Krugman & The iPhone: Why The Times’ Econ Icon Should Be Deleted from Discourse

Paul Krugman has done it again:  From his lofty perch at The New York Times, the chief jester of the Keynesian court has wrapped a warped economic thesis in yet another comfortable quilt of misdirection.

English: Paul Krugman at the 2010 Brooklyn Boo...

Paul Krugman (Photo credit: Wikipedia)

Paul Krugman recently declared that the Apple iPhone—capitalists’ favorite example du jour of the power of free markets—somehow presents a compelling argument for higher government spending.  I give him full credit for achieving new heights of audacity, though perhaps we’d all be similarly audacious if we found that, no matter what sort of dubious logic we publicly embraced, our societal stock only continued to rise.  (Note to the mainstream media: Your de facto Economist Laureate has no clothes.)

A Sleight-of-Hand

Krugman begins his deftly deceptive economic foray by citing a JPMorgan research report that estimates the launch of the iPhone 5 could add between .25 to .50 percent to gross domestic product growth in the fourth quarter.

Noting that most of the iPhone’s price tag represents money spent on retailing, wholesaling and advertising, Krugman then observes that “these short-run benefits have almost nothing to do with how good (the iPhone) is.” Rather, he says, “the reason JPMorgan believes that the iPhone will boost the economy right away is simply that it will induce people to spend more.”  And if you agree that “more spending will provide an economic boost…you have to believe that demand, not supply is what’s holding the economy back.”

As Krugman dangles his Nobel Prize in one hand, he uses the other for a quintessentially Krugmanesque sleight-of-hand, in the form of his dismissive treatment of the money Apple spends on retailing, wholesaling and advertising—costs that are, like others, passed on to consumers in the final sale price.  He seems to imply that only the physical iPhone brings value to the economy, and that the other costs embedded in the final price are so much fluff.   They aren’t, and their role in boosting GDP shouldn’t be trivialized.  Apple spends significant sums on these functions in exchange for real-world benefits: enlightening the public about the features and benefits of its product, motivating them to take action and then closing the sale.

In many ways, these processes are as vital to the iPhone’s success as the design process. And what product’s price tag doesn’t include a host of costs that don’t convey a direct benefit to the consumer (from groundskeeping to corporate tax preparation)?  Of course, given his insatiable appetite for government spending no matter what the utility (this is the same Paul Krugman who said massive government spending under the guise of a hoaxed alien invasion would be a good thing), it’s easy to see why he might be blinded to the value of real service work when he sees it.

In Krugman’s World, Measures Are Ends in Themselves

Difficult as it may be, pretend for a moment that the service component of the iPhone’s cost offers only flimsy “short-run benefits” that are largely unworthy of consumers’ dollars.  Resting on that faulty foundation, Krugman’s conclusion that “the reason JPMorgan believes that the iPhone 5 will boost the economy right away is simply that it will induce people to spend more” is particularly telling.

English: Apple iPhone 3GS

An Apple iPhone: Exhibit A in the Case for Deficit Spending? (Photo credit: Wikipedia)

It’s telling because he derides the service contribution of the iPhone to GDP, and then declares this supposed waste is ultimately a success merely because it made the GDP needle move higher.  For Krugman, then, it seems GDP isn’t a diagnostic tool, it’s an end in itself. He embraces any phenomenon that inflates the measure regardless of whether the activity that drives it is beneficial to consumers or not.  In treating the patient that is the American economy, Dr. Krugman is a physician obsessed with altering the reading on the thermometer, without regard for whether his prescription fosters a healthy and lasting recovery.

Is summing the nation’s output of goods and services, GDP serves to measure the health of the economy.  However, a truly healthy economy is one where growth in the output of goods and services is driven by market forces—that is, the goods and services serve bona fide needs and offer real value that consumers and businesses are willing to pay for.

The iPhone 5 won’t “boost the economy” in the fourth quarter merely because it boosts GDP per se.  GDP is a measurement. Apple’s new phone will boost the economy because it represents a valuable good, as signaled by businesses and consumers making individual purchase decisions with their finite resources—decisions that are then reflected in GDP.

Bent solely on moving the GDP measure, Krugman advocates another debt-fueled federal spending spree, with little care for where the money goes.   As Robert Tracinski at RealClearMarkets notes in his own dissection of Krugman’s iPhone stimulus theory, “what Krugman is advocating is precisely the plain transfer of money from one person to another, as if that is the only economically relevant fact.”

An economy isn’t healthy merely because money trades hands or the GDP measure rises in a given quarter—if that were the case, the prescription for prosperity would be simple: Let the Federal Reserve print money and pay everyone to do nothing.   Offered sarcastically, that credo is uncomfortably close to the nation’s policy trajectory.

Forever mistaking spending per se and “aggregate demand” for real-world economic progress, Krugman’s views might be amusing if they weren’t deemed credible by the legions of politicians and pundits he and his fellow Keynesians have duped.  Krugman’s opinions are dangerous because they ultimately amount to an irrational call for Congress to pile on debt at an even faster rate than today—as we sit $16 trillion in the red—and they provide Ivy League intellectual cover for those who would shrink from administering the uncomfortable prescriptions our country sorely needs.   

