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Is Paul Krugman a Voodoo Economist?

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The reduction in money growth caused a recession. As the OMB budget projection did not anticipate the sudden collapse of inflation, nominal GNP and thus tax revenues collapsed below projection. This was the main cause of the "Reagan deficits."

As the Reagan deficits resulted from the unanticipated collapse of inflation and thus nominal tax base, they were not a problem. Deficits that result from inflation's collapse cannot cause inflation or dollar devaluation in currency markets.

In the post-war US (post WW II), most federal budget deficits or the worst ones resulted from the Federal Reserve causing a recession in order to reduce the inflation that Keynesian demand management produced. The high tax rates of the post-war era discouraged and reduced the response of supply to the stimulated aggregate demand. Consequently, in place of output rises, prices rose. This was the problem that supply-side economics addressed. The problem had worsened with time and became known as worsening "Phillips curve" trade-offs between inflation and employment. In the Carter years the problem was termed "stagflation" and the "malaise" of the American economy. It gave hope to the Soviet government that the US economy was also afflicted with troubles.

It would be interesting to know what Krugman's response was to the "Reagan deficits." Like Robert Parry now into his fourth decade of his war against Reagan, Krugman does not like Reagan. I wouldn't be surprised if Krugman wrote that the "Reagan deficits" were the end of the world. Krugman is a Democrat, not a Republican, so are Reagan's deficits bad, but not Obama's? Other economists seem to have the same problem.

Perhaps I am being unfair to Krugman. More likely, the truth is that Krugman, being an old-fashioned liberal, saw the income distribution aspects of high marginal tax rates as more important than the relative price or incentive aspects that affected inflation, employment, and economic growth. Krugman probably saw supply-side economics as threatening the arrangement of the income distribution without realizing that stagflation -- the problem that supply-side economists addressed -- was far more harmful to the working class than to the rich.

Krugman has a social conscience for which I respect him. I am confident that he would agree with me that economists who lack a social conscience do more harm than good. In my opinion, for what it is worth, Krugman does not understand or realize the way in which jobs offshoring has changed the US economy, the position of US workers and employees, and the efficacy of economic policy.

As I have often explained, when US corporations pursue higher profits at the expense of US labor by offshoring the jobs that produce the goods and services that they sell to Americans, they separate the US labor force from the incomes associated with the production of the goods and services that they consume. Eventually, this destroys the consumer market. According to the Census Bureau, American median family income is 9% less than a dozen years ago. This means that what once was spending power of American consumers is now the paper wealth of the mega-rich.

Keynesian stimulus policy works when the jobs from which people have been laid off still exist. By boosting aggregate demand for goods and services, the stimulus puts people back to work. But if the jobs have been moved offshore and the factories closed, the jobs no longer exist. No stimulus policy can put the unemployed into jobs that no longer exist.

Krugman has not come to terms with this basic fact. Nor have the majority of economists. Economists assumed that new and better jobs would take the place of the offshored ones. However, as I am forever pointing out, there is no sign of these jobs in the employment data.

Most economists believe that jobs offshoring is free trade and that free trade is beneficial, which simply demonstrates their confusion. Jobs offshoring is based on the pursuit of absolute advantage, the antithesis of comparative advantage that is the basis of free trade.

As I have said before, many economists are bought and paid for. I do not think that Krugman is one of the whores. In my opinion, Krugman, whatever his contribution to economics might be, simply does not understand how First World labor has been disadvantaged by Wall Street and US transnational corporations. The upward redistribution of real income is not solely the result of reductions in tax rates. The larger impact results from the offshore relocation of labor to low wage countries and from the deregulation of the financial sector. Labor arbitrage has converted American wages into corporate profits.

In my opinion US marginal tax rates were appropriate where Reagan left them. Their further reduction by Bush/Cheney and Obama are not necessary policy adjustments but rewards to the mega-rich who underwrite political careers and provide grants to economics departments and think tanks.

