Does Paul Krugman Really Care About the Poor?

Does Paul Krugman Really Care About the Poor?
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In the 19th century, the term ‘liberal” had vastly different connotations than what it does today.  Political thinkers who endorsed the economic ideas of free trade and laissez faire, such as Frederic Bastiat and Jean-Baptiste Say, were at the forefront of what was known as the classical liberal movement.  With the progressive movement came the hijacking of the term liberal that lead to it being used to describe those who regard government intrusion in the economy as a must.  Liberal is no longer reserved for those who valued liberty.  Its bastardized definition now describes those who wish for unquestioned devotion to the state.

Any observer would be hard pressed to find a more ideological leader of modern liberalism than Paul Krugman.  Krugman is, of course, the Nobel Prize winning economist who teaches at Princeton University and writes a twice weekly column for the New York Times.  He has written several books, including the “Conscience of a Liberal,” and hundreds of columns which have a tendency of devolving into politically partisan attacks.  Some may even say Krugman writes more like a political hack than an economist.  His basic strategy involves using his leftist ideology to criticize opponents of government intervention and portraying them as hating the needy.  Like the New York Times itself, Krugman is rabid defender of the welfare state.

But does Paul Krugman, in being the mouthpiece of Keynesian economics, really care about the poor?

As an unabashed proponent of liberalism, it would at first appear so.  In Krugman’s own words, “liberal in the United States means more or less what social democratic does in Europe.”  According to David Gordon, the term social democrat was originally used in reference to socialists.  Eduard Bernstein, social democracy’s initial theorizer, saw representative democracy as being the true path to communism unlike the revolutionary violence Marx prophesized.  Today, social democrats typically value the democratic process over production completely in the hands of private owners.  They believe that the citizenry is owed a number of social rights including public healthcare, education, child care, and aid for the retired.  To pay for these benefits, progressive taxation is pushed for as a means of combating income equality.

Readers familiar with Krugman’s editorials would certainly agree that he holds many of these ideals.  He is quick to depict himself as a champion of the poor and destitute while demonizing robber baron capitalists for their greed and stinginess.  A favorite argument of his is painting the so-called Gilded Age as a time of atrocious hardship for the common man (despite all historical evidence) while claiming the Keynesian revolution brought the average Joe the wonderful middle class lifestyle he enjoys today.

Recently, another dominant theme has crept up in Krugman’s writing; notably since the onset of the financial crisis and subsequent economic contraction.  With unemployment staying high for an unprecedented amount of time, the Nobel laureate has taken to calling on central banks to begin aggressively combating what he sees as “depressionary conditions” with massive amounts of monetary easing.  In an April column, he wrote:

Indeed, a bit more inflation would be a good thing, not a bad thing.

If the Fed refuses to take even the slightest risk on the inflation front, despite a disastrous performance on the employment front, it’s violating its own charter. And, beyond that, would a rise in inflation to 3 percent or even 4 percent be a terrible thing? On the contrary, it would almost surely help the economy.

Krugman argues that an increase in inflation would help reduce debt overhang and encourage spending.  Of course such a position assumes Federal Reserve Chairman Ben Bernanke could begin contracting the money supply before inflation expectations got out of control.  That aside, what Krugman, and his fellow Keynesian advocators, conveniently forget to mention is the underlying, and subtly deceptive, effect of money printing.  While he may play the role of the leading intellectual Robin Hood, Krugman’s prescribed remedy for the unemployed is not as benevolent as it may seem.

What inflation ultimately does is lower the real wages of all workers thereby clearing the market.  This end result doesn’t occur overnight however.  The injections of newly created money are constrained by time and space.  Money doesn’t, as David Hume showed, appear in everyone’s pocket overnight.  It must go through a series of hands in order to reach the broader economy.  This has the insidious effect of enriching the first receivers immediately who have the privilege of bidding up the price of other goods through spending.  Those at the bottom of the monetary totem pole, typically the lower class and the retired, must cope with rising prices before their own wages rise; if they do at all.  For a wonderful illustration of this process, see the graph from investor Martin Sibileau below:

What is referred to as the Cantillon Effect is really the means the federal government and those banks closely affiliated with the Federal Reserve use through coercively imposed legal tender laws to make themselves rich at the expense of the whole population.  While voluntary market exchanges are mutually beneficial, the scheme of central banking is exploitive to the core.

