The fact that Paul Krugman received the Nobel Prize in economics makes sense given that both Al Gore and Obama received the Nobel Peace Prize. But that is the only way that it makes sense.

In his December 29^th column in the New York Times, Keynes Was Right, he continues to make the case that the only reason we haven’t come roaring out of the Great Recession is because we spent too little.

Krugman cites the downturn of 1937 when FDR’s government programs were curtailed and unemployment rose. He says that unlike in that fateful year we should instead redouble our efforts and spend more to prime the economic pump. Austerity is insanity he says. We must spend more as Keynes would have advised, deficits (and inflation) be damned.

Build pyramids as Keynes said we should. So what if the they do not contribute, and probably detract, from the quality of the economy. It is the quantity of economic activity that we are interested in not quality. Get people employed doing whatever. This is the road to prosperity!

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Naturally I disagree with much of the opposition and my well-meaning colleagues on the left in regards to Keynes and his school of economics. Many in this school of thought cannot accept the fact that Keynesian economics has never worked; it did not work in the depression nor has it worked any time since then. The only time stimulus has “worked” is after the economy has already recovered and then becomes overheated by the stimulus. Keynesian economics is an excuse for politicians to buy off special interest and voters with other peoples’ money. Let me address some of the opposition’s specific points:

Stimulus spending creates jobs

False, stimulus spending financed by taxes substitutes relatively inefficient government spending for private spending. In other words, government spending “crowds out” private spending. The opposition may disagree that public spending is less efficient but the recent analysis of the government spending does not support their point of view.

It is not taxation but debt that is financing the government spending

I maintain that government debt crowds out private borrowing and investment. Many of my anti-capitalist colleagues say that government spending is not crowding out private investment because interest rates are low. Therefore there is plenty of money to finance private investment. Unfortunately, in an attempt to protect depositors, and the government guarantee of such deposits, the bank regulators have increased the credit underwriting requirements on banks. Consequently, they are not lending to small and medium sized businesses.

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While Obama tours the country promoting his personal donation plan, the Republican Presidential hopefuls are in a pitched battle for the nomination and arguing which tax simplification plan is best. Threatened with the possibility of rate cuts, the Media and politicians trot out the usual suspects of lies about tax hikes and tax cuts.  This is a battle Republicans must win and, to do so, they need to expose those lies.

Keep in mind that the battle between those who create wealth and those that want to redistribute it, mainly politicians, is as old as civilization itself.  We read of tax battles and even reform in every age, like Urukagina’s tax reductions in Babylonia/Sumer in 2350 BC.  Equally venerable are the constant set of demagogic lies by those against tax cuts and simplification.  It is important to note that politicians like complicated tax codes and high tax rates because they control those rates and dispense the loopholes and regulations that complicate the tax code.  Tax simplification means they lose power.  As a result, resistance to tax reform is more often the rule than reform. As for the lies, they abound, so let’s consider just a few:

Lie # 1: Tax cuts cause deficits/Tax hikes balance the budget.  The Media and the Left often say that the Reagan and Bush tax cuts led to deficits while Clinton’s tax hikes led to a balanced budget. In truth, according to the IRS, federal tax revenues rose dramatically after the overall Reagan tax cuts/reforms (98%) and the Bush tax cuts (a record $700+ billion). This is just as they did after the Harding/Coolidge cuts (61% revenue increase) and after the Kennedy/Johnson cuts (62% revenue increase).  Those are the four major income tax reductions we have had since the inception of the income tax in 1913 and every time revenues rose after they were in place – every time.

So did the tax rate cut cause a deficit? The lie, of course, is to blame the revenue gathering mechanism (tax code/rate cut) instead of the revenue spending mechanism, i.e. Congress/Presidents.  The spenders kept spending – often at an accelerated rate when they saw the new revenues.  Thus, the fault for continuing deficits lies not with tax rate cuts, which produced higher revenues, but with politicians who spent too much.