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http://www.paulcraigroberts.org/

Dr. Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan Administration. He was associate editor and columnist with the Wall Street Journal, columnist for Business Week and the Scripps Howard News Service. He is a contributing editor to Gerald Celente's Trends Journal. He has had numerous university appointments. His book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is available here. His latest book,  How America Was Lost, has just been released and can be ordered here.

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Your thinking is passé. Here's what PK is on the ... by Brad Parker on Thursday, Oct 31, 2013 at 3:01:10 PM
To be fair to Reagan, it was his policies that sen... by Richard Pietrasz on Thursday, Oct 31, 2013 at 4:09:25 PM
Reaganomics has failed.  In exactly the ways ... by Samson on Thursday, Oct 31, 2013 at 4:54:14 PM
Reaganomics succeeded for the Reagan gang.What thi... by Richard Pietrasz on Thursday, Oct 31, 2013 at 11:09:10 PM
Remember, with today's fed reserve bookkeeping, it... by Samson on Thursday, Oct 31, 2013 at 4:52:19 PM
The debt-money system is unsustainable.  Cred... by Scott Baker on Thursday, Oct 31, 2013 at 5:07:27 PM
What is not sustainable in this day and age is 57%... by Michael Dewey on Thursday, Oct 31, 2013 at 6:12:44 PM
I thought Paul Volcker had the right idea. He wrun... by Peter Duveen on Thursday, Oct 31, 2013 at 10:16:42 PM
How interesting that  PR does not notice that... by Mark Sashine on Friday, Nov 1, 2013 at 8:00:46 AM
Two items: Glass-Steagall needs to be reimple... by Janet Gaudiello on Friday, Nov 1, 2013 at 12:03:46 PM
Roberts' defense of supply-side hardly needs to be... by Jim Arnold on Friday, Nov 1, 2013 at 2:07:23 PM
Dr PCR analyzing Krugman???Now I may have seen eve... by BFalcon on Friday, Nov 1, 2013 at 2:32:01 PM
No worse than the last Roberts article before this... by Robert S. Becker on Friday, Nov 1, 2013 at 5:50:39 PM
He is a case of misinformation gone wild.... by BFalcon on Saturday, Nov 2, 2013 at 1:17:00 AM
Roberts also often suffers from the Knee-jerk Hype... by Robert S. Becker on Saturday, Nov 2, 2013 at 1:49:53 PM
I don't know, but I find people's approval for the... by BFalcon on Saturday, Nov 2, 2013 at 2:20:52 PM
You are likely correct.Roberts' biggest flaw is th... by Richard Pietrasz on Sunday, Nov 3, 2013 at 2:49:46 PM
More Right-wing supply side crap....Do they never ... by Ralph Demers on Friday, Nov 1, 2013 at 2:43:09 PM
Hmmm...Roberts is right about the fact that the go... by Jerry Lobdill on Friday, Nov 1, 2013 at 4:11:56 PM
Small farms and employee owned companies along wit... by intotheabyss on Friday, Nov 1, 2013 at 5:08:11 PM
Worker owned Cooperatives, modeled after Mondragon... by Michael Dewey on Friday, Nov 1, 2013 at 7:19:46 PM
Did you see this interesting update on Mondragon a... by Robert S. Becker on Saturday, Nov 2, 2013 at 1:46:35 PM
Thanks, the other day had vaguely heard that Fagor... by Michael Dewey on Saturday, Nov 2, 2013 at 3:17:41 PM
Is Paul Krugman being presented here as a rabbi we... by Mort Persky on Saturday, Nov 2, 2013 at 12:57:46 AM
Mr Krugman's capable hands, yes."Mr Roberts"/ Dr P... by BFalcon on Saturday, Nov 2, 2013 at 1:15:52 AM
The five hundred pound gorilla in the room is our ... by molly cruz on Monday, Nov 4, 2013 at 12:05:18 PM