30 Sep 2011

Paul Krugman, Pet of Big Government

Climate Change, Conspiracy, Economics, Krugman, Shameless Self-Promotion 4 Comments

That’s my latest post at the IER blog, in response to Krugman’s shrugging off of the Solyndra scandal. An excerpt:

To repeat, the Solyndra scandal is not simply a matter of the federal government wasting money on bad business ideas—the government does that all the time. Rather, Solyndra is “special” because the government managed to lose half a billion in taxpayer money even when its own analysts had given clear warnings beforehand. What is being investigated is whether the Department of Energy ignored its own protocols because of the special treatment given to Solyndra (which had made large campaign contributions and visited the White House many times).

So let’s go back to Krugman’s Pets.com analogy: If it turned out that Pets.com officials had raised money from outside investors on false pretenses, and had given sweetheart contracts to (say) suppliers of kitty litter at above-market prices, and then it turned out that Pets.com analysts had warned management that these contracts would blow up the company, yet the executives did it anyway because of kickbacks from the kitty litter vendors…then yes indeed, this would have been grounds for a lawsuit, and the government would start an investigation.

This isn’t a hypothetical supposition on my part. The public was shocked to learn that Goldman Sachs analysts internally referred to mortgage derivative products as “sh*tty” that they were selling to some of their clients, and in fact the government launched an investigation. So Krugman’s flippant analogy is wrong in multiple dimensions.

4 Responses to “Paul Krugman, Pet of Big Government”

  1. David S. says:

    This is a very small scandal, though a scandal. Get a life.

  2. Tom says:

    Must be nice to have friends in power.

    Sometimes I wonder if I would have enough moral fortitude to not engage in crony capitalism if I were a member of the ruling class. Lucky for me, I will never have to face that “test.”

    In the mean time, though, all these crooks should be working hard labor to repay their half billion dollar debts.

  3. kavram says:

    Maybe it’s just me, but I have trouble believing that Dr. Krugman actually views a Pets.com logo as a serious defense of the Solyndra scam. This might be proof that Kruggie ‘plays dumb’ to support his arguments…

  4. Tel says:

    The correct argument to Krugman’s “because the private sector never ever puts money into ventures that end up failing” sarcastic hand waving is that when the private sector puts money into ventures that fail, it’s their own money, but when government puts money into ventures that fail, it’s other people’s money.

    This is generally known as the Agency Problem, or to put it in my own words, “You cannot outsource trust.”

    I’ll also point out that Amazon.com had an almost identical business plan — sell everything on the Internet, make a loss in early years to establish market share and get infrastructure into place. So far, Amazon.com is hanging in there (doing a lot better than Pets.com), but investment in new enterprise is intrinsically risky, there will always be losers. The point is not about whether some will win and some will lose, the point is that if you are putting your own money into it, the incentive is very much to think hard and long about what the risks really are, when you are putting other people’s money into an investment… who cares? Corruption is inevitable when the incentive to stuff pockets and payback buddies is larger than the danger that you will have to wear the risk yourself.

    I’m absolutely sure Krugman understands all this. He just can’t be bothered explaining it to his readers.