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As an economist, I eschew the soft-headed convenience of ready-made ideologies, together with their carrying rationalities, turning upon intellectual vulgarities I haven’t the stomach to bear. But even when we look askance at ideologies, focusing instead upon flinty economic facts evidenced in history, a certain resolve may be expressed without overstatement:

1. Markets are the best means to capture the wisdom of individuals acting in their own interests.
2. Taxes should be moderate, clear and specific, to afford business and individuals the most efficient options for planning investment and economic activity.
3. Regulations should be specific and not speculative; written with sufficient flexibility to address new situations, with a clear, speedy review process to put right such anomalies as may arise from human action.
4. Under this framework, capitalism provides, not merely, the most efficient means of producing prosperity for the largest possible number of persons, but also the best means by which those without it may acquire capital, by which they too can become more direct authors of their won prosperity.
5. So long as the above is true, the well-off, the well and the not-so-well-off can co-exist in social harmony, because there is the belief that with application and diligence anyone who is not well-off may become so, within the system as described.

There are further elegant truths in history offering wisdom by which clear thinking on these questions may be maintained, advanced and reinforced:

1. Too aggressive a tax rate offends the sense of accomplishment of those who toil for their own prosperity; increasing the feeling that the fruit of their labours is being apportioned by an unaccountable few for the sake of an increasing many.
2. The habitual debasement of the currency undermines the assumption of value, which instigated the resolve to labour for oneself, in the first instance.

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Maxine Waters’s startling call for a trillion-dollar jobs bill this past week sent shudders down the spines of Democrats–for more than one reason. In addition to her ubertransparency about the progressives’ Keynesian desire to heap debt upon debt, you have to wonder if they’re hoping no one remembers what happened almost exactly one year ago this week.

It was September 16, 2010, when President Obama signed into law the Democrats’ Small Business Jobs Bill, a behemoth lending program in the mold of the TARP bailouts with a soaring price tag–and even more soaring promises from the promoters of this spending.

Clocking in at a sobering $30-billion, The Small Business Jobs Act was touted as the last, best chance for the Democrats to show the country how their solutions would restore our economy’s strength. The premise was that the Treasury would flood banks with capital, in the hopes that they would lend the money to small businesses–despite the lack of any requirements for banks to use this money to lend.

Some of the claims made exactly one year ago this month, as part of the full-court-press marketing for The Bill to End All Jobs Woes:

“Democrats estimate the measure could create 500,000 new jobs,” one reporter noted in September of 2010.

From the Democrats’ House Committee on Financial Services website:

Herman Cain probably had the best reaction to the President’s speech: “We waited 30 months for this?”

My reaction yesterday was mixed. In some sense, I was almost embarrassed for the President. He demanded a speech to a joint session of Congress and then produced a list of recycled (regurgitated might be a better word) Keynesian gimmicks.

But I was also angry. Tens of millions of Americans are suffering, but Obama is unwilling to admit big government isn’t working. I don’t know whether it’s because of ideological blindness or short-term politics, but it’s a tragedy that ordinary people are hurting because of his mistakes.

The Wall Street Journal this morning offered a similar response, but said it in a nicer way.

This is not to say that Mr. Obama hasn’t made any intellectual progress across his 32 months in office. He now admits the damage that overregulation can do, though he can’t do much to stop it without repealing his own legislative achievements. He now acts as if he believes that taxes matter to investment and hiring, at least for the next year. And he now sees the wisdom of fiscal discipline, albeit starting only in 2013. Yet the underlying theory and practice of the familiar ideas that the President proposed last night are those of the government conjurer. More targeted, temporary tax cuts; more spending now with promises of restraint later; the fifth (or is it sixth?) plan to reduce housing foreclosures; and more public works spending, though this time we’re told the projects really will be shovel-ready.

And let’s also note that Obama had the gall to demand that Congress immediately enact his plan – even though he hasn’t actually produced anything on paper!

