I admit to being a Paul Krugman junkie, or at least read his twice-weekly column in the New York Times. This is not so much because I agree with him — a rarity, believe me, whenever he writes on economic matters — but because I want to get a sense of what the "leading minds" in the economics profession are thinking.
Furthermore, Krugman tends to be an inspiration for helping me to assess economic theory. For example, when he tries to push Keynesian economics, it always provides me with a good way to refute Keynesianism to my students. Most economists today tend to run at least a little bit away from the pure Keynesian dogma, but Krugman remains a True Believer, all the way to his insistence that the "Liquidity Trap" nonsense really did apply to Japan during the 1990s.
In the last two days, however, even Krugman has managed to outdo himself. First, through his blog he unleashed a vicious attack on Ron Paul, declaring him to be a "friend of corporate fraud." This is a serious accusation, in my mind, for Krugman is saying that Paul advocates theft and dishonesty, which goes to the very heart of a person’s character. Thus, Krugman’s charge must be examined in detail.
Second, in his latest screed, "Banks Gone Wild," Krugman claims to have discovered why the financial system built the huge house of cards with "sub-prime" mortgages: "Around 25 years ago, American business — and the American political system — bought into the idea that greed is good." Now, I am sure that Krugman considers himself to be a man of Great Insight, but nonetheless I think that a better explanation is needed — especially from a professor of economics who regularly is nominated for the Nobel Prize — than the "capitalists are greedy" mantra.
Let us look first at the attack on Paul. Krugman writes:
Doing research for tomorrow’s column, I ran across a chapter most Ron Paul supporters probably don’t know about.
The quiet campaign against provisions of the Sarbanes-Oxley Act may have had something to do with the proposal by Representative Ron Paul, a Republican from Texas, on Thursday to eliminate Section 404 entirely. In a statement, the congressman said the provision "has raised the costs of doing business, thus causing foreign companies to withdraw from American markets and retarding economic growth."
What’s that about?
Section 404 requires companies and their auditors to assess the companies’ internal controls, which are the practices or systems for keeping records and preventing abuse or fraud.
Ron Paul, enemy of the Iraq war — and friend of corporate fraud?
This attack involves the very mechanisms Krugman claims are unfair — when used against him, of course. (Krugman claims that it is unfair when people use Krugman’s own words — in context — to point out contradictions in his pronouncements.) In fact, it is worse, since Paul never has called for another round of corporate fraud. However, according to Krugman, just the very criticism of a part of the Sarbanes-Oxley law is enough proof that Paul really is a thief in disguise.
Krugman’s methodology is a form of intellectual and political bait-and-switch, and it reminds me of Anthony Lewis’ screeds in 1995 after the Republicans had taken over Congress following the 1994 elections. You see, the Republicans were critical of some environmental regulations, so, according to Lewis, that meant that they wanted "feces to wash up on beaches." To criticize a regulation, believe Lewis and Krugman, is to be in favor of whatever the regulation was supposed to prevent, and once a regulation is in place, it is like the Law of the Meades and Persians, in that it never can be altered.
Now, I can excuse Lewis, since he always has been a partisan hack, his NYT pedigree notwithstanding. I have no expectations from him other than hackdom. (I have no greater expectations from my dogs, other than they will act like dogs.) However, I hold Krugman to a higher set of standards, as his Ph.D. and subsequent honors and high professorships mean that he actually is supposed to know something about economics.
Economists long have used their analytical tools to examine what we call the "Law of Unintended Consequences," which is especially prevalent in the study of political economy. The journals are full of papers which document the phenomena that occur when laws and regulations contain perverse incentives that create outcomes that the authors of the laws and regulations never intended. (Indeed, we see some of that in the recent collapse of the sub-prime market, something I will address, since Krugman ignores it.)
