The price is always right…

…Prof. Krugman is wrong

In his column “The Price Is Wrong” Prof. Krugman argues with the free market proponents on how to address our unemployment. The Austrians, as Prof. Krugman calls them, see the solution by forcing presently unemployed to go back to work at suppressed wages by cutting off “moocher-friendly programs like food stamps, unemployment benefits, disability insurance, and whatever.” Prof. Krugman calls this approach “prima facie absurd.” I would take a second look at this option.

Somewhere in between, Prof. Krugman takes a cheap shot at his opponents claiming that: “it doesn’t matter what you say about their position, any comprehensible statement leads to angry claims that you don’t understand their depths.” My stake in it is that, as an engineer and a businessman, I have no problem in understanding the so-called Austrians, but see lapses in the reasoning of Prof. Krugman. Hence, let us leave Austrians alone, and let me focus on my understanding of Prof. Krugman, hoping that one day he may write something allowing a layman such as myself to comprehend his reasoning.

No doubt Prof. Krugman knows much more about economy than I do. What makes me nervous is Prof. Krugman’s confidence that he is knowledgeable enough to be a master economy manipulator. In this sense, I have a fundamental disagreement with Prof. Krugman as I envision government as an arbiter guaranteeing equal liberties of enterprise for all private ventures, big and small. My field experience tells me that when given freedoms of enterprise individuals pursuing their selfish goals always will come up with creative ways to resolve all of our big problems; much better than the central government with all the professors advising it.

As an engineer I spent a big part of my professional live troubleshooting and fixing problems. It strikes me that Prof. Krugman does not even mention any reasons for our current market disequilibrium. He does not attempt to fix the problem by analyzing and eliminating its causes. For him our high unemployment is a god given cataclysm, such as a tornado or earthquake, and the government should address it accordingly, by throwing money at it.

The real problem is that American economy is not competitive in the global market anymore. We have great infrastructure, we have technology, and we have human capital. Hence, why is it so bad when it is supposed be very good?

Our immigration policy is a bunch of nonsense. In Canada, 19.8% of population is foreign born; it is 12.9% in the U.S., including illegal immigrants. That 7% difference amounts to about 20 million of workers and consumers that we need. Opponents of increased immigration bring up high unemployment. We have it due to mismatching of supply and demand caused by our immigration policy. Guest workers would fill the gaps. In my completely unscientific estimate every 1000 low wage workers would create about 200 well-paid managerial and blue collar jobs. This is the way to deal with unemployment. Government seems to be confused how to address this issue and this constitutes uncertainty of the markets, resulting in postponing investments. I would not be myself, if on this occasion I did not mention that I prepared the immigration reform proposal called the Freedom of Migration Act.

Presently government directly runs 45% of our healthcare, but practically controls it all. We all agree that our healthcare system is unacceptably inefficient. Instead of freeing the market from the present government inefficiency, somehow Americans were lured into supporting even greater role of the government in our healthcare system. Business people understand dangers they face in 2014, and it is the factor causing many of them to sit on cash and wait. Again, I prepared a market driven health care reform proposal called life cycle health insurance.

It is five years since the housing market collapse. The government assisted banks too big to fail but had no clear policy for homeowners trapped in the game run by big boys. This impoverished many Americans, and left almost nonexistent the housing market, usually one of the economy motors. Again, this uncertainty made many people with money stay on the sidelines and wait for the dust to settle. As a reader may guess it, I prepared the plan to help homeowners as well.

On top of the above we have a swarm of petty government regulations on all levels making it much harder for a person of limited means to open a new business. Consequently, fewer people than ever before does it. Summarizing, we need more capitalism, less socialism.

For Prof. Krugman it is a much easier problem. His recipe seems to be in more government spending, by increasing debt (eventually taxes will need to pay it) or by currency manipulation. He sees wealthy people and big corporations sitting on an abundance of cash and not willing to open new businesses because there is not enough demand for products and services they might offer. He is not interested to find out what obstacles the government should remove in order for these people to start investing. His thinking is how to use the power of the central government in order to force these riches to put their money in motion against their free will. As a businessman, I can assure Prof. Krugman that regardless of how clever the government policy is, no business person will stay in business unless there is profit to be made, and that the intrusiveness of the government is always outsmarted by the ingenuity of business people.

Instead of scratching his head on how to steer people into opening new businesses, into creating a new wealth, Prof. Krugman’s recipe is in increased government spending, so instead of becoming inventive in producing new wealth, people put their ingenuity in getting access to the government distributed wealth already created. This is not the way to expand economy; this is moving money from the left packet to the right one.

However, maybe I am missing something. Let us just make a few calculations how that increased government spending could work.

Let us say, that the government through taxes or currency manipulations takes from me $1,000 and gives it to my potential customers; then let us assume that they will spend all that money on my products. Let us say that I need an additional $800 (and let us assume that I have it or can borrow it) to produce whatever my customers are willing to pay me $1,000. After everything is set and done I will lose $1,000, gain $800, and I will end up with the $200 loss. My customers will gain $1,000 in value of my products. Less my $200 loss, one may say that thanks to government intervention we enriched society as a whole, of $800. Isn’t wonderful?

It is not, as it can work only as long as my wealth is unlimited. Eventually my money will run out or I will run away with my money (many big corporations already keep their cash reserves abroad) and the government will need to address the original problem: why I did not want to invest my money on my own will?

The trick as above, could work if my customers getting that extra $1,000 would use this additional cash to start or expand a business, and generate a new wealth this way. However, they face the same obstacle as I do; it is as hard for them to make a profit as it is for me. Hence, most of the $1,000 that the government took from me and gave to others will go to consumption. After that we will be back at square one.

Will the logic change if it will be a trillion dollars? This might be the reason that some Austrians agree with Prof. Krugman that “printing money (…) and government borrowing drive up interest rates;” however, to Prof. Krugman’s discontent say: “but not here, not now.”