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Pacific Investment Management Company (PIMCO), the world’s largest manager of bonds, has just released research analysis titled: “Saying No to Keynes and Fiscal Folly”. The report is a dramatic departure for PIMCO; who had fully embraced the Keynesian “pump priming” economics of stimulus spending, bailouts, and corporate interventions. But with the American public now opposed to Keynesian government spending by a stunning two to one margin; PIMCO may just be the first of a coming swarm of powerful elites to abandon Keynesianism for self-preservation.

The PIMCO has made big money on the credit crisis over the last three years. PIMCO’s management stated that their firm’s strategy was to “shake hands with the government” by investing money in areas that would benefit from the government’s rescue efforts. With the stock market in tatters, investors rushed to place huge bets in PIMCO’s bond funds. The U.S. Federal Reserve even hired the company firm to manage $500 billion in distressed mortgages. But a few months ago PIMCO made a disastrous investment decision by selling all of their U.S. Treasury Bond investments, just prior to the United States credit rating was downgraded and value of government bonds rising by up to 20%.

Now that PIMCO is losing money on that handshake with the government, they seem to be turning on their former masters. PIMCO’s recent report offers three key conclusions:

• Taxpayers have been hoodwinked into believing the cost from profligate government spending is low relative to the benefits.
• The Keynesian revolution ignited a decades-long abuse of the core principle of Keynesian economics: for government to increase spending when private sector aggregate demand weakens and stymies job growth.
• The central banker is left to shoulder the burden, seeking all the while to pressure the fiscal authority to amend the abuse of Keynesian economics and decades of fiscal folly.

Most people do not realize that the American Revolution was a revolt against efforts by Great Britain to collect brutally high taxes from the colonists to pay the massive debts Great Britain accumulated in the Seven Years’ War with France.

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While driving home Friday, I had the miserable experience of listening to a financial journalist being interviewed about the anemic growth numbers that were just released.

I wasn’t unhappy because the interview was biased to the left. From what I could tell, both the host and the guest were straight shooters. Indeed, they spent some time speculating that the economy’s weak performance was bad news for Obama.

What irked me was the implicit Keynesian thinking in the interview. Both of them kept talking about how the economy would have been weaker in the absence of government spending, and they fretted that “austerity” in Washington could further slow the economy in the future.

This was especially frustrating for me since I’ve spent years trying to get people to understand that money doesn’t disappear if it’s not spent by government. I repeatedly explain that less government means more money left in the private sector, where it is more likely to create jobs and generate wealth.

In recent years, though, I’ve begun to realize that many people are accidentally sympathetic to the Keynesian government-spending-is-stimulus approach. They mistakenly think the theory makes sense because they look at GDP, which measures how national income is spent. They’d be much less prone to shoddy analysis if they instead focused on how national income is earned.

This should be at least somewhat intuitive, because we all understand that economic growth occurs when there is an increase in things that make up national income, such as wages, small business income, and corporate profits.

But as I listened to the interview, I began to wonder whether more people would understand if I used the example of a household.

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Based on this morning’s numbers, I’ve updated my chart showing what the Obama Administration said would happen with the so-called stimulus compared to what actually has happened. As you can see, the unemployment rate is about 2.5 percentage points higher than the White House claimed it would be at this point.

Since I just did an I-told-you-so post about Greece, I may as well pat myself on the back again (albeit for another completely obvious prediction). Here’s the video I narrated a couple of years ago on the Obama faux stimulus.

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New from Econ Stories (an Emergent Order joint) the music video Paul Krugman refused to pole dance in….

London was just hit by heavy riots as part of a protest against the “deep” and “savage” budget cuts of the Cameron government. This is not the first time the U.K. has endured riots. The welfare lobby, bureaucrats, and other recipients of taxpayer largesse are becoming increasingly agitated that their gravy train may be derailed.