This is the statement from Paul that Krugman apparently finds to be so offensive:
Sarbanes-Oxley was rushed into law in the hysterical atmosphere surrounding the Enron and WorldCom bankruptcies, by a Congress more concerned with doing something than doing the right thing. Today, American businesses, workers, and investors are suffering because Congress was so eager to appear "tough on corporate crime." Sarbanes-Oxley imposes costly new regulations on the financial services industry. These regulations are damaging American capital markets by providing an incentive for small US firms and foreign firms to deregister from US stock exchanges. According to a study by the prestigious Wharton Business School, the number of American companies deregistering from public stock exchanges nearly tripled during the year after Sarbanes-Oxley became law, while the New York Stock Exchange had only 10 new foreign listings in all of 2004.The reluctance of small businesses and foreign firms to register on American stock exchanges is easily understood when one considers the costs Sarbanes-Oxley imposes on businesses. According to a survey by Kron/Ferry International, Sarbanes-Oxley cost Fortune 500 companies an average of $5.1 million in compliance expenses in 2004, while a study by the law firm of Foley and Lardner found the Act increased costs associated with being a publicly held company by 130 percent. Many of the major problems stem from section 404 of Sarbanes-Oxley, which requires Chief Executive Officers to certify the accuracy of financial statements.
However, Krugman ignores this statement:
Compounding the damage done to the economy is the harm Sarbanes-Oxley does to constitutional liberties and due process. CEOs and CFOs can be held criminally liable, and subjected to 25 years in prison, for inadvertent errors. Laws criminalizing honest mistakes done with no intent to defraud are more typical of police states than free societies. I hope those who consider themselves civil libertarians will recognize the danger of imprisoning citizens for inadvertent mistakes, put aside any prejudice against private businesses, and join my efforts to repeal Section 404.
Nor does Paul do this in the name of promoting "corporate fraud." He has another agenda, that being rule of law, which clearly is reflected in his next statement:
The US Constitution does not give the federal government authority to regulate the accounting standards of private corporations. These questions should be resolved by private contracts between a company and its shareholders, and by state and local regulations. Let me remind my colleagues who are skeptical of the ability of markets and local law enforcement to protect against fraud: the market passed judgment on Enron, in the form of declining stock prices, before Congress even held the first hearing on the matter. My colleagues also should keep in mind that certain state attorneys general have been very aggressive in prosecuting financial crimes
Section 404 of the Sarbanes-Oxley Act has raised the costs of doing business, thus causing foreign companies to withdraw from American markets and retarding economic growth. By criminalizing inadvertent mistakes and exceeding congressional authority, Section 404 also undermines the rule of law and individual liberty. I therefore urge my colleagues to cosponsor the Due Process and Economic Competitiveness Restoration Act.
Now, if one were to quote Krugman selectively, one can be sure that whoever committed such a vicious act would be unmercifully skewered in Krugman’s next column. However, we see Krugman doing the same to Ron Paul. Nowhere in Paul’s statement is there an endorsement of corporate fraud, but we do see a concern for the ability of businesses to compete in the modern global economy — and we see a deep concern for civil liberties and the trashing of the fundamental building block of criminal law: mens rea.
None of that means anything to someone like Krugman. Ron Paul believes that Section 404 of the Sarbanes-Oxley Act is unconstitutional, runs roughshod over civil liberties that the Constitution is supposed to protect, and that it adds unnecessary costs to American businesses. Thus, we are supposed to mean that civil liberties and rule of law really are code terms for "corporate fraud." Krugman, on the other hand, believes that the state through Keynesian policies, can give us Harry Potter Economics.
Being in the Holiday Spirit, however, I am not done with Krugman. In his self-congratulatory column on banks, Krugman first quotes himself (I guess is it OK for Krugman to quote himself, but always is evil if someone else does it):
This slump was both predictable and predicted. "These days," I wrote in August 2005, "Americans make a living selling each other houses, paid for with money borrowed from the Chinese. Somehow, that doesn’t seem like a sustainable lifestyle." It wasn’t.
More than two years before Krugman wrote his supposedly prophetic words, I said:
As has been written on this page many times, the 1990s boom — termed then as the “new economy” — was credit-driven and collapsed under its own weight of malinvested capital. Unfortunately, those with political power — and their allies in academe and the media — believe that our current problem is nothing more than a lapse in “aggregate demand,” which can be cured by some new money and a few thousand government checks to be written for various wasteful federal and state projects.
In 2004, I wrote:
…during boom times, people do place investments into lines of production that are not sustainable, and during the bust the malinvestments are laid bare. Furthermore, no one, not even Paul Krugman, is claiming that reflation by the Federal Reserve System could bring back the go-go business conditions that existed at the height of the boom.
Granted, I do not have Krugman’s pedigree, but nonetheless I recognized that the economy was being pushed via a credit-inflated and unsustainable housing boom. Nor was I the only person to notice it; others on the Austrian blogs understood the perils of the housing boom and why it ultimately would lead to a collapse of the housing market.
