Thrift” states that saving money might be good for a few people, but if everyone saves, then it retards economic growth and drives the economy into recession.  (The Wall Street Journal recently had an article blaming savers for not spending “just as the economy needs their dollars the most.”  The article referenced the “Paradox of Thrift” as though it were legitimate.)

Obviously, economists and pundits who cite this faux “paradox” are ignorant of how capital formation occurs and how a boost in the savings rate will lessen the impact of a recession and help bring about a real recovery.  These economists, however, are looking at only the immediate impact of spending and saving (I will deal with “short-run” thinking in a future column), not the longer-term effect of capitalization and economic growth.

Economists tend to be divided into two groups.  The first sees the economy as a perpetual motion machine that magically grows even as people consume down the capital stock (which replenishes itself and even expands on its own, just as long as consumers continue to spend).  The second sees economic growth occurring only because people save for the future and create new capital that matches with consumer needs and desires.  It does not take a genius to recognize the “bad” economists and the “good” ones.

Not surprisingly, the “bad” economists fall over the Fallacy of Composition on both ends.  They fail to recognize it when it comes to government spending and misuse it when examining consumer behavior.

Next week: The Fallacy of “Money is Wealth.”

Reed explains:

Examples of collective terms are “society,” “community,” “nation,” “class,” and “us.” The important thing to remember is that they are abstractions, figments of the imagination, not living, breathing, thinking, and acting entities. The fallacy involved here is presuming that a collective is, in fact, a living, breathing, thinking, and acting entity.

The good economist recognizes that the only living, breathing, thinking, and acting entity is the individual. The source of all human action is the individual. Others may acquiesce in one’s action or even participate, but everything which occurs as a consequence can be traced to particular, identifiable individuals.

Consider this: could there even be an abstraction called “society” if all individuals disappeared? Obviously not. A collective term, in other words, has no existence in reality independent of the specific persons which comprise it.

It is absolutely essential to determine origins and responsibility and even cause and effect that economists avoid the fallacy of collective terms. One who does not will bog down in horrendous generalizations. He will assign credit or blame to non-existent entities. He will ignore the very real actions (individual actions) going on in the dynamic world around him. He may even speak of “the economy” almost as if it were a big man who plays tennis and eats corn flakes for breakfast.

A corollary to this is “in the public interest.”  People like Ralph Nader demand that government regulate every aspect of our lives “in the public interest,” yet they are demanding that government engage in activities which will make it more difficult for firms to produce goods, thus making millions of people poorer.

Indeed, when we hear the pundits demanding certain policies are “in the public interest,” what they really are saying is that such policies serve the interests of people in certain politically-connected groups.  For example, politicians and editorial writers tell us that the “nation’s economic security” depends upon “energy independence.”

What they mean is that unless all fuel consumed in this country is produced domestically, most Americans face economic disaster.  This is most interesting, since Americans have imported fuel for many decades, and even during the short-lived Arab oil embargo in 1973 and 1974, the American economy did not “collapse.”  (The “energy independence” scam really is nothing more than attempts by politicians and politically-connected producers of “alternative” energy sources, like corn-based ethanol, to raid taxpayers’ wallets because people would not purchase these “alternatives” unless forced to do so by government.)

Reed stresses the point about “collective terms” noting that economic analysis by its very nature must begin with the individual.  Socialists view human beings simply as a collective, be they “workers” or “capitalists” or “proletariat.”  The good economists know that one cannot understand markets without understanding the behavior and preferences of individuals.  There is no such thing as “social utility,” even though some economists – not the good ones – attempt to “construct” the fraudulent apparatus known as the “social utility function.”

When individuals are left out of the picture, then human beings are seen by those in power as little more than putty to manipulate.  The mass murders by totalitarian governments over the last century took place only because the powers that be decided to define people solely in collective terms.

Therefore, one cannot understand “good” economic thought unless one realizes that collective terms like “country” or “the economy” are useful only in the informal setting, as they are words of convenience.  However, they are useless and even harmful when government agents attempt to foist policies upon people in the name of “helping society.”

Next week: The fallacy of composition

(We don’t have to worry anymore about being intellectually challenged by politicians.  They have decided to give us what Robert Higgs calls “vulgar Keynesianism” as economic policy in the name of “stimulating” the economy.)

In 1981, I subscribed to The Freeman, having been introduced to it by the economist William H. Peterson.  That April, the featured article was “7 Fallacies of Economics,” by a young professor named Lawrence Reed, who now is president of FEE.

The article itself was simple.  Unlike what one might read in the latest edition of American Economic Review, this piece actually made sense.  Furthermore, part of its being profound was in its simplicity; here was a commentary that laid out the principles of economic thought in a way that not only was coherent, but also exploded the vast majority of modern economic literature that seems to glory in one fallacy after another.

While it appeared nearly three decades ago, nonetheless “7 Fallacies of Economics” is more relevant than ever, and I am going to spend the next seven weeks examining each of these fallacies.  I’ll link each of them to current government policies to point out that not only are the fallacies still with us; they are being forced upon us, to the detriment of each person who reads these words.