The vast majority of protesters have been peaceful, but some hooligans took the opportunity to wreak havoc. These nihilistic punks apparently call themselves anarchists, but are too dense to understand the giant disconnect of adopting that title while at the same time rioting for bigger government and more redistribution. My anarcho-capitalist friends must be embarrassed by the potential linkage with these angry morons.

Speaking of rage, Paul Krugman is equally dismayed with Prime Minister Cameron’s ostensibly penny-pinching budget. Summoning the ghost of John Maynard Keynes, he asserts that such frugality is misguided when an economy is still weak and people are unemployed. Indeed, Krugman argues that the U.K. economy is weak today precisely because of Cameron’s supposed austerity.

Not surprisingly, the purpose of his argument is to discourage similar policies from being adopted in the United States.

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Since the beginning of government, the ambition of those who spend money has rarely been matched by the ability of citizens to pay for government.  Modern day America, California or Greece are not exceptions to the rule, just examples of yesterday on a more grand scale today.  As perpetual as that problem is  - so too is the argument over the best way to raise tax revenue.  In simple terms, lower tax rates produce a more vibrant economy and higher revenues over time.  Higher tax rates do the exact opposite.  Heading into 2012, the Country cannot afford for Republicans to lose that economic argument.

The issue of taxes produces perhaps the greatest display between real politics and false economics.  Politicians throughout time have passed laws claiming to raise taxes.  In truth, politicians pass laws that raise tax rates.  That is a political process.  From there, the laws of economics take over.

In general, throughout all time, people adjust their behavior in reaction to political laws by acting in accordance with economic laws which are driven by human nature.  So if the penalty for speeding went up to $5000 per ticket – the number of people who speed would be reduced.  If the penalty for making income increases, i.e. taxes, rises – the amount of income actually made or reported will be reduced over time as well.

Today we are faced with astronomical deficits nationally and in many states.   The debt repayment obligation for California next year alone is larger than the budgets of 21 states.  What should governments do?  Should they politically raise tax rates? Or should they economically lower rates?  The answer is the latter and if Republicans (1) fail to make the argument why in 2011 and 2012, as this article implies they will, Grover Norquist, Tom Coburn duel over tax hikes , and (2) don’t stop simply saying NO to so-called tax increases, then Barack Obama will be reelected.

Consider this argument for cutting tax rates to raise revenue:

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I’m understandably fond of my video exposing the flaws of Keynesian stimulus theory, but I think my former intern has an excellent contribution to the debate with this new 5-minute mini-documentary.

The main insight of the mini-documentary is that Gross Domestic Product (GDP) only measures how national output is allocated between consumption, investment, and government. That’s useful information in many ways, but if we want more output, we should focus on Gross Domestic Income (GDI), which measures how national income is earned.

Focusing on GDI hopefully would lead lawmakers to consider ways of boosting employee compensation, corporate profits, small business income, and other components of national income. Focusing on GDP, by contrast, is misguided since any effort to boost consumption generally leads to less investment. This is why Keynesian policies only redistribute national income, but don’t boost overall output.

The analysis in this video also helps explain why Obama’s so-called stimulus was a flop. The White House genuinely seemed to think a bigger burden of government spending was going to create jobs, but the real-world numbers show higher joblessness.

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Seeking to bolster the sluggish economy, President Barack Obama is using a Labor Day appearance in Milwaukee to announce he will ask Congress for $50 billion to kick off a new infrastructure plan designed to expand and renew the nation’s roads, railways and runways. …The measures include the “establishment of an Infrastructure Bank to leverage federal dollars and focus on investments of national and regional significance that often fall through the cracks in the current siloed transportation programs,” and “the integration of high-speed rail on an equal footing into the surface transportation program.”

Under mounting pressure to intensify his focus on the economy ahead of the midterm elections, President Obama will call for a $100 billion business tax credit this week… The business proposal – what one aide called a key part of a limited economic package – would increase and permanently extend research and development tax credits for businesses, rewarding companies that develop new technologies domestically and preserve American jobs. It would be paid for by closing other corporate tax loopholes, said the official, speaking on condition of anonymity because the policy has not yet been unveiled.