(I need to add here that Krugman does not consider Austrians to be serious economists — they actually understand the Law of Unintended Consequences, which disqualifies them in Krugmanland — so just because the Austrians were right does not mean they were right.)
While I suspect I could write all day on Krugman’s bad economic and historical analysis, I will concentrate on only one thing: his belief that "greed" played no economic role until Ronald Reagan took office. Now, while I do not worship at the shrine of Reagan, nonetheless I believe that Krugman has gone overboard in his recent attacks on the late president.
For example, in previous columns, Krugman has tried to portray Reagan as a closet Klansman. Writes Krugman:
…in December 1979 the Republican national committeeman from Mississippi wrote a letter urging that the party’s nominee speak at the Neshoba Country Fair, just outside the town where three civil rights workers had been murdered in 1964. It would, he wrote, help win over "George Wallace inclined voters."
Sure enough, Reagan appeared, and declared his support for states’ rights — which everyone took to be a coded declaration of support for segregationist sentiments.
Being that I am a few years older than Krugman, I can say that I do not remember Reagan’s presidency bringing back Jim Crow. Moreover, Ronald Reagan has not been the only person to campaign in Neshoba County, Mississippi, nor does one have to be a racist or segregationist to hold that a federal system of divided political sovereignties is less likely to have widespread tyranny than a system dominated by a single central state.
Krugman’s attack on Reagan was part of his recent concerted attacks on Republicans in general. Now, Krugman is entitled to his opinions, but I believe that if one speaks as an economist — which Krugman does — then one is not free to speak simultaneously as a political operative.
Back to Reagan. Krugman holds that it was Reagan who somehow opened Pandora’s Box to give us greed. Of course, this is a man who has praised the Great Depression as a Golden Age because it gave us the New Deal and the compression of incomes. (More than anything else, Krugman holds “income inequality” to be the Greatest of All Evils. However, I have not received word if he demands that his income at Princeton be no higher than that of the campus maintenance workers.)
Ronald Reagan did not give us the ill-fated housing boom, nor was it predicated upon greed or racial segregation or any of the other Seven Deadly Sins that Reagan supposedly unleashed. Instead, it came about because of the demand by people like Krugman that interest rates be held artificially low by the Federal Reserve System, and that the lending process be opened to bad credit risks via the Community Reinvestment Act.
Moreover, I have not read Krugman calling for dissolution of entities like Fannie Mae and Freddie Mac that have enabled mortgage lenders to divert huge sums of money into credit booms that are unsustainable by any stretch of the imagination — even Krugman’s. Nor does Krugman say anything about the government’s deposit insurance scheme which creates horrific conditions of moral hazard and provides us with a perfect example of the Law of Unintended Consequences.
One reason we have seen new money go into various bubbles like the stock market bubble of the 1990s or the recent housing bubble is because capital in this country has few places to go that are not under open assault by politicians and federal regulators. As for those executive incomes against which he rails (because they cause income inequality, in his book), part of the problem is that in 1993 Congress, at the prodding of the Clinton Administration, attempted to cap executive salaries at $1 million a year via tax law. (Today, you can’t even get a mediocre college football coach for that salary, but Congress still wants us to believe that someone will take the huge risks of being a CEO of a major corporation for far less than what a major league outfielder makes.)
The "scandals" tied to the paying of stock options were due in part because companies needed to find some way to adequately compensate their key people. Now, I am not against paying bonuses and giving stock options and the like, but everyone can understand the moral hazard problems that can exist in such a payment regime. Krugman does not address this issue, but why let facts get in the way when one is preaching against corporate greed?
What we have is yet another statist attacking private enterprise, telling us that the state is our moral arbiter. In so doing, Krugman attacks Ron Paul, one of the most honest and honorable politicians in this country’s history. Look for Krugman in the future to smear Paul with charges of racism and whatever else he might concoct in his mind. But what he really attacks is private property and private enterprise, and anyone who might advocate such liberties ultimately will find himself declared an "enemy of the people" in one of Krugman’s columns.
November 24, 2007
William L. Anderson, Ph.D. [send him mail], teaches economics at Frostburg State University in Maryland, and is an adjunct scholar of the Ludwig von Mises Institute. He also is a consultant with American Economic Services.