This week, I will deal with the introduction and opening points.  Reed lays it out with the following:

First, economics is simply not physics, chemistry, or mathematics. It is the study of human action, and humans are not programmed robots. Yes, certain immutable laws of nature do indeed exist, but one of them is that humans are—each and every one of them – inner-motivated, creative, self-interested organisms. They range from docile to irascible, meek to daring, complacent to ambitious, smart to not-so-smart. As Adam Smith pointed out more than two hundred years ago, “In the great chessboard of human society, every piece has a principle of motion of its own, altogether different from that which the legislature might choose to impose upon it.”

This inherent variability can easily give rise to dissent among those observing it and it can just as easily confound the predictions of those bold enough to place a mathematical handle on it.

In these two paragraphs, he manages to deal with a couple of truisms about economic thought – truisms that seem to escape most professional economists (unfortunately).  The first is that there really are “immutable” laws of human action, which means that there are immutable laws of economics.  Thus, good economics is going to be a priori in the way we analyze economic phenomena.  That is, when governments attempt to apply policies, such as price controls, that violate laws of economics, we already know what the outcomes will be.

Second, the attempt by academic economists to put all economic phenomena into mathematical equations is inappropriate at best and harmful at worst.  Not only does the use of mathematics in this way make it more difficult to understand the points the economist is trying to make, but it also means that the conclusions to be drawn are likely to be wrong, given that human action generally does not proceed with mathematical precision.  (As Henry Hazlitt once wrote, if a mathematical equation is not precise, then it is a “fraud.”)

So, as I reprise “7 Fallacies of Economics,” we also can see just how current policymakers are violating the very tenets of economic logic.  It should be interesting.

Higgs writes that while he understands why Wall Street executives might have no problem grabbing loot made available by Congress, the economists who have endorsed some of these schemes are another matter:

But why have free-market economists and other commentators expressed approval of this blatant piracy? It now appears…that these free-market experts were not so expert after all. Indeed, many of them seem to have failed to understand how markets work and how government actions can hobble or kill those workings. Many have talked as if they actually believe in vulgar Keynesianism or other crackpot ideas – about “systemic risk” where none exists or about “missing markets” for poor-quality assets that only a fool would try to sell privately when the alternative of a munificent government buyout shimmers on the horizon.

While many economists have declared some real howlers, I should point out that many economists simply do not have the theoretical and analytical tools by which to logically analyze the present situation.  Yes, I know that is a shocking statement, for many of these people have doctorates from the most competitive and highly-ranked graduate programs in the world.

Furthermore, while I have a Ph.D. in economics, it was not earned in a program that garners the academic respect of a Harvard or Stanford doctorate.  Supposedly, that means I cannot criticize anything that the “high-level” economists say.

Yet, for all the calculus and the hard-to-comprehend statistical techniques they learn in graduate school and use in their “A” journal papers, many economists do not know economics.  They might know academic economics, but they cannot comprehend economic logic, and that makes all of the difference.

Although I realize that this sounds arrogant, nonetheless it is accurate.  The problems are not limited to “macroeconomics,” the study of the overall economy; difficulties also abound in “microeconomics,” which analyzes individual markets, consumer behavior and business firms.

For example, according to standard microeconomic theory, unless an industry is dominated by tiny firms with small production capacity and all goods sold in that market are exactly the same, there exists a market failure.  That is right; according to the economics canon, any product differentiation is “proof” that the market has failed, and only can be set right by outside (read that, government) action.

In the real world, competition is defined by heterogeneity; people seek to demonstrate that their products are better than others, that there is a quality difference.  Academic economists, however, hold that such differences demonstrate that markets are less competitive than what is socially optimal.  (Joan Robinson, a student of Alfred Marshall and a developer of “imperfect competition” theory, wrote that such differences provided a “spatial monopoly” to producers and should be regulated by government.)  Nor do they have a workable theory of capital, and they ignore the role of time and time preference.

On the macro side, things are even worse.  Most economists receive Keynesian training in graduate school, and it dominates academic textbooks.  Money is said to be a state-created quantity variable, and texts declare market economies are prone to collapse unless government intervenes.

Thus, the present foolishness we see from policymakers – that the government literally will spend its way out of this recession – comes right from the academic texts.  Ironically, even though these policies defy economic logic, nonetheless most economists claim that the criticisms of the Austrian School, which dismantle these crackpot theories, are “discredited.”  (Henry Hazlitt never even went to college, yet he was a better economist than most Nobel Prize winners.)

Why?  Because academic economists said so, and according to them, that is the “market test.”  That present government policies will lead only to more unemployment and more economic misery is irrelevant.  As long as the mathematical theories claim government can “fix” an economy, government always is successful, even when it isn’t.

Even the thoughtful Stephen Chapman of the Chicago Tribune has called for inflation as a way (temporarily) to boost the economy.  (One expects such nonsense from Paul Krugman and cheerleaders for the state, but when libertarians join the inflation chorus, we know we a crisis exists.)