For a more thorough dissection of Krugman’s iPhone stimulus theory, read Robert Tracinski’s piece, “In Krugman, Keynes Meets Orwell,” at RealClearMarkets.  

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Obama’s Remedy for Rising Tuition: More of What’s Driving It Already

English: Barack Obama delivers a speech at the...

Image via Wikipedia

Following up on his State of the Union address, President Obama visited the University of Michigan on Friday to address the rising cost of education.  There, amidst a rapt crowd of collegians, he enthusiastically recommended a renewed commitment to the very policies that are driving those soaring prices in the first place.

Before examining Obama’s faulty solution to the still-expanding education bubble, however, it’s helpful to consider three key forces that contributed mightily to the real estate bubble that ruptured in 2007:

  • Easy credit. Progressively loose underwriting practices—encouraged by Fannie Mae and Freddie Mac and even forced upon the mortgage industry by the Community Reinvestment Act—made loans available to legions of un-creditworthy applicants, fueling demand and driving prices higher.
  • Low interest rates.  Spurred by political pressures which included George W. Bush’s promotion of an “ownership society,” the Federal Reserve’s manipulation of rates lowered mortgage payments, giving borrowers the ability to take on larger debts and bid prices higher.
  • Taxpayer money. In addition to various income tax credits and deductions embraced by both parties, the federal government’s implicit backing of mortgage guarantees offered by Fannie and Freddie promoted riskier behavior which translated into more loans being made with dubious underwriting.  That implicit backing later turned all too explicit when Congress approved enormous taxpayer-funded bailouts of Fannie and Freddie that to this point exceed $186 billion.  While that price tag already makes it the most expensive of any financial crisis bailout, the Congressional Budget Office expects the taxpayers’ tab to race higher still.

With the real estate example in mind, let’s turn to higher education costs.  The relentless ascent of college tuition is no secret, but the specific math is jarring:   Over the decade culminating in the current school year, in-state tuition at four-year public universities increased at a rate of 5.6% per year above and beyond the general rate of inflation, according to the College Board.  Increases at private schools adhered somewhat closer to the broader inflation rate, but still exceeded it by a hefty 2.6%.

While other factors are surely contributing to this trend (colleges’ antiquated practice of awarding tenure comes to mind), the same trio of forces that helped inflate the price of housing—easy credit, low interest rates and taxpayer money—has been at work in the education market for decades.  Unfortunately, that didn’t stop Obama from offering this hair-of-the-dog prescription to the nation’s college cost malady:

  • Easy credit.  Obama touted federally-funded student loans, which are offered without any credit check whatsoever—and which, by their very nature as a deferred debt, make consumers of education less sensitive to price increases and more willing to pay the asked price.
  • Low interest rates.  The rate on taxpayer-subsidized student loans is set to rise from 3.4% to 6.8% in August—a substantial jump, but to a rate that’s still quite competitive with other loans that aren’t collateralized by a home or a car.  As Mandi Woodruff reports at Business Insider, a higher rate could help bring the forces of supply and demand to bear, spurring parents and students to more carefully weigh the value they’re getting for the price charged by a given institution and perhaps gravitate to less expensive alternatives.  However, rather than letting market interest rates heighten the cost-consciousness of consumers, Obama vowed to seek Congressional intervention to keep the rate artificially low.
  • Taxpayer money.  After lauding his administration for having already secured an increase in taxpayer-funded Pell Grants, Obama pressed for more ambitious transfers of taxpayer money—either directly or through students—into the coffers of education purveyors.   His proposals, elaborated upon in a White House fact sheet, ranged from a permanent extension of the American Opportunity Tax Credit to $55 million to help educators “develop and test the next breakthrough (education) strategy” to a $1 billion “investment” in an inter-collegiate competition focused on keeping prices down—a scheme incongruously-named “Race to the Top” (I suppose “Race to the Bottom” didn’t play as well with focus groups).

The parallels between the housing and education bubbles are clear.  Where the former saw builders offering status-conscious consumers ever-bigger homes,  the latter is accompanied by colleges competing to offer the most lavish amenities—like those ubiquitous climbing walls and even resort-like outdoor pools.

And, as with the real estate bubble, there lies beyond rising prices another unintended consequence:  millions of Americans saddled with debt—an average of $25,250 for 2010 grads.   The worst off?  Those who fail to complete their education and have little to show for their effort beyond a big taxpayer-backed liability on their balance sheets.

What presidents, legislators and consumers usually fail to grasp is that well-intentioned government intervention that seeks to help consumers afford higher prices of any product only serves to inflate those prices further.  

Doubling down on Uncle Sam’s counterproductive strategies will likely pay dividends in the voting booth, but—at a time when the federal government borrows 40 cents out of every dollar it spends—it’s unbearable to watch the government plunge deeper into debt to fund policies that yield results precisely the opposite of their intentions.  That it does so without any authority granted by the Constitution only makes it more excruciating.

Brian McGlinchey is principal at Liberty Messaging—a communications firm serving libertarian causes. He is the founder of 28Pages.org and a contributor at The Libertarian Institute.