In a very predictable editorial yesterday, the New York Times pontificated in favor of higher taxes. Compared to Paul Krugman’s rant earlier in the week, which featured the laughable assertion that letting people keep more of the money they earn is akin to sending them a check from the government, the piece seemed rational. But that is damning with faint praise. There are several points in the editorial that deserve some unfriendly commentary.

First, let’s give the editors credit for being somewhat honest about their bad intentions. Unlike other statists, they openly admit that they want higher taxes on the middle class, stating that “more Americans — and not just the rich — are going to have to pay more taxes.” This is a noteworthy admission, though it doesn’t reveal the real strategy on the left.

Most advocates of big government understand that it will be impossible to turn America into a European-style welfare state without a value-added tax, but they don’t want to publicly associate themselves with that view until the political environment is more conducive to success. Most important, they realize that it will be very difficult to impose a VAT without seducing some gullible Republicans into giving them political cover. And one way of getting GOPers to sign up for a VAT is by convincing them that they have to choose a VAT if they don’t want a return to the confiscatory 70 percent tax rates of the 1960s and 1970s. Any moves in that direction, such as raising the top tax rate from 35 percent to 39.6 percent next January, are part of this long-term strategy to pressure Republicans (as well as naive members of the business community) into a VAT trap.

Shifting to other assertions, the editorial claims that “more revenue will be needed in years to come to keep rebuilding the economy.”  That’s obviously a novel assertion, and the editors never bother to explain how and why more tax revenue will lead to a stronger economy. Are the folks at the New York Times not aware that both economic growth and living standards are lower in European nations that have imposed higher tax burdens? Heck, even the Keynesians agree (albeit for flawed reasons) that higher taxes stunt growth.

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The president’s problem is largely a mess of his own making. Deficit spending did not begin when Mr. Obama took office. But he and his Democratic allies have supported, proposed, passed or signed and then spent every dime that’s gone out the door since Jan. 20, 2009. Voters know it is Mr. Obama and Democratic leaders who approved a $410 billion supplemental (complete with 8,500 earmarks) in the middle of the last fiscal year, and then passed a record-spending budget for this one. Mr. Obama and Democrats approved an $862 billion stimulus and a $1 trillion health-care overhaul, and they now are trying to add $266 billion in “temporary” stimulus spending to permanently raise the budget baseline. It is the president and Congressional allies who refuse to return the $447 billion unspent stimulus dollars and want to use repayments of TARP loans for more spending rather than reducing the deficit. It is the president who gave Fannie and Freddie carte blanche to draw hundreds of billions from the Treasury. It is the Democrats’ profligacy that raised the share of the GDP taken by the federal government to 24% this fiscal year. This is indeed the road to fiscal hell, and it’s been paved by the president and his party.

The U.S. economy is on the mend and has been for some time. The reason is that, as Marx acknowledged in The Communist Manifesto, the capitalist system is an engine of powerful forces.

Market capitalism, true capitalism and not big government colluding with big business to engage in what Bastiat called “legalized plunder,” is the most efficient way of organizing resources. As a system it drives innovation, which is the source of our increased standard of living. In fact, this system is so powerful and efficient that our economy is doing well in terms of producing goods and services, not because of government intervention, but in spite of it. There is no question that the federal government has been engaged in activities that have suppressed and will continue to suppress economic growth and will leave millions of our person unemployed for lengthy periods. But the economy as a whole will be productive and our gross domestic product will continue to increase in the near future.

There is substantial empirical evidence that the economy is recovering. Fourth quarter real GDP grew at a 5.6% annual rate, the Federal Reserve Industrial Production Index was up in March for the 9th month in a row, the ISM manufacturing index was up in March to 59.6 and the employment index was at 55.1, the fourth straight month above 50, housing starts and existing home sales were up in March, the Conference Board’s Index of Leading Indicators increased 1.4% in March, and one can cite more data showing the upside of the business cycle is underway.