And it just so happens to be the gospel which Paul Krugman never tires of preaching.  Under the guise of lifting the impoverished onto plateaus of opulence, the Nobel laureate’s mighty solution to the world’s problems enriches precisely those who don’t need any help.

In another recent New York Times column, Krugman once again lets his readers know that he is dismayed over the reluctance both the Federal Reserve and European Central Bank have toward reigniting the printing presses.  He notes that as the rate of inflation has slowed, neither central bank is showing any signs of being ready to flood their respective banking systems with liquidity.  What’s peculiar about the piece is not only does Krugman endorse Spain’s government bailing out its banking sector, he also admits to inflation being needed for “internal devaluation” and “cutting wages.”

Economist Henry Hazlitt identified why such a policy may seem straightforward but is unsuccessful in the end.  As he writes in his classic “The Failure of New Economics”

Let us assume a situation, for example, in which all wage rates are at equilibrium levels except wages in the building trades, which are 10 per cent above equilibrium levels. There will then probably be unemployment, not only in the building trades themselves, but also, say, in the steel, cement, brick, and lumber industries, because of the falling off in demand from the building trades. And there will be some unemployment in the television, camera, clothing, and other trades because of the unemployment in the building trades and the consequent fall in retail business.

The whole situation could be cured by a 10 per cent cut in building wages alone (which would show up in the average for all industry, say, as a cut of less than 1 per cent in wage-rates). But such a cut in building wages alone, in Keynesian theory, would be “gradual” and “irregular” and hence “unjust” and “inexpedient.” For Keynesian theory is not interested at all in particular adjustments. It sees them merely as disturbing factors. Therefore Keynes’s remedy would be a 10 per cent debasement of the monetary unit to raise prices and living costs. In other words, he would wish to raise all prices 10 per cent, and cut everybody’s real wage about 10 per cent.

But if he could succeed in doing this, the outcome would not cure the situation. For after all these adjustments had been made, wages in the building trades would still be 10 per cent too high in terms of all other wages and prices. When the temporary effects of the inflation had worked themselves out, the unemployment would return, because the same maladjustment within the wage-price structure would exist.

It should be clear that inflation engineered by central banks, in addition to setting off the business cycle, does not help the average worker.  In fact it acts as a burden on his ability to accumulate savings to invest in his own productivity.  With the dollars in his wallet losing value almost every day, what’s a man to do besides spend them now while they are still worth something?

This is in addition to the central banking system which exists for the sole reason of cartelizing the industry in favor of those banks closest to the money printer.  These banks, such as Goldman Sachs, JP Morgan, and Citigroup in the U.S., have first dips on newly printed dollars which they then use to extend credit and create their own money out of thin air.  For legalizing such a corrupt and fraudulent system, the federal government is returned the favor by having its bonds purchased in order to be resold to the central bank.

This is the wealth distribution Krugman is really in favor of.  His constant slander of Wall Street’s excesses is paired with endorsing the very banking system which perpetuates extravagant risk taking.  When pushes come to shove, he is happy to see banks bailed out just so they will continue to finance their own governments.

What central banking really comes down to is one gigantic Ponzi scheme based on the fraudulent practice of inflation where, as Murray Rothbard always pointed out, benefits some at the expense of others.  The whole banking system has become dependent on newly created funds in order to perpetuate its image of solvency.  The politicians and bankers are always the first to profit while the rest of the public has the benefit of being next in line.  Like any other method the state uses to fund itself, it is based on legalized pick pocketing.

If this is truly Paul Krugman’s ideal system for helping the downtrodden, I would hate to see what type of solution he would come up with if he wanted them to suffer even more.

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James E. Miller is editor-in-chief of Mises Canada and a regular contributor to the Mitrailleuse . Send him mail

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