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.

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.

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.

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.

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.