At issue is why is the economy recovering and is it likely to be a sustained recovery? We may also ask why unemployment remains stubbornly high while production is increasing. Normally, as the economy comes out of a recession productivity increases, part-time employment increases, and finally full-time employment increases. Why have we yet to see the last stage of this process?

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When Dorothy and her friends finally reach Oz, they present themselves to the almighty Wizard, only to eventually discover that he is just an illusion maintained by a charlatan hiding behind a curtain. This seems eerily akin to to the state of Keynesian economics. It does not matter that Keynesianism isn’t working for Obama. It does not matter that it didn’t work for Bush, or for Japan in the 1990s, or for Hoover and Roosevelt in the 1930s.

In the ultimate triumph of theory over reality, the Keynesians say all that matters is the macroeconomic model behind the curtain showing that more government spending leads to more jobs and growth. Consider the recent report from the Congressional Budget Office (CBO), which claimed that Obama’s stimulus created at least one million jobs. As Brian Riedl of the Heritage Foundation noted:

CBO’s calculations are not based on actually observing the economy’s recent performance. Rather, they used an economic model that was programmed to assume that stimulus spending automatically creates jobs — thus guaranteeing their result. …The problem here is obvious. Once CBO decided to assume that every dollar of government spending increased GDP…, its conclusion that the stimulus saved jobs was pre-ordained.

But surely this can’t be true, you may be thinking. Our public servants in Washington would not make important policy decisions based on a model that automatically produces a certain result, would they? Peter Suderman of Reason pulls aside the curtain:

…those reports rely on assumption-packed models that effectively predetermine their outcomes; what they say, in essence, is that the stimulus worked because we assume it did. …That’s especially true when estimating government spending’s productive effects, which is accomplished by plugging numbers into a formula that assumes that government spending produces a multiplier—an increased return for every government dollar spent. In other words, it extrapolates from how much money is put in rather than from what has actually come out. And it does so using a formula that dictates that if money is put in, even more money will come out. According to the CBO’s estimates, depending on how the money is spent, one dollar of government spending can produce total economic activity of up to $2.50. What a deal! …for all practical purposes, the same multipliers that were used to predict how many jobs would be created are being used to estimate how many jobs have been created.

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This new video from the Center for Freedom and Prosperity explains how last year’s so-called stimulus was a flop – and also reveals why politicians are pushing for another big-government spending bill.

Interestingly, since last year’s stimulus was such a disaster, the redistributionists in Washington are calling their new proposal a “jobs bill.” But as I say in the video, this is akin to putting perfume on a hog.

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The struggles of the Democrats and the Republicans are making news.  The Democrats are learning that it is far easier to make campaign promises than it is to govern. As for Republicans, the party that loses the Presidential election often spends the off-year attempting to refine its message if not find a new message and new messengers. In the watchful eye of 24/7 cable news channels and the Internet, however, such political soul searching can appear rather untidy.  As the calendar turns, the process remains unresolved for Republicans to say the least.  Worse than mere overexposure, according to Rasmussen polling, despite Obama’s falling polls and Democrat divisions, the Republican Party would fare worse in an upcoming election than the Tea Party – a “Third Party” that, as of yet, does not exist.  It is no minor issue because with the help of Tea Party activists, Republicans certainly can beat Democrats next year – without them they may not.

It would seem evident to many that the Tea Party movement should be the natural ally of the Republican Party.  After all, the issues that inspire most Tea Party activists should not be inimical to Republican Party leaders.  However, the fact that the Tea Party movement is at odds with certain aspects of the Republican establishment belies the greater issue as to why the Tea Party movement – and its potential to be a 3^rd Party movement – arose at all.

It is worthy, as part of this discussion, to note that the rise and fall of third party movements and candidates is directly tied to whether voters perceive the existing parties as being successful.  In this context, successful means providing effective leadership on the major issues of the day.

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