Yet, there is someone that President Bush or Krugman and others with political power or influence have not read, although his words are wiser than those of all the modern political pundits put together: Frederic Bastiat.  Readers of The Freeman or the FEE webpage likely are familiar with this French statesman who wrote some of the best economic prose of the Nineteenth – or any other – Century.  We revisit one of his great works: That Which is Seen and That Which is Not Seen, completed in 1850, shortly before his death.

Bastiat explains that economic analysis depends not only upon observing those things which are readily visible – domestic auto workers receiving paychecks instead of being laid off – but also those things which do not happen because of the original action, things that in the long run would be more economically (and socially) beneficial.  He writes:

In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause – it is seen. The others unfold in succession – they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference – the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, – at the risk of a small present evil.

Indeed, the “bad” economists have advised short-sighted politicians (Dare I repeat myself?) to do the most visible things.  The news cameras will show the autoworkers in Detroit going to work instead of being laid off.  When Congress and the incoming presidential administration raise the minimum wage, the news cameras will record the life of a single mother who has received a raise.

The cameras, however, will not record those millions of people elsewhere who lose their jobs because resources are being diverted from productive uses to the political uses of propping up automobile companies that have been a rendition of the “living dead” for many years.  The cameras will not record those thousands of single mothers who are thrown out of work because the increase in the minimum wage essentially priced them out of the labor market.

Over time, unfortunately, that which is not seen at first ultimately is seen in its full horror.  Nearly 80 years ago, presidents Herbert Hoover and FDR tried to prop up the U.S. economy by forcing up real wages, bailing out failing firms, promoting labor unions (and the violence that inevitably accompanies their activities), and inflating the dollar.  What ultimately was seen was a decade of high unemployment which ended in the horror of world warfare.

Instead, of reading Krugman and other “distinguished” economists, perhaps policymakers should discover Bastiat.  What he wrote 150 years ago still is more cogent and relevant than the entirety of what the political classes and their media allies are telling us today.

Rep. Barbara Flynn Currie, who chairs the committee considering impeachment, declared that Blagojevich created a “crisis of confidence” in state government. It is not unlike what a professor told me when former U.S. Rep. Tom Delay was indicted: He should go to jail because his actions “caused people to lose confidence in government.”

Indeed, as I see it, the real scandal lies not with Blagojevich’s taped statements, as awful as they are. Nor am I concerned that people have their “belief in government” shaken. No, the real scandal is the fact that this political hack is someone who was given life-and-death power over the lives of other people. Governors sign death warrants for execution, they make decrees that have the force of law, and generally have much control in how people live – and die.

Americans constantly run to the well of “good government,” hoping to draw up “dedicated public servants” who make decisions based upon “the common good.” Yet, the stuff that bubbles up from that well always is toxic, but that does not stop people from hoping that the next batch of political swill will have a sweeter taste.

No one runs for office on a platform of “bad government.” No one runs for office promising to enrich cronies and impoverish political enemies through the power of taxation and income distribution. Instead, political candidates promise to govern wisely and engage in behavior that will serve the “public interest.”

As we know, however, the devil is in the details. Government cannot “help” one constituency without harming another; there is no way to spread the “benefits” of government expenditures evenly. Thus, some who are taxed receive less value for their taxes than others, while others receive benefits that well exceed what they paid to the taxman.

Lest we think, however, that the essence of government is “providing services” that we cannot provide for ourselves, think again. As Fred McChesney of Northwestern University has written in his classic book Money for Nothing, government is best understood as a legal “protection racket” in which government agents extort money from people who understand that those agents can destroy or even kill them. People tend to think that such threats are limited to those involved in “organized crime,” but government is far more effective than any Mafiosi at extortion.

Take the government’s antitrust action against Microsoft a decade ago. It seems that Microsoft and most Silicon Valley high-technology firms were not sending the requisite political contributions eastward to Washington, D.C. The Washington Post even sniffed in one article that Microsoft did not even have a Washington office. How dare they not let us “wet our beaks”!

Billions of dollars later, the government was able to extract enough from Microsoft and other companies to get its message across: pay us, or we destroy you. Indeed, it was “Mission Accomplished;” Microsoft now has a new office building in Reston, Virginia, near the D.C. Beltway.

Americans were told that the rapacious monopolist Microsoft harmed consumers by making a free browser available to them (instead of consumers having to pay almost $100 for browsers made by Microsoft’s competitors). The government’s reasoning was fraudulent, a raw attempt at extortion.

The only difference between the government’s attempt to destroy Microsoft and Blagojevich’s comments was the overt crassness of the Illinois governor. No one in the Clinton Department of Justice was that tactless, but in substance, there was no difference in what the government did there and what Blagojevich did in trying to “sell” Illinois’ U.S. Senate seat.

Although Blagojevich’s alleged comments are awful, we must remember that we should not be shocked, SHOCKED to hear someone in that position speak like that. Perhaps we should be more shocked when someone in government actually